Gatineau pot producer Hexo targets European cannabis market with Greek expansion

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Hexo co-founder and CEO Sébastien St-Louis. Photo provided

A slew of expansion announcements and fresh attention on Gatineau-based Hexo have driven the company’s share price up nearly 40 per cent in the three weeks following shareholder’s calls to explore options to boost the cannabis producer’s market standing.

The latest big news came this week when Hexo (TSX:HEXO) announced it will establish its first international production facility in Greece. The firm will partner with a Greek medical pot company, Qannabos, to establish a 350,000-square-foot production facility in the Mediterranean nation where medical-use cannabis will soon become legal.

Hexo CEO Sébastien St-Louis tells OBJ that the move to Greece will give the firm a European base of operations from which to expand when and if adult-use cannabis is legalized in markets such as the United Kingdom and France, a move he expects in the next three years.

Hexo got its start tackling the Quebec cannabis market – the company landed a five-year, $900-million supply deal with the province – but sees a much bigger opportunity internationally. St-Louis says Canada’s pot industry, where he expects to take a 12 to 15 per cent market share of cannabis products in the coming year, will be worth around $10 billion by Hexo’s measure. He says the company expects the European cannabis market to be worth $110 billion if it follows Canada’s lead and legalizes the drug across the board.

"That would mean we've become a Fortune 500 company right here out of Gatineau, Quebec."

St-Louis says Latin America’s marijuana market, where Hexo is also eyeing expansion opportunities, will be worth another another $10 billion. Round it out with the $100-billion estimate for the United States, and with Hexo eyeing two-per-cent cannabis market share internationally, that’s a $4.6-billion business.

“That would mean we've become a Fortune 500 company right here out of Gatineau, Quebec,” St-Louis says.

Cannabis bubble?

Of course, that’s assuming things go according to plan, and in the cannabis space, certainty is currently in low supply. Some observers are calling the rapid surge of cannabis stocks ahead of Canadian legalization in October a bubble.

St-Louis says while the pot market is “very frothy” – analysts use “froth” to describe market conditions preceding a bubble – he doesn’t think we’re there yet. He urges investors to do their “due diligence,” but he considers Hexo to be on solid footing, citing long-term supply deals such as the one in Quebec as a sign of the firm’s stability.

The price of Hexo’s own stock has been a recent point of contention. Earlier this month, Hexo shareholder Riposte Capital sent a letter to the firm’s leadership team asking the company to undertake a strategic review of options – including potentially selling the company – to boost what it viewed as an undervalued share price. While Hexo said it wasn’t going to do that, the company and analysts agreed the firm’s shares have been undervalued.

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Inside Hexo's Gatineau cannabis production facilities. Photo by Mark Holleron.

The market appeared to agree. Since the letter was sent, Hexo’s share price has risen roughly 38 per cent, trading at around $8.50 on Friday. That’s an increase of more than 87 per cent since the start of the year.

While St-Louis says the letter itself and associated media coverage may have helped draw attention to Hexo, he “disagreed with the process.” He said volatile share prices have a negative impact on the industry as a whole and he doesn’t spend his days worrying about how far up or down Hexo is trading.

“I think we need to concentrate on building long-term revenue streams, we need to concentrate on customer-centricity and building great products, and the stock will take care of itself,” he says.

In the near future, St-Louis says Hexo will be looking to list on a U.S.-based stock exchange to attract American institutional investors to the company.

Ontario-based ‘centre of excellence’

Earlier this month, Hexo bought a 25 per cent interest in a two-million-square-foot facility in Belleville, the site of a former Sears distribution centre. The building, purchased in a joint venture with Olegna Holdings, will be Hexo’s first footprint outside of Quebec.

The Gatineau firm will initially lease 500,000 square feet in the facility, with first right of refusal on the remainder. The space won’t be used for growing cannabis; instead, the facility will be a manufacturing and R&D “centre of excellence” for Hexo to collaborate with industry partners on new cannabis products.

The space will host the firm’s industry partners such as Molson Coors, which announced last month it will work with Hexo to develop cannabis-based beverages. St-Louis says the firm is looking for similar partners in the cosmetics, edibles and vaping industries.

“If Molson decides that they need 150,000 square feet, I can offer it to them. If an Estée Lauder comes to the table and says, ‘I need half a million feet,’ then I can offer that to them. So it's really about flexibility,” he says.

The Ontario cannabis space received a bit of clarity this week when the provincial government laid out its rules for private cannabis retail. The framework puts no limit on the total number of retail licenses issued by the provincial cannabis agency, but licensed producers would be limited to a single outlet at a production facility.

That’s great news for Hexo, which is not hoping to run its own retail operations. Rather, St-Louis says the ability to get its products into an unlimited number of dispensaries in the province expands its market penetration opportunities.

Back in its home province, Hexo’s headcount has passed 300. That includes two executive hires last week: Dominique Jones, formerly “chief people person” at Ottawa’s Halogen Software, will join the firm as vice-president of human resources, while Nick Davies will become Hexo’s vice-president of marketing after a career that includes 13 years as an executive with Ottawa’s Corel.

Before hopping off a Friday afternoon phone call squeezed between meetings, the busy chief executive made a point of praising his growing team, a note he says often gets lost between high-profile announcements.

“I'm very proud of all the hard work everyone's doing … often I get the pop, but I don't get to thank the team,” he said shortly before hanging up.