Aurora Cannabis Inc. (ACB) Q1 2022 Earnings Call Transcript | The Motley Fool

I would now like to turn the conference over to your host, Ananth Krishnan, vice president, corporate development and investor relations.

After the market closed today, Aurora issued a news release announcing our financial results for the first quarter of fiscal ’22.

Actual results could differ materially from those anticipated in these forward-looking statements and the risk factors that may affect actual results are detailed in our annual information form and other periodic filings and registration statements.

For analysts, we will ask that you limit yourselves to one question and then get back in the queue.

We are pleased that our track record of strategic and financial progress from fiscal 2021 has carried into the first quarter of fiscal 2022 and in our efforts to build shareholder value or gain momentum.

It’s our competitive advantage, and it’s why we’re allocating further resources to the Canadian, European and Israeli medical markets.

We’ve already achieved run rate savings of approximately $33 million from our announced plan in September, which puts us on target to achieve $60 million to $80 million in cost savings without impacting planned growth investments.

To be clear, if and when we make an acquisition, it will be accretive with managerial talent we don’t currently possess and align with our premiumization strategy.

Given the fragmented nature of this channel, we have a clear opportunity to expand our presence through education and by helping patients navigate medical cannabis alternative treatments through our proprietary end-to-end experience, and this represents a great long-term opportunity for us.

While we may still see month-to-month fluctuations of purchase orders from our Israeli partners, this is a tremendous vote of confidence in the quality of Aurora’s products and is a proof point of our ability to profitably navigate a complex and evolving regulatory environment.

Our expertise in medical cannabis and the ability to operate within a highly regulated framework gives us a great opportunity to expand in the global adult rec when those markets open up.

This has been proven repeatedly over time, and now we are seeing this in the Netherlands, which based on today’s global regulatory framework, we expect to become the largest federally regulated recreational market outside of Canada.

That’s why our focusing on rec is on higher quality, higher potency, higher margin products that drove a 29% sequential revenue increase in our premium and super premium dry flower products.

And finally, in terms of our Science and Innovation business unit, we believe it provides Aurora with a strong right to win in premium consumer categories.

The breeding program located at Aurora Coast, the state-of-the-art facility in Vancouver Island’s Comox Valley is expected to drive revenues through genetic rotation into our product pipeline and greatly improve the efficiencies of cultivation through our higher yielding plants, higher cannabinoids and better disease resistance.

While we are just building out this part of our business, and you’ll hear much more about it soon, we view genetic licensing as a capital-light long-term revenue growth opportunity for Aurora and one that will ultimately bring a wide array of products to the market.

I will now review our Q1 2022 financials, which I believe show both the distinctive strengths of our business and our progress on our business transformation program.

This consists of approximately $424 million in cash, no term debt and access to $1 billion through a shelf prospectus, including a $300 million.

This strong margin profile has held steady over the past few quarters and is an important gross profit driver that both distinguishes us from our competitors and is critical to reaching positive EBITDA.

At a summary level, our Q1 results benefited from our broad diversification across international medical, domestic medical and adult recreational segments.

Our medical cannabis segment continues to excel, generating $41 million in sales and a gross margin of 64%.

On a related note, our average net selling price per gram of dry cannabis rose 21% to $4.67 from $3.86 in Q1 of last year, reflecting the increasing prominence of our medical cannabis business.

As we have said previously, our Canadian medical patients can be segmented into two groups: Those with cost reimbursement coverage and those without a reimbursement program.

That said, we may see some migration of price-sensitive non-reimbursement patients from the medical channel to the adult recreational channel as that market continues to develop over time.

Our premiumization strategy gains traction as evidenced by a 29% sequential revenue growth in our premium dry flower category, largely driven by the launch of three new cultivars.

Put it together and we see the directional change we’d like to see with consumer gross profit up 5% from last quarter, benefiting from our purposeful mix shift toward premium.

For clarity, in our adjusted EBITDA, we do not include the benefit of $14.4 million of government wage subsidy grant that we report in other income as this program has now been phased out by the Canadian Federal Government.

Approximately 60% of cash savings under the business transformation program are expected to be realized on the P&L and our cost of goods as inventory is drawn down following the implementation of our lower production cost structure.

We are very pleased that our transformation plan is on track, and it’s important to note that the foundation of that plan is medical cannabis where we expect continued revenue growth with very high margins.

1 Canadian LP by medical cannabis revenues globally, and we’ve been able to differentiate ourselves in Canada through investment in our proprietary end-to-end patient infrastructure, which create barriers to entry in a sticky insured patient base.

As far as adult rec in Canada, we believe the market is in the process of bottoming and we are encouraged that our premiumization strategy is gaining traction.

This positions us to achieve EBITDA profitability in the first half of fiscal 2023, and our team is aligned and energized to get there.

Before we take questions from our analysts, I will turn the call over to Ananth to ask a few questions from our retail shareholders who were invited to submit questions ahead of today’s call.

What I will say is that our strategy of being thoughtful and being patient has clearly paid off.

So when you think about our overall goal of EBITDA profitability, we’re not going to put that into risk by looking for a nontraditional investment.

That being said, with the right opportunity, we have the balance sheet and financial flexibility to be opportunistic when we see the right transaction.

and Israel, all around the world in excellence, in a regulatory compliant framework is what best positions us to be successful in the U.S.

So first and foremost, as a company that has a globally diversified business, we get benefits out of innovation, out of our scientific progress, both in the medical business, but also in the rec business, which is probably more of the gist of your question.

Those SKUs are heavily skewed toward new flower rotations that are powered by our genetics breeding facility that I mentioned previously, as well as new concentrate and edible SKUs that have been driven by historical investments in new capabilities and competencies.

And we’re also introducing hash for the first time, which we’ve relaunched under the Whistler branding with new packaging and price points and are planning on releasing a whole new lineup of rotational genetics that come from our Coast facility.

that people forget that there’s a huge world out there with positive cannabis legislation and regulations evolving.

But each and every market has these core conditions, highly regulatory, be compliant, significant hurdles in everything from manufacturing to packaging, the sales and marketing.

But there are a couple of — several core markets that we’re really excited about, and I mentioned some of those on the call.

And in terms of European Medical, which is set to become about a $5 billion market by 2025, we’re really excited about our leadership in a couple of key areas.

1 supplier of flower in Germany is of September, almost a 35 share, growing share of the oils market, and we’ve doubled that share since September.

And as to what sets us apart from the competition, our consistent regulatory expertise, science, testing and compliance have been recognized all around the world as our ability and a real differentiator in our ability to succeed in those key markets.

I wanted — as important as the medical business is, and we’ve talked a lot about it on prior quarters, I actually wanted to focus on your consumer business in Canada because the mix shift is apparent and it’s certainly a positive evolution of your portfolio.

Which was the bigger driver, San Raf or Whistler? And then as a follow-up to that, how do you think about these third-party craft brands sitting in and driving not just top line growth, but also not being dilutive to your margins? Thank you.

Most of the market share gains from competitors are coming from the large pack size, which is really a value play.

So as an example, the discount 28 gram, which in some cases might even have a negative margin in certain provinces, people are chasing because of excess inventories and a bunch of other things.

If you want to have really large market shares, I just don’t think it’s a profitable strategy in the short term.

The other thing, as you talked about Hifyre data and clearly, syndicated data is evolving and is getting better, but it’s just not there yet in a way that maybe others would look to say in the U.S.

At the end of the day, there are places where you can make money in Canadian rec premium aspects, in some of those premium categories definitely are that, we’re focused on that.

And I think for those that are really of their hard set or looking at overall market share, I just don’t think there’s a direct correlation between overall market share.

And I do think if you look at Colorado and California, as an example, you do see premium categories start to evolve and really articulate.

But can you just discuss more the cost side of things? I mean, your — my understanding is you’re shipping in Europe from Denmark, right.

But just talk more about stickiness because the idea that compliance — being compliant with the regulatory framework in those countries is a key competitive advantage makes me wonder whether others could easily emulate that and just break in with lower cost and maybe more distribution than you have.

The reality is the standard in Germany is you have to have within a 10% deviation on the core components, particularly potency.

So it’s not only having CUMCS certification, which is a pretty unique certification beyond EU GMP, but also your ability to test, package, ship and have all of that has made a significant difference in Israel.

Medical patients and their clinicians and their physicians will find an item that they like.

And there’s a reason why the same companies are being successful in Germany, U.K., France, Netherlands, Israel and it’s about compliance, regulatory forward, all of that infrastructure that you need.

And so while we may be competing against some of the larger other LPs, we all agree that having a proper regulatory framework and adherence to compliance measures make sense.

It’s not insignificant, but it’s not a prohibitive cost because in many cases, you’re shipping bulk and getting into finished goods in market.

And just to understand some of the context and outlook and specifically, with San Raf and Whistler, in particular, having 29% sequential growth and all of medical, even with the international boost from Israel, being up, I think, 17% sequentially.

It was clearly a really strong performer in the quarter.

So margins in the mid-60s really sticky, meeting all the infrastructure, high hurdles to get in, all the compliance stuff I mentioned internationally, medical takes a unique skill set, and that’s one that we have.

The benefit of our system is we also can take those same products and put it into the medical business.

But I think if you’re laser-focused on profitability and sustainability, you’re going to focus on those areas that are more consistent, which are right now is medical.

Biosynthetics and other aspects of genetics, we think will be really important in a global environment as people are looking for that.

And for those that say that the rec business is broken, I would ask them to take a good look at Colorado and California, which appear to be about 18 months ahead of Canada, and you are seeing good success not only in margin-accretive categories, but in premium brands.

But could you kind of give us a sense of where that business should stabilize and you should see that start to grow from either market share or patient growth standpoint? Thanks.

I think it’s mostly in those that aren’t receiving reimbursement, most evidenced by the fact that we grew share, yet you saw a little bit of a decline.

So we do see an opportunity to not only see grow a little bit as things normalize, but also continue to grow share.

Quarter-over-quarter, the sales to the reimbursement groups, in veterans in particular, was absolutely consistent.

We’re also launching a number of products and innovations that we believe will appeal to our existing patient population, particularly the reimbursement ones.

So you might have seen something launched, I think, in the last couple of days as the PAC system, a nice bundle for veteran patients, and great pricing to continue to reward and engage those that are — really important patients for us.

I was hoping you could help us better understand how you expect the Netherlands market will play out.

The reality today is it’s a very sort of formal and legalized structure for the coffee shops, the over 600 retail outlets, but the production parts has been sort of a black hole.

Clearly, there are going to be advantages for those 10 at a time in which we expect this goes legal.

We’ve talked about it being when it all goes potentially even as big as Canada and there’s going to be a clear advantage for those that participate early.

And so this is an example, I think, of where we are bullish and the opportunity to have it, participate both in the medical and rec business.

It’s a big, big market and all the incentives from the government, the regulators, the retail owners all line up well here, and so we think we’re in a good spot.

There’s a number of cities that are required, all the coffee shops and most of these are required to participate in this trial.

So it’s a very compelling opportunity, and we’re excited to be — we think one of the leading companies involved there.

But can you help us understand, like is this growth from activating more store funds to carry our new cultivars? Or, I guess, some of this growth in new orders because these products are seeing good consumer traction.

So I would say that there’s — as with all things with the consumer product, there are probably four primary reasons why we’re seeing growth.

So if you look at the uniqueness of the attributes, if you look at the potency, if you look at the genetics and those new cultivars and what we’re seeing on San Raf across the board are better.

And every month, we’re able to touch about 90% of the volume, which allows these new brands to get in.

And I think, lastly, the overall sort of consistency and as we see new being the most important thing that people are buying, the steady sort of rollout of these and seeing that not only in flower, but other brands, has started to bring some of the shine back to San Raf, particularly with budtender and store owners.

You’re going to see everything from continued new cultivars and new genetics from San Raf and Whistler, but you’re also going to see a lot of seasonals and you’re going to see what we call collaborations.

And I think we’ve put a great foot forward with the recent product call and the innovation that Miguel was talking about, I think is the route forward there.

But the innovation that we’ve been putting forward and the success that we’ve seen with that innovation to date, I think, is positioning us well to get this back on track over the next little while.

So when we put — when we renew the brand with new cultivars and especially the type of cultivars we put in there, we see the pickup and we see the response, you see it in social media and things like that.

My question just has to do, you talked about the stickiness of the international medical business.

When you see other markets, say, like Poland as an example, this last quarter, we saw a bit of a regulatory hitch for a lot of companies, including us, and that caused a delay in timing.

Can you meet the standards? What’s happening with the overall product specs? What’s going on with the packaging? What’s happening with the testing? All of that is sort of consistent.

And while there are timing points or hiccups or whatever you want to describe it, we’ve done really well.

But I think if you’re bullish on the macro theory of global cannabis and you understand the high regulatory hurdles, and you understand that these regulators all talk to each other and there’s a lot of interaction.

You’re going to see the same companies win time after time after time.

Poland, for instance, where we sold almost nothing until last quarter, as we had to reregister our Danish production facility for shipments into Poland.

So for us, the diversified basket of international markets is important as they develop, to your point Doug, some will offset others as we grow.

When should we expect sales to start there? Just how long will it take for your partners there to start operating? And then in terms of margins there as well.

I think it’s really cool to see a well-established market like that that will actually have Aurora brands in the coffee shops when you go to Amsterdam or some of the cities that are participating there.

So it starts kind of beginning of calendar ’23, we expect to see sales just after that.

And we expect to get healthy — think about kind of medical like margins, which is why we’re keenly interested in it.

We look forward to sharing that success with you as we come in the upcoming quarters, and we appreciate everything that you do and covering Aurora.

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