Q3 2021 OrganiGram Holdings Inc Earnings Call
Good morning, My name is wrench and I'll be your operator today at this time I would like to welcome everyone to the organic Graham Holdings, Inc. 's third quarter fiscal 2021 earnings conference call.
All lines have been bleeds and mute to prevent any background noise.
Third the speaker's remarks, there will be a question and answer session.
We ask you to please limit yourself to 1 question and 1 follow up question.
You may re queue. If you have further questions.
And as a reminder, this conference call is being recorded and a replay will be available on organic grams website.
At the sign and I would like to introduce Amy Schwalm.
<unk> Vice President Investor Relations.
Thank you Ron and joining me today are organic Rand's Chief Financial Officer, Derek West and our Chief strategy Officer Paolo de Luca.
Before we begin I would like to remind you that today's call will include estimates and other forward looking information from which our actual results could differ please.
Please review the cautionary language in today's press release regarding various factors assumptions and risks that could cause our actual results to differ.
Furthermore, during this call we will refer to certain non I address financial measures, including adjusted EBITDA and adjusted gross margin.
These measures do not have any standardized meaning under after ash and our approach and calculate and each measures may differ from that of other issuers and so may not be directly comparable.
Please see today's earnings report from more information about these measures.
I will now hand, the call over to Paolo.
Thanks Amy.
Good morning, and thank you for joining Derek and me today.
We do not have a permanent CEO and place as we are conducting this call and I will address that right upfront in terms of what we can share with you at this point.
That way the questions and answers portion at the end of this call and be focused on other questions that you might have.
Speaking on behalf of our board of directors, we know that it is a priority to get the right person and the rule as soon as possible.
A leading search firm has been hired and committee responsible for the selection of a new CEO has been busy reviewing candidates from across the CPG sector in North America.
They are now and the second stage of the interview process with a shortlist of candidates.
And any event the company is operating very well during this interim period with the management team and board working together more closely than ever to expedite decision making.
I would also like to point out that our chairman and Peter Emerald is acting as an executive chair and he brings tremendous experience being the longest serving board member of the company as well as deep CPG experience through a series of senior executive roles, including our Molson and <unk> foods.
We feel very equipped as a management team with the key input and oversight from Peter and the rest of our board of directors.
Many of the senior executives have a strong track record at the company and have contributed to the success. We are seeing from our revitalized product portfolio, which I will talk about more and a moment.
In addition to some long standing executives, we also announced 2 key new hires with deep experience and cannabis and CPG.
And our SVP of marketing and communications, Meg and Macquarie as well as our VP of innovation born as laminate.
We also onboard and great confectionery and management capabilities as part of our Edibles and infusions acquisition and James Fletcher, who remains president of EIC.
And.
In addition to a better top line trends, we have seen cultivation ramp with the benefit of increased stocking and critically we've seen cultivation cost per gram continued to decline on the back of higher plant yields as well as the realization of other cost efficiencies and improvements.
We have our newly promoted vice president of operations, not only bad and to thank for leading these efforts.
Again, all of this to reinforce that we feel very good about managing the business through this interim period and continued to benefit from the long track record and expertise of Peter Admiral and the rest of the board.
We feel even better about our prospects when we look at the strong outlook for the entire industry and with Covid restrictions being unwound nationwide, a strong seasonal backdrop and the ongoing expansion of the retail store network and key markets like Ontario.
Derek will go into more specifics on our outlook for our fiscal Q4.
So just to sum up before I continue to discuss the quarter, we won't be answering any other questions on the CEO search on this call, but look forward to updating you as soon as we are able to.
Now I will move along to the fiscal Q3 results that we released earlier this morning.
I will talk a little about revenue and new product launches as well as some of our strategic developments and we'll leave Derek to go through detailed financials and our outlook for Q4.
As we expected and Directionally guided and I say directionally as we do not provide specific revenue or earnings guidance.
And our last quarter's disclosure Q3 revenue improved from a challenged Q2.
Which we believe represents a clear inflection point for the company.
As I mentioned, we have ramped up operations and staffing such that we were better able to fulfill demand and Q3.
We believe Q3 revenue was still negatively impacted by relatively suppressed demand from some provincial boards, particularly and the most populous provinces of Ontario.
Strict COVID-19 restrictions and Ontario, less staffing to enable physical distinct and retail stores being limited to 25% capacity for most of March and then close completely to all foot traffic for the balance of our fiscal quarter, which ended May 31.2021.
However, we did not have the production disruptions related to COVID-19 cases that occurred in our Q2 quarter and in February 28, which essentially shut down the mountain to facility temporarily on 2 occasions and your larger groups of employees home to isolate.
Our revitalized product portfolio is resonating with consumers and this is reflected in revenue growth and Q3.
We conduct ongoing consumer research and leverage detailed analysis of our consumer purchasing behaviors to help ensure our offerings are aligned with existing and unexpected evolutions and consumer preferences.
Consumer trends have continued to emerge and call us, including ongoing growth and the large format value segments, a desire for higher THC as well as the pension for newness, including new genetic strains and novel products.
Organic revenue began our product portfolio revitalization and mid calendar 2020 to address these consumer trends and preferences.
We have launched 84, new Skus since July 2020, and up to 20 more skus are still to come in Q4 fiscal 2021.
Dried flower and pre rolls remains the first and second largest categories, respectively, and the Canadian adult use recreational market of all product form factors and the company believes these categories will continue to dominate base from the sales history and mature legal markets and certain U S States.
As well as regulatory restrictions on other form factors for example, the 10 milligram per package THC limit and the edibles category.
Cannabis consumers continue to want both high THC dried flower products and bulk of our diversity and supported by available sales data.
And the popular value segment sales of shred continued to impress almost tripling from last quarter and representing the fastest growing brand and the country.
It has remained the number 1 most searched brand on the Ocs website for the last 8 consecutive months.
There are a number of exciting developments I want to highlight when it comes to this highly demanded products.
First the product margin on shred is improving with a pivot and commercial strategy and a declining cost structure as our yields and efficiencies are improving with increased scale.
Second we have had the benefit of being able to leverage shreds extremely strong brand equity to introduce new better margin products like shreds drove joints are can be into or up 14 have Grand Prix rules of shreds Tropic Thunder.
And we have more accounts will stay tuned.
We will obviously provide more details as these products are rolled out.
Late in Q3 organic Grandma officially announced the launch of big bag low buds indoor grown strain specific dried flower and a 'twenty grant 28 gram value format.
The new Big <unk> lineup includes existing cultivars such as the company's industry, leading ultra sour otherwise known as limelight and our Edison brands, along with new cultivars and rotation of onetime screen offers.
Big Bagel Budd.
And as a minimum of 17% THC and onetime offer and <unk> will range and strength selections, including grapefruit GG 4 <unk>.
Original glu and lemon tree screens.
<unk> doubled its sales in Q3 from Q2, and we see this excellent trend continuing into Q4.
As we said last quarter, we are focused on growing our sales mix into our higher margin dried flower brands.
We have made ongoing investments and genetics to support the Edison and brand promise of innovation and new and exciting products.
We plan to keep the Edison and Brian revitalized over time with new streams as well as high potency.
As you have heard other licensed producers lament. It is not easy to grow new streams at scale with both high THC and balancing that with high plan.
But we are increasingly encouraged by our progress and recent results.
And Q2 fiscal 2020, 1 the company launched 3 new Edison cannabis scope and the constraints, which included high potency, Blackberry punch and ice cream cake or ICC as well as <unk>.
Blackberry Punch joined limelight is the top seller of their respective strength amongst other Lps with similar strains and market.
And late April 2021, the company announced the launch of another 2 new high potency Edison dried flower screens, GMO cookies, and Mac, 1 which have a THC range of 20% to 26% and are available and either a 3 and half gram format or a package of 3 have Grand Prix rules.
Both strength feature a distinct.
And they'll type of profile flavor and a roadmap as a result of being grown and 1 of organic revenue stream specific microclimates.
We expect to introduce more new cultivars under the Edison brand and the near term.
And late March the company introduced another high margin dry flower brand to the market called indie 1 of Canada's only cannabis brands dedicated exclusively to indigo cultivars.
Skyway Kush was the first and only stream and the companies and the portfolio offering <unk> seen the range of 20% to 23% until June.
When we launched 2 new and be streams, and 3 and a half gram formats be Scott. The July felt with the THC range of 20% to 26% and July close number 33, with a Tc range of 17% to 23%.
Pre rolls are the second largest category and adult use recreational market and the fastest growing on a quarterly basis. This year at about 33% and calendar Q2 over Q1.
And late March of this year, we introduced the new Edison streams of Blackberry Punch, ICC and <unk> and a package of 3 have Grand Prix rolls produced with a new pre roll machine.
This machine was commissioned in March and is now producing an average of about 43 wells per minute.
We have ordered another machine expected to be delivered and commissioned and early Q1 fiscal 'twenty 2 as pre roll demand hasnt shown any signs of slowing down.
Derivative product sales were lower in Q3 than Q2.
But we look forward to gaining sales traction and the largest derivative product category.
With the launch of 2 new <unk> products with higher THC concentrations.
These include and Edison plus further disposal vape pen at a very competitive price points as well as the new 1 Gram Edison cartridge for the 510 vaporizer.
Both products are based on limelight, our top selling flower screen and the country's best selling ultra sour.
And we expect our new soft chews or gotten used to be available and certain retail stores and early August.
To date, and Canada Edibles are 1 of the fastest growing segments of derivative products and the largest product subcategory within edibles as Ganesh.
With our acquisition of Winnipeg, based Edibles, and Infusions Corporation or <unk> for short we entered this market back by leadership with proven confectionary experience and a track record of delivery to some of the world's biggest retailers, including Costco and Walmart.
We now have 2 facilities capable R&D product development and large scale manufacturing capabilities to deliver derivative products.
Our flagship facility and mountain and our derivatives dedicated GIC facility in Winnipeg.
Both design and built with EU GMP specification standards and mind.
While flower and related profit is still accounts for more than 70% of the overall Canadian market.
Derivative sales rules growth is outpacing the overall market is new product formats or launch and consumer preferences evolve.
For example, edibles currently represent about 4% of the Canadian rec market compared to 12% to 15% and a more mature U S markets.
Lastly, we have a very innovative and davita derivative product launches still to come and Q4 fiscal 2021.
I do not want to give away any more details until we are ready to launch except to say our team is very excited about the potential of this product.
In addition to the acquisition of EIC.
We also announced a collaboration with and strategic investment from BHP and March.
I won't reiterate all of the details of the transaction as we covered it in great detail last quarter.
However by way of update we were pleased to announce the successful launch of the center of excellence or.
And our Moncton facility has outlined and the PDC agreement with BHP.
The <unk> has been established to focus on developing the next generation of cannabis products with initial focus on CBD.
As the company and BT refined plans and ramp up on execution for the Sealy and.
Number of initial skilled positions have been created including innovation focus rules, such a scientist and product developers and overtime and the employee count is expected to increase as new product projects and work streams are brought online.
The Coa is government and supervised by steering committee, consisting of an equal number of senior members of each of organic growth and beauty.
Under the terms of the PTC agreement, both organic <unk> and VP of access to certain of each other's intellectual property.
And subject to certain limitations of the REIT to independently and globally commercialize the products technologies and IP created pursuant to the PBC agreements.
Approximately $31 million and <unk> 221 million dollar investment and organic Graham.
Has been reserved for <unk> portion of its funding obligations under the <unk> initially mutually agreed upon 3 year budget.
Costs relating to the <unk> being funded equally by organic growth and beauty.
From a governance perspective, there was a steering committee to supervise and government Act.
Activities with an equal number of senior members from both companies.
And we also anticipate benefiting benefiting from 2 nominees to organic <unk> board of directors.
At closing of the transaction and we welcome to Mr. Giant have her to our board and the other nominees is expected to be appointed and the near term.
Not only is this collaboration with BTG going to accelerate and strengthen our research and product development activities.
It is also anticipated to be instrumental and establishing the foundation for our U S and international strategy.
As part of the transaction and <unk> invested approximately $221 million and us for 19, 9% equity interest.
With the significant capital injection organic <unk> is well positioned to expand into the U S and other international markets at the right time and subject to applicable law.
I will now turn the call over to CFO Derrek question.
Thanks, Paul.
I will start with our strong financial position as we announced last quarter, we have a balance sheet free of any significant GAAP. After repaying our entire term loan balance of $58.5 net.
And this elimination of our debt and ask you about $2.7 million.
Future savings.
In terms of liquidity, including $31 million and restricted funds. The company currently has 229 and cash and short term investments.
We have made the decision to complete the phase 4 expansion of our multi facility for more production capacity in order to meet the longer term forecasted demand for our products.
We are also making changes to our growing and harvesting methodologies as well our design improvements to the Moncton campus that are expected to result in higher quality flower and reduce production costs.
And as budgeted amount per page foresee and this work is estimated to be 38 carnival and anticipated to be incurred starting in fiscal Q4.2021 with completion targeted during fiscal 2023.
We have sufficient cash and short term investments to support these expenditures and a corresponding growth to our working capital assets, while still maintaining sufficient liquidity and financial flexibility.
As you May have noticed we did file a preliminary base shelf perspective, just recently, which allows us to move quickly to access even more capital to pursue attractive growth opportunities should they arise.
Q3, 2021, net cash used in operating activities of $10.8 million compared to $3 million provided by operating activities and the same prior year period.
Change was largely due to the increase and working capital assets as the company ramped up cultivation activities during the current quarter.
Turning to our earning results for Q3.
Gross revenue grew 51% from Q2.2021 and <unk>.
And 31% from the same period and fiscal 2020 to $29.1 million net.
And net revenue grew 39% from Q2 and 13% from the same prior year period, respectively to $23 million.
The revenue growth was primarily due to higher adult use rec net revenue, which grew 40% from Q2 and 10% from from same period, and 2020 and higher wholesale revenue, which our sales to other licensed producers during Q3 and this year.
Cost of sales decreased 47% to $23.4 million from Q3 of 2020, primarily due to almost $30 million and inventory write offs reported and Q3 of last year and provisions as well as charges related to reduce workforce due to COVID-19, which were.
All incurred and the prior year period.
The charge related to Unabsorbed fixed overhead and included in cost of sales continues to decline and fall sequentially. This quarter as we expected and indicated and our Q2.2021 disclosures. It is anticipated to decline further in Q4 as we continue to ramp up operations.
Yes.
We harvested 8379 kilos of flower journey, and Q3 compared to 4740, <unk> flower and Q3 of the prior year.
The increase from the comparative period was primarily related to increased cultivation planting and staffing and Q3 of this year to meet the increased demand for many of the new products as part of the product portfolio ribeye amortization as well as the increased industry demand on the back of the ongoing accelerated retail store and build them, particularly in Ontario.
We were using approximately 80% of our growing loans and Q3 fiscal 2021 and.
And as of the data for MTS, and we were using 85% of our programs.
Once complete.
Phase 4 C and increase our annual capacity put in production a flower from 38000 kilos to approximately 65000 kilos.
The total capacity of the company's Moncton campus facility will continue to fluctuate as the company further refines its growing methods and grow and utilization.
<unk> gross margin increased to a positive $2.1 model from a negative $59 and Q3 and 2020 largely due to lower cost of sales as I just described as well as net non cash positive fair value changes to biological assets and inventories sold in Q3 of 'twenty 1 versus negative change.
And the prior year comparison period.
Adjusted gross margin was a negative <unk> 7 million and Q3, 'twenty, 1 as compared to a positive $4.1 million and the same prior year period, largely as a result, and the value segment offerings, comprising a larger proportion of total revenues and Q3 of 2021.
Combined with prior periods, our cultivation costs moving up the current <unk> cost and sales.
SG&A.
Excluding noncash share based compensation increased to $13.6 million from $10.3 million and Q3, and 2020, largely due to increased staffing and office costs related to the establishment.
The organic growth center of excellence and the EIC acquisition.
Higher cultivation related research and development cost as well as higher audit fees and connection with the company's from regulatory required to obtain and integrated audit and team for the first time for fiscal 2021 financial statements.
Adjusted EBITDA increased to a negative $10.2 million ultimate and negative $2.1 million and Q3 'twenty largely due to lower adjusted gross margins in Q3, 2021, and due to some higher general and administrative costs as I just described.
And net loss in Q3 of 2021 was reduced from Q3.2020 loss of 90 million to $4 million.
The improvement to earnings was as a result of higher <unk> gross margin during the current quarter combined with the impairment charge to the property plant and equipment and recorded and the prior year period.
I will wrap up with our outlook for Q4 fiscal 'twenty..1 just a reminder, we won't be reporting on this Q4 quarter until later in November and accordance with the filing deadlines for financial year ends.
First we're very positive on the outlook for industry growth.
According to <unk> data.
And a wide recreational retail sales are expected to total $309 million in June which is a slight decline from the high power estimate and nearly $322 million and now.
And flat with 310 million in April which is the most recent available data from statistics, Canada.
Based on the estimates available from high bar the second quarter of calendar 2021 was a record for the Canadian cannabis market with 940, and with knowing and total direct retail sales and implies sequential quarterly growth of 12%.
This occurred despite the strict COVID-19 restrictions in place.
There are a few factors, creating <unk> for further industry growth first day legalization in October of 2019 of many derivative product categories and attractive consumers, who were not interested and smoking or vaporizing dry flower, including pre rolls and.
New categories, such as many patents edibles.
Which is the soft chews and chocolates beverages and other ingestible products have significantly expanded the addressable market.
Retail stores continue to open with Ontario, and driving the growth and targeting 1000 stores opening and the problems by the end of the summer since July and store count and our problems and so grew by 131% to 2229 stores currently.
Driven by Ontario, growing to 755% to 872 stores.
And of course, these stores and any provinces have been closed to foot traffic from much of 2021 and eliminate to delivering and some cases.
Mike.
And collect.
And the candidates consumer wants to be able to go into stores to buy their product as such we should see a boost in sales as the stores have recently been permitted to reopen to foot traffic.
The new stores authorized opening for the first time ever.
And third.
History as a whole has made a concerted effort to convert consumers from illicit to legal consumption.
The GAAP between standard legal and illicit cannabis market continues to widen.
The latest statistics, Canada data suggests.
Spending on adult use cannabis products and regular channels grew to $918 million and the final quarter of 2020.
And for $204 million more than the estimated the amount spent on illicit candidate and the same period.
Spending on legal recreational cannabis overtook illegal transactions for the first time and the third quarter of 2020, when regulated expenditures outpaced approximate elicit sales by approximately $59 million.
The legal market benefited from the growing retail options and calendar 2020 regulated sales also benefited from a wider breadth of consistent inventory and improved selection of products.
In February of 2021, the province, and British Columbia tested candidates and found 24 distinct petrified pesticides, and <unk> samples and dried flower and the.
Samples went to a federally and license lab for testing and results show that a lot of the 24 unapproved pester pesticide there were high levels of bacteria fungi and heavy metals and many of the samples. These samples were subjected to the same fault panel and Pamela analysis to chemical and microbial contaminants as life.
Since Kansas producers are required to use we believe the more of that knowledge like this becomes better known amongst consumers and more and more some candidate as consumers shift to the legal market.
Against this backdrop of strong industry growth.
Particularly as COVID-19 restrictions are being removed nationwide and a strong seasonal period, we expect to generate higher sequential revenue in Q4 fiscal 'twenty, 1 as compared to Q3.
We have strong demand for our revitalized product portfolio and with increased cultivation and more staffing we are better equipped to fulfill that demand.
Revenues to date and purchase orders from senior from customer support our expectation for higher revenue in Q4.
Beyond Q4, we expect to resume shipments to <unk> and Israel and Q1 of fiscal 'twenty 2.
We received the good agricultural practice certification by the control Union Medical Canada standard to comply with Israel updated standards for imported can candidates and early Q4.
However, the timing of shipments is condition convention promised regulatory approval from health, Canada, including obtaining and export terminal.
We also expect to see a sequential improvement and adjusted gross margins in Q4 fiscal 'twenty, 1 largely due to lower product cultivation costs as well as other economies of scale as we continue to ramp up cultivate cultivation cultivation and realize the benefit of ongoing cost efficiency improvements.
The overall level of Q4 fiscal 'twenty, 1 adjusted gross margins versus Q3s will also be dependent on other factors, including but not limited to product category and brand sales mix.
Although the sequential improvement to adjusted gross margin is anticipated to be fairly marginal and Q4 fiscal 'twenty 1.
Company has identified a number of opportunities, which it believes has the potential to further improve adjusted gross margins over time.
We expect to gain economies of scale and efficiencies as we continue to scale up cultivation.
As I noted earlier, we plan to make changes to our growing and harvesting and methodology that Chanel and enhance the quality of our flower, but also reduced production costs over time.
The recent launches and newer higher margin dried flower strange on Edison and <unk> brands with more expected to come and have the potential to positively impact gross margin as these products gained traction and market and comprise a greater proportion of the company's overall revenue.
International sales have historically attracted higher margins and are expected to represent a greater proportion of revenue once we resumed shipments to Canada.
Further we continue to launch more multipack pre rolls and 1 granted cartridges and these higher volume skus attracts and tracked generally generally attract higher merchant.
The company continues to invest and automation to drive cost efficiencies and reduced dependence on the non labor.
Lastly, Q4 fiscal 2001, SG&A is expected to be higher than Q3, primarily due to the R&D work at the center of excellence and increased selling and marketing expenses as stores reopen the foot traffic and the retail network expands.
In closing, we feel very confident about our prospects and remain focused on operational execution to drive topline growth and just as importantly to try and cost reduction and operational efficiencies at the same time, we are investing in innovation and research and development and product development, which we believe is critical to gain.
And and sustain a long term competitive advantage and the industry.
So that concludes our prepared remarks, operator, if you could go ahead and open up the line for questions. Thank you.
Thank you we have a free.
First question from the line of David.
Keith <unk> from 8 capital.
Capital markets. Your line is now open.
Hi, good morning, congratulations on the quarter. Thanks.
And we're taking my questions here I wanted to start I think in your prepared remarks, you mentioned and revenue mix and you look at margins.
<unk> increased in Q4 as a result, the product category and are dependent upon product category and sales mix I just wanted to know from organic ground perspective, now with dispensaries opening some of many of the COVID-19 restrictions lifting.
To what extent do you view this as a tailwind for you and the industry as a whole, especially when it comes to the derivative products or to point out product offerings, just given that we know that many consumers require that in store or dispensary and face experience.
And to actually educate a lot of their decisions with these products.
And with that said.
Are you able to comment at all about what you.
Potentially think that our revenue mix could look like from a 1 point versus 2 point.
Product category split thanks.
And there.
And even sorry can you hear me okay.
Yeah loud and clear.
Perfect. Thanks for the question, it's a great question.
First of all yes, we do view everything that's happening.
Of the stores the available both.
New stores opening and also in store foot traffic and also just the seasonality, where we are and kind of the summer the kind of the whole social experience and so forth, we do view that as a tailwind.
I think your point on derivative products is bang on some of those products.
Require.
A bit more.
Handholding, maybe from <unk>.
Bud tenders that was in AR and AR.
Our store in Toronto, and just last week walked in and it was.
I was really taken aback about how much about tinder can influence.
Our consumers purchase decisions.
The.
Preceding question walks into the store.
And a middle aged man and.
But tinder really.
Strong influence in terms of the heat and this particular instance, he was looking to buy and edible and and really help them navigate to a particular brand and so forth. So when I think of derivative products and I think our derivative products in particular, our powdered beverage.
Which I think is relatively novel and innovative product that will certainly do better and our view in.
And a.
Situation, where someone walks into the store and can be navigated.
By about tender too.
A different type of beverage day, but something thats not as heavy to carry around something that they can put in there and their per server. They are back pocket and now that they are.
To be more social lender.
Better kind of Covid environment.
We think the same thing certainly with our dummies, which youre going to be coming out in August.
And.
I think chocolate is also another great opportunity, which is more geared to the kind of the fall and winter seasons.
So I definitely think.
Derivatives will be a big beneficiary of.
And in person store traffic and the and the expansion of retail stores.
And our derivative portfolio and.
And in aggregate has probably under index.
And the Canadian market in the last year that is also by design and our part because with the restrictions of Covid and.
And.
The limitations that we experienced there for a while in terms of less staffing we thought it was prudent to pivot to higher bigger categories, such as flower and pre roll. So we've over index, there, even even against the 70%, which I said and the in the prepared comments.
But I think we'll definitely be shifting more to derivatives going forward and starting with Q4 as well you'll see some product launches and the next month to 2 months that we're excited about and.
Yes.
Derek do you want to add anything on the on the margins or the revenue mix.
Yes, I would say that as it relates to that.
And our group.
We don't.
Disclosed any.
Exact margins by any of our product categories and brands, but I wouldn't say that.
It's a mix on all of it in terms of.
Pointing to any product category, there is various margins depending from farming and the brand.
I would say that we will benefit.
Over time.
And with economies of scales that we expect to get and and so we're lowering the cost per unit cost per gram, which positively impacts all of our product categories, including derivatives, although not has dropped and 1 to 1 as well with the flower category and so with.
And we've essentially doubled the production volume in Q3 compared to Q1, and where a large portion of our costs are fixed we are benefiting significantly over the last quarter with regards still and lower cost per Gram and we'll start to see that show up most of that most of that benefit ends up into our inventory and 2 months old and we will start to see that.
And as we look forward to a certain extent and as we continue to.
Who move through higher production levels and while we.
We see a bit of that.
And of a tiny and it's always going to be exact but definitely with the higher production levels, we're running at along with other efficiencies.
And operations improvements that we're making and getting improved yields at the facility there is positive.
This positive wins at our back now as it relates to our cost per Gram and that will help margins as we look forward from categories.
Okay. Thanks, Paolo and Derek very helpful. Last question from me and then I'll hop back in the queue I just I know you mentioned in your prepared remarks, the center of excellence associated with the British American Tobacco company.
Beyond what you've said in your prepared remarks is there any color you can give us.
And what type of products, you expect to hit the market and potential timing here. For example are these going to be existing products that you already have that youre looking to tweak.
Like chocolates or beverages or are these going to be a new product offerings altogether. Thank you and congrats on the quarter again.
Thanks, David Yeah look on the <unk>.
A ton that we can really say because we just we just launched it I can tell you that we're extremely happy with the people that are involved and the Coa. The hirings that we've made the launch has gone.
Very well to date and the teams are.
Within that group are working on product plans and work plans and so forth I think the best thing to do in terms of.
And have talked.
Talk about where this is heading is.
For sure the products will be and derivative types of style products.
The focus really is on.
Product innovation and also research understanding safety understanding.
And the efficacy of the products and that will be the foundation.
To which these derivative products will be developed so the idea here is to really develop.
And product.
Products that are.
That can transcend boarders that was so once we've developed them and we have supporting them and we've got a body of research.
And testing to support how these products work that we can.
Establish them as products.
And markets around the world subject to regulations, and we think that the.
The work that we're going to do is going to be important regardless of which market you go into regulators and.
Public health officials are going to be first and foremost concerned about.
Safety and again efficacy and the ability to make product claims is going to be.
And based off of that so derivative products safety and efficacy supported by research supported by science.
And with a focus in terms of cannabinoid primarily on CBD in terms of timing I think we should be very realistic above expectations.
And certainly nothing that we're expecting to bring to market in the next kind of 12 months beyond that it'll be subject to which products and how far away, we are along and progress and in terms of whether they will be innovations on existing products that we have.
And at or completely new products the answer to that is both against subject to the work streams and the product plans that our teams put together, which we're still and the relatively early stages of that but really excited I think the people on both sides are have been great. We've been collaborating great and I think that's just going to going to get to.
Get a lot better when we're able to kind of travel more freely and so forth and I think with COVID-19 kind of hopefully on the on the on the.
Downslope.
These collaborations will just get amplified going forward and we're excited about everything that we've done to date.
Thanks, very much congrats on per quarter I'll pass it along.
Thank you. The next 1 is from and June from Stifel. GMP. Please go ahead.
Hi, Good morning, Thank you for taking my questions.
Maybe it could.
Just discuss profitability a little bit.
You had a big revenue bump this quarter sequentially.
But it seems like on a reported adjusted gross margin basis. It was relatively stable.
Cognizant that you still have some unabsorbed fixed costs and that.
And youre continuing to scale so.
If your product mix remained stable could you give us a sense of what kind of revenue level, we would need to see.
In order for you to return to kind of pre COVID-19 gross margin levels or normalized gross margin.
Yes.
Yes.
I'm not sure I'm going to do a projection and look forward on a breakeven analysis on the margin just because we are offering and a large number of product.
Categories and different brands and.
And there is always and munis and the market every quarter, we have a number of launches and down.
And what are kind of happen and this happened every corner and that does change.
I guess the mix in terms of the product and there has been pricing compression and the market. We do feel that most of that has been flow through I would say that.
The cost reductions on the flower over the last few quarters have been insignificant from most of it does show up.
And the inventory balances somewhat which did help the.
And the current periods cost of sales, but not to the extent that and Ritchie on ongoing basis.
But.
There was a larger volume of sales and the current quarter with value formats.
And could contribute to the increase to the revenue and this period and.
And so the margin did not and move up as much as we would have otherwise targeted but we would think that with.
The continued efficiencies from both.
Changes in processes that our EVP of operations and <unk>.
<unk>, along with just and natural gains that we're going to achieve through the spreading of the cost of the overhead facility and the removal of the drag for this and absorb fixed charge that you were referring to which I think it was $1.7 and 9 in the quarter. So I think the combination of all those.
And we'll need to wait.
Volume is the same and the mix is the same we are going to have mathematically better margin, just because we would be flowing through and low more comps number.
That would just be the mathematical outcome, but.
But we're targeting.
<unk> revenue growth to continue and over time, we do believe that we will achieve higher margins, but system something that is automatic and happens just in 1 quarter and and but we would expect to see improved margins from product categories again, because of lower cost and we're just a fair number of initiatives.
And play and we are achieving much better it's not just an iron and applying the cost to more production volumes, we are getting better yields out of the room true journeys process changes that have been implemented and somewhere and we'll start to see the benefit of that as we move forward and of course and sales fulfillment and having higher sales dollars will help.
As well on the margin and it does have our attention and and we're having continuous meetings and on how we can best and prove on all the profitability metrics that start with a margin question.
Okay. Thank you for that color and maybe just switching gears.
Health, Canada is expected to start the review of regulations that force.
Paul.
Just curious if you.
You have any thoughts around that.
More specifically, perhaps on on CBD and.
And how that plays into the.
Partnership.
Okay.
Yes.
Yes, I can take that question look.
And we're awaiting that.
That review period as well.
We have a view that longer term, we think CBD will hopefully be.
Available just beyond just the traditional retail stores, but we don't have any inside knowledge on that and can't really offer a firm opinion, 1 way or the other but just we think.
Over and over.
Over time that that level likely happen.
I think the CBD market, obviously is a market that has a lot of opportunity.
Just based on what we've seen in other jurisdictions as well.
And the.
The only thing I can offer as it relates to BT is that we've signaled.
Through formal communication that that is the cannabinoid CBD is it kind of it.
The which will represent a primary focus to start with so.
We think that that's obviously, a bigger addressable market than psychoactive products. So we will.
We will obviously make that up.
Priority, both organic revenue independently and us from Sidoti.
Okay and thank you for that.
I was just going to add to that that we expect the 3 year and view the results and some incremental changes to regulation and.
And some of it some of which may be positive to the industry, but we're focused on competing and the playing field that exists now and we don't predicate our success on the prospect of a favorable regulatory change, but obviously it won't be.
And certain level of change and then we'll be ready and agile to Nick and move to <unk>.
Take advantage of those changes.
Okay do you have any view on what changes might occur.
No we don't really comment on that.
Okay. Thank you for taking my questions.
Okay.
Thank you. The next question is from the lineup and me Chen Your line is open.
Thanks, Good morning.
First question I had is.
On the thinking behind the decision to complete the phase for expansion.
And I noticed another 1 of your competitors recently brought on a lot of new capacity on there and so I just wanted to dig into that a bit further.
And you talked about.
And can meet longer term forecasted demand, but and as far as I think we can see at least and the earlier part of this year provinces, we're still rationalizing skus. It looks like there have been some share losses, among the bigger LP apparently just from crossovers. So I just wanted to understand what specifically are you seeing.
And that prompted this decision to finish range for is it discussions with provinces going forward.
Or is it.
Or just getting more bullish on voluntary and stores.
Just wanted to dig into that and get more thank you.
Hey, Tammy, it's Paolo great Great Great question, and I have a few comments to make on that so number 1 I think we're bullish on stores. We are bullish on growth. We're also bullish on organic ground.
And all of the <unk>.
The available information, including from high fire will point to our market share has been increasing.
And we were not able to even produce what.
We need to meet demand now so that's part of the decision or.
Specific situation that organic growth requires us to produce more flower we also have.
And that's part of the investment initiatives to improve our THC and.
Improve our efficiency. So when we did the analysis all the signs point to too that this was the right decision to make and that we needed to do this to grow our business.
In the context of the macro environment I would just also mentioned that.
When you look at the <unk>.
The industry has unfolded and the past few years and never made sense for all of the facilities. All the production facilities that were built to be put online and we knew that over time the.
And best facilities, and what I would just say that I'm talking about either lowest cost of cultivation or highest.
Quality product or a combination thereof would survive over the long term and we've seen some of the larger players shuttered some of their production facility, because either inefficient or cannot produce the right quality flower.
And also in M&A situations, we've seen companies post M&A again shuttered facilities. So what's happening now is the best producers in terms of being able to produce at a lower cost or higher THC or combination thereof, and we think we're certainly in that category are going to survive and are going to be the ones response.
And is providing.
The cultivation and Canada, So we think that.
Where where needed.
As a cultivated in Canada, and we needed just free but in our own demand and.
And we are very bullish on Canada as a whole.
I think the market is still has a lot of room to growth.
And we hope to see that growth now.
I'll take those opening and stores and stores are opened and foot traffic.
And when I look at markets like <unk>.
More mature markets and the U S like Colorado, which day.
Less than 6 million people and they did $2.2 billion and sales and 2020. So if you were to <unk>.
Canada follows a trajectory that's even a fraction of that.
We're going to be about cultivation. So again for US there is demand on the table that we need to satisfy there's efficiencies that we need to go after and Theres THC improvements that we still think we can make and that's that's what's driving the decision to make that investment into finished foresee.
Got it okay, and Thats very helpful and that was that from all thank you.
Thank you. The next question is from the line of Adam <unk> from Scotiabank. Your line is open.
Good morning, Thanks for taking my questions. So maybe a question on tobacco and is there.
And so you talked about your capacity and how it has grown throughout the last 2 quarters are you able to give us an idea of what you sell rate as on <unk> as of Q3 versus prior quarters.
And I don't have that much.
And.
I don't know Derek if you have.
And those numbers handy I don't have the exact numbers, but I can tell you directionally speaking to that it's gotten a lot better.
And in particular with the largest province, Ontario, we had I think.
I think most recently and we filled I think something like 99% of our appeals that were actually cut.
On some of our R <unk>.
Bigger skus so are.
A lot of credit to be given to our operations department and not only in particular.
They've got in.
A lot better and fulfilling.
And I think our sales and.
Operations planning process, we've got and way better.
Really dialing that in and I think thats going to help us on our efficiencies and also not missing and on sales opportunities. So I can't give you exact numbers.
For both for the whole company at this point, but I can tell you got and significantly better and we're very pleased and.
And I think that gives us a lot of confidence going forward in terms of meeting our.
Purchase.
Border obligations.
Okay, great. Thanks.
Second question from me.
And I was wondering if we could get an idea.
And you guys had pretty strong sales growth and the flower category right.
How much of that velocity from a SKU perspective characters from larger format versus a smaller format products.
And then I guess, secondly, like how much and that I think and give us an idea for.
The newest trains versus some of the more legacy products.
Yes, I can tell you that.
We've been we've.
We've been rationalizing our skus to make sure that we're focusing on higher velocity Skus and right. Now we are firing on all cylinders. Our 3 big brands that are better and I think are worth mentioning shred Edison and <unk>, they're all moving well back and Budd. This is obviously a large format SKU.
Shred as also our job joints is doing extremely well.
So we're very pleased with with our velocity and the flower and fuels and particular, there's probably a bit more work to do and the derivative portfolio, but that's going to be revitalized and the next month or 2 and you'll see that.
With new Skus coming to market.
So we're really excited I think the biggest.
Kind of limb.
Limitation and we've had is just the availability of flower, which again speaks to our.
Our commitment to doubling down or non doubling but but increasing their capacity and finishing off these foresee which is already substantially complete.
Okay, great. Thanks.
Thank you. The next question is coming.
From the line of refresh by week from Oppenheimer. Please go ahead.
Good morning, Thanks for taking my questions. So Paul I just had a question just on the competitive backdrop out there. So clearly we've seen a lot of consolidation and space.
Really the past few months. So just curious how you feel about organic loans position just given some of the developments out there and then where does where does consolidation or M&A.
Or is that a focus going forward for organic growth.
Yeah look I think I think when you look at the.
And the decision tree between buying market share and being extremely dilutive doing that which I think has been a trend that some of our peers have demonstrated in the past versus taking that market share with our own internal capabilities and the.
And like even what we announced today in terms of our commitment to finishing foresee and and.
And some process improvements the math definitely works.
In terms of build it yourself and expand.
And we have the confidence to do that now because our forecasting and our planning and and our brands just from just our Edison brand and our shred brand are so strong so much brand equity there that we have the confidence to do that.
Ourselves so.
I think we're not going to say no to M&A. We have seen we've had we've looked at a lot of companies. None of them have made sense from a risk reward perspective, I think we are going to do something and the M&A space and is going to be much more targeted to either a product category or segment that maybe we need a little boosting.
Or to just Goldman and fast wrong.
But.
Look we're really excited about the market share we've captured the last couple of months.
And we think there's actually quite a bit of runway on that as well so.
Our focus really is.
And <unk>.
On what's within our control, which is our 2 facilities now 1 month and 1 in Winnipeg and.
And we still have a lot of optimization to do there and we.
We think like.
Like I said I'm answering <unk> question, our facility is going to be 1 of the winners that survives and Canada.
It's a crown jewel of ours.
And I think thats something that others don't have and we're going to leverage that as much as possible before trying to buy market share with just.
With M&A, because I think that that's not a winning proposition for our shareholders.
Okay, great. Thank you I'll pass it along.
Thank you we have our last question from the line of John and Bero from CIBC. Please go ahead.
Thank you good morning.
I'd like to better understand the strategy when it comes to how organic growth and gets to improve margins and and I ask that with the backdrop of we've all seen the numbers on shred I think we can all agree it's pretty remarkable growth, but it's 1 of the largest their top selling brands and Canada already.
But that doesn't necessarily result in positive margins and so I wonder does this need to get to and even higher.
The level of sales to become a positive margin contributor or should we think about it as that and.
Probably not going to be the primary driver of margin expansion and that margin expansion will come from the other categories that youre that youre focused on.
John That's a great question look I think I think.
To answer that question and what I would say as shred will benefit from increased volume for sure.
<unk> will also benefit from lower cost of cultivation, which we're already demonstrating.
Shred will also benefit from line extensions.
John joins as a good example of that.
That's a better margin product for example for us than the 7 Grand pouches.
And we think we can take the brand extension too.
To other products as well.
The brand equity that shred has is remarkable.
It's a pleasant surprise for us and along with Edison and I think we've got 2 real winners to build upon and.
Getting brand equity and cannabis has been has been.
A hard proposition for a bunch of reasons structural included and regulatory and.
And so forth solar can advertise and all that other stuff.
So I would say look we we want to EBITDA, obviously shipped as much as possible to our higher margin brands that is happening already I think with our new Edison streams, and I think that investment that we've made and a facility to bring the THC up will allow us to do that.
But.
We are keeping a close eye on shred and.
Trust me, it's a big topic of discussion internally and we have a plan to take it to.
And to a better margin place and.
And just be patient and work just rolled out over the next couple of quarters.
But I think line extensions would be 1 answer efficiencies on just cost of cultivation and then just general efficiencies in terms of the way we operate I think we're going to get there.
Very soon.
Okay. That's very helpful. Thank you and.
And then the <unk>.
Question I suppose is 2 parts there both related to margin though.
First are there other international markets that you're potentially going to sell into over the next couple of quarters, and then second and Canada. How would you characterize where we're at in terms of price compression on the producer side and is there still room for this to pull forward in your opinion and the next few quarters.
Yeah on International I think we're we're signaling that we're probably going to restart and international sales.
And our fiscal Q1 of next year.
International while we would like to make it a bigger part of our business. We're still we still have a lot of opportunities to deal with and Canada here and we want to make sure that we're capturing all of that demand, but longer term I think that's part of our strategy. We do have to figure out a way to get more international sales and and hopefully we'll have more news on that again.
As the.
By the time, the next quarter rolls around.
On price compression.
Look that's a hard 1 to answer because that requires a forecast of supply and demand it's hard to actually get good transparency on what the other producers are producing in terms of <unk> and again I think I made the comment earlier on the M&A question is.
We think.
And that Theres going to be continued rationalization of cultivation facilities, obviously as that cultivation comes offline.
That will.
The supply will hopefully start to reap the side of the equation will start to balance a bit better.
And the demand side, though were seeing growth.
Certainly the proliferation of stores and Ontario is going to drive a lot of that and.
So.
It's certainly slowed down if nothing else, so thats, probably a sign that its bottoming and I think.
The margins just become impossible and at certain points were from <unk>, if they keep dropping and so I think rationality will prevail and I.
And the 1 thing I am encouraged about with M&A is that people will be.
A bit more rational I think some of the companies that have done that are we're.
We're going to have to look really closely and the mirror to see and asking the question is is it worth producing in this facility that can't get the THC.
And to the right level or at the cost of production is too high that would get rationalized and I think that's going to help the overall supply demand equation, but on our side, where we're committed to making money at.
And at these prices because we have to do with its within our control to get.
And more efficient and that's what we're driving to and again on the THC side, we've seen a THC.
Client, but theres still more work to do there and.
I think that's the way, we're going to deal with it and our and just making sure that we maximize our THC and keep our cost as low as possible.
Understood. Thank you very much.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Have a great day.
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