Organigram's 2023 Q4 to 2025 Q2 Earnings Call: Contradictions Emerge on International Sales, U.S. Market Strategy, EU GMP Certifications, and Capital Allocation

Date of Call: December 20, 2023

Financials Results

• Revenue: Gross revenue up 12% YOY and net revenue up 11% YOY; Q4 gross revenue +9% and Q4 net revenue +1% vs Q4 FY22
• Gross Margin: Adjusted gross margin for fiscal '23 25% ($40.2M) vs 23% ($33.4M) in fiscal '22; Q4 adjusted gross margin 17% ($7.9M) vs 23% ($10.4M) in Q4 FY22

Guidance:

• Free cash flow positivity targeted in H2 fiscal 2024; prior target (end of calendar 2023) delayed due to THC inflation and shipping delays.
• Adjusted EBITDA expected to strengthen in H2 2024 as production optimizations and scaling of pre-roll/infused products take effect.
• Convert 30% of the garden to seed-based production by end of fiscal 2024 to lower cultivation costs and stabilize genetics.
• Expect international shipments to ramp (Australia, Israel, new agreements with Germany and U.K.); EU GMP audit pending to accelerate exports and shorten turnaround.
• Fiscal 2024 aggregate cost savings of ~$10M from 2023 CapEx and process improvements is expected to contribute to margins.

Business Commentary:

• Market Share and Innovation Leadership:
• Organigram's market share in Canada's legal cannabis market grew significantly in fiscal 2023 despite a challenging regulatory and competitive landscape.

• Growth was driven by a focus on consumer needs, innovation, and strong marketing efforts, including the development of products such as Rip-Strip Hash and THCV gummies.

• Pre-roll Market Expansion:

• Organigram's pre-roll sales increased by 54% from 2022 to 2023, ranking the company as the number 3 market position in the category by year-end.

• The expansion was driven by investments in production capabilities and strategic product launches, particularly in tube-style pre-rolls, which showed a 21.5% year-on-year growth.

• Revenue and International Sales:

• Organigram's gross revenue increased by 12% and 11% year-over-year for fiscal 2023, primarily due to an increase in recreational and international revenue.

• The increase in international sales was supported by new supply agreements with companies in Germany and the U.K., and the expectation of EU GMP certification for international medical markets.

• Cost Optimization and Production Efficiency:

• Organigram achieved a 61% increase in harvested flower quantity, with 87,000 kilograms in fiscal 2023 compared to 54,000 kilograms in fiscal 2022.
• This was driven by operational improvements, including the implementation of cost-saving processes and the use of advanced technology in production.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management repeatedly described the company as "positioned for long-term sustainable growth" and "well positioned" with no debt and strong cash; they forecast margins and adjusted EBITDA improving in H2 2024 and cited $10M expected savings and a plan to convert 30% of garden to seed-based production as drivers of improvement.

Q&A:

• Question from Aaron Grey (Alliance Global Partners): So first from me, I just wanted to touch on gross margins. So you called out a couple of things that impacted some of the gross margin pressure, including pricing, some of the higher flyer costs, higher cost per unit, as well as the inflation impact and international. So just to think sequentially, down 200 basis points, 90%, 70%, can you help to quantify maybe a rank order, which one has been the biggest impact to that margin pressure? And then how we think about the margins on the near term? Because you spoke to international, right back up in fiscal year 2024, is that more of an ex-quarter dynamic or do you think it'll be more of the back half? And then how do we think about the impact in terms of the Canadian marketplace on gross margin as T&C inflation remains? So any color on your gross margin expectations in the near to medium term would be helpful. Thank you.
  Response: International sales are the largest driver of margin (about half of the impact); margins should recover in 2024 as international volumes return and pre-roll/infused production inefficiencies are resolved, with stronger margins expected in H2 2024.

• Question from Aaron Grey (Alliance Global Partners): Second for me. I know still relatively early days, just in terms of the Jupiter initiative and the potential investments there, any color in terms of what you're seeing in the marketplace and how you might've narrowed in on some opportunities, particularly geographically, some catalysts ahead on the international front with Germany medical reform and potential door use down the line with Phase 2, and then obviously in the U.S., where potential rescheduling as well. So any color in terms of what you're seeing out there in the marketplace, U.S. internationally, or maybe potentially in Canada that might be appealing to you where you might be able to deploy some capital for some investment opportunities? Thanks.
  Response: Jupiter will focus primarily on the U.S. (60–75% of investments) with some international allocations; the company is screening opportunities and expects more announcements in calendar 2024.

• Question from Federico Gomes (ATB Capital Markets): My first question is just going back to your comments on international and that being the largest margin opportunity for you. So I'm just curious, tying that to your free cash flow guidance for the second half of fiscal year 2024, does that guidance sort of relies on international growth? And if you could unpack a bit of the drivers behind that guidance and how much of it is about, in terms of the sales mix of domestic sales international, that would be great. Thank you.
  Response: Yes — the target for free cash flow in H2 fiscal 2024 depends materially on international growth (including new supply agreements and expected EU GMP certification) and the resulting higher-margin shipments phasing into the back half of the year.

• Question from Federico Gomes (ATB Capital Markets): My second question is just looking at the Canadian rec market. And I guess in your outlook, you mentioned the many LPs are behind payment of their taxes. And there's obviously a lot of challenges to raise capital and some bankruptcies happening. But at the same time, it just seems that this process of rationalization among LPs is always around the corner and never arrives. So just curious on your perspective here for next year, why could it be different from this year? How do you see that playing out? Is it going to accelerate into 2024? It's going to be more of a gradual process. How do you see that happening? Thank you.
  Response: Consolidation is accelerating as CRA enforcement, tax arrears and capital scarcity force weaker LPs out; Organigram believes this is sustainable consolidation and that it is well positioned to survive and take advantage given its cash, brands and efficiencies.

• Question from Yewon Kang (Canaccord Genuity): I just wanted to shift gears back to the Canadian adult use market and wanted to ask about the THC innovation that you guys have been rolling out recently. I wanted to ask if there is a dollar premium that you're able to attach to these THC products versus non-cannabinoid THC products. And as well, was also curious to see how you guys have been thinking about the cost benefit analysis of how these THC products have been performing, although it's early days, against the investment dollars that you guys have spent on Phylos for the partnership so far.
  Response: There is no pricing premium yet for THCV gummies but market reception is strong; Phylos delivers exclusive THCV access and enables seed-based production (targeting 30% garden conversion) expected to lower costs and standardize cultivars, which is the primary payback.

• Question from Yewon Kang (Canaccord Genuity): On the international shipments for fiscal '24 going forward, I know that you guys are going through an audit to get your facility EU GMP certified. So is it fair to expect that the international exports will likely, the sales will likely accelerate in the back half of fiscal '24 as you guys receive the EU GMP certification for shipments going to the U.K. and Germany? Thanks.
  Response: EU GMP certification will shorten turnaround, enable finished-goods shipments and reduce lumpiness, accelerating international sales, but timing is uncertain and the company expects some shipment increases even prior to certification via new supply agreements.

Contradiction Point 1

International Sales and Margins

It involves differing perspectives on the impact of international sales on margins, which are critical for understanding the company's financial strategy and performance.

What was the primary driver of gross margin pressure, and how should margins be viewed in the near to medium term considering international sales and THC inflation? - Aaron Grey(Alliance Global Partners)

2023Q4: International sales are the most important factor affecting margins. While margins were affected by international sales in Q4 fiscal '23, they are expected to improve with diversified international sales and an EU GMP certification that will expand market access. Margins should improve by fiscal 2024 as international sales normalize, and production efficiencies optimize. - Paolo De Luca(CFO)

How do you balance domestic and international sales given differing margins? - Aaron Grey(Alliance Global Partners)

2025Q2: Organigram is working to balance domestic and international sales. International sales have higher margins due to absence of excise taxes, but market share in domestic cannabis brands is crucial. Capacity expansion through LED upgrades and new projects will increase international sales. The focus is on maintaining a balanced approach as international demand grows. - Beena Goldenberg(CEO)

Contradiction Point 2

U.S. Market Investment Strategy

It involves differing perspectives on the company's investment strategy in the U.S. market, which is critical for strategic decision-making and market positioning.

What opportunities are you seeing with Jupiter in U.S. and international markets, and how will you deploy capital? - Aaron Grey (Alliance Global Partners)

2023Q4: Jupiter is focused on the U.S. market, with 60%-75% of investment going there. Opportunities are diverse and include strategic investments in production and international market expansion. - Beena Goldenberg(CEO)

Are there appealing investment opportunities in the U.S., such as federal rescheduling to Schedule III? - Aaron Grey (Alliance Global Partners, Research Division)

2025Q3: Our M&A focus remains on international markets for the short term as they offer more opportunities for legal investment. - Beena G. Goldenberg(CEO & Director)

Contradiction Point 3

EU GMP Certification and Market Expansion

It involves differing timelines and impacts of EU GMP certification, which is crucial for market expansion and revenue growth.

Will EU GMP certification accelerate international export sales? - Yewon Kang (Canaccord Genuity)

2023Q4: Our Moncton facility is now fully operational and certified to EU GMP standards, which allows us to sell our products into Germany and the U.S. [...] We expect the export sales to accelerate in the latter part of fiscal '24 as we begin to ship to new partners in Europe. - Beena Goldenberg(CEO)

What is the international market strength in Germany and EU GMP certification timeline for the Moncton facility? Are oversupply risks a concern? - Yewon Kang (Canaccord Genuity)

2025Q1: The Company's Moncton, Ontario facility is now operating at EU GMP standards, which has allowed the Company to sell its products into these countries and potentially other international markets. - Greg Guyatt(CFO)

Contradiction Point 4

Capital Allocation and Strategic Investments

It involves differing priorities in capital allocation and strategic investments, which are crucial for future growth and market positioning.

What opportunities do you see in Jupiter's U.S. and international markets, and how will you deploy capital? - Aaron Grey (Alliance Global Partners)

2023Q4: Jupiter is focused on the U.S. market, with 60%-75% of investment going there. Opportunities are diverse and include strategic investments in production and international market expansion. While regulations in countries like Germany and the U.S. haven't fully materialized, Organigram is positioned well to capitalize on opportunities as they arise. - Beena Goldenberg(CEO)

What types of investments or acquisitions do you consider optimal for capitalizing on international market growth, and which geographies or supply chain areas would you target? - Aaron Grey (Alliance Global Partners)

2025Q1: Organigram's strategic investment fund, Jupiter, will provide the Company with additional capital to further its strategic initiatives. These initiatives are primarily focused on leveraging the company's IP and brands through an investment in the U.S. market as well as international markets. - Beena Goldenberg(CEO)