Organigram Holdings Inc.

Q4 2021 Earnings Conference Call

11/23/2021

spk00: Good morning and welcome to our Gannogram Holding Inc. fourth quarter earnings conference call for the fiscal year 2021. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session with analysts. We ask you to please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. As a reminder, this conference call is being recorded and a transcript will be available on Organigram's website. Listeners should be aware that today's call will include estimates and other forward-looking information. Please review the cautionary language in today's press release on various factors, assumptions, and risks that could cause the company's actual results to differ. Furthermore, during this call, reference will be made to certain non-IFRS measures, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS, and our approach in calculating these measures may differ from that of other issuers, and so these measures may not be directly comparable. Please see today's earnings report for more information about these measures. I would now like to introduce Ms. Bina Goldenberg, Chief Executive Officer of Organigram Holdings, Inc. Please go ahead, Ms. Goldenberg.
spk01: Thank you, Operator, and good afternoon. Thank you for joining us today. With me is Derek West, our Chief Financial Officer. For today's call, we'll discuss the financial results for the three and 12 months ended August 31st, 2021, and I will provide a general business update. We will then open the call for questions. To begin, I'd like to say how pleased I am to be part of the Organigram team and host this call with investors. With Organigram's reputation for high quality products, our strong brand portfolio, and our proven ability to innovate in ways that meet consumer needs, I believe we are positioned for success. What's more, we have the strategic partner, the team, and the resources in place to ensure we will execute on our growth strategy. Our fourth quarter 2021 results demonstrate progress against all of our strategic objectives. We achieved double-digit growth in recreational revenue. We introduced innovative products that were quickly embraced by consumers. We continued to improve our adjusted gross margin. We enhanced operations through adding key team members and advanced our product development collaboration with BAT. Also, and importantly, according to High Fire data, we grew our recreational cannabis market share to 7% in Q4 from 5.4% in Q3, positioning Organigram as the number 4 LP in Canada. And the momentum continues. Our latest data shows a market share of 7.9% at the end of October. Starting with our brand, in the quarter, we continued the revitalization of our portfolio with the introduction of 16 new SKUs into the recreational market, bringing the total to over 100 new SKUs in fiscal 2021. In addition, we recently introduced two new brands, Shredin's Gummies in Q4, and our CBD Forward Wellness brand, Monjour, subsequent to quarter end. We have been refreshing our portfolio based on our ongoing consumer research to ensure it is aligned with current and expected evolutions in consumer preferences. The launch of Shred and Big Bag of Buds is a great example of our strategy to tackle the migration to large format, low price and high THC offerings. While Big Bag of Buds offers 28 grams of high quality flour at a consumer friendly price, Shred is a potent value segment product that has built leading brand equity through its unique and bold flavor profiles. It has captured the imagination of the cannabis consumer, with sales growing 67% from Q3. Shred has remained the number one search brand on the OCS website for 11 of the past 12 months. When it comes to addressing the evolving needs of the premium cannabis consumer, we continue to invest in our Edison brand. In fiscal 2021, we introduced seven new high-potency strains that were well received by consumers. Moving forward through our in-house genetic breeding program, that's why our R&D investments in our advanced cultivation facility, we plan to bring new cultivars to market with unique terpene profiles and the high THC content that consumers are looking for. We also devoted significantly marketing budget to Edison to elevate new product introductions and solidify its brand position. And we are seeing the results of our marketing efforts. According to Brightfield's survey of 3,350 panelists over the August to September period, Edison experienced a 4% growth in brand awareness and achieved a significant increase in its numbers of social mentions and positive consumer sentiment scores. In fact, over 80% of consumers indicated they would likely recommend Edison to a friend. We will continue to invest in building our flagship brands with consumers, both in marketing and product development, to ensure this momentum continues over time. While we are committed to improving our mix in favor of premium products, we do recognize the importance of the value segment and its pivotal role in converting illicit market users to the legal market. That's why we continue to focus on offering brands such as Shred and Big Bag of Buds to consumers seeking a high-quality legal product at a fair price. That said, we are committed to ensuring we can do so profitably. While Big Bag of Buds has always had reasonable margins for the segment, we were able to leverage the strong consumer demand and loyalty on Shred to take price, which improves the margin on this popular brand. On the premium side, we expect that in time, consumers will become more discerning and will start making choices based on genetics, bud structure, flavor, and aroma profile, as well as other quality attributes. Our product development strategy anticipates this evolution, and we will be ready as the shift in consumer behavior happens. Moving on from flour, in the fourth quarter we launched Shred'ems gummies to leverage the success and brand recognition of Shred. Shred'ems are available in Indica, Sativa, and hybrid versions with exciting flavors like Sour Cherry Punch, Sour Mega Melon, and Wild Berry Blaze. Shred'ems quickly gained momentum capturing 5.8% national market share in the gummy category as of last week. This is the first product launched from our recently acquired Edibles and Infusions Corporation and demonstrates the synergies achieved from combining EIC's confectionery expertise with the strength of our Shred brands and our keen focus on consumer insights. The efficiencies that are in place at EIC also allow Shredins to be one of the most competitively priced gummies on the market. Launched in August, Edison Jolts was another first-to-market offering in the quarter that demonstrated our R&D capabilities, our creativity, and our commitment to consumer-driven innovation. Jolts are Canada's first flavored, high-potency THC lozenges. They are available in a package of 10 mint-flavored lozenges with 10 milligrams per lozenge for a total of 100 milligrams per package. For the eight-week period ending November 6th, Jolt's reached the number one position within the ingestible extracts category. And finally, last week, we announced a major addition to our cannabis derivatives lineup with the introduction of a CBD-infused soft-shoes under our new wellness brand, Monjure. They are offered in berry-medley and citrus-medley flavors, as well as in both vegan-friendly and sugar-free formats. Monjure offers 20 milligrams per piece and is attractively priced with 30 pieces per pack. Monjure is also produced at our EIC facility in Winnipeg. Again, EIC's highly efficient production technology means we can produce high-quality, low-cost edible products at scale. In fiscal 22, we expect to add even more edible products to our lineup in both THC and CBD formulations. Moving on to our growing facility in Mountain. In the past quarter, we launched several initiatives to increase the average THC content per plant as well as the average yield. These initiatives are aligned with consumers' demand for high THC and are expected to continue the improvements in our margin. In Q4, our yield per plant was 127 grams compared to 117 grams in Q3 and 101 grams in Q4 of fiscal 2020. We harvested about 12,000 kilograms of dry product in Q4 compared to about 8,400 in Q3 of fiscal 2021. The increased harvest helped to meet the growing demand for our products and for the growing store build-out in Ontario. However, we are reaching capacity at our month-end campus. The higher consumer demand for our products has meant that we are not able to take advantage of all the sales opportunities presented to us. In order to better capture these opportunities, we have decided to complete the Phase 4C expansion of our growing facility at Moncton, which will significantly increase our capacity and ability to meet and monetize further demand. This is a rare situation in the Canadian cannabis industry. While other Canadian LPs are closing facilities, we are expanding. I think this speaks to both the prudent initial build-out of our growing infrastructure and our compelling product offering. Our current annual capacity at the facility is approximately 40,000 kilograms. When the Phase 4C expansion is complete, the facility will have an annual capacity of approximately 70,000 kilograms of flower. We are also making design improvements and environmental enhancements to the facility to improve yields and flower quality. In the fourth quarter, we significantly advanced the build-out of our Centre of Excellence, or COE, in Moncton that we are building as part of our product development collaboration with BAT. As has been discussed in prior quarters, the COE will develop the next generation of breakthrough cannabis products, IP and technologies. Both OrganiGround and BAT are contributing scientists, researchers and product developers. Currently, we have reached the first 100-day milestone in the project with staffing, construction, and project planning underway. In the next 8 to 10 weeks, we expect to have the remaining core construction projects completed with the bio lab to be completed in Q2 of fiscal 2022. Research collaboration has begun with the initial focus on CBD cannabis, vapor, and oral products. This is an exciting opportunity. This strategy should enable us to grow our market presence in Canada. What's more, having access to new IP from the collaboration and the ability to sub-license the technology opens up significant opportunities in the US and other markets. Finally, before Garrett provides the financial overview, I'd like to comment on our international sales to Israel. We recently resumed shipments to Kandahar and we expect to make further shipments in fiscal 2022. This is a high margin revenue source for us and one that provides our leading cultivars to markets outside of Canada. Over to you, Garrett.
spk02: Thanks. I will start with our strong financial position. In terms of liquidity, we ended fiscal 2021 with $184 million in unrestricted cash and short-term investments, compared to $75 million at the end of fiscal 2020. This $109 million increase was primarily due to the $65 million unit offering done during November of 2021, the $221 million private placement as part of a strategic investment from VAT, net of the allocation of $31 million to restricted funds for the C of E, along with $115 million used towards debt repayment. Our strong cash position and debt of $300,000 ensures we are well resourced to execute on our growth strategy. As Dina mentioned, earlier this year we made the decision to complete the Phase 4C expansion at our Moncton campus. The budget amount for Phase 4C is estimated to be $38 million and began in fiscal Q4 2021 with completion targeted during fiscal 2022. We have sufficient resources to support these expenditures and the corresponding growth to our working capital assets while still maintaining sufficient liquidity and financial flexibility. In addition, on August 31st, we filed a preliminary base shelf prospectus, which allows us to move quickly to access even more financial flexibility, if necessary, to pursue attractive growth opportunities should they arise. To date, we have not offered any securities under the space shelf prospectus. Net cash used in operating activities was $7.7 million during Q4 fiscal 2021, which was flat compared to the same prior year period. For the fiscal 2021 year, cash used was $28.6 million, down from $45.1 million in fiscal 2020, mainly as a result of improved inventory management. Net cash provided by financing activities was $55,000 during Q4 fiscal 2021, down from $46 million for the same prior year period, which had been driven by draws from the credit facility. For the fiscal 2021 year, cash provided by Finance and Activities was $174 million, up from $150 million in fiscal 20, with the current year's net amount driven by the net proceeds from the equity investments net of debt repayment. Turning to our earnings results for Q4 fiscal 2021. Gross revenue grew 24% from Q3 2021 and 43% from the same period in fiscal 2020 to $36.2 million. And net revenue grew 22% from both Q3 2021 and from the same period in fiscal 20, respectively, to $24.9 million. These increases to revenue was primarily due to higher recreational net revenue, which grew 36% from Q3 and 52% from the same period in 2020 due to an increase in sales from the flower categories. Cost of sales decreased 11% year-over-year to $26 million, primarily due to the current period's lower cost of cultivation and due to the nearly $11 million in inventory write-offs and provisions recorded in Q4 of last year. As expected, the charge related to unabsorbed fixed overhead and inclusion cost of sales continues to decline again sequentially. It is anticipated that we will no longer have unabsorbed fixed overhead, and we expect this to help our margin going forward. We harvested approximately 12,000 kilos of flour during Q4 fiscal 2021, compared to approximately 8,800 kilos of flour in Q4 fiscal 20, an increase of 38%. This increase was directly related to increased cultivation, planting and staffing during Q3 and Q4 of fiscal 2021, which was done to meet the growing demand for many of our new products as part of the product portfolio revitalization, as well as the increase in industry demand. Largely due to higher net revenue and lower cost of sales, gross margin in Q4 improved to negative $1 million from the negative $8.6 million in Q4 of 2020. On an adjusted basis, gross margin was $3 million compared to negative $700,000 in Q3 of 2021. We expect that the price increase to shred, as well as lower production costs, will further improve margins. SG&A, excluding non-cash share-based compensation, increased to $13.6 million in Q4 2020, from 10.8 million in Q4 2020, largely due to the establishment of the Organigram-BAT Centre of Excellence, increased data licensing fees with the continued goal of stores in Ontario, combined with marketing initiatives behind Edison and the launch of our new company products as well, as well as higher audit and related professional fees in connection with the company's regulatory requirement to obtain an integrated audit opinion for the first time for fiscal 2021 financial statements. Also, as a result of improved revenues and margins, adjusted EBITDA was negative $4.8 million in Q4 2021 compared to negative $9.2 million for Q3 2021, the most recent quarter. We also reduced our net loss year for year from $39 million to $26 million. Overall, we are pleased with our improving financials and the momentum we are seeing. Based on this, we currently believe that we will achieve positive adjusted EBITDA by Q4 of fiscal 2022. This concludes my comments. Thank you. I would like to turn the call back to Venus.
spk01: Thanks, Derek. As you've heard today, we have generated significant momentum in Q4 fiscal 2021 against all of our strategic objectives, which include achieving strong sequential revenue and volume growth in addition to doubling market share, innovating to bring new and exciting products to market, and improving our ability to match our supplies with increased demand for our product portfolio. We also expect to see further improvements in our adjusted gross margin as we continue to realize economies of scale from cultivation and as our price increase on shred comes into effect. We are excited for what fiscal 2022 holds for Organigram. Looking ahead, we expect to continue our strong momentum as we maintain our focus on increased points of distribution, growing market share, exceeding consumer needs by bringing more insights-driven and innovative products to market, and improving our ability to fulfill growing demand. I look forward to updating you on our progress. And now, operator, you may open the call for questions.
spk03: Thank you, ma'am. And as a reminder, if you wish to ask a question, simply press star, then the number one on your telephone keypad. And we ask you to please limit yourself to one question and one follow-up question. You may recoup if you have further questions. Once again, if you wish to ask a question, simply press star, then the number one on your telephone keypad. Your first question is from the line of Federico Gomez. Your line is now open.
spk10: Hi, good morning, guys. Congrats on the quarter. Thanks for taking my question. So first question is just on market share. You guys are obviously getting share really rapidly in Canada now, number four LP here. So that's positive. But just wondering, how do you plan to keep those market share gains or just how sustainable do you believe they are? Just considering the fragmentation in the market, the heavy competition of price, and we've seen some other LPs gaining market share and then losing some of that. So what are your thoughts there?
spk01: Thank you, Federico, and for your question. um look they we believe we have a very strong position with our shred brand we see a heightened consumer interest through the search on the ocs website for the brand we see strong consumer pull and demand to the extent that at this point we can't supply the demand that that brand is generating with consumers. And we think it's a unique offering because it's not simply a milled flour. We're providing bold sort of flavor profiles that are resonating with our consumers. At this point, we believe there's opportunities to extend our momentum and our market share because we see that there's opportunities to extend trends to other regions across the country. We currently sell most of our product in Ontario and Alberta with a little bit of shred being sold in Quebec. The demand is out there. We have plans to continue to build out our capacity so we could fulfill that demand. So that's on our Shred business. We believe there's further opportunities. And with respect to Edison, which is our premium brand, we need to continue to bring news to that brand and keep making sure it resonates with the cannabis enthusiasts. And we will do that with continuing to bring new flower unique strains out to the marketplace and bringing some other products such as vape that we have with live resin, other products that will continue to advance that brand as a more premium brand within our portfolio. So we're confident that we have the plans in place to continue the momentum and that we have the consumers interested in our brand and will be coming back for more.
spk10: Okay, thank you, Bina. That's helpful. And then just on international markets, you know, you mentioned your shipment to Israel, but are you looking at any other markets out there in Europe in addition to Israel? And to that point, you know, would you consider an acquisition to enter some of those markets? We've seen some LPs there making acquisitions, you know, in Germany, Netherlands. So any caller there would be helpful. Thank you.
spk01: Yes, sure. So in terms of renewing or resuming our shipments with Israel, so we have a great partner in CanDoc and have an opportunity to continue to supply that market. We currently supply the Australia market and are working with our partner Canitrek in Australia to continue to build out our portfolio there. so those are markets that we're currently in and certainly the news on on germany that's been coming out makes it a market that we will continue to explore but in terms of interest in acquisitions in other european markets at this point we'll continue to evaluate the opportunities We'll continue to look at how regulations change because sometimes the news happens way faster than the actual changes happen in the regulations. So we'll monitor it and continue to evaluate opportunities in the international market.
spk10: Thank you. I'll hold back the video. Thanks.
spk01: Thank you.
spk03: Your next question is from the line of Rahul Sarugarat from Raymond James. Your line is now open. Rahul, your line is now open.
spk11: Good morning, Bina and Derek. Sorry, I was talking to myself on mute. I apologize for that. Thanks so much for taking my question. So congratulations on driving a terrific top line, quarter-on-quarter growth, as well as market share. My question, however, is really on margins. We saw the gross margin profile relatively slack last between last quarter and this quarter. Given the capacity expansion that you talked about, Bina, as well as the changes in the unabsorbed fixed overhead that you talked about, Derek, can you give us a little bit more color in terms of how you expect margins to improve over the next few quarters?
spk01: Thank you, Raul. Let's start, then I'll pass it to Derek to add to my comments. First of all, as you can imagine, As we increase production, we get economies of scale in our facility. We saw that benefit as the numbers improved between Q3 and Q4 of 2021, and we expect to continue to see that opportunity as we build out more capacity within our facility. We have some environmental enhancements that are driving the deals, and we expect that to continue to drive improved gross margins. as well as driving higher THC. And we all know that we can get higher average selling price if we sell higher THC products. You know, as I talked about in my opening, we did have the ability to make a price increase on Shred. And that is a unique thing to have in this market where most of the prices are coming down, but we have such high consumer demand that we're able to be recognizing our inability to fulfill all of the sales opportunities. We were able to take a price increase, which again will help our margin. And finally, as we look towards 2021, there's an opportunity to improve our margins through improving our provincial NICs. Right now, we're heavily sold in market to be the most compressed margin market. And as we expand to further provinces, we expect to see improvements in our margins. So those are a couple of comments, but Derek, I'll let you go next.
spk02: Yeah, I just add, I guess in addition, we are reviewing our sourcing with suppliers and considering more strategic sourcing. There is opportunity for further automation with regards to our blinds with a shred pre-milled flour, along with we'll have in Q1 the automation of our second pre-roll machine and have labour savings with that. So we do see some near-term improvements with our margin. As well, we were leaving Q4 near capacity, but during Q4 in the early parts, we were not at capacity, and there was a heavy 6th. cost component to our operations. And as we achieve these economies of scales from operating in Q1 at the current capacity and then with the filled out, we do think that we can drive down fairly significantly our cost of cultivation that will allow us to have sustained quarter-by-quarter improvements. to our cost and therefore to our adjusted gross margin. And just by example, in going from Q3 to Q4, our adjusted gross margin went from negative 4% to plus 12%. So in one quarter, just from some of the initiatives we've already implemented, we've improved our adjusted gross margin by 16%.
spk11: Great. Thanks so much for that, Collar. And then just pivoting towards the British American Tobacco Partnership, specifically given the investment that you have in Hyacinth and the recognition that this was potentially a key motivator for that partnership, we're starting to see biosynthesis or fermentation-derived products start to hit market by a few of your competitors. Maybe give us an update in terms of that partnership, how you see products rolling out, and maybe potentially a broader update on the British American Tobacco Partnership.
spk01: Okay, perfect. So let me start with Hyacinth. As you said, we have invested in Hyacinth. This is something that we believe there's a long-term opportunity to build out from this partnership. We actually did a strategic review of the investment back in the summer and found we were very happy with the progress being made, very happy with the IP that has been developed, and we continue to look forward to the opportunity to further our investments our relationship with Hyacinth because we do believe down the road there's an opportunity around biosynthesis of some of those rare cannabinoids, and we'll look forward to updating you further on that relationship and helping you to invest and build that one. As for the BAT partnership, that is you know, prominent every day in what we do. We have great relationships with our investor. We have the center of excellence, as I mentioned earlier, that is well on its way and being out. We've hired scientists and product developers and researchers both from BAP as well as from OrganiGram that are working together. We have the build out of the Centre of Excellence almost complete. As we said, we expect all the construction to be completed by Q2 of fiscal 2022. That includes not only the lab, but also the bio And this is the facilities to work with our collaboration projects to continue to build out, you know, that we're looking, you know, around Canada. floral and vapor products and CBD products. So lots of opportunity here to continue to, you know, build out the IT and the technologies that we think have some opportunity for both our companies. But we would have that ability to take it to other markets around the world.
spk11: Great. Thanks again for taking our questions and congratulations again on the quarter.
spk01: Thank you.
spk03: Your next question is from the lineup, Rupesh Parikh from Oppenheimer. Your line is now open.
spk09: Thanks for taking my question. So I guess just going back to that target for positive EBITDA margins later in your fiscal year, is there any way to frame, I guess, what type of gross margin you expect to get to to be able to achieve that target? And I guess a second question is just, I guess as you look at the capacity right now that you have, I guess what type of revenue, once the facilities are fully ramped, what type of revenue do you think you can get up to with your existing facilities?
spk01: Derek, why don't I pass that one over to you?
spk02: Okay. As it relates to the margin that we would need, to get the positive adjusted at the door. I mean, that's not really the type of guidance we would normally provide. I know we are providing the positive guidance, but just based upon where we are today and the trends and the products. that we have and the cost analysis that's been done and our control over our SG&A costs. We are confident that we can get to the Q4 adjusted at the top positive, and that will happen over time, gain benefit as well from the economies of scale from operating at the higher output, more towards the 70,000. In terms of what type of revenue that it results in, I mean, you're not going to, of course, sell everything that you produce when you're at 70,000 kilos a year in capacity because there are packaging and processing losses. But what the ultimate top-line revenue and sales number is, extrapolates to is really dependent strongly on the mix of the flower that's being offered and whether it's in mainstream or indoor value and when it's with pre-roll. So there can be large fluctuations with that. I think that you can look at some of the you know, the data points on the net average selling price and our disclosures and come up with a range for it. But it's not the type of extrapolated guidance that we would be comfortable going on record with at this time. But, you know, we are providing the guidance that we will be at least at 70,000 kilos of flour by the end of the year after completing the construction. So that is the guidance we can provide.
spk09: Okay, great. Maybe just one follow-up question. So clearly your liquidity position seems to be better than peers. Where does it emanate in the strategy going forward at this point for the company?
spk01: So thank you for that question. Look, we're continuing to look at opportunities as they make sense in our business. Right now there's a lot of talk about, you know, what is the opportunity in the U.S.? Watch as things keep moving forward and we'll just as we evaluate those regulations, when or if it's right for us to move into the U.S. market and how to do it. So we'll continue to look at opportunities. We will go there when it's time for organic RAM, not because other competitors are there. And look, we're watching what our other competitors are doing. So it's something that we'll continue to evaluate. And I'd say beyond the U.S., there are opportunities in Europe that we could look at. But there are certainly opportunities in Canada as well as we strengthen our position in the Canadian marketplace. So right now, we're focused on getting our foundations right, getting our business, our product portfolio revitalized, growing our market share. And as we see acquisitions that fill in our portfolio, So gaps in whether it's in segments, gaps in certain regions, we'll look to fill those gaps with accretive acquisitions that make progress.
spk09: Great. Thank you for all the color.
spk03: Your next question is from the line of Aaron Gray from Alliance Global Partners. Your line is now open.
spk02: Hi, good morning. Thanks for the questions and congrats on the market share gain and improvement on the gross margin. So just want to double back my question in terms of some of the gross margin commentary, specifically as it relates to what you said, Derek, in terms of targeting EBITDA profitability in 4Q 2022. Okay, just maybe, you know, maybe get some targets you have, you know, within that to help get that break even mark, maybe in terms of metrics for gross margin or top lines to help us kind of model out, you know, how we might get to that. Thanks. Yeah, I understand the desire to run the models off of that. There's just so many variables that can come into play, whether it's when the flower comes off in terms of what market range and what brand, there is a large range in selling price. uh depending on the product format and the brand that can lead to to a range and so you know i kind of look at it in terms of the average of averages that's based upon um getting to the higher level and capacity which we only get to at the end of the year um and after the construction is complete that is it's very reasonable that we would expect to be at a break-even or positive. But to get grammar in terms of what that exact math is, I'll let everyone do the modeling on that. But we do believe that we can significantly reduced our cost of cultivation as we produce at a higher level, going from 47 kilos of flour to 70,000. And there's, of course, what's improved yields from the innovation work that we're doing. There's extra opportunity there that would go on top of that. But there's just too many variables at play for me to put it on one or two. But we are confident that based on the cost structure of the facility and our overhead expenses, and the fact that we have the capacity to sell um the product that's coming everything is being harvested and in the foreseeable future that we're confident that we will be able to be at a positive compute for you know that's helpful commentary uh thank you for that um and then second question for me uh you guys done really well in terms of market share you know as of recent uh so just You know, a lot of your previous talks about, you know, shifts, you know, to more consumers shopping in brick-and-mortar. The team kind of regained some share gains, you know, during that time. So I just wanted to hear about you guys and your strategy as consumers potentially go to more shopping in brick-and-mortar versus online. You know, how you're looking to maintain, you know, the market share trends that you guys have. Protected, maybe if there's maybe less of a focus on price. I know you guys also talk about, you know, the value proposition you have within that price range. But what would be your kind of commentary now in terms of potential shifts in consumer topping in higher positioning. Thank you.
spk01: Yes, sure. No problem. So I would like to just remind everybody that one of the unique differences for Organigram is that we have our own dedicated sales force. And, you know, while many of our competitors use third party, we're focused day in, day out in this space. And our team is out in retail stores, meeting with bud tenders. And so we We think that that's a competitive advantage for us. We'll continue to build out, you know, our presence in the stores. You know, we were able to get our shred and gummies significantly into distribution within, you know, 12 weeks of launch. We were out in mass distribution across the country, except Quebec, but we were able to get that product out quickly. And that is, so as you talk about what happens as people start going back into stores and The reality is I think that's going to be a benefit for us. We know that it will help our Edison brand where bud tender recommendations are important. We'll do some more in-store activations, which we weren't able to do last year during COVID. And so getting, you know, the name out, getting that contact, it will help us maintain our business. our presence and continue to drive our momentum. But we have bud tender education programs. We kicked off a program called Plant Lab last year, and it's a dedicated program for bud tenders and learning about the quality of our products and available to consumers. And on top of that, we'll continue to improve our consumer communication strategies. It's a difficult category because you can't market like traditional CPG companies can to consumers, but there are two places we could reach our consumers, and that's in-store and it's on online and you know the in-store was uh hampered last year with all the retail restrictions during covid so we're excited about the opportunity to ramp that back up and continue to improve our online programs to really reach the consumers both for our Edison brand and for our other new products like our gummies and our jolts that we think have great potential to continue to drive further improvements in our product mix.
spk02: All right. Dreena, thank you very much for that call and commentary, and I'll jump back to the queue.
spk03: Your next question is from the line of Tammy Chan from BMO Capital Markets. Your line is now open.
spk04: Thanks. Good morning. Sorry to hound on the growth margin again, but I just want to make sure I understand. Going from the negative 4% growth margin last quarter to 12% is quite a significant recovery. So was that more due to changes in your product mix, or was that largely because you're producing more and so you had those economies of scale? Was it more due to the latter?
spk02: I would say that the improvement of the 16% was more to do with cost improvement that we achieved at the facility over Q3 and the early Q4 that did allow for the improved margin and that was prior to operating at full capacity at the 45,000 kilos and that was why we were gaining confidence as to the improving cost structure and the improvement to the margin. We're always looking to sell our products in the brands and formats that allow for the highest selling price. And that will, of course, be a big improvement to the margin as well. But we have seen the improvement over the last quarter significantly come from improvements in the cost structure.
spk04: Oh, so it was improving to the cost structure, so this was even prior to getting to more production economies of scale?
spk02: Correct, which was one of the drivers along with the sales demand for our product that gave us the ability to give the guidance on the adjusted at the end of the year.
spk04: Interesting. Okay. So it sounds like now that you're producing more and as you continue to produce more through fiscal 2022, that's where that upside to more margin improvement will come from. Okay. And my next question is, can you give us a sense, like your big bag of buds and your shred, I know you just took that price increase on shred. With those two product lines, Like, are they in the positive margin, gross margin territory at this point now, or is like shred after the price increase still kind of like just that break even? Like, can you just give us a sense of the margin you get off of those two products? That's it. Thank you.
spk02: Yeah, at this time, I'll look my way around. product categories and brands have a positive margin, product margin, but to get into the details of one over the other and format sizes and provincial jurisdiction is, you know, not something that we would normally get into, but I would indicate that because of the lower cost of production already achieved over the last couple quarters, but our lower categories have positive product margins.
spk04: Okay, thank you.
spk03: Your next question is from the line of Adam Buckham from Scotiabank. Your line is now open.
spk08: Good morning. Thanks for taking my questions. So maybe just following up to Tammy's question there, Derek, are you able to provide some more color on, particularly in the flower segment, what the mix between value and premium was for you guys this quarter and, you know, where that compares to maybe the last two quarters?
spk02: I would say that Shred has been very popular and that's been great for OrganiGram in the sense that we've been able to have demand that exceeded our production capacity at the time and perhaps lost sales on the table in that situation. So it was over the last couple of quarters with the success of Plans with the Shred, has increased the percent of total with regards to the value for much of the value brands. However, with our current spend and future spend on innovation, And we know that is a focus of ours to have more product available in mainstream to premium brands. And as well, I would refer to some of the comments made by Abin in terms of M&A opportunities that would always be considered to complete the portfolio. We don't historically give volume breakout by brands, but no question, the success of blends through Shred has... created a bigger percent to the total in terms of the sales of the facility, but that's helped cover the overhead costs and has allowed for us to show these improved margins.
spk08: Okay, great. That's good color. Thanks, Derek. So just my second question. So obviously, you know, if you look over the last four or five months, you know, many of your peers have kind of tried to jump into premiumizing their overall portfolio. So if you look at your market share gains through the summer, it sounds like a lot of them have come through the Shred brand and the associated products through that. So if you look more specifically at Edison, are you able to provide some color on how market share has trended in the premium category for you guys, like with the launch of the new strains, are you starting to see greater uptick? Some color there would certainly be helpful.
spk01: Okay, Adam, thanks for that question. So our focus on Edison, and as I mentioned in my comments earlier, is really going to be around building that consumer connection. We're investing in Spark. you know, to continue to build on that brand awareness and the loyalty factors attached to Edison. Certainly during COVID, the ability to talk to consumers more Get Bud Tender recommendations was limited. We see over the next year the opportunity to strengthen the messaging and that connection with our consumers on Edison. We also have the plans in place to introduce some new products that bring some new news to Edison. So not only new screens, but also it's safe at Edison. product under Edison just to continue to build out that portfolio beyond just flour on a more mainstream consumer as opposed to it all being about I think Edison is more than just ITHC. We're talking about adding terpenes to our labels. We're talking about adding more visibility to our screens. And these are things that I think over time the cannabis enthusiasts will be interested in. So, you know, it's a slower build on Edison, but I think we have a really good platform which to build and continue to build that brand. While we leverage, as I said earlier, leverage Shred to, you know, to get those new, those consumers from the illicit market coming over with a lower price offering, higher THC offering, you know, that one is, an easier message. We don't put a lot of our marketing funds towards Shred. I think the positioning in the market works on its own, but our investment is being made into our Edison brand.
spk08: Okay, that's great color. Thanks and congrats on the quarter.
spk01: Thank you.
spk03: Your next question is from the line of Douglas Maine from RBC Capital Markets. Your line is now open.
spk06: I guess as part of this gross margin question, I am curious if you could comment on if you're getting close to capacity today at 40,000 and as you move to the 70,000, can you tell us what's going to be required to get there in terms of are there any new approvals required? As you bring on capacity, is there a chance that margins could decline over the next few quarters before We get to Q4.
spk02: Obviously, I don't really see where the margins, in terms of being impacted for the extra capacity, just there is this fixed cost component in terms of running the facility, whether we're talking about labor or other overhead types. costs. And as we add new rooms and add new capacity, we are spreading those costs over. And so I'm not really seeing where margins are going to be interfered with. I mean, obviously, there's a little bit with room changeovers and things as we make these various environmental and other enhancements and line enhancements to the facility. But on an overall basis, in moving from $40,000 to $70,000 by the end of the year in terms of I do not really see that we would have a disruption to the monthly or quarterly cost structure that would hurt the margin. But beyond the cost of the flour, there are other factors beyond, you know, the quality of the followers being sold as well with our derivative products. We recently launched in Q4 with Edison Jilts along with the Shredham Gummies and the derivative products. And they're capturing a larger part of the market share and becoming a larger part of our revenue. And so that will also assist the overall margins for the end grant as we look forward.
spk06: Okay, perfect. And then... Maybe you could comment on, you know, one of the things that you've obviously been very good at is your ability to identify changes within the consumer, how they're thinking. And maybe you could describe some of the new consumer research that you're seeing right now and how that's changed over the last, let's say, 6 or 12 months and how you intend to take advantage of that. Okay. And that's it for me. Thanks.
spk01: Sure. Thank you for the question. So in terms of where we see the consumer going over the course of the next little while, we do see the evolution where consumers will start to look at not only the highest THC for the lowest price, but we'll start to really care about aromas and flavors. And we'll also look at the genetics and making sure that You know, there's something unique and interesting about it. So there's a certain kind of foodie approach to the cannabis enthusiasts that they want new and unique, different cultivars. So we think that will happen and we'll be ready with our in-house breeding programs to continue to provide that under our Edison brand. We also see that the wellness segment will continue to be a trend. We just launched our Bonjour, you know, providing CBD in a sort of daily regimen. We believe that more wellness will continue to build over time, and, you know, we have to have offerings to consumers that perhaps aren't looking for the high but are looking for the wellness benefits of both CBD and balanced CBD THC offerings. You know, I think, you know, these are things, you know, the consumer will continue to look at edibles instead of oil. You know, over time, I think the oil segment has declined as edibles have become a nice way to get, you know, discrete but, you know, specific milligram intake over time, sort of dosing. get into that gummies category very quickly. So we have said that we have, you know, last quarter we talked about our Cannabis Innovations Panel. We have 2,500 consumers that we speak to to get better insight into trends. We used that panel to understand flavors to launch in our gummies. We used it to look at what we want to do on pre-rolls or on chocolates. So we have an opportunity to continue to dip into that consumer research and continue to adjust our portfolio accordingly.
spk06: Great. Thank you.
spk03: Your next question is from the line of Andrew from Steeple. Your line is now open.
spk05: Hi, good morning. Thank you for taking my questions and congrats on the profitability improvement in this quarter. Maybe just talking about your REC performance. You mentioned that you took price increases on Shred. I'm wondering what that did to the average net selling price in the quarter. And, you know, if you continue to take price increases on Shred, where that can go in tandem with your premium offerings?
spk01: Thank you, Andrew. And so let's just talk first about the increase on shreds. So here's a brand that we're struggling to supply the demand. And when that happens, taking prices is a natural response. We have... had our Alberta price increase in market in August, as of August, and the Ontario increase took effect at the end of October. So the benefit of the price increase we'll see in our next quarter's results as we continue to grow those brands. But I think That should help the margin on that brand. And there are other opportunities as we have supply to take the brand to other markets. Ontario is the most price compressed market. So just expanding that brand in other regions will also help on our average selling price for that brand. When you asked about Edison, we feel strongly that our Edison brand maintains a good position in the marketplace for a mainstream brand in terms of pricing. And we just need to continue to provide news and excitement behind that brand. And that's you know that's our strategy as we move into fiscal year 2022 talk to talk to consumers talk to bud tenders add innovation it's a it's a great opportunity to continue to build our mix towards premium and then you know as i mentioned earlier the gummies that we're launching so our derivatives both Bonjour and our Shredin. Add an interesting mix, obviously, higher ASPs as you move out of the flower segment. So we're excited about the opportunities as we look at our product portfolio moving forward.
spk05: Thanks for that. And maybe just continuing on that, you know, you talk about the continuing revitalization of the Edison brand. Maybe just providing a little bit more colour on the mechanics behind that. Do you need to win any SKU listings for that? I'm not sure that you're required to do that in the past. You may have just switched them out with your existing legacy strains. Just some colour on the path forward given the provincial markets or the provincial buyers are are being a little bit more stringent with skew listings here.
spk01: Yes, sure. Look, part of our interest is to have the best-selling products in the marketplace at all times, right? And so I think we're working with the provincial boards to make sure we have our best offerings in their portfolio. So we will work with them and, you know, look at if we have any slower movers and switching them out to add new SKUs. There is... a need for new in this category to continue to refresh the portfolio. And so that is an ongoing process that we currently do with our provincial boards. And so we're not worried about trying to get too many more incremental SKUs. We're looking at optimizing our offerings in each board to make sure we have the best selling SKUs in the marketplace. Certainly when we bring in something that's unique, like our Edison Joltz, you know, we find a way to get in incremental, you know, listings across the board. But there is a need to ongoing, you know, rationalization and optimization of your portfolio. And so as we bring new cultivars in, we retire some and continue to refresh our portfolio.
spk05: Thanks for that. I'll get back in the queue.
spk01: Thank you.
spk03: Once again, if you wish to ask a question, simply press star, then the number one on your telephone keypad. Your next question is from the line of Green Gringler from Heath Capital. Your line is now open.
spk07: Hi, good morning, and thank you for taking my question. With respect to the expansion of capacity at Phase 4C, the company is still incurring charges for unabsorbed fixed overhead and the cost of sales. So I wanted to know what those charges are related to, given the fact that it's currently expanding capacity, and what types of level of output are needed to be achieved to fully absorb that overhead. Thank you very much.
spk02: yeah um thanks i can take that question the unabsorbed overhead which was more significant in the earlier quarters um was as a consequence of the under utilized uh portion of the depreciation on uh our chocolate business our chocolate machine and secondly to the unused grow rooms that um And that was mostly occurring in the earlier quarters. We had a much smaller amount impact our Q4 financials, but looking forward, We do not expect to have any of these conserved overhead amounts as a consequence of reducing the rooms as they're available for growing, et cetera. So that was more of a historical context. And as that cost comes out of the cost of sales and we're using all the rooms, we're absorbing the rest of the cost naturally through our margins. And so that will have an overall positive effect. impact to the gross margin. And those costs mainly relate to the depreciation, property tax, and insurance on the unused rooms or unused rooms at the time. But again, as we got to capacity at the end of Q4, it was more of a nominal charge for Q4, not expected to reoccur even with the expansion. Because as new rooms come on, we'll only be depreciating them as they're put into use, and they'll be immediately put into use And so hopefully that provides that clarity you're looking for.
spk07: Okay, understood. Thank you for that. Then with respect to incremental capacity coming online with Phase 4C, can you comment on the company's position in downstream packaging and processing, what the spare capacity looks like to handle the increase in production errors that had been a bottleneck in the past? Thank you.
spk01: So thank you for that question. We continue to invest in automating our production, you know, our downstream processing. We had one automated pre-roll line last year. We brought on a second automated pre-roll line last year. just in August or September of this year. We're looking at more automation in our packaging and in our blending. So as we build out our capacity, we're also looking at downstream processing to make sure that we're able to not only grow the flour, but get it out the door and meet our consumer demand. So that's all part of plans and efficiencies that we hope to gain in this fiscal year.
spk07: Okay, thank you very much for that.
spk01: Thank you. And thank you, everybody, for joining this call today. Thank you, operator. And I look forward to updating you on the progress moving forward. Have a good day.
spk03: And with that, this concludes today's conference call. Thank you for attending Q&A Now Disconnected.
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