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spk06: 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 second quarter 2023 earnings conference call. 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. We ask that you please limit yourself to one question and one follow-up question. You may re-queue if you have further questions. Thank you. Max Schwartz, you may begin your conference.
spk10: 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 Organigram's website. Listeners should be aware that today's call will include estimates and other forward-looking information from 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, reference will be made to certain non-IFRS measures during this call. including adjusted EBITDA, free cash flow, and adjusted gross margin, among others. These measures do not have any standardized meaning under IFRS and are intended to provide additional information and as such should not be considered in isolation or as a substitute for measures of performance prepared in accordance with 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 in combination with data from Weed Crawler, provincial boards, retailers, and our internal sales figures. I will now introduce Bina Goldenberg, Chief Executive Officer of Organigram. Please go ahead, Ms. Goldenberg.
spk04: Thank you, and good morning, everyone. With me is Derek West, our Chief Financial Officer. For today's call, we'll discuss the results for the three months ended February 28th, 2023 and the general business update. We will then open the call for questions. We continue to generate solid financial results in the second quarter of fiscal 2023. We achieved a 24% year over year net revenue increase. The quarter reflected the typical seasonality we have seen in previous years where sales into provincial boards declined from December through March. We delivered record adjusted gross margin in our fifth consecutive quarter of positive adjusted EBITDA while maintaining our number three market position among Canadian LPs. In Q2, we were number one in the milk flour segment, number three in gummies overall, number one in pure CBD gummies, and have had the number one hash brand nationally. I'd like to point out that the wins we've had in the hash segment are a great illustration of our core strengths. We acquired Laurentian Organics in December 2021. We leveraged our in-house sales and marketing team to achieve national distribution for Tremblay hash. We then expanded our presence in the segment by introducing Woola and Holy Mountain pressed hash. Additionally, we innovated in the category with the launch of ShredX Ripstrip hash, the first product of its kind in Canada. So to sum it up, we identified the right acquisition, applied our CPG expertise to gain share in a new segment and introduced a new product that created consumer excitement. Now let's talk about Shred. It is a well-recognized cannabis brand in Canada with SKUs in the most popular market segments. Shred milk flour holds the number one position in its category by a wide margin and with three of those SKUs, Tropic Thunder, Funkmaster and Narbury, have been the top-selling SKUs nationally for the six months ended February 28, 2023. Shred products are now available in almost 90% of retail stores in the country, and the brand has generated $190 million in retail sales in the past 12 months. This is a brand platform that continues to deliver success. Looking at regional board data, we have the leading market share in the Maritime, and we're number one in milled flour, gummies, and hash. In Ontario, we were the number two LP. We were number one in milk flour and capsules, number one in hash, and number three in gummies. We are also very pleased with our growth in Quebec, where we have held a strong number three position. This is partly from the addition of Laurentian's products, but also due to significantly increased sales of our overall portfolio. Based on the data from Weed Crawler, we had the number one hash SKU and were number one in milk flour. Our strong position in the market and our continued success comes from our focus on creating innovative products that excite consumers as their tastes evolve. In Q2, we introduced 18 new SKUs, including 8 new Holy Mountain SKUs. As I mentioned, we launched ShredX RipStrip Hash at the end of Q2, and the response has been extremely strong. It is an exciting new hash format that addresses many pain points consumers report when using hash products. and opens the hash segment to new consumers. The hash is formatted in 10 pre-cut strips that can be used to make your own infused pre-roll and offered in Tropic Thunder and Blueberry Blaster flavor profiles. Our patent-pending Edison jewels continue to lead in the ingestible extract category with 85% growth in sales compared to Q2 of fiscal 2022. On March 13th, we announced that Health Canada determined that JOLTS lozenges in the 100 milligram THC per package format were improperly classified as an extract rather than an edible. Health Canada has allowed us to continue to sell and distribute our inventory of JOLTS until May 31st. Now, Organigram launched JOLTS in 2021 following significant research, development, and regulatory work. We remain of the view that the patent-pending jolts are properly classified as cannabis extracts and compliant with cannabis regulations. We have filed an application with the Federal Court of Canada seeking judicial review of Health Canada's determination. As court proceedings can take some time, we intend to file a motion for a stay seeking to set aside the decision in the interim. In terms of production at Moncton, we are achieving scale benefits from the completion of the 4C expansion. We continue to implement environmental and technology improvements designed to increase both yield and cultivar quality. Also, new cultivars, including several developed by our plant science team, are being screened with a view to be added to our portfolio. Finally, CO2 extraction has been optimized to generate higher yields. In Winnipeg, we continue to increase our capacity to meet the high consumer demand for Mon Jour. As of February 2023, the facility produced an average of 3.1 million gummies per month. We also continue to see solid productivity on the packaging line, with 35,000 to 40,000 pouches per day being produced. Construction is complete at Lac Superior. And while we expect the greenhouse to come online in the summer, we have moved our hash production into the new facility. In February, we commissioned an ultrasonic blade with a capacity of 150 units per minute and automatic labeling equipment to help us meet the demand for our new ShredX Ripstrip hash. The vape category is an area of focus for our product development collaboration with British American Tobacco. This includes analysis of volume, particle size, and pressure. This will help us assess the quality of different devices. In parallel with this, we are conducting a quantitative sensory analysis with our in-house expert trained panel of over 200 individuals. This research will serve as a foundation for future development activities, including consumer safety, product quality, and performance. Further, these insights are expected to enable Organigram to capitalize on the new vapor heating technology garnered from our $4 million U.S. investment in GreenTank Technologies, a leader in vape hardware and technology. This investment, which took place after quarter end, is reflective of our commitment to grow in the vape category. We believe GreenTank's technology is the first true innovation in vaporization in almost a decade. It solves many of the clogging and performance issues associated with vapes and may also increase the perceived potency per puff. We have obtained exclusivity for this new technology in Canada for 18 months after it is introduced to the Ontario market and expect to launch this improved 510 format product by the end of our fiscal year. Moving on to international sales. In Q2, we delivered a record $10.7 million of dried flower to Israel and Australia. For the first six months of fiscal 2023, our international sales have reached $16.6 million, exceeding the $15.4 million of sales in the full year of fiscal 2022. The significant international sales in the quarter reflected the introduction of several new SKUs in Australia and Israel. Going forward, we expect international revenue to normalize to the level seen in the past two quarters. Now, before I turn the presentation over to Derek, I'd like to comment on the continued pricing pressure we are seeing in the market. While many producers have discussed not wanting to participate in a race to the bottom, we are seeing the opposite in the market. large format 28 gram offerings with a sub $100 retail price point increased by almost 300% over the past six months. Large format pricing in some markets has reached the point that concerning the cost of production and the excise tax burden, the products are being sold at a loss. This is not sustainable and hurts the cannabis industry. While our low cost structure allows us to compete at these reduced prices, We have not matched the aggressiveness of our competitors and have seen some market share erosion in our large format flower. At Organigram, we are focused on delivering value to all stakeholders. We are confident that our branding and marketing expertise, proven track record of innovation and operational efficiency will provide long-term success and leadership in the cannabis industry. This is supported by our strong balance sheet, which allows us to continue to evaluate investment opportunities that increase our competitive advantage. Over to you, Derek.
spk08: Thanks, Bina. As Bina mentioned, in the second quarter of fiscal 2023, we benefited from the increased efficiency and scale we created in fiscal 22 and Q1 of 23, supported by strong international sales and product introductions. In fiscal Q2, gross revenue increased 20%, while net revenue increased 24% compared to Q2 fiscal 22. The increase over the previous year was primarily due to increased adult use recreational and international sales. As Bina mentioned, price compression across the market did have an impact in the quarter. The cost of sales in Q2 fiscal 23 was $29.6 million compared to $24.9 million in Q2 of the prior year. an increase of 19%, which is 5% lower than the growth to net revenues. The increase in the cost of sales on a year-over-year basis was due to higher recreational and international sales volumes for the same period. A $3.5 million net realizable value provision for unsaleable inventory is included in the Q2 23 cost of sales figures. We harvested approximately 21,000 kilos of flour during Q2 fiscal 23 compared to about 10,000 kilos in Q2 fiscal 22, which represents an increase of 110%. In Q2, the harvest continued to benefit from the increased annual capacity at the Muckton growing facility. We expect similar harvest levels to continue through fiscal 23, which positions us well to Canadian and international sales demand. On an adjusted basis, Q2 gross margin was $13.4 million, or 34% of net revenue, over the $8.3 million, or 26%, in Q2 fiscal 2022. Despite price compression in the market, this is our highest adjusted gross margin rate in the past three years. The significant improvement in adjusted gross margin was primarily due to the higher overall sales volumes, combined with a lower cost of production and increased international shipments. SG&A, excluding non-cash share-based compensation, increased to $16.1 million in Q2-23 from $14 million in Q2-22. While there was a small increase to the total dollar spend, as a percentage of net revenue, SGA expenses decreased to 41% from 44% in the previous year's quarter. The increased dollar amounts over the prior year's comparison period was primarily due to the following. the increased general corporate and office expenses as a result of the company's growth, increased employee costs, and ERP implementation costs. In the quarter, we achieved positive adjusted EBITDA of $5.6 million compared to $1.6 million in Q2 2022. Adjusted EBITDA for the first six months of fiscal 23 was $11.2 million, exceeding the $3.5 million realized for the full fiscal 2022 year. The primary drivers of this significant improvement in profitability were the higher volume of products sold, the lower per unit cost of production, and increased international shipments, which collectively contributed to our increased gross margin. Q2 23 was our fifth consecutive quarter of positive adjusted EBITDA. Based on our look for revenue, including international sales and improved efficiencies primarily achieved through scale and automation, we expect this trend to continue. In the quarter, we had a net loss of $7.5 million compared to a net loss of $4 million in Q2 2022. The increase in net loss was primarily due to a lower gain in the fair value adjustment to derivative liabilities. From a statement of cash flows perspective, Net cash used in operating activities was $19.7 million in Q2 23 compared to $803,000 in the prior year period. The increase in cash use is primarily due to the increase in accounts receivable in the quarter due to increased sales including significant international shipments during February. As well, there was a large decrease to payables at the end of February as the company reduced their obligations in preparation for the Phase 1 ERP Go Live, which was done on March 1st. Cash provided by investing activities in Q2 23 was $11.7 million, compared to cash used of $22.6 million in Q2 22. The current quarter's cash was provided from a $15 million redemption of GICs, net of $5.6 million in capital, capex spending. In terms of our balance sheet, On February 28th, 23, we had $72 million in unrestricted cash and short-term investments compared to $99 million as at August 31st. The decrease is primarily the result of capital expenditures of $14 million and an increase in net working capital assets of $6 million. With organic grant generating positive adjusted EBITDA, the stabilization of net working capital assets combined with the completion of the fiscal 23 CapEx spend We expect to generate positive free cash flow by the end of calendar 2023. This concludes my comment. I will now turn the call back to Bina.
spk04: Thanks, Derek. As a leading pure play cannabis company, we aren't just looking for short-term wins. We're invested in and advocating for the success of our industry for years to come. We have put in place industry-leading production facilities to achieve our goals. and are committed to continuously improving our efficiency. We have brought CPG expertise to the industry and are committed to exciting consumers with novel products that build our brand. This focus and our financial discipline are expected to deliver solid results through the rest of the fiscal year. Thank you for joining us today. Operator, you may open the call for questions.
spk06: Thank you. At this time, in order to ask a question, press star, then the number one on your telephone keypad. As a reminder, we ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Andrew Partineau from Stiefel GMP. Your line is open.
spk00: Hi, good morning. Thanks for taking my questions and congrats on the great gross margin here. Just wanted to talk a little bit about the REC channel and the pricing environment that you were talking about during the call. You mentioned that you're not necessarily going to compete at the same irrational price levels that you're seeing on the value side. That has resulted in a little bit of market share loss, and you've introduced some new products to try and compete a little bit differently in that market. but inventory seems to have increased this quarter as you expanded production. So I'm just wondering what kind of inventory level do you think is adequate for the business and how are you thinking about this given it sounds like it may be challenging to drive volumes in the segment that's responsible for a large majority of your sales in this irrational price environment?
spk04: Yes, no problem. And thanks for the question, Andrew. I think right now, just to be clear, we feel pretty comfortable with our inventory levels where we're at. Remember, at last year, we struggled to supply our consumer demand. We were hand to mouth for most of the year. We were buying a significant amount of flour from other LPs to meet our commitments. And we were restricting our international sales opportunities. So, you know, right now we don't, you know, we're watching our inventory. We don't anticipate having any kind of issues with the amount of production because we believe we need it to meet our demand for our rec and our international business. We did build in sort of extra safety stock so that we could improve our customer service levels. Um, last year we struggled with on time in full and by building some extra safety stock, we're, we're able to maintain, you know, higher levels of service to our customers, which was important. Um, and, and just remember, you know, a lot of people look at market share erosion and they're looking at dollar market share, but we're selling more kgs to get to the same level. Right. So we're watching that difference, uh, as well, you know, our, our current. difference between the kilos that we're selling and our dollars is about one and a half market share points. So just to be clear, we need the volume to compete, even when we're not driving down to the irrational pricing. It means we're pulling back from certain markets that are less rational to say, but we are still competing in the flour segment. We are, you know, we have a strong, skew in our big bag of buds that continues to perform at a much higher price than others with our pink cookies offering. And we've introduced some new large format flour under Holy Mountain. And we believe that brand really speaks to a specific consumer. So we're not walking away from large flour formats. We're out there. We will compete. We will continue to bring new specific strains that at you know good quality higher thc offerings but we just won't compete at the very low prices it's just not sustainable and we have by the way had conversations with some of the boards uh where there aren't um price floors in the market and have said you know it's introducing the consumer price point when you go below even below sub hundred dollars that isn't sustainable. And it's really tough to move consumers off of a price point once it's established. It's really not a good practice for the industry. And we have received recognition that there needs to be something done here. So, you know, as I said in my comments, we're in it for the long term. We want to make sure we're being, you know, responsible and we're going to generate profitable growth. And, you know, if there's a short-term impact in terms of
spk00: loss of some market share um you know we're accepting that as we move forward appreciate that um and just thinking about you know your gross margin outlook the international sales outlook and um and your operating cash flow so you know you did have the best gross margin in three years and and you did it seems correct me if I'm wrong, but you did, it seems, to adjust your gross margin outlook higher for this fiscal year. You mentioned international sales could normalize a little bit below what we saw in this quarter Q2. I'm just wondering if you can expand a little bit on that. Where are you seeing the drivers of the better gross margin outlook for this fiscal year and And the negative operating cash flow before working capital, could we see that reverse in the next quarter?
spk04: So let me talk a little bit about international sales and then I'll turn it over to Derek to respond to your gross margin question. So just to be clear on international sales, as I mentioned earlier, Last year, we were restricting our sales in international markets because we just didn't have the flour inputs. With the completion of our 4C expansion, we were able to build our flour inventory that allowed us to do a certain amount of pipeline fill to Australia and Israel in this quarter with some new cultivars in the market. And so that was, you know, a higher than expected growth in international sales. we do expect it to normalize back to the level of repeat purchases that we're seeing in the last two quarters. So this was really a pipeline impact on international sales after not being able to supply last year. But with that note, I'll pass it over to Derek to talk about gross margin.
spk08: Yes, thanks, Bianette. There's no question that the increase in the current quarter on the high water mark for our adjusted margin of 34% was assisted by the larger international shipment that did occur this quarter. But I would note there are other factors that have allowed us to achieve the current quarter's margin rate and really it's been driven by the cost of cultivation, which is not just the expansion at 4C, higher flower yields that we've been achieving over the end of Q4 of last year and Q1 of this year that lower cost of cultivation in total and improved our flower margins on all product categories, on all our flower categories, not just on the international shipments. But of course, our margin as we look forward is impacted not just by the product category mix, but the channel on the REC versus international. And so we do think that moving forward, the margin rate will modulate somewhat from the Q2 print that we just have. But we are comfortable in providing guidance that we do believe that we can achieve a gross margin rate at greater than 30% for the rest of this fiscal year, even given the price compression. And again, it's a combination of just lower operating costs and continued initiatives that we're doing around automation and process efficiency. In terms of the operating working capital statement, we did have a working capital adjustment that was negative that put our operating cash flow negative for the quarter. And part of that would be reversible. Part of it is just the growth, the sales and in the month of February that put receivables up and there was a small increase to the inventory level, which we wouldn't expect to see large changes from here. Now that we've been operating at this higher level for a couple quarters now. But we did reduce our payables by over 13Million dollars in the quarter and that did create a significant reduction to our cash position and our cash flow working capital change in the quarter. And part of that was actually just done that part of our phase 1 implementation of our new ERP system. We did do an abnormal number of early check runs in order to pay down all payables that we could at the end of February, because our goal line was March 1. so we do have an abnormal adjustment that has negatively impact the current quarters operating. cash flow and some of that would reverse itself as we got back to more normalized working capital assets and liabilities in the next few quarters.
spk00: Appreciate the answers. I'll get back in the queue.
spk06: Your next question comes from a line of Tammy Chen from BMO Capital Markets. Your line is open.
spk01: Thanks. Good morning. First question is, I want to go back to your flower sales in the recreational market. It was quite a decline sequentially. Dean, I know you called out seasonality, but I guess I'm just surprised that it was such a large sequential decline. You've also then mentioned some of the share erosion in large format flowers. So I was wondering, can you help us understand, I guess, How much was seasonality? How much was that share erosion in large format flowers?
spk04: Certainly. So, you know, this isn't different than what I've talked about last year as well. This is our lowest quarter sales every year. We do see the reduction, you know, it's seasonality in this business, which is why sequential, like I struggle with sequential growth when you have seasonality in the business. Remember, we did grow year over year, so still seeing strong growth versus Q2 of last year. And that's where we like the comparison where you take out the impact of seasonality. In terms of large format flower, we did see erosion. As I mentioned, we didn't chase some of this low perhaps non-profitable sales. However, we've seen really strong growth in some of our other categories. We're very excited about higher margin hash growth and higher margin gummies growth. And we continue, certainly in the quarter, with really strong sales on our jolts. And these are all things that make sense for us to put our time and effort, drive our distribution, because those are things that are going to drive profitable growth as opposed to just empty calories on the top line. So that's been our focus. And you don't get perhaps the tonnage in those categories, but you certainly get the dollars. And that's what's really driving the gross margin improvements and our EBITDA improvements. So we're balancing, this is, you know, we could have chased some of that lower volume achieved, you know, higher growth in our sales by chasing it and seeing, you know, more diluted margins. That's a choice we made in terms of how we want to operate in this category.
spk01: Okay, got it. And my follow up is on a separate topic, the green tank investments. Can you elaborate a little bit more on this all-in-one product or technology that they've got? So is there nothing else like it in the market right now? I guess it sounds like it's something they've recently developed. Do you know that this is something consumers would want and would attribute a higher price point to? Thank you. Sure.
spk04: So let me start by saying this green technology, we believe really is a game changer in the vape space. And, you know, we believe that the new technology will address some of the pain points that have been, you know, associated with the vape category. So, you know, first of all, you know, you asked about the all-in-one. Let me start by saying that You know, we're going to start by launching a 510. You know, we know that a significant over 90% of the industry today invades the 510 offering. So we want to have a 510 offering out there that incorporates this new technology. And down the road, we will introduce the all-in-one, which would be, you know, the battery and the cartridge units all in one, calibrated for the optimal, calibrated for to power the heating element at an optimal level. So that will be down the road, but are going in position at 510 because that's where the market is today. What we like about this is that this new technology replaces ceramic coils with a precision heating biocompatible material. And that vaporizes all the oil that comes in contact with it at every puff. So it doesn't have the oil, the partially cooked oil that saturates the old ceramic coils, that causes the clogging and leaks and the unpleasant flavor. When we look at the vape category and you look at mature markets like California, where vape represents 29% of the category, and you look at Canada where we're at 17%, excluding the impact of Quebec, we believe there's a lot of room for growth. And we think the real opportunity is bringing in something that addresses those pain points. You know, and the other thing on GreenTank is we believe it produces a higher quality vapor cloud that could lead to a higher potency per puff. And when you ask sort of what research we've done, look, we've done research in our R&D facility testing the product. We've actually tested the technology in our product development collaboration labs. And of course, GreenTank has obviously done some of their testing on the technology as well. So, We're really excited about this because we really think that it is a demonstrable difference in the vape space in a 510 offering that will allow us to differentiate our products in the market. We recognize that we're underdeveloped in vapes relative to other players, and we really believe that finding something that was differentiated that brought news to the category that consumers would notice the difference, would really make us, you know, set us apart and give us a reason to grow our position in the vape category. With respect to margin, your question on margin, look, It is, you know, that the carts are going to be perhaps a little bit more expensive than a traditional cart. But at the end of the day, we're such a small player in what is a higher margin category that this is truly an opportunity for us to break out in the vape segment.
spk05: Got it. Thank you.
spk06: Your next question comes from a line of Frederico Gomez from ATB Capital Markets. Your line is open.
spk07: Hi, good morning. Thanks for taking my questions. My first question is on your revenue outlook. So you guided for sequential growth in Q3. And obviously, as you mentioned, in Q2, you had a large contribution from international, which you expect to normalize. So first, when you say normalize, what sort of level of repeat purchases are we talking about? Then second... I imagine that because of that, most of the sales growth that you're expecting is coming from the RAC side. So what's the key driver here? Is it about timing of shipments or are you regaining share this quarter? Can you talk a little bit about that?
spk04: Sure. So first of all, let me answer the question on the international sales. When we say normalized back to the last two quarters, so if you look at our run rate on international sales in Q4 and Q1, that would be sort of our normalized level. And the incremental sales in Q2 were really some pipeline on some new SKUs into the markets that we deliver to. So that's kind of what the normalized level we expect on international sales. still significantly higher than year over year in Q3 of last year. We'll have higher sales, but not at the level we had in Q2 of this year. In terms of our sequential growth, we actually do see every year an improvement in Q3 over Q2, and then again in Q4 over Q3, and that is really, again, back to seasonality, where our highest seasonal quarter is always our fourth quarter during the summer, where there's a significant consumer uptick in consumption. So we do see there some of it is really coming from category dynamics and just seasonality will help drive some of the sequential growth. But when you get down to where do we expect to see our sales, we do expect flower sales will be a challenge in the short term. But we have a strong innovation pipeline to help drive our back half revenue. We're still ramping up on Holy Mountain. I mentioned we launched 18 SKUs in the quarter. Eight of them were behind Holy Mountain. We introduced that brand to help us not only enter into a value offering that could get into smaller formats, so not only playing in the 28-gram large format flower, but into 3.5-gram formats. So we're excited about ramping that brand up and getting distribution across the country. We are actually very excited about some of the work we have on our hash introduction SKUs that I talked about. We have a really strong pipeline of pre-rolls. Pre-rolls are heavily, they grow significantly in the summer months, and we've invested in a high-speed pre-roll machine as well as new technology to improve the efficiency of infused pre-rolls. And we have a strong innovation pipeline on both those that will hit the market at the end of Q3 and into Q4. And then we're also looking at introducing a new premium brand that we could put into the marketplace in the fourth quarter. And that would be featuring some high potency THC, but it would be from flowers that have been hang dried. So we've introduced hang drying into our facility with some unique genetics, some improved terpene profiles, right? So we're excited about, you know, balancing our portfolio with a little bit more premium brands as we move our Edison brand into a more mainstream position, given its value profile to consumers. You know, we expect also like superior products will help us, you know, gain some of that momentum as well. So we have a lot of things in terms of innovation coming, some stronger entries into the flower segment on the three and a half gram and premium brands. And, you know, we have confidence in what we could do with these products.
spk07: Thank you. That's great, Collar, Bina. And then my second question is just on your balance sheet. So you finished the quarter with 72 million in cash. You have no debt. But at the same time, you are investing for growth for the remainder of the year. You have a pretty ambitious CapEx plan. So how should we look at that, your cash balance? What sort of minimum cash balance are you comfortable with? Thank you.
spk08: Yeah, I mean, during the quarter, we did have a larger drain on our operating cash that brought our expected cash level slightly below what would be on a normalized level. And again, some of that operating portion would reverse itself to a certain extent, particularly with regards to that large accounts payable pay down. But we do have a larger a CapEx program that we're part way through the spend on this year. We expect to have it complete this year in terms of the expansion out at Lux Superior along with the automation at all facilities and that we'd have that complete at the end of the year. So we would end up ending the year post that in a lower cash position than we are today because of that CapEx spend. However, we are forecasting that given our profitability metrics and the stabilization of working capital assets and the capex spend behind us, that we will affect not just the operating cash flow positive, but free cash flow positive at the end of this calendar year. So we believe that we will have a strong balance sheet at the end of the year. Of course, it will not be as strong as it was at the beginning, but we knew that coming in as a consequence of the investment that we're going to need to do on both the COPEX and on the networking capital assets to support just the business. But again, I think we get there at the end of the year with all three facilities at full capacity. Probably not looking to provide exact guidance on what a minimum cash balance would be, but we're very comfortable on our ability to manage our cash flows without the need for additional capital. Of course, we'll always consider options that are available to us, but at this time, we're not concerned about our cash liquidity.
spk07: Thank you. Great call. Thanks.
spk06: Your next question comes from a line of Aaron Gray from Alliance Global Partners. Your line is open.
spk09: Hi, good morning, and thanks for the questions. So I just want to talk a little bit about some of that value segment. I certainly understand why you don't want to be participating in those lower prices, but I want to get some color in terms of whether or not you're starting to see some signs of stabilization there. And do you believe this is more sell off of excess inventory, you know, to get some cash versus some write-downs, or just given because of how long this has lasted, do you think this is more of a structural issue of cultivation efficiencies? And if so, like how long can that persist? Because obviously, you know, selling below cost, you know, sometimes, you know, chicken will not come home to roost. So I just want to get a perspective in terms of, you know, how long you believe this type of dynamic can last and what you're seeing out there in terms of this lower price offerings. Thanks.
spk04: Certainly. So let me start by saying, I think it's a combination of a couple of those things that you mentioned. When you think about some of the low prices, I mean, we've seen 28 gram offerings at $70 out in Alberta. And, you know, if you take a look at what that markup model would be, and then you subtract $28 related to, you know, excise tax, and there's really nothing. left as you can imagine you're you know this is something that people are selling off either aged inventory you know inventory that they don't have a home for and will take whatever you know monetize whatever cash i don't think that's um around for the long term i think that is an impact we're having now in the industry because there's still excess capacity out there on the good news side we are closely tracking the market and there are a number of lps with with meaningful market share who have, you know, significant financial, they'll have significant financial difficulty by the end of the year. So, you know, we're looking at these and we're thinking, you know, as companies go through CCAA, take cultivation out of the market, that will help the situation. You know, also listening to some of our competitors converting some of their cultivation into vegetable or fruit growing facilities, that's good news. Canopy took cultivation out. Aurora took cultivation out. With the acquisition announced yesterday between Tilray and Hexo, they're taking out some of the Hexo cultivation. I think as the market stabilizes in Canada, where the cultivation capacity is more approximating the demand, some of this you know, activity or rational pricing behaviors will change. So, you know, I do think we're living with this for probably another year while we see perhaps some other cultivation capacity come out of the market. But longer term, this isn't sustainable, and I do believe it will, you know, pricing will move up. I'm, you know, I'm happy that Ontario has a floor on large format flour at their just below $100 per ounce. Love to see pricing floor in Alberta. That would improve the situation. But the other good news is one of our competitors, and if I go back a year ago between Organigram and Village Farms, we were the combined market leaders on the flower category. I think that, you know, hearing village farms talk about the fact that they might take some pricing increases is a good sign, right? So this is, you know, the moving forward position when you have quality products, you know, out there, high potency quality. Why not, you know, get it out there at a price point that is great for consumers, but also that, you know, the companies could make a decent margin on. And so there's signals. that things will turn, but I do suspect that we're, you know, in this compression for perhaps another, you know, maybe, hopefully not longer than a year as we see the cultivation capacity normalize.
spk09: Great. Thanks, Chad. That was a really helpful comment there. Second quick question for me, just in terms of Edison jolts, right? So, obviously, I see some nice growth there, but Yeah, just talk about potential timing and remedies. And if you know, you don't win, in terms of the classification that you believe is appropriate, or there are other things they have available, or it's best to assume that, you know, for right now, that'll be, you know, taken off the market until you get that issue resolved. So just any further clarity in terms of, you know, a positive production, I think they said, and press release, and then potentially, you know, getting that back up, you know, outside of getting that result and any timing within that. Thanks.
spk04: Yeah, that's a good question, and I'd love to be able to answer it. Listen, we fundamentally believe in the strength of our position on jolts. We believe they are properly classified as ingestible extracts. We really can't comment further on what is a pending legal matter between Organic and Canada. We hope that we're able to achieve a stay, which would allow us to continue to sell our products while we go through this judicial review. but that is still something that is underway and we don't know the answer whether we can. So that's our approach right now. Love to be able to get this product back on the market. We're still in the market until May 31st, but get it back into the market. We know and we have consumer research that shows that if consumers can't buy this product in the legal market, they will turn to the illicit market. And we have, you know, expressed that concern to Health Canada as they, you know, claim concern over product health and safety. You know, we've been on the market for 18 months. We don't have any issues. And if people turn to the illicit market, we know that that's where the problem exists with product health and safety. So, you know, it is our position that we believe we are an ingestible extract. We'd love to be back full time in the market for the balance of this year with our product. And, you know, we're going to go through the motions because we just don't feel like, you know, shutting it down when we feel strongly that we're compliant is the right move. As a leader in the industry, you know, this is, you know, a battle we feel is right to fight.
spk09: Okay, great. Thank you very much for the call. And I'll jump back in the queue.
spk06: And again, if you'd like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Michael Freeman from Raymond James. Your line is open.
spk11: Good morning, Pina. Good morning, Derek. Thanks very much for taking our questions. I wonder if you could provide an update on the production capacity levels at each of the facilities, Moncton, Luxembourg, and Winnipeg, perhaps in a percent of total or units per year basis.
spk05: Derek, do you want to go first?
spk02: Sure.
spk08: I guess for the mucking of flour facility that we have, a conservative estimate would be that we are at 85,000 kilos a year of flour. And of course, in addition, we would have the trim that we would fully utilize for our derivative products. With La Superior, with regards to our hash, we've now, based on the shifts that we have, about 2 million units, hash units a year is what our capacity is. And the Kraft flour would be about 2,400 kilos. For Winnipeg, we measure gummies, I guess, in units. And I don't have that top of hand. I know that you were looking at that yesterday. Do you have that number?
spk04: Well, our monthly volume, average volume is 3.1 million gummies. But just for perspective, that's running really maybe a 10-hour shift five days a week. So, you know, obviously lots of excess capacity if we run a second shift and run to seven days a week.
spk02: Okay. All right. That's very helpful.
spk11: And then I wonder if – I guess among those facilities, I guess you shed some light on the Winnipeg capacity or available capacity. Where do you see potential places where capacity could increase materially in your other facilities?
spk02: I think just
spk08: As a general statement, we have been investing quite a bit last year and this year to get our three facilities up to a certain capacity level that we do believe that we can ultimately operate at a new capacity and flow through and sell the product. But I would say that in all three cases that at the end of this fiscal year that we would be um i guess done the spend to maximize um the capacity i guess there's always extra shifts that can be run particularly in lux superior and winnipeg that i guess could allow us to flex on capacity but uh but i would say uh without uh you know significant changes in in that structure that uh you know we are we'll be leaving this year approximating capacity of all three facilities and let me just add
spk04: add to what Derek said to just, you know, expand on the automation. So, you know, we talk about capacity, but the automation has allowed us to increase our throughput on, you know, on the packaging side, on the milling side, on the, you know, just on the pre-roll side, we'll have significant automation. So there's, you know, expanded capacity in those areas simply through automation that we've invested in as well.
spk11: Okay. All right. Thank you. That's very helpful, Keller. Now, looking at international sales, I wonder if you could give us, I guess, your most recent understanding of price fluctuations in Israel in particular. I'm wondering if you've seen any variations or compression in price in that market.
spk04: You know, we've certainly seen commentary out of the market. there is price compression happening in Israel. I continue to see from Organigram's perspective, we offer products that is seen as, you know, premium in the market. It's Canadian indoor grown. It's differentiated from what's available in domestic market. So we haven't seen pressure on pricing from our end on international shipments, but Certainly, there is a domestic industry in Israel that is driving the value segment down, and that's just not where we compete right now.
spk02: Okay. Thank you very much. I'll pass it on.
spk06: And there are no further questions at this time. Ms. Bina Goldenberg, I turn the call back over to you for some final closing remarks.
spk04: Perfect. Well, thank you everybody for joining us this morning for our call. We're very excited about the results that we announced this morning. We're happy with our improved gross margin, adjusted gross margin. We're very happy. You're reporting a fifth consecutive quarter of adjusted EBITDA, providing an outlook that we will grow Q3 over Q2 in terms of net revenue and still holding to our forecast on positive free cash flow by the end of the calendar year so we continue to navigate this challenging industry we have some great products some great brands and we're excited to continue to grow in this space thank you and have a good day this concludes today's conference call thank you for your participation you may now
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