Following a recent acquisition spree, HEXO Corp. (TSX:HEXO) (NASDAQ:HEXO), a consumer packaged goods cannabis company, announced in December that it was streamlining its operations to core facilities as part of its ongoing integration plan. HEXO plans to close two 48North plants in Ontario at the end of January. It also will decommission the Zenabis facility in Nova Scotia by the end of February. The closures will affect about 155 employees, who the company will relocate if they take jobs at another HEXO facility.
The company recently provided an update on its strategic plan, designed to solidify HEXO’s position as the number one cannabis company in Canada by recreational market share, with the goal of becoming the first amongst its peers to be cash flow positive from operations.
The plan is expected to generate incremental cash flow of approximately $37.5 million in fiscal 2022 and an additional anticipated and approximate $135 million in fiscal 2023 for a total of $175 million over the two years, from a combination of cost reductions and anticipated organic revenue growth.
“It is a strategic imperative for HEXO to strengthen its capital position and restructure the Company’s operations to ensure a path to achieving positive cash flow from operations within the next three quarters,” Scott Cooper, president and CEO of HEXO said in a press release. “As an organization, we are making strategic decisions quickly to ensure we have the optimal operating footprint we need for the next phase in HEXO’s strategic evolution while remaining focused on the needs of customers and in our continued efforts in product innovation.”
The announcement provides updates on two strategic pillars: streamline and simplify the organizational structure and reduce manufacturing and production costs.
These initiatives are expected to represent a 30% reduction in the Company’s SG&A by fiscal year-end 2023. These cost reductions will be achieved through a combination of reduced reliance on outside consultants, streamlining the organization as a new IT platform is implemented, right-sizing the organization, and realizing the synergistic benefits of the recent acquisitions.
In addition to the SG&A savings, the Company has also identified approximately $30 million in additional savings from optimizing HEXO’s production network and leveraging the capacities of its recent acquisitions.
Analyst Scrutinizes Latest Hexo Plan
The moves, disclosed in a Wednesday morning corporate update, come a month after Hexo embarked on a “transformative plan” in which some of the company’s top executives and board members were replaced. Analysts are skeptical about plans outlined by Canadian marijuana producer Hexo Corp. to slash manufacturing and production costs and sell some non-core assets as the Quebec company looks to turn itself around after years of losses, reported MJBizDaily.com “Considering Hexo’s indebtedness and cost structure, we continue to view material financing, dilution, and going concern risks impacting the company until a comprehensive balance sheet restructuring occurs,” ATB Capital Markets analyst Frederico Gomes wrote in a note to investors.
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