Greetings and welcome to the Aurora Cannabis Incorporated First Quarter 2022 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, November 9, 2021.

I would now like to turn the conference over to your host, Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Please go ahead.

Ananth Krishnan - Vice President, Corporate Development & Investor Relations

Thank you, Betsy. And thank you all for joining us. With me today are Aurora's CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed today, Aurora issued a news release announcing our financial results for the first quarter of fiscal '22. The release, accompanying financial statements and MD&A are available on our IR website and via SEDAR and EDGAR. In addition, you can find a supplemental information deck on our IR website.

Listeners are also reminded that certain matters discussed in today's conference call could constitute forward-looking statements, which are subject to risks and uncertainties related to our future financial or business performance. 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.

These documents may be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session. For retail investors, we have compiled questions submitted to us prior to the call. For analysts, we will ask that you limit yourselves to one question and then get back in the queue.

With that, I would like to turn the call over to Miguel. Please go ahead.

Miguel Martin - Chief Executive Officer

Thank you, Ananth. 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 have gained momentum. Our transformation plan is on track and we continue to expect to achieve adjusted EBITDA profitability sometime in the first half of fiscal 2023. We focus on four areas to achieve this goal. First, we're the number one Canadian LP in global medical cannabis revenue with leading margins of over 60%. This is nearly double what the industry generates in adult rec.

It's our competitive advantage and it's why we're allocating further resources to the Canadian, European and Israeli medical markets. Long-term we see medical continuing to expand globally, and we strongly believe the leader in medical will be the key beneficiary of recreational cannabis when legalized. Second, is redesign the company to create a more efficient and effective enterprise. The big part of this is expense reduction. We've already achieved run rate savings of approximately CAD33 million from our announced plans of December, which puts us on target to achieve CAD60 million to CAD80 million in cost savings without impacting planned growth investments.

Third is our strong balance sheet and improved cash burn of only CAD16.6 million this quarter. This not only supports our organic growth but also provides us with the means to evaluate M&A opportunities. To be clear, if and when we make an acquisition, it will be accretive, bring managerial talent we don't currently possess and align with our premiumization strategy. Four, our science and innovation business unit; this business unit is focused on launching a strong pipeline of new releases globally to leverage our intellectual property in genetics and biosynthesis.

But first, let's briefly discuss medical cannabis and adult rec. In Canada, we represent about 23% of the medical market, almost twice that of our closest peer, but only 1% of the population are currently patients. 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. Our International Medical business continued to show exceptional growth growing by 146% over the prior year comparative period.

We shipped a total of CAD8 million during Q1 to our partner in Israel, Cantek, which we believe is the largest single shipment of cannabis that Israel has ever received. 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. Also contributing to International Medical during Q1 was our continued success in Germany where we have a leading position in dry flower and in growing share of its oil market.

We also saw over 50% sales growth in both the UK and Australian market this quarter, which we expect to become significant profit drivers for us in the future. In France, we delivered our first shipment in August for the pilot program under which we will supply the entire medical cannabis dried flower range. Our expertise in medical cannabis and ability to operate with 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.

Yesterday, we announced an agreement to invest in Netherlands-based Growery one of 10 license holders entitled to participate in the Controlled Cannabis Supply Chain Experiment, the CCSC. Although we are providing Growery with the secured loan to construct a facility and fund early operations, our cash investment upfront is minimal and the remainder of our investment is dependent on achieving certain milestones. During the CCSC, approximately 80 out of the nearly 600 coffee shops in the country, will only sell legally produced cannabis from the 10 approved federally licensed producers. Should the trial be expanded on nationally, we estimate a market size of about CAD2.8 billion annually, which is about the same size of the Canadian market.

On Canadian adult rec, we believe this segment is still in the process of bottoming. That's why our focus 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. In contrast, the overall segment was relatively steady in Q1. It's important to note that the discount segment of rec is largely a commodity, almost completely driven by price. This will certainly create issues for the foreseeable future which is why we're pleased to focus on premium rec, but more generally a strategy that centers on high margin, high growth medical that's a key differentiator.

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 category. Within this unit is our world-leading genetics and breeding program, which we expect to become a real differentiator for Aurora with the ability to bring new high cannabinoid cultivars to market that are more customer focused, sustainable and profitable. 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.

We are also expecting revenue growth through genetic licensing agreements for these novel cultivars. Four new proprietary cannabis cultivars with distinct terpene profiles and high THC potency have already been developed. These include our three San Raf cultivars launched in September and Farm Gas, which we launched, licensed to North 40, a Saskatchewan-based premium micro producer. 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.

Finally, we also believe that our intellectual property includes the most efficient pathway for cannabinoid biosynthetic production that puts us in a pivotal position with nearly all cannabinoid biosynthetic work being undertaken in the industry today. We are actively working to build, partner, enforce and protect this valuable intellectual property.

I would now like to turn the call over to Glen, so that we can provide his financial review.

Glen Ibbott - Chief Financial Officer

Thanks, Miguel and good afternoon everyone. I appreciate you all joining us today. 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. Let me point out a few of the highlights. We have one of the stronger balance sheets amongst Canadian LPs. This consists of approximately CAD424 million in cash, no term debt and access to $1 billion through a shelf prospectus, including a $300 million ATM. Our capacity to raise capital is available to us as financial firepower to be used for strategic and accretive M&A opportunities.

Our cash flow also continues to substantially improve year-over-year. In Q1, cash used was CAD16.6 million, down from CAD142.8 million in the comparable period a year ago. We have plenty of cash to fund our operations as we move towards profitability and positive free cash flow. Our core medical businesses continue to deliver overall growth in a normalized gross margin in the 60% range, with 64% in Q1 2022. 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.

Of course, our SG&A is also a fraction of what it used to be in prior years and upon continued execution of our business transformation plan will be coming down further. At a summary level, our Q1 results benefited from our broad diversification across International Medical, Domestic Medical and Adult Recreational segments. Overall, Q1 net cannabis revenue was CAD60.1 million, 10% higher than last quarter. Our Medical Cannabis segment continues to excel generating CAD41 million in sales and a gross margin of 64%. Medical represents about 68% of our Q1 revenue and about 81% of our gross profit. Our consumer cannabis business delivered CAD19.1 million and a gross margin of 32%.

Overall Q1's adjusted gross margin before fair value adjustments was 54%. This compares favorably to 48% a year ago and 53% last quarter. The increase in adjusted gross margin is due primarily to a shift in sales mix towards medical market, which delivers higher average net selling prices and margins. On a related note, our average net selling price per gram of dried cannabis rose 21% to CAD4.67 from CAD3.86 in Q1 of last year, reflecting the increasing prominence of our Medical Cannabis business. Now, a bit more detail on each of our business segments. Our Canadian Medical revenue was CAD25.1 million in Q1, reflected a consistent performance in the face of the continued consumer retail industry roll out.

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. Our success is really driven by our high-volume insured patient groups. These reimbursement make some consistent and reliable buyers, and this is why we've made patient groups with reimbursement coverage a high focus priority in our medical business. 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 International Medical revenue was CAD15.9 million and that reflected a 146% growth versus the prior year and 84% sequentially. Q1 revenue included CAD7.9 million of sales to Israel. As I said on our last conference call, BDS Analytics estimate the market size of about $3.2 billion by 2025 for just Germany, Poland, UK, France and Israel. Clearly, International Medical is worthy of our focus and investment and demonstrates why Aurora's leadership internationally is an important driver of long-term shareholder value. Our Q1 consumer revenue was CAD19.1 million, which was relatively consistent compared to the prior quarter.

Our premiumization strategy gained traction as evidenced by a 29% sequential revenue growth in our premium dry flower category, largely driven by the launch of three new cultivars. Consumer margins were healthy at 32%, up over last quarter as we saw the shift in our sales mix towards the premium margin side of our portfolio. Put it together and we see the directional change we would like to see with consumer gross profit up 5% from last quarter, benefiting from our purposeful mix shift towards premium. Now for SG&A, which includes R&D, it remains well controlled coming in at CAD44 million in Q1 excluding restructuring and prior period adjustments.

And while we've made a lot of progress in driving down SG&A, we are also implementing measures to take out further costs. These efforts should get us well below CAD40 million quarterly run rate by the time we exit this fiscal year. By pulling all of this together, we generated an adjusted EBITDA loss in Q1 2022 of CAD11.5 million excluding CAD600,000 of termination and restructuring charges. The CAD4 million decrease in EBITDA loss compared to last quarter was primarily driven by Q1's 10% increase in revenues while adjusted gross margins remained strong and steady. For clarity, in our adjusted EBITDA we do not include the benefit of CAD14.4 million of government wage subsidy grants that we reported in other income, as this program has now been phased out by Canadian Federal Government.

Now let me remind you of the timing along our path to EBITDA profitability, 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 would expect to see those savings in our P&L beginning late this fiscal year and into the next. The remaining 40% of cash savings will show up in SG&A as they are executed beginning with Q2 of this fiscal year. So to wrap up, two key takeaways from these financial results. We have a clear path forward to being adjusted EBITDA positive by some point in the first half of our next fiscal year through actions that we control and our balance sheet remains strong with a healthy cash balance and improved working capital and cash flow.

Now I'll turn the call back to Miguel.

Miguel Martin - Chief Executive Officer

Thanks, Glen. Before we go to Q&A, let me leave you with these final thoughts. We are very pleased that our transformation plan is on track and it's important to note that the foundation of that plan was medical cannabis. We expect continued revenue growth with very high margins. We will remain the number one 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 case in infrastructure with discrete barriers to entry and a sticky insured patient base.

We expect to be a market leader as jurisdictions around the world continue to open up. Our number one position in medical also paves the way for success in global adult recreational cannabis. As medical-only jurisdictions evolve, our most recent proof point is Netherlands, where others will surely follow. Our regulatory compliance, testing and commitment to science make Aurora the ideal partner in both medical and rec over the next decade. 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.

We also expect continued innovation in our product pipeline, supported by our science and innovation program. Most importantly, any softness related to the discount segment will impede our ability to reach profitability. To that point, we've already achieved CAD33 million run-rate cost savings with more on the way. This positions us to achieve EBITDA profitability in the first half of fiscal 2023 and our team is aligned and energized to get there. Thanks for your time today. We're excited about the secular opportunity that continues to be very significant. We look forward to updating you on our progress.

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. Ananth, please go ahead.

Question & Answers

Ananth Krishnan - Vice President, Corporate Development & Investor Relations

Thanks, Miguel. Let's begin their questions. The first one here is the following. When do you expect to enter the U.S. market?

Miguel Martin - Chief Executive Officer

So Ananth, it's a great question. First and foremost, know that we are spending a lot of time focused on the U.S. and paying attention to U.S. I personally have over 25 years working in the U.S. with the FDA, ATM, DEA and have a very keen sort of perspective on this topic. What I will say is that our strategy of being thoughtful and being patient has clearly paid off. If you look at assets in U.S., they have declined in overall value by 60% to 70% and so taking our time from a valuation standpoint clearly has been the right play. Secondly, the Biden administration has been consistent.

Medical first plus decriminalization and so with that, we expect that the number one Canadian medical company and one of the largest Canadian LPs medically globally will have something to say about that. So when you think about our overall goal of EBITDA profitability, we're not going to put that into risk by looking for a non-traditional 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 so as we go forward with that, we'll continue to keep an eye on it. We understand the news of this week in what's been put forth and obviously we'll pay attention. But I'll leave you with this. The work that we do in Germany, the Netherlands, the UK 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.

Ananth Krishnan - Vice President, Corporate Development & Investor Relations

Great, thanks, Miguel. Our next question is, can you tell us more about your upcoming product launches and new innovation initiatives?

Miguel Martin - Chief Executive Officer

Absolutely. 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 the gist of your question. If you look at our full year 2022 innovation calendar, it includes over 80 new SKUs. In Q4, full year '21, we delivered 25 compelling new products to the markets followed by another 22 SKUs in the Q1 of 2021 and this has clearly been our most significant and successful innovation push since legalization.

Those innovation SKUs are doing extremely well and right now, they're driving almost 40% of our wholesale revenue reflecting really strong customer and consumer interest. Those SKUs are heavily skewed towards new flower rotation 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.

Beyond that, we're also seeing great value in limited runs and seasonal offerings and this winter we'll be offering a Canna Cane Mints and Cranberry Vape for the holiday season under our Drift plan that we think will be received very well 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 planning on releasing a whole new lineup from rotational genetics that come from our Coast facility. So overall, there is a big focus on innovation. We get benefit out of it, both in our rec and medical businesses and we see it as a key component of our premiumization strategy.

Ananth Krishnan - Vice President, Corporate Development & Investor Relations

Perfect. And our third and final question from the retail shareholders is, which international markets do you view as the most important for the business and how are you planning on staying ahead of the competition in those markets?

Miguel Martin - Chief Executive Officer

Ananth, yeah, it's a great question. I think everybody has been so focused on the U.S. that people forget that there is a huge world out there with positive cannabis legislation and regulations evolving. We've talked about Germany, we've talked about UK. We've talked about key markets like Australia, but the reality is, these are really big markets with huge opportunities. But each and every market has these core conditions, highly regulatory, de-compliance, significant hurdles in everything from manufacturing to packaging, to sales and marketing.

So we see huge potential in our ability, and we've seen great success historically. But there are a couple of several core markets that we're really excited about and I mentioned some of those on the call. Israel was a large driver for us in Q1, and we continue - the bulk sales that we'll have with our partner Cantek to continue. Also, our partnership with one of the most forward regulatory agencies, the IMCA under the leadership of Yuval Landschaft has been really important, and we think the investments and work we've done with Yuval and his team definitely will play dividends globally.

We've also announced our entry in the Netherlands yesterday, which we expect to be a significant, about a CAD2.8 billion market in future and in terms of European medical, which is set to become about a CAD5 billion market by 2025, we're really excited about our leadership in a couple of key areas. The number one supplier of flower in Germany as of September, almost a 35 share - growing share of the oils market and we doubled that share since September. We also believe we're the number one in the UK dry flower business where we had an exceptional quarter.

And as we've mentioned, we're the exclusive flower supplier, three of the nine tenders in the French medical cannabis pilot program. And so what sets us apart from the competition - our consistent regulatory expertise in science, testing and compliance have been recognized all around the world as our ability and real differentiator in our ability to succeed in those key markets. We're not going to rest on our laurels and we're aiming to maintain and grow our market share as these markets develop and we know that the expertise and experiences that we have there will play well all around the world and including the U.S.

Ananth Krishnan - Vice President, Corporate Development & Investor Relations

That's great. Thanks, Miguel. So that's the end of the retail shareholder questions. Operator, I'll turn it over to you for questions from the analysts.

Operator

Thank you.

AI Assistant

AURORA CANNABIS INC

Q1 2022

Earnings Transcript

Find Answers

Ask about any part of the document to get insights, explanations, or key details.