Q4 2022 OrganiGram Holdings Inc Earnings Call
Speaker 1: mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one. Thank you Craig McPhail. You may begin your conference.
Speaker 2: Thank you and good morning everyone.
Speaker 2: Before we start, I would like to remind everyone that today's call will include estimates and other forward-looking information from which the company's actual results could differ.
Speaker 2: Please review the cautionary language in today's press release on various factors, assumptions, and risks that could cause our actual results to differ.
Speaker 2: Further, reference will be made to certain non-IFRS measures during this call including adjusted EBITDA and adjusted gross margin. These measures do not have any standardized meaning under IFRS. Our approach to calculating these measures may differ from other issuers, so these measures may not be directly comparable. Please see today's earnings report for more information about these measures.
Speaker 2: Listeners should also be aware that in making certain statements relating to market share data, the company relies on reputable third-party providers.
Speaker 2: Unless otherwise indicated, all references to market data are sourced from high fire data as of August 31, 2022, pulled on October 18, 2022. I would now like to introduce Beena Goldenberg, Chief Executive Officer of Organigram Holdings, Inc. Please go ahead, Ms. Goldenberg.
Speaker 3: Thank you and good morning everyone.
Speaker 3: With me is Derek West, our Chief Financial Officer.
Speaker 3: For today's call, we'll discuss the financial results for the three months, and year ended August 31, 2022, and I will provide a general business update. We will then open the call for questions.
Speaker 3: Now, I joined Organigram in September of 2021, and at the time I said what attracted me to the company was its high quality products, strong brand portfolio, and proven ability to innovate to meet consumer needs. This was bolstered by a strong sales team to get products into distribution and efficient operations that would enable us to compete in the large value segment.
Speaker 3: I'm happy to report that in fiscal 2022, those strengths proved to be significant and resulted in success on several fronts. In fiscal 2022, we generated net revenue of $146 million, an 84% increase over fiscal 2021. In Q4, our net revenue was $45.5 million.
Speaker 3: an 83% increase over Q421, and our sixth consecutive quarter of record revenue growth.
Speaker 3: We also became adjusted EBITDA positive in Q2 of this year and have delivered three consecutive quarters of positive earnings.
Speaker 3: Our share of the adult recreational market grew to 8.2% in Q4 fiscal 2022 from 7% in Q4-21.
Speaker 3: For the month of October 2022, we held the number two position in terms of market share.
Speaker 3: According to Highfire, Organigram was the only top 5 LP to grow market share in our fiscal 2022.
Speaker 3: At the end of our fiscal year, we held the number one position in the flower category, which represents the largest portion of the adult recreational market.
Speaker 3: Also, according to provincial board data, since January , we held the number one position in Ontario in ship sales, with a Q4 market share of 8.8%.
Speaker 3: and in the Maritimes with a 14% share in Q4.
Speaker 3: In Quebec, we moved into the number 3 position in September , as shown by data from WheatCrawler.
Speaker 3: We have built Shred into a recognized brand across multiple categories, milled flour, gummies, and vapes.
Speaker 3: It is one of the biggest brands in the country with over $150 million in retail sales.
Speaker 3: SRED also has a solid net promoter score of 77%, according to Brightfield, based on field surveys from August 4 to September 27.
Speaker 3: We continue to hold the number three position in the gummy category. This includes Shredim and Monjour CBD-infused gummies and are the number two in terms of volume sold. In Q4 we had a 24.3% volume market share which means that close to one out of every four gummies sold in Canada was an organogram product.
Speaker 3: In fiscal 2022, we introduced over 60 new SKUs to the market to refresh and optimize our product offerings. For more information, contact me at abdominal
Speaker 3: These new SKUs represented about 30% of our sales in the year, which speaks to our ability to not only innovate, but to create products that engage consumers.
Speaker 3: In Ontario, we have the highest average sales per SKU, which is more than double the average of the top 10 LPs.
Speaker 3: showing the efficiency of our lineup.
Speaker 3: A great example of innovation is our ingestible extract, Edison Jule.
Speaker 3: We introduced JOLTS in August 2021 using proprietary IP and it quickly took the second position in the capsule category. There are now three flavors in the JOLTS lineup and it holds a 26% market share.
Speaker 3: In fiscal 2022, we also launched our Monjour Wellness Focus brand. It was the first large format and multi-flavor offering in the space and quickly gained share.
Speaker 3: It is now the number one selling pure CBD gummy with a 37% share.
Speaker 3: We continue to innovate with Monjour by adding new flavors and other minor cannabinoids into our formulations.
Speaker 3: We have also been successful at innovating in the value segment. Big Bag of Butts was introduced in May 21 in the 28 gram format. It was unique in offering quality high potency strains not typically available in the value segment such as ultra sour and GMO cookies.
Speaker 3: It was quickly embraced by consumers and received positive reviews on social media.
Speaker 3: Now we did not have a presence serving the value segment in smaller pack sizes which accounts for over 300 million dollars in retail sales.
Speaker 3: So to address this subsequent to quarter-end, we introduced a new brand, Coley Mountain.
Speaker 3: Currently, we are in market with a strange run and MAC1 in 3.5 gram format, as well as press cache. We are in market with a strange run and MAC1 in 3.5 gram format, as well as press cache.
Speaker 3: I'd also like to talk about our success with acquisitions.
Speaker 3: Compared to the rest of the industry, we have taken a very prudent approach to acquiring companies.
Speaker 3: We look for those that will complement our product line and have the potential to be accretive to shareholder value.
Speaker 3: First was the Edibles and Infusions Corporation, based in Winnipeg, which we acquired in April 21.
Speaker 3: It was pre-revenue and pre-sales licensed, but had a manufacturing facility purpose-built for cannabis-infused products with highly efficient state-of-the-art equipment.
Speaker 3: This provided us with a significant opportunity to disrupt the cannabis edible market in Canada.
Speaker 3: We launched three gummy SKUs in Q4 of 2021 and grew that to 14 SKUs by the end of 2022. The three original SKUs continued to grow in sales from Q1 to Q4 by 19%, while we brought new ones to market, indicating that the new SKUs attracted new consumers and further built our market position.
Speaker 3: We have invested in additional automation at Winnipeg, including high-speed poach packing lines and automated exercise stamping.
Speaker 3: In September of 2021, we shipped 339,000 gummies. In October of 2022, we shipped 3 million and have the capacity to increase further.
Speaker 3: In December , we purchased Laurentian Organics, a licensed producer of Kraft cannabis and hash. As well as giving us an important presence in Quebec, it was a successful operation with Creative Revenue and Evica.
Speaker 3: We have committed $13 million to expand the facility to increase its annual capacity to 2,400 kilograms of flour and over 2 million package units of hash.
Speaker 3: Construction is expected to be complete by the end of this calendar year.
Speaker 3: Our new Holy Mountain press patch is produced at this facility.
Speaker 3: We added Laurentian's trombone hash to our national distribution and it was available in 10 provinces in 5 months post close.
Speaker 3: It has maintained its number one position in the Quebec market and is now the number two hash scale in Canada.
Speaker 3: Also, a very important contemplated synergy, our new footholds in Quebec enabled significant growth of core organogram views in the province.
Speaker 3: In fiscal 2022, we achieved a 50% increase in revenue per SKU. And as of September 2022, we increased the number SKUs in market from 21 to 35.
Speaker 3: I'm also pleased with our production success in fiscal 2022. In Q4, we brought all the cultivation rooms in our 4C expansion at our Monkton Cultivation Center online.
Speaker 3: We have 115 grow rooms available to us for the flowering period, which provides an annual growing capacity of 85,000 kilograms.
Speaker 3: We have also completed environmental enhancements at the facility with LED lighting in every room.
Speaker 3: This has resulted in an 11% increase in yield per plant.
Speaker 3: decreased power consumption per room, and a 21% reduction in the cost of cultivation.
Speaker 3: We have also introduced fractional watering. It will be available in all rooms by the end of this calendar year and has already shown to create further improvements.
Speaker 3: The results of these efforts have been lower production costs, higher yields, and higher potency.
Speaker 3: In Q4 of fiscal 22, we had a record harvest of 16,000 kilos, 33% higher than Q4 of fiscal 21. And yield per plant was 141 grams compared to 127 grams a year earlier.
Speaker 3: In fiscal 2022, the Centre of Excellence, formed as part of our product development collaboration with VAT, completed all key spaces, including the R&D lab and the state-of-the-art biolab for advanced plant science research.
Speaker 3: As part of the development, the COE has undertaken initial stage development and safety studies on first generation edibles and novel beverages as part of its work.
Speaker 3: The COE has created and set numerous delivery systems and created over 60 unique formulations to develop differentiated products in the future.
Speaker 3: Another key strategic advantage for us is the dedicated cultivation R&D space.
Speaker 3: This new space has accelerated rapid assessments and screenings by delivering 20 to 30 unique cultivars every two months while freeing up rooms for commercial growth.
Speaker 3: The plant science team continues to move the garden towards unique, high terpene and high THC in-house grown cultivars while also leveraging the newly commissioned biolab for ongoing plant science innovation.
Speaker 3: Their focus is on quality, potency, and disease resistance to enrich the future flower pipeline.
Speaker 3: In fiscal 2022, Organogram established a significant position as an international supplier of cannabis.
Speaker 3: We shipped a total of $15.4 million of flowers to Kandalk in Israel and Medcan and Canotrek in Australia.
Speaker 3: This compares to 351,000 of international sales in fiscal 2021.
Speaker 3: To date, this fiscal year, we have shipped approximately $6 million of dried flower internationally.
Speaker 3: With our expanded capacity at Moncton, we expect to increase our revenue from international sales. On November 17th, we entered into a new agreement with Kandok in Israel. This new agreement, over a three-year supply term, allows for the shipment of 10,000 kilograms of dry flour, with an option per Kandok to order an additional 10,000 kilograms.
Speaker 3: This agreement speaks to the consistently high quality of our flour and our strong relationship with Candoc and allows us to collaborate in the future on other emerging medical cannabis markets and jurisdictions.
Speaker 3: I will now turn it over to Derek to present the financial overview.
Speaker 4: Thanks, Vito.
Speaker 1: As Dina mentioned, we achieved record revenue in both the fourth quarter and the full year for fiscal 2022.
Speaker 1: Gross revenue grew 81% from Q4 2021 to 66 million. That revenue grew 83% from the same period of this to 46 million.
Speaker 1: On an annual basis, gross revenue grew by 86% to $209 million from $110 million in fiscal 2021.
Speaker 2: Net revenue grew by 84% to $146 million from $79 million in the previous year.
Speaker 1: These revenue increases were primarily due to higher recreational net revenue, which grew 64% from Q4 of fiscal 2021.
Speaker 2: and 78% over the prior fiscal year.
Speaker 1: The cost of sales in Q4 fiscal 2021 was $37 million compared to $26 million in Q4 fiscal 2021, an increase of 42%.
Speaker 1: Annually, cost of sales were $119 million, a 15% increase over $104 million in fiscal 2021.
Speaker 2: The low increase of cost of sales relative to a large increase of revenues was due to the lower cost of production that was primarily achieved through improved efficiency from automation.
Speaker 1: We harvested approximately 16,000 kilos of flour during Q4 fiscal 22 compared to about 12,000 kilos in Q4 fiscal 21, an increase of 33%.
Speaker 2: Annually for fiscal 2022, we harvested 51,000 kilograms, a 76% increase over the 29,000 kilos in fiscal 2021.
Speaker 2: The annual capacity of the monthly growing facility has increased to 85,000 kilos. This positions us well to meet our growing Canadian and international sales demand.
Speaker 2: On an adjusted basis, gross margin was $10.4 million for 23% of revenue over the $3 million or 12% for Q4 of fiscal 2021.
Speaker 1: On an annual basis, adjusted gross margin was $33.4 million or 23% of revenue as compared to 3.6 million or 5% for the prior fiscal year.
Speaker 5: The significant improvement in adjusted gross mergens was primarily due to the higher overall sales volumes, combined with a lower cost of production.
Speaker 5: SGMA, excluding non-cash share-based compensation, increased to $15.7 million in Q4 2022 from $12.4 million in Q4 2021.
Speaker 5: Annually, SG&A was $60 million compared to $46 million for the prior fiscal year.
Speaker 5: The increased amounts over the period are largely due to the increased employee headcount related to the acquisitions of the Winnipeg and Lake Superior facilities, increased professional fees, ERP implementation costs, and non-cash amortization of the intangible assets acquired from the two acquisitions.
Speaker 5: While there was an increase in SG&A, as a percentage of net revenue, it decreased from 56 to 39%.
Speaker 5: In the quarter, we achieved a positive adjusted EBITDA of $3.2 million compared to a negative $4.8 million in Q4-21.
Speaker 5: Annually, adjusted EBITDA was $3.5 million compared to a negative $27.6 million for the prior fiscal year.
Speaker 5: The primary drivers of the significant improvement to profitability were the higher volume of products sold lower.
Speaker 5: per unit cost of production which increased margins.
Speaker 5: Q422 was our third consecutive quarter of positive adjusted EBITDA, and based on our outlook for revenue, including international sales and improved efficiencies, primarily achieved through scale, we expect this trend to continue.
Speaker 5: The net loss was $6 million in Q4 fiscal 2022 compared to a net loss of $26 million in Q4 fiscal 2021.
Speaker 5: For the fiscal year, the net loss was $14 million compared to $131 million for the prior fiscal year.
Speaker 5: The decrease in net loss was primarily due to the increased revenues of improved cost structure along with reductions to inventory provisions.
Speaker 5: From a statement of cash flows perspective, beginning with operating activities, there was net cash used of 36 million during the year. This was mainly driven by the increase to our working capital assets, which grew as a result of higher sales and production levels.
Speaker 5: From an investing perspective, Organigram dispersed 49 million in capital expenditures across the 3 facilities, 8.4 million in cash consideration towards the acquisition of Laurentian Organics.
Speaker 5: and a $2.5 million investment into highly-sent biologicals.
Speaker 5: From a financing perspective, the company had lease obligation payments of approximately $1 million and raised $6.4 million from the issuance of common shares, which was primary through VAT exercising its top-up rates.
Speaker 5: In terms of our balance sheet, on August 31, 2020, the
Speaker 5: 2022, we had 125M in cash and short term investments compared to 215M at the end of the prior year.
Speaker 5: During the year, the company undertook a significant expansion at its monthly facility, which resulted in an expected decrease to our cash position.
Speaker 5: As we complete our expansion, operation, and automation and enhancement investments at the Winnipeg and Luntton facilities,
Speaker 5: The company expects to spend approximately $29 million for fiscal 2023.
Speaker 5: The company's $125 million in cash and short-term investment includes $26 million in restricted cash for the Center of Excellence, thereby leaving $99 million of unrestricted cash.
Speaker 5: With the company now generating positive adjusted EBITDA, we believe that we will generate positive cash flow from operating activities during fiscal 2023.
Speaker 5: and positive pre-cash flows in calendar 2023.
Speaker 5: We believe our capital position is healthy and that there is sufficient liquidity available to support the growth of the business over the near to medium term.
Speaker 5: This concludes my comments. I would like to turn the call back to Dina.
Speaker 4: Thank you.
Speaker 3: We are pleased to present the fiscal 2022, which reflects all our efforts in building a leading Canadian consumer packaged goods industry.
Speaker 3: fiscal 2022, which reflects all our efforts in building a leading Canadian consumer packaged goods focused on cannabis.
Speaker 3: With the progress we've made, the market penetration we've achieved, our highly efficient production, and our innovation platform, we are positioned to deliver long-term shareholder value.
Speaker 3: I want to express my gratitude to our board for their valued support and guidance, as well as to our employees for their dedication and ingenuity. We look forward to further success in 2023.
Speaker 3: Thank you for joining us today, and operator, you may open the call for questions.
Speaker 1: At this time I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad.
Speaker 1: Your first question comes from a line of Tammy Chen from BMO Capital Markets. Your line is open.
Speaker 3: Hi, thanks for the question. First, I just wanted to ask in terms of your thinking on the flower portfolio, it does seem like especially with Holy Mountain and Bina you talked a bit about the rationale of launching this but seems like your portfolio continues to be more in value so I'm just wondering as you go forward.
Speaker 3: Is that where you want to stay for the most part? Things are working there or would you consider trying to up price the consumer with some more mainstream or premium type products in the future to improve your margin?
Speaker 3: Thanks for the question Tammy. I think the answer is we're comfortable in participating in the value segment because it's the largest segment in the market. It's important to be able to compete there profitably. But we do have our Edison brand which is now going through a revitalization to really establish a stronger position in a more premium space.
Speaker 3: And through the acquisition of Laurentian, we also have the craft opportunity to continue to push the craft flower set. So, you know, we'll have products in all the different consumer segments, flower products, but we have brands that fulfill the value segment because that's where a lot of the volume is.
Speaker 3: Got it. Okay. And a follow-up for me is, so this quarter in your fiscal year ended in August and some of your competitors that had September and talked about how the disruptions in Ontario from the cyber attack as well as labor strikes, I believe in both BC and Quebec, gave them a bit of a noisy period, had some disruptions.
Speaker 3: on the sales side. So I was wondering if to the extent you can comment, did you see something similar post quarter? Thank you.
Speaker 3: Sure, no problem. So, listen, despite the challenges in the market during the month of August , of both the cyber attack and the the BCE strike, we were able to deliver a record net revenue in our fourth quarter.
Speaker 3: In terms of the OCS, we were proactive with our sales team. They were able to work directly with retailers to let them know which SKUs were available at the OCS warehouse. So they were able to get around of the allowed or work within the allowed limits. We kept up our position and our sales through that period until things got back to normal.
Speaker 3: Now I will say we did see some minor impact in September as we had such strong sell-through in September that it had us run down to some minimum volume levels at our distribution centers on our high velocity skews. And we had a bit of a delay in replenishment of those, so there was a slight impact, but overall we're very pleased with the results of our quarter.
Speaker 3: and we feel very good that everything is resolved and we're having a solid key one as well.
Speaker 6: Okay, great. Thank you.
Speaker 1: Your next question comes from a line of Ty Collin from 8 Capital. Your line is open.
Speaker 7: Hi, thanks for taking my question and congrats on the quarter. Just wanted to start off, I'm wondering if you could share your views, Bina, on the structure that Canopy Growth is using to roll out its U.S. assets and whether that's a pathway you're considering for OGI to establish a presence in the U.S.
Speaker 3: So, Ty, thank you for your question. And listen, every single cannabis company is looking at what Canopy has done in the marketplace. I think it's important to start with that we have been laser focused first and foremost in making sure we have a sustainable and profitable position in Canada, right? And take an advantage.
Speaker 3: with some international opportunities through exports. Now we've looked at the US and in particular in the past, we've looked at CBD, but we haven't found a transaction that makes sense to us. So on the THC side, we'll continue to develop a market entry strategy. We'll pay close attention to the proposed legislative changes and the acceptance of the certain transactions from some of our competitors.
Speaker 3: So I guess the answer to your question is, we will enter only when we've determined the risk reward dynamic makes sense for the company and all stakeholders. But we're watching it, and we're going to see what works.
Speaker 7: Okay, great. Thanks for that. And then maybe one directed more towards Derek, I'm wondering if you could unpack the gross margin rate a little bit for us. It looks like that came in lighter than expected, particularly given the significant step up in international revenues this quarter. I'm just wondering how much of an influence maybe pricing and mix were, for example. I just appreciate any color you could provide there.
Speaker 5: Sure, in Q4 we did have a significant increase over Q3 for the international sales. However, that was actually less than the increase that we had on flower sales in the rec market, which did allow us to achieve the highest rec sales overall for the company in the quarter. So the mix was still...
Speaker 5: somewhat heavier with the Rec Flower and with Value Brands. But I will note that on an overall basis our gross margin was 10.4 million. It was the highest quarterly amount in the past three years over the last 12 quarters. And as well we have the larger harvest now that are lower cost of production over Q4.
Speaker 5: But those harvests were just coming off at the end of Q4 and therefore were not part of our cost of sales in the quarter and will be more likely to impact our Q1 margins. But overall the margin was essentially flat quarter to quarter even with the increase in international sales only because the large reason are.
Speaker 5: Our sales went up in the quarter with the extra sales in flour that we had in the rec market.
Speaker 6: Thanks for that.
Speaker 1: Our next question comes from a line of Aaron Gray from Alliance Global Partners. Your line is open.
Speaker 5: Good morning and thank you for the questions. First question for me is on international. Nice to see the $6 million of sales you guys had in the quarter. It sounds like $6 million a year to date as well. I just want to talk about your expectations there, you know, more longer term, specifically on the Israel market. I know you guys signed the agreement.
Speaker 5: with Intercure earlier this month, $20,000, $10,000. Now with an option on another 10,000, sounds like 3,000 is already delivered. Just given some of your peers kind of backing away from that market, we'd love to get your longer term view there. Do you think it's more of just the indoor quality that's why you're not seeing some of the pricing pressure that some of your competition has called out?
Speaker 5: and just how you're seeing that overall marketplace, because I know there's been different views regarding some of your competitors in this rail market. Thank you.
Speaker 8: Sure. So thanks for the...
Speaker 3: Listen, we have a great partnership with Candoc. The product in the market is dual branded. It includes Organigram and it clearly says indoor grown Canadian flowers. We certainly are known for indoor grown and we don't have competition in the domestic market. The quality of the flower is there and well accepted by consumers.
Speaker 3: we could explore other opportunities beyond our current customers to see where we could export our high quality indoor grown flower. So we're very optimistic about international sales moving forward and looking at other customers and other markets as well.
Speaker 5: Great, great. Thanks for that. And just given the lack of the excess tax you wouldn't have international versus Canada, as you look to allocate the extra capacities, is it fair to say that you might prioritize some new customers internationally versus what you might have domestically, particularly as you're targeting a little bit more of the value segment in the near term on the Canadian side? Thanks.
Speaker 3: No, I think the answer is the reverse. As I said earlier, we really want to make sure we have a sustainable, profitable leadership position in the Canadian marketplace. And so over the course of last year, we prioritized our domestic market and continued to supply not only the value flower, but we supplied our Edison brand that has close to a 2% market share.
Speaker 3: So we continue to have a brand playing in the premium segment. We are building capacity at our Laurentian facility in Life Superior to really participate in the craft flowers. So we'll have a complete portfolio of products for the Canadian market, and we'll explore excess opportunities with international markets.
Speaker 3: because we have great quality flour, now we have the capacity to do it. So I think the priority will still be to make sure we're strong at home and then build from there on opportunities internationally.
Speaker 9: Okay, great. Thank you very much for the call, and I'll go ahead and jump back into the queue.
Speaker 1: Your next question comes from the line of Andrew Partinew from Stiefel. Your line is open.
Speaker 10: Hi, good morning. Thanks for taking my questions. Maybe first just to expand on the previous question on gross margin. You know, correct me if I'm wrong, but if I understand, you know, the better international sales, higher margin international sales were kind of offset by
Speaker 10: more
Speaker 10: REC value flower sales. Just thinking going forward here understanding that expansion is going to benefit with operating leverage and lower production costs going forward.
Speaker 10: I just kind of want to understand what the uplift potential to gross margin is. As mentioned, this quarter teams value kind of offset international but
Speaker 10: Is that something that we're going to see less of starting in Q1 of fiscal 23? And again, what kind of pickup on gross margin could we see from the expansion here, assuming that a lot of your future demand is going to be value focused?
Speaker 5: 75% of our revenues are in the flower categories and yes, there is a delta between the margins on international versus domestic as a consequence of the excise tax, which is fairly high on the flower categories for all LPs.
Speaker 5: And we are selling a large portion of our products in the value brands. However, we currently are profitable in that sector in Canada. And that is really without the benefit of getting to scale. While we are leaving fiscal 22 at this higher annual capacity from the month of February , our core demand is especially close in the Warcraft world where this year has been in question for a while but still we have atrl facing fast forward back on that site face NEXT
Speaker 5: At the beginning of the year we were at $45,000 and the construction was only completed at the beginning of Q4 and then we were planting in the rooms on a staggered basis. So while we had some benefits to our cost structure through efficiencies and some automation, we didn't really have the benefits to our income statement yet for just the lower cost of production.
Speaker 5: But we did indicate that our cost on a year-over-year basis for cost accultivation has decreased 33% and that amount will ultimately lower our cost of flour. I'm sorry, 23%, I apologize. And that will start to benefit our margins across all flour categories in fiscal 23.
Speaker 5: 22 just based on getting to scale.
Speaker 10: Thanks for that. Then thinking about cash and the guidance that you put out there, positive cash flow in fiscal 23 and positive free cash flow in calendar 23. First, could you just confirm is this positive guidance more specifically to the entire fiscal 23 as a whole and the entire...
Speaker 10: Is this going to be a little bit more gradual to get to positive? And just kind of managing expectations here would be helpful. Thank you.
Speaker 5: Yeah, the guidance that's being given is not for the whole fiscal year. It is that we will achieve it in during the fiscal year in one of our quarters. So, starting with the operating cash flow.
Speaker 5: We finished the year with a fairly large increase in sales. We do expect sales to continue to grow. We're significantly increased the production level in Moncton. And if we plan in those rooms, that will increase our investment in our biological assets and our inventories. So as we continue to have success in the marketplace with our products and getting to a higher level of scale.
Speaker 5: there will be negative cash pressures on the operating activities for the first half of the year. However, we do expect that once we are fully operating at capacity at all facilities, that that will level off and we're confident that we will have a positive operating cash flow prior to the end of fiscal.
Speaker 5: 23 and with regards to free cash flow, our main CapEx spend program, while significant in fiscal 22, we are doing further enhancements and automation in Winnipeg and Moncton and as well with completing the expansion at Malentton, we expect to have that completed in fiscal 23.
Speaker 5: And from there, we have no identified large capital projects. It would be more sustaining capital and as a consequence.
Speaker 5: As we get into the first part of Fiscal 24, we would expect that that positive operating cash flow with nominal cap-backs will lead us to a positive free cash flow and that's why we indicate that guidance.
Speaker 5: by the end of calendar 23, which covers our first quarter of fiscal 24.
Speaker 11: Okay, I appreciate that. Thanks. I'll get back in the queue.
Speaker 1: Your next question comes from a line of Matt Bottomley from Kennacord Genuity. Your line is open.
Speaker 12: Good morning everyone. Congrats on a strong finish to the fiscal year. Just wanted to get kind of maybe more of a state of the union on what we're seeing in what's a saturated landscape in just terms of the number of participants in this sector, particularly on the cultivation production. So, appreciate all the commentary on how you're positioned and you know, you're pretty much sort of top three in everywhere where you're playing. But are you seeing any shakeouts right now? A lot of the commentary we've had from LPs as of last year
Speaker 3: Um, well, um, an interesting question. So let me start by saying, um, we do see over the course of this past year that there has been, you know, those, um, facilities, cultivation facilities that couldn't compete, whether it was on quality or price that have shuttered that's that has taken some capacity out of the marketplace. Um, and, but there are other, um, players that are still in there.
Speaker 3: to see the most growth and we're comfortable participating in that. While some of our competitors have said they only want to participate in the premium segment, it's not a large enough segment. We'll get economies at scale and at the end of the day while people have focused on a margin percent, the dollars matter. That's what you take to the bank and we are continuing to grow our overall gross margin dollars.
Speaker 3: So I feel comfortable that the market, you know, we will have some further consolidation. We've seen some companies go into CCAAA, we've seen some shuttered facilities over the last while. You know, this is going to be an interesting next 12 months in the market. We're comfortable in our position in our, you know, improved, we're projecting improved gross margins as you've heard Derek say.
Speaker 3: really haven't been participating in leveraging our shred brand and saw some nice growth in that segment. You know we we have more opportunities to build on the Trombla hash portfolio because of the strength of that brand and that product. So we do see opportunities in other segments as Derek said we're predominantly a flower.
Speaker 3: company right now and we have great assets that give us great quality there. But we continue to build our portfolio and our two acquisitions that we completed in the last year really have helped us expand our portfolio to some higher margin.
Speaker 12: Got it, thanks. I think I might have dropped. Maybe not, but if I'm still on the line, just one more follow up for me. And I know you touched on this a little bit, but I just want to make sure I understand the cadence of what's in your guidance as well. So, you know, given calling for a significant increase in adjusted EBITDA. You know, over the last fiscal year, I'm just wondering if you think that the sort of run rate that you're at now, or at least the 3.2 million that you did in this quarter.
Speaker 5: of fiscal 22. We were nominally positive and most of the current fiscal 22 EBITDA was generated in Q4. We do see EBITDA sequentially improving over next year. There can be some swings that can depend on next but again generally speaking with the lower cost of production that we will have for next year.
Speaker 5: and with our sales being at the level that they are, that we think that we can maintain and continue to increase, that ultimately we will see that it would increase over the year but we can't guarantee one quarter over another at this time. So we're not giving guidance specifically by quarter but we would certainly see the year fiscal 23 being higher than fiscal 22 in a significant way as a concept.
Speaker 13: an impressive year. My first question is on lung capacity. You indicate you've completed build-out of the FORCE expansion in Moncton. You're continuing to expand cultivation capacity in the Laurentian facility.
Speaker 13: But with international agreements,
Speaker 13: Looking like they're on a trajectory of growth, there seems to be continued unmet demand in Canada. Do you see, even with these capacity expansion projects you've been undertaking, reaching...
Speaker 13: running out of capacity to meet demand both domestically and internationally, and if so, what routes might you take to address that?
Speaker 3: Well, thank you for the question. I think to start with, we continue to look at ways to enhance our yields further. So even with the completion of our expansion build out in Moncton, the LED lights only rolled through all of our facilities by the end of this past quarter.
Speaker 3: And so the full impact of that benefit isn't yet in our numbers. As I mentioned, as I was talking, fractional watering will only be complete through the end of the calendar year, so that benefit is still to come. And we work with our plant science group, the work that they're doing on cultivars, breeding, crossbreeding, and selection.
Speaker 3: We're finding cultivars that have higher yields and higher potencies and will continue to update our garden with those products. There is upside even to the 85,000 kilograms that we're talking about right now as we work through the fiscal year at our Monckton facility.
Speaker 3: with the capacity to do that. With that being said, and as you also mentioned, we have the capacity for the wrenching facility. Um you know, there was always the opportunity to go out into the market and buy incremental flower as. As required to fulfill our our sales needs. Um we don't anticipate needing it for fiscal year 23 based on sales,
Speaker 3: could certainly look at that. There is excess capacity in the marketplace. And again, that will be buying products that meets the specifications that we need to have to meet our consumers' demand and the quality of products they're looking for from us.
Speaker 4: Okay.
Speaker 13: Okay, and if I didn't just drop, I have another question. Thank you for that answer. Now, talking about the categories in which you play, you know, organogram has been dominant in flower, very strong in edibles. You know, the number two and three most important or largest categories, apart from these, largest categories in the nation are pre-rolls.
Speaker 13: and vapes after that in which, by my calculations, organogram stands number 9 and number 12, positioned respectively among LPs. How is organogram thinking about these categories? I recognize there's an increased attention put towards vapes. Recently, we saw some positive movement there. How can organogram cultivate a right to win?
Speaker 13: in each of those categories if these are aims.
Speaker 3: the next year? Right. So I think a couple of answers here. Look it's always important to look at all the different categories and where there's new opportunities for growth. Certainly pre rolls is one that we have been and we have held higher market positions and where we are. And at the end of the day, no different than our flower demand and fiscal 22. We got got our market number changed.
Speaker 3: And so, you know, we weren't fully pushing on our pre-roll opportunities. Now that our flower is coming in, we have more opportunity to expand our pre-roll offering, and we will continue to do so. So we have a strong pre-roll offering under our SHRED brand called Jar of Joy.
Speaker 3: And we have a really.
Speaker 3: you know, good product offering under our Edison brand, our pinners that are dual, we have dual flavored, dual strained offerings under Edison. So we have good competing offerings. We just haven't been pushing pre-rules to the extent as a result of our available capacity. And that will change going into fiscal year 23 as we have more flower.
Speaker 3: both what consumers are looking for at the right price. And it's a very crowded space in bakes right now and the market is is very highly competitive. So you know while we have something to offer that's unique and different we're in there and we do believe but offering flavors that match our very successful flour flavors for shred milled flour that we had something unique to offer.
Speaker 3: And that's what we're working on behind the scenes while we continue to push on the segments that we have good penetration.
Speaker 13: Okay, that's really helpful. And if you would indulge just one more, since you mentioned the COE with BAT, I wonder if you could remind us the fate of those products that you develop in tandem with BAT. You mentioned 60 formulations developed and a bunch of delivery systems worked on this year. Where might we see these products and under what company might these be commercialized?
Speaker 3: or the IP that we've developed. So we have the right to do that. And look, we will look to leverage these formulas not only internationally, but also within the Canadian marketplace where the products have a differentiated offering that really stands apart. So some of the work, some of the science going on behind the scenes, working on improved.
Speaker 3: on-set or improved bioavailability, those kind of things. We're working on those and if we come up with products that really will differentiate our products, they will be introduced in our Shred-ems or Monjour brands or into our Shred-X Vapes or whatever the portfolio where it makes sense to continue to build.
Speaker 3: the strength of our brands with differentiated products, and to give us a competitive advantage over those that aren't doing the kind of research we're doing in the background.
Speaker 13: Terrific and congratulations. I'll pass it on. Thank you.
Speaker 1: Your next question comes from a line of Federico Gomez from ATB. Your line is open.
Speaker 14: Yeah, good morning. Congrats on the quarter. Thanks for taking my questions.
Speaker 14: My first question is on your guidance for CapEx next fiscal year. So if I got that right, you're planning to spend about $29 million. So it seems like you're continuing to materially invest in your automation and your cultivation, your capabilities. So that stands out compared to what many of your competitors are doing right now in the marketplace.
Speaker 14: So could you provide a bit more color on the return you expect from that invested capital and why does it make sense from a capital location standpoint to continue to invest at that space in the current market conditions? Thank you.
Speaker 5: Yep, maybe start the answer on that 1. I would say that a substantial portion of that capital that we're allocating for fiscal 23 relates to the plan spend at the facility and Lex and Lex superior. We acquired a company that had the capacity for hash of 1M units a year and we're looking to double that capacity to 2M.
Speaker 5: Automation that will drive margins, everything that we're investing in based upon our outlook on margins has a very quick paybacks and are very attractive. But we don't, we have not identified anything significant with our current you know, 3 facilities that we now have going beyond fiscal 24. This would be just the
Speaker 3: in our operations where some of our competitors who don't have the cash balances that we have, have had to stop that kind of investment, which again provides us with an opportunity of a competitive advantage as we continue to see our cost per gram go down through this investment of automation and other enhancements. So, you know, this is again a long-term play. We're here for the long term and we believe these are the right investments now.
Speaker 3: to make us, you know, continued, you know, ongoing improvement in our profitability and really be, you know, a leader in the space.
Speaker 14: Okay, thanks for that. And then in terms of...
Speaker 14: pricing in Canada and your average selling prices. So I know that in the past, Pina, you have mentioned that you saw some signs of stabilization here in Canada in terms of pricing, but at the same time, in terms of net average selling prices that you report, we continue to view decline there. So could you talk about that dynamic, what you're seeing in the market right now and how you...
Speaker 3: really, you know as opposed to you know, Edison flower that mix does drive the lower average selling price, but overall You know, we didn't take any price reductions in the market in Q4. This was simply the impact of mix There is a drive to more value offerings in the marketplace, right? It's back to the comment earlier about
Speaker 3: you know, we're in a high inflationary market right now. Well, consumers are not going to use less cannabis. They're going to look for the best value they could buy. And so we have to be aware that that's out there and that, you know, there's going to be a push to more larger formats. So the one ounce or 20 gram formats is growing and it's going to be, you know, pricing compression there while consuming, while, you know.
Speaker 3: So, the smaller formats are going to obviously be priced a little bit higher than the large flower format. So, we'll have that benefit to our pricing. But we also have a strong program planned on Edison.
Speaker 3: on the revitalization of that brand. And that's important to us. It was delayed this past year because again, we had our flower demand was outstripped for our supply. So we had to delay some of the work we've done. But we expect that will improve as well. So I guess for us,
Speaker 3: Average selling price is important, but it really, you know, it will depend on the mix of our brands. And then, you know, our portfolio, obviously derivatives have higher prices. So, you know, the more we could sell of our Tremblant hash, you know, our overall, you know, margins will go up. And we'll continue to operate like that. I think.
Speaker 3: a more macro answer to your question in terms of what we see in the marketplace. You know, we'll see some further challenges on especially the large format flowers simply because there is still excess capacity in Canada. And so, you know while there's excess capacity, you know companies might do different things, but you know what? From our perspective, we're comfortable with where we are.
Speaker 14: Okay, thanks for that caller and congrats on the quarter again. Thank you.
Speaker 1: And there are no further questions at this time. Ms. Beana Goldenberg, I turn the call back over to you for some closing remarks.
Speaker 3: Perfect, thank you operator. And to everybody who congratulated us, order, thank you for that. We did have a great quarter and a great year, so thanks for joining the call today and I do look forward to providing an update on our fiscal 23 progress in the new year. Thank you.
Speaker 1: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Please wait, the conference will begin shortly.
I.