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 speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 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, references 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 Hifyre in combination with data from Weedcrawler, provincial boards, retailers and our internal sales figures. I will now introduce Beena Goldenberg, Chief Executive Officer of Organigram. Please go ahead, Ms. Goldenberg.

Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today’s call, we’ll discuss the results for the three months ended February 28, 2023 and the general business update. We will then open the call for questions. We continued to generate solid financial results from 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 and our 5th consecutive quarter of positive adjusted EBITDA, while maintaining our number three market position among Canadian LPs. In Q2, we were number one in the milled flower segment, number 3 in gummies overall, number 1 in pure CBD gummies and had the number 1 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 strength. We acquired Laurentian Organic in December 2021. We leveraged our in-house sales and marketing team to achieve national distribution for Tremblant Hash. We then expanded our presence in the segment by introducing Wô Lá and Holy Mountain pressed hash. Additionally, we innovated in the category with the launch of SHRED X Rip-Strip 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 milled flower holds the number one position in its category by a wide margin, and with three of those SKUs, Tropic Thunder, Funk…

Thanks, Beena. As Beena 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 Beena 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 gross 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 $2.5 million net realizable value provision from saleable inventory is included in the Q2 ‘23 cost of sales figures. We harvested approximately 21,000 kilos of flowers 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 Moncton growing facility. We expect similar harvest levels to continue through fiscal ‘23, which positions us well to meet 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 ‘22. 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,…

Thanks, Derrick. 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 brands. 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.

[Operator Instructions] Your first question comes from the line of Andrew Partheniou from Stifel GMP.

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 these -- 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?

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 flower from other LPs to meet our commitments, and we were restricting our international sales opportunities. So right now, we don’t -- we’re watching our inventory. We don’t anticipate having any kind of issues with the amount of production, because we believe we needed 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. Last year, we struggled with on-time, in-full. And by building some extra safety stock, we’re able to maintain higher levels of service to our customers, which was important. And just remember, 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 as well. Our current difference between the kilos that we’re selling and our dollars is about 1.5 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 flower segment. We are -- we have a strong SKU in our Big Bag O’ 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 flower under Holy Mountain, and we believe that brand really speaks to a specific consumer. So, we’re not walking away from large flower formats. We’re out there. We will compete. We will continue to bring new specific strains at 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 where there aren’t price floors in the market and have said -- it’s introducing the consumer price point. When you go below -- even below sub-$100, 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, as I said in my comments, we’re in it for the long term. We want to make sure we’re being responsible and we’re going to generate profitable growth. And if there’s a short-term impact in terms of loss of some market share, we’re accepting that as we move forward.

And just thinking about your gross margin outlook, the international sales outlook and your operating cash flow, so you did have the best gross margin in three years 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 gross margin -- of the better gross margin outlook for this fiscal year and the negative operating cash flow before working capital? Could we see that reverse in the next quarter?

So, let me maybe talk a little bit about international sales, and then I’ll turn it over to Derrick 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 flower input. With the completion of our 4C expansion, we were able to build our flower 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 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 Derrick to talk about gross margin.

Yes. Thanks, Beena. Additional question that the increase in the current quarter on the high watermark for our adjusted margin of 34% was this assisted by the larger international shipments that did occur this quarter. What 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 of 4C, but 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 build -- 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 of sales, and in the month of February, they 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 of quarters now. But we did reduce our payables by over $13 million 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 as part of our Phase 1 implementation of our new ERP system. We did -- do have a normal number of, say, early check burns in order to pay down all payables that we could at the end of February because our go-live was March 1. So, we do have an abnormal adjustment that has negative impact to current quarter’s operating cash flow, and some of that would reverse itself as we get back to a more normalized working capital assets and liabilities in the next few quarters.

Your next question comes from the line of Tamy Chen from BMO Capital Markets.

First question is I want to go back to your flower sales in the recreational market. It was quite a decline sequentially. Beena, I know you called out seasonality, but I guess I’m just surprised that it was such a large sequential decline. You also then mentioned some of the share erosion in large-format flower. 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?

Certainly. So, 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 -- 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 grow -- drive profitable growth as opposed to just empty calories on the top line. So, that’s been our focus. And you don’t get the -- 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 -- we could have chased some of that lower volume achieved higher growth in our sales by chasing it and seeing more diluted margins. That’s a choice we made in terms of how we want to operate in this category.

And my follow-up is on a separate topic, the Greentank investment. 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. So, let me start by saying this Greentank technology, we believe, really is a game changer in the vape space. And we believe that it will -- the new technology will address some of the pain points that have been associated with the vape category. So -- well, first of all, we -- you asked about the all-in-one. Let me start by saying that we’re going to start by launching a 510. We know that a significant -- over 90% of the industry today in vapes is 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 the battery and the cartridge units all-in-one, calibrated for the optimal -- calibrated to power the heating element at an optimal level. So, that will be down the road. But our going-in position is 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 in 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. We -- when we look at the vape category and you look at mature markets like California where vapes represent 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. And the other thing on Greentank is we believe it produces a higher quality vapor cloud that…

Your next question comes from the line of Frederico Gomes from ATB Capital Markets.

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? And then second, I imagine that, because of that, most of the sales growth that you’re expecting is coming from the rec 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?

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 a 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 have -- we’re still ramping up on Holy Mountain. I mentioned we launched 18 SKUs in the quarter, 8 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 and not only playing in the 28 gram large-format flower, but into 3.5 gram format. So, we’re excited about ramping that brand up and getting distribution…

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?

Yes. I mean, during the quarter -- listen, 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, from the operating portion, we would expect it to reverse itself to a certain extent, which particularly triggers that large accounts payable pay down. But we do have a larger CapEx program that we’re partway through the spend on this year. We expect to have it complete this year in terms of the expansion at Lac-Supérieur along with the automation at all facilities and we’d have that completed at the end of the year. So we would end up -- ending the year post that and 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 in fact not just be 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 CapEx and on the net working capital assets to support just -- of the business. But again, I think we’d get there at the end of the year with all three facilities at full capacity. Probably not looking to provide exact guidance on what we -- 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.

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

So I just want to talk a little bit about some of that value segment. I certainly understand why you might not -- 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 a sell-off of excess inventory to get some cash versus some write-downs, or just given -- because of how long this has lasted, this is more of a structural issue of cultivation efficiencies? And if so, like how long can that persist? You’re obviously selling below cost, sometimes chicken will not come on the roof. So, what are your perspective in terms of 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.

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 if you take a look at what that markup model would be and then you subtract $28 related to excise tax, and there’s really nothing left. As you can imagine, you’re -- this is something that people are selling off, either aged inventory, inventory that they don’t have a home for and will take whatever -- monetize whatever cash. I don’t think that’s 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 meaningful market share who have significant financial -- they’ll have significant financial difficulty by the end of the year. So, we’re looking at these and we’re thinking as companies go through CCAA, take cultivation out of the market, that will help the situation. 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. We’ve -- with the acquisition announced yesterday between Tilray and HEXO, they are 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 activity or rational pricing behaviors will change. So 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 -- pricing will move up. I’m happy that Ontario has a floor of large-format flower at -- they’re just below $100 per ounce. Love to see pricing for 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 hearing Village Farms talk about the fact that they might take some pricing increases, is a good sign, right? So, this is the moving forward position when you have quality products out there, high potency quality, why not get it out there at a price point that is great for consumers, but also that the companies can make a decent margin on. And so, there are signals that things will turn, but I do suspect that we’re in this compression for perhaps another maybe -- hopefully not longer than a year as we see the cultivation capacity normalize.

Second quick question for me, just in terms of Edison JOLTS, right? So obviously, I see some nice growth there. But can you talk about potential timing and remedies, and if you don’t win in terms of the classification that you believe is appropriate, or are there other things you have available, or it’s best to assume that for right now that will be -- take off the market until you get that result? So just any further clarity in terms of pausing of production I think they said in the press release, and then potentially getting that back up outside of -- given our results and any timing within that?

Yes. It’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 Organigram and Health [ph] Canada. We hope that we’re able to achieve a stay, which will allow us to continue to sell our products while we go through this traditional 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 expressed that concern to Health Canada as they claim concern over product health and safety. We’ve been on the market for 18 months. We don’t have any issues. And if people turn to illicit market, we know that that’s where the problem exists with product health and safety. So, it is our position that we believe we are in ingestible extract. We’d love to be back full time in the market for the balance of this year with our product. And we’re going to go through the motions because we just don’t feel like shutting it down when we feel strongly that we’re compliant is the right move. As a leader in the industry, this is a battle we feel is right to fight.

[Operator Instructions] Your next question comes from the line of Michael Freeman from Raymond James.

I wonder if you could provide an update on the production capacity levels at each of the facilities, Moncton, Lac-Supérieur and Winnipeg, perhaps percent of the total or sort of units per year basis?

Derrick, do you want to go with this one?

Sure. I guess, for the Moncton flower facility that we have, we -- a conservative estimate would be that we are at 85,000 kilos a year of flower. And of course, in addition, we would have the trim that we would fully utilize for our derivative products. With Lac-Supérieur, with regards to our hash, we’ve now at -- based on the shifts that we have, about 2 million units -- hash units a year is what our capacity is. And the craft flower would be about 2,400 kilos. For Winnipeg, we measured gummies just in units, and I don’t have that top off hand. I know that you were looking at that yesterday. Do you have that number?

Well, our monthly volume -- average volume is 3.1 million gummies. But just for perspective, that’s running really maybe a 10-hour shift, 5 days a week. So obviously, lots of excess capacity if we run a second shift and run to 7 days a week.

And then, I wonder if -- I guess, among those facilities, you shed some light on the Winnipeg capacity -- available capacity. Where do you see potential places where capacity could increase materially in your other facilities?

I think just 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 openly operate at a year 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 I guess, done the spend to maximize the capacity. I guess there’s always extra shifts that can be run, particularly in Lac-Supérieur and Winnipeg that, I guess, could allow us to flex on capacity. But I would say, without significant changes in that structure that we are -- we believe in this year approximating capacity of all three facilities.

And let me just add to what Derrick said to just expand on the automation. So, we talk about capacity, but the automation has allowed us to increase our throughput on the packaging side, on the milling side, on the -- just on the pre-roll side we’ll have significant automation. So, there’s expanded capacity in those areas simply through automation that we’ve invested in as well.

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. Wondering if you’ve seen any variations or compression in price in that market?

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 a product that is seen as premium in the market. It’s Canadian indoor grown. It’s differentiated from what’s available in the 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.

And there are no further questions at this time. Ms. Beena Goldenberg, I turn the call back over to you for some final closing remarks.

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 reporting the 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 disconnect.