Organigram Global Inc. (OGI) Earnings Call Transcript & Summary

Thank you. Matthew, I'll be your conference operator today. This time, I'd like to welcome everyone to the Organigram Global Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Max Schwartz, Director of Investor Relations.

Good morning, everyone, and thanks for joining us today. As a quick reminder, this call is being recorded and a replay will be available on our website within 24 hours. Today's call will include forward-looking statements and actual results could differ materially due to a number of risk factors outlined in our filings and the cautionary statements included in our Q3 fiscal 2026 press release and MD&A. We'll also reference certain non-IFRS measures such as adjusted EBITDA, adjusted gross margin, and free cash flow. Definitions and reconciliations are available in our disclosure materials. Unless otherwise noted, market share data is sourced from Hifyre, WeedCrawler, provincial boards, retailers, and our internal sales tracking. Discussing our results today are [ James Yamanaka ] and Greg Guyatt, CEO and CFO of Organigram Global. I once again welcome you to today's call. And with that, I'll turn the call over to James.

Thank you, Max. And good morning, everyone. Thank you for joining us today. Q3 represents an important milestone for Organigram. For the first time, our financial results include almost a full quarter of contributions from Sanity Group, providing a clearer picture of a larger, more diversified, and increasingly international cannabis business. Before I discuss the business, I'd like to recognize our teams across Canada and Germany. Together, they delivered the highest quarterly net revenue and adjusted EBITDA in Organigram's history. Organigram today is a fundamentally different company than it was earlier this year. We are larger in scale, broader in geographic reach, and better positioned for long-term profitable growth. This quarter demonstrates that our strategy is beginning to translate into stronger financial results, which we believe reset the trajectory of the company to achieve higher margins and profitability in the coming periods. I'll begin with Canada, where I'll discuss the progress we've made recovering share in vapes and infused pre-rolls following the challenges we experienced in Q2, before turning to our international business and the integration of Sanity Group. Greg will then walk you through the financial results in greater detail. Starting us off with Canada. As of quarter end, Organigram held an 11.1% share of the Canadian recreational cannabis market. Several of our core categories continued delivering strong growth while the corrective actions we implemented during Q2 related to vapes and infused pre-rolls began gaining traction in June. At the same time, we've become more disciplined with our portfolio. Compared to last year, we've reduced our SKU count by roughly 10%. Rather than chasing shelf space through product proliferation, we're positioning ourselves to gradually invest behind fewer, stronger brands with clear consumer positioning and less complexity. We believe this approach reduces complexity, strengthens execution, improves operational efficiency, and ultimately creates more durable brands. Beginning with vapes, we completed the rollout of our new all-in-one hardware platform and higher-potency Liquid Diamond products near the end of Q2. These products are now broadly distributed across Canada alongside the enhanced quality control processes we discussed on our previous call. The earlier results have been straightforward. During June, our all-in-one vape share increased by 1.1 percentage points month over month, while declines in the 510 segment began to reverse. While 1 month doesn't establish a trend, we believe it provides encouraging evidence that the product improvements we've made are resonating with consumers. Infused pre-rolls also returned to growth, gaining 0.3 share points month over month, while regular pre-rolls also improved, resulting in overall pre-roll growth. While the category has become Canada's largest and most competitive segment, representing more than 36% of total industry sales, as quality and potency continue improving, we believe there is opportunity to expand our share further. BOXHOT infused pre-rolls were a particular highlight this quarter, growing 0.8 percentage points year over year. Our strongest performance, however, continues to come from flower. Driven by continued advances in cultivation, genetics, and plant science, Organigram ended the quarter with a 12.5% share of the flower category, up 2 percentage points year over year. We also achieved a higher service share in the important 3.5-gram format. These gains reflect years of investment in cultivation excellence. During Q3, average THC potency for Moncton reached a record 30.4%, while harvested kilograms remained above 30,000 per quarter, up approximately 25% year over year. Outside of flower, we also delivered strong growth in beverages and concentrates. In beverage, Organigram ranked 4th nationally with an 8.6% category share, up 3.1 percentage points year over year, exiting June above 10% share as SHREDs, sodas, and shots continued gaining consumer traction. In concentrates, we strengthened our leadership position as Canada's #1 LP, finishing the quarter with 17.9% share, up 3.3 percentage points year over year, driven by continued success in whipped diamonds and hash. One category where performance softened modestly was edibles. While share remained relatively stable year on year, we experienced sequential pressure from lower price live rosin and competitors. Our response is a broader rollout of our ingestible innovation platform across the edibles portfolio beginning in September. Looking ahead, we are entering what has historically been our strongest seasonal period, supported by successful summer retail programs, improving category momentum, and positive consumer response to our refreshed vape and infused pre-roll portfolios. Overall, we're gradually shifting the orientation of our Canadian business toward increased competitiveness and efficiency and are progressing initiatives to reinforce revenue and margin stability here as we expand into more emerging markets internationally. Now turning to the international part of the business. Q3 marks the first quarter of consolidated financial results from Sanity Group and the business demonstrated strong performance. As we indicated when announcing the acquisition, we expected Sanity Group to average approximately EUR 25 million of quarterly revenue. Since consolidating on April 15, 2026, the business delivered EUR 24.5 million, contributing more than CAD 40 million of net revenue to our consolidated results, and generated EUR 25.5 million during the full fiscal quarter. While Canada remains the foundation of our business, approximately 35% of our consolidated revenues was generated internationally this quarter, compared to roughly 10% prior to the acquisition. This represents a structural evolution of Organigram's business model and significantly diversifies both our revenue base and future growth opportunities. We believe Europe increasingly represents the largest near and long-term growth opportunity for the company, and we now have a vertically integrated supply chain from Canada to Europe. Demand across Sanity Group's distribution platform continues to grow. Our priority is expanding access to compliant product through our own production improvements and additional supply partnerships. In Moncton, we're continuing to improve our international flower pass rates while standing up EU GMP compliant remediation pathways. Facility-wide pass rate initiatives have been implemented while we simultaneously identify cultivars that have high levels of resistance to microbes. Commercially, Sanity Group also continued expanding its platform throughout the quarter. The business continued preparations for an additional Swiss recreational pilot project, advanced its entry into Poland, launched branded products in the U.K. through new strategic partnerships, established a new Swiss medical partnership, and recorded its first medical cannabis sales in Switzerland. Regarding the recent German regulatory changes disallowing medical cannabis reimbursements, we expect minimal impact on Sanity Group as approximately 1% of historical sales were reimbursed through government insurance programs. Outside Europe, Australia remains an attractive long-term growth market. Our Australian portfolio is now broadly available and we're focused on driving physician adoption and prescription growth as the market continues to develop. In the United States, the regulatory environment remains uncertain in light of the upcoming ban on hemp-derived THC products. There are efforts to delay the ban by 4 weeks to December 11, which we view as a positive step. Our business development activities in this segment are effectively paused until we receive regulatory clarity. That said, we are bullish on rescheduling and federal legalization efforts in the U.S., and we continue to closely monitor opportunities for Organigram to participate in relevant segments of the market as it evolves. Our primary international focus right now, however, will remain Europe and Australia, where we believe the opportunities are both larger and more visible over the median term. To summarize, Q3 demonstrated three important things. First, the integration of Sanity Group is progressing according to plan, and it's already meaningfully reshaping Organigram's financial profile with record net revenue and adjusted EBITDA, and an improving margin profile. Second, the corrective actions we've taken across our Canadian business are beginning to produce encouraging results, particularly in categories where we experienced temporary execution challenges earlier this year. And third, Organigram today is a significantly larger, more diversified, and more internationally positioned company than at any point in our history. While execution remains our priority, we're confident in the opportunities ahead as we continue building a cash-generating global cannabis business. Finally, I would like to recognize Paolo De Luca, who will be departing Organigram after 9 years of exceptional leadership and service. During his tenure as both Chief Financial Officer and Chief Strategy Officer, Paolo played an instrumental role in many of the company's most transformative transactions, helping lay the foundation for Organigram's evolution into a global cannabis company. On behalf of everyone at Organigram, I thank Paolo for his many contributions and wish him every success in the future. With that, I'll turn the call over to Greg to walk through the quarter in more detail.

Thanks, [ James Yamanaka ]. We are pleased to report that with the addition of Sanity Group to our consolidated results, Organigram delivered the largest revenue quarter in the company's history, improved adjusted gross margin both sequentially and year over year, and generated record adjusted EBITDA. As noted, international revenue now represents more than one-third of our total revenue. That marks a fundamental shift in Organigram's business profile. We are now operating as a diversified global cannabis platform with meaningful scale across multiple markets. With that, let's turn to the detailed results. Net revenue for the quarter was $105.8 million compared to $70.8 million in the prior year period, representing a year over year increase of 49%. The increase in net revenue was primarily attributable to contributions from Sanity Group, partially offset by slightly lower Canadian market share year over year due to lower vape and pre-roll share as well as our intentional reduction in SKU count, an ongoing project to simplify our portfolio and ultimately improve margins. Sanity Group's contribution since the close of our acquisition on April 15, 2026, contributed EUR 24.5 million or approximately $40 million to Organigram revenue. For the entire quarter, including the 2 weeks that we did not own them, Sanity Group's revenue exceeded EUR 25 million, in line with expectations at the time of acquisition, with the stage set for additional growth over the course of the remainder of the year and into fiscal 2027. The adjusted gross margin was 37%, an increase of 300 basis points year over year, and 600 basis points sequentially. The increase was primarily driven by contributions from Sanity Group and improvements in Canadian operations compared to both comparison periods. It is important to note that the underlying cost structure of Organigram's Canadian operations is expected to continue improving. Cultivation yields, potency improvements, and portfolio rationalization remain positive contributors, and we expect these to become more visible as we continue optimizing the business. G&A expenses for the quarter were $20.6 million compared to $15.7 million in the prior year period, an increase of 31%, primarily attributable to the inclusion of Sanity Group expenses and the amortization of intangibles related to the acquisition, partially offset by a $3 million recovery of a previously recorded bad debt provision. As a percentage of net revenue, G&A was approximately 19%, representing a decrease of approximately 300 basis points year over year and 600 basis points sequentially. The reduction compared to both prior periods was primarily due to operational leverage from the consolidation of the Sanity Group. Sales and marketing expenses in the quarter increased to $12.1 million versus the prior year period amount of $8.8 million. The increase was, once again, driven by the inclusion of Sanity Group expenses, as well as higher investments in advertising and promotional activities in line with seasonality, our Summer of SHRED campaigns, and new product launches. Overall, SG&A in the quarter was $32.7 million versus $24.5 million in the prior year period. As a proportion of net revenue, SG&A declined from 34% in Q3 of last year to 31% in the current period, a decrease of approximately 300 basis points. Our record adjusted EBITDA for Q3 was $13.4 million compared to $5.7 million in the prior year period. The 136% increase was primarily driven by Sanity Group as well as efficiencies in Canada. Net income for the quarter was $105.5 million compared to a loss of $6.3 million in the prior year period. This substantial increase in net income in the current period was primarily attributable to higher fair value gains on derivative liabilities, preferred shares, and other financial assets of $105.8 million. Cash provided by operating activities before working capital changes was $6.2 million compared to cash used of $0.7 million in the prior year period. This improvement primarily reflects stronger underlying operating performance, including higher net revenue, better product mix, and higher gross margin. Cash used in operating activities was $4.3 million compared to cash provided of $14.6 million in the prior year period. Despite stronger cash generation before working capital changes, operating cash flow was more than offset by working capital investments during the quarter, part of which was building inventory to address German demand issues and the timing of sales during the quarter. Free cash flow was an outflow of $3.9 million for the quarter compared to an inflow of $5 million in the prior year period. Underlying cash generation improved meaningfully before working capital changes and capital expenditures were substantially lower than the prior year period. However, these benefits were more than offset by working capital investments associated with the company's increased scale and growth expectations. Regarding liquidity, as of June 30, Organigram had cash and cash equivalents of $11.7 million and total liquidity of $49.2 million, including our debt facilities. To conclude, we are very pleased with our strong financial performance this quarter, highlighted by record revenue, record adjusted EBITDA, and resumed margin expansion. We are delighted with the performance of Sanity Group thus far, as well as the growth we are expecting in the coming quarter, which we believe will further strengthen our earnings profile while expanding our international platform. Although working capital investments impacted cash flow during the quarter, they were largely a function of supporting a substantially larger and growing vertically integrated global business. We continue to expect revenue to exceed $350 million for the full year of fiscal 2026, adjusted gross margin and adjusted EBITDA to meaningfully exceed fiscal 2025 levels. The underlying earnings profile of the business has strengthened, but working capital requirements associated with integrating Sanity Group and supporting a much larger business are expected to result in negative free cash flow for the full year this year. Importantly, we continue to expect positive free cash flow in the fourth quarter, which we believe is a better indicator of the business's ongoing cash-generating capacity. With that, we'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Aaron Gray with AGP, Alliance Global Partners. Please go ahead.

First question for me, just in terms of, now that you've closed Sanity Group, it would be great to get any early learnings or what you're seeing now as a wholly consolidated entity for a longer period of time, a full quarter, and what opportunities you might feel present themselves well internationally as it remains a top priority for you as well as many of your other Canadian LP peers.

Sure. Thanks, Aaron. This is [ James ]. I'll tackle the first part of that and maybe let Greg say a little more at the end if he'd like to. I think over the first several months of having Sanity Group in the group, there are a number of key learnings I think so far. Number one is that it has completely changed the profile of the group where the focus is more on the international, although Canada remains the core of the business. Two, I think the growth rate there is putting stress not just on organizations but I think a lot of other suppliers in terms of flower supply, but we're addressing those through our activities in Moncton, as well as looking at different suppliers, partnerships that we can do to make sure we satisfy that. And I think the cultural fit between the two companies and the lack of overlap is making it easier for us to move forward, although I think like any new partnership, there are teething problems along the way, but I think we sorted through most of those. Greg, I don't know if you wanted to add anything else to that.

No, I would just add that we were really happy with the performance in the first quarter of consolidation. Getting to that EUR 25 million benchmark was really an important achievement for us. And now that we've sorted out some of our flower challenges that we had last quarter, we're expecting that growth to continue, looking forward to a strong Q4 that's going to outperform what we did in Q3.

Okay, great. Really appreciate the color there. And then just on the Canadian side, you know, maybe talk about how you're prioritizing, you know, capacity allocation. Obviously, you have, you know, international as a driver, but, you know, you've made it clear you want to maintain your market leadership within Canada. So talk about how you're allocating capacity accordingly to be able to do that.

Okay, yes, thanks. That's a good question. First of all, I think when we're looking at the overall Canadian portfolio, as I mentioned earlier, what we're trying to do is simplify the portfolio. We've already reduced the SKU count by about 10% to simplify, both from, you know, to reduce the complexity on the back end across all the different product categories. And you can see that we've been able to address a lot of the issues from last quarter around [ APRs ] and it's only a month, but the trajectory is good. I think in terms of the allocation, you know, it's always going to be a trade-off between international and domestic, but we're confident that with the different activities we're doing both within our own supply with partnerships, and other mechanisms where we are increasing the flower supply, we'll be able to satisfy the needs of both Canada as well as international markets. Greg?

No, I totally agree with that. Obviously, looking at how we optimize our margins and balancing our mix between internally sourced flower and sourcing flower from third parties. But clearly, there is a strong benefit towards allocating as much as we can to Sanity Group while protecting Canada.

Okay, great, thank you very much. I'll jump back in the queue.

Your next question comes from the line of Frederico Gomez with [ ATB Cormark ]. Please go ahead.

First question I want to ask again about Sanity Group. You know, we've been performing in line, I guess, with your revenue expectation. But I'm curious if you could talk about margins from Sanity Group and how is the competitive environment for distributors in Germany looking like from a margin perspective and how do you expect that margin profile to evolve over the next two quarters?