Organigram Holdings Inc. (NASDAQ:OGI) Q4 2022 Earnings Call Transcript

Organigram Holdings Inc. (NASDAQ:OGI) Q4 2022 Earnings Call Transcript November 29, 2022

Organigram Holdings Inc. reports earnings inline with expectations. Reported EPS is $-0.01 EPS, expectations were $-0.01.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the OrganiGram Holdings Fourth Quarter and Full Year Fiscal 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Craig MacPhail, you may begin your conference.

Craig MacPhail: Thank you and good morning everyone. Before we start, I would like to remind everyone 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 we made to certain non-IFRS measures during this call, including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today’s earnings report for more information about these measures.

Listeners should also be aware that, making certain statements relating to market share data, the Company relies on reputable third-party providers. Unless otherwise indicated, all references to market data are sourced from High Fire data as of August 31, 2022, pulled on October 18, 2022. I would now like to introduce Beena Goldenberg, Chief Executive Officer of OrganiGram Holdings Inc. Please go ahead Ms. Goldberg.

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Beena Goldenberg: Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today’s call, we will discuss the financial results for the three months and year ended August 31, 2022, and I will provide a general business update. We will then open the call for questions. Now, I joined OrganiGram in September of 2021 and at the time I said, what attracted me to the Company was its high quality products, strong brand portfolio and proven ability to innovate to meet consumer needs. This was bolstered by a strong sales team to get products into distribution and efficient operations that would enable us to compete in the large value segment. I’m happy to report that, in fiscal 2022, those strengths proved to be significant and resulted in success on several fronts.

In fiscal ’22, we generated net revenue of $146 million and 84% increase over fiscal ’21. In Q4, our net revenue was $45.5 million, an 83% increase over Q4 ’21, and our sixth consecutive quarter of record revenue growth. We also became adjusted EBITDA positive in Q2 of this year and have delivered three consecutive quarters of positive earnings. Our share of the adult recreational market grew to 8.2% in Q4 fiscal 2022 from 7% in Q4 ’21. For the month of October 2022, we held the number two position in terms of market share. According to High Fire, OrganiGram was the only top five LP to grow market share in our fiscal 2022. At the end of our fiscal year, we held the number one position in the flower category, which represents the largest portion of the adult recreational market.

Also, according to Provincial Boards Data, since January, we held the number one position in Ontario in ship sales with a Q4 market share of 8.8% and in the Maritimes with a 14% share in Q4. In Quebec, we moved into the number three position in September, as shown by data from Weedcrawler. We have built SHRED into a recognized brand across multiple categories milled flower, gummies, and vapes. It is one of the biggest brands in the country with over $150 million in retail sales. SHRED also has a solid net promoter score of 77%, according to Brightfield based on field surveys from August 4th to September 27th. We continue to hold the number three position in the gummies category. This includes SHRED’ems and Monjour, CBD-infused gummies, and are the number two in terms of volume sold.

In Q4, we had a 24.3% volume market share, which means that close to one out of every four gummies sold in Canada was an OrganiGram product. In fiscal 2022, we introduced over 60 new SKUs to the market to refresh and optimize our product offering. These new SKUs represented about 30% of our sales in the year, which speaks to our ability to not only innovate, but to create products that engage consumers. In Ontario, we have the highest average sales per SKU, which is more than double the average of the top 10 LPs, showing the efficiency of our line-up. A great example of innovation is our ingestible extract, Edison JOLTS. We introduced JOLT in August, 2021 using proprietary IP, and it quickly took the second position in the capsules category.

There are now three flavors in the JOLTS lineup, and it holds a 26% market share. In fiscal 2022, we also launched our Monjour wellness focused brand. It was the first large format, a multi-flavor offering in the space and quickly gain share. It is now the number one selling pure CBD gummy with a 37% share. We continue to innovate with Monjour by adding new flavors and other minor cannabinoids into our formulations. We have also been successful at innovating in the value segment. Big Bag O’ Buds was introduced in May ’21 in the 28 gram format. It was unique in offering quality, high potency strains, not typically available on the value segment, such as Ultra Sour and GMO cookies. It was quickly embraced by consumers and received positive reviews on social media.

Now, we did not have a presence serving the value segment in smaller pack sizes, which accounts for over $300 million in retail sales. So to address this, subsequent to quarter end, we introduced a new brand, Holy Mountain. Currently, we are in market with the strains R*NTZ and MAC-1 in 3.5 gram formats as well as pressed hash. I’d also like to talk about our success with acquisitions. Compared to the rest of the industry, we have taken a very prudent approach to acquiring companies. We look for those that will complement our product line and have the potential to be accretive to shareholder value. First was the edibles and infusions corporation based in Winnipeg, which we acquired in April 21, it was pre-revenue and pre-sales license, but had a manufacturing facility purpose, built for cannabis infused products with highly efficient state-of-the art equipment.

This provided us with a significant opportunity to disrupt the cannabis edible market in Canada. We launched three gummy SKUs and Q4 of 2021 and grew that to 14 SKUs by the end of 2022. The three original SKUs continued to grow in sales from Q1 to Q4 by 19%, which we brought new ones — while we brought new ones to market, indicating that the new SKUs attracted new consumers and further built our market position. We have invested in additional automation at Winnipeg including high-speed pouch packing lines and automated excise stamping. In September of 21, we ship three 39,000 gummies. In October of 22, we ship 3 million and have the capacity to increase further. In December, we purchased Laurentian Organics, a licensed producer of craft cannabis and hash, as well as giving us an important presence in Quebec.

It was a successful operation with accretive revenue and EBITDA. We have committed $13 million to expand the facility to increase its annual capacity to 2,400 kilograms of flower, and over 2 million package units of hash. Construction is expected to be complete by the end of this calendar year. Our new Holy Mountain pressed hash is produced at this facility. We added Laurentian, Tremblant hash to our national distribution, and it was available in 10 provinces in five month post close. It has maintained its number one position in the Quebec market and is now the number two hash SKU in Canada. Also, a very important contemplated synergy, our new foothold in Quebec enabled significant growth of core organic SKUs in the province. In fiscal 2022, we achieved a 50% increase in revenue per SKU, and as of September 2022, we increased the number of SKUs in market from 21 to 35.

I’m also pleased with our production success of fiscal 2022. In Q4, we brought all the cultivation rooms in our 4C expansion at our Moncton Cultivation Center online. We have 115 grow rooms available to us for the flowering period, which provides an annual growing capacity of 85,000 kilograms. We have also completed environmental enhancements at the facility with LED lighting in every room. This has resulted in an 11% increase in yield per plant, decreased power consumption per room, and at 21% reduction in the cost of cultivation. We have also introduced fractional watering. It will be available in all rooms by the end of this calendar year and has already shown to create further improvements. The results of these efforts have been lower production costs, higher yields, and higher potency.

In Q4 of fiscal ’22, we had a record harvest of 16,000 kilos, 33% higher than Q4 of fiscal 21, and yield per plant was 141 grams compared to 127 grams a year earlier. In fiscal 2022, the Center of Excellence formed as part of our product development collaboration with BAT completed all key spaces including the R&D lab and the state-of-the-art biolab for advanced plant science research. As part of the development, the COE has undertaken initial stage development and safety studies on first generation edibles and novel beverages as part of its work. The COE has created and set numerous delivery systems and created over 60 unique formulations to develop differentiated products in the future. Another key strategic advantage for us is the dedicated cultivation R&D space.

This new space has accelerated rapid assessment and screening by delivering 20 to 30 unique cultivars every two months, while freeing up rooms for commercial growth. The plant science team continues to move the garden towards unique, high terpenes and high THC in-house grown cultivars, while also leveraging the newly commissioned biolab for ongoing plant science innovation. Their focus is on quality, potency and disease resistance to enrich the future flower pipeline. In fiscal 2022, OrganiGram established a significant position as an international supplier of cannabis. We shipped a total of $15.4 million of flowers to Canndoc in Israel, and Medcan and Cannatrek in Australia. This compares to the 351,000 of international sales in fiscal 2021.

To-date this fiscal year, we have shipped approximately $6 million of dry flower internationally. With our expanded capacity at Moncton, we expect to increase our revenue from international sales. On November 17, we entered into a new agreement with Canndoc in Israel. This new agreement over a three year supply term allows for the shipments of 10,000 kilograms to dry flower with an option for Canndoc to order an additional 10,000 kilograms. This agreement speaks to the consistently high quality of our flower and our strong relationship with Canndoc and allows us to collaborate in the future on other emerging medical cannabis markets in other jurisdictions. I will now turn it over to Derrick to present the financial overview.

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Derrick West: Thanks, Beena. As Beena mentioned, we achieved record revenue in both the fourth quarter and the full year fiscal 2022. Gross revenue grew 81% from Q4 2021 to $66 million and revenue grew 83% from the same period of this point to $46 million. On an annual basis, gross revenue grew by 86% to $209 million from $110 million in fiscal ’21. Net revenue grew by 84% to $146 million from $79 million in the previous year. These revenue increases were primarily due to higher recreational net revenue, which grew 64% from Q4 of fiscal ’21 and 78% over the prior fiscal year. The cost of sales in Q4 fiscal ’21 was $37 million compared to $26 million in Q4 fiscal 2021, an increase of 42%. Annually, cost of sales were $119 million, a 15% increase over $104 million in fiscal ’21.

The low increase of cost of sales relative to the large increase of revenues was due to the lower cost of production that was primarily achieved through improved efficiency from automation. We harvested approximately 16,000 kilos of flower during Q4 to ’22 compared to about 12,000 kilos in Q4 of fiscal 2021, an increase of 33%. Annually for fiscal 2022, we harvested 51,000 kilograms, a 76% increase over the 29,000 kilos in fiscal ’21. The annual capacity at the Moncton growing facility has increased to 85,000 kilos. This positions us well to meet our growing Canadian and international sales demand. On an adjusted basis, gross margin was $10.4 million or 23% of revenue over the $3 million or 12% for Q4 fiscal 2021. On an annual basis, adjusted gross margin was $33.4 million or 23% of revenue as compared to 3.6 million or 5% for the prior fiscal year.

The significant improvement in adjusted gross margins was primarily due to the higher overall sales volumes combined with the lower cost of production. SG&A excluding non-cash share-based compensation increased to 15.7 million in Q4 2022 from $12.4 million in Q4 ’21. Annually, SG&A was $60 million compared to 46 million for the prior fiscal year. The increased amounts over the period are largely due to the increased employee had found related to the acquisitions of the Winnipeg and Lac-Supérieur facility, increased professional fees, ERP implementation costs, and non-cash amortization of the intangible assets acquired from the two acquisitions. While there was an increase in SG&A as a percentage of net revenue, it decreased from 56% to 39%.

In the quarter, we achieved a positive adjusted EBITDA of 3.2 million compared to a negative $4.8 million in Q4 ’21. Annually, adjusted EBITDA was 3.5 million compared to a negative $27.6 million for the prior fiscal year. The primary drivers of the significant improvement to profitability were the higher volume of products sold, lower proven the cost of production, which increased margins. Q4 ’22 was our third consecutive quarter of positive adjusted EBITDA, and based on our outlook for revenue, including international sales and improved efficiencies primarily achieved through scale, we expect this trend to continue. The net loss was 6 million in Q4fiscal 2022, compared to a net loss of 26 million in Q4 fiscal ’21. For the fiscal year, net loss — the net loss was 14 million compared to 131 million for the prior fiscal year.

The decrease in net loss was primarily due to the increased revenues of improved cost structure, along with reductions to inventory provisions. From a statement of cash flow’s perspective, beginning with operating activities, there was net cash used of $36 million during the year, and this was mainly driven by the increase to our working capital assets, which grew as a result of higher sales and production levels. From an investing perspective, organic brand dispersed $49 million in capital expenditures across factory facilities, $8.4 million in cash consideration towards the acquisition of Laurentian Organic, and a 2.5 million investment into Hyasynth Biologicals. From a financing perspective, the Company had lease obligation payments of approximately 1 million and raised 6.4 million from the issuance of common shares, which was primarily through BAT exercising its top off rate.

In terms of our balance sheet, on August 31, 2022, we had $125 million in cash and short-term investments compared to $215 million at the end of the prior year. During the year, the Company undertook a significant expansion at its Moncton facility, which resulted in an expected decrease to our cash position. As we completed our expansion off at Laurentian and automation and enhancement investments at the Winnipeg and Moncton facilities, the Company expects to spend approximately $29 million for fiscal 2023. The Company’s $125 million in cash and short-term investment includes $26 million unrestricted cash for the center of excellence, thereby leaving 99 million of unrestricted cash. With the Company now generating positive adjusted EBITDA, we believe that we’ll generate positive cash flow from operating activities during fiscal 2023 and positive free cash flows in calendar 2023.

We believe our capital position is healthy and that there is sufficient liquidity available to support the growth of the business over the near to medium-term. This concludes my comments. I would like to turn the call back to Beena.

Beena Goldenberg: Thank you. We are pleased fiscal 2022, which reflects all our efforts in building a leading Canadian consumer package goods focused on cannabis. With the progress we’ve made, the market penetration we’ve achieved, our highly efficient production and our innovation platform, we are positioned to deliver long-term shareholder values. I want to express my gratitude to our board for their valued support and guidance as well as to our employees for their dedication and ingenuity. We look forward to further success in 2023. Thank you for joining us today. And operator, you may open the call for questions.

Q&A Session

Operator: Your first question comes from a line of Tamy Chen from BMO Capital Markets. Your line is open.

Tamy Chen: First, I just wanted to ask in terms of your thinking on the flower portfolio. It does seem like, especially with Holy Mountain, and Beena, you talk a bit about the rationale of launching this, but things like your portfolio continues to be more in value. So, I’m just wondering, as you go forward, is that where you want to stay for the most part, things are working there, or would you consider trying to up price the consumer with some more mainstream or premium type products in the future to improve your margin?

Beena Goldenberg: I think the answer is we’re comfortable in participating in the value segment because it’s the largest segment in the market and it’s important to be able to compete there profitably. But we do have our Edison brand, which is now going through a revitalization to really establish a stronger position in a more premium space. And through the acquisition of Laurentian, we also have craft opportunity to continue to push the craft flower set. So, we’ll have products in all the different consumer segments, flower products, but we have brands that fulfill the value segment because that’s where a lot of the volume is.

Tamy Chen: And a follow-up for me is. So this quarter in your fiscal year ended in August and some of your competitors that had September and talked about how the disruptions in Ontario from the cyber attack as well as from labor strikes, I believe in both BC and Quebec, gave them a bit of a noisy period had some disruptions on the sales side. So I was wondering if, to the extent you can comment, did you see something similar post quarter?

Beena Goldenberg: Sure, no problem. So listen, despite the challenges in the market during the month of August, so both the cyber attack and the BC strike. We were able to deliver a record net revenue in our fourth quarter. In terms of the OCS, we were proactive with our sales team. They were able to work directly with retailers, to let them know which SKUs were available at the OCS warehouse. So, they were able to get around of the allowed or work within the allowed limits. So that we kept up our position on our sales through that period until things got back to normal. Now I will say, we did see some minor impact in September, as we had such strong sell through in September that we have had to run down to some minimum volume levels at our distribution centers on our high velocity SKUs, and we had a bit of a delay in replenishment of those.

So there was a slight impact. But overall, we are very pleased with the results of our quarter, and we feel very good that everything is resolved and we are having a solid Q1 as well.

Operator: Your next question comes from the line of Ty Collin from Eight Capital. Your line is open.

Ty Collin: Hi. Thanks for taking my question and congrats on the quarter. Just wanted to start off. I’m wondering if you could share your views being on the structure that Canopy growth is using to roll up its U.S. assets and whether that’s a pathway you are considering for OGI to establish a presence in the U.S.?

Beena Goldenberg: So, Ty, thank you for your question. And listen, every single cannabis company is looking at what Canopy has done in the marketplace. I think it’s important to start with that, we have been laser focused first and foremost and making sure, we have a sustainable and profitable position in Canada, right, and taking advantage of some international opportunities through exports. Now we have looked at the U.S. and in particular in the past, we have looked at CBD. But we haven’t found a transaction that makes sense to us. So, on the THC side, we will continue to develop a market entry strategy. We will pay close attention to the proposed legislative changes, and the acceptance of the certain transactions from some of our competitors. So I guess the answer to your question is. We will enter only when we have determined the risk reward dynamic makes sense for the Company and all stakeholders. But we are watching it and we are going to see what works.