Organigram Global Inc.

Good morning. My name is Rob and I'll be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings third 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 you to 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.

Good morning and thank you for joining us today. As a reminder, this conference call is being recorded and the recording will be available on our website 24 hours after today's call. 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 our press release dated July 13th, 2023 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 earning 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 share data are sourced from High Fire in combination with data from WeCrawler, provincial boards, retailers, and our internal sales papers. I will now introduce Pina Goldenberg, Chief Executive Officer of Organigram Holding Inc. Please go ahead, Ms. Goldenberg.

Thank you, Max, and good morning, everyone. With me are Tim Enberg, our Chief Commercial Officer, and Derek West, our Chief Financial Officer. For today's call, we'll discuss the results for the three and nine months ended May 31st, 2023, and the general business update. We will then open the call for questions. In Q3, the team at Organigram continues to position the company for sustainable long-term success while navigating the short-term challenges present in the industry. We were successful in the continued growth of our Canadian recreational business versus last quarter, with a 7% increase in net revenue, driven largely by success in hash and a late rebound in flour. Year-to-date, recreational net revenue also increased by $8 million, or 10%, over the same prior year period, reflecting growth in pre-roll, gummies, and hash. Despite this positive momentum, three factors outside of our control contributed to the softening we saw in our Q3 financial results. Lower than expected growth in the flower category for Organigrams, delayed international shipment, and the impact of our patent-pending Edison jolts being removed from the market had the largest impacts on our net sales and gross margin for the quarter. Regarding our flower growth trajectory, I want to first address the issue of PHC inflation. The increasingly widespread practice by certain licensed producers of inflating the stated THC potency on flour products through selective sampling and testing practices. As Health Canada's regulations prevent dialogue and education around cannabis products, the consumer is left with fewer tools to make educated decisions about which products best suit them. The result is that price and THC content have become their paramount decision drivers when purchasing flour. which has led LPs to race to the bottom on price, with many falsely overstating the THC content of their products. Let me be clear, as an industry leader in the nascent cannabis industry, Organigram has not, nor do we intend to engage in the practice of inflating THC levels on our labels. We firmly believe that we have a responsibility to act ethically and responsibly in our regulated industry. We are dedicated to our consumers and believe they have the right to transparency when it comes to their label. And we also believe that it's our responsibility to build an industry that we can be proud of. THC fixing deceased consumers and hurts our credibility as an industry. In the context of today's regulations, this is happening because Health Canada has not yet prescribed specific and rigorous testing standards for cannabis as they have in other categories like tobacco as an example. Given the strength of our balance sheet, Organigram can weather the financial impact of irrational pricing and THC fixing. And as such, we are tackling the issue the right way. First, the THC contents of our flower cultivars is trending upwards through recent operational optimizations and the addition of new, more potent cultivars. Second, we are working collaboratively with key stakeholders in the industry on several initiatives aimed at bringing solutions regarding standardized testing and sampling. The second event impacting our results in Q3 was our international sales. In Q2, we achieved a banner quarter in export sales due to a pipeline of new cultivars. We anticipated that Q3 would return to normal replenishment levels. However, a newly enforced CUMCS testing protocol meant that we were unable to ship product to Israel in the quarter. During Q3, we have refined our testing protocols in line with these regulations and have built inventory to meet demand going forward. The third event impacting our results was the stop sale of Health Canada on our high margin patent pending Edison JOLTS product. We remain confident in our categorization of JOLTS as an ingestible extract and await the judicial review in late July that will determine whether OrganiGAN can resume producing and selling JOLTS under the ingestible extract category. We still believe that JOLTS is an important product within the extract category, as its format, potency, and price point was highly successful in converting illicit market users to legal product. Now I'd like to move on to discuss some of the exciting developments from this quarter and what they mean moving into Q4 and fiscal 2024. Our strong balance sheet continues to be an asset in this competitive landscape and has allowed us to make investments in synergistic companies while maintaining our competitive edge in both consumer-centric innovation and production efficiency. In March, we made a $4 million U.S. investment into Green Tank Technologies. The investment provides OrganiGram with access to new industry-leading vaporization technology that will be exclusively available with OrganiGram products for a period of 18 months post-commercialization. This technology not only solves the clogging and declining flavor performance issues we see in the legacy vapes in the market, but we anticipate that consumers will experience a noticeable difference in potency. GreenTank-enabled vape cartridges are slated to hit the market in Q4 with two new SKUs and an additional SKU extending through into 2024. Our investment in GreenTank reaffirms our commitment to accelerating our focus on the vape category by delivering meaningful differentiation to consumers. Yet another example of our commitment to innovation is the strategic investment we made in May into Phylos Bioscience, an industry leader in seed genetics. Aside from being our first U.S. investment, this arrangement is exciting from multiple perspectives. First, Philo's has delivered cultivars with THCV concentrations that are significantly higher than anything else we've seen in the market. This makes these cultivars commercially viable for extraction for derivative products containing THCV. Given that it's very difficult to grow cultivars with high concentrations of THCV, It is our belief that we will maintain a competitive advantage in whole flour-derived THCV products. Now, consumers are excited about THCV because, like CBD, it is non-psychoactive and acts as an antagonist for some of the qualities associated with THC. For example, THCV is reported to mitigate the appetite stimulation associated with THC, earning it the nickname diet weed in the media. Further, it is reported to enhance focus, creativity, and calmness. We intend to incorporate THCV into various formulations across different formats, starting with gummies, followed by vapes. Our investment in phylos goes beyond THCV. Our technical relationship with phylos will allow us to convert a portion of our garden to seed-based production, as opposed to the clone-based propagation we see across the industry today. This is exciting because seed-based production is cheaper, faster, and results in more robust, disease-resistant and consistent plants across key characteristics such as potency, terpene content and aroma. Clone-based production has a foothold in the industry now as it is faster for creating and experimenting with different cultivars. However, given its many advantages, we believe that seed-based production is the future of cannabis while clone-based experimentation will remain on a smaller scale. We have already begun converting a portion of our garden to seed-based production and will increase our seed footprint over time. Our investment in Phylos is consistent with our commitment to becoming the most advanced cannabis company in Canada. On the international front, in May, we added Germany to our list of export partners for medical cannabis through our supply agreement with Sanity Group. We continue to grow our list of international business partners and are actively pursuing opportunities in this business segment. Operationally in Moncton, we have invested in a variety of efficiency-improving and cost-cutting CapEx projects that will rely $7 million in annualized savings. We have internalized some of our testing requirements, implemented remediation in-house, commissioned rapid drying machines which decrease drying time while increasing the available footprint in our Moncton facility for hang-dried flour. We automated our shred packaging, which reduced headcount. Our new Cantos pre-roll machine is producing tube-style pre-rolls at scale. And our new speed mixer has allowed us to infuse our milled cannabis for infused pre-rolls with distillate, diamonds, and botanical terpenes in a one-step process. In addition to these initiatives, we are currently targeting further productivity savings of $8 million over the next 12 to 18 months. It's amazing to see how our mountain facility has developed over the 10 years Organigram has been in operation. This quarter, we achieved a company milestone, our 2,500th harvest. Over a decade ago, our first harvest tested a 13% THC. Given our steady approach to growth and our disciplined, data-driven strategies to optimize microenvironments, our 2,500th harvest tested over 26% THC with over 3% terpene content. Incredibly, we have now cultivated and harvested over 200 different cultivars. At our hash and craft cannabis facility in Lac Superiora, Our newly commissioned ultrasonic knife and automatic labeling has allowed us to keep up with the strong demand for our newly launched ShredX Rip Strips, while cutting headcount by over 50%. Further, construction of our craft roll rooms is complete, and we expect them to come online this October. In Winnipeg, our state-of-the-art edibles production facility continues to drive impressive results, producing approximately 3.2 million gummies per month to support our Shred'ems and Monjure brands. Finally, I'd like to provide an update on our research and development activities with BAT at our Centre of Excellence in Moncton. Both the product development collaboration and the organogram commercial business are seeing significant benefits from a scientific development standpoint and in terms of revenue driving commercial capabilities. The in-house extraction laboratory has resulted in the imminent commercialization of high potency THCV extract derived from exclusive whole plant flour. Organigram has been able to test and learn about the inclusions of several minor cannabinoids, which has allowed it to expand into more complex minor cannabinoid stacks across several brands in the Winnipeg facility. The PDC is in late-stage development of a suite of emulsions, novel vapor formulations, flavor innovations, and packaging solutions, which are planned to be used alone and in combinations across the Organigram portfolio of products. The broad focus of the PDC has been the development of improved cannabinoid delivery, rapid and predictable onset, and products that target and satisfy a range of consumer needs. For ingestible innovations, Organigram is currently beginning recruitment for clinical studies so that the company can quantify and substantiate the benefit of these innovations. So after two years of R&D with the PDC, we are excited to begin commercializing the technologies developed within the Centre of Excellence. And so to recap, we continue to grow our recreational business in Canada, and despite the softer net revenue and gross margin in Q3, we feel confident that we are entering Q4 in 2024 with a strong foundation in place that sets us up for long-term success. We have positioned ourselves to drive further costs out of our facilities. We continue to focus on the consumer with our investments and innovation, and we have a strong balance sheet with responsible stewardship of capital, all geared to delivering shareholder value in the long run. And on that note, I'd like to invite our Chief Commercial Officer, Tim Enberg, to provide his insights on Organigram's market share performance this quarter, new product performance, and commentary on trends we are seeing in the market.