Q1 2020 Earnings Call
Good afternoon, everyone welcome to the or cannabis first quarter fiscal 2020 conference call.
Three months ending September Thirtyth 2019.
During today's call for rural we'll be referring to in earnings presentation, which listeners are encouraged to download from the financial report section of the company's Investor website, Investor Dot Aurora M. Jay Dotcom.
Listeners are reminded that certain matters discussed in todays conference call or answers that maybe given two questions asked could constitute forward looking statements that are subject to the risks and uncertainties relating to eras future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements.
The risk factors that may affect results are detailed in a <unk> annual information form and other periodic filings and registration statement.
Documents may be accessed via SEDAR and Edgar databases.
I'd like to remind everyone that this call is being recorded today Thursday November 14th 2019 I.
I would now like to introduce Mr. Cam badly chief corporate officer for Aurora Cannabis. Please go ahead mr. badly.
Thank you very much good evening, everyone and thank you for joining todays call with me today are our executive Chairman Michael singer Jerry Booth, Our Chief Executive Officer, and Glenn exhibit our Chief Financial Officer, as we're doing today's call a little later than usual for today's agenda I'll do a quick review of the quarter, including our operational.
Hi, lights and discuss our upcoming next generation products and then Glenn will discuss our financial results. We will then take your questions.
I would like to point out what the operator referred to and that is our presentation. That's available in a financial report section of our website investor Dot Aurora Dot Com in particular, if you go to that site you will see an innovation that we began using a couple of quarters ago and that is our dashboard with keeper.
Warm and indicators for the quarter.
This quarter all the bad news is in the top left hand corner.
And that is that our Canadian consumer cannabis revenues are down 33%, obviously not the number we were hoping for however, if you take a look at the other eight key performance indicators that we've been tracking now for three quarters, they're all green Arrow positive our Canadian medical revenue is up are you.
International revenue is up our cash cost to produce is actually down 25%. We've moved under a dollar and we came in at 85 cents per Gram a the cash cost to produce our average net selling price per gram is up 7%, our gross margin our industry leading gross.
The margin remained stable at 58%, which is head and shoulders above our peers are kilograms produced were up through a 43% and even our SGN eight a which we promised that we would control as part of our path to profitability.
He is actually down 3%, including the impact of a onetime out of period adjustment and then finally, our a number of active registered patient is up 8% to a record of 91000.
Now I'd like to briefly address the current state of the market. The past few months had been challenging for the broader cannabis industry between issues of governance evolving consumer demand and provincial retail bottlenecks, there's been no shortage of negative news.
That said I want to reiterate that our view of the opportunity in the Canadian and global cannabis industry is still extremely robust it's important to remind ourselves that the Canadian consumer market is just over a year old.
These issues will take a little time to result, but in the end will be a stronger business because of it.
At Aurora, our objective is to continue to define the future of cannabis worldwide and positively and significantly impact the lives of millions of people buy cementing our leadership position in the medical consumer and hemp derive cannabinoid markets.
As we indicated on our Q4 call we expected to see growth plateau in the market in Q1 2020 and in fact, as we reported today, our consumer market revenues declined as a result of changes in customer preferences, and particularly challenges in retail and potential distributors I want to emphasize that we view these.
Short term headwinds and despite them a war has continued to maintain our position as the leading producer and supplier of high quality medical and consumer cannabis products.
Our non wholesale cannabis net revenue declined 19% this quarter totaling in at 60, and a half million at the end of Q1.
To that we added a further 10.3 million for wholesale transactions.
We believe that the wholesale market continues to represent an opportunity for Aurora and we will be opportunistic we are in a unique position to capture a greater share of that market in the coming quarters with potential white labeling strategies and other bulk sale opportunities.
Our strong cultivation capability highlighted by our record 41436 kilograms of production in fiscal Q1 is part of what gives us the confidence in our ability to capitalize on this market.
Our industry, leading Q1 2020 gross margins remained stable at 58%, providing 53.7 million in gross profit to fund our operations.
I'm also proud to report that are high tech cultivation facilities delivered on our promise to provide industry, leading indoor cash cost to produce below a dollar Graham and effect. This quarter. We came in well ahead of our expectations at 85 cents a gram.
While we continue to leverage our coast to coast supply agreements to offer a broad range of premium consumer products across Canada or also remains focused on supplying medical patients with consistent premium product in Q1 2020. The total number of active registered patients increased by 8%.
Constraining the value of a roars product and patient loyalty to the Aurora family of brands.
Turning to the consumer side, the Ontario, Canada store Ontarios online retailer recently announced their top selling dried flower products. After the first year of consumer legalization I'm very proud to report that our products performed exceptionally well with San Rehfeld 71 paint cushe in the number one selling spot followed.
By a rural Blue Dream, and second place and Sandra fell 71, Tangerine Dream, taking third position.
This is excellent confirmation that our premium cannabis products continue to resonate extremely well with Canadian consumers because were adaptable to their demand for high quality consistent product.
We continue to be successful because Aurora has built a product development strategy that focuses on strengthening our competitive advantage with innovative product forms enhancing the experience of existing customer customers and capitalizing on opportunities to attract new consumers and new patients.
Great. Examples of this or one Great example of this is how we continued to address the demand from medical patients for alternative delivery formats and dosing options.
A couple of the unique products that we brought to market include the recent launch of Aurora oral dissolve strips, a sublingual strip, which were created together with CTG pharmaceuticals.
Does all strips are a discrete easy way to use the product that is ingested sub lingually to provide more rapid bioavailability of the cannabinoids to the body.
We're also excited to have recently reintroduced Aurora cloud for our medical patients. It's the first and only legal concentrated CBD veight product in the Canadian market today.
In addition, with the second wave of legalization coming into effect shortly Aurora insights and product innovation teams have done tremendous work to formulate new products in the right format that we think will exceed customer expectations and drive category growth.
Aurora cannabis 2.0 strategy focuses on four key pillars.
Using quality extract leveraging proprietary extraction technologies to produce high potency concentrates providing a range of superior products to suit different consumer preferences, and using our expertise to produce consistent and reliable products at scale.
The initial suite of new products that we will launch include Veight concentrates gummies chocolates mince and cookies Weve selectively partnered with a variety of organizations prioritized our resources and built the inventory to help ensure consumers across Canada will have access to our high quality.
Derivative products.
We are ready to ship product as soon as the regulations allow and are excited for consumers and patients to finally have access to a greater selection of product forms.
As well in advance of our new product forms being available to the market. We've launched ready for edible. It's a campaign dedicated to educating new and experienced cannabis consumers on responsible consumption and save storage of edibles products before they become available for sale in December .
We want to ensure the Canadians have the information that they need to understand these new products, how to consume them responsibly and most importantly, they should be kept away from children and pets.
Educational content will also focus on identifying signs of overconsumption understanding the differences in onset times and effects.
Cautions around mixing with alcohol and driving while intoxicated.
This we believe is the behavior of the industry leader.
So as you can see we're looking ahead, continuing our focus on strategy and execution, serving our medical patients and consumers with premium safe affordable products, and gaining consumers' confidence and brand awareness.
I'd now like to turn the call over to Glenn Who'll discuss the financial highlights of the first quarter and then we'll open up blended questions.
Thanks, Tim and good evening everyone.
Figures I'll be going over today can be found in our financial statements and in our M&A and all are in Canadian dollars unless I note otherwise.
Our first quarter fiscal 2020 for the period to Lifers to September Thirtyth, we reported revenue of just over $75 million.
Our total cannabis net revenue, including wholesale came in at 71 million for the quarter.
Non.
So cannabis net revenue was down 19% of 61 million.
Yes attributed primarily to decline in consumer cannabis revenues.
Of note demonstrating our continued commitment to the medical market our medical cannabis revenues grew 3% given in the faces challenges from the consumer system cannibalization. Finally, we did out of for the 10 million in wholesale revenue at a very attractive 68% gross margin.
I'll now go into a bit further detail on each of these revenue streams.
Okay.
During Q1 2020, our medical cannabis net revenue increased 3% quarter over quarter over 30 million driven by our continued success in growing our patient base. We currently stands at just over 91000 clients.
Our revenue was affected by a slight decrease in the average net selling price of medical plan that most of 6%, but more than offset by patient growth.
Climbing selling price was the result of completely printing incentives designed to support the move of valuable long term medical patients, who Aurora and away from LTV or not servicing them well.
As usual, our medical kind of a sales and gross margins were impacted by our decision to absorb the cost of excise taxes, we continue to lobby to government tree taxes from medical products.
Our international Medical Canada sales during Q on increased 11% to 5 million comprising 7% over total consolidated number.
We expect a higher rate of growth in our international markets and over the last quarter, but being adjusting strains under cultivation at our new GMP facilities to better meet the needs of the European markets. We have also been growing or Salesforce in Germany and believe we continued to have the leading market share of natural medical cannabis.
Consumer revenue.
Was $30 million, a decrease of $15 million or 33% from the prior quarter.
This decline.
Well no was driven by constraints distribution networks that have caused a temporary decline in ordering at the potential distributors they allow inventory levels to normalize.
With adequate consumer choice now available. We're also seeing consumers exercise of choice to select those products that they prefer.
We monitor the sell through rates from the provinces to the retailers very carefully.
We believe that to be a strong indicator that our products are meeting the needs of consumers for both quality and pricing.
We're pleased that the Royal family of brands continues to show strength across the major provinces for sell through.
We expect headwinds to persist through the next quarter before Canadian consumer infrastructure develops and matures throughout the back half of our fiscal 2020, but the licensing of new retail stores across Canada, and the introduction of the new products farmers.
I do want to emphasize that our average net selling price of $5.68 per Gram was a sequential improvement of 7% further highlighting that demand for high quality recreational cannabis is strong and premium product to capture better pricing.
During Q1 of our generated $10 million at wholesale revenues compared to 20 million prior quarter.
Although the selling price the ground declines from the previous quarter.
We consider that selling excess.
Extraction, great product at a 58% margin was a very prudent decision as we noted on our last conference call. We expect our wholesale revenues to continue to be uneven, but with our reliable production of quality cannabis or very low cost or is uniquely positioned to capitalize on this wholesale revenue opportunity we.
Do have line of sight to further wholesale revenues in Q2 2020 and are actively pursuing the development of the white label business as well.
Aurora produced over 41000 kilograms of cannabis in Q1 as compared to 29000 kilograms per quarter.
The increase in output was primarily due to our production levels, achieving a steady cadence as targeted capacities and our continued operational optimization that our site hemorrhage facilities.
In Q2, we expect production to respond closer to our targeted annual capacity.
50000 kilograms, as we undertake certain R&D initiatives designed to enhance the cultivation process and as we introduce into our cultivation certain higher potency, but lower yielding screens during high demand as consumer preferences evolve and become evident.
Our cash costs to produce for ground the dry cannabis decreased 85 cents per gram down 25% from the previous quarter.
Sam mentioned, we delivered on a very important milestone.
We've been talking to you about for several quarters sub one dollar cost to produce.
In an industry, where reliable and quality supply is critical to adults in the revenues and brands that will drive the company forward. We have a suite of production assets have delivered very high quality cannabis on a consistent basis and with the lowest production cost among those of our peers that are operating at scale.
It is hard to overstate, how important unisys for our success over the next several years.
The set out an example.
$100 of revenue at the ROE will deliver almost $60 to fund growth of the business without having to access external financing sources.
It also allows us to move quickly profitability as revenues recover.
Let's consider to comparable companies each were $80 million quarterly EPS Jenny.
Ferrara would need to generate about $130 million.
To flip profitability.
A comparable company I'd say, a 30% gross margin lead almost $270 million and revenue breakeven.
Our fundamental business leverage with these gross margins is incredibly important to building a long term healthy business. It should be evident that are our can compete strongly in any market situation and would still deliver healthy returns a pricing.
You sustainable for others.
Now I'd like to discuss our SGN a levels, so I need to provide some context.
You will recall that we booked just over $10 million in audit adjustments in our last quarter.
As we noted then our true ups, Jamie was about $83 million.
For Q1, 20 point estimate actually decreased by 3% $81 million.
This decline was primarily driven by reduced fulfillment and shipping costs related to revenue levels and a decrease in sales and marketing expense as a result of smaller scale a targeted marketing campaigns during Q1.
Cost reductions were partially offset by controlled increase and corporate salaries.
Annual salary increases and the addition of professional talent, both new hires outsourced consulting.
Support strategic growth initiatives.
As our company matures, we have made a number of changes to internal policies and oversight in order to closely manage the expansion of SGN gains in our drive to profitability and prudent capital management.
As at September Thirtyth, 2019, we had $153 million in cash and cash equivalents in August we announced the upsizing of our secured term credit facility of $360 million with an accordion feature for an additional $40 million of capacity and in early September only disposed of.
Our our remaining equity investment Green, our global Dutchman generating approximately $86 million from gross proceeds.
Our adjusted EBITDA loss for Q1 was 39.7 million compared to 26.6 million dollar loss in the prior quarter again, when you take into account the impact of our year end adjustments in Q4.
The change in on adjusted EBITDA losses, primarily due to the quarter over quarter decreasing.
Developing a profitable and robust global cannabis company is extremely important or.
We believe our industry, leading gross margins in high quality compensation philosophy will allow us to control continued to thrive underpinning all market conditions, we expect adjusted EBITDA to improve in the future.
Market constraints or relieved as we increase revenues through the sale of higher margin derivative products and as we manage corporate development and asked unit growth prudently.
As you may have seen in our press release is today, we have announced a decisive plant we strengthened our balance sheet.
This plan includes several steps that are designed to streamline our operations provide financial flexibility and reduce financial leverage in response to a changing markets congratulatory set of conditions, all with a view towards long term growth and sustainability.
First we continue to monitor forecast and supply and demand on the Canadian and international kind of as markets in order to time, our scale up of further our production capacity as needed.
As a result, we've recently adjusted the construction timeline for both your were assigned and are more nordics two facilities.
Closely aligned with our current expectations for the timing of increasing demand.
Adjustments will result in a significant decrease in our ongoing quarterly level of capital investments and are expected to conserve approximately $190 million of cash over the next few quarters as compared to our previous buildup plan.
With the work completed to date, the company will be well position to advance these capital projects as global demand or as the roars market share growth.
As we noted in our release, we still expect of products complete approximately 238000 square feet at over our signed in calendar 2020, representing six grow rooms and another room.
As I mentioned last quarter Q4, 2019 was peak for our Capex spend with over 20 capital projects on the Bill.
Many of these projects continued through Q1 camp and substantial was delivered in October November .
Our expectation for fiscal 2020 quarterly Capex is that Q2 will be similar to the 108 million. We reported this quarter Q3 will be in the $70 million range in Q4 opium the 50 million dollar range.
Next we announced that we have entered into converged to support agreements with investors, representing approximately 155 million or 67% of the principal value of the March 2020 convertible debentures that are currently outstanding.
Under this contemplated transaction all holders of the March convertible debentures will be granted the special conversion option for short periods of time.
Hi, There March Cds at a price to be determined.
By a five day formula.
Any holders not exercising their conversion option.
We remain holders of their original debentures.
That will mature on March nine 2020.
Finally, we have been active under our US 400 million dollar aftermarket financing program.
It represents a strategically valuable source of equity capital.
To be clear cash raised under this program is transacted at the market price with no discounts warrants or other sweeteners offered we can we consider the availability of the ATM for Aurora, given our normal trading volumes to be a very important tool, especially given the current market conditions.
Fiscal year to date. The company has raised gross proceeds of 124 million, you us or approximately $165 million Canadian through the issuance of just over 29 million common shares.
We believe that these measures to strengthen our balance sheet and financial position. In addition, solid operating performance weakness, we've discussed earlier strongly position or to outperform the Canadian an interim national markets again.
Spend the size of the addressable market.
Ill now turn the call back count.
Thanks Glenn.
In conclusion, we continue to focus on what we can control and an evolving market consistent execution operational excellence and our focus on operating a sustainable long term business and in addition to being agile and intelligent in responding to changing market and regulatory conditions as our key performance indicators.
Show Aurora delivered solid operating results. This quarter. This is exemplified by our industry, leading indoor cash costs to produce which declined 25% and our continued strong and industry, leading gross margins and market share.
Our announcement of a formal plan to settle the March convertible debentures, a reduction in our capital investments over the next several quarters.
And raising over US 124 million in gross equity proceeds since the start of fiscal 2020 through our ATM are designed to put Aurora on a solid path to being a long term winner in the global cannabis business I'd now like to ask the operator to open the call for questions.
Certainly to ask a question you will need to press star one on your telephone to withdraw your question press the founder hash key.
Analysts are allowed to ask one question and one follow up if required.
Please standby, while we compile the Q and a roster.
Your first question comes from the line, if even with Cowen and company. Please go ahead, Sir your line is open.
Hi, Jane Thank you for the question.
Hi.
Yes.
Your revenue priority. Please I appreciate your commentary around the margin benefits around white label product. That's certainly in your near 60% gross margin, which is CPG like and very impressive broadly in staples and in particular in Canadian kit.
But at the same time MPB has been you need to delivering higher quality candidates impressively low cost. So after this week, where we've seen so many of your peers report earnings.
We know this is an increasingly challenging for your peers to achieve.
Sure.
Number one.
You get comfort on demand planning around wholesale.
And number two will do you think that you're like high quality production is replicable scalable.
Thank you.
Glenn if you would if you take the financial side of that and then I can speak to that production.
Yes, Hi, Vivian.
You are asking how we get a view on wholesale has a long term business. What we are seeing is that the the extractors and as you know theres a number that have scaled up over the last year and playing an important role in the industry right now.
Actually being selective about the quality the inputs that they're getting.
So we in this quarter of the 10 million, there's at least three it's kind of spread evenly amongst three extraction companies than a small between LP.
And we do continue to get.
You know sort of the.
Interest as long as we can supply that the quality of cannabis that they're looking for for continued buying what we're just trying to be cautious as last quarter last quarter, because we still think it'll be a little bit lumpy in there would be sort of can offer opportunistic element to this.
But we do have a view for continued.
Revenues I'm not going to go as far as saying as much as this quarter, but certainly.
Enough to pay attention to the white labeling piece of this I think is really interesting to us. We are seeing a number of LP is that are either late to the game in a more interested in building a brand or simply just are starting to realize that maybe tom to exit to exit the cultivation side in the manufacturing scale up is on the.
Hello.
And we have the capacity across the chain from from PC to sale.
Built within our business now to be able to execute a white label business. So we do have the team working actively on that I think that's a.
Real interest in terms of.
The additional capacity that we can produce is to go that route because I believe long term that'll be where the where the better margins are I believe on the wholesale bulk opportunities to extraction companies will see pricing pressure there develop over time, we haven't seen you've got but we will see yes. So much more interested in white labeling sites Kim.
Yes, so on bidding to get the the other part you asked whether we think that our high quality candidates production is ratable replicable and scalable and answer is yes, that's exactly how we design our production technologies and innovations from the very beginning including our large sky class facility.
And we keep getting better and better at that so we already had the highest production efficiency per square foot in the world and and we think that we can continue to enhance that so yes, our production with that high quality at low cost is designed specifically to be with replicable and scalable.
I just had to that can follow liabilities here I'm, sorry, Vivian how are you doing here.
Yes, good okay.
As you Cams and Glenns comments with respect to these these wholesale deals that were doing they're mainly consist of trim and shake.
It's the lower quality product comes off of our product that we would normally extraction ourselves and in fact some of the supply agreements in that bulk sale includes extracting for other LP. So it's not a line of business. It's a profitable one with product that we would not only.
Consider high importance to us.
That's super helpful. Thank you very quick follow on I'd be mindful and thank you.
Thank you.
Framework can we just signed what quality me because I was chastised several times over the last two nappies at our conference in Boston around pegging the.
The Q quality is that could very well I don't know that the Canadian market places, so sophisticated and I don't know that your buyers are sensitive skin either.
You guys are clearly delivering a better product that has wholesale than me.
There seems like what do you think the demand drivers ads.
Our for that wholesale business at Kerry.
Please and thank you.
Can you speak to that Jeff Yes. Please please go ahead.
Sure so quality quality of cannabis, it's something that has to be growing in a pristine environment.
Has to be growing in a our monthly controlled environment with your proper them on Seo to.
Micro moles of temperature and humidity and at the end today, we know we can grow great plot.
And Thats.
Hi, guys station to the awards that we receive.
From the consumers are largely.
Consumers that are very educated with respect to catalyst and it's really the profile of the cannabis, including the cheeks sea levels CB levels interpret profiles.
Dripping profiled very important those three come together in a pleasing effect, if you will and and that is what chalks upgrade plus like our Japanese reactors that Raphael and their blue Dream. It is what the educated and longtime users products.
Look for.
Nuggets bottom of plant feed and guys. They can't grow order gels equates grow quite white and if you have raunchy bearings your throat and those things aren't doing very well our today.
And that is because they are growing in that environment conducive. They are not conducive to growing great smooth.
I see.
Actually the fact cannabis.
If the profile.
That's a good summary, Terry yes.
Okay.
Your next question comes from the line of Tami with BMO capital markets. Please go ahead. Your line is open.
Tim.
Hi. Thanks first question is could you clarify what you mean by on the longest support and the the press release on the debentures. So.
Our committed $155 million shareholders are they are subject to a share lock up and if so for how long.
Yes can I ask Glenn and Michael to weigh in on that.
Sure, it's Mike gravel for pipe there you go much.
Yeah. So so we indicated that we have secured a commitment to up to 155 million. So a big a majority of that is irrevocably commitments and they will be free trading stock at the time at which we grant that was to be holders. So we're very confident that obviously that represent.
It can portion of that convertible debenture and we feel good that we're making a huge step forward and strengthening our balance sheet by virtue of this decision.
Okay. So they will be free trading at moment of graph there is no longer period.
There was no lockup period correct okay.
My follow up question is.
Just trying to reconcile between your commentary about.
A number of your strange our products I should say our top rated in a number the provinces versus the sell in that we've seen this quarter recognize that there is the limited distribution and number of stores, but we're seeing some of your peers.
Thanks increase their share of sell in sequentially. So could you help me reconcile between these two assets. Thank you.
Yeah. This is Ken.
What we're tracking is that our brands remain.
Either number one or number two in all the major markets across.
The the country.
What we're seeing is that we obviously moved an awful lot of product in the previous quarter and and so it takes time for them to work through the inventory that's essentially what we anticipate that we're getting nothing but good feedback on our brands and we believe that we continue to lead to have a leading brands in that in the marketplace.
If not number one the number two.
I'd like to high to add to that.
If the well what happened with the provinces last October was there was an undersupply and the license producers took sheet.
Provinces took sheet.
We allocated the best we could I don't take many of our contracts were under supplied and then we all started growing channels. So some started growing gentlemen, and a little bit later and not being able to provide I'm stuff to the shelves a tall.
During the summer.
Provinces feasted.
On.
The supply that was available and stock their shelves to the to the limits.
That was.
Maybe a good idea in their minds, because they're not.
I'm going to have supply issues from the retailers anymore.
But it also affected the next quarter, which they didnt buy as much. The other thing is as Kurt is into some help is.
Putting ourselves we put some product decide for 2.0.
And getting ready for this derivative market. If you will this higher value market. So.
Some of our higher cost range Werent as available.
To these problems is because we were we were saving it and we were extracting and we're creating pens and yummies and cookies and things like that they're going to be available to for health. So I think that if any LP has increased its sale just because the change in the party later or are they finally had the ability to provide the.
Contractual mounted they were committed to.
Your next question comes from the line of Chris with Bank of America. Please go ahead, Sir your line is open.
Hi, Chris.
Hi, good evening.
Okay. So so maybe I just wanted to ask you know.
Higher level.
You know kind of philosophical question and the second time today to use that word.
Uh huh.
And so you know I guess, maybe just trying to understand your decision process right and maybe.
How that's evolved and what you've learned over the past six month rate because I guess, we've known for a little bit now that maybe things were slowing and.
And you know that Capex has stayed high obviously, it's coming down going forward, which which is good to see.
You have to use this ATM in thing kind of dilute your shareholders more just to kind of buffer your balance sheet and I get that sort of what's required right now.
But.
So I don't think anyone's, arguing with.
The company's ability to execute on.
Cultivation and get good gross margins in supply the channel and certainly you know I think the Canadian government and.
The retail channels, it's not helping you out right, but there's another aspect of it that.
Discretionary spending has been pretty high.
And and here, we kind of our at you know really having a buffer the balance sheet with things that aren't aren't show ideal and so maybe just kind of.
How your decision, making process has evolved right overtime and yes, how we should kind of thinking about things over the next 612 months.
You know you that's what we've learned the answer is a hell of a light.
And and you noticed that we started to change our behavior, including our spending habits.
At the beginning of 2019.
And that's when we started to get very serious about the path to profitability. So since then we've been putting an awful lot of effort and controlling it in cost management right and you see that our ESG today is clearly that's being well managed.
And until this quarter, it's been growing less fat than our revenues.
So we we have learned a lot I think you should also take a really close look at at the margins our commitment to high margins.
And higher margins than our peers.
And continually bringing those costs down while increasing scale.
If that's something that speaks to a sustainable business now you say that there had been indications that the retail infrastructure would not be there well, yes, but that's true and we'll take our lumps on that as long as everybody else does too and I don't just mean other producers analysts and observers across the board I think anticipated that there would.
Be more retail infrastructure available by now than there is.
Now if the question then becomes what do you do about it and we think that we are doing the intelligent rational things, we're scaling our production to make sure that its dare to meet the demand we're going to it trying to enhance that demand and stimulate that demand certainly, but we're also we're making very careful stay.
Apps to ensure that we maintain that that high margin and keep delivering those high margins over time to us that speaks to the company is that will come out the other side. After a winnowing because we all know that not all existing cannabis companies, including publicly listed ones are going to make it.
To us that business strategy speaks to a company that's going to come up the other side and be a long term later.
Okay. Thanks, Kim and then just as the follow up.
And glad I suppose assay something similar to last quarter and the the pieces have just changed a little bit here, but.
If you kind of.
The the what's remaining on the on the credit facility and you know the fact that you don't probably have to pay as much on.
On the on the convert obligation.
In in your calendar Q1.
But but even if you kind of assume cash burn at the improved capex and maybe even operating cash flow better.
Is it is the kind of your base case now that you need to exercise all the ATM.
To kind of get you to your fiscal 21.
Cash flow.
When maybe you get cash flow positive or.
Or maybe said another way if that's not the right way to think about it because thats kind of maybe how my math is working out you know.
What's the appropriate way to think about.
Just just cash burn relative to the funding needs and how you're going to get there. Thanks. So much.
Yes, so Chris and yes, it's consistent an excellent and an obvious discussion we've had it.
Before and we all want to do the mouse the.
I'm wondering I think about this is theres a lot of things yet to come and I know in them up our peers have still for instance, with strong revenue guidance and stuff because we need to see how a few things play out.
You know is an excellent feedback.
From your numbers versus on our initial product offerings with 2.0 products.
You know the provinces won't issue purchase orders until December when they're legally allowed to purchase but we're starting to get a view that.
We've got the rate lineup of products quality products, so and that's the right pricing. So we think will be offered that start their big part of this as we all with the 1.0 launch was.
You know showing up so the showing up with a good product portfolios piece of it.
It will also depend on how our pure show up as well so.
As we talked about earlier by example, about leveraging that the margin.
The profitability or EBITDA line has been be highly dependent on how the consumer market with the new products and with the retail.
But print if we take Ontario at their work and speed things up.
That's going to impact our revenues a lot and mental impact how much.
Cash and when we get to profitability, but how much cash will need that we're also trying to balance.
Or need or desire to continue to develop the global business. So part of this I think will inflect as we look at certain strategic and the transactions were looking at would certainly be accretive but.
We will I guess see how it plays out right now my anticipation is isn't that we would need to use.
ATM through the to the extent, we currently have approved.
But I'm going to have to wait to see on how a 2.0 and retail rollout.
And certain strategic transactions play out over the next several quarters before it.
Before we can lend definitively on that.
Certainly happy to continue to talk to you know.
Monthly fee for both us because I think we are learning every step of the way as to how things are going to look at the next couple of quarters.
Hi, Chris.
Barry here just to add to Glens commentary, there with respect to Canada 2.0.
There's a few things here with 2.0 I also include the interior retail.
Government process is being fixed.
Alberta, Matt.
Ontario sales.
Yet were one third of the population.
Ontario, So that tells me is a significant amount of.
Cannabis users because we have the same cannabis users per capita and the province, as Ontario, Alberta. So there's a massive amount of people who have not been brought into the web if you will have.
Of legalize canvas because it hasn't been as available.
And if you think about it all that we repaid Sally these for retailers.
Joint capsules.
Picture and Budd.
And how we're going to be adding a numerous different product lines.
Truly meet the mandate the turn of government and the you and convention when you legalize adult cannabis you have to show that you're going to be competing with and reducing the gray market.
This 2.0 is going to do that and it's going to allow the retailers too.
Do better off it's going to increase the sales on high value.
Products and it's going to bring in more users that are already in the system, but still.
Choosing to go to the great margin I'm excited as Hell about.
2.0.
I'm supposed to be told me conserving period, but I really am pumped about how a lower has done is job and getting ready for 2.0 and all indicators.
From our retailers from our provinces from Health, Canada, all the little handset you hear that.
Or is it the top that pack as well so we're pretty pumped.
Your next question comes from the line of Doug with RBC Capital markets. Please go ahead, Sir your line is open.
Hey, Doug Thank you.
Hey, how you doing.
Couple of questions that maybe been obvious but I'm just curious about how things are going with the.
USS CBD deal in terms of timing if were storm time, there or if there's anything new on that too.
Discussion.
Yeah, I'm going to end of two to Michael.
And maybe come back at the end because we've learned a great deal.
Yes, the U.S. market because remember it's not just the Canadian cannabis sector. That's been struggling it's the U.S. sector as well so there's been a lot to learn about that Michael do you want to seek to this.
Sure. So so no surprise, we remain very active in looking at opportunities in the U.S. and they have to fit a number of certain criteria and I think what we're looking to do is to try to sort of piece together a number of different sort of strategic initiatives that off that I'll lay out. So obviously, we're gonna have to operate under the.
Current regulatory framework, that's a key criteria for us so we see the U.S. market as a platform for us to be able to capitalize on not just the U.S. market, but use that as a springboard if you want for international CPG expansion.
So that links very nicely to our relationship with Nelson and the Congress and the connections at Nelson has provided us in terms of some of these strategic partnering discussions where we're actively involved in a in negotiating a long term relationship with many of these CPG companies with Nelson's help in terms of how we're going to.
Structure. This so that we could linked together like I said not just the U.S. strategy. The one that integrates a number of different are these strategic partners in different industry verticals that we start to think about owning a lot of these different industry verticals that that we see as a huge global opportunity. So we're we're not at a point of which.
We can announced that today of course, but we continue to make tremendous progress and we're excited about the development of those discussions are the continued dialogue that we have numerous parties that I think when we eventually do announce a U.S. entry into strategy, it's going to be very clear as to how this ties together and it's not just those strategic.
Eric Partners, we've announced other strategic partners like the U.S.C. So all of this is going to be all encompassing.
And the very clear path forward in terms of how we feel we're going to operate any different.
Developing industry opportunities.
Okay very good I.
I could add Michael on the.
Oh, Gee pretty slow it down.
But it's important that we know what the regulatory framework will look like and the U.S. da just recently like two weeks ago, maybe less finally put out there.
Requirements around the production of hemp testing of him and CBD continent piece, you ABS when they get passed it and that drives a lot of our decisions on which partners we choose to.
Enter into the United States with so we're happy about slightly out and that battle.
Got to come but expedite decision on the entry point.
Okay Perfect. My follow up question, just us to do with them.
Incremental opportunity, we have seen good product velocity with your various products, but.
Maybe what you could do is just compare and what you're producing in style versus med relief slashed Whistler and then maybe dovetail that into we've seen a lot issues and maybe this was touched on a little earlier around product returns and no shortage of things and do you believe that there's any evidence that you could face a cuts.
Interim from pricing decreases or or project returns in the future and with that I'll leave it there thanks very much.
Yes, it is candlestick the first cracker that.
We have not to date, we have not seen significant issues with product returns and I know, you're asking because that's really kind of like some of our peers. We're not having the same issues I want to touch wood, because you never know what will happen in the future, but we do not anticipate that we will have a those issues either too.
The remind me what is the first part of your question was Doug if the microphone still open.
Hi, Doug is no longer connected.
Okay.
I'm, sorry, Doug will have to do that in a follow up call.
It's been a London I haven't had quite division coffee [laughter].
Your next question comes from the line of John with T. Ibcs. Please go ahead. Your line is open.
Hi, Jon Good afternoon, all right.
Can you referenced changes in the or end customer preferences impacting revenue in the quarter I'm just hoping you can elaborate on what that is and just to clarify.
Commentary from earlier do you expect to grow revenues in Q2.
We're not projecting that we're not giving guidance on that as Glen indicated earlier, well have better visibility once we see exactly what the rollout of new retail infrastructure is going to look like and and also when we see what happens with the uptake on that cannabis 2.0 products.
And in the impact during the quarter like the changing customer preferences.
Yeah look that we were constantly evolving our product mix one of the things. If you were on an earlier call today is.
One of the other companies.
Perhaps had difficulties with the volume of certain derivative products that they were trying to move into consumer market.
On the in terms of flower too, we're always adjusting based on which sells well. So we have we've already started to change the mix of cultivars that we're growing.
And and we will continue to do so so I think actually were very very agile, we've got very good markets surveillance and I would suspect.
For the most of our peers and that's essentially what we're talking about there.
Okay. Thanks, then my follow ups on profitability I'm, So sorry standard various puts and takes in the market and and we all know there's not enough stores you'd previously expected profitability couple of quarters ago. So I'm trying to get a sense of when do you expect it now and what ability do you have to flex SNA down a in case, the retail rollout delay content.
Yes.
Thanks can you speak that.
Sure.
Listen I think it is important.
We do have a long term view.
On this industry Camote line, a little bit earlier, very excited I haven't seen anybody pulled back on kind of the accessible market projections.
In Canada in the U.S. and globally. So we're balancing you're asking specifically about flexing s. DNA. We think we have it at a pretty good state right now.
You know the folks and the spending of course were containing and control and really watching it closely but im also recognizing we're trying to build a global leader here and sometimes are going to be careful not to sort of pulled out too far short term.
Cost of the long term value creation, so I guess, what I'm trying to get out here is we think SG means that a good level, we'll manage it prudently.
In terms of profitability and.
As Ken mentioned earlier, I don't think Theres any of US on this call that we're expecting Ontario year after legalization.
Q4 stores. So they made the right noises lately on certainly are little more optimistic that there.
I'm going to get out of the way.
Start licensing.
Problems properly and it's.
And Ontario simply because there is the biggest province in there so far behind the leaders like.
Alberta, which has almost 300 stores compared Ontario's 24 so.
When we were looking at EBITDA positive we will expect.
We typically carry place we've seen a retail store going.
Thank you very encouraging.
At those stores, so we expect that to be a big driver.
We're just being very cautious right now we're controlling controlling effectively all believers that will take profitability and certainly amongst our large scale peers. We think we'll get there much earlier than others, but we've drawn on it but the margins. We think that's incredibly important you know again using my example, the difference in revenues you need to Joe.
Generate property, 60% margins of 30% margins to get to profitability or astounding.
And we control yesterday, we deliver the product mix, but the market. Once we got all those pieces in place, we just need the retail infrastructure the potential distribution in the new products and then we'll see how this plays out so we're staying away from projecting when that will happen, but we know what we're monitoring to see.
With that what that ramp looks like.
Your next question comes from them Fine of Michael with Piper Jaffray. Please go ahead. Your line is open.
And Michael Thank you good evening.
I'm kind of strategic question and a quick follow up after but.
Strategically I guess, if you look at your.
Business, you've got the highest growth gross margins in the industry event, the lowest cost at least.
Our almost anybody.
Yeah, you're in the EBITDA margin is negative it got worse, it's obviously behind the targets for profitability you'd had for fourq to and from hearing you're right, there's not really necessarily in light of given the terminal.
As you look at your wholesale sales and you talked about the attractive margins there even slightly better than total company gross margins and also the outlook you gave with.
Very positive remarks around the outlook for for White label sales.
I guess I just want to understand how you think about where you're right to win is and.
Where are your best position that would you ever rethink how you approach to your position in the market and maybe pivot a little bit more to take advantage of where you've got these advantages and rethink little bit who want to be when drilling.
So let me let me just clarify are you talking about 'em do we want to move more toward wholesale in the short term or the medium term rather than.
Then something else is that what you're saying.
Well, a little bit yeah, I mean, I guess, here's something how I'm thinking about you've also obviously you mentioned the attractiveness of the wave 2.0 products and that's clear.
Clearly, everyone, saying that and there's no brands established yet if even for the instructors quality products to put into those quality flower to go into the attraction for those products you seem to be saying over and over again that your cultivation has really your strength.
Does it make sense is it right to be investing as a brand owner and on the downstream side is really where you can win is on your low cost advantages.
So okay, there's lots of unpack that and let's start with wholesale let's remember that virtually all the wholesale product that we're selling is trim and shake and maybe some some popcorn, but the smaller less attractive flowers. So theres a limited amount of that.
We also have Aurora arguably has the most attractive medical brand certainly in the world and we've got the most attractive consumer brands in Canada, I would not say that our chief strength is just cultivation. It is cultivation and thats, great and we've emphasized now for what three quarters.
That we see.
The critical success factor in the short term here in this industry being able to produce consistently without crop loss high quality low cost cannabis and then to move it through multiple distribution channels.
But that's not the only thing we're going to our technology is amazing and so one of the reasons. We are so confident about cannabis 2.0 is because our product development team led by Dr., Shane Morris, who is it's just amazing we have a tremendous product development team and we're very excited about our products, we think that.
In general cannabis 2.0.
Advantages will tend to benefit the larger companies more than the smaller companies and we think that we have particular advantages. There. So we're not prepared to concede any aspect of this business right now.
Okay. That's really helpful color and just a follow up I'd love a quick sense. If you look at it this way or have some way to quantify it when you look at your portfolio and your with your yield your crop.
Clearly we've seen the stronger demand on the higher potency side I don't know of 20% the magic cut off I'm I'm not sure. How you may classify it but when you look at your portfolio and what you sell do you have a sense of how it breaks down by potency.
Hi, Gary do you want to program.
Sure sure were your bank on potency is the driver at this point of.
The popularity of.
Canada Sunflower.
If you think about it.
Potency and the next 2.0 as whatever we want to be right. We can take right up to the Max work is going to be derivative products like.
Shatter and has she shouldn't that oils.
In the future and near term future that we'll have extreme potency and we'll be able to shake out exactly where that demand is that people really want to take it to a you know a 95% well, we'll see I think that the Kim the culture community people that.
Our chronic users of this excellent product well be looking towards that but what is the percentage of those we don't have all the stats you know the west coast of USAID provide some insight into that.
The higher value products go and you're right the demand for the high potency there and that's why we pivoted over the last month to start.
Focusing on the higher potency me myself, you don't think that what I would.
Use but because it does take into a different Lala land and I think that people are still looking for it though the millennials are looking what they think they're getting more product when they get more T. C. I until they get fully educated with respect to.
The different combinations of.
And Terpening said, CBD and THC and the other 114 Klabin I may have.
No no find their way and they'll find there Brian we're still in year, one here right [laughter] any ending to perhaps in Canadian dealt usage and Lora has now that we all if you remember these other companies other thinks about six quarters or headstart on Aurora.
I hate to belabor that point, but we've caught him in past them. We've done a two quarters in a row, what we're doing and a great way you're wrong story is a great one because we went with.
A method of grow that would not.
Risk.
Risky we de risk the method to grow by hobby.
The purpose built facilities purpose built okay and I can't say then how proud we are of the teams of several of these will become the employer of choice would becoming a partner of choice globally.
These health.
Hartman, it's across the world calling out first.
The team that works outside of Canada, our nailing it across the board I have the Val.
Yeah, we had a drop in.
In Canada sales, but it was anticipated and we like to get out Hey, the provinces were oversupplied.
Some of US producers that are reading oversupply, the problem and hence the return issue. We had our allocation plan. We didn't take debate, we maintain our allocation amount as per our contract and that's why we have very few returns if any.
Let me note.
We got the odds broken box.
This is a significant difference between pops in Iraq.
The spec quality and to suggest that we're just great producers. That's crazy we are great at every vertical that we factored that we'll continue to execute every vertical that yeah, Gary by hiring great people want to come come over work right.
Your final question comes from the line of math with Canaccord Genuity. Please go ahead, Sir your line is open.
Matt Hey, how are you guys you and thanks for taking my question I know, it's getting laid I'll just keep it to one it relates to.
You know you mentioned the importance of your Ah you know your gross margin as the key metric.
And it's something that as you sort of look at all the different capacity expansion plan throughout the industry that are.
Starting to reach inflection points here, you've noted a couple of of facilities, we are going to be taking the put off the accelerator.
As a means of reallocating capital, but what's your view on the risk of facilities are actually currently already up and running where that money is already in capitals already been invested.
Becoming underutilized as more and more capacity comes online and how that might impact your gross margins in the near term given that I think it's generally understood that there is a a huge over Saturn of overall capacity, let alone the inventory that's sitting at the retailers right now leave it there. Thanks again.
Okay, I'm going to take the first crack at this and then hand, it to Glenn and if he wants that Terry.
Overcapacity is really an interesting question because there is no release that there really is no such thing and economics over the long term right, it's going to find its appropriate level and we always felt from the very beginning that we had to be able to produce a very large amount of cannabis, but particularly economically something that a number of our peers have not demonstrated the ability to.
Do now.
You're right a lot of capacity has come into the system I don't know how much of its going to state and and there are producers out there who are not economic right now and they'll never be economic because they simply don't have the capability to produce cannabis.
At low cost.
I would say that from your perspective on the contrary werent quite prepared to generate very very healthy margins. Even if there was price compression over time that stands us in very good stead.
As as Glenn has emphasized to be able to continue to succeed under any market conditions. Glenn did you want to add to that and take us home.
Yeah, I think it's important to make the point that when we hear about oversupply as we've seen there is over supply of some poor quality product, resulting in a not moving through as I mentioned in my prepared comments. So we monitor sell through from the provinces to the retailers closely I think.
That's a good indicator that the viability of the health of the business or you're producing products of consumer wants. So when we're you know one number one number two in the major provinces and sell through rates, it's important to us because it says that we're actually yeah, we're producing so as everybody else well producing products that people want and so.
But when we talk a little under supply you need to Peel with apart a little bit I think and just say oversupply of what and if its oversupply of poor quarter cannabis and we're seeing a few you folks in the industry launching what they've said our value brands, but that was.
In some cases, its dumping inventory brands.
Yes, they're going to have to get rid of that inventory.
Production that whatever pricing there with the public is willing to pay for it.
That's a little different follow ups and producing quality product, even if we want to compete in the value category.
A quality product.
Healthy margins that consumers want so I think as Tom said, there will be some capacity I think that exit the market. If you could see price compression on the poor quality cannabis and you can't produce for you know sub one dollar, but even if you can produce for.
And $3. Then then you're going to have a real problem, we mean viable in the cultivation side. So well see is very interesting time next year number corridors are going to play the game out here and we'll see whose whose left that.
It can compete.
Got you healthier.
Yes.
Glenn if I can add to this quality question you know when we negotiated with these problems as a year ago.
They didn't want to differentiate between quality candidates because they didn't know in fact, we knew we knew that we've got better Canada mode.
We were trying a very bad but they granted that's hard to.
They now you guys Shelby prices hold bucket until we see where the demand.
The demand is up Douglas, who do you know the baby docs and them away.
Champagne are starting to see that.
People want a workout of this on shelf, there's some things that we cannot.
Growing up up and were on that good.
Such as we can have the brands are high demand and that's just catching up now so I didnt.
Good to know like a year to sort of figure that out a now let me go back to provinces, they lock or the criteria isn't about as much retailers are ordering this is what the selling what the consumers what we're able to put that price up even more.
Think about it we have the bumper price because of high quality candidates that were the lowest cost producer. That's a recipe for success. That's what makes me.
I did have big way and I. Thank.
We're all going to be happy Camper European best in Aurora.
Come close to quite know, Mike really look what to point out was that that might not be.
Last calendar quarter, it might be the first calendar quarter, that's a better be.
If we're driving a bus right but.
It's a rosy picture for Aurora I wouldn't want to be in some other shoes out there in this industry. We know that we accessed the capital is difficult.
That's why we set up right instrument, you know at market not discounted not warrant.
No no vs.
We have found plan.
We're making sound decisions and reducing capex based on.
Global do that we're able to occur not back on R&D.
And we do feel I feel that would really that.
It was in a short timeframe, but let's see Hello.
A word once again, taking another step to lead this world as the biggest tennis company in the world and we're very proud of that.
This concludes the question and answer session I will now turn the call back over to Mr. badly.
Yeah, and I'll just wrap it up I want to thank everybody for your question. Thank you very much and we'll look forward to speaking to you next quarter have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.