Good morning. My name is Keyla, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Organigram Holdings Third Quarter Fiscal 2024 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Max Schwartz, you may begin your conference.

Thank you very much and good morning, everyone, and thank you for joining us today. As a reminder, this conference call is being recorded and a recording will be available on Organigram's 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 August 13, 2024, 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, adjusted gross margin and adjusted gross margin percentage. 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. In this call, references to fiscal 2023 are to the 13-month period from September 1, 2022 through September 30, 2023. References to Q3 fiscal 2024 are to the three-month period ended June 30, 2024, and references to Q3 fiscal 2023 are to the three-month period ended May 31, 2023. Listeners should also be aware that the company relies on reputable third-party providers on 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 payers. Today, we'll be hearing from key members of our senior leadership team, beginning with Beena Goldenberg, Chief Executive Officer, who will provide opening remarks and commentary, followed by Greg Guyatt, Chief Financial Officer, who will review our quarterly financial results for Q3 fiscal 2024. With that all said, I will now introduce Beena Goldenberg, Chief Executive Officer of Organogram Organigram Holdings Inc. Please go ahead, Ms. Goldenberg.

Thank you, Max. And good morning, everyone. We appreciate you all joining our call today and for your continued support of Organigram one of Canada's leading and most innovative cannabis companies. Q3 fiscal 2024 saw Organigram achieved significant milestones in targeted growth areas that we highlighted in our earnings calls at the start of our fiscal year. Those areas include: continuing to grow our domestic business by focusing on innovation and quality; expanding our global footprint and diversifying our international revenues; achieving cost savings associated with our previously completed CapEx programs and strategic investments; and maintaining a strong balance sheet that allows us to be opportunistic in an evolving market landscape that is rationalizing. First I want to highlight our domestic performance this quarter. Our Canadian recreational business in Q3 grew 25% year-over-year, driving our overall net revenue for the same comparison period. We have also grown our net revenue sequentially every quarter of fiscal 2024, thus far, achieving over 9% growth versus Q2, and we expect continued revenue growth in Q4. There's no question that Canada is a tough market owing to high competition and onerous regulations. As of the end of Q3 there were 25 LPs with 1% or more market share up from 20 last year. And there are now 153 LPs with at least $1 million in sales, contributing to average market share erosion for the top 10 LPs of 0.4 points year-over-year. In contrast, Organigram has outperformed these statistics, gaining 0.6 points year-over-year in Q3, and has maintained a market share of over 7% for eight consecutive months as of the end of July. It's tough to hold on to market share in this landscape, let alone grow it. Organigram has further narrowed the gap between itself and the number one LP in the market…

Thank you, Beena. We are pleased with the progress Organigram has made from a financial perspective with a return to generating adjusted EBITDA in the quarter. As Beena mentioned in her comments, our net revenue grew by 25% versus Q3 last year and over 9% sequentially. At the same time, our gross margins have seen a significant improvement owing to higher yields and increased operating efficiencies in the business. While yields and THC content will fluctuate over time, the trend we have seen over the last two years has been higher yields and higher potency. In our Q2 earnings call, we highlighted that we would begin to see lower cost flower harvested in Q2 flow through in Q3. That is indeed what we have seen. And the record yield of 185 grams per plant that Beena mentioned contributed to the improved adjusted gross margins in the quarter. Our adjusted gross margin rate in Q3 showed a meaningful increase of 36% from 19% in Q3 last year, an improvement of 17 percentage points. Sequentially, we saw a 5 percentage point increase. The combination of higher sales and higher adjusted gross margin rate resulted in a 139% increase in gross margin dollars year-over-year to $14.6 million. The year-over-year increase was attributable to several factors, including lower cultivation and post-harvest costs, reduced inventory provisions, and lower depreciation resulting from impairment charges recorded last year. In addition to our gross margin improvements, we also reduced our operating expenses in Q3. Adjusting for impairments realized in the prior year period, total operating expenses in Q3 decreased by 20%. Driving the lion's share of that change was a 22% decrease in SG&A to $14.8 million in Q3 from $19 million in the prior year period, resulting from lower costs associated with the implementation of the first…

Thank you, Greg. We are pleased with our solid financial results. Revenue is up, margins are up, and costs are being managed. We have built a strong foundation on which to execute our growth plans and are well positioned to capitalize on the opportunities ahead of us at home and abroad. Once again, I'd like to thank everyone on the call for their support and interest in Organigram. I will now open the call up for questions.

[Operator Instructions] Our first question comes from the line of Aaron Grey with AGP. Your line is open.

Hi. Good morning, and thank you for the questions. Congratulations on a nice quarter there.

Thank you.

So first question for me, just on the EU-GMP, being I believe you said that, that's expected in the near-term, could you just provide any more additional color on when you're expecting that? And are there any additional things you would need in terms of export licenses or otherwise that would hold you up to be able to utilize that EU-GMP to export? And then secondly on that, just with Sanity Group being a purchaser and how you just look to allocate capacity, domestic versus international, once you receive the EU-GMP approval. Thank you.

Sure. So thank you for the question. So we have been EU-GMP ready since much earlier this year and are just awaiting the German regulator to come out to do the audit of the facility. We would have liked them to come out already. This is just a scheduling issue, so we expect it will happen in the fall and once you have the audit we expect it'll take a couple of months for the paperwork to get the certification. So we feel comfortable that early in calendar year 2025 we should have our certification and be ready to start capitalizing on using that certification. Until such time we continue to supply our GACP flower internationally, but obviously it has to go through additional steps, so we look forward to leveraging that certification in the future. In terms of your question with regard to how you're going to allocate our volume, we would obviously prioritize international sales simply, because without the excise it's higher margin business and then you know protect our branded business domestic recreational sales. This past quarter we've had some opportunistic you know sales to B2B customers in the domestic market. That is the area that we would reduce as we continue to expand our international business. Obviously, both from a margin and a competitive standpoint, that makes sense.

Okay, great, Thanks guys. Really helpful color. The second question for me, a real nice uptick in the gross margin came ahead of our estimate. So I just want to get some color in terms of how much more room there is for gross margin expansion there. You talked about some of the seed-based initiatives you had and some more benefits come there. You're also going to have initial margin capture once you get the EU-GMP flowing through in 2025, and that sounds like. So just some expectation in terms of where you believe gross margins can get you free guys. Thank you.

Yes, thanks for the question. Look, we're really happy with where we are at 30% adjusted gross margin and we're going to do everything we can to try to work on that trajectory. I think in the short-term, maintaining margins around this sort of range of 36% is probably reasonable. As the international business scales up further next year, I think that's where we'll be looking to get some benefit from that. But at this point, we're really happy with where we are and the cost savings initiative that we put in place, the increased yield for plants and our lower cost per gram are really the contributors there. But at this point, I think in the range that we're at is where we think we'll be for the next quarter or two, at least.

And your next question comes from the line of Pablo Zuanic with Zuanic & Associates. Your line is open.

Thank you, good morning, everyone. Beena, can you comment any color or feedback that Sanity may have given you in terms of what happened in Germany in the second quarter? I mean, some companies have talked about significant growth from April to July. Any color you can give in that sense would be helpful? And I asked this question in the context of the reported data coming out of Germany says that imports were up about 50% between 1Q and 2Q. But when we look at the large LPs numbers that have been reported, we didn't see much growth there. So I wonder where that's coming from. So it's a two-part question. Thank you.

Sure, Pablo. So thanks for the question. Absolutely, we have heard the same from Sanity in terms of business doubling from since April 1. The challenge that most German companies are running into right now is securing the incremental revenue -- sorry incremental volume to deliver even more upside to their revenue. So, you know, here's the challenge with a product that takes, you know, five months from the time you plant it until you harvest it and you get it out to the market. When business grows exponentially, it's hard for the volume to catch up to be able to supply the market. And that's why you're not seeing as much product shipping from the LPs in Canada. That will go up. Germany wants the product. Sanity Group has asked for more. They certainly feel like they are being, they are restricting their upside opportunity, because they don't have the volume and we're doing everything we can to get the product ready to ship over there. And it's just a time challenge on the ramp up, really, that you're facing right now. But it's an exciting opportunity. Sanity has told us about the growth. We're seeing it from other German customers. And Sanity has more initiatives they want to do. So we're excited to get that product ready to be able to ship it over to them.

Thank you. If I can just follow-up here. In terms of Jupiter's investments in the U.S., in the case of OBX, right, on hemp extracts, any concerns about the bands we are seeing at the state level or they haven't really materialized bands on hemp derivatives? What are the people from OBX telling you? And then the second part, would you be looking at making investments through Jupiter and U.S. MSOs, right? We've seen other companies do that through -- with guardrails. Is that something that you would also consider? Thank you.

So let's answer the question about OBX. We are tracking with them, you know, what's happening on the front of hemp derived derivatives. We are following what's happening with the Miller Amendment to check what's going on state-by-state. We have confidence that there are some states, who have already put in regulations that will maintain the availability of hemp-derived cannabis offerings. So, you know, we feel good that there will be a market there, but we're watching the regulations closely with OBX to understand how this will roll out, and it will influence our next steps in the Delta 9 space in the U.S. So that's a bit of a regulation watch and then make decisions coming out of there. In terms of your second part of your question about U.S. opportunities. Look, there were a lot of inbounds as soon as we announced the Jupiter investment pool. There are a lot of companies that are strapped for capital that would like an investment, but we're at this point where we have to make sure what we do in the U.S. obviously is compliant with our listings. We have watched what some of our peer groups have done. We have historically said that our priority is to make sure that our investments are not passive investments. You know, you could always invest in a real estate arm of one of the MSOs and meet the guardrails, but that's not something that we would typically want to do. We're looking for more strategic investments that have long-term opportunities for us. We're looking at how to leverage some of our IP in the U.S. market. And those are things that we'll continue to look at. U.S. is a priority market for us. It's taking us a little bit more time just because it's a little bit more challenging, but it's a focus and hopefully we'll have something to report soon on that front.

And your next question comes from the line of Frederico Gomes with ATB Capital Markets. Your line is open.

Hi, morning, congrats on the quarter. Thanks for taking my questions. Beena, you mentioned the improvement that you saw, I guess, in youth per plant, a record for OGI. Does that have any relation to your seed-based production, or is it related to other factors? And then just in terms of the seed-based production, can you remind us about what's the impact in terms of margins that would have to you? Thanks.

Okay, certainly. So first of all, as I mentioned in my remarks, the three rooms we harvested in Q3 from seed-based production generated an average 200 grams per plant. So certainly that helps the overall number, but three rooms out of, you know, somewhere between 55 and 60 rooms aren't going to drive the numbers. So our overall yield is coming up on our regular clone-based production, as well as [Technical Difficulty]. We will continue to add some more seed-based production and that will help us. Obviously we will optimize our production as we continue to go. But what seed-based does for us is a couple of things: number one, the cycle time is shorter. So you don't go through the whole pre-veg stage. So you have perhaps cycle time of around 70-days versus 100-days in a normal clone-based production. So that gives us more turns in our facility, which will give us more volume that obviously that we could sell, so that increases capacity. But secondly, it also with as we move from elite seeds so we're now currently using elite seeds, but as I mentioned that one of the reasons we fast tracked the Phylos sort of a partial payment of their final tranche was to get some auto flower seeds. And the difference with auto flower seeds, not only do you get the benefit of the cycle time, so extra capacity, but there's less plant care required for those seeds. So there's a significant labor savings. So as we convert over between elite seeds to auto flower seeds, there's further margin improvement to be had. Exactly the quantity, well we have to still run our trials to provide that number, but the plant science work that we've done already suggests that there is significant labor savings that will help on our overall cost program.

Thanks for that. Then in terms of the pricing, I guess, environment in Canada, I believe your average selling price for flower was sort of flat quarter-over-quarter. So could you just comment on that in terms of how do you see that market evolving? Do you think we are finally going to be stable here and maybe increase in prices. So just any comment there, because I know that the market remains very challenging, but we're seeing some stabilization here?

Yes, absolutely, Fred. So we are seeing that pricing on flower has stabilized. As a matter of fact, it's picked up a bit. We certainly saw it on our B2B sales that we were able to sell for a higher price program than a year ago. So there is benefit there. And we've also taken some pricing on our large format big bag of buds, because there's opportunity. So we are seeing supply and demand come into play and that's good on flower. You know, our business has remained flat in terms of average price and that one is purely a mix issue. So if you sell less on international sales or when you sell more big format versus small format, you'll get that mix impact, but like-to-like on a 28 gram format, we've actually seen a pickup from pricing. So I think that the low is behind us at this point in the supply and demand picture in Canada. That being said, we do see price compression in other segments. So, for example, on the edible side, we are feeling some price compression there on edibles, which has historically been more focused on flower pricing. Now with a little bit of excess capacity or maybe some competitors that are just on the verge of being around, needing to generate revenue to just handle some of their cash requirements. They're taking pricing down, which is not really the greatest thing for the overall industry and for the edible segment. But over time, we hope that irrational behavior will go away and that we have great quality products. We're really excited about our nano emulsion gummies that are coming out. And we hope to see pricing come back into that segment as more differentiated products get out there.

[Operator Instructions] Your next question comes from the line of Yewon Kang with Canaccord Genuity. Your line is open.

Hi, good morning. Thank you for the question. Obviously, congratulations on a fantastic quarter. Nice to see sequential increases across virtually all metrics. Just my first question here is regarding Germany. Now that we're a few months past the April 1 K&J enactment, can you comment on any of the trends that you've been seeing with respect to the increased consumer demand for medical cannabis there, along with increased supply becoming available in the market particularly by Canadian LP exports and its impact on the pricing dynamics in the initial days there? Thank you.

Sure, so again like I said we certainly have seen an increase in – through -- we've heard from Sanity, there was an increase in demand for medical cannabis. Definitely the sense that people who were buying from the illicit market are moving over, you know, and picking up their cannabis at pharmacies. I think, again, this is something that is, it was a pent up demand, but we do expect it to continue to increase as supply becomes more readily available. So early days, the pharmacies were even having trouble getting product out to the people, who are coming in to purchase cannabis. And there's still this delay between supply getting out from all international markets into Germany. So as we work through those challenges, I think we're going to see even greater volume going through that market. And we're very excited about it. I mean, it's a good indication. And Sanity Group is just ready to open up their telemedicine platform and again, that one, they're just waiting on getting the right amount of supply to make sure they kick it off and can supply their customers. So all signals out of Germany are there is upside happening and there are a lot of LPs ready to supply that market. We're excited because obviously our investment in Sanity guarantees us a certain amount of flower being shipped in, but there's other customers in Germany that are looking for volume as well. So, you know, it's an exciting market. Like Germany is going to be the next big phase wave of growth and it's a very good opportunity for us.

Thanks for that. And if I could just ask my second question as a follow-up. Regarding the yields and potency KPIs that you guys maintain in terms of operational improvement. I think it was mentioned as part of the prepared remarks that these operational KPIs will fluctuate from time-to-time and that it will have an impact on margin performance over time. I was just wondering what kind of activities would make it more stable throughout? And your expectation on the margin performance going forward should the yield and potency results become more stable throughout.

So just to be clear, if the yield and potency is very predictable for a specific cultivar. But again, demand on the different cultivars changes and that will be why you have fluctuations. So, you know, if more people want a cultivar that perhaps has a slightly lower yield when you grow it versus another cultivar that has higher yields, right? There's a mix between not all plants grow exactly the same. You know, obviously, we continue to improve the yields on all plants as we work on them, but just physiologically, some plants will grow bigger, higher yields. And so the fluctuations are going to be there as long as there's a cultivar mix fluctuation. Over time, it would be simple if everybody bought just one cultivar and you just grew your whole facility in one cultivar. But that's not reality. I know our operations people would have loved that, but because there's mix and, you know, consumer demand for different types of turpentine profiles, aromas, different, you know, there won't be that mix impact. And that's what's causing the fluctuation. I think over time, we will continue to drive higher numbers, but we will still see ups and downs depending on the rooms that are harvested in that quarter and what we've grown in those rooms.

And at this time I would like to thank everyone so much for joining us today. This does conclude today's conference call, and you may now disconnect.