HEXO Corp. (HEXO) CEO Sebastien St. Louis on Q2 2019 Results - Earnings Call Transcript

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About: HEXO Corp. (HEXO)
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Earning Call Audio

HEXO Corp. (NYSEMKT:HEXO) Q2 2019 Earnings Conference Call March 14, 2019 8:30 AM ET

Company Participants

Jennifer Smith - Senior Manager, IR

Sebastien St. Louis - Co-Founder & CEO

Conference Call Participants

Tamy Chen - BMO

Brett Hundley - Seaport Global

Graeme Kreindler - Eight Capital

Matt Bottomley - Canaccord Genuity

John Zamparo - CIBC

Robert Fagan - GMP Securities

Steven Schneiderman - Cowen & Company

Scott Fortune - Roth Capital Partners

Operator

Good morning and welcome to HEXO Corp's Second Quarter Fiscal 2019 Earnings Call. After the presentation, we will conduct a question-and-answer session. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Please note that this call is being recorded today, March 14, 2019, at 8:30 A.M Eastern Time.

I would now like to turn the call over to Jennifer Smith, Senior Manager of Investor Relations at HEXO Corp. Ms. Smith, you may proceed.

Jennifer Smith

Good morning, everyone and welcome to HEXO Corp's second quarter fiscal 2019 earnings call. My name is Jennifer Smith and I am the Senior Manager of Investor Relations at HEXO Corp. We will start with a presentation by our CEO, Sebastien St. Louis, who'll recap the company's second-quarter results recently announced definitive arrangement agreement to acquire Newstrike Brands Limited and financial outlook before opening the floor to questions from financial analysts.

Before we begin, I would like to remind you that today's presentation contains forward-looking information that involves known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. These statements should not be right as assurances of future performance or results. The statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the company appears in the company's annual information form for the year ended July 31, 2018, and the company's management discussion and analysis for the three and six month periods and did January 31, 2019, which were available under the company's profile on SEDAR. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of the presentation, the company disclaims any intention or obligation except to the extent required by law to update or revise any forward-looking statements as a result of the new information or future events or to any other reason. Sebastien.

Sebastien St. Louis

Thank you, Jennifer. Welcome, everybody. Really exciting times and glad to have everyone on the call today including our first call that we're opening up to the public. So it'll be an analyst question, but we have our shareholders, investors and the public online as well. So, very excited to be leading in. I mean, Q2 was a busy quarter, we continue to execute on our strategy towards it becoming one of the leading cannabis producers and product innovators and not only in Canada but in the world. Our vision has remained consistent to create a branded consistent on and off cannabis experience across a variety of verticals in a variety of experiences ranging from sleep, to sport, to sex, to diet, to fun.

Through this vision, we intend to become the premiere branded ingredients for food companies not only a top two in Canada, but also top three globally. We continue to focus on operational scalability, product innovation and brand leadership on the path to achieving this goal. In Q2 we executed on our promise to list in the U.S. gaining our New York Stock Exchange listing on the American on January 23, 2019. We closed the public offering of $57.5 million. I think very significant who were the leaders in that public offering to Tier 1 chartered Canadian banking institutions. So CIBC and Bank of Montreal. We hit our construction an licensing milestones as well. We had announced a year ago that we would put up a million square foot state of the art purpose build greenhouse. And not only did we get that done on time, on budget, we actually got it licensed within the construction timeline. So we got everything done and ready in 12 months, which is positioning us very well for the next year.

Q2 2019, we produced approximately 4.9 tons of dried cannabis, which was a 39% increase from Q1 in 2019. As a result of the growing scale of operations, our headcount rose by 32% with 374 employees now at the end of Q2 from 283 at the end of Q1. And I want to take a moment to thank Dominic Jones, our Chief People person who'd been ramping up all our people operations and I'm looking forward to next quarter as our people ramp accelerating meaningfully. We also added Veronique Hamel Chief Innovation Officer. Veronique is amazing. She brings 25 years of innovation expertise to her leadership roles. He's built strong innovative teams that Church and Dwight Bosch and Loam, Bosch health companies and as our CIO will develop and oversee our research and innovation pipeline. This is really the spend that's coming from this $57 million raise we did over the next two years. We're standing up in innovation design and engineering team that will span over 100 employees in food, vape, beverage, emulsions, extractions and that's in addition to the current size 25 or so R&D employees that are working developing our various emulsions for our hub and spoke partners today.

So, as well as was working hard towards yesterday's announcement regarding our intention to acquire Newstrike Brands, we also announced something pretty exciting in the -- we took the opportunity to reach out to all of you to all our analysts and all our partners to update what we're going to do next year. And I think it's quite significant because I think for the last while, HEXO has been expected to perform in the mid-cap range. Analyst consensus for our numbers were in the $260 million revenue range and management following this acquisition is now confident enough to come out with our number for 2020 ending July. And we're very pleased to be able to share that number, which is going to be $400 million in net revenue. For this quarter, our gross revenue was $16.2 million and that was a 13.7 increase over the same quarter in the previous year. The gross revenue in Q2 exceeds a total fiscal by 200%. Our gross adult use revenue was $14.8 million up from $5.2 million in Q1. I think very significant, if you remove the one outlier or the one competitor that has arguably the largest market share right now, which would be cannabis, if you look at the second grouping of every single competitor in the space, this amount of adult use revenue puts HEXO firmly in place in that second tier grouping, right behind cannabis. So we're very excited about moving that forward meaningfully. And of course, next year when we're 400 million, we expect the majority of that to be an adult use in Canada and we expect to be a top two Canadian company.

Sales volume increased 166% so that was about 2.5 tons from Q1. As we continue to scale up B9 and execute on our SQDC and other supply agreements. I want to take note to mention that the SQDC 20 ton commitment is fully on track. Our relationship remains an amazing standing and we're really excited about all the stores they're opening, the education programs they're setting up and the additional products we'll be introducing in October. Our B9 facility is being stood up quite nicely. It's scaling up. It is on schedule. On that note though, there is some scale up and I do want to adjust everyone's expectations for Q3 on that note. As harvest will be starting meaningfully during this quarter, as we shared in our ND&A, our Q3 will be relatively flat to Q2. So I just want to prepare everybody to not expect us to blow up the quarter. This quarter our meaningful wrap towards that 400 million starts in Q4.

We achieved adult use revenues per gram of $5.83. So that was actually an increase of $0.38 over last quarter. So you can start to see that demand that our customers have for our products, but also willing to pay for premium high-quality products. And 84% of our adult use sales were realized through our agreement with the SQDC. So that was 16% in Ontario and BC. I remind everybody that currently HEXO is not selling any dried flower and Ontario and BC. So we're achieving these market shares and this performance without even our full toolbox. So of course, toward the end of Q3 ramping into Q4, we are unlocking that toolbox and that's what is leading us to that $400 million in net revenue next year. Of course, the additional capacity from Newstrike is going to help as well. Our cost of sales increased at $6.5 million as a result of increased sales, increases in transformation process of our value-added products as we're preparing as well for the legislation coming down in October.

The net fair value adjustment was a $4.7 million loss and fair value adjustment on the sale of inventory was $3.7 million, which has increased from $1 million in Q2 2018 due to an increase in sales, which was offset by lower fair value per gram on the adult use market. Biological assets fair value was a negative $8.4 million compared with negative $1.1 million in Q2 2018 and this was due to an increase in the number of plants on hand and increased yields in the quarter. Since Q2 2018, B6, which is our 250,000 square foot greenhouse has become fully operational, increasing our supply to meet the demands of the adult use market.

What I think is important, historically we've talked a lot about cost per gram. And you've noticed last quarter HEXO dropped that metric because we thought it was confusing. We weren't getting much credit in the market for actually using a real number, although I think we were. But now we really can start talking about gross margin. And as we start to operate, that's really what's going to matter as we start to look at these product makes. And we're very pleased to show that we had a 52% gross margin on net revenue. Gross margin after fair value adjustment on biological assets was $11.$6 million.

In terms of operating expenses or G&A increased to $8.2 million in Q2 from $1.8 in Q2 2018 and this reflected the growth in operations as we strengthen our general finance and administrative staff, we've added an entire strategic finance division, which is getting very robust then certainly getting their legs under them after this recent acquisition, we've added a rental space in Belleville, our total a general admin payroll of $1.9 million and a professional fees listing of legal expenses about $1 million and not related to our up-listed to the TSX and also to the New York Stock Exchange American. Insurance also increased about $1.3 million for DNO related to the move to NYSE.

In marketing and promotion, we increased to $4.8 million in Q2 from $1.4 million for the previous year. But I think more significance is if you look at how we've dialed in our marketing expenses following our [indiscernible] in the previous quarter. So in the previous quarter, we have had quite a big splash. We went out with a bunch of concerts. So we had Wu-Tang Klan [ph] and we have celebrity chefs and we were trying a lot of special activations. That came out of cost and the previous quarter was about an $11 million spend. Now we're dialing it in. So at that $4 million spend level, we're more in the range of where we plan to be, which we think kind of long-term marketing expenses should be in that 5% to 8% range of revenue and we're trying to keep it as tight as possible while trying to lever really digital media to get more bang for our buck.

Stock-based compensation increased to $5 million from $2 million in Q2 2018 and this is really based on the philosophy that we have to have that every single at HEXO should be an owner. We need to align incentives with our stock holders and generally, it was as we increase the team, we increased the options. Amortization of PBNE increased to $452,000 in Q2 2019 and that was a direct result of our continued ramp up, bringing online additional facilities and acquiring cultivation and production equipment. We had a $6.9 million loss from operations in Q2 2019 compared to a $4.7 million loss in Q2 2018. So, the result of higher expenses from expanding the scale of operations and preparing and executing and the adult use market, this increase in costs from scaling up was offset by a 10 times increase in net revenue was when compared with Q2 2018.

Yesterday, we had huge news and we're very pleased to include the Newstrike team to the HEXO family. Anybody from Newstrike on the call, a big welcome. I can't wait to meet the every single one of you. And that deal was done at an all-share transaction value that approximately $263 million. As part of that deal, Newstrike shareholders will receive $6.332 of the HEXO common share for each Newstrike share. And I think what's significant is this keeps telling the HEXO execution story. I mean, I think given where valuations are in marijuana space, marijuana companies, especially LPs, have an opportunity to go out and overspend, pay big premiums and by all sorts of assets. What HEXO is trying to do is really to deliver value and to look at an M&A strategy from a value perspective and we were able to do that with Newstrike because Jay and is management team, really saw the shared vision. We had to buy him from the HIP team, they understood what HEXO is doing, they understood powered by HEXO, they really believed in it and they saw an ability to uncouple their sharp rise by joining forces with us. So what that has meant is that HEXO, essentially dispersed no premium deal in the marijuana space. And I think that's a good example of our M&A team's execution and ability to go find value. Of course, as this turns into what we're guiding to be $400 million in net revenue next year, we think it'll be very accretive.

So, with this deal, we bring capacity boosts. So we'll have a combined capacity of 150 tons a year of high-quality cannabis. That includes an indoor grow as well. So we have opportunities to diversifying product branding for a smaller percent of the market that demands the ultra-premium indoor. We will now have access to for cutting edge production campuses. And this is an addition, I remind everybody on the phone to our 580,000 square foot Belleville facility, which is expandable to 2 million square feet. So Belleville is very significance because we plan on centralizing all manufacturing there, which we think will eventually lead to those margin improvements and the ability to bring in strategic partners to build a center of excellence. So we're looking forward to receiving a trust, for example, as part of our Belleville team and adding our other future hub and spoke partners through cosmetics [indiscernible] in that facility.

We've diversified with the deal or domestic market penetration. HEXO, I think has -- although we gained a lot from our relationship from tobacco, the public perception is certainly be that we're a back only stories. And HEXO's ambition is global. We are taking a very careful approach, one province by province, and then now we're focused on Canada before really launching in a big way internationally, which will be done through a hub and spoke partners. But that does not mean we're connect story. And I think we can say that firmly now. I mean four campuses, two of which are in Ontario, including significant growth, significant manufacturing and distribution in eight provinces.

We do think we'll pick up a couple of synergies along the way. So, between, listing fees, legal fees, some key executives where you should be able to find synergies above $10 million. The one thing on the roadside, we believe most employees will stick around. That's certainly HEXO'S intention. We're growing very quickly. We don't intend to lay off any managers and the individual contributors. We planned that those teams will be needed to grow. In fact, we plan on hiring more.

Well, of those people, we're adding about 165 employees to the HEXO team. And as I mentioned before, a big welcome to everybody from Newstrike team.

With that, I'll open it up to questions, look forward to clarifying any or color for comments. So please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tamy Chen of BMO. Please go ahead.

Tamy Chen

Thanks. Hi, Sebastien. First question on Newstrike, are you able to give us an update in terms of where the company is with respect to the ramp of their greenhouse in Niagara? Where are they currently at? Any color there would be helpful.

Sebastien St. Louis

Yes. So, of the total 450,000 square feet that we're adding, there's 250,000 feet that are licensed operational and we're looking forward to bringing in the HEXO team in there to ramp up the yields. We believe that coupled with the great infrastructure Newstrike's put in place, putting in HEXO's management and production processes will greatly increase a yield there.

Tamy Chen

And the other 200,000 square feet that's still under construction?

Sebastien St. Louis

That's correct. So, well under way, the walls are all up, the glasses on, but there will be a licensing -- there's an expected licensing delay on that. But of course, we're putting our regulatory team which as we've proven time and time again and one of the best in the business, so we don't want to anticipate any major issues.

Tamy Chen

Okay, thanks. My next question is just looking at yesterday there was some Health Canada data that came out about industry production inventory and sales data. And there seems to be this continued disconnect in terms of inventory seems to be piling up, but it's not fully through enough down to the sales channel. And just wondering if you have any insights and what HEXO's experience has been. I mean, what's causing this, is it production issues, is it supply chain issues and as a result, can you just comment on how we should think about HEXO's pace of sales over the rest of this year in this context?

Sebastien St. Louis

Yes, and well, I think that pace of sales I've mentioned that Q3 would be relatively flat and that's much do do not only the growing out of B9 but also all the processing equipment required. I think as a general rule, all the LPs including HEXO generally under-estimated the amount of packaging, infrastructure and logistics and the employees and space that it would take to actually do fulfillment. It's one thing to grow this product. It's one thing to bag it and drying bags, but by the time you're thinking about putting it in individual multiline products that's one complex. And this is why HEXO was very bullish and why we think our Belleville facility is transformational. A 2 million square foot facility will give us enough space to fulfill that $400 million net sales next year and beyond. And so that's all baked into that forecast that we're giving you, that we will be up and running in Belleville in fact that we expect to have that fully up and running by the end of the summer. And so, we don't expect any -- too many more challenges from there. But that's where you're seeing the disconnect is basically inventory piling up from cultivation and LPs not being able to process it.

Tamy Chen

And my last question is, think on the last call, you had indicated that the range in terms of how long did it take for B9 to hit full run rate production could be anywhere between 6 to 18 months. I'm just wondering if that's still what you're guiding to and if so, what are the key variables in driving this big delta in the range?

Sebastien St. Louis

So, I think I've mentioned to you was kind of the end of the year, so end of the calendar year is when the B9 would be fully operational. Now, what's exciting is we're actually starting to see possibility to go beyond the current 108 tons fully ramped up number. But we're not commenting or guiding to that number just yet; so, preferred to give a macro number. Essentially the factors that can affect that or strange choice product mix requirements, there can always be onlining and commissioning, for example, when you commission a new building, especially in greenhouse, you'll often have things like a glass break that can go in the first month. So you'd have to deal with those issues. These are all relatively minor issues, but they can all affect the timeline by a week or two. Of course, HEXO has had over six years in greenhouse experience now, so our team is pretty good at handling those problems as they occur.

Operator

Your next question comes from Brett Hundley of Seaport Global. Please go ahead.

Brett Hundley

Hi, this is Luke Purdah on for Brett Hundley. First one here is can we get an update on the Trust partnership with Molson. The company expect to have production ready for late this calendar year. Is there any segment of the beverage market that you're targeting?

Sebastien St. Louis

Yes. Thank you, Luke. So, I'm glad you're asking the question. I'll take a moment to point out that that $400 million in net revenue next year that does not include trusts. And I want to clarify that that's not because trust [ph] have revenue, it's because the way the joint venture is structured, the 42.5% net income is expected to flow through HEXO's balance sheet, but the sales will be consolidated up into Molson. So we'll all see the sales there. Now, we're not giving you a number of what it's going to do but we're very confident and we're going to let Brett via the CEO of trust come out in the following months with his detailed plan. But essentially, October 209, as long as we get that beverage legislation as expected, we will be one of the top two average companies. Trust will be one of the top two beverage companies with a variety of SKUs across a variety of different products. And it's really a full spectrum strategy. We're targeting most segments of the market, although we won't be launching -- most likely we won't be launching economy segment right on day one.

Brett Hundley

And as it relates to HEXO's hub and spoke model, what's a good timeframe for expecting this model to fill out? Have you been in disappointed that you haven't found another partner by now?

Sebastien St. Louis

No, not at all. I think last quarter I said it would take 12 months. So that's what I committed to. We're well on track with that timeline and these are very complex deals and I won't sacrifice the economics of HEXO in terms of speed. So, what's important is finding the right partner, global distribution, best in class technology and we're also making sure that there's a cultural fit between the organizations. So all that takes quite a bit of time. If you look at the negotiation of the Molson deal, just the negotiation, it was almost eight months. So we're quite happy with the health of our funnel and we remain on track for delivering something in the nine months now.

Brett Hundley

And the last one here on the Newstrike Brands deal, you talked about that $400 million expected in revenue from the combined entity, seems fairly conservative based on Newstrike capacity and legacy growth brands with HEXO. Can you talk a little bit about the forward asset mix expectations for Newstrike and any other factors that might own your forward revenue projections?

Sebastien St. Louis

Yes. So, I'm not breaking up the HEXO and Newstrike. So forecast is really a function of us correcting the overly conservative analyst's estimates. I'm glad to hear your comments. I mean if you think that's conservative, that was certainly -- the intention is to hit that number. So, we'll do that or better and so anything above that is really upside. We're quite happy. Just providing that to the market is obviously a much bigger number than where the market had us. So we'll make sure we do that. I think if we can do better, obviously that's great, but achieving that $400 million in net revenue next year will firmly put us in the top two position we believe.

Operator

Your next question comes from Graeme Kreindler of Eight Capital. Please go ahead.

Graeme Kreindler

Good morning, Sebastien. Thank you for taking my question here. I wanted to touch briefly on the joint venture in Greece. I saw that you put in an initial investment in this quarter and you're expected to increase the ownership in the summer. Can you just outline in terms of how the capital commitments can roll out and what sort of developments are going on there in terms of an update on the facility being built and any other initiatives going on the ground right now?

Sebastien St. Louis

Yes. So, the reason we structured it as a joint venture is because HEXO as a company is very focused on adult use sales. We're very focused on delivering our powered by HEXO model and are working directly with Fortune 500. The issue was Europe in the short-term is that all the near-term revenue is really medical. And so what we did is to not distract our management team is we stood up. HEXO is really as a medical forward joint venture and that still gives us all the opportunity to use those facilities for transporting purposes on the adult use side. But as such, for the moment until we need to vertically integrate it, it's essentially going to be a 50/50 joint venture. So what we've done is about a $2 million investments and we own 50% of that venture. The venture itself needs to fund itself for the next phase of construction. We're expecting that that funding will be about €27 million will be the requirement. Currently, we're evaluating whether or not that HEXO will finance that itself directly, which could be very likely. So, that could potentially be about $50 million in CapEx from HEXO, which could, of course, increased our ownership and give us a control position. So, we're currently in discussions that. State of progress is very good that we have excellent relationships with the Greek government and are expecting licensing relatively soon.

Graeme Kreindler

And then I just wanted to get some more clarity on the development of the various zones in a million square foot greenhouse. I saw that the first harvest is expected in Q3. So, is there a number you can give on how big in terms of square footage these zones are and how they're expected to come online as the first one will now be on harvest schedule?

Sebastien St. Louis

Yes. So, on purpose, we've been trying not to do kind of a zone-by-zone licensing because we're trying to get some more meaningful press releases. But I can tell you that every single cultivation zone in that building is now fully licensed. The plants are rolling out very nicely and we're on track so there's no issues there. We do plan at the first harvest to actually do a full announcement kind of a ribbon cutting for the licensing of the entire building including the front of house. So that's going to be coming up in a press release a in the future.

Operator

Your next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.

Matt Bottomley

Good morning, Sebastien and Jennifer. I just wanted it to go back to the HIP deal, the Newstrike deal there and a couple of implications. The first just on the ability to diversify into other provinces. Are there other provinces outside of Quebec where you think Newstrike, obviously Ontario is probably one of them, gives you an edge or brings relationships in that will help you get increased purchase orders throughout Canada?

Sebastien St. Louis

Yes, I mean, I think the HEXO sales team has done a phenomenal job. We've obviously been focused on Quebec, but we were doing -- we have phenomenal relationships and BC, Alberta and Ontario. Really supply constrained to be able to flex that muscle. What Newstrike did that was there was quite good, they've also built the amazing relationships, but they've focused on province outside of Quebec. So, there was a lot of synergy. Not a lot of overlap. So essentially, yes, it's a good news story. I think that having a presence at Ontario will be meaningful to the OCS and the Ontario government. And so, we expect to be able to be one of the major providers there in the following years.

Matt Bottomley

Okay. And then going just back to the international comments, you had a little bit more of a focus on the longer term recreational potential outside of Canada. Does this deal at all expedite any of your other endeavors medically given that it is a bit easier to get product out the door from an indoor facility? At least that's been my experience speaking with a lot of LPs.

Sebastien St. Louis

Yes. So for sure, that gives us additional flexibility, especially for test runs in the lead in. Long term, I don't want the export from Canada. I don't know if that makes sense. That doesn't make sense from a costing perspective. Really what we're interested in doing is setting up zone by zone transporting. So think about a European product approval zone for HEXO products, Latin America product approval zone for HEXO products and then state by state in the U.S. where it's legal. Then we will stand up a global supply chain. Whether we source from marijuana or hemp-based cannabinoids in those various jurisdictions again legally, and hopefully from certain centers that are logistically better. So Greece would feed long-term our European endeavor versus Canada's taken care of with the existing infrastructure. The U.S. will be mostly fed by industrial hemp [ph], and Latin America most likely coming out of Columbia.

So what's significant about having that into our goal is the ability to start early work on fast-forwarding [ph]. We are applying for example, within DIMA [ph] in Columbia right now for HEXO product approvals which would give us a platform in Latin America. So that's the sort of low capital deployment impact that we're doing to really lever or attack our IPO regulatory expertise.

Matt Bottomley

Just one more for me. Just given -- the sector was pretty quickly, do you have any other updates on what the federal government in Canada is saying on these derivative product classifications that are hopefully going to come out in fall? And just what the techs are doing in preparation of potentially your SKUs going up, who knows, three-four-fivefold?

Sebastien St. Louis

Yes. So we're planning on having full product lines or [indiscernible], I mean we've hired in chocolatier onto our IDE Team and so we will be ready. My concern and the risk factor there is more of the government. So although we have indication that this will still be ready for legalization in October, there are rumors of a potential federal election before then, so we're just keeping our eye on that to see what impact that may have. But if we get the legal go ahead in October, HEXO will be ready as I mentioned with trust with a full line of beverages and also in a couple of animals category in base.

Operator

Your next question comes from John Zamparo of CIBC.

John Zamparo

Maybe we could start on the Newstrike deal. I'm just trying to better understand the supply constraints because it seems like the existing footprint in getting -- get you to over 100,000 kilos a year in relatively short order and only about a third of that is dedicated to Quebec. So I guess why did you feel the need to accelerate this and acquire capacity?

Sebastien St. Louis

Really because we're not constrained to Quebec, John. We have demand from all the other provinces, so as I mentioned, the HEXO team has been working very closely with Ontario, BC and Alberta, and we expect that their demand will be quite high. And given the lack of supply from various competitors, what's interesting about Newstrike is newer term supply. So we're completely confident or be -- our 108 tons, we will get there, and in fact maybe better but what's important is that near-term supply and supply that we have now and start to build the brand, ensure we get distribution and get in front of customers.

John Zamparo

And it has been communicated in the past that you may look to offload some of the ownership of the cultivation assets. Do you still look to own these in the future? Does this deal change that or do you still feel the same way as before about ownership of cultivation?

Sebastien St. Louis

I feel the exact same ways before. So it's -- that has not changed but that's a decision that will be made given the realities that come in the future. So before I can make that decision, we need to have that global supply chain. In the meantime, it's critical that we establish ourselves as that top two distribution partner with all the provinces because the provinces will require companies like HEXO to essentially run that wholesale distribution in the background. So there is a lot of things that have to fall in place for that to become a reality. I still think it eventually will.

John Zamparo

And last one for me; I just want to follow-up on the prior question about this coming October. What are your thoughts on preliminary regulations that have been released from Health Canada on derivative products? And how do you feel about your ability to operate within that? And I guess lastly, do you think the current proposed regulations present similar restrictions in the market as we've seen for round one of legalization?

Sebastien St. Louis

Yes. I mean, there is still tons of -- they are not as clear as we would like. I mean, we don't have clear marching orders at the moment from Health Canada. I know they are working very hard on delivering that and I'm confident that they will. In the meantime, HEXO's regulatory team has been in this ambiguous position for the last 5 years. I mean this is not new to us, regulatory ambiguity is something we thrive in and we can operate with whatever the regulator requires us to do. We're not capital constrained, we have a phenomenal team and so we will respond. Obviously, it has an impact on the quality of products available to consumers, so we're working tightly with Health Canada on those rags [ph] to try to make sure certain decisions are made that allow us to inform the consumer, put products on the legal market that can adequately compete with the black market and of course differentiate in the broader attributes, especially when we start to talk about or powered by HEXO experiences.

Operator

Your next question comes from Robert Fagan of GMP Securities.

Robert Fagan

Sebastien, I just want to focus on your guidance for the next quarter being so much flat in terms of revenues. If we kind of look at that outlook and assume you double sales in the Q4, it would still require a pretty significant rampup in volumes in Q1 2020 to hit your 20 tons supply commitment to Quebec. How confident are you feeling about that and is there any risk for that?

Sebastien St. Louis

I'm absolutely confident about that Rob. Look at historically what we've done in terms of rampup, so if you look at the multiples we've put forth on previous sales; I think there has always been a doubt for HEXO's ability to rampup and we've executed every single time. So I'm telling everybody now we will execute again. Are there risks? Yes. So there is some licensing risk around our Belleville facility. So that Belleville facility and the infrastructure and the backing is critical towards getting this done. But we've given ourselves adequate buffer, the license application is already in, we're already in conversation with Health Canada, and we have of course, phenomenal relationship. So we think that's adequately mitigated.

Robert Fagan

Other one on the Newstrike acquisition -- good support from the board and some management there but with no premium for pros, acquisition price and you know, the 25% of shareholders entering into support agreements; do you see any risks to that deal closing and/or maybe a longer time period to close it?

Sebastien St. Louis

Yes, there is always risk. I mean, I don't know if -- I don't expect anyone to come over the top. But I mean, if anyone wants to come and pay 4x the price, we're not going to get annoyed at that. At the end of the day there is an extreme alignment between HEXO's management and board and Newstrike's management and board, and their partners like the Hip. So we really have a shared vision and HEXO is really -- have the differentiated strategy. Our structure powered by HEXO centralizing intellectual property in the hub and being able to gain insight from consumers and every specific vertical while running those separate verticals with management teams that are experts in those verticals; that's a unique structure to HEXO. And so no other acquirer could offer that structure to Newstrike, so I think that they would remain very aligned to going on this journey with us. And of course, we do have 25% hard lockups which helps.

So I do think the deal will close but there are always risks that someone comes in and tries to overpay materially.

Robert Fagan

Just again, on the Newstrike deal, what's the plan for the branding of products across Canada? Are you going to rationalize any SKUs of Newstrike in favor of HEXO branded product or do you maintain kind of similar distribution to currently for the Hip brands versus your own?

Sebastien St. Louis

We're going to wait until close to really rationalize anything, see what -- exactly what we're going to do here. But conceptually, we want to push HEXO as a master brand strategy, so HEXO core products which includes our dried flowers, our [indiscernible], and then having powered by HEXO products that are distributed through Fortune 500s. So under that plan we're going to have to look closely in workloads over the HIP as well to see where the support comes in, and we look forward to giving those news post-close [ph].

Operator

Your next question comes from Steven Schneiderman of Cowen & Company.

Steven Schneiderman

Just one question on Q3 being relatively flattish. Is that more of a factor of what you're seeing in terms of market demand or is that more of a factor of current production limitations? And just also in the face of that you produced twice as much candidates as was built in the quarter, it would seem to -- that there should be enough inventory for a little bit more of meaningfully rampup in the quarter. So I just wanted to get your thoughts there?

Sebastien St. Louis

Yes, it's entirely related to the supply and packaging infrastructure. So I've alluded to this earlier in one of the questions but effectively growing cannabis is one thing and producing it and putting it on the inventory as bulk packaged inventory but then actually packaging is for the consumers and entirely different beast, and we're ramping all -- we're ramping up all that production infrastructure to rapidly accelerate; so that's really what's happening. Although the product coming off the line from our B9 facility is -- I mean, the hardest are starting soon. Once it come off the line you have all the testing protocols, you have all the cleaning protocols that need to go in such as the radiation or other, and then you need to actually have the packaging, shipping etcetera loading into the stores; so there is a delay there. And really it's that delay coupled with the kicking in of B9 which is causing a bit of a flat Q3 but of course we're unlocking that in Q4. So we think it's momentary and then there is really a complete decoupling when we hit that $400 million net [ph] next year, and of course, that's supported by very strong demand; that's why we're confident putting that number. We have that demand end up through multiple provinces beyond Quebec.

Operator

Your next question comes from Graeme Kreindler of Eight Capital.

Graeme Kreindler

I just wanted to ask a question with respect to Belleville. Are there any specific licensing requirements there or how are those expected to unfold overtime as we can scale-up there?

Sebastien St. Louis

Yes, so our intention is to get a master site license for the project, so that would be the entire 2 million square feet which essentially enables our future strategic partners to drop in without waiting, right. So the idea is that we would get a trust to operate under our HEXO license. So there are quite a few complexities due to achieving that but our regulatory team again had tons of experience there. You have your usual security requirements, all the laser fences, the cameras which we have tons of experience with. And from a sub-site license the various sections of the building will need to either have processing license or manufacturing license etcetera; all that's well underway, so we're confident we're going to deliver, certainly complex.

Graeme Kreindler

And then one last thing, is there a projected timeline for closing with respect to the Hip transaction or a target date at this point?

Sebastien St. Louis

We're planning on closing in 60 days following shareholder approval.

Operator

Your next question comes from [indiscernible].

Unidentified Analyst

I wanted to circle back to the JV with Trust here. You probably saw earlier this week that a new acting FDA Commissioner was announced, Ned Sharpless. I'm just wondering from the Farm Bill and how this relates to hemp and potentially more [indiscernible] and Trust. Do you see any setbacks with this interim FDA Commissioner?

Sebastien St. Louis

I don't think there is much setbacks as this is general understanding. So the state-by-state FDA approvals I think are going to progress. Of course that's still up in the air and anyone's best guess is to exactly when but we're feeling pretty confident, so let state that we will see FDA approval at the state level and that would be part of HEXO strategy to enter into the U.S. So at that point our strategy is to extracting those specific FDA legal states to source in industrial hemp in those specific states; and then to provide our formulated part by HEXO experiences through our Fortune 500 partners that was operating in those states and then feed in their distribution and manufacturing on a state-by-state basis. So the plan remains sound, the timing of course is still up in the air. So we're working hard on that.

Unidentified Analyst

And a follow-on to that now going into Canada, is it a fair assumption that in the U.S. this will be really focused on hemp derived CBD and in Canada there we could see a mix of THC and CBD beverages?

Sebastien St. Louis

100%. So our intention is to deliver a range of experiences. So one of those experiences, for example, is our powered by HEXO fund. That's euphoric [ph] experiences which requires THC, we would love to put that experience globally everywhere but we're not going to break any laws and any level of government to do it. What's exciting though is that it's not just a question of CBD, everything HEXO is trying to do is to go beyond the ingredient. So for example, anybody could put THC in a product and say, 'hey, go get high' in absolute fun; for HEXO, the power by HEXO fund is when we can dial-in that high if you will, deliver it in a said amount of time, guarantee a set offset time, have a consistency of experience, and maybe be able to take away some of the elements of that experience with THC that are not pleasant like the [indiscernible], for example. So we could bring in our powered by HEXO diet and combine it with our experience to basically modulate out of that regulation.

Speaking of that, when you start to look at industrial hemp, what's interesting is you have access to more cannabinoids from industrial hemp than just CBD. And the same way that we want to go beyond THC, we want to go beyond CBD where I want to do is take industrial hemp, extract it, gather a list of cannabinoids than formulate it using our proprietary patented powered by HEXO experiences, so we can deliver things like powered by HEXO diet with hemp legislation. So imagine a sparkling water that reduces appetite for 4 hours, that's a stretch-full [ph] given our IDE Team to put on the market, it won't be next month but I think over the following years we could certainly get there. That product would be fully enabled and that experience would be enabled under Hemp Laws. Overtime, our goal is to see full range approval including Marijuana Laws in the U.S. which should give us every single experience but we have a range of stuff we can do in the meantime.

Operator

Your next question comes from Scott Fortune of Roth Capital Partners.

Scott Fortune

You've covered everything, I just want to get a quick update on the medical side, obviously [indiscernible] but what you're seeing from the medical side and you expect to kind of go into the Europe to international side on the medical side for prior recreation and coming onboard there?

Sebastien St. Louis

So, HEXO itself from here is not interested in going out for medical in Europe. Our JV partner that's set up which is under the leadership -- well, we'll be announcing leadership shortly but our JV partner, HEXO Med in Greece will be exclusively focused on medical in Europe. So those plans will be rolled out in the future. As for medical in Canada, we're really seeing it as an additional direct channel. So there our intention is to basically centralize all of our product and branding under that HEXO brand, there is the changes coming in April from Health Canada which are requiring that to align, and so we expect to use essentially that channel to be able to test our forward products, test some ideas, advance innovation and we're excited about that potential.

I think when we start doing that we might start to see some update but it's nothing that's going to move the needle on that $400 million. Really the 90% plus of our sales are expected in the adult-use channel.

Operator

Your next question comes from John Zamparo of CIBC.

John Zamparo

One follow-up; I was just wondering if you could comment on your CapEx needs over the next -- call it, year and a half? Thanks.

Sebastien St. Louis

We're very capitalized. I mean the last $57 million we raised was really directed towards our innovation design and engineering department, so there is some CapEx required that in building up laboratory space, test kitchens, that type of stuff. In terms of our Belleville facility that total CapEx requirement is $100 million to start. Obviously, as we add small partners, there may be additional CapEx needs. When we start to look at Trust, for example, that's probably about our $24 million investment in the near-term but that could change materially if we add, for example, a large food partner to the mix which would require their own lines. So right now we're not anticipating and we need to go back to market, we're well capitalized with the [indiscernible] put in place for us, and so from a CapEx perspective we're in pretty good shape. But of course, as we grow strategically, I'll remind everybody on the call that I see the global vision for HEXO requiring significant amount of capital. So just as we've established a leading market share position on adult use in Canada, we know that that cost kind of a total of $400 million when we start to look at the CapEx and the OpEx.

So when I look at Europe, which long-term to be 5x the opportunity, that's $2 billion required over there, the U.S. is 10x; so that's another $4 billion. All that to say that over the next 10 years HEXO will require about $6 billion in capital to achieve it's vision, whether that comes direct from treasury in the form of raises or M&A, I think you're probably -- anyone's best guess but call it a $3 billion on the raise side and $3 billion on the -- essentially the M&A side to achieve our vision of becoming a Top 3 global cannabis player by market share.

Operator

[Operator Instructions] There are no further questions at this time. Please proceed.

Sebastien St. Louis

Thanks for your time everybody. Pleasure to talk to you, see you next quarter.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.