Q4 2020 Aurora Cannabis Inc Earnings Call
My skill set in a regulated CPG product development here at Aurora I'm fortunate to step into a company built with the dedication to science and the compliance first approach with strong execution I expect to build a profitable business in Canada that we believe can be portable to other larger global cannabinoid markets.
Having spent four months now at Aurora I've seen the talent and industry knowledge that makes this company innovative and agile rohr will be a global leader in cannabinoids, when the largest markets open up and my job is to make sure that Aurora executes on that plan with that.
With that I'd like to turn the call over to Glenn of it our Chief Financial Officer to walk you through the financial results for Q4, 2020, and then I'll be back to discuss some of our business plans going forward Glenn.
Yes, Thanks, Miguel now my pleasure to take our first earnings call together very excited about the vision you have for Aurora and the opportunity for a runner to realize its full potential as we remain focused on becoming a profitable growth oriented leader in global cannabinoid market.
So good afternoon, everyone and thank you for joining us on todays call as you.
And as you know on September eight we provided a business update including certain unaudited preliminary fourth quarter 2020 results before I can be a bit briefer. My review of our financial results for the quarter. The figures I'll be going over today can be found in the press release, we issued after market closed today and our all in Canadian dollars.
For our fourth quarter fiscal 2020, the period from April one to June Thirtyth 2020, our net revenue came in at $72.1 million, while our total cannabis net revenue came in at $67.6 million.
Our sales mix remains evenly split with the consumer Canada segment, delivering $35.3 million in net revenue and our medical cannabis segment delivery $32.2 million in that revenue.
Total kilograms of drive consumer can whistle increased by 36% as compared to the prior quarter, but this was offset by an approximate 30% decrease in the average selling price per gram of dry canvas flower.
The daily special our value brand accounted for 62% of total net consumer revenue from flower in the quarter as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried kennametal flower.
Consumer candidates extract net revenue decreased by $1.5 million as compared to the prior quarter, driven primarily by a decrease in sales or herve products.
During the fourth quarter.
The increase in our medical candidates net revenue was comprised of an increase in Canadian medical sales, though point $7 million and an increasing our international medical cannabis business by 14% or point $6 million pricing in both markets stayed strong and steady.
We produced over 44000 kilograms of 10 of us in Q4 as compared to approximately 36000 kilograms in the prior quarter.
However, as we continue this aspect of our business reset which consists of rationalizing our production footprint and closing a number of our smaller facilities. We expect our total production going forward to average about 35000 kilograms per quarter. None of this production, 65% or more is expected to meet our top quality flower standard.
We expect our facility rationalization to be accretive to our gross margins over time, while we continue to work on maximizing yields potency and other quality characteristics of our cultivation.
Our forecast for inventory drawdown suggest that our flower production versus sales will reach a steady cadence over the next several quarters well trim will also reach a steady state drawdown, given our renewed focus on base and other growth categories.
Our cash cost to produce program of drug candidates. So.
Sold improved to 89 cents down 27% from the previous quarter. This is a slightly modified method from previous quarters that reflects changes to our inventory costing methodology, which places the heavier weighting on our top quality flower and less on by products.
Our low cost of per unit production is another lever that allows us to build brand across multiple pricing tiers, while maintaining strong healthy sustainable margins.
Our adjusted gross margin before fair value adjustments on cannabis net revenue was 50% in Q4 versus 43% from the prior quarter.
As you are well aware, we have been focused on prudently managing ftn any costs down to our targeted run rate of $40 million to $45 million per quarter.
Most of the second half of fiscal 2020 the ARPU.
We are pleased to successfully reduced estimate costs, which includes R&D spending from over $100 million in Q2, 2020 down to $64.6 million in Q4.
Excluding approximately $3 million of nonrecurring costs related to the business reason thanks.
Thanks further encouraged to tell you that we are now operating at our targeted quarterly SDMA run rate in the low $40 million range as of Q1.
Fairly reducing the run rate to below $40 million range is very important as we strive to deliver positive EBITDA. We also believe this level of FTD.
And is quite sustainable and very capable of supporting a much higher revenue line.
Our progress in continuing to reduce both overall and per unit production costs as well as the significant decrease in SG nine demonstrates our commitment to manage the ROI positive EBITDA for Q2 2021. These efforts will certainly necessary have clearly been disruptive to the organization. So while there is still more work to do and are now in a position.
And where most of the year our team can focus their attention on delevering the gals plan for growth.
So pulling all this together adjusted EBITDA in Q4, 2020, with a loss of $34.6 million.
$30.7 million, if we exclude severance in nonrecurring costs related to our business transformation. This is obviously a substantial improvement over the prior quarter adjusted EBITDA loss of $15.4 million in it.
And it is the second consecutive quarter of improvement in our adjusted EBITDA. We expect this trend to continue through our first half of fiscal 2021 and two.
As we remain dedicated to achieving positive EBITDA in Q2.
Turning to our balance sheet as of June 32020, our consolidated cash position was $162 million compared to $230 million as of March 30, Onest 2020.
Cash used in Q4 was similar to that in Q3, however, the mix within cash use shows our significant positive progress we used $53.3 million in cash to reduce our term debt and lease obligations and weve made additional debt payments and subsequent to quarter end as of two.
Today, our outstanding term debt balance stands at about $110 million.
In the quarter, we use cash to pay capital expenditure invoices of $32.8 million, which includes of course work done in previous quarters.
This is a $51.3 million reduction in capex quarter over quarter cash spend.
Finally cash used in operations for Q4 was $63.9 million.
In the fourth quarter, we raised approximately $48 million under our aftermarket financing program and also financed the new prospectus supplement to enable us to raise an additional 250 million us dollars under the ATM program.
So as that the June quarter end, we had approximately 220 million us available under our current ATM program and this provides us with additional balance sheet support if required as we drive towards achieving adjusted EBITDA profitability in the near term.
So in this environment, we believe that access to capital is of Paramount importance. However, we are focused on getting to cash flow positive as quickly as possible to alleviate the need for additional equity capital as much as possible we.
We have multiple levers to pull to achieve this milestone, including cost and efficiency opportunities and production SGT that we've identified that should continue to drive costs lower overtime and of course, the successful execution of our tactical plans to improve market share in the Canadian consumer market.
As we have demonstrated with our progress on the operational reset we will continue to prudently manage our liquidity as we strive for positive EBITDA in the second quarter fiscal 2021.
The material run rate reduction in our Capex and SGN eight costs should provide comfort to our investors as the health of our income statement and balance sheet is a primary importance to us we expect that our current cash position should be sufficient to fund operations to the point, where positive EBITDA and free cash flow are achieved.
And sustainable the remaining capital available under our shelf prospectus protects the company and our shareholders as the backstop in an uncertain environment.
Use of judiciously for opportunities that deliver near term payback and have in fact to use that subsequent to our June quarter end to fund the announced termination payment to view ABSSSI.
Since we are closing in on the end of Q1 2021, we thought it would be helpful to provide some forward looking commentary on how the quarter shaping up.
Following the divestiture of noncore subsidiaries during fiscal 2020, our net revenue in Q1 2021 should be comprised exclusively of cannabis net revenue.
Which is expected to be between 60 million and $64 million compared to the $67.5 million of Q4.
We expect adjusted gross margin before fair value adjustments on cannabis net revenue to be within a range of 46% to 50%.
So while growth in the consumer Canadas revenue was not expected in Q1 2021, our medical business is expected to remain steady.
And we expect traction from our execution of consumer market share tactical plan as Miguel will outline for you shortly.
Our results beginning in Q2.
However in terms of progress filed with an EBITDA.
The Q1 consumer revenue level is more than offset by adjusted gross margin continued to stay strong due to a favorable sales mix.
And a significant reduction in S genie levels to low $40 million range.
So two housekeeping note before I turn the call back to the guidance.
First as we announced in our business update on September eight Aurora and the lessee have agreed to mutually terminate the partnership we will therefore be making a onetime payment of usthirty million dollars to terminate contracts. In Q1. This is expected to allow us to reallocate more than $150 million to our core markets that would have.
The license band and feeds research costs and marketing activation expenses over the next five years.
Second we reached an agreement with our syndicate of banks regarding amendments to our secured credit agreement in demand.
These amendments provided us with additional flexibility, including a reduction in adjusted EBITDA milestone.
And including shifting the attainment of positive adjusted EBITDA in Q2, 2021, and finally, a reduction in the size of the revolver facility to better align with our average receivables balance and thereby reduced standby fees.
For the conclude.
We have made many difficult decisions over the past few quarters and have leaned heavily on the talented and hard working people in our organization.
Oh Thats been disruptive it was also absolutely necessary.
But now we feel the company is unencumbered from distraction and can execute on the vision and strategy being developed by Miguel.
So with that I'd like to turn the call back over to Miguel and happy and share some of his thoughts.
Turning to the financial summary, Glenn I strongly believe that the long term outlook for cannabinoids is very exciting.
Both in THC and a non cash fee variants and I think Aurora is uniquely positioned to realize opportunities in both segments.
We're seeing the level of interest globally and medical systems grow and Canada is consumer market is returning to a nice pace of growth. So there continues to be positive momentum in the industry and our job now is to prove to investors that we can achieve profitability in our core markets Bill.
Building a base of free cash flow in our core business today will also allow us to invest globally for the multiyear investment horizon, we see and cannabinoids the hit.
The history of global CPG brands is rooted in building capabilities and core competencies in their home markets rather than portable globally and that is what we intend to continue to build shareholder Laura Hello.
Having been with the company for about four months I believe I've, a reasonably firm grasp on what we need to accomplish across four main focus markets first the Canadian medical second European and select International Medical third Canadian consumer and for US CBD to be successful are due.
Our domestic and international medical businesses are operating well and continue to track to plan.
We will continue to invest in these areas to maintain and grow our leading share in these markets.
And concentrates and for tactical sales execution, including addressing product availability visibility packaging and a focus on higher margin product sizes and formats on.
On the first part we've made investments in both syndicated and proprietary data sets. This includes monthly information for more mature markets in the us that assist us in modeling future ROI opportunities. These insights are expected to guidance and decision, making and effective execution. So.
Second I want to dispel the current thinking that the whole canvas category will be commoditized, the data from Canada and other mature markets indicate their premium and superpremium brands have been and will continue to be successful in all formats, we expect to refocus our dried flower business towards gross profit dollar pools and away from total revenue.
Okay.
One of the first steps, we expect to take is building a more balanced portfolio offering across multiple pricing tiers. We.
We already have a collection of great premium brands Aurora, San wrap and then Whistler as our Super premium offering so we need to emphasize all of our strong premium brands to balance out the total offering to our consumers. We also intend to better position. These three premium brands across various formats to foster grant greater brand visibility and provide good.
Later choices to the consumers for example, San RAF pre rolls or higher quality was surveyed.
Third we note the important part of growth in such a new category and this is a direct experience that I've had from my days at logic and then it reliever is that project innovation and leveraging technology needs to be a core competency.
Thankfully, we have a history of product development here to Laura and you should expect us to see us leverage that internal expertise into new segments of the market, particularly expanding our.
Our market, leading edible offerings into concentrates gummies represent a good example of where Aurora already has a leading market position and we expect to allocate additional resources in the coming quarters to solidify and enhance our leading position and grow that format.
These opportunities represent sources of strong gross dollar contribution and where we have technical know how that gives us an advantage over our competitors.
And finally, we'll be focusing on driving profitable growth.
It means making sure that we're improving our execution when classic CPG sales marketing trade marketing and customer engagement systems. This will improve in stock conditions visibility of key brands customer relationships and that has historically resulted increase market share further.
Furthermore, we will explore aligning our packaging sizing without regional demand to enhance our profitability and where applicable consider more flexible packaging packaging options to reduce costs. These are.
These are just a few of the low hanging initiatives will be executing in the coming months that should continue to build strong brand awareness and infinity with consumers.
Well I've outlined just a few of the tactical plans are putting to work for now and our Canadian consumer business. My focus is on ensuring that the entire where our team is executing to their respective plan. This is.
This includes continuously looking for more effective ways to connect with our consumers and opportunities to extract efficiencies from our operations.
Throughout my career Ive implementing multiple examples on simple well executed plans, resulting in outside gains in CPG categories.
We operate in a category where market share is moving 500 basis points in a few months. So I feel strongly that our plan executed correctly should return us back to our leadership position in the Canadian consumer market.
Glenn has already provided an overview of Q4 financials, including our focus on achieving EBITDA profitability in Q2 and I can certainly appreciate the key stakeholders are skeptical of forward looking statements from Aurora. So all I can say is look to the data in the coming months and see the trajectory of our success in the Canadian consumer market. If you see progress in our premium brand.
Okay and adjacent key categories like based on pre Rolls you know the plan is on the right track. Thank you for your time I'd now like to ask the operator open the call for questions.
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Our first question comes from the line of Vivien Azer with Cowen You May proceed with your question.
Thank you and good afternoon. My question has to do Miguel with definite portfolio on the initiatives that you've just laid out you know given be increasingly large role that value is playing back in your portfolio is above the category as a whole as you look to improve your position.
Gaining market share on Whistler at Kinross, or Andrew or OVARA on do you see the need for any type pricing adjustment up or down to create a little more differentiation on throughout your portfolio. Thanks.
Well Vivian good afternoon, and thanks for your question you know I believe having experience in 20 years and the tobacco vapor another regulated product experience that there really is an opportunity to have more articulated portfolio. You know the focus on low cost flower I think has created a lot of pressures. The reality is the Canadian consumer.
Or another consumers really value the differentiation that this product can bring in some ways more so than other categories that I've worked in whether its potency turbines packaging or background I just think there's a greater opportunity and there is evidence when you look at more mature markets like Colorado, and California that consume.
Others are willing to pay more and so yes adjustments do need to be made in order to make sure. We take advantage of that so that we do get a premium and premium margins. The other thing I I will talk a little bit about that you're quite familiar with is the ecosystem of a brand and its equity. So whistler as an example, I believe it's been under <unk>.
<unk>, it's always been a super premium flower products organic and its very nature and finite there are no reason that the cues that you see with the Whistler or roar or San route can't find its way to other formats, such as vapor such as pre roles such as concentrate and as long as those keen.
It's a premium that validate the economics I think you can have a really strong ecosystem, where you're always going to have a certain amount of value, but that the consumers given proper opportunities to work up you know that value chain and given the economics of you know the difference in margin contribution between the Super premium and the value.
Product you know given my background with brands, such as Marlboro, Copenhagen, and Skoal logic, and even parts of the reliever portfolio I think I have a pretty strong background in finding a place for multiple brands throughout the portfolio. So we're excited about it I will say, it's one of the things that really attracted me to the job I am blessed with real.
Okay, great premium and Super premium assets and now we have to bring them to the consumers in the marketplace.
Perfect and then one quick follow up for me on as you've indicated you know we should keep an eye on you know just my time on revenues.
Development, there and benchmark of success, but as you think about market share on what did the charge for your team is it to improve our overall market share or are you more focused on market share my place. Thanks.
Thanks, David No I'm absolutely. It's the latter so you know I've lived in worlds and you've seen worlds, where overall market share is not a true indicator of a company's profitability, we will be much more interested in the market share of our premium and super premium categories much more interested in the market share of categories, such as vapor and pre rolls in concentrates that are.
Margin accretive and you know if others want to play in that deep discount flower business that really has compressed margins in order to boost their overall company market share so be it but this really is an effort to achieve profitability at higher margins and so it will be the latter part of your example, there will be a clear focus to us and it's our target around.
EBITDA profitability and being margin accretive that it's much more of the focus of the company that an overall company market share.
Very helpful. Thank you very much thank you bill.
Thank you Vivian.
Our next question comes from the line of published with Cantor Fitzgerald and proceed with your question.
Thank you and finally relationship when they go but can we just a quick recap in terms of what's happened over the last six months and the reason I ask that you are guiding for rig sales or do we don't into 20% in the September quarter, right. If I do the math medical staying around 72, so Rick.
So Rick in the September quarter is falling 10% to 20%.
In about 10% in the June quarter right on the you talked about 60% of sales with more coming from your value brand daily specials. So just what happened there was it that the value segment, a little share and he doesn't seem to be the case why do they do special not work and.
And that's one question and then the second one when I look forward.
[music].
Yes, you are going to be focusing on the premium side and given your bag. It down on the know how you've talked about I'm sure that that can be one can materialize, but you're going to have a 60% of sales or more that I. Suppose is meant to be declining probably because of the trend that we have seen their value. So these transition could take place for a while I mean, we would be looking to flat sales for more than just one quarter. If you can.
Going to highlight it thank you.
Sure. Thank you Pablo and I appreciate your kind comments.
No. My opinion is the company had a tremendous success with daily special and if you look at the February say through April time period, there was a massive amount of market share.
That was taken and they were a first mover ended our value segment. However, you know others quickly followed and when you're this playing on price you know it just becomes a diminishing return and so I think the company got a big distracted.
By the success that they saw with that discount offering which was daily special which sort of a delayed other inputs such as vapor and pre rolls are they there is a lot of growth in the category and then everyone else kept piling in and because there was such a reliance upon that discount business.
As in a lot of different ways, both on the growth side on the sales side on the trade marketing side. When that was just completely you know pressed against by competitive pricing pressure. It became hard to pivot now in terms of your point on timing I guess I would raise sort of three points first is the category is growing.
Laura has not participated in that category growth in a way that you know I think is reflective of what I would expect that the company and so the good news is that consumers continue to command stores continue to open, particularly Ontario, and the warranties to participate.
One thing is we are see brands shares moving very quickly the consumers in a very dynamic situation. Unlike say domestic tobacco or other categories I'd been in where 20 to 30 of share points or basis points of share of moved in.
In a month, you're seeing 200 300 basis points.
Basis points, a share moving them on so you can do it with the right products with the right execution and so in terms of timing, we are going to be launching a stronger portfolio vapor products, you're going to see a greater effort from us on pre rolls and you're going to see a deeper focus on our premium power products that plus a stronger focus on so.
Sales execution and engagement with the provinces and trade marketing I'm sure you know should allow for a quick move I'm not you know here to debate exact timing and I don't think it's fair to predict exactly when you're going to see x. amount of market share by category, but through headset data and other data that clearly is available to you I would keep going back to this if you.
See progress from a war on its premium brands in the upcoming weeks and months and if you see progress in those categories that are margin accretive versus just overall market share led by low cost flower that we're on the right track and everything I'm going to do everything in my background I think puts me in a good place to drive that type of execution.
Thank you that's very helpful and just a quick follow up for Glenn So again I'm in a P.T. or you have to you spoke to the ATM to settle the U.S.C., but I suppose we didn't we all understand that.
But looking forward how do you think on the convertible bonds right at about a 50% discount is that an opportunity that wouldn't make any sense or financial sense and strategic deals. So to use about two ATM to to buy some of those ones I think on my math that would be agreed you can touch on that please thanks.
Yeah. Thanks, Bill so.
I mean, there is an awful lot going on at Aurora, and he talked about the business transformation and the and the significant effort and focus that took from the organization now we're pivoting to much more of a focus on delivering on the on the commercial sector, but ER and the goal is just outlined for you.
But I think that yes, I mean, we've said before that one of the mine that changes we've made within organizations much more financial discipline, and prudence and I'm that they kind of sophistication. If you will so it's not you know it's not immediate concern I recognize exactly when you're talking about.
On the immediate concern but.
But we will look at all opportunities to see if they me ER positive sense for the company and our shareholders and we will certainly consider them, but you should know that there were certainly mostly most of the organization focused on delivering on the Gulf just outlined for you got it.
Got it thank you.
[laughter].
Our next question comes from the line of Michael Library, with Hyperscale and well proceed with your question.
Good afternoon. Thank you.
Good afternoon Michael.
Can you talk about some of the thinking around the profitability targets and what some of the key hurdles are and things to watch it.
Specifically.
Coming close to ready to then first quarter.
What's in place already how much is there some things you still need to achieve good just kind of a sense of of progress along that and what the key variables are.
Yeah, Let me go into like neither.
Yeah, why don't you start glad and then I'll talk a little bit forward looking please.
Yeah absolutely.
Yeah, you know listen I mean, we we we've done a lot of heavy work over the last two quarters and you know I'm young with asked here in a yen and continuing to mean something.
Keep some healthy margins in place.
Fits the number of pieces of the business to drive you EBITDA, but we do have the consumer piece of the business that needs to be corrected me goals, probably a little bit of both I'm happy to tell you more I'm sure.
But if you look at what we delivered in terms of EBITDA in Q4. It was just over negative $30 million you know taking out the severance costs, but that was while we were still carrying $64 million best unit cost. So as we stand in Q1, we're now running in the $40 million range. So you can see an immediate improvement in EBITDA of $20 million.
Yes, just simply from a from our SGN a reset Reid.
We do expect continued strong performance in the Canadian European Medical markets I, So really the root causes of the EBITDA is exactly the hills line.
You can watch that and the data over the coming months and our continued focus on fiscal Prudence I mean, we have done a lot of hard work on our cost structure, but we'll continue to focus on your incremental opportunities because the whole company.
Because the whole company in a different mindset now and they know they're all looking for you.
We can save cost in it and stuff so.
So it's a different company or position I think well and be as they say the route forward is to to deliver on some of these a premium categories and and even within the flower Mart and ship that product mix up to something that delivers more.
More dollars the gross profit line as opposed to simply just delivering around.
Yeah, I mean, Mike like I guess, the other thing I would say is when I look at those companies that have been successful of our competitors.
They've executed you know a pretty.
Got full plan, but the execution level was tremendous and it looks a lot like CPG and I'm sure you can imagine who I'm talking about so I don't think that the approach has to be you know pretty.
Particularly advanced or take a long time and simplistic is not the right word because I've deep respect for our competitors as much as I want to be an aggressive competitor against them, but Tim Glenn's point. The company really was distracted I think in a lot of ways that Lisa.
Both on the people side and on the production side I think.
I think there was a lot of credence put together around overall flowers share, but there were some investments made that with the right direction and when the right Accountabilities and focus and you're going to hear me say this over and over again I'm pushing the company into focusing on its premium assets in flower vapor and pre rolled.
And implementing you know classic CPG sales trade marketing consumer engagement methodology, that's what's worked for others and the rewards have been outsized. So I think we have the assets I believe we have the right people and with the right plan and Accountabilities and the Glenn's point, we have enough resource.
Says, we don't need Capex regarding additional accountability because at the end of the day, Michael as you know, there's only roughly a thousand stores in Canada.
So if you can execute you know this plan successfully you can move quickly with the right products in the right availability and I could rattle off you know the five peas and on and on but that's really going to be about execution, but I'm confident that we have the product availability of the product quality and the plan now is ever gonna be.
Quick enough for everybody know, but I think you'll find our steps to be thoughtful and if you look at what our competitors have done successfully there's nothing sort of in our portfolio are in our capability set that gives me pause that we don't have what they have.
Oh, that's it that's helpful color. Thanks, just on the portfolio mix, you've mentioned the 62% value in for Q1.
What does that look like one Q to date and then do you have a target range for where you could see that should be going forward.
I I don't have a specific target I know, but some might say well. That's helpful. I can tell you that there will be a significant amount of focus put on Whistler, San wrapping Aurora and that will be across the board and as you know is the most great brands, particularly in a market, where there's dark marketing or dark marketing you know provisions having the sale.
As far as having the province's having the product distribution and availability and potency be focused on that does a lot of it so you're going to see progress you're definitely going to see a more balanced portfolio and you're also going to start to see the development of this ecosystem you know Whistler will stand for things in the core the cattle.
Glories built in flower and adjacent see San routes will stand for things and those other categories and sole Aurora in ways that may be daily special doesn't it all those articulations. So my goal is to make progress and to have a defensible articulated portfolio and you're obviously well aware of as we all are of Marlboro Friday create.
To get a scenario, where you sell would damage the discount business that it creates you know structural advantages over the premium and superpremium business is really not a great place to be and so we're going to start to reverse that and those percentages and allocations will definitely advantage. The high end of those purchases in those three or four primary county.
Right and I guess, the only other thing I will say is when you look at things like vapor concentrates and pre roll there's a lot of opportunity to bring some classic CPG elements in packaging and alignment.
On vapor many of the things that you're seeing in other categories on heat not burn into consumer connectivity that allows the consumer to see value in there for a pay higher margins in a way that maybe traditional flower doesn't lend itself. So I'm pretty bullish on on those opportunities and I believe some of the experiences that had on combustibles and smokeless and they.
Super and other categories lend itself well to this regulated market.
Okay, great. Thank you very much.
Very very welcome Michael.
Our next question comes from the line of David Kit, Okay that TTB capital markets. You May proceed with your question.
Hi, Hi Center Eco actually 10 million per day, so congrats on the quarter guidance. Thanks for taking my question. So.
So just to start I mean, what you're seeing in the market. So far how should we think about derivatives in terms of overall revenue mix that you're targeting as well as in terms of margin potential compared to flower maybe over the next fiscal year and also or longer term.
[noise], Glenn you want to start out and I'll I'll pick up the back side of it or is that going to start.
Uh huh.
Yeah, maybe I'll start and I'll, let him I'm sorry, that's it [laughter]. So I think if I understand your mix is that how we should think about adjacent categories. So from a mix standpoint, you know due to the fact that so much production and capacity was brought online you clearly we're going to see a glut of flower.
And particularly what we would call you know lower quality flour and that would be lower potency intervenes and and then the higher Graham sizes, and that's always going to have a lower margin profile and there will be a place for that but as we think about you know higher margin offerings. It's not just you know whistler, saying wrapping Aurora, but.
So those you know packing sizes like three and a half and seven gram that when done right give the consumer additional value and so you know we've we've laid out the historic margins and obviously talked about a medical margins I think as you think about adjacent margins. There's two things really to consider and I'm not going to give you. The precision of the answer that may want blog.
With a sense of it.
When you look at pre rolls vapor and edibles. They are margin accretive, particularly as you offer premium items. The second aspect of it is excellence around extraction or in other ways to use the byproduct of your flower production facility also creates economic value are margin accretive opportunities.
So that environment when you can be having a you know a strongly articulated flower portfolio.
As well as also being in a situation where the byproduct can find its way into margin accretive products and you can have a fully articulated portfolio, where you know you're doing you know a decent amount of your business and Super premium a strong amount of your business in the premium and you have a necessary amount in the discount that clearly.
Should have significant margin impact as well as the impact of selling higher margin items, such as premium they pre rolls and concentrates and if you look at the U.S.
You see a wonderful opportunity and you know and that's not a national framework, we see brands developing in California, and Colorado in tough markets and so clearly if they can do what they are definitely definitely demonstrates that we can do it in Canada and you know we feel good about our opportunity and if you look at the equity scores and you look.
Get sort of the awareness of those premium brands, we're blessed with I'm bullish that we can move up the margin chain and flour and in those other adjacent categories.
Yeah, I'll, just add a little bit maybe an example for a little bit of flavor, you've heard me I'll talk about margin accretive and premium out there.
If we use the and like the 3.5 Gram pack of our Whistler flour and compare that to a 3.5 Gram a typical discount flower for what we see in the market.
That package of with where it will be to deliver 10 times or more the gross profit dollars that's it.
The discount power where it.
So when we say, we're blessed with some premium assets and where youre focused on the margin accretive.
[laughter] you know it doesn't mean that we have to replace older do this and the daily special revenue.
Equal amount, though with a rough although I'd be delighted if we did but but we are really trying to be a more sophisticated it may help that they're more of a CPG oriented company that is really focused on delivery EBIT I mean gross profit dollars, so, though that margin accretive and premium across the brand but also.
Within flower incredibly important our execution here over the next number of quarters and so the mix I think if I can direct you to anything please pay attention to.
The mix as you know that line in those categories, rather than just pure sort of revenue market share allocation that will be the indicator of our success.
Okay. Thank you that's helpful and just a follow up for me on more of a broader question here in terms of international markets.
I mean, you've talked a lot about the Canadian market, so, but how does that how does international markets sitting through our strategy right now.
So from an international standpoint, your national revenue today continues to be largely from the German market and that has been a consistent performer for the past few quarters and we expected to show growth you know into the future. We've had success you know in the German market, where actually number one provider of flour and we continue to see opportunities in the oil markets.
And were closed or just getting some really important regulatory milestones, including GMP certification in our operations in Denmark now that facility in Denmark will allow us to ship from Denmark, Germany, and the rest of the you in other parts of the world, particularly those parts of the world that really look for GMP products. So you know we're bullish.
On the international market, we're not going to play everywhere I think you're going to find this to be opportunistic, but the one thing I will say about the international market that also I think speaks to other opportunities.
'cause it takes a lot of investment and it takes a lot of compliance experience and it takes a lot of thought to be successful to the high standards that these international markets out once you build those capabilities, which we continue to do in the Canadian market in Germany, and other markets. It becomes very portable and I know everybody wants to talk about them.
Hi potential of U.S. and these other markets, but clearly as these larger markets come online those companies, particularly the successful Canadian Lps that have demonstrated expertise in the Canadian market interacting with health, Canada and then there's other markets that are highly you know compliant and require a lot of infrastructure and thought.
Puts us in a great position. So we'll continue to be opportunistic we feel good about the international business, we feel that medical in many cases leads to rack opportunities and that muscle memory that we're developing there can be portable in a way that is definitely on advantageous to us as these markets continue to open.
Okay. Our next question comes from the line of Andrew Carter with people you May proceed with your question.
Hey, Thanks. Good afternoon. So my question is just kind of going back to what was implied in the consumer performance, you've got a stable medical business and perhaps you might want to comment on are unbelievably well as how that's trending in line with acquisition, it's pretty pretty significant step down in the step downs well ahead of kind of what we're seeing in the consumption data. So a couple of questions.
Our you know are you seeing anything is there any disruption in the orders from the province's thought Ontario would be picking up the stores are you missing orders because you talked a lot about execution on pre rolls concentrate et cetera could you help us with any more clarity kind of what's going on beyond that.
Sure it probably averages so I mean, you can see it in the headset data.
The company made a big push in the discount.
You know in that February to April time period.
Built a lot of share everybody piled in it became sort of a bit of a race you know who could have the lowest price product. The company did not have no other products, whether it's in the premium flower business or vapor or pre rolls and because those categories. Also grew at an exceptional rate war I did not.
Keep pace with category growth lost share and therefore, the step down. So I don't you know I'm not trying to be defensive I. Just I think you can see what the opportunities where you can see one competitor in particular, they did really well they had a fully articulated portfolio high levels of availability and visibility.
They did well in a finite number of those adjacent categories, particularly vapor and pre rolls.
And that's the model we're going to follow so it's going to be you know I know I'm going to sound repetitive, but it has worked it will work I think the benefit. We have now is we had a bit of the distraction of the reset in the factory stuff going on we do.
We do have great brands, we do have the products coming online and at the same time that you see on terror and others. So when you look at the provinces. The provinces operate like any other wholesaler in the U.S. They don't you know play favorites, they want to make money. They want to have a certain amount of days on hand, and they want to service their retailers so as Brad.
And you know in this dynamic category, they've done a pretty good job, particularly Ontario, and others and so when you don't have the offerings and your brand is declining share it's less about the execution I'm not worried about that if we have the right offerings and the right product categories, particularly in premium and superpremium, which they're also incentivized to push.
Because they make more money on it then we'll be there so I'm not worried about that we can take care of what we need to take care of and I feel good. We will we'll have the support of the provinces, who operate as wholesalers and we'll have the support of the retailers and again I I just highlight a finite number of retailers I mean I've worked in.
Systems, where you're talking about hundreds of thousands of retailers. This is about a thousand and sell a proper sales execution, which I have a long history of and engagement I don't think there's anything systemic or systematic in the provinces are the retailers that holds US back. We just did not participate we lost share 'cause.
We didn't have the right premium offerings and flour and we and we weren't there on vapor infills those things will be fixed algebra reliever sorry go ahead.
No I said that was going to really the next time you go ahead, Greg So a lot of our lead.
I would leave a reliever 99 plus percent of its sales our brick and mortar and you might ask during the cold environment. Why two reasons one is because the retailers that we partner with and were exclusive with some of the largest retailers in the country. We're in over 23000 stores, which I think may be the most they've taken a really good view at those.
Instead of pivoted to all.
To online sales and so we decided to play some long ball and not do that secondly, we're very bullish on you know what weve heard out of the FDA and I don't think that hinges on the November political decision you know Senator Mcconnell you know on the Republican side is the biggest cheerleader of a industrial hemp and obviously, it's been a good issue for the damage.
Grads, but the reality is as a retail driven company called good you know really hurts reliever no given its variable nature and not a lot of fixed costs, it's not losing money, but its not making a material amount of money now the deal was as was announced contemplated a performance based metric. So I believe it doesn't.
You know perform that back end of the payments of the shareholders. Obviously, yeah would not be there, but it's a wonderful optionality and I will remind people that to this day, we'll leave as the number one ranked Yeltsin a company and number two when I arrived and so it's wonderful optionality and when the FDA goes forward those companies or the history of compliance.
And in brick and mortar will win and I think we believe it will be a wonderful asset and even at its most conservative estimate CBD represents over 1.8 or $2 billion in retail revenue. So the real hidden gem in this whole thing and when we talk about global cannabinoids is leveraging a lot of science and innovation on the non THC parts of the ports.
Folio, which could be bigger than the T.H.C. parts of the portfolio, particularly with positive FDIC auction in the U.S.
Sure enough and some of the some of this quarter. Obviously it was worse some cuts and the focus on cost savings. So anyone who's as you're trying to get back in the game I guess, you've got another round of restructuring kind of what comfort can you give that you did you have the right investments in place and perhaps investments don't even need to go higher from here and that you can successfully execute these.
And and grow market share here and I'll pass it on.
Yeah, I mean, we don't there's not but if you look at capex or other investments I mean, what I'd describe you know it can be handled by the production facilities are the marketing and sales organization and everything that we have so we're going to be nimble and more agile, but we from an infrastructure standpoint, I don't see that added investment required and as the.
You know category continues to move I think you'll find us to be you know pretty agile around my background has and you know lower fixed and higher variable. Obviously this category and this company has a little bit different but will do what it takes to be competitive in the marketplace, but the simple answer. Your question is there's no big investments we need.
To make to be competitive in premium flower vapor pre rolls are concentrates.
Thanks Ted.
Definitely to that Mike.
[noise].
Okay, I mean, its been a massive change from where we were a number of quarters ago and 10, new calling the question are we at a sustainable level. We have you know absolutely believe that current level is sustainable and certainly capable.
Supporting a much bigger revenue business.
What happened I think is the Rand to strip it down to the core market. There is a whole lot of non core assets than.
Okay, awesome and distraction, so stripping away the weaker divested a number of non core businesses, taking complexity of business are rationalizing your production footprint to gain taking complexity out of the business really focus on focusing on something that should be fairly straight forward you know, we produce and deliver.
A number of brands and across the categories. So you know good better best that Mcdonalds World and we complain.
And we can play in a number of different categories, all derived from Canada, and and extract so it isn't that a fairly simple conceptual business in it we've made it very complicated because of all the optionality, we've given ourselves over the year. So it's time to take all that out we're down a nice number right now I think is very similar.
The animal over the next number of quarters.
Thanks <unk>.
Thank you.
Our next question comes from the line of Henry Chien with BMO Capital markets. You May proceed with your question.
Great. Thanks for the question first I just want to ask can you elaborate a bit more fine I don't have the material weaknesses in certain channels control that was referenced in an earlier press release and how you will vanish.
[noise] Yeah, absolutely Tammy you know this was our first year as a sox recorder.
And quite frankly with the companies such as ours has been built through through acquisition was a monumental challenge and then you throw the coal that pandemic in on top of that where everybody then had to scatter and start working remotely. It was it was it was incredibly complex they material weaknesses and you'll see them in.
I'm going to say that were found a couple of days.
For the most part revolve around as the the number of IP systems that we have many of them scheduled for decommissioning.
And were slowed down as part of business transformation, and and quite frankly think cove and things like that so we ended up at the year end they'll use inconsistent we hadn't expected to use. So there. There are some you know some issues I know you know like minor issues and I should be minor issues. So you know segregation of duties within.
<unk> within that system. So there was nothing in there that that causes us pause we're actually.
Hey come a comfort is that a lot of it's been remediated already and the remediation plan for the remainder for the most part revolves around finishing the full implementation of the ERP system, that's been underway for a while now.
It did not result in any material air their salaries statements or and how quickly the outcome of that given the environment.
First year Sox and incredibly complicated.
You know the company behind the scenes at that time.
With a pretty good outcome, but again I don't know errors no no no restatements in a in a clear path worker immediately that's here.
Okay got it. Thank you and my follow up is just going back to the you know the premium strategy Macau that you're talking about I'm. Just wondering when you talk about this well what is it specifically that you have your eye on that consumers are willing to pay up for and you know what are your data and.
Well its telling you because every company or license producer sort of says a similar thing got it the high Peach tea a lot of chirping.
On the Bates good quality hardware no leakage <unk> surely wont be the only one that can potentially succeed on that so I'm just trying to understand going forward when you're trying to push their premium strategy and is there something more to it that sets up a more proprietary are defensible moat for here in the segment.
Yeah, I mean, I think well first and foremost it's being done today right not everyone's just selling discount products. So the environment the consumer or the trade all have had an aptitude for premium products now the trades an important one and it's one I've spent most of my career on if you talk to the retailers in the provinces.
They want to sell more premium products, so there's finite space and the retail stores, there's finite delivery windows. So everyone's sort of watch that in terms of what we're gonna do different you know Laura has a long history and strong cultivation.
And you know a variety of other things that bring there. So when you look at the consumer cues of what they're willing to pay more for higher potency higher Terpenes consistency brand quality, you know strains some of that IP Enginetics that you know we see that has been positive with other companies and us.
In past iterations, so whistler for a long time, it's been a super premium brand, where the company has been able to sell everything has been able to make because of that strong organic nature and so we're going to do more with that and bring those queues into vapor now I'll be more than happy to spend a lot of time on all the reasons why someone is more willing.
You can pay more for a super premium premium vapor experience you can see it impacts you can see the non THC products, whether it's the technology the materials the ecosystem. The software those are all things that I have a long history would on pre rolls you see in California, Colorado, the Premiumness of the input the paper.
For the packaging the branding I mean these are all sort of things you can do but it's being done today I mean, so if you look across the environment in Canada. There are companies being successful both big and small we premium offerings and all the core categories I think the sort of stable of brands, we have and.
The quality and the consistency, we're going to be able to put out a really laser focused on the trade, which I spent a lot of time on in a finite number of stores, given where we were which was not a focus on those items and a real push on daily specials, a discount proposition and the results we had a.
I think you're going to see a big Delta and we'll see I mean take a look at the headset data and I think you'll know quickly how we're doing.
Okay. Thank you.
You're very welcome.
Our next question comes from the line of Matt Mcginley with Needham You May proceed with your question.
Thank you.
$135 million in inventory impairments in the fourth quarter, but you produced 44000 kilograms in that quarter and and you alluded to the fact that you expect inventory to continue to build for a number of quarters. I think you said at around 35000 kilograms per quarter [noise], you when you're selling it in the fourth.
In the fourth quarter it in under under 17000 kilograms. So I guess it does seem still seems to be a disconnect between the inventory build and and now with the sales levels would be especially given that the shift to premium product, which presumably would mean, we'd be Samsung gear a kilogram. So I guess what causes you to reach equilibrium equilibrium on that.
Inventory and you feel your any risk of taking you know additional impairments in the future given given there's such a disconnect between what you're pretty thing. This is it yourself [noise].
[noise] Oh, a couple a couple of things will impact that as we look forward when there's the milk or that we may add in our press release and I alluded to it in my my remarks.
And then be more of course in the M.D. and manageable, but we took a look at.
We took a look at you know we continue to understand the market better and better and which products are in demand, which show you know exactly how much we need on hand, so a lot of the write off at June Thirtyth was there there was some older slower moving product from from a number of quarters ago, but there's a lot of it was trim and something we took that down and then we.
Also took a look at the way we are looking or costs within our inventory. So we've we've changed methodology to put a much heavier waiting on on flower and makes it much reduced waiting on trim limits me, probably a lot of sense Tonight, I know one or two of our peers taken that's definitely expect everybody will have to at some point.
But what that does for US is a couple of things you know intended.
In terms of volume, we do expect that you know with some of the execution and operational improvements that were in the midst of making.
That we should see traction you know across the categories that they use flour and don't misread. The remarks I think it's not that we don't expect to continue to ship you know millions. So you know into a discount market is we just need a much more balanced portfolio and I think.
And I think you know and mail said as you know maybe I'll take a look at it you know, it's pack sizes, and delivering ostroff and things like that but it's not that you know we exit that we've just seen a balance in our portfolio. So we still expect that to.
To consumer volume and quite honestly I don't know if that.
We didnt participate in category growth I would say that this market is starting to get you know, it's getting plenty big enough and you know our expectation and certainly what we see from market expectations, but it should continue to grow. So we think by simply just stepping out executing better participating in market growth and maybe you know over participating in.
Category, we want to be we should see an increase in the volume so consumed but but the other to settle point is that there we won't be building up much in terms of dollar value on our balance sheet related to trim, because it's kind of very low cost allocation now.
Got it.
The EBITDA guidance for that for the second quarter, you expect that to be positive I assume the SGN end doesn't have any big variance there, but what gives you the confidence that the revenue. The gross margin is going to increase given that you know, but the decline than in the prior quarter's did did you see trends improving in September or is this kind of all in the comments that before is reposition into in here.
Fiscal second quarter.
Yeah, well, let me start and let me know well I'm sure add some color to this.
Yeah. So so the goal arrived in the CTO chair.
Beginning in July and then was promoted to CEO. Shortly thereafter, he's the right guy with a very experienced and certainly our track record of executing exactly the situation. So you know we we have to you know and we are in the process kind of you know just make your arresting the decline that we saw over the last year.
[music] mines and getting back into that to even keel. There and then there is a number of initiatives specific initiatives that are focused more on the higher margin dollars. So let me call let them. Let me I'll use the term you probably hear more and more money in the future quality revenues. So as opposed to just revenue quality revenue for me now.
That is delivered a healthy gross profit dollar as opposed to simply just you know a gross margin percentage.
I used the example of Whistler and that's an extreme example weren't delivers 10 times the gross profit dollars and then discount.
And that might but that is that our route forward in putting dollars on the bottom line is not to sell more of you know a large pack discount brand.
Brand, which delivers some dollars.
But not a ton is to to playing in the category deliver real dollars to that gross profit line. So so the units that we have underway are those they are the ones that deliver real gross profit dollars on not just percentage or so that that teens quality healthy revenue and that's the focus and that's that.
The piece that needs to be many traction there and as you know that you can watch the headsets data or other market data that you get and you should see us performing in those categories than that but that's a different.
Revenue dollar than the stuff you know that the discount category the levers.
All revenue dollars are not created equally and that's an important part of our reset and refocus and going forward.
Yeah, I mean, I guess, the only thing I'm. The only thing I'd add is now you say you see where the SDN is going.
You've heard what the plans are I mean, I will still say and even when the amount of discount business. The company did in the previous quarter to have the margins land where they landed.
You know is a good indicator that there's upside there and so you know the math isn't too complicated I think you know our indication ours, we actually get the premium calamities adjacent products, we should get where we need on that side of it.
Okay, great. Thank you.
You're very welcome Dan welcome.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to Mr. Mcgough mine closing remark.
Thank you so much and I want to thank everybody for joining today's call I'm honored to be a part of this team and I really look forward to leading award a success I Love you and all your families or shape in this world. We wish you all the best bigger.
Good.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a breakthrough.
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