Germany Is the Engine: What BAT Knows That Cannabis Doesn't ft. James Yamanaka

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Bryan Fields: James, before you became CEO of Organigram, what was your involvement with Organigram from the BAT side? James Yamanaka: Yeah, my involvement with Organigram was actually quite distant. During most of the initial investments in Organigram and in cannabis in general, I was actually running the Japan, Korea, Taiwan part of the business. So what the corporate strategy was relative to cannabis was fairly irrelevant to me because I was running a market, and it was all about driving nicotine, the pouches, and those sorts of things. I did join the group strategy team three years before I came here, so I was aware of the investment strategy that BAT had, and the strategy toward cannabis was very much a long-term bet pending legalization in the US at a federal level, and the removal of something called POCA in the US — the Proceeds of Crime Act — which prohibits UK companies from investing in businesses that are illegal. So it was very much a long-term bet on the assumption that it would get there. What they were looking at is Organigram as kind of the hub of their investments, where it would be the investment vehicle without ever taking a majority share. So I knew about it, I was never directly involved in the cannabis strategy, but I was aware it was happening. Once I was put in the hat as a candidate for this job, I went through the whole recruitment process — psychometric testing, interviews, multiple rounds. I had to recuse myself from anything related to it. I had known about the Sanity Group deal being discussed, but I couldn't be involved in it at all. So I knew about it, I knew what the strategy was, but I was never directly involved in the cannabis strategy. Bryan Fields: Just staying with the thesis side, I'm always fascinated to understand — when you're taking that long-term approach, saying, "Okay, Organigram is going to be part of a longer-term strategy" — how much effort goes into understanding the core structure of the business, where it's positioned, how the industry operates as a whole? Cannabis has that unique dynamic where Canada, the US, and Europe all operate a little differently. So when you're picking an asset to think about as a long-term bet, how much due diligence goes in from the BAT side to understand the core structure, the strategy, and how it fits into the roadmap down the road? James Yamanaka: Yeah, there's a huge amount of diligence that goes in. They'll look at historical performance, cash positions, debt, what the actual products are and how sustainable it is. One thing you never want to do is buy decline. So they're looking to be fairly certain they have a growth trajectory with products that are relatively profitable, or have the potential to be very profitable. They'll look at brand strength and the distribution networks of the companies they're buying into in this category. And I think in the end it's really probably the last barrier — whether they trust the management or not. If you have a good, professional team of managers, that's probably the thing you'd rather have — a team you trust with average numbers versus great numbers from a team you don't trust. It's a pretty extensive process for any investment BAT makes, whether it's cannabis or any other industry, and it'll be slightly different depending on how much information there is — what you get out of a data room when you start discussing. But it's an extensive diligence process before any investment on the BAT side. Bryan Fields: It's interesting too, because in an industry that operates so much on a short-term perspective, the ability to have that long-term thinking is a massive separator. Teams can make the right long-term decisions and not feel rushed to claim market share because they need cash today. I think that's a helpful part of the partnership when aligning both perspectives. James Yamanaka: Absolutely. To put the BAT side's long-term thinking in context — it's a cash machine. Unlike cannabis, where some companies don't generate as much as I'd like us to, this is a company that generates about 8.5 billion pounds of cash every year, reliably, with almost no risk. To put it in context, my P&L and revenues in Japan were four times the size of this business, and when I was running the Nordics they were probably two and a half times the size — and both substantially more profitable. So investors in cannabis from a BAT point of view can put in money that sounds big from a Canadian cannabis perspective, but from a corporate of that size it's not a rounding error, but it's also not going to break the bank — they wouldn't even have major discussions about it given the scale of that company. That allows them to make these long-term bets, and they don't need a return in the short term from Organigram, and in fact they can't take any return because of the regulatory constraints. Bryan Fields: How has the thesis changed? You're inside Organigram now — I can only imagine you came in with some understanding of the original thesis, and now that you're on the other side of the fence, how much has changed from your perspective? James Yamanaka: Well, when I was offered the chance to apply for the job, the thesis from my side was: look, it's an interesting industry, it's maturing, at least in Canada it's federally legal so it's fairly stable from a regulatory point of view, and there's a lot you can do to make it grow. At this stage in an industry you can still shape it, and at the same time run a company, drive value, increase the share price — all those things attracted me. How often do you get the chance to come in and really shape an industry and an entire company? Since I've arrived, most of those things hold. What I wasn't quite as aware of was the strength of this business — the people, the sophistication on science and R&D, the scale of the facilities were all surprisingly strong to me. On the flip side, it's seen as one of the more mature companies in Canada, but it still has a long way to go before it becomes a more stable, fully grown corporation — it still has remnants of a startup. But that also means there are fantastic opportunities in every corner. What makes me really excited is you have an industry that's growing, and with Sanity Group in Europe you have a market that's exploding, and so much of it is about getting the operations to work well — you can significantly improve performance, share price, and build a culture internally that feels like it's winning. The second thing is it's far more complicated than I expected. I come from a big but very simple industry. Here there are so many players, constant price wars, launches, different categories of products — it's fairly chaotic every week. It's also Canada, but it's not really Canada — it's provincial markets, very different ways of working in every province. That complexity was probably the thing I most underestimated. And at the same time, now that we've closed the Sanity Group deal, we have another engine to grow in leaps and bounds over the next few years. Bryan Fields: It's hard not to laugh thinking about the Canadian dynamic — why operate so differently, especially compared to the states? But when you boil it down you start to understand it, and in strategy conversations you probably keep asking "how about this," and the answer is often "well, James, Canada operates like this." So how does the learning curve work? You lean on the management team, but you're probably flushed with ideas. How do you balance wanting to drive an idea versus waiting and listening more to understand how things currently work? James Yamanaka: Yeah, personality-wise I have a bias toward listening first. A lot of times when people see me drop into Japan, the Nordics, or a role like this, they're surprised because I tend to be one of the quieter ones in the room at the beginning — not because I'm not interested, but because I'm listening and making sure whatever assumptions I have are right. I have a strong view, but I'm convincible. As a first step, I have enough self-understanding to know I don't know what I'm talking about when I first come in. At the same time, you have a frame from previous experience, and probably 70% of those instincts are still right. When you look at a portfolio in Canada, it's about thinking it looks like too much — most consumer goods companies end up with too many things in the portfolio, way too complex, some making money, some making less. So learning which categories are growing and profitable, and where to invest, was one way of learning — combining listening with putting a frame on it. I also made sure I got around everywhere — went to the facilities, talked to people, figured out what was driving them crazy about the way we operate. I love going to different dispensaries too, because you learn more from talking to people who sell day-to-day than from any consumer research paper — how people decide what to buy, what they ask for, how many know what they want before they walk in. On the international side, it was starting all over again with a completely different business in Sanity Group, understanding the medical side. It's not rocket science — you listen, put on your experience and frames, and think about it. Most of the time it still makes sense; about 30% of the time you realize you're looking at it totally the wrong way. Things like EU GMP and micro requirements when exporting to Europe — you think how hard can that be, until you see how hard it actually is. Bryan Fields: Is there a specific area you focused your attention on? You described talking to customers, being in cultivation facilities, large-scale extraction, dealing with Europe — there are endless opportunities to get your hands dirty. Did you attack one specific vertical, say the vape category, to build your understanding from a brand and customer standpoint? James Yamanaka: I don't know that I had one specific area, and I think if I got down into that level of detail I'd be micromanaging the person running the market. I need to know what's growing, what's not, what's profitable, which brands are working, what consumer insights are driving decisions, what returns we get on marketing spend. But I don't get down into the details myself beyond that — my philosophy is if I don't have somebody there I can trust with that, I need to change the person, and I don't have that problem. I ask the questions that matter and get the answers. I fundamentally don't believe in micromanaging from my position because you don't get the best out of people. I spend a lot of time understanding how it works, figuring out pain points, what I can do as CEO without micromanaging, how to set things up so people can succeed, what information they need, how to let them make 80% of decisions without coming to me so we're faster and more agile, and what guardrails make clear what's theirs versus what needs to come to me. I've gotten way more into detail here than I ever would have at BAT, because BAT has more established ways of working, so I've had to dig into the Canadian market and the Sanity Group business in Europe. But my philosophy is once I know the key questions and pick good people, I let them run — they'll be much faster and better. If I'm a better marketing person than my marketing person, I need to fire the marketing person. Bryan Fields: I love that. What I'm hearing is data helps guide all those concepts — you want to be on the ground talking to customers, but you also want to understand from a data standpoint how it all flows through so you can get a pulse on what's working. Was that infrastructure already established, or did you want a different data perspective when you came in? James Yamanaka: There's less data available than there would be in the established companies I came from, but I'm sure it's better than a lot of our peers in Canada. We have enough data, and one of the priorities right now is getting more, because I am very data-driven in the end — but I supplement it by going to the stores, because data never tells you everything. You see a number, but you need the story behind what's driving it. I'm visual, so I need to picture why people are buying, why they might pay more, what's happening down the supply chain that's allowing us to service it well or not. Once I have that in my head, I ask questions based on it. I have to have data to make decisions, but I'm quite happy to go with 80% right — if the data is good enough, I don't need perfect data, as long as the missing 20% isn't a compliance issue. We just fix it as we go along. Bryan Fields: You said some data was missing that you're looking to acquire — was there something specific? James Yamanaka: It's things like the level of granularity. We have the topline numbers, all the reporting data from the markets, but when you want specific analysis — say we've talked about stock positions being too high, too much cash sitting in working capital — what we don't have yet is the granularity of exactly what's driving it and where. Especially when you bring in new companies, you need to reintegrate the bills of materials and all those systems. The data exists, it's just not in the system yet, or it takes too long to get it. I'd say we're about 70% to where I'd want to be, and getting to 100% allows my team to do more — because I'm not going to do the detailed work myself, but knowing the drivers helps me give direction. Bryan Fields: It's really important to have that signal. I think that's where simplifying SKUs makes a big difference — you look at it all and realize 80% comes from six products and the other five don't do much, and maybe they're hurting morale on the production side too. James Yamanaka: No, absolutely, it's a common problem — too many SKUs. Like any company, there's a certain number that makes up 80% of the revenue, or at least of a category — for example, a big bag of buds is a big chunk of flower and you don't need ten more to do that. Over time we'll simplify it. The only problem is when you do it, you always lose a bit of revenue and EBITDA along the way, so you have to manage that. Ideally you have your bets placed where they're growing and big, because if you're in a declining category you start every year in a hole, whereas if the category's growing you can keep the same share and grow with it. It's almost like taking a one-off hit to get the right ones so your base then naturally grows — you use marketing better, flow with the market, and perform better where you invest. That takes time, because there are hits along the way and investors care about short-term revenue targets, so you have to explain it well enough to get through those dips. Bryan Fields: That's part of the long-term thinking from the thesis standpoint — cannabis as a whole is going through that now, needing to simplify to figure out what's working. But the dynamic, bullwhip-effect nature of consumer demand makes forecasting difficult. So from a forecasting standpoint, if you're going to eliminate a SKU, how do you integrate that into planning so everyone's aligned? James Yamanaka: There are some SKUs and categories that are actually quite consistent within an otherwise chaotic market, and those are where you make investment choices easily. For the others, it depends on scale — if they're tiny, you just pull them out; if significant, you roll it down over time, deciding when to stop production and distribution. It's easier to let go of the ones with lower margins. I look at the top SKUs, the ones growing and the ones relatively consistent. For the chaotic ones, you either get rid of them or, better, never get into them in the first place. Vape is an area where we probably need to think this through better, because there's always something new — a device, a flavor, a gizmo — and every launch is another device investment that loses value immediately if it doesn't sell, unlike flower, which will eventually sell through. Part of it is being brutal on the small ones now, having a good plan to migrate others out, and in some categories not even chasing new trends. I had the same experience with vapor at BAT — if you chase everything, you lose money and don't gain much share. You need to be focused, service the market's desire for something new selectively, and make sure what you launch isn't just a me-too product, or you'll end up writing off a lot of stock. Bryan Fields: Going back to vapes — is there experience you can pull from BAT? If Organigram runs into an issue in extraction or product development, can you leverage those relationships? James Yamanaka: Yes. We have a venture around the Product Development Center, where BAT sends some of their people — it's essentially a joint venture, and we can pull a lot of their technologies and experience around vapor, including liquids and different technologies. We get access to a lot of that expertise, including seconded employees who worked in vapor and are now sitting in Moncton at the product development center. From a commercial perspective, a lot of what I described is exactly the experience BAT had in nicotine vapor — you can chase Chinese companies forever, but a company like BAT is never going to be as fast or willing to launch everything they launch. It's similar in cannabis — I'd rather make a few big bets on things we think are relevant. That experience of losing money by chasing everything comes from BAT, and it's why you need to pick the consumer groups who stick around, look at their long-term value. Generally, the people who always need something new tend to be on the fringes with zero loyalty — why chase them? You want the ones who buy consistently, good-margin products. It starts with picking the right consumer, making bets, not chasing everything, and managing your level of risk. Bryan Fields: You're reactive in those environments, always chasing that customer who's going to hop around, spending money to reacquire them as things evolve. That's where the BAT relationship becomes so valuable — lessons learned the hard way, scientific and product development approaches passing through between the two industries. That knowledge transfer might not show up on the balance sheet, but it's a massive advantage. James Yamanaka: I agree — it's commercial, but also product knowledge, how the pieces work together, supplier relationships, and the scientific background and studies we've done to make sure what we're selling is right. We do clinical testing and probably have more data on actual product impacts than anyone in the industry, a lot of which comes from BAT's expertise built over a long time. They've also financed a huge amount — Sanity Group could not have been done without the Jupiter pool of money they gave us for the acquisition. It helps that I know everyone there since I worked there recently, but day-to-day they don't bother me much. Bryan Fields: But if there's ongoing R&D or experiments, given BAT's forward-looking strategic position, that information is so helpful in thinking about how the industry might evolve — a huge, underappreciated advantage in highly regulated environments. James Yamanaka: Yeah, it was a good training ground for this industry, and a lot of it sits with me now because I came from there. Even the way you think about engaging with government to get regulatory changes is different. What I've noticed in the cannabis industry is a lot of lobbying around excise — in Canada you have provinces with different stamp requirements creating inefficiency — but it tends to focus on "this costs us money, change it," when in reality the government's response is "tell me how I fill my budget hole if I change excise, how I balance this against stakeholders who don't like the industry." One thing we don't do enough is know what we want and make the broader case. I've been saying a lot that people don't realize the size of this industry in Canada — we employ close to 250,000 people as an industry, we contribute about 16 billion in GDP to the economy, and we're now the biggest exporter to Germany, the biggest cannabis market in the world. I think 46% of the German market is supplied by Canadian companies right now because US companies can't do it, and if you think about the flower that goes through places like Portugal, probably 60% of the European industry is Canadian flower. Why wouldn't the Canadian government support an industry creating jobs and GDP as an export, one of the few places Canada is a true global leader? The US will come eventually, but who knows when — and right now is the time for Canadian companies to take advantage of it. Bryan Fields: It's massive, and I always wonder why the US government can't get out of its own way. So let's talk more about the Sanity Group deal — can you set it up and give some background on how it worked out? James Yamanaka: I wasn't involved in the early stages from the BAT side, but the key thing to know is BAT already had an investment in Sanity Group — they were the largest shareholder there, and in some ways played a broker role. From Organigram's perspective, the big idea was: we want to expand globally, and here's a great medical company in Germany, one of the leading companies there, with a great distribution network across pharmacies, telemedicine, and doctors, growing exponentially, faster than the market. Put those two together — a big producer and manufacturer with local brands and distribution in Europe, where supply is an issue, so it's a huge asset for them, and a ready-made distribution network with good brands for us. In the medical space in Europe, brands actually matter more than they do here in Canada, because rec is chaotic here, whereas medical channels go through doctors or online, and once a brand is established people want consistency. So when you had one company wanting to grow internationally and the other wanting supply security, with a common owner, putting them together made sense. It's not a synergy deal like a typical M&A — unlike our Motif Labs acquisition in Canada, which was about cutting costs and combining teams — this one is almost entirely complementary. There will be some synergies, but that's not the rationale. It gives the combined company supply capability to grow, and a ready-made distribution network and brands we wouldn't have been able to build ourselves. And similar to BAT, Sanity Group happens to have a fantastic management team, including Finn, the CEO and founder, probably among the most well-known people in the cannabis industry in Germany, maybe in Europe as a whole. Then it was the usual due diligence, negotiating numbers, satisfying shareholders, and financing — we used a combination of our own cash, the Jupiter fund from BAT, and a share placement to fund the whole thing. It was actually quite a complex deal behind the scenes in terms of financing. Bryan Fields: You mentioned it wasn't a synergy deal but more of a growth add-on — does that change the KPIs for evaluating success in the immediate future? James Yamanaka: For OGI as a whole, the combined company, we need to get into much more consistent revenue growth, higher profitability, and incremental improvements quarter on quarter, a lot driven by operational efficiencies, primarily in the supply chain, where our margins are lower than most of our peers. Long-term, I'd expect more out of the combined company than out of Organigram alone. The Canadian market is now in a slow-growth phase — this year it's been about 2%, we were expecting about five. It's a single-digit growth market, so if we were only in Canada you'd expect share growth within that context. Germany is a market that will double in the next couple of years — Sanity Group's revenues and profits grew 100%, and the market as a whole will grow at least that much. Right now it's about a 2.5 billion euro industry; from the trends we're seeing, in two years it should be around 4.8 billion. That's not a crazy assumption when you consider there are only about 800,000 patients driving that 2.5 billion euros, out of a population of 83 to 84 million, with about 70 million adults in the country. Even 4.8 billion gets you to only about 1.8 million patients out of that population. So as long as there's no regulatory shock, the potential in that market is huge, and I'd be disappointed if OGI as a whole doesn't tap into that over the next few years. Bryan Fields: When you're modeling it out, you're double-checking the math because the numbers look almost too good — but when you look at the number of patients, it is tiny even with an aggressive forecast. James Yamanaka: Right, exactly. Bryan Fields: Sometimes people forget how early we still are as an industry and how far we still have to go — opportunities like this are hard to fathom mathematically, and once we dial in consistency and operational efficiencies, the numbers really improve. You had to slug through the mud for a while before it started to pop. James Yamanaka: Yeah, I think in Canada specifically we need to grow but move away from a sole focus on revenue and market share toward more balanced, quality growth — much more profitability out of the portfolio as a whole. A headlong push for revenue and market share leads to bad investments at the fringes, something other companies have already learned, and we've started addressing but could do more. In the absence of major regulatory changes, Canada needs to drive profitability that allows us to invest in Europe — Germany first, but also other markets. Sanity Group also has inroads into the UK and Poland, and they're one of the few companies with a pilot program in Switzerland, which is always a great market in Europe — small, but margins are great, the only place where consumers actually want something more expensive because they read it as quality; every consumer goods company sees outsized margins in Switzerland. Sanity Group being there first, with cannabis expected to become legal there around 2027 or more likely 2028, means we already have brands and stores established. There's opportunity all around, and I think over the next few years more countries in Europe will move toward legal medical cannabis at a minimum. Bryan Fields: I can only imagine, given the places you've visited and worked at BAT, how helpful those contacts and that familiarity with Europe must be as more countries come online. James Yamanaka: Yes, and there's familiarity with how the EU works, how it relates to local regulation, how open different countries tend to be. Some countries love regulating like crazy. Germany, everyone would expect heavy regulation, and they do have rules, but it tends to be one of the more liberal countries in Europe on things like cannabis or even tobacco — they were one of the more liberal countries in Europe on tobacco too. But knowing how the system works matters. Bryan Fields: James, last question — what question do you wish more people asked you? James Yamanaka: That's a hard one. Maybe just, "Why are you doing the job, why are you excited?" because that brings in a lot of what I've shared today. To me this is one of the most exciting industries in the world to be in — I think this Organigram-Sanity Group combination is one of the best, with so much growth under our own control, meaning the market and demand are there, and if we fix operational things, streamline our portfolio, and take advantage of the European opportunity, there's a fantastic opportunity to drive consistent growth in the company. What I'd really love is for the markets to reflect what we're able to do, because it's still an industry heavily driven by small individual investors, so performance doesn't always link to valuation. I'd love for people to reconsider the industry — it may not be the hot one right now given its checkered history, but it's settled to the point where it can grow, particularly in Canada, but also in the US over time. So I don't know if that's a question I'd want, but it's a message I wanted to share. Bryan Fields: Perfect. For those who want to get in touch and learn more about Organigram, where can they find you? James Yamanaka: You can contact Organigram's Max Schwarz, our head of investor relations, or just drop me a note directly. Bryan Fields: Thanks for taking the time, James. This was a lot of fun. James Yamanaka: All right, enjoyed it.