Aurora Cannabis Inc. (NASDAQ:ACB) Q2 2023 Earnings Call Transcript

Aurora Cannabis Inc. (NASDAQ:ACB) Q2 2023 Earnings Call Transcript February 9, 2023

Operator: Greetings and welcome to the Aurora Cannabis Inc. Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Thank you, Ananth. You may begin.

Ananth Krishnan: Thank you, John, and good afternoon, everyone. We appreciate you joining us today. With me are, CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 second quarter financial results. This news release, accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you will find a supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today’s conference call could constitute forward-looking statements that 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.

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 similarly be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our analysts. We ask you to limit yourselves to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Miguel, please go ahead.

Miguel Martin: Thank you, Ananth. First and foremost, we are very proud to have achieved what we set out to do several quarters ago, namely, reaching our objective a positive adjusted EBITDA by the end of the 2022 calendar year. We are confident that we can deliver positive adjusted EBITDA on annualized basis going forward. Although there may be some quarter-to-quarter variability due to the dynamic nature of the cannabis industry, and the seasonality we previously talked about at our Bevo business. Importantly, as part of our business transformation, we also completed the structural changes we had intended to make us part of our cost rationalization. These will certainly yield benefits for Aurora in both the near and long-term.

Annualized savings now total approximately $340 million since February 2020, and included substantial progress in cutting quarterly SG&A to well below $30 million. Our next financial milestone will be achieving positive operating cash flow as part of our plan to build long-term shareholder value. We expect this to be a multi quarter initiative, and we will update the market on our progress to this new milestone. Looking forward our enthusiasm for the future is anchored by our number one position in global medical cannabis among Canadian LPs and the growth we’ve been able to sustain despite some quarter-to-quarter variability. With loyal patients and existing markets and more developing countries poised to open, we think the top line growth trend should continue.

As a reminder, medical cannabis is a business we want to invest behind not only because of its growth characteristics, but because of its defensive nature in volatile times. It also enjoys enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis. Aurora is also ideally positioned because of our robust balance sheet and net cash position, which puts us in select company among our industry peers. This has allowed us to repurchase approximately $302 million in convertible debt in the last 12 months, resulting in about $17 million in cash interest savings on an annual basis. Finally, our investments in science, breeding and genetics have resulted in proprietary cultivars and driven meaningful improvements to yields and potency that have benefited all of our product lines.

We also remain committed to furthering medical cannabis clinical research in Canada, which should position us for innovation, which will be a key factor to success going forward. So those key strengths as a backdrop, let’s take a deeper dive into our global medical cannabis business. As we had expected, international medical revenue grow sequentially compared to Q1, which can be attributed to our strength in the Australian market as well as continued success in Europe. Our European business continues to demonstrate stability and growth on a year-over-year basis, anchored by the German medical market will remain number two in flower. Based on recent comments from the Health Minister, we expect further clarity around recreational legalization in Germany sometime this spring, with a potential start to the market there as early as 2025.

We continue to believe Aurora’s position as one of only three companies with a medical domestic production license will give us a significant advantage as the regulatory framework is developed. We are also bullish on the opportunities that lie ahead in our other key European markets, which include Poland, U.K, Czech Republic and France. While markets such as Australia and Israel continue to develop, our presence across nearly a dozen countries outside of Canada affords us relative insulation to individual economic and regulatory climates. Turning to the high margin Canadian medical market, most of the sequential growth in revenue was driven by a one-time benefit from Q1. However, even after normalizing for this adjustment, we still experience a 2% growth in revenues.

We are extremely happy with this when coupled with recent cost reductions which drove meaningful improvements and profitability. Over the past several months, Aurora patients have been given access to the largest ever selection of products and formats on Aurora medical with over 75 SKUs launched in the medical channel between Q1 and Q2. These include products from our full portfolio of adult-use cannabis brands, such as Being Quickstrips, Greybeard premium flower, and new pre-rolls concentrates and minor cannabinoid oils. Notably, our Canadian medical business benefits from strong patient retention, with insured patients comprising about 80% of all medical sales as part of a concentrated market with significant barriers to entry. Our industry leading market share also remains at about 25%, roughly double that of our closest competitor.

To sum up, we remain very optimistic for this segment as we are not only increasing the number of patients in the insured category, but I’ve also experienced year-over-year increases in basket size and participation rates. Note that only about 1% of the Canadian adult population is involved with medical cannabis. So any sort of movement makes a massive difference, but the benefits outsize to a very small subset of companies like Aurora and participate in the segment. Switching to Canadian adult rec, our Q2 revenue show sequential growth of 7%. This increase was achieved despite some temporary industry disruption and a reduced number of shipping days over the holidays. The key driver for us here was strong sales execution, coupled with a strong pipeline of innovative new product offerings.

As you may recall, one of the key reasons for our acquisition of Thrive last year was their ability to manage our Canadian rec business, and we are thrilled to see our M&A strategy paying off. Finally, we plan to drive significant shareholder value over the long run. We are controlling interest in Bevo, which is one of the largest suppliers of propagated vegetables and ornamental plants in North America. We are currently repurposing the Aurora Sky facility for orchid and vegetable propagation with minimal capital investment. This will not only increase Bevo’s production capability and extended shipping range in Canada and U.S., but also enable us to generate predictable, incremental revenue and adjusted EBITDA. And with that, now I would like to turn the call over to Glen for our financial review.

Photo by Andrés Gómez on Unsplash

Glen Ibbott: Thank you, Miguel, and good afternoon, everyone. Before reviewing our Q2 financial performance, let me take a couple of minutes to discuss our balance sheet and cash flow. I’d like to reinforce what I said a number of times before and that is we take great pride in having one of the strongest balance sheets among Canadian LPs and are one of a very few net cash position. Of course, we’re always on the lookout for further opportunities to improve through smart and defensive capital allocation decisions. As of yesterday, February 8, we have approximately $310 million of cash including $65 million of restricted cash. And we believe this is sufficient to fund operations into our cash flow positive. We have only $149 million Canadian of principal remaining on our convertible loans due in 2024.

During Q2, we repurchased $135 million in principal on our convertible notes at a total cost of $128.7 million cash, including accrued interest. The debt we repurchased during calendar 2022 has resulted in cash interest saving, but now total approximately $17 million annually. We also continue to have access to significant capacity under our base shelf prospectus, including approximately $180 million remaining under our ATM program. During Q2, we issued 39.5 million shares for net proceeds of $68.8 million. The current shelf will expire in April and we do expect to refile a new shelf and ATM program at that time. And we reiterate that the proceeds from share issuance are expected to be used only for strategic purposes. Our operating cash flow in Q2 consisted of a net use of $60.6 million.

But that included $15.5 million for a number of one-time payments related to our business transformation. $12.4 million for once a year payments such as insurance and Health Canada fees, and approximately a $12 million investment in working capital. So we are pleased with the positive impact our business transformation is having for our future cash flows. With the restructuring of our business now largely executed, we do not expect one-time payments to recur at these levels. And we do expect that the combination of reduced costs and increased revenue from the same footprint will be significant levers for the company to reach positive operating cash flow. At the same time, it is worth noting that there may be some quarter-to-quarter variability in operating cash flow.

As we saw in Q2, when the company achieved significant increases to sales, the long cash conversion cycle of this industry means that investment in working capital may be required, which may negatively impact operating cash flow for that period. Quarterly capital expenditures were approximately $3.5 million, down 36% from the $5.5 million last quarter, and more than offset by $14.7 million of cash from the sale of our Polaris facility. Looking now to Q2 business performance. Q2 total net revenue grew 25% to $61.7 million, compared to $49.3 million last quarter. We saw strength across all business segments, while also benefiting from a full quarter contribution from Bevo. We achieved our goal of positive adjusted EBITDA generated $1.4 million.

This was primarily due to growing revenue in our industry leading Canadian and international medical cannabis operations and from reductions in costs across our business, primarily in SG&A. We’ve now stabilized the company at a much leaner operating structure and see a real opportunity to drive more revenue from these assets in the future. Let me now address each of our businesses in a bit more detail. Canadian medical revenue was $25.8 million in Q2, up 10% from Q1. Much of the sequential growth in revenue was driven by a one-time revenue recognition benefit as more shipments than usual are in transit at the end of Q1. However, normalizing for this adjustment, Canadian medical still delivered a 2% increase. Performance that was important given that most of our final cost reductions were in the segment during Q2 2023.

So looking forward to fiscal Q3, we expect the Canadian medical business to perform similarly to Q2 excluding that one-time revenue benefit of $800,000. International Medical revenue was $13.8 million and reflected a 69% increase versus Q1. The segment rebounded from Q1, as expected, through shipments to export markets such as Australia, Poland, U.K and Cayman Islands, and return to levels more consistent with Q4 of 2022. We expect our international business to deliver revenues in fiscal Q3 that are consistent with that of Q2. Taken together, our medical businesses in Canada and internationally generated $39.5 million of revenue, up 25% from Tier 1. Medical cannabis represented about 64% of our Q2 revenue, may be 7% of gross profit. Adjusted gross margin was 61%, down from 67% in the prior quarter.

The decrease was primarily driven by higher sales into a certain international export market, which yield a slightly lower adjusted gross margin, but still contribute strong positive gross profit. Consumer cannabis net revenue was $14.6 million, a 7% increase compared to last quarter. The Q2 increase was driven by growth in both Aurora’s premium San Rafael brand and by our value brand, Daily Special, which offers consumers a strong potency quality and price proposition. Looking forward into fiscal Q3, we expect the Canadian consumer market to continue to be fluid with Aurora’s top line revenue being flat sequentially. Adjusted gross margin before fair value adjustments on consumer cannabis net revenue is 20% in Q2 compared to 25% in the prior quarter.

The decrease was primarily driven by the incremental sales of value branded products we just mentioned. Going forward, we of course remain committed to maximizing profitability through low cost production and margin accretive categories and all supported by our science leadership. Our controlling stake in Bevo enabled us to recognize $6.6 million net revenue during Q2, up from $3.3 million in Q1. This increase is a result of a full quarter of contributions compared to only a partial quarter in Q1. Bevo is categorized as plant propagation in our financial disclosures. As a reminder, Bevo has a seasonal cadence with two-thirds of Bevo’s annual revenue and EBITDA being realized during the period from January to June. On an annualized basis, Bevo’s business is steady, predictable and supports our ability to generate positive adjusted EBITDA.

Bevo’s adjusted gross margin before fair value adjustment was 15% in Q2 compared to 16% in Q1. The adjustment primary primarily related to one-time impact on fuel costs, which management expects to be very transitory in nature. Due to seasonality, we would expect improved margins in the key spring and summer sales windows. Overall, Aurora has adjusted gross margin before fair value adjustments was 45% in Q2 versus 50% in Q1, still amongst the industry’s best. Excluding restructuring and nonrecurring costs of $14 million in Q2, SG&A and R&D were well controlled, down 17% sequentially to $26.6 million. Notably, we have made good on our commitment to reducing SG&A to below $30 million as part of our business transformation plan, a rate that we can sustain going forward.

So pulling all of this together, we generated positive adjusted EBITDA of $1.4 million compared to a loss of $7.4 million in the previous quarter. And finally, just a reminder that our fiscal year 2023 has only three quarters as we have changed our fiscal year-end to March 31. And that’s in order to achieve certain internal costs and staffing efficiencies. So thanks for your interest. I’ll now turn the call back to Miguel.

Miguel Martin: Thanks, Glen. At Aurora, our purpose is opening the world to cannabis. As a global leader in this very exciting industry. And in that spirit, let me share some final thoughts. First, we’re very pleased to have completed our transformation plan, delivering on approximately $340 million in annualized savings since February of 2020. Our entire team’s hard work resulted in positive adjusted EBITDA, while maintaining a strong balance sheet that will allow us to compete at a very high-level and take advantage of future global opportunities. Second, we’ve done this without sacrificing growth opportunities and our high margin domestic and international medical cannabis businesses, which remain one of the best places in the industry to invest.

Third, we completed our plan during a period of volatility and uncertainty around the Canadian rec market. The good news is it continues to rationalize, which will give us added opportunity for market share improvement. Finally, our future success will be enabled by science through continued plant genetics, improving yields and better crop quality. We believe this will drive high margin, new cultivar licensing opportunities in the future and place Aurora at the center of industry wide innovation. Looking forward, we continue to focus on profitable growth opportunities across all segments, ongoing discipline in capital deployment and improving operating cash flow. Taken together, our ability to make progress in these areas will position our shareholders for significant value creation, especially from these levels.

Thank you for your time and interest in Aurora. Operator, please open the line for questions.

See also 25 Biggest Georgia Companies and 15 Small Innovative Companies.

Q&A Session

Operator: Our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Vivien Azer: Hi, thank you. Good evening.

Miguel Martin: Good evening, Vivien.

Vivien Azer: So I wanted to dig in on medical cannabis gross margins please, down a little bit year-over-year and sequentially clearly was not an impediment to you guys hitting your target for positive adjusted EBITDA, which is really, really nice to see and congratulations on that. But given the call out that the margin dilution was coming from frontier market, do you think that kind of current gross margin levels for that business are an appropriate run rate? It seems like you’ve got a lot of opportunity ahead of you and your mix to frontier markets might kind of stay at these levels and reclaim a little bit until there’s a real catalyst in Germany? Thank you.

Miguel Martin: Yes, I mean — so, as it pertains to medical cannabis, I think structurally we don’t see the margin compression that maybe you would see in the rec market. We’re up to about 25% of the Canadian business. And the reimburse market, which represents about 80% of our revenues in Canada is at a healthy number that is part of the overall system. Some of that was mix, as you sort of mentioned in Canada, but structurally, we don’t see anything there. When you look internationally, you also don’t sort of see those impediments. And yes, there will be places, maybe where lower cost items gain a little bit of traction, but because the model is structured in a manner that most of the supply chain takes their margin off of percentage of the wholesale list and because you see reimbursement in those markets, there’s not a structural reason to see margin compression.

Secondarily, in the rec business in Canada, you’re competing against hundreds of manufacturers, and in some cases, some that need to sell their product at a lower number. In most of the international markets, you really are competing against three or four other manufacturers because of the significant barriers to entry. So you don’t see that competitive aspect where you play on price. And lastly, you really are seeing value from clinicians and physicians and patients, as they are interested in quality, which comes at a cost. So overall, we see this as a steady business from a margin standpoint. And we see consistency in market to market, and while there was a little bit of mix change that affect the overall margins, there’s nothing there structurally that gives us pause.

Operator: And the next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery: Thank you. Good afternoon.

Miguel Martin: Good afternoon, Michael.

Michael Lavery: Just wanted to come back to the ATM, you mentioned you’ve got the remaining amount to go there. And if I caught it right, I think you also said you would anticipate renewing that. Can you just give us a sense, given where your balance sheet is already? What the thinking is? And I guess it’s some amount of how much is enough? Is there a point at which you would feel like you’ve exhausted what you need on the ATM or something that you feel like it got a longer runway? How are you thinking about that?