Q4 2021 Aurora Cannabis Inc Earnings Call
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As a reminder, this conference is being recorded I would now like to turn the conference over to your host announced Krishnan, Vice President corporate development and Investor Relations. Please go ahead.
Thank you John and thank you all for joining us for Aurora cannabis fourth quarter fiscal 2021 conference call. This is being recorded today Monday September 27, 2021 with me today are our CEO Miguel Martin and CFO Glenn.
After the close of markets today, Aurora issued a news release announcing our financial results for the fiscal fourth quarter and fiscal year 2021.
The release and the accompanying financial statements and MD&A will be available on our website or on our SEDAR and Edgar profiles. In addition, you can find the supplemental information deck on our IR website.
Listeners are reminded that certain matters discussed in today's conference call could constitute forward looking statements that are subject to the risks and uncertainties related to a robust future financial or business performance.
Actual results could differ materially from those anticipated in these forward looking statements the risks and risk factors that may affect results are detailed in Aurora as annual information form and other periodic filings and registration statements. These documents may be accessed via SEDAR and Edgar databases. Since we're conducting today's call from our respective remote.
Location, we may experience technical issues. We thank you in advance for your patience. Following the prepared remarks, Magellan Glenn we will conduct a question and answer session. We ask that analysts limit themselves to one question.
For retail and institutional investors, we will review the questions through the chat function of the webcast link with that I would like to turn the call over to Miguel. Please go ahead.
We made significant strategic and financial progress during fiscal year 2021, and in fact as of fiscal Q4 I can safely say, we're in the best shape. The company has ever been and while there's certainly more work to do Aurora is on the right course to build shareholder value, particularly from these levels.
Building value starts with profitability on an adjusted EBITDA basis. The entire team is focused on this effort and additional facility closures, we announced last week is another proof point to show that these actions are well underway.
Building on that let me speak to a few more data points that underscore our progress into 2021, and how that sets the table for value creation. In 2022 first Aurora is and remains the number one Canadian LP and global medical cannabis revenue with margins over 60%. This is nearly double what we see in the adult Rec segment for that reason, we will happily continue to Alan.
<unk> resources to the Canadian European or Israeli medical markets, where our regulatory expertise science testing on compliance combined to create a portable and profitable model the.
The second lever, we're pulling as expense reduction as you know we are on track to deliver another $60 million to $80 million in incremental cost savings and it's important to note that these savings won't affect any planned growth initiatives. These additional savings will also clear a path to being adjusted EBITDA positive by the first half of our next fiscal year, even if revenue was to remain constant with our fiscal 2000.
One fourth quarter levels that said, we do not expect revenue that said, we do expect revenue growth in 2022.
Another value creation data point that complements our P&L was the balance sheet and a growing dynamic and fragmented market, our regulatory expertise and number one position in Canadian medical are further advantage with a strong balance sheet I'm pleased to say that we are vastly improved ours with approximately 400 million of cash as of Friday, no secured term debt and <unk>.
Access to U S $1 billion of capital under our shelf perspectives, we've also gotten better at managing our operating cash flow, reducing the need for incremental capital.
We also expect to leverage our significant investments in R&D and monetize a world leading science and innovation program. The foundation of this is what we believe to be the world's largest dedicated cannabis breathing and genetics facility located in Comox, British Columbia, and lastly, we have strengthened our executive team by bringing in two highly skilled individuals in the areas of operations and HR.
Alex Miller, and Lori check respectively with that as a backdrop I want to remind our listeners that Aurora is comprised of four distinct yet complementary components first a number one ranked Canadian medical business by revenue and the largest federally regulated medical market in the world.
As our international medical business, which ranks as the second largest Canadian LP by revenue net revenue from these two businesses increased 18% during fiscal 2021.
Third is our science and innovation business unit, we are monetizing our intellectual property and genetics and biosynthesis and finally fourth our Canadian adult Rec business, where we've already made progress although challenges remain.
Let's take a deeper dive on medical cannabis is it really serves as a solid foundation for our future domestically, we represent about a fifth of the Canadian medical market, but only about 1% of the population are currently medical cannabis patients while our market share is roughly double that of our next closest peer the top five Lps within the Canadian medical channel represent less.
40% of the market. This gap represents Aurora has opportunity to expand our presence and we have done so through significant investment to help doctors and patients fully appreciate the benefits of medical cannabis that outreach includes education.
<unk> investments and sophisticated technology, coupled with unparalleled professional counseling and guidance and navigating medical cannabis alternative treatments have enabled us to provide an end to end patient experience for our growing clientele of recurring Canadian patients.
About 80% of our Canadian medical cannabis net revenue is constituted by cannabis insured <unk> subsidize patient groups, which sets up the medical channel is a very solid core revenue growth.
Also our infrastructure to support a direct to patient distribution model, which begins a patient querying and then transitions to onboarding medical consultation and finally prescription fulfillment across a variety of price points, all being a key factor of our success.
To improve our Canadian medical business. Further we are now leveraging technology and our patient intake and user experience a lower wait times raise service levels and increased product choices. This is a key driver of margin.
In its totality our market position in Canadian medical our innovation and tactical execution have created tangible barrier to entry, which is good news for shareholders as we grow other parts of the business in.
In terms of international medical we're leveraging core capabilities from Canada as new countries look at launching medical cannabis. This is a distinct advantage over our peers, creating a deep moat around our business.
A data point here is our leading position in Germany, and dry flower with a growing share of the oil market there in France, Aurora and MP farm were selected in October of 2020 by the National Agency for the safety of medicines and health products to supply the entire medical cannabis pilot program will drive flower, we won three of the nine tender lots.
Which includes all available dry flower lots and just delivered our first shipment in August and.
In Israel, we delivered an $8 million, Canada shipment in July as part of our supply agreement with <unk>. We believe this is the largest single shipment of cannabis at Israel has received.
Israel, we are excited to announce an extended supply agreement with <unk> under which we just received a po for a further 9 million shipment, which we expect to deliver in fiscal Q2, our compliant expertise was responsible for the extension all good news.
Of course, our expertise in medical cannabis and ability to operate within a highly regulated framework gives us a great opportunity to expand in the global adult Rec history demonstrates that medical regimes eventually evolve to adult rec as companies like Aurora that have a proven ability to operate in federally regulated regulated systems will have an advantage with new markets open up.
Let's pivot to Canadian adult Rec, those who follow the market are well aware of industry right industrywide challenges, but I'll bring up two points.
While fixing this segment will clearly take longer than expected, we did grow 8% sequentially compared to fiscal Q3 and are seeing early signs that our focus on higher quality higher potency higher margin products is beginning to pay dividends specifically our sales mix was positively impacted by growth of about 400 basis points and San RAF offset.
By a modest decline in daily special the growth in San RAF represents over 20% increase in dollar terms.
We believe this momentum should continue with additional premium product introductions and a focus on innovation throughout all categories.
Second we believe the adult Rec segment is in the process of bottoming out and is now poised to rebound given new store openings and rising consumer demand the dried flower rec category in Canada is a tale of two markets first the high margin premium dried flower category, where margins are 50% or higher and second the discount flower category, where many skus or breakeven.
Or even negative margin our strategy centers on that premium category, we're not going to be chasing unprofitable market share, we're going to be chasing profit pool dollars. Furthermore, our focus on product innovation and manufacturing excellence is squarely aligned with the expectation of our retail partners.
With our segment discussion out of the way, let me pivot to our P&L and our primary goal of adjusted EBITDA profitability.
Laura has identified cash savings in the midpoint of our previous guidance $60 million to $80 million, we plan to deliver 30 million to $40 million of those savings within the next 12 months and the remainder within 15 months, we expect approximately 60% of the savings will come from asset consolidation operational and supply chain efficiencies for example.
Last week, we announced internally a plan to centralize much of our Canadian production at our river facility in Bradford, Ontario, and the resulting closure of our Polaris facility. We expect the remaining 40% of savings to be sourced through SG&A and keep in mind that these efficiencies are incremental to the approximately $300 million of total cost reductions achieved since February of <unk>.
'twenty.
Again expense reductions margin improvements and sustainable cash flow generation won't inhibit our growth plans to be clear to reach adjusted EBITDA profitability by the first half of the next fiscal year, we do not expect to need revenue growth in the Q4 2021 levels, but I hope you can tell we are positioned for top line growth in 2022 and with that adjusted EBITDA profitability should follow.
With that I will turn the call over to Glenn.
Thank you Joe and good afternoon, everyone. I appreciate you joining us today and your patients with a slight delay in getting earnings out as we finished off the last piece of our audit.
Before I get to our Q1 results I'd like to take a moment to review the success of our business transformation program over the past year.
As we go referenced our financial fundamentals are in better shape now than they have 80% four years.
Our balance sheet after having paid off the $90 million secured term debt in June.
Having invested approximately $30 million for a new insurance structure in September.
Yes, it's at around $400 million attachment that's right.
That is excellent considering we started Q$524 million.
$20 million of debt reduction and investment.
The depth and insurance auctions will save us almost $35 million in annual cash flow.
Our core medical businesses continued to deliver overall growth and enviable margins generally say, 60% or better with the resultant gross profit dollars being absolutely critical driver of our path to positive EBITDA.
And of course, our SG&A and Capex are a fraction of what these which is clearly good news for our investors.
So now to Q4 results, which I believe demonstrates the importance of <unk> diversified business, both consumer and medical markets across 12 countries.
Overall Q4, net cannabis revenue before provision was $62.0 million.
Our medical cannabis segment continues to excel.
<unk> $35 million in sale and a gross margin of 68%.
This represents about 63% of our key core revenue.
And almost 80% of our gross profit.
Our consumer cannabis business delivered $22 million, excluding COVID-19 and the gross margin of 31%.
So overall Q4 gross margin was 54% with just north of $30 million of gross profit.
<unk> do you think.
If not the best gross profit generators in the Canadian cannabis industry.
SG&A remained well controlled resulting in an improvement in adjusted EBITDA excluding restructuring.
Negative $22.0 million it is heading in the right direction.
Now a bit more detail on each of our business segments.
Our Canadian medical revenue was $30.0 million in Q4, essentially flat quarter over quarter. Despite the impact of competition from continued store openings in the consumer market.
Our Canadian medical patients can be segmented into two groups those with cost reimbursement coverage.
Without the reimbursement program.
Our success is really driven by our high value insured patient groups with reimbursement mix and recurring buyers and this is why we have made patient groups with reimbursement coverage, our high focus priority and our medical business.
You may see some migrations pricing.
Reimbursement patients from the medical channel to the Rec channel.
That market continues to develop over time.
Our international medical revenue was $14.0 million pounds.
Down slightly quarter over quarter, but up 88% versus the year ago.
In Q4, this business delivered a 72% margin, beating our mid sixties expectations.
Exceptional result was driven mainly by country mix Q4 International margin also benefited from the transfer of almost all of our European supply.
Nordic facilities, Denmark.
And while there were no sales to Israel in Q4, as we noted we did deliver approximately $1 of medical cannabis to Israel in early July.
A further 9 million shipments planned for next month.
Bds analytics estimate the market size of about $5.0 billion by 2025.
Germany, U K, France and Israel.
With that context, it is clear why international medical worthy of our focus in investment and why our leadership internationally as an important driver of long term shareholder value.
Our Q4 consumer revenue of about $20 million, including provisions was an increase of 8% compared to Q3.
We are seeing signs of our shift to the higher margin core and premium segment that will underpin our future success in this market.
We all noted Q4 saw a step forward for San Raphael 71 brand.
This contributed to an increase in our average net selling price per gram drug candidates.
Now for SG&A, which includes R&D.
It remains well controlled coming in at $52.0 million in Q4, excluding restructuring a 30% decrease compared to last year.
While we've made a lot of progress in driving down SG&A with past 12 months.
<unk> stated earlier, we are implementing further measures to take out costs that should get us well below a $40 million quarterly run rate at the time, we exit the fiscal year.
So pulling all of this together we generated an adjusted EBITDA loss in Q4, 2021, $22.0 million, excluding restructuring one time costs.
This represents about $18 million improvement year over year, and the $8.0 million improvement from the prior quarter.
To help investors think about our path to EBITDA profitability I'll provide some thoughts on how the cost reduction plans that Miguel described will flow through the P&L.
Approximately 60% of cash savings are expected to be realized in cost of goods inventory is drawn down.
Or should it occur over several quarters as our lower production cost structure shows up in finished goods.
We expect the remaining 40% of cash savings to show up in SG&A. These savings will be seen as they are executed beginning with Q2 of this fiscal year.
I noted earlier that we are financially stronger today than we have been for several years, particularly with respect to a materially improved balance sheet and financial firepower.
We started Q4 with $520 million cash during the quarter, we paid out our term debt facility using almost $90 million to do so.
This frees us from restricted debt covenants and result in principal and interest savings of approximately $6 million per quarter.
Moves us further towards positive free cash flow in the coming quarters. Despite.
Despite paying off our term debt, we still ended the quarter with $440 million of cash.
Additionally, we have the one 1 billion U S dollar perspective, including the full amount of the U S $300 million at the market facility is still available.
These are available as financial firepower, as we prepare for strategic and accretive opportunities.
So to wrap up what I hope you take away from our Q4 financial results is the following.
<unk> has a clear path forward to being adjusted EBITDA positive by the first half of next fiscal year through actions that we control.
We have significantly strengthened our balance sheet with more cash working capital.
Having eliminated secured term debt now.
Now I will turn the call back to Neil.
Okay.
Thanks, Glenn before we go to Q&A I want to talk briefly about our science and innovation business group, which we feel is a real differentiator. We launched this group last may with the goal of commercializing patented and patent pending technology, which we believe will be key to developing cannabinoid production and biosynthesis and the plant itself.
Through licensing agreements Aurora and 20, <unk> century group share of the global IP rights for their key commercialized in key aspects of cannabinoid production and biosynthesis implants. We believe the long term market for cannabinoid molecules producer biosynthesis or the plant will be incredibly profitable and we have seen global market size estimates of $10 billion by 2025.
As I said this is a long term effort, but one that we believe will ultimately allow companies to bring a wide array of new generation products to the market when someone else is using the technologies and infringing our rights, we expect to be compensated willingly or through legal action.
In addition to our industry, leading genetics and breeding program is positioning Aurora to win in the flour and concentrate consumer categories. This program is expected to not only drive more revenue by injecting rotation and variety of our product pipeline, but also greatly improve the efficiencies of cultivation through higher yielding plants higher cannabinoids.
And better disease resistance, our team has been able to screen over 7000 cultivars from 2021 alone in August and September of 2021, Aurora launched the first three new proprietary candidates cultivars and our San RAF brand all of which have distinct turbine profiles in high THC potency.
We're already seeing the results through nearly $1 billion in sales since their launch.
<unk> and breeding program, which is an asset light business model is always expected to generate high margin revenue from license agreements.
So to wrap up our call today I'd like you to take away. The following first we are the number one Canadian LP and our global medical business by revenue, which is a huge and growing total addressable market.
The expertise here will transfer to adult rack as medical only jurisdictions continue to open up Aurora will be the partner of choice third despite cost savings that will get us to profitability, we're still developing proprietary and protected premium product that is being sold in licensed innovation will be the lifeblood of success in this industry and positive.
Cash flow and a strong balance sheet will be required not all of our competitors have this but Aurora does.
Lastly, Canadian Rec will come back with that timeline won't impede our strategic or financial progress.
As shown in the incredible agility over the last two years the final leg of our transformation is well underway and one of the unique attributes that we bring to this dynamic opportunity I've never been more confident in where the company is as we head into fiscal 2022, we look forward to sharing further progress on upcoming calls and that concludes our prepared remarks before moving to analyst questions.
Answer a few questions from our retail shareholders, who are invited to submit questions ahead of today's call.
Okay.
Thanks Miguel.
Prior to analyst questions, we will be addressing three questions from our retail shop retail shareholders. So Mcgill first question is when will you be EBITDA positive and why should investors now believe that the time is right to be EBITDA positive they've been waiting for profitability.
And they are first and foremost I can absolutely sympathize with the frustration around past milestones not being achieved but there's a big difference between what we're saying now and what we said then those forecast are based on assumptions of revenue growth and that's not what we're saying here now we've initiated aggressive cost saving measures in that when fully implemented we expect will get us to EBITDA profitability none of.
Our core businesses need to grow revenue or increase their margin from the Q4 I think it's also important to understand that we do have a history of delivering on our transformation plans. We've got SG&A from over 100 million a quarter. The low forties, we've aligned production of sales we've reduced complexity in our network and sold a number of facilities, we've significantly cut capex.
<unk> improved working capital.
So we have a completely new team that is executing this plan I mentioned, Laurie chicken, Alex Miller, but we have an incredible new talent up and down throughout the company. So as I mentioned, we are aligning our revenue growth to get us there and but we still expect to be able to deliver it. So I think thats the quota share.
Our confidence in this versus what's been said in the past.
Great.
Thank you Miguel.
So our next question.
Is should we expect to see any acquisition anytime soon given where the market is today and the recent consolidation seen in the cannabis sector.
We're going to be really consistent on this point. Our primary objective is to be EBITDA positive and nothing is going to take our attention away from this objective. So I know there are some people that want us to be bigger than to chase market share, but we're not going to do a deal that sacrifices profitability in order to be a bigger less profitable cannabis company. So theres been credits.
In the past about the way the company has handled this space and we're going to take a diligent and patient approach to M&A I think if you look at what's happened in the environment recently.
Being patient intelligence is absolutely the right path. So we're going to continue to look and if there's something that makes sense that has a strong strategic rationale and that can bolster our ability to make money. We have the balance sheet and we have the ability to do it but we're not going to raise shareholder capital without a strong business case.
Okay.
Okay, Great and one last question from our retail shareholder base Mcgill.
Before we kick it over to the analysts.
We've seen many of your Canadian LP competitors structure deals to enter the U S THP market when it becomes federally legal.
Why has the Aurora a slow in addressing this key growth market.
Well first and foremost I would say we haven't been slow we've been saying for a long time that the U S is going to take longer many of our peers thought it was going to happen faster and these investments would make more sense I think investors don't want our company to make a structured deal that may or may not.
Transitioned into a profitable situation that doesn't mean, we're not looking at the U S. But a couple of things there first is and I'll keep saying it our goal is to be EBITDA profitable that is the unique position the number one Canadian LP in terms of medical the number one global company in terms of all the things I've mentioned and profitability, that's our goal and so flushing that all down the.
Trained to chase something in the U S. I don't think it is important secondly, we just had a big election in Germany, and it's a big world out there and I understand the interest in the us and I've got a tremendous amount of respect for the Msos and my Canadian LP peers, but if you look at Germany. If you look at Israel. If you look at France, you look at these markets. There is a lot of money to be made and we're doing that and we are.
I think an exceptional job of that what the learnings are in those markets absolutely are applicable to the U S and we continue to believe that the path towards the U S will.
We'll be through medical will be through federal legalization in decriminalization and clearly if you look at the U.
Capabilities of Aurora, both in Canada and around the World, We will have a lot of options when it does open up.
Okay.
That's great.
At this time, Jon I'd like to turn it back over to you to open up the queue for analyst questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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One moment, please while we poll for questions.
Okay.
Okay.
Our first question comes from the line of Vivien <unk> with Cowen and co.
You May proceed with your question.
Hi, Thank you good afternoon.
Magellan Glenn I was hoping to begin please on the consumer cannabis segment.
I would like to hear how the quarter settled out relative to your going in expectations and if there are any key call out in terms of form factor or a price point drivers as it relates to the 8% sequential revenue growth. Thank you.
Thank you and good afternoon. So let me kick it off and then ill share to Glen I made the comment that its a tale of two cities. If you look at the margins of discount flower in many cases at best a breakeven and in some cases in certain big provinces. They are negative and so thats just.
As this whole thing shakes out chasing that and chasing overall market share of the cost to profitability really is not our strategy. That's not to say it may not benefit others, where we're going is the higher margin premium flower in the higher margin concentrates that's a place where consistently we're seeing almost <unk>.
And if you look at that coupled with our rack business because again, if you can use the same products in both rec and medical their efficiencies and we've seen a big uptick in patients looking for premium products I think there's a lot of value. There. So it's going to take a bit longer Bev I think.
In order for that discount flower business to shake out as people try to compete on price and it will I mean theres no way that is sustainable long term at that point, we've got some great brands and we've got some great capabilities, but at this juncture, we're going to focus on making money Glenn.
Okay.
Yes, we are starting to see I mentioned in my remarks, I mean normally go echoed. This we haven't started to see some of the data that shows us that we are seeing.
That shift for instance, certainly rapidly even even just during the summer has been picking up in Quebec, we picked up at least 1% or better market share and I know it doesn't always show up in the data like the headset data and things like that I come back I don't think you get.
The decrease but our average selling price in Quebec is 80% higher than Ontario, because of the shift into San RAF and you've always done well. There. So we are seeing it I think it will take a little bit.
We didn't see it in Q4 as much in terms of the revenue, but there's a lot of stuff happening under under the covers there.
Our core and premium brands picking up and certainly the innovation that we launched in during the summer and coming up with.
Uh huh.
Strong expectations for but can you point, we can also see some revenue fall off as we exit unprofitable.
Segments in coffee.
Gross profit level. So that's.
That's kind of what's happening there, but we're seeing the data we're seeing some of the traction, but I think it will be reflected in our financials over the next several quarters.
Okay, and I know no follow up so just just to clarify relative to your expectations, maybe just on the premium side what was the premium side of your business from consumer candidates in line with expectations.
Yes, I'll take that listen I'm never satisfied innovation accounts for the vast majority of products I mean, if you look at the data and I know you know this better than anybody the majority of products that sold in the last 30 to 60 days didnt exists more than 12 months ago. So our full year 'twenty two innovation calendar includes 80, new skus versus 80.
Five we put in the market, so what I like to see more progress.
And the San RAF and once Theyre, absolutely am I confident that we have the right plans in place and the right amount of infrastructure to meet what we need to do I do.
And so I think thats a lot.
Long winded way to say, we're pleased with where we're at but we could always be hungrier to push faster.
Thank you.
You.
Our next question comes from the line of Pablo <unk> with Cantor Fitzgerald You May proceed with your question.
Good afternoon. This is Matthew Baker on behalf of tableau with two questions. Today. So firstly can you discuss what your your cultivation facilities are currently operational and in the case of Aurora Sky. How many rooms are currently operational.
Matthew.
We've made the announcement post rationalization that we're gonna have I'll talk about sky on a second we have sky. We have Whistler, we have river and we have ridge and then we have the Nordic facility in Europe that is a incredibly strong.
Not only portfolio of manufacturing centers of excellence right now as we've talked about Sky is operating at about 25%. There's a lot of good work. It is one of the largest facilities in Canada that carries a CEO Mcs certification, which is quite a challenge and as a requirement for Israeli shipments and so.
Listen we have plenty of capacity, if we needed it but we haven't also the flexibility with those facilities to be able to right size them.
As we need to be quite anything want to add to that.
Just the second part of your question on Sky.
It isn't a matter of rooms are actually using most of the rooms.
<unk> changed some of the cultivation habits, we've got in there to produce a higher quality plan. So.
There we go.
We're operating that at 25%, but we have plenty of flex capacity to service the Israel other export markets.
Any other growth needs that we have so we feel quite confident that we'll add we've also got our outdoor facility, which coal valley. We saw commercial sales items Valley last year, and we just just taken down the harvest a couple of weeks ago from the first set of.
The first harvest is enough for you to come in the fall.
And we expect that we would see.
Commercial or consumer grade cannabis coming out of that facility as well so that's a real win for us.
Alright. Thank you for that for a second question. We wanted to know how you guys feel about the outlook for your export business and if it's reasonable to assume that this revenue flow could double in full year 2022 compared to full year 2021.
Yeah, Let me talk a little bit about Israel, and then I'll kick it and Glenn you can talk about the aggregate Israel is a very challenging marketplace. The <unk>, which is the regulatory authority in Israel, It's one of the strictest.
In the World, we have a wonderful relationship with the lead regulator there you've all land chat and he is.
Quite a leading.
Regulatory a figure around the world.
Really taken a hard stance in terms of what it takes it's beyond Siem Ucs, it's a variety of different pesticides. They look forward. So we're not giving guidance on Israel because it continues to move around we feel really confident that as long as the border is open for imports will continue to be almost unique in our ability to navigate that with high quality highly regulated.
<unk> and compliant cannabis products and for our country of 9 million people with over almost 100000 patients I think we've done an excellent job, which.
Really sets us up well for new markets coming on I mentioned in my prepared remarks about Germany, we're thrilled with that election, and having the number one flower business with also very challenging regulatory environment sets us up well for that market Glenn.
Yes.
I'll add Europe for Us I mean, this is an important container operating equal 12 countries, we're actually selling and seeing strong growth in the number of really important countries for us the UK Poland of course, Germany.
We project over the next year in India.
Riding on this but our opportunity for growth is certainly the German market, but you see the other markets as well.
I mentioned some sizing from Bds.
Where they expect certain European markets to be by 2025, and Thats just as a reminder, those are sizable markets well worth our investment love that we are leaders in Europe, but $8.0 billion market in just those countries I mentioned by 2025 gives us tons of room for.
Growth.
And our team there has continued to deliver quarter after quarter for a number of years now.
Have a great deal of confidence in our international medical business.
Thank you guys.
Thank you.
As a reminder, we would like to remind you that the requests only one question. Please for the following questionnaires.
Our next question comes from Michael elaborate with Piper Sandler.
You May proceed with your question.
Thank you good afternoon.
Good afternoon, Mike on you touched on the IP.
That you have just before the Q&A and some of the royalty opportunities or ways to monetize that can you give us a sense of.
Of timing or what we might be able to expect there in terms of how that could unfold.
Yes, it's a great question. So the company had spent a lot of money on those previously in these assets came out of the <unk> acquisition and as we mentioned we partner with 20 <unk> century accompany that that we all know well right now we're sort of in the early stages of it all indications are though that the biosynthesis and the IP.
Those pathways.
Are some of the more important ones.
Cannabinoid molecules, we know some of our peers are doing good work in that space. We also know that in other categories. It's a significant piece.
Piece of business clearly for those companies that don't want to be vertically integrated so Michael I think we're probably you'll you'll start to see us defend the IP, which we've started to do youll start to see us talk a little bit more specifically about it we're excited on the analyst day to share with you.
Some of the new talent that we brought into that space. Both on the science side as well as on the business development side, and I think with that you'll have a better sense on the timing and scope of it clearly if you look at almost any other category.
That is evolving like this there is a significant amount of IP I would also say that the legal construct to defend it is quite strong I mean this is not pie.
Pie in the Sky that accompanies youre going to be able to defend this type of IP, obviously U S is stronger than some other markets, but globally. There is a very consistent and well tread.
Pathway for companies to defend their pathways on biosynthesis in a variety of things. So we're excited about that.
Okay, great. Thanks, so much.
Very welcome.
Our next question comes from Andrew Carter with Stifel. You May proceed with your question.
Hey, Thanks, Good evening I know you've mentioned the kind of stores opening, but I guess, what we're seeing right now from stores. These candidates beyond saturation and stores aren't getting into some areas where it needs to the other thing. We're seeing is kind of the retail inventory levels are pretty high relative to where they started the year. So could you just kind of help us understand how your portfolio is positioned.
And kind of to grow with the market anywhere at the end of this quarter. So should we see another sequential increase taken a lot of heavy lifting cleaning up the portfolio just help us with that thanks Gabby.
<unk> and its a great question first and foremost the retail environment and this is no disrespect anybody that's connected to it is unlike any other regulated product you've ever seen.
Out of stocks marketing principles, the inability to have merchandising programs because of the inducement provisions the differences between.
Province to province, the low penetration of chains, there's some very good ones, but the overall store count and then to your point things coming online in saturation and so I think we're in the early days Andrew of a real optimized retail environment.
Provincial buyers and decision makers are also catching up to as we come out of Covid and when you see out of stocks from primary brands and 30%, 40% of the time and when you see the number one SKU in Canada only being in about two thirds of the stores you see a lot of opportunity for execution. So you'll have to ask one question on <unk>.
I'll tack on a statement to it how do we see our portfolio, we feel really good about our portfolio because we're now putting out high potency high tech products, both for us and for.
For some of our partners.
So you are aware of north 40, and the great work they've done they use some of our genetics with a product called farm gas they've got almost say 30 potency and so that's a big win secondly, we're partnered up with what I would say is probably the best broker network in Canada through <unk>, a division of southern Glazer, where we're able to make three times.
Number of calls we made previously and really develop and lever their excellence around that and so I'm bullish on our category in the primaries.
I will say, though we're not going to chase market share.
Company right now wants to be top five they would have to have a significant piece of discount flower and it's just not a priority for us I also don't think it's a priority for our retail partners, who are looking to hold onto margin and to sell products that would move off the shelves. So we're going to be consistent in that we're going to make money.
And I think the market will normalize and we've seen our competitors also sort of pivot to a less in a race to the bottom on price and try to focus on some margin accretion.
Thanks ill pass it on you're very welcome I appreciate it.
Our next question comes from Heather <unk> with Bank of America. You May proceed with your question Hi, Thanks. This other basket.
So I'm, just curious and putting some of the comments together that you've made with regard to consumers demand for value versus premium.
And I think you mentioned that it's taking a bit longer than you. Originally expected I'm just curious what youre seeing in terms of now that markets are starting to open up people are going into the stores more are you seeing.
Changing trends.
Any any interest from the consumer.
We've heard that there's been a fair amount of turnover in the Bud tender.
I guess since that vendors in general and how that's impacting demand for value versus premium.
Is there anything youre seeing as markets are opening up.
Sure we average it out there so I think it's a couple of things one is everybody.
He is trying to figure out what the new normal looks like and the reality is particularly on a 28 gram discount flower, it's a challenge to make money on that format. We also see.
Similar to what you see in Colorado, and California that over time, there is a absolutely a stronger group of consumers that will pay more for premium. This is now going to be the one regulated category, where all that is sold as discount.
And there's still align from one of my peers. This isn't going to be like everyone. Just goes and buys moonshine and alcohol business Johnnie Walker.
He knows there are value of brands is it taking a bit longer yet now you bring up a really interesting point about the Bud tender and I think to be fair about the environment. When you have an environment, where there's massive out of stocks. When you have an environment, where you can have formalized.
Merchandising programs and you have a market where each of the manufacturers are trying to figure out exactly what is there a specific.
Approach and with half the sales 60% of sales being something that didn't exist a year ago. The bud tenders hold an incredibly powerful.
Over the consumers and what they are many of the companies like us are starting to develop educational tools from a category standpoint, not just in the self serving way and I know the chains are also trying to bring category management principles to it so I think youre going to see an evolution of it.
Particularly as we get into concentrates in Gen. Two and Gen three products that take a little more explanation and.
And clearly.
I keep saying this is not going to be the one geography in the world and the one category, where theres not premium products sold for a premium margin.
Alright, thank you.
You're welcome Heather.
Our next question comes from John.
Some <unk> with CIBC you May proceed with your question.
Thanks, Good afternoon.
Wanted to follow up on a comment you'd made Glenn really just trying to reconcile what were seeing from data providers at the retail level with the commentary about San RAF improving in just a modest decline in daily special.
And what have you seen in F Q1 to date that gives you the confidence that you are turning around in terms of the consumer market.
Let me start and then mango.
Sure.
I think I wanted to make.
That moves data that is out there.
Because Quebec owns the retail distribution, you don't necessarily get direct data from them in these data sources. They sometimes extrapolate for the rest of Canada, where trends. So that's always been a strong market for us, particularly for San RAF in fact, most.
<unk> quarters, we saw more flower in Quebec that we do in Ontario.
We at the point that we are selling the higher margin stuff.
Our.
<unk>.
80% greater in Quebec.
<unk>.
So.
I think that was the only point is just I know we've asked you to look at the data, but the data is still evolving as well.
It's relatively new and there are.
Challenges I think can be interpreting ethane train overplay this but it just.
One of our more important markets, it's not necessarily reflected.
Well suddenly.
But we have seen.
And then I'll talk about innovation.
Critically important you'd think we finally got our pipeline plugged in really well and the introduction of these three new cultivars understand rounds.
Launched in Quebec in August and in Ontario.
Provinces in September we're seeing really nice reactions is stuff that's unique unique <unk> profile mid twenties for several of them in terms of <unk>.
<unk> potency and then farm gas.
Our partnership with the couple of batches that are hitting opex.
30% THC incredible Turkey profile. So we've got the science and the generics side plugged in nicely to kind of drive that innovation.
Clayton innovation launch plan over the next number of quarters and so that's really where we see sort of continued.
Shifting to the <unk>.
Shifting to the premium side of the market.
Yes, I mean, I guess the only other data point I'd mention is when you look at competitors when you put out a high quality product, whether it's new or whether it's an extension and what do I mean by that north of 22, you can see.
In a format thats interesting potentially high temp levels it almost.
Equally does well and so it's not a.
Secret recipe in terms of what is required here in order to meet the consumer needs.
Clearly as someone who has played a lot with market shares in.
In the premium category, it's not where I'd want it to be but I think to Glenn's point. If you look what we were able to do and get over $1 billion in revenue out of three brand new Skus in a couple of core provinces I think we're on the right track and we'll keep pushing on that.
Thank you. Our next question comes from Frederico Gomez with ATV capital markets. You May proceed with your question.
Hi, Good afternoon, guys. Thanks for taking my question.
I just wanted to touch on you are yet to be D segment. I know you guys said any impairment there.
But can you provide an update on really the strategy for that segment you guys plan to grow that business or invest any money or is it just not a priority right now thanks.
It's a great question today, we launched a secondary line called K G. Seven that's got more of a sports orientation to it.
And absolutely has a better price point on gummies, which is the largest segment.
We continue to have if not the largest one of the largest amount of store distribution in the U S.
And while we are.
Frustrated with the progress that we see at the federal level, we did see what may be the most important state that has lapped, California passed an important piece of legislation that will allow us CBD to be sold at so I continue to think that our positioning of the brand of choice for mass retail.
Throughout the country in a responsible and compliant way will play dividends for US I would also mention it's such a highly variable model that you're just not seeing losses like you see from some of our competitors in that space. So it's a one year old piece of Optionality. We're also starting to see some international markets be interested in what continues to be then everyone Nielsen ranked brand in CBD.
And that would be additive to the overall financials.
Okay.
Thank you I appreciate that you're very welcome.
Our next question comes from Tami Chen with BMO capital markets. You May proceed with your question.
Hi, good evening. Thanks for the question I just wanted to ask what's the plan for Sky and you mentioned, it's still operating at 25% capacity I would assume that's not the level of capacity like it could be running at.
For that for the status quo going forward. So what's the plan with that facility and can you just confirm with respect to your sand left so and is that all coming from internal sourcing or do you are procuring from third parties for some of that thank you.
Great. So sky as I mentioned, we have about 25% of the capacity online, but when you have margins in the Israeli business and the international business. It very quickly as an additive piece is that those businesses come more online and the difficulties in getting <unk> certification.
Patients Sky is really important also we're seeing some of those new cultivars I just mentioned now being grown at Sky and seeing a real progress in terms of the overall potency that is a nice to have and if we can get there with the cost structure of sky be totally additive. So we like what we've done there. It gives us I think the best of both world.
<unk> in that facility and we'll sort of.
See where it goes but I do want to take the second part.
Okay.
Sky.
Sky operating at current levels with the type of business that we're driving under there is actually quite quite a nice cash flow generator.
Don't don't get thrown out, but the 25% because that's not a kind of a low margin facility and new markets to deliver even stuff that brings higher margins with us which was really an important part of the repositioning and the.
And the improvement in the quality potency coming out of that facility.
Sorry, your second piece of your question.
I just wanted to ask for your steering rack supply that's all coming from internally produced product.
Wholesale some of it.
Acquirer and we've acquired a couple of small batches from some craft cores that are.
Launched enduring growers dash brand, but San rapid so the three cultivate that's all being driven out of her.
Out of our.
New genetics side of our coast facility.
Post.
Thank you.
Our next question comes from Doug <unk> with RBC capital markets. You May proceed with your question.
Yes.
Good afternoon.
It just has to do with the crop growers.
What you see in the Canadian marketplace.
Earlier in the year they did.
<unk> quite well and they were taking market share from our larger rfps and I'm just wondering if youre seeing is being sustained or D.
Do you see yourselves and maybe some of the other larger competitors, taking that share back from the crop growers.
Yes, Doug it's a great question Liz.
Listen I think there's always going to be a place in the Super premium segment, albeit not a lot of volume for a very craft regional.
Grower similar to what you might see in micro beer RC in the spirits business I would say.
Say that the large Lps.
Aurora are really leading the way of up their game in terms of delivering on what the consumer wants I think youre going to start to see.
Like we saw with San rapid the advantages of a large LP, whether thats listings whether that's.
Retail execution, whether that's innovation, whether that science are going to come to bear it's not I keep going back to this it's just not going to be the one category, where the large Lps.
The top seven only represent 35, 40% of the business might take a little bit longer than we all like but there are inherent advantages that we all and I think particularly Aurora has that will allow us to grow profitable market share now like I said, if someone wants to chase a bunch of discount flower and get 300, 400, 500 basis points and lose money, particularly on a 28 gram.
They can have it.
But I think in that core and that premium space youre going to see companies like Aurora do very well, particularly as the consumers start to expect more and get more from those large Lps.
Okay. Thank you very welcomed.
Our next question comes from Adam <unk> with Scotiabank you May proceed with your question.
Hey, guys. Thanks for taking my question.
So I wanted to touch back on Israel.
I guess I have two parts. The first one is you know thinking about the two large sales that you've made first in July and then I guess the upcoming one can you maybe talk to how much of this is the releasing of the bottleneck. That's occurred there and then secondly are you able to comment on how many Canadian Lps are supplying Israel currently.
Yeah, I don't I mean, I don't think Thats, a bottleneck I was out there in July the reality is <unk> got local Israeli companies that are high quality, they're growing candidates.
As I mentioned in the <unk>, which I have a tremendous amount of respect for and I had the pleasure of spending a lot of time with expects that Israel is going to have some of the most stringent regulatory requirements of any market in the world and be a leader in regulatory compliance that's really hard so a lot of people would love to access Israel and the margins.
I think in order to do that first and foremost you have to have popped up excellence and regulatory compliance. Secondly, you have to have a really strong partner that can execute on the ground and we're really pleased with our partnership with <unk> and third I think you have to make a commitment as a company.
Long term.
Couldn't be happier with all of those things coming together I would I don't know all the different Lps that would try to get into Israel, I can imagine with that margin structure.
Body would love to be able to get into Israel, but <unk> all the pesticide testing everything that I mentioned is not easy and so its been a handful of companies that have been able to navigate it I might argue we've done better than most but we'll stay on it and we're thrilled about it.
Great. Thanks.
Yeah.
At this time, we have reached the end of the question and answer session and I will now turn the call over to <unk> for any closing comments.
Thanks, very much John and thanks, very much for everyone for joining the call.
Look forward to coming back in November.
According our Q1 fiscal 2022 financial results.
Everyone else, please stay safe and hope to speak to you soon thanks, so much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
[music].
Yeah.