Earnings Call Transcript - OGI Q3 2022

Operator, Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the OrganiGram Holdings Third Quarter Fiscal 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please see today's earnings report for more information about these measures. I would now like to introduce Craig MacPhail, you may begin your conference.

Operator, Operator

Good morning, and welcome to OrganiGram Holdings Inc.'s earnings conference call for the third quarter of fiscal year 2022. As a reminder, this conference call is being recorded, and a replay will be available on OrganiGram's website. Further, references 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. As such, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Please see today's earnings report for more information about these measures. I would now like to introduce Beena Goldenberg, Chief Executive Officer of OrganiGram Holdings, Inc. Please go ahead, Ms. Goldenberg.

Beena Goldenberg, CEO

Thank you, and good morning, everyone. With me is Derrick West, our Chief Financial Officer. For today's call, we'll discuss the financial results for the three months ended May 31, 2022 and I will provide a general business update. We will then open the call for questions. In the third quarter of fiscal 2022, we achieved our fourth consecutive quarter of record year-over-year revenue growth. This progress speaks to our ability to build enduring, recognizable brands and innovate to create consumer demand in multiple segments of the cannabis market; as well as top line growth, we continue to secure a growing share of the market. According to Hifyre data as of July 5, in the third quarter, we held the #3 position in the Canadian recreational market with a 7.8% share, up from 7% in Q4 of fiscal '21. We saw further momentum in June with an 8.5% share. With only 50 basis points separating the top 3 Canadian LPs in June, we are confident that our consumer-focused strategy will enable us to continue to drive for market leadership. Our SHRED milled flower products are the top sellers in Canada with Funk Master, Tropic Thunder and Gnarberry holding the #1, #2 and #3 positions. We also hold the #3 position in the gummies category in terms of sales and are #2 in terms of volumes sold. This includes SHRED'ems gummies and Monjour, our large-format CBD-infused soft chews, both benefiting from new product introductions. Edison JOLTS, our unique high potency THC lozenge maintains its position as the top SKU in the capsules and mints category. In the third quarter, we added 2 new flavors to the JOLT lineup, Electric Lemon and Arctic Cherry and both quickly took top 10 positions in the category. According to Brightfield research, a survey of over 3,000 cannabis users conducted in calendar Q1 of 2022, our 3 largest brands, Edison, SHRED and Big Bag O' Buds, all have Net Promoter Scores of over 80, which shows that when OrganiGram builds brands, we build ones that resonate and win with consumers. The key to our growth strategy is to introduce new products to our lineup based on consumer insights and leveraging our brand. In the last quarter, we extended the SHRED brand with products in the flower, vapes and derivatives segment. SHRED-X kief-infused blends was launched in March. This product combines kief with SHRED milled flower and is now available in 7 provinces. SHRED-X vapes, our 510 cartridges that were also introduced early in the quarter and were well received. With this launch, we have made gains in the vape segment moving to the #12 position in the category from #22 back in January. SHRED Dankmeister XL Bong Blends, a unique grind of SHRED milled flower designed for bong and pipe users was launched very recently in Ontario. Initial consumer reaction has been positive, and we plan to roll it out to all provinces. We also added 2 sour and 3 pop flavor extensions to the SHRED'ems gummy line, which has helped contribute to our overall third market position in that segment. Now our Edison brands have had additions in flower and derivatives. Besides Edison JOLTS mentioned previously, the Cherry Limelight strain was introduced through our in-house genetics program and made available in flower and in live resin packed cartridges. In May we also added a novel product to our Monjour wellness brand, CBN Bedtime Blueberry Lemon soft chews, combines the cannabinoid CBN which is reported to have sedative properties with CBD-infused seeds in a lemon blueberry flavour. Moving on to our international business, in Q3, we made $1.3 million worth of shipments to Cannatrek and Medcan in Australia. Subsequent to quarter end, we made another shipment to Cannatrek worth $1.8 million. And this month, we made a shipment to Canndoc in Israel worth $3.3 million. We expect to make further international shipments in fiscal 2022 and are working on potential opportunities to expand supply arrangements into Europe, leveraging our capacity from the expansion at Moncton. Now let's look at operations. We are finalizing the 4C expansion at our Moncton cultivation center, which is substantially complete and already 20 of 29 cultivation rooms are online, with the remaining rooms expected to put in use next month. With harvest from the initial rooms filled back in May, the first harvest will occur this month. Once complete, the total annual capacity at Moncton is estimated to be 82,000 kilograms. Environmental enhancements are currently in place in about 66% of the facility and should be fully implemented by Q1 of fiscal 2023. These will further enhance yields and flower quality based on results obtained from cultivation rooms already benefiting from these upgrades. As a result of our continuous improvement, yield per plant was 132 grams in Q3 compared to 117 grams in Q3 of last year, and we are targeting 150 grams once the enhancements are complete. In Winnipeg, during Q3, we installed and commissioned our packaging and excise stamp automation, and are now averaging 4,000 packaging units per hour. This improved throughput will drive improved margin and support our increasing gummy demand. We are also making progress with the Lac-Supérieur facility acquired in December. It currently has 6,800 square feet of cultivation area, which is being expanded to 33,000 square feet. This expansion expected to be completed by the end of the calendar year will increase the annual capacity to 2,400 kilograms of flower from the current 600 kilograms and 2 million packaged units of hash from the current 1 million. We have committed $13 million towards the expansion in order to support increased cash and craft flower demand from the facility. In Q3, we expanded distribution of Tremblant hash to 5 provinces achieving full distribution across the country. In addition to being the top hash SKU in Quebec, we have the #1 SKU in PEI and New Brunswick in the last 13 weeks, the #2 SKU in Ontario, while approaching top 5 in BC, Alberta and Nova Scotia. We also launched Laurentian craft flower into Ontario. The biomass construction at the Centre of Excellence was completed in the quarter, and advanced plant science research and consumer-focused research on CBD and other cannabinoid edibles have commenced. This research, part of the product development collaboration agreement with BAT, will enable us to continue to produce unique, exciting products for Canadian consumers and create proprietary IP that we can introduce globally. I will now turn it over to Derrick to present the financial overview.

Derrick West, CFO

Thanks, Beena. Turning to our earnings results for Q3 fiscal 2022. Gross revenue grew 90% from Q3 2021 to $55.2 million and net revenue grew 88% from the same period in fiscal 2021 to $38.1 million. These revenue increases were primarily due to higher recreational net revenue, which grew 105% from Q3 of the prior year. The cost of sales in Q3 fiscal '22 was $29 million compared to $23 million in Q3 of fiscal '21. The cost of sales increased as a consequence of the large increase in revenue in the period. We harvested approximately 13,000 kilos of flower during Q3 fiscal 2022 compared to about 8,400 kilograms in the prior year's comparison period, an increase of 57%. The key drivers for this increase from the prior year was yield per plant improvements and higher cultivation planning levels. On an adjusted basis, gross margin was $9.3 million or 24% compared to a negative 4% in Q3 of fiscal 2021. The improvement was primarily due to the higher overall sales volume combined with a lower cost of production. SG&A, excluding noncash share-based compensation, increased to $17.5 million in Q3 2022 from $12.3 million in the prior year's comparison quarter. This was largely due to the increased employee headcount related to the acquisitions of EIC and Laurentian and increased technology fees, including $1.4 million in ERP installation costs. In the quarter, we achieved a positive adjusted EBITDA of $583,000 compared to a negative $9.2 million in Q3 2021. The large improvement in EBITDA was a consequence of the higher sales and margins, somewhat offset by an increase in SG&A expenses. Based on our outlook for revenues, including growth from the Canadian recreational market and international sales and reduced cost of production from efficiency gains, we expect to increase adjusted EBITDA in Q4 of fiscal 2022. Net loss, which includes deductions for noncash depreciation, was $2.8 million in Q3 of fiscal 2022, a reduction from the prior year comparison period's loss of $4 million. Net cash from operating activities was negative $6.4 million compared to $10.8 million in the prior year's comparison quarter, a reduction of $4.4 million. The current quarter saw an increase in both production and sales, which together increased the level of receivables and inventories, and this resulted in a cash outflow, despite OrganiGram achieving their second consecutive quarter with a positive adjusted EBITDA. Cash provided from investment activities for the 3 months ended May 31, 2022, was $52 million compared to cash used of $154 million in the previous year. The cash provided in Q3 was primarily due to a $68 million redemption of short-term investments, offset by $17 million in capital expenditures. In terms of our balance sheet, at May 31, 2022, we had $127 million in unrestricted cash and short-term investments compared to $184 million at the end of fiscal 2021. The decrease during fiscal 2022 is due to the company's investment in its working capital assets to support the growth and capital expenditures for facility improvements which includes the purchase of Laurentian and the additional investment in Hyasynth. This concludes my comments. I would like to turn the call back to Beena.

Beena Goldenberg, CEO

Thanks, Derrick. To summarize, fiscal 2022 has demonstrated our success as a consumer-focused innovator. We are seeing a positive impact from consumer engagement, expanded distribution and market share. With our increased cultivation capacity, economies of scale from Phase 4C expansion and our investment in automation at all 3 manufacturing locations, we expect continual improvement in our bottom line. 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.

Operator, Operator

Your first question comes from the line of Rupesh Parikh from Oppenheimer & Company.

Rupesh Parikh, Analyst

So the area I want to touch on is international. So strong results this quarter, commentary very positive on quarter-to-date, what you're seeing there. If you can just remind us of the bigger opportunities you see on the international front going forward. And then how do you think about the margin profile of your international revenue versus the rest of the business?

Beena Goldenberg, CEO

Certainly, and thank you for your question. To begin with, the international business will have higher margins because it is not subject to the excise tax that applies to the recreational side. This results in a significant positive impact that flows through the business, contributing to strong margins. It is a crucial aspect of our operations, and we will continue to seek out additional opportunities. As we mentioned last quarter and probably in the last couple of quarters, we have been really tight on our supply. Our demand was outstripping our supply. And as a result, obviously, we built the expansion to the Moncton facility. With the expansion coming fully online, we're able to turn our focus to expand our customer base outside of our customers. We obviously have a very strong partnership with Canndoc in Israel, Cannatrek in Australia. We added 1 more customer this quarter with Medcan in Australia. And so we'll continue to look at other opportunities. As everyone knows, Europe is starting to look very promising with legalization comments coming from several countries. And with our excess capacity, we'll be able to capitalize on some of those opportunities.

Operator, Operator

Your next question comes from the line of Andrew Partheniou from Stifel GMP.

Andrew Partheniou, Analyst

I just wanted to touch on your gross margin profile in the quarter. You had a pretty impressive revenue growth here, strong rec sales, but it seems the gross margin declined quarter-over-quarter. Trying to unpack that. And if you give some more color on the puts and takes there?

Beena Goldenberg, CEO

Certainly, Derrick, this one is yours.

Derrick West, CFO

Yes, there was a decline in the third quarter with an adjusted gross margin of 24% compared to 26%. A couple of factors contributed to this, and it's worth noting that in the first quarter of this year, we were at 18%. Overall, the trend has been positive. As Beena mentioned, due to the excise tax, the current quarter has an average excise tax rate of 31% for the company, but it's more impactful on our flower categories than on the overall mix. Consequently, we end up paying more than 31% on average for our recreational flower in Canada. When we do the lower shipments on the international, we don't have that cost. And so that is a meaningful improvement to margin. And if we had had the shipments that we had expected to occur during the quarter, we would have seen sequential growth in both our adjusted gross margin and our adjusted EBITDA. Shipment was made, it was just delayed and occurred in the end of July.

Andrew Partheniou, Analyst

Okay. Thank you.

Derrick West, CFO

Yes, there's one more factor to consider. We have experienced a decline in production costs overall. However, during Q3, we continued with many of the environmental enhancements at the facility. While we were completing that construction, there was some downtime, which may have caused a delay in realizing the full savings we expect from our overall operating costs and production costs. We anticipate seeing these improvements once we enter fiscal 2023, after all the rooms are operational at the new capacity. This will lead to ongoing enhancements in our production costs and improve our margins in Canada for all our recreational flower.

Andrew Partheniou, Analyst

Okay. And a segue about the 4C expansion. You mentioned 20 out of 29 rooms are online right now. First harvest is coming very soon here. Could you talk a little bit about what you expect 4C to be incrementally accretive on margin? How high could we go with 4C? And you talked just now about this really being a big impact in fiscal '23. Could we start to see those impacts in Q4 or is this really only you're going to start seeing on the income statement in Q1?

Derrick West, CFO

I'll take that, Beena?

Beena Goldenberg, CEO

Yes.

Derrick West, CFO

We will begin to see the benefits in Q4. Consequently, we have increased flower output. We are distributing some fixed costs and applying noncash depreciation across a larger part of the business, which will reduce our overall production costs for the flower categories. Even with significant cost reductions in Q4, much of those savings will be reflected in inventory rather than immediately impacting the income statement. This is why we reference Q1 of next year, as the inventory produced in late Q4 will be sold in Q1. However, we will see some cost savings in Q4, as we continue to plant and open new rooms. Therefore, Q4 will serve as a transitional quarter. In terms of capacity, as Beena outlined earlier, we are moving from 45,000 at the start of the year to an annual capacity of flower, reaching approximately 55,000 in annualized capacity by Q3. We expect to finish fiscal '22 with around 82,000 of flower capacity once all the rooms are planted. We believe there is potential to exceed the 82,000 number if we achieve the targeted yield that Beena mentioned earlier.

Andrew Partheniou, Analyst

Can you quantify the impact that 4C has had on the gross margin so far? What indications are there that we might see an improvement once that expansion starts to contribute?

Derrick West, CFO

Well, I would say that a large portion, 25% of our costs are essentially noncash depreciation related, the rest are operating cash costs. And of that, a portion of it is fixed. So just taking your operational capacity from, say, the 55,000 kilos that we had on average in the quarter, up to an 82,000 and not having to add significantly at all to a fixed cost component, it is going to have a meaningful positive impact to our cost of production once we are operating at that level on a sustained basis, which will improve the margins in our flower categories, but our margins are positive in all our flower categories. And how we're just looking, of course, to improve them, and we feel that we will, and that's why we've given the guidance that we expect to have improvements to the margins in the future quarter Q4 and onwards, along with the EBITDA as we continue to realize the savings just from the economies of scale. But in addition to that, we think we can get more cost reductions from improvements to flower yields. And ultimately, there's margin improvements that can come from mix within brands and provincial allocations, but that's not part of the cost structure element.

Operator, Operator

Your next question comes from the line of Aaron Grey from Alliance Global Partners.

Aaron Grey, Analyst

So first question for me. You had some real nice momentum on the top line, especially regarding adult-use sales. Definitely outpaced what we saw in terms of the Hifyre data. So just wanted to know in terms of whether or not there was some sell-in, some potential buyers and there might be kind of some type of shift in that, go through the POS or maybe some lighter coming into the next quarter, particularly in terms of the adult-use flower seem to see the large sequential increase. So just if you talk about some of the sell-in to provincial buyers and if there's any timing in that one on there?

Beena Goldenberg, CEO

Certainly. At this point, the provinces are pretty tight in terms of how much inventory they're going to take. They're not really interested in carrying heavy sell-in volumes like we've seen in the past. So in most cases, you're working off of 2 weeks of inventory. I don't believe we have the sell-in inventory we actually are seeing the flow-through. And that's what you're getting with the Hifyre data, really strong velocities in our business. We have some of the strongest sales per SKU in the market. The offtake numbers we are receiving through Hifyre clearly indicate that this is growing alongside our revenue. Therefore, I don't think we have any of this sell-in. We've had some of our strongest recorded weekly sales numbers in this quarter. This signifies momentum behind our brands. In previous calls, I mentioned that due to limited available flower, we restricted the markets where we were selling our SHRED product. Last quarter, we primarily sold SHRED in Ontario, Alberta, and Quebec. Now, we have started expanding that distribution to more provinces and are selling SHRED in all of them. We have great confidence in its performance based on our results in the markets we were previously in. We are very excited about the momentum we have. This provincial mix will help us on our margins because we know Ontario is the most compressed margin province. And it's just great for the brand to be able to be coast-to-coast. We had limited ability to do that in the past. So this increased momentum is about new distribution. It's about distribution on some new innovation that we're focusing on, but we're seeing the offtake.

Aaron Grey, Analyst

Fantastic. Second question for me, just on overall pricing environment. I know there are a lot of operators talked about some stabilization in terms of pricing of flower and certainly seeing less pricing pressure of flower versus other categories, but you're still seeing some of it. So wanted to get your feel in terms of continued pricing pressure for the flower category going forward? And obviously, you guys are doing very well in terms of market share gains or at least holding or gaining regardless, your overall take in terms of continued pricing pressure for the flower category?

Beena Goldenberg, CEO

Yes, certainly. So we are the #1 flower provider in the country. So it's a very important segment of our business. We've looked at this specifically our average selling price over the course from Q3 of last year to each quarter this year. And there was a decline between last year and the start of this year. We mentioned that in Q3 of fiscal '21, average selling price was $2.12; and this quarter, was $1.88 per gram. But when we look back at Q1, Q2 and Q3 of fiscal year 2022, on average, we've been sitting in that $1.80 to $1.90 average selling price. Obviously, there's some mix based on which brands you're selling, which provinces you're selling. But from our perspective, the cost compression in flower happened over the last couple of years and has stabilized. And that's not surprising because we've said you have to get pricing in line with the illicit market to have that movement of consumers, some are listed into legal, but we've reached that point. So this is kind of where I believe the pricing, especially in the value segment needed to get, and we're not seeing further pricing compression in that flower segment.

Operator, Operator

Your next question comes from the line of Ty Collin from Eight Capital.

Ty Collin, Analyst

Given the turmoil we're seeing in the cannabis retail landscape right now, I'm curious whether you're seeing any changes in how retailers are ordering and whether there are any risks or opportunities to think about given the challenges downstream?

Beena Goldenberg, CEO

Yes. So certainly, I think you're pointing out to the fact that there is going to be some consolidation on the retail environment. And we are seeing a certain amount of pricing deflation coming from the retail landscape as opposed to the LP landscape. My last comment was around the LP landscape in terms of average pricing sold in. But we're seeing in the actual data, the impact of more value retailers out in the marketplace, some deflation, and it's going to lead to some, obviously, consolidations in the marketplace, especially in places where there is oversaturation and many of us have seen that in key markets. So what do I think is going to happen? I mean I think we're going to be in the situation where pricing is going to push some of these mom-and-pop shops to either exit or they're going to get gobbled up by retail chains. I think what we've seen in the last year is some of the regional chains becoming national, some of the national chains getting stronger. And that's just part of the maturation of this industry. I think at the end of the day, the bigger LPs are going to be able to build programs with the regional chains and national chains and get stronger performance than the kind of work that had to happen where you're dealing with a significant independent retail market. Now this is going to happen over time. There's still a lot of independent shops now, and we have the greatest sales team out in the marketplace. They're out working with bud tenders and working with the independents. But I think the benefit to the larger LPs is going to be establishing programs with the regional chains and with the national chains to really build out our business. They're going to want to deal with the vendors who could provide more than just 1 SKU or 1 segment, but the vendors who could provide one-stop shop to them. And the nice thing about the OrganiGram portfolio is that while we're very strong in flower, which is obviously the #1 category, we've got strong presence in gummies. We're building our presence in vapes. We have very strong performance in concentrates coming from the acquisition of Laurentian back in December. And we're building out our extracts business. We have a great product in JOLT. So they're finding it easier to work with us because we could build programs around that POS in the stores that aren't just about 1 SKU. And I think that is an advantage to the larger LPs.

Ty Collin, Analyst

That's great color. And just for my follow-up, following up on a comment you made earlier in the call, you talked about the incremental international opportunities that might open up as the additional capacity from 4C comes online. I mean, are there any other new revenue opportunities to think about as that capacity opens up maybe in white label and new product categories? Just appreciate any thoughts on that.

Beena Goldenberg, CEO

Yes, certainly. So as our capacity opens up, our primary goal will be to fill out some of the distribution gaps we currently have in Canada because we were really stealing from 1 pocket to the other as we're trying to balance the demand to what available capacity we had. So we're excited about having that so we could meet the needs and the demand of the Canadian consumer across the country. So that will be a priority of ours. But as we talked about and Derrick talked about earlier, international business is good margin business. It needs to be part of our mix. And we have a great relationship with some of our international partners in Canndoc and Cannatrek. In terms of opportunities, look, if you look at how legalization talks are happening in Europe, especially Germany, as many of you are following, in the most cases there is less capacity built to supply that market in Europe. There are some cultivation sites, but I think many of them shy off of building out heavy assets based on sort of learnings from the Canadian launch into legalization. And so we look at it as big opportunity to provide supply to some of those players in that market. And recognize that we have enough volume that it could be a meaningful supply agreement as opposed to companies looking at buying whatever 50 kgs once every 3 months, like we'd be able to provide significant regular volumes. And so we'll be having those conversations of supply agreements because the 1 thing about international business you want to have is something a little bit more predictable that you guys could model. We certainly had less international volume this quarter than expected. And that really was all about just the timing issue on our Israel shipment, which has already been shipped out. But as a result of that, more business that is contracted supply agreements that could be a regular cadence and is predictable is where we want to get to on our international business.

Operator, Operator

Your next question comes from the line of Matt Bottomley from Canaccord Genuity.

Matt Bottomley, Analyst

Just curious on your assessment on where the industry is when we sort of look on the capacity side of things. So you're one of the few LPs that is still adding incremental capacity on and it serves you very well. I think that OrganiGram is a good example of a company that hasn't over-allocated to its CapEx spend with respect to the number of facilities. But we have seen some of your peers shutter even their flagship facilities.

Beena Goldenberg, CEO

Right. So good question. A couple of points to be made on that. So the first thing is, a lot of facilities were built that were perhaps not built in a way to produce the high-quality product that needs to come out. So you've heard Aurora talk about their Sky facility and could only produce THC in the 16% to 18% range. That's not going to cut it anymore. What we've observed in the market over the past few years is that the target for THC has been escalating. Previously, the target was 20%, then it rose to 22%, and now it has climbed to 24% or more. This THC range is continuously evolving. Building a facility like ours in Moncton, which is an indoor grow operation, allows for better control of the environment, ensuring consistency throughout the year without seasonal variations. This environmental control contributes to higher yields and increased THC levels, which should enhance our competitiveness in the future. You could meet the needs of the consumer changes and continue to operate efficiently. I think some of the facilities that were shuttered just were designed in a way that they could do that. We have if not the largest, certainly one of the largest indoor growth facilities in the world, and we're very proud of what we have in Moncton, and we can do that. And as a result, as the market sits, we're optimizing our facilities. We talked about the environmental enhancements. It continues to drive our higher THC that is expected. So why what do we think about internal grow versus using third party? I think, look, some of the third-party guys are going to have challenges with meeting those increasing THC expectations as any grower would. And some are going to be very good at doing it. As capacity shuts down across the country and aligns more with market growth needs, controlling your own supply allows you to benefit from cost savings. Conversely, as capacity tightens, some third parties may raise their prices, putting you at the mercy of their decisions. I think it's not a bad idea to have a portion of your business outsourced so that you always make sure you're benefiting from, if there's a cheaper supply summer, you get the benefit of that. And it certainly would be something as we look forward to more international business. If we have to go out and certainly buy some product to continue to fulfill some of our value brands, we will. That's the luxury we have. But having your own cultivation where you control your cost and you control your quantity, I think, is a competitive advantage. And we get that from our tremendous facility, we have a Moncton and that's really what differentiates us.

Matt Bottomley, Analyst

Understood. I appreciate that. And then just 1 more for me, just pivoting now to maybe U.S. optionality and your thoughts on how to strategically position yourself for, I think, an eventual opening of that market.

Beena Goldenberg, CEO

I think a lot of consensus out there, it's getting a little messier with respect to when that timing might actually be. But given some other Canadian LPs that have either bought existing businesses that might be THC adjacent or some of the options we've seen or financial instruments purchased, do you feel the need to execute on something in addition to what you've already done with BAT in maybe the next year or 2? Or is OrganiGram waiting to get a little more color on exactly when and if something might actually change out of the border? So good question. I mean, we talk about this obviously often. Our key goal originally was establish a strong foundation in our Canadian marketplace. We feel we are there and we will continue to benefit from that strength. But it is time for us to look outside of the Canadian borders. Whether the U.S. is going to be a primary goal or whether Europe is more interesting as perhaps legalization will happen sooner there than it happens in the States? I have said previously, we want to be a pure-play cannabis company, so we're not going to be looking at adjacencies. And I'm not sure I believe in the whole optionality because its legalization unpredictable, you don't know what you're buying into right now. We will continue to explore opportunities in the U.S. to establish a presence where possible. CBD has been a focus for several competitors, and it remains an option for us given our current listings, but it must align with our objectives. We will assess opportunities where it makes sense for us. OrganiGram has always taken a cautious approach, ensuring that the opportunities we pursue are suitable for our business. However, expanding beyond Canadian borders is a key priority for our long-term strategy.

Operator, Operator

Your next question comes from the line of Frederico Gomes from ATB Capital Markets.

Frederico Gomes, Analyst

Maybe just to start off, are you seeing any significant impact of inflation in your supply chain? And if so, how do you view your capacity to pass on some of these potential inflationary costs to your customers, just given the pricing pressure that we're still seeing across the industry?

Beena Goldenberg, CEO

Yes, thank you for the question. There is no doubt that we are experiencing inflationary costs. Freight rates are increasing as we ship products from Moncton across the country. To help mitigate these inflationary costs, we have leveraged our Winnipeg facility this year. We have a warehouse in Winnipeg, and we are bringing product across from Moncton, cross-stocking to pick up our gummies as we ship to Alberta and BC. And we're supplying the Manitoba orders straight out of Winnipeg. So we have some productivity initiatives that are offsetting the inflation costs from freight, maybe not completely flowing to the bottom line but certainly more than offsetting them. In terms of procuring consumables, we have focused heavily on this over the past year. As we grow, we can leverage our volumes. We have collaborated on RFPs with key suppliers and successfully negotiated to offset rising inflationary costs by working directly with suppliers instead of through distributors. Now these initiatives that we've done, in a lot of ways, we had hoped would drive right to the bottom line and some of them are being offset in part due to inflationary pressures. But I think we have more opportunities. We have a lot more productivity initiatives on our plate. And so at this point, I don't see that any kind of price increase is going to come through in the cannabis space. I'd love to see pricing, but the truth is, right now is the time for us to stay the course. We're seeing positive margins, and I anticipate that some of our competitors will face challenges in the coming year. We will remain focused on enhancing our margins, and hopefully, there will be some consolidation in the industry, with certain players exiting, leading to better long-term profitability.

Frederico Gomes, Analyst

And maybe just a comment on your market share in edibles right now. It seems like it's increasing pretty rapidly. So where is that fast growth coming from? And would you expect that to continue so that you could potentially take on a leadership position there?

Beena Goldenberg, CEO

Yes. So look, we have a new product with the OCS. Obviously, they're the largest provincial board and we have been very successful in getting our innovation in. And so with each product call, we're able to look at our lineup, make sure we have an optimized lineup in each province. We have these relationships top to tops with other provinces as well with Alberta, with BC. In this last quarter, we've had some conversations there. And we've equally, with the acquisition of Laurentian, have been able to build that relationship with SQDC as well and have seen some planned increases in our planograms. And so some of this market share growth is simply increasing our distributions on some core items and the success of launching new products. And I just want to bring your attention to the fact that a quarter ago we said we had 90 products in market. And this quarter, we said 85. So the message here is while we're launching a lot of products, we're not just leaving products that aren't performing out in the marketplace. We continue to optimize our lineup. We have 1 of the largest sales per SKU in the different provinces. And that makes the provinces want to work for us. They're efficient SKUs. So innovation is key in this category. We've put a lot of focus on innovation and continue to do that and have a lot more plans as we go forward. But I believe it's that, the success rate we're having other LPs might present 10 new SKUs and get 2. We present 10 and get 9 or 10 of them in the market because we have strong relationships with our customers. We're hearing what they're looking for in terms of innovation. What gaps they have in their offering. And we have a great R&D team working on developing these products. And our cycle time from ideation to market is quite spectacular.

Operator, Operator

Your next question comes from the line of Tamy Chen from BMO Capital Markets.

Tamy Chen, Analyst

I just had a couple of quick follow-ups here. First is, Beena, I thought I saw recently that Israel might have halted imports because 2 of the distributors didn't have the right permits or something like that. Do you know anything about that? Like could that be a bit of a disruption for your Israel shipments for the next little bit?

Beena Goldenberg, CEO

So let me answer that by saying, look, the IMC in Israel has got ongoing audit requirements. They keep changing, and you have to be able to change with them. And I have to say part of the delay in our international shipment was us needing to make sure we met all those audit requirements before we got that shipment out. So it is an ongoing thing that we pay a lot of attention to. We have already shipped another shipment to Israel this quarter, so there hasn’t been an interruption. However, some of these regulatory changes do cause delays that can be somewhat unpredictable. We are fortunate to have a strong partnership with Canndoc, and we are closely monitoring these changes while continuing to collaborate with them to ensure that we fulfill all necessary requirements.

Tamy Chen, Analyst

I would like to ask if you could provide more details about the language used in your fiscal Q4 outlook regarding one of the factors for sequential growth being a stronger forecasted market growth. Can you elaborate on what you're seeing? Is it mainly due to seasonality and a busier time of the year, or are there more fundamental indications of an improving growth trajectory in the market?

Beena Goldenberg, CEO

Yes. So I think it's 2 things. There's certainly seasonality in the business as you get into the summer months, typically anyway. I think the last 2 years with COVID has probably restricted some of that growth. So there is going to be we predict a rebound from some of the COVID restrictions and gatherings to see some incremental growth. We believe that this will really support the market during the summer months. While there is some growth from new retail stores, the primary focus of that observation was on seasonality and the improvement compared to the limitations experienced a year ago.

Tamy Chen, Analyst

Got it. Okay. If I could just ask one last follow-up, regarding your comment about the price competition that retailers are currently facing, you mentioned that this is not affecting the licensed producers. You indicated that you believe there isn't significant further price compression, particularly for flower. Can you elaborate on this? Are you not worried that the new value strategies being implemented by some retail chains might eventually impact the pricing you will receive?

Beena Goldenberg, CEO

I think that's a good question, Tamy. The reality is, I'd like to believe it's not going to flow back. We've already experienced significant price compression on the LP side, and it will be tough for any LP to lower their prices further given the industry's profitability. I believe retailers are navigating a highly competitive market and some rationalization will occur. This isn’t an issue related to us; it’s their choice on how to price their products. Will some of this impact us? Hopefully, we can offer them opportunities through efficiencies, a one-stop shop, appropriate programs, and training for their staff, which will assist us without affecting our selling price. We have a strong presence right now in the value segment. This is about where you're going to go? We're not planning to implement a price increase, but we are certainly not very enthusiastic about any decrease in prices. This business needs to be sustainable, and you must be able to maintain a margin on what you're selling. We have decent margins on our value brands, which enables us to compete effectively in that segment. There are better margins associated with some of the derivatives and our more premium flower offerings. However, it's uncertain what the future holds. I can't predict actions that will be taken, but we are not seeking to raise prices due to inflation. Instead, we will actively resist any further price declines in the current market conditions.

Operator, Operator

Your next question comes from the line of Andrew Bond from Jefferies.

Andrew Bond, Analyst

Andrew on the line for Owen Bennett. So really detailed call so far, so most of our questions have already been answered, but maybe for you, Beena, an overall consumer strategy more generally. With continued market share gains and achieving top share positions in a number of categories really mostly via organic growth, obviously, it's a number of things coming together strategically that has helped lead to this. But just wanted to hear from you what 1 or 2 things specifically you think has been really key to OrganiGram's success and continuing to grow sales and market share while larger competitors have failed to do so?

Beena Goldenberg, CEO

Certainly. Focusing on consumer data and consumer packaged goods, the essential factor in driving the business is consistently providing high-quality products that satisfy consumer expectations. Our SHRED brand exemplifies this, as we have received feedback from consumers indicating that every time they choose a SHRED Tropic Thunder, they enjoy a consistent experience with top-notch, fresh quality. The challenge of operating on a tight schedule was that while we were harvesting, we were also processing and immediately shipping out the products, resulting in our consumers receiving high-quality, fresh items. We received feedback indicating that even though the THC content on our SHRED products only indicates 20%, it provides them with a better experience than some higher THC products they purchase. This is largely due to our consistent delivery, which has significantly benefited that brand. We spend a lot of money on research to understand our consumers to understand what they want from our brands. We've built out a portfolio of brands to meet their needs. Our innovation platform is based on that consumer insight. And so again, this is not unfamiliar territory in consumer packaged goods. It's about understanding your consumer, it's building your brands, delivering consistent quality and you're going to continue to build that brand.

Operator, Operator

Thank you for your question. But I think we are now over time. Operator, I think it's time that we close down the calls, and I want to just again thank everybody for joining us today. It's been a pleasure. We're very excited about the performance of our business. We're looking forward to updating you on our progress moving forward. Have a good day. This concludes today's conference call. You may now disconnect.