Q1 2022 OrganiGram Holdings Inc Earnings Call
Good morning, and welcome to organic Graham Holdings, Inc. First quarter earnings conference call for the fiscal year 2022 .
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After the Speakers' remarks, there will be a question and answer session with analysts.
We ask you to please limit yourself to one question and one follow up question you.
You may re queue. If you have further questions.
As a reminder, this conference call is being recorded and a transcript will be available on organic brands website.
Listeners should be aware that today's call will include estimates and other forward looking information.
Please review the cautionary language in today's press release on various factors assumptions and risks that could cause the company's actual results to differ.
Furthermore, during this call references will be made to certain non <unk> measures, including adjusted EBITDA.
And adjusted gross margin.
These measures do not have any standardized meaning under ifr and our approach in calculating these measures may differ from that of other issuers and so these measures may not be directly comparable.
Please see today's earnings report for more information about these measures.
I would now like to introduce Bina Goldenberg, Chief Executive Officer of organic Graham Holdings, Inc.
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 will discuss the financial results for the three months ended November 32021, and I will provide a general business update we will then open the call for questions.
The first quarter of fiscal 2022 showed continued momentum from the progress we achieved in the last quarter of 2021.
We achieved record net revenue in the quarter the highest in the history of the company, we solidified our number four market share position among Canadian Lps in the recreational market in Canada, becoming one of the few larger Canadian Lps registering market share growth.
Subsequent to quarter end, we completed an accretive acquisition of Laurentian that expands our product and brand portfolio and bolsters, our geographic presence in Quebec.
And we made further progress on our goal to achieve profitable adjusted EBITDA, which should be accelerated with the purchase of the wrenching.
Net revenue in Q1 was $30 4 million, a 57% increase over Q1 in fiscal 2021.
This record level of net revenue speaks to our success and innovating to best address consumer needs and introducing compelling brands that resonate with consumers.
We continue to hold the number four market share position among Canadian Lps in the quarter at seven 5% a year ago before our product revitalization program, our market share with four 4%.
The high fire data provides detail on how our products are being received in the market shred continues to be the most popular flower brand with Tropic Thunder and pump Master Skus holding the number one and two positions respectively for November and Tropic Thunder and Norbury at the top two skus in December based on sales.
And volume.
Shred also remain the number one search brand on the Ocs website for 13 of the past 14 months.
These sustained positive results, while the price of shred was increased in Alberta, and Ontario demonstrates its exceptional consumer demand.
[noise] shred them Gummies were introduced in August 2021, and are quickly gaining distribution and traction in the market.
In November they were ranked number three in terms of both sales and volume of units sold.
Edison Joel our unique high potency THC lozenge maintained its best selling position within the Ingestible extracts category.
Our momentum continued after quarter end December data from high fire highlights that organic Grandma <unk> seven 6% market share up 10 basis points from November hoping the number one position in the important flower category number three position in gummies and moving up to the number four position and pre rolls.
We're very pleased with these results and you should also note that this market share does not reflect the contribution from the sales of Laurentian products that will get us closer to an 8% market share.
In November we launched <unk>, a wellness brand, providing large format CBD infused soft chews and Barry medley in citrus medley flavors, both flavors are available and vegan friendly and sugar free formats for maximum consumer choice.
In the short time since its launch last month Mojo has already shown strong momentum in the market. We are very pleased with the start and look forward to this new brand achieving the same success as our recent brand introductions.
We continue to focus on the needs of premium cannabis consumers through our flagship Edison brand.
As stated last quarter Bright-field data has shown growth in Edison as brand awareness and a significant increase in its number of social mentions and positive consumer sentiment scores.
Seven new high potency strains were introduced in fiscal 2021 and fiscal 2022 started off with the launch of several new products, including the Edison Blue Velvet Vape.
And yet another first to market product the Edison Pinterest combo pack. The first pre rule 10 pack in the market to offer consumers two unique genetics within one pack.
Consumer demand has been strong on these innovations and we're excited to continue to offer new relevant products to the market throughout the rest of the year.
Now, let's look at our operations.
In Q1, our yield per plant was 129 grams compared to 86 grams in Q1 of fiscal 2021.
As we have brought on new grow rooms, and improved operational efficiencies our cost per gram has been reduced by half while increasing THC levels.
At the mountain cultivation center upgrades to the facility are currently underway. This includes increasing capacity through our <unk> expansion, a second harvesting area, adding environmental enhancements and performing upgrades to the irrigation system.
This will further enhance yields and flower quality.
In terms of automation the second pre roll machine was commissioned last quarter and investment in high speed pouch lines for big bag, a buzz and shred is underway.
Our product development collaboration with <unk> advanced in the quarter with the completion of the quality assurance and control laboratory.
Construction has also begun on the bio lab, which will conduct advanced plant science research and on the GPP food and Edibles facility. Both of these are expected to be completed in February of 2022.
This is an important milestone the research conducted as part of our PDC will contribute to ongoing development activities, which could result in new products in the future support market share growth and our reputation as a consumer centric innovator.
Initial development is focused on CBD and other cannabinoid edibles drinks and.
An ingestible products with focus on product set improved delivery efficacy convenience and create new usage occasions.
Our commitment to innovation is also reflected in our increased investment in highest since biologicals hi.
<unk> is a leader in cannabinoid science that is using biosynthesis to produce THC CBD and rare cannabinoid without themes of cannabis plants.
This greatly reduces the cost and production time of the compound with a smaller environmental footprint.
In December we increased our total investment in highest since to $10 million.
This provides us with approximately 49% interest in the company and two board seats.
Once highest since commencing commercial production, we have the option to purchase as cannabinoid at a discount to the wholesale market price for a period of 10 years.
Producing any major or rare cannabinoid quickly and at scale opens up multiple possibilities for medical wellness and recreational products as one of only three large Lps investing in biosynthesis organic <unk> is well positioned to take advantage of these opportunities.
Finally, I'd like to highlight the acquisition of Laurentian, we made in December .
Laurentian is our Quebec based El P of our seasonal craft cannabis sold under the Laurentian brand and Quebec top selling cash sold them or the <unk> cannabis brand.
<unk> current annual capacity is about 600 kilograms of flower and 1 million Pax units.
We intend to invest $7 million and growth Capex behind Laurentian expansion program, which will increase capacity to about 3000 kilograms of flower and 2 million units of hashed by the second half of 2022.
We are excited to further expand the distribution of Laurentian brand outside of Quebec, leveraging the strength of our national sales force.
The acquisition cost was $36 million, consisting of $10 million in cash and $20 million in shares as well as potential earn out consideration.
This is a significant acquisition that strengthens our premium portfolio with high margin products and increases our presence in Quebec.
It is also accretive as Laurentian has been averaging since it entered the Ontario market in November and annual net revenue run rate of $17 million with $6 million in EBITDA.
Now I will turn it over to Derrick to present, the financial overview Derrick.
Thanks Peter.
Turning to our earnings results for Q1 fiscal 2022.
Gross revenue grew 75% from Q1, 2021 to $44 3 million and <unk>.
Net revenue grew 57% from the same period in fiscal 2021 to.
$34 million.
These revenue increases were primarily due to higher recreational net revenue, which grew 9% from Q4 fiscal 2021 and 49% from the same period in 2021.
And the resumption of shipments to Israel under our agreement with Campbell.
While gross revenues grew 75%.
Cost of sales increased only 21% year over year to $28 million.
There was no charge for unabsorbed fixed overhead for unused grow rooms in Q1 fiscal 2022 compared to $2 7 million in Q1 of the prior year.
We harvested approximately 11 6000 kilograms of flower during Q1 fiscal 2022 compared to about 3900 kilograms in Q1 of the prior year an increase of 197%.
This increase was directly related to increase yield per plant along with the increased cultivation planting during Q4 fiscal 'twenty one in Q1 fiscal 'twenty two to meet the growing demands for our products.
Okay.
Largely due to lower cultivation and post harvest costs.
Slower changes in fair value of biological assets and inventory provision the gross margin in Q1 improved to 610000 from negative $16 7 million in Q1 2021.
On an adjusted basis gross margin was $5 5 million.
<unk> to $1 9 million in Q1 2021.
We expect that the price increase the shred. The addition of higher margin premium products to our offering and lower production cost will further improve margins.
SG&A excluding.
Alluding noncash share based compensation increased to $12 6 million in Q1 2022 from.
$10 5 million in the prior year's comparison quarter, largely due to higher employee costs due to increased head count general wage increases.
Increased professional fees due to technology fees and the auditor fees from the new requirement to have an integrated audit and higher trade investment and marketing spend initiatives and to support the launch of our new coming in other derivative products.
Also due to improved revenue and margins the negative adjusted EBITDA was reduced from $5 7 million in Q1 of 2021 to $1 9 million in the current quarter.
We also reduced our net loss year over year from $34 3 million to $1 3 million.
Overall, we are pleased with our improving financials and the continued momentum we're seeing.
In addition, starting in December of 2021, we began to recognize revenue from a branch and acquisition.
Based on this we have now advanced our view on achieving positive adjusted EBITDA by Q3 of fiscal 2022.
In terms of our statement of cash loans.
Net cash used in operating activities was $9 3 million during Q1 and fiscal 2022 compared to cash generated of 294000 in Q1 of the prior year.
The change was primarily due to the current periods investment in working capital offset as we supported the growth of the business.
Net cash used by financing activities was 270000 during Q1 fiscal 2022, primarily driven by reduction of debt and lease liabilities.
Net cash generated from investing activities was $54 million during Q1 of fiscal 'twenty, two an increase of $38 million from the prior year's comparison quarter.
During the current period, there was $60 million from short term investment proceeds.
$1 million from restricted funds net of $7 million incurred for capital expenditures.
In terms of our balance sheet on November 32021, we had $168 million of unrestricted cash and short term investments compared to $184 million at the end of fiscal 2021.
The decrease during the period is primarily due to the Companys investment in both its working capital assets and capital expenditures for facility improvements.
This concludes my comments. Thank you I would like to turn the call back to Bina.
Thanks Derrick.
To close we are very pleased with the record results from the past quarter. We continued to generate significant momentum that I believe positions us for a successful fiscal 2022.
Investors can continue to expect strong revenue and volume growth more new and exciting product introductions.
Increased brand penetration.
And further improvements in our adjusted gross margin.
Thank you for joining us today I look forward to updating you on our progress and now operator, you may open the call for questions.
At this time, if you would like to ask a question you may do so by pressing Star then the number one.
Again, that's star then the number one in order to ask a question.
Your first question comes from the line of repairs Perique of Oppenheimer and company.
Good morning, Thanks for taking my question. So I guess, the first thing I wanted to just market share. So a significant increase in market share year over year, what would you guys attribute the key efforts that drove the market share increase.
Sure. Thank you for the question so.
We saw significant growth in the interest in our shred brand, it's really been quite.
Increased demand from consumers really related to not only the convenience, but the high <unk>.
Labour profile of the offering that's attracting consumers and we've seen really strong growth behind that brand and in addition, we have started we launched into the gummies category. After our acquisition of EIC back last April we launched into the category in August and saw significant traction behind our.
Shred EMS brands, we came in with a cost competitive cost into the marketplace and built to the number three position in the market by November so pretty quickly. So we continue to focus on building our derivatives offerings.
And in addition, as I mentioned earlier, we launched our printers are Edison printers, which is.
Our pre roll offering 10 pack that has two different strains in it it's a unique offering to the marketplace. So we're just listening to our consumers understanding what they're looking for and launching products that meet their demand and this has helped us gain our market share.
Great. That's helpful color and then maybe just one follow up question is on the Laurentian organic <unk> acquisition. So it's pretty impressive they already have $6 million EBITDA run rate on the sales basis was $17 million, what's unique about the business that already generates.
EBITDA and <unk>.
Really low revenue base.
Right. So I mean, their focus and Laurentian is predominantly on selling hash products and they are the number one selling hash into Quebec marketplace, So and it's a.
Our premium product offering with some good margins on it in that has been.
Really.
Yeah.
Drove great consumer appreciation for its taste and flavor and feel of the product. So.
<unk> been able to manage maintain really strong margins on that offering.
Complement that with some craft flower, we know craft flower is a good margin product so.
Their focus has been on the Quebec market will continue to expand those offerings as we build out capacity to take advantage of those higher margin offerings to our overall portfolio.
Great. Thank you.
Your next.
Question comes from the line with Tami Chen of BMO BMO capital markets.
Hi, good morning, Thanks for the question.
First I wanted to ask a bit more about the cost structure and margins.
So can you help us understand you know once you are up and running on the expanded capacity of I recall somewhere around the 70000 kilograms a year.
What sort of you know minimum sales level would you need at that level of capacity to maintain positive margins and EBITDA I ask because while you are gaining share now which is.
A positive the market does change a lot in and who is gaining share could fluctuate from time to time. So I wanted to understand the flexibility or operating leverage or deleverage nature of your cost structure.
Hi, Jamie it's Derrek here.
We are revising the outlook in terms of the total capacity to move from 70000 to 75000 based on the improved yields that we have been getting consistently over the last three four months.
And we are operating at capacity now based on the rooms available.
Despite the increasing over the last few quarters, we have significantly reduced our cost structure to the point that we've gone from negative adjusted gross margins to positive adjusted gross margins.
There is as you know there is a fixed cost element to that facility that's beyond the variable cost on the wafer.
And.
As such.
We we do plan based on.
I am on all products that at this point Frank sheets are achieved.
Our current capacity, but we're only going to be planting in the rooms. As this demand continues to outstrip our current capacity based on the success of all our colleagues and our plans for innovation on launching new products, we do feel that as we complete the construction of the rooms to take US from this 55000 capacity we have today to the <unk>.
75000 that we will be able to be operating at or near capacity. So we're not viewing this from our perspective, whereby there is a significant downside to Jamie.
The expansion.
Given where the demand is today based on the capacity that we have today moving from this 55000, you anyways run rate to 75000.
Of course.
Ashwin all off campus companies. If there is an element whereby your nonoperating I could talk capacity with.
The competition in the marketplace. There there are there is a cost or a fixed cost element.
But it won't be a direct charging.
Cost of sales should we not be operating at capacity, but we feel that there is so.
So much more that we can provide on cost reduction just based on going from 65000 to 75000.
And so should we think it will be sufficient buffer should there be.
Slowing in demand of our products, which again, we do not expect.
Right, Let me just add one more comment on top of what Derrick just said Tammy right now are very popular shred brand is really only available in two marketplaces.
In two provinces in Ontario, and Alberta, we have some small volume that is in Quebec, but we haven't been able to expand the distribution to other markets due to the lack of supply. We do believe there is a lot more opportunity for us to expand that brand and take advantage of what we believe is a great product.
Offering out in the marketplace. So we're not.
While I recognize your comment that.
Consumers have been swapping between brands, we've seen some pretty sustained demand on our shred brand and continued great performance and we're looking forward to having that extra capacity to be able to expand our distribution.
Got it thanks for the comment there that's actually a good segue to my follow up question. So Bina, that's very interesting on shred, because I was going to ask how much more upside in consumer demand you see in the shred brand because it's gotten so much success over the last year. So to clarify shred is really only in Alba.
And Ontario, and not really in the other provinces.
So I I see the upside there how about in the provinces of Ontario, and Alberta that shred as already and do you continue to anticipate or see that there is still even more demand upside on shred. Thank you.
Yes, so so we absolutely see opportunities in those markets and I should correct. We do have a little bit of business also on shred in Quebec, and a 15 grand format versus the seven Gram format, we have in Ontario, and Alberta.
But we do see.
Upside because currently we're on allocation.
Can't supply the demand. That's currently out there. This is why the increase in our production capacity and our improved yields is helping us we will continue to be able to fulfill them.
Orders as they come in but.
And just having our joint business planning meetings with the Ocs, they're basically telling US there is big demand from the retailers and we can't supply that demand at this point, we're really looking forward to our expanded capacity. So we could fulfill that demand and I think it all comes back to the fact that we're offering a product.
That is competitively priced to the illicit market.
And so we're bringing product in people in from the illicit market into the legal market through this brand introducing them to high quality offerings and so I do think there's lots of upside as more people move over from the illicit market to the legal market as well.
Great. Thank you.
Your next question comes from the line of Aaron Grey of AGP.
Hi, good morning, and thank you for the questions.
So first question for me I, just wanted to touch on Israel sales begin again this quarter.
On the go forward two questions in its first of all could you comment maybe on the margin profile that you guys are receiving for some of the products Israel and then how do we think about sales going forward that they could should continue in 2022, just one no relative to revenue you received in the first quarter whether or not.
We continue to be lumpy because that's.
Kind of a good base to build buffer. Thank you.
Right. So thank you for the question Adam at.
At this point, we had strong.
Resumed shipments to Israel and in Q1 of fiscal 2022, we have a great partnership with <unk> and they're very interested in ongoing receiving ongoing product from what.
What they are selling their market is premium indoor grown cannabis from Canada, they see it as a big draw they get a premium.
Price for that product and with our shipments that we made in Q1 of fiscal 'twenty. Two they were very pleased with the performance of our strains I believe we ship them Mac, one that sold out in their stores within.
24 hours so.
They're very pleased Theyre looking for more product, we expect to be on a cadence of.
Shipment once a quarter can dock, obviously that.
Does depend on no changes to the regulatory environment, but at this point, we have a strong partnership with <unk> and we do expect to see ongoing shipments throughout the balance of our fiscal year.
Okay, great. Thank you and then just a quick follow up can you just comment if any color on the margin profile.
Sure sorry.
You did ask that okay. Yeah. So so certainly we have good margins on the product that we sell to Israel and Thats, obviously, because when you sell export markets. You don't have the excise tax impact that you have when you sell within the recreational market and so it's a strong margin for us.
And it helps drive our overall net revenue.
No Derrick if you want to provide any more color.
Yeah.
We don't normally get into the margin by product category.
<unk>, specifically, but we do have healthy.
Margins on the on the on the <unk> business as a consequence of the cutbacks that was noted as well just to put the packaging that youre doing in spending on the on the export is more simplified process and in terms of both labor and the marketing elements and so it does allow for <unk>.
Margins that are in hand, and as compared to the flower margins in the Canadian market.
Well that's helpful qualitative color I appreciate that.
Second question for me then just in terms of high level view on the market and pricing.
Some peers have talked about potential continued pricing pressure.
And using price as a lever to kind of regain market share I just want to get your overall view in terms of with recent price increases in shred, how youre going to look at pricing and kind of maintain price gaps kind of as we go through 2022, especially relative to potential changes in market share.
As mentioned earlier, we've seen different fluctuations over time with different brands. Thank you.
Right. So so I think we've seen the price compression that's happened in the flower category, but from my perspective, we basically team it sort of level off we got to a place in flower where supply and demand are getting more.
Wind in the marketplace.
The price compression, we're seeing now is coming in other segments, you see quite significant compression coming in the vapor category.
We have a good competitive cost structure for our gummies, So we're not concerned.
In that category in terms of price compression, we know that we have to be competitive in the value segment too.
Prices offered in the illicit market to maintain.
That momentum so I think.
You obviously have to watch.
The pricing, we certainly have seen the compression in.
In the flower category over the last year, but it's I think really a good indication of the strength of our shred brand that we're able to take pricing in this category and continue to maintain the momentum on the brand. So I do believe that we've kind of leveled on flower.
There might be some compression on the high end and the craft flower segment, but on the value segment, I think we've sort of leveled off.
I could be proven wrong, but that's certainly our what we see as we were able to.
Get that price increase on shred.
Okay, great. Thanks for the color then I will jump back into the queue.
Your next question comes from the line of Thai Collyn of eight capital.
Hi, Thanks for taking my question just looking for some additional color on the Q2 outlook I think the language in the press release guided towards higher year over year sales in Q2, but not necessarily sequential growth. So just wondering if Q2 s looking flat or down what are you seeing in terms of adult use some of the puts and takes there would be great.
Thanks.
Perfect. Thanks for the question.
You know we are.
Going into the quarter, obviously, we have December behind US we've had some good momentum.
And we do have the incremental revenue coming from Laurentian, but the careful consideration on a quarter over quarter.
And could very well be growth quarter over quarter, but we do want to recognize the fact that there is seasonality to this business.
The second quarter, our second quarter is usually our lowest quarter of the year, because you have sort of the shutdown over Christmas you have the shorter February .
As well as the provincial boards that year ends are in March. So, we're just being cautious recognizing that while we.
Certainly are striving for revenue quarter over quarter.
We are very clearly going to be significantly higher than the same quarter prior year.
The other thing I do want to recognize look nobody likes to talk about this but COVID-19 is back out there. There are some restrictions in some of the retail stores in terms of capacity limits and then.
Quebec who's allowed into the stores.
There is the impact of labor shortages as people are infected with Covid. So we're just being cautious on our statements for this quarter, but we certainly have momentum coming in and we certainly have the incremental revenue coming from Laurentian that should help us deliver a great solid quarter in Q2.
Great I appreciate the color there and just as my follow up you mentioned earlier in the call that the company still can't keep up with demand for for Shred. For example is there any way to quantify how much sales were left on the table this quarter and when do you expect that the supply demand picture will start to balance that with given the.
Capacity expansion and Moncton. Thank you.
Right. So good question I mean, we we.
Certainly believe that we will be out of our <unk>.
Supply challenges once foresee expansion is up and running so as Derek mentioned earlier, we're focusing on 75000 kilos of product out of the facility and that should be able to address the needs and demand of shred and enable us to look at expanding the distribution.
Two other markets on top of feeding the markets. We're currently in where were on allocation in terms of how much demand are our sales are we leaving on the table.
That's a hard one to answer we certainly know that in our conversations with the ocs.
They certainly see it as a very large number and their retailers are looking for product and it's something we can't supply so.
Every every quarter we.
Started to see improved yields we started to build some extra supply this past quarter.
And that should help us fulfill more orders over the next quarter. As you know there is sort of that that delay between when you plant and you harvest.
But we should continue to see improvements over the next couple of quarters, but I see the big unlock coming in once foresee expansion is.
<unk> is complete and we will have production out of those grow rooms by the end of our fiscal year.
Thanks, and congrats on the quarter.
Your next.
Question comes from the line of Andrew <unk> of Stifel.
Good morning, Thanks for taking my question.
Maybe just starting off with some of your products continuing on shred.
Is it possible to quantify the price increases that you've made in Q1.
How much more do you expect.
Yeah.
To increase it by in Q2 and.
And as you bring shred into new markets are.
Are you thinking about having a.
Standardized national price on shred or could there be even further upside on on price.
So thank you Andrew so so here.
With regard to shred.
We know that currently we're selling in the most price compressed market.
Which is in Ontario, the biggest bulk of our volume.
And that's just based on their margin model and so we do believe that as we rollout to other markets. There is.
Margin upside as we have some markets that have.
Better for prices and we could get better.
Better margins on on our shred in terms of the price increase.
We were able to get the pricing through in Alberta, a little bit earlier in the quarter.
We were only able to get the Ontario pricing through by the end of October . So we do think that there is good upside in the next quarter as we see the full impact of the price increase in Ontario.
Is it possible to quantify the price increases.
Derek do you want to.
Pick that.
Yeah I'm.
I am not I.
Im not sure if it's.
A quantification I mean, we were.
We partially benefited in the quarter.
As noted just on the timing and.
But from here it would be.
No.
And the 5% range effective in terms of the.
The impact to the top line sales.
Sales just based on our transitional implementation on the timing during our Q1 reporting period.
Thanks for that color and maybe transitioning to <unk>.
R&D expenses.
You had that nice outlook of of accelerated profitability.
Could you clarify.
I believe that's excluding R&D expenses.
And when thinking about R&D expenses.
I believe the last time, we spoke about it.
You were talking about maybe $30 million over three years.
Has that outlook changed at all.
Could you maybe talk about cadence in <unk> and.
And any other color you can provide on on the level of R&D expenses to take into account.
Profitability outlook.
Yeah, I would say that.
Our R&D expenses to date has been.
Modest just in terms of the timing.
Timing of that.
The spending programs that are within the center of excellence the employees have been hired.
Virginia the work.
From.
It was at the center of Excellence and we of course have our own innovation and R&D teams over and above those.
Center of excellence.
I would indicate that the total program spend.
As was originally budgeted.
And.
Our originally forecasted and that it's more or less at the timing on some of the spend on the programs has been pushed out a few months.
But the aggregate of the spend would be similar so it can get a bit lumpy, but.
But we would see that it would start to increase from the run rate that you've seen in Q Q4, and Q1 of this year.
In terms of the total R&D spend for the company.
Thanks ill get back in the queue.
Your next question comes from the line of Rahul So regardless of Raymond James.
Morning, Derrick Paolo Thanks, so much for taking our questions.
We've talked a little bit about gross margins already but just wanted to drill down a little bit about due to the interplay between capacity and gross margins we saw historically that.
Company was extraordinary.
<unk> in the early days of legalization when operating at capacity.
And Derrick I think you referred to being close to capacity if not fully at capacity right now.
How should we be thinking about the sort of upper end or the.
The rate limiting step in terms of capacity and gross margin now and then how do we see that.
With the expansion that you potentially see sort of a dip in margins as you transition to that expansion.
Yes.
Firstly, I would not see any dip to our emerging as we proceed to the expansion.
The costs that are getting added the operational costs that are getting started.
Or not.
At the same dollar per dollar pro rata.
The extra capacity, it's going to generate.
Just by example, when we say we're at 55000 annualized capacity say that's for the month of January but for Q1 reporting period.
Approximately 45000, so just in terms of volume output.
To date, and where we can get to we will be going from 45000 from Q1 effectively to 75000, an increase of 30, which is significant.
And.
Our cost structure, and where there is a fixed cost component sort of tying backdrop.
Quality games on any chance question earlier.
Earlier is that.
Most of that cost from here are going to be variable in nature.
As a consequence.
Our cost of production per unit is going to go down.
As you increase every room that we increasingly have already seen that as we've increased the number of rooms available in Q1 compared to Q4 and in Q4 over Q3. We've we've had these significant increases to our adjusted gross margin of getting going from a negative to us.
Positive, 18%. So we do think that there is no macro political reason that this should not continue as we get to full capacity of 75000.
Great. That's very helpful. And then just switching gears a little bit we saw organic ground.
Continued to support.
Investment in Hudson.
And we understand that how is it starting to meet.
Two milestones, particularly in terms of the production implementation production of BBVA.
Could you maybe give us a sense for when we might start to see the incorporation of.
Hi.
<unk> molecules into organic brands products and hitting shelves given that we see a couple of years at least one of your major competitors hit shelves with the fermentation derived Netherlands.
Right. So thank you for that question. So at this point.
Pleased with the.
So with the IP that that's come from Hyacinthine, It's why we furthered our investment.
We are looking at having a contract manufacturer organization, that's sort of agreements in place to help on the scale up by around Q3 of 2022, that's calendar year 2022.
And expect production sort of material revenue coming out of their facility or that agreement by the end of calendar 2023, So it's still a little ways away before we have.
Scaled a rare cannabinoid out of that production.
Production, but we're very excited about what we've seen in terms of their technology and IP, We think we have.
A simplified approach that is easier to scale up in some of our competitors.
And we believe that while we're talking about revenue only coming out by <unk>.
Significant material revenue coming out by the end of calendar 2000, 22023, we do believe that the opportunities in terms of use of these products.
We will take that time between now and then to work on some of the innovation and work with <unk> and our product development collaboration to see where the greatest opportunities are in bringing in these products. So we'll use that time to do the right research to do the right.
Consumer work and make sure that we're ready to go once the product is scale.
Great. That's very helpful. Thanks, again for taking my questions.
Your next question comes from the line of Adam <unk> of Scotiabank.
Good morning, Thanks for taking my question and congrats on the quarter.
Dino you provided some great color on the demand for shred I wanted to focus more on the sort of flower vital for revitalization project thats been undertaken over the past year to half are you able to provide some high level detail on the contribution for sort of premium flower to overall sales versus let's say last quarter or versus last spring.
I'm just trying to get a idea about demand that youre seeing for those sort of new products that you've launched.
Right. So so a couple of points on that question. So we have seen.
From a flower standpoint, we've seen the growth obviously in our shred demand, but also in our big bag a bunch. So that's R 20 Grand format.
Unique strains and again, we have limited distribution, but as we work through our capacity challenges, but we're seeing some growth in that format as well our.
Our Edison brand we've seen.
It's been sustained market share on Edison brand, we expect to see some growth on our Edison flower in the back half of this year as we start introducing some of our newer genetics behind that brand higher THC higher turpin offerings on Edison, which is <unk>.
<unk> with the consumer demand for.
More premium brands.
So so that is coming in the interim we continue to focus on building out our portfolio behind Edison with our Vapes.
<unk> we have.
Some live resin Bates under Pax that will be coming out to market, we have our Edison jolts, which I talked about briefly in the script.
That really was.
A great intro into sort of high potency lozenge category, and we're seeing additional skus coming out in that space because because of the demand so margin up outside of flower through some of our derivatives, we launched our mazor offering which.
CBD, <unk> soft chews and and again.
Larger format CBD offering theres not very many in the marketplace.
Good margin for us a great offering for consumers.
And the opportunity to build that that distribution. So I think there is theres going to be margin improvement as we continue to build out our portfolio.
And then as I said earlier I think with Edison, It's just a matter of some of the new products, gaining some traction and we did see that with our Edison, Pinterest, which where our pre rolls this past quarter. So.
I hope that answers that question.
Yeah no. It certainly does thanks for the color.
Secondly, I just wanted to kind of touch on Israel again.
I'm just wondering if your partner can Doc has shared any sort of commentary on what they expect for Ford competitive dynamics of the market.
It seems basically right now that is a real what you sort of anything Canadians put on the table, but you know of course, everybody lp's looking to get into that market given the attractive demanded and margins right. So is there anything you can share on that front in terms of what you expect on a core basis I know you said you.
A sequential one order every quarter, but.
Anything on that front would be helpful.
Right. So I think what became clear in our discussions with can dock is what theyre looking at what is really gaining the best premium prices and Israeli market is Canadian indoor grown flower.
Flowers. So what I think provides us with a unique opportunity is that we're one of the largest indoor grown facility supplying that marketplace.
They've said that as soon as they put product out there.
With our brand and identify it as Canadian indoor grown at just flies off the shelf. So it's we've seen as you know premium quality product in that marketplace. So while I think there will be some.
Competition from Israeli drunk.
Certainly think that.
We feel pretty strongly about.
Our performance in the market and Ken Doc has is very pleased with the products and.
They were certainly told us how quickly that that some of our new strains that we introduced.
Sold out in the marketplace. So I'm feeling good about that relationship and continuing to build from there.
Great. Thanks for the color and congrats on the quarter again.
Thank you.
Your next question comes from the line of Douglas <unk> of RBC capital markets.
Good morning couple.
Couple of questions first question just has to do with.
Illicit market.
Maybe what you could do is walk us through.
Where do you see the pricing in that market, particularly in the.
And the larger provinces.
And the price differential between your shred big bag, a bunch of product.
And that type of differential that you need to maintain in terms of pricing.
How firm price sorry can you take before youre not able to take share.
From the illicit market.
Just wanted to start with that.
Right. Okay. So thank you for that question I think we've actually crossed that market.
In terms of pricing with the illicit market. If you look at price per Gram.
We've seen overall in the market, where the price per gram in the legal market and some of the value offerings has actually fallen below the price per gram on the illicit market now it's hard to say, whether that's a level playing field you you have differences in obviously.
Strains and THC, but I feel like the increase in our demand on shred has sort of indicated that we're there we're getting that crossover from the illicit market into the legal market and where we're at the right price there that I don't that we continue to see them and I believe.
But it's come across that right now the legal market is now 53% of sales versus four.
47% of illicit market I mean, there's still a long way to go to get more of that.
The illicit market over but in terms of price per Gram on flower I think we've kind of crossed over.
And I think that gave us the opportunity to take a little bit of pricing on shred.
Obviously, the market dominant dynamics are a little bit different depending on the province urine.
But generally speaking that I think we've already hit that mark.
Okay.
Sure.
Second question I wanted to ask was about.
You see that you are selling into Israel, but there are going to be a couple of other markets.
Open up in Europe in the next little while.
Perhaps in the next 12 to 24 months.
What are you, what's your thinking or the company's thinking for <unk>.
International expansion side of Canada, and what Youre doing in Israel.
Right. So so first of all we also have a partnership with cannot track out in Australia.
We had shipped them a while ago when we have re engaged with them and are looking to expand our export shipments to Australia as well. So that in addition to Israel. Our current businesses that we will certainly look at fulfilling in this fiscal year in terms of other markets certainly we're all.
Watching Germany, and trying to understand legalization, there and other available markets in Europe .
What we're doing in the short term we're evaluating.
How to get some EU GMP or GMP status in our Moncton facility, how to build out some capacity to be able to take advantage of that market as well.
The facilities are designed to get two EU GMP, that's our derivatives facility in Winnipeg as well as our Moncton facility. We don't have the certification yet, but it's something that we'll look at over the course of the next 12 months as we consider those export markets in Europe that become another off.
<unk> for us.
Okay. Thanks very much.
Thank you.
Your next question comes from the line of Andrew Bond of Jefferies.
Good morning, Andrew Bond on the line for Owen Bennett. Thank you for taking our questions I understand this late in the call. So I'll keep it to one.
Just around use strategy for federal legalization understanding the timing remains uncertain, we have seen several different approaches and transaction types from other Lps like optionality agreements and structured agreements with msos as well as CPG oriented brand plays obviously organic Graham has shown great traction based on market share data. So just curious.
What specifically youre thinking about as you develop an approach to the eventual use THC market. Thank you.
Great well thank you.
So where we've been looking at the U S market.
And obviously, it's something that that we apologize hold on a second.
Sorry about that so we have looked.
It looked at the U S market and I don't believe necessarily that the options that some of our competitors have done is the right approach.
We know how significantly this market has changed over the course of two years.
And I'm not sure if you put in an option now youre going to be getting in two years' time, given the rapidly changing market dynamics.
As a company will continue to look at the market and track.
Regulation changes to make sure that we understand when the you know.
The opportunity is really develop in the U S for us well.
We will explore CBD offerings in the U S and other adjacencies. So those are things that we'll look at but we're going to do it when it's the right move for US the short term goal.
In the last six months has been to build out a foundation in our Canadian marketplace, We added EIC, which got us into <unk>.
Gummies market very quickly, we've just added Laurentian, which bolsters our presence in Quebec and gets us both into craft flower and into concentrates in a bigger way with the Trump black hash.
So I think that was our priority as we continue to look and as we've built out our base in Canada will start to look and I'm not sure if the U S. As the first market a real look outside of the U S. But we will look at expanding internationally.
As we are.
See the right opportunities come for us.
Great. Thanks for that color and congrats on the quarter. Thank you.
Your next question comes from the line of Rodrigo <unk> of <unk> capital markets.
Hi, Good morning, and thank you for taking my question keep in Q1.
In terms of your market share. So you guys have a good momentum going there, but you know the markets do very very competitive fragmented so just going forward.
Do you expect to continue gaining share of the market.
Is there any target you guys have in mind in terms of how much share you can say organically or.
Or would you expect that that market share curve do you kind of.
Slept lineup so the market consolidates.
Thanks for the question.
I think what we've said so far is obviously, we're not taking full advantage of our shred offering because we are capacity constrained. So we do believe as we build out our capacity there is more upside to gain on our shred as well as our big bag of buds are 2008.
Graham F format.
As we build out our capacity, we do believe theres more market share to grab.
From those offerings and we do have.
Derivatives business that we continue to build out so we have more offerings coming in our gummy lineup, we have yet to really see the full benefit of our new launch behind our mature brand.
We have some new innovation on.
Pre rolls more more dual pack pinterest coming out and more <unk> coming out.
Which we are underdeveloped in the vape category, but we have some new veins coming out both under our shred brand and our Edison brand. So I think that the answer is we do think that there's opportunity to gain market share.
And I'll also say that while Quebec is a challenging market.
A good read on because of the limited data coming out of that marketplace.
We certainly believe we'll have a larger market share simply through the benefit of the acquisition of Laurentian.
Great. Thank you very much.
This concludes today's Q&A session I will now turn the call back to Dana.
Thank you everyone for listening this morning, and thank you for some great questions. We're very excited about the momentum we have on the business and I look forward to updating you again soon thanks for joining the call.
Yeah.
Thank you for participating in today's call you may now disconnect.
Yeah.