Organigram Holdings Inc. (NASDAQ:OGI) Q1 2023 Earnings Call Transcript

Organigram Holdings Inc. (NASDAQ:OGI) Q1 2023 Earnings Call Transcript January 12, 2023

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings First Quarter 2023 Earnings Conference Call. Thank you. Craig MacPhail, you may begin your conference.

Craig MacPhail: Good morning, and thank you for joining us today. As a reminder, this conference call is being recorded, and a replay will be available on our Organigram website. Listeners should be aware that today’s call will include estimates and other forward-looking information, which the Company’s actual results could differ. Please review the cautionary language in today’s press release on various factors, assumptions and risks that could cause our actual results to differ. Further, references will be made to certain non-IFRS measures during this call, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable.

Please see today’s earnings report for more information about these measures. Listeners should also be aware that the Company relies on reputable third-party providers when making certain statements relating to market share data. Unless otherwise indicated, all references to market data are sourced from high-fire data as of November 30, 2022, pulled on December 21, 2022. I would like to introduce Beena Goldenberg, Chief Executive Officer of Organigram Holdings Inc. Please go ahead, Ms. Goldenberg.

Beena Goldenberg: Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today’s call, we’ll discuss the results for the three months ended November 30, 2022, and a general business update. We will then open the call for questions. The first quarter of fiscal 2023 reflected the results of our efforts in fiscal 2022 to enhance scale and efficiency through facility expansion and productivity improvements. These initiatives have had a positive direct impact on our bottom line. In the quarter as well as a 43% year-over-year increase in net revenue, we delivered our fourth consecutive quarter of positive adjusted EBITDA, positive net income and record adjusted gross margin. In Q1, we maintained our number three position among Canadian LPs. We were number two in the flower segment, number three in gummies and hash and again held the number one market position in capsules.

SHRED remains a solid and well-recognized brand, embraced by cannabis consumers and we continue to hold the number one position in milled flower by a wide margin. We expect our focus on product innovation, brand revitalization, strong sales execution and advanced plant science will enable us to continue to gain share. Looking at provincial board data. We have leading market share in the maritime and we’re number one in flowered gummies and hash. In Ontario, we have the top three selling SKUs. We were number three in gummies, number two in hash and whole flower and number one in milled flower and capsules. In Quebec, our sales have nearly tripled compared to Q1 of fiscal 2022. This is partly from the addition of products from the Laurentian acquisition, but also due to significant increased sales of our overall portfolio.

Based on data from Weak Crawler, we had the number one hash SKU, we’re number one in milled flower, and SHRED was the third largest brand in the province. This national market strength comes from our focus on creating products that excite consumers. In Q1, we introduced 17 new SKUs, including infused pre-rolls, such as Edison Grape Crescendo and Tremblant Sweet Cherry. In November, we launched Holy Mountain, a new brand in English Canada and Wo La in Quebec. These brands offer unique strengths such as R*NTZ and MAC-1 and 3.5 gram format and pressed hash. They provide us a position in the small pack size value segment that isn’t covered by our successful Big Bag O’Buds. In terms of production, with the 4C expansion completed at Moncton in Q4 of fiscal ’22, we achieved scale benefits from a record harvest in Q1.

After the expansion, Moncton has an annual capacity of 85,000 kilograms, but this will increase as we continue to refine our cultivation technology. This includes LED lighting implemented in fiscal 2022 and fractional watering, which is now in place in all grow rooms. In the quarter, we achieved a yield of 168 grams per plant, a 30% increase over 129 grams in Q1 of fiscal ’22. As a consequence of a larger capacity and improved yields, the Company has significantly reduced its cost of cultivation, the lowest cost in our history. In Winnipeg, we have increased our output for gummies in kilograms by 35% from Q4 ’22 to Q1 of ’23. This was driven by the increase of Monjour units in response to high consumer demand. We continue to have great productivity on our packaging line with 35,000 to 40,000 pouches per day production.

At Lac-Superieur, construction is substantially complete. We expect to begin to move into the new building in February, which will help support the launch of several new exciting hash SKUs. The greenhouse expansion is expected to come online in May. This will take us towards expanding the facility’s annual capacity to 2,400 kilograms of craft flower and over 2 million packaged units of hash. As well as expanding and increasing automation at Lac-Superieur, we are adding staff to the packaging chip to increase production. Another initiative completed in Q1 was transitioning our medical cannabis business from direct patient fulfillment to having orders completed through medical cannabis by Shoppers Drug Mart. This provides a proven and trusted platform for our patients.

We remain committed to our medical cannabis business, ending Q1 have added 26 SKUs to the Shoppers channel. Our center of excellence is now active and focused across various cannabinoids to develop and launch new product technologies. One area of activity is supporting discovery and development efforts on novel vapor ingredients and substrates. This research also creates an industry-leading vapor data set that will serve as a foundation for future development activities, including consumer safety, product quality and performance. The state-of-the-art Biolab facility has been operational since June. The focus is on developing genetic toolboxes to aid the research of key cannabis traits and accelerate R&D activities. This has already supported several plant science discoveries that will benefit our current plant portfolio and long-term growth strategies.

So overall, this foundation of increased capacity, high-quality, efficient production and innovation serves us well in addressing markets in Canada and internationally. In Q1, we delivered $5.9 million of dry flower to Israel and Australia. This is a 71% increase over $3.4 million in Q1 of fiscal 2022. On November 17, we signed a new agreement with Canndoc in Israel. This agreement over a three-year term supply allows for the shipment of 10,000 kilograms of dried flower with an option for Canndoc to order an additional 10,000 kilograms. This is a great long-term partnership with Canndoc. The products sold in Israel is dual-branded with Organigram and is identified as indoor growth Canadian flower, which is recognized as premium product by Israeli consumers.

We also expect to make further shipments to Australia in fiscal 2023 and are looking at other international opportunities. I will now turn it over to Derrick to present the financial review, and then I will return with some closing comments.

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Derrick West: Thanks, Beena. As Beena mentioned, in the first quarter of fiscal ’23, we benefited from the increased efficiency and scale we created in fiscal ’22. Gross revenue grew 37% from Q1 ’23 to $60.9 million, and net revenue grew 43% from the same period in fiscal ’22 to $43.3 million. These revenue increases were primarily due to higher recreational net revenue, which grew 43% from Q1 of fiscal ’22. The cost of sales in Q1 fiscal ’23 were $32 million compared to $28 million in Q1 ’22, an increase of 13%. The low increase in cost of sales relative to the increase in revenues was due to the lower cost of production that was achieved through higher output from expansion and improved yields. We harvested approximately 22,000 kilos of flower during Q1 ’23 compared to about 12,000 kilos in the same prior year period, an increase of 92%.

In Q1, the harvest benefited from the increased annual capacity at the Moncton growing facility to 85,000 kilos. We expect to see similar harvest levels in ’23, which positions us well to meet our Canadian and international sales demand. On an adjusted basis, gross margin was $12.8 million or 30% of net revenue over the $5.5 million or 18% in Q1 of ’22. The significant improvement in adjusted gross margin was primarily due to the higher overall sales volumes, combined with a lower cost of production. SG&A, excluding non-cash share-based compensation, increased to $15.7 million in Q1 ’23 from $12.6 million in Q1 ’22, while our total spend increased as a percentage of net revenue, SG&A expenses decreased to 36% from 42% in the previous year’s quarter.

The increase over the prior period was primarily due to the increased employee headcount related to the acquisitions of the Winnipeg and Lac-Superieur facilities, increased professional fees, ERP implementation costs and non-cash amortization of the intangible assets acquired from the acquisitions. In the quarter, we achieved positive adjusted EBITDA of $5.6 million compared to negative $1.9 million in Q1 ’22. The primary drivers of this significant improvement in profitability were the higher volume of products sold and the lower unit per unit cost of production, which resulted in a large increase to gross margins. Q1 ’23 was our fourth consecutive quarter of positive adjusted EBITDA, based on our outlook for revenue, including international sales and improved efficiencies primarily achieved through scale, we expect this trend to continue.

In the quarter, we had net income of $5.3 million compared to a net loss of $1.3 million in Q1 fiscal ’22. The transition to positive net income is primarily due to higher gross margins along with a fair value gain in biological assets that occurred as a result of a large number of plants now growing in the multi-facility as a consequence of the 4C expansion. From state in a cash flows perspective, there was cash provided from operations of $3.5 million compared to cash used of $9.3 million in Q1 ’22. This improvement was primarily driven by the quarter’s positive adjusted EBITDA and a decrease to accounts receivable. Cash used in investment activities in Q1 ’23 was $1.7 million compared to cash generated of $54 million in the prior year’s comparison period.

In Q1 ’23, the cash use reflects a net redemption of short-term investments of $5 million, offset by the purchase of property, plant and equipment of $8.4 million. Note that cash generated in Q1 ’22 includes proceeds of $60 million from the redemption of short-term investments. In terms of our balance sheet, on November 30, 2022, we had $95 million in cash and short-term investments compared to $99 million at the end of fiscal ’22. The small decrease is primarily a result of capital expenditures of $8.4 million, partially offset by the cash provided from operating activities. With Organigram generating positive adjusted EBITDA and the expected completion of the planned CapEx spend during fiscal ’23, we expect to generate positive free cash flow by the end of calendar 2023.

This concludes my comments. I will now turn the call back to Beena.

Beena Goldenberg: Thanks, Derrick. Before we open the call to questions, I would like to reiterate that our success in the first quarter of fiscal 2023 resulted from the strategic investments we made in our business in fiscal 2022 that helped improve our margin and enabled us to compete profitably in today’s competitive industry. This disciplined approach will continue and will help drive solid progress throughout the rest of the year. Thank you for joining us today. Operator, you may open the call for questions.

Q&A Session

Operator: Your first question comes from the line of Andrew Partheniou from Stifel. Your line is open.

Andrew Partheniou: Congrats on the great quarter here. I wanted to talk a little bit about gross margin, please. I think Q1 was the first quarter where you benefited from the expanded production in Moncton, as you mentioned, we saw some great gross margin expansion. And then in the outlook section, you mentioned that it could potentially stabilize from these levels in the rest of fiscal ’23. Please correct me if I’m wrong in interpreting that. But assuming that’s what your press release indicates, could you talk about what kind of expectations you have for price compression that could offset your yield improvements and scale benefits that you expect to see in the rest of fiscal ’23? Maybe you could — to the extent that you can dive down into your assumptions, price compression on the types of products? And is this primarily on your domestic business here in Canada? Or do you see the potential for price compression on your international sales?

Derrick West: Yes. Thanks, Andrew. I think that we’re seeing price compression now in the Canadian rec market, particularly around flower. And when we factor that in, notwithstanding, we do believe that we can continue to decrease our cost of production as a consequence of just the continued flow through of the higher yields and in terms of our cost of cultivation that will help our flower margins and as well with the CapEx spends around automation, et cetera and the extra margin we should be able to get from Lac-Superieur based on having an improved cost structure there post expansion. I think that while we have room for all things being equal, we have room to improve the gross margin rate in the Canadian rec business, if everything remained equal.

But as noted, we do see price compression that could be such that it is equal and offsetting. We’re hopeful that it will not be fully equal and offsetting. But in light of that, we do believe that we can achieve the current gross margin rate that we have now being the 30% as we move forward. And if the price compression is not meaningful as we look at this, then we have room to increase the rate. And of course, as we continue to grow, which we would expect, knowing the innovation that we continue to do as sales move up will be more gross margin dollars, But the guidance we’ve given is specific to the rate of 30%, which we haven’t historically provided, but we are comfortable that this is the new normal for us in the climate of the current market and again, with an offset for some price compression.

Andrew Partheniou: Appreciate that fulsome answer. And if I could switch gears a little bit and talk a little bit about the balance sheet inventories, biological assets. Seeing that you did increase it this quarter, which I think you previously guided to and in line with the production expansion, could you talk a little bit about your internal planning and what you’re comfortable with in terms of the level of biological assets and inventory in any way that you’re comfortable with talking about a turnover absolute dollars or anything like that? And when do you think that inventory of biological asset could be a source of cash going forward?