Q4 2022 Aurora Cannabis Inc Earnings Call
Greetings and welcome to the candidates each fourth quarter 'twenty.
The conference call.
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I'll now turn the conference over to your host Krishnan you may begin.
Thank you operator.
And we appreciate you all joining us this afternoon.
Today with me are Magellan Martin CEO CFO .
CFO .
After the market close <unk> issued a news release announcing our fiscal 2022 fourth quarter and full year financial risks.
This news release accompanying financial statements and MD&A will be available on our IR website and can also be accessed via SEDAR and Edgar.
In addition, you will find the supplementary information on our <unk>.
Our web site.
Listeners are reminded that certain matters discussed on today's conference call could constitute forward looking statements that are subject to risks and uncertainties related to our future financial or business performance actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect actual results are detailed in our annual information.
Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and Edgar.
Slowing the prepared remarks by Magellan, Glenn we will conduct a question and answer session for our covering analysts we ask that you limit yourself to one question and then get back in the queue. Please with that I will turn the call over to Miguel Miguel. Please go ahead.
Thank you enhance before discussing the business more broadly let me begin with a brief discussion of our latest acquisition of <unk>.
Trolling interest and bad, though one of the largest suppliers of propagated Bachelor bowls and ornamental plants in North America.
This transaction first and foremost underscores a disciplined approach to capital allocation and second is consistent with both our immediate needs and our vision of becoming a leader in global cannabis sales.
It will be managed by its existing management team. We have over 85 years of agricultural experience and have consistently demonstrated growth in revenue and earnings over the past decade.
Collectively they retain a substantial equity ownership position as they embark on our robust growth plan.
As part of the transaction that we have identified a profitable opportunity to repurpose the <unk> guide facility.
The orchid cultivation and vegetable propagation with minimal capital investment this will greatly increase <unk> production capability and extended shipping range in Canada, and the United States.
Also enable us to generate incremental revenue and adjusted EBITDA, while saving on previously announced wind down and selling costs with.
The transaction is immediately accretive to Aurora, adding approximately $9 million annual adjusted EBITDA and importantly is another tangible step towards our goal of adjusted EBITDA profitability on a run rate basis by December 31, 2022, we are pleased to have Belo as our partner and expect our investments to dry.
Significant shareholder value over the long run.
Beyond the acquisition, we feel very good about our position in the market.
Our optimism is based on the inherent strength of our global medical canvas business, where we remain the number one Canadian LP.
Medical cannabis remains the best segment to invest in.
As both defensive and stable in turbulent times and commands enviable adjusted gross margins that consistently exceed 60% two times that consumer cannabis.
And while our Canadian medical cannabis business is steady our international business saw revenues increase by over 70%. This fiscal year with notable progress in Germany, Poland, The U K and Australia.
The second reason for our enthusiasm as we continue to excel at rationalizing the business to the current environment.
As you know our annualized cost savings of $150 million to $170 million will be completed within the next two quarters and once complete will materially reduce our cash needs and get us closer to EBITDA breakeven.
Our balance sheet is also a key differentiator and has enabled us to repurchase $155 million in convertible debt during Q4, which will result in considerable savings on cash interest costs.
Additionally, we have approximately $370 million in cash as of yesterday, which makes Aurora one of only a handful of companies within the cannabis industry to have a net cash position.
Finally, we feel great about our investment in science, which is beginning to pay off specifically our breeding program has delivered nine new proprietary cultivars through our product pipeline. Since June of 2021 delivered meaningful improvement to yields and is expected to generate incremental high margin revenue through license agreements for these.
Frenetic innovations to other licensed producers in fact I'm excited to announce that we signed our first group agreement to license genetics or a major Canadian LP during Q4, and we expect more to follow.
So, let's take a deeper dive into our global medical cannabis business.
During Q4 International medical revenue was up 35% compared to last year as our regulatory expertise compliance protocols testing and science capabilities supported our leadership position.
While revenue contributions for individual countries can certainly ebb and flow as these new markets develop due to various factors, including the timing of government approvals and import permits.
We believe our exposure to nearly a dozen countries outside of Canada affords us relative installation as it relates to the economic climate and conditions in specific countries across Europe , Israel and Australia.
In Poland revenues nearly doubled year over year, and we maintained our number one market share position, we continue to invest in marketing efforts there to support our planned launch of new flower and extract products.
In the UK, our revenues increased by 25% compared to Q4 last year. We believe we're the market leader in the flower segment. The U K witnessed rapid growth in patient population over the last year and we hope to see this continue as new clinics open up.
Turning to Germany, we received EU GMP certification for our state of the art domestic medical cannabis production facility in May and made our first shipment to German pharmacies that same month.
Recall that we hold one of only three licenses in Germany and are number two in medical flower with the 17% volume share.
Our market share is also growing steadily in the extract market, thanks to new product innovation.
During Q4, we also launched three sizes of Dronabinol, making our first step into that category.
While growth in patient has moderated during the year, Germany remains the largest market in the EU was 83 million citizens with only about 100 to 120000 medical cannabis patients. We are certainly well aware of some of the economic challenges that Germany is facing at the present time as it grapples with the war in Ukraine, and the impact that.
Is having on energy prices and inflation.
Still we are hopeful to growth will pick back up this fiscal year, even against this backdrop, driven by Doctor education, and a simplified reimbursement process.
We expect to begin generating revenues in France in 2023, where we're currently the only supplier of dry flower in the pilot program.
Finally in Australia, our Q4 revenue rose, 700% year over year, driven by record number of patients.
Let me reiterate that we believe that canvas growth story will center on international medical and recreational over the next several years.
Now we believe there are about 150000 patients in Europe alone and if the countries that have so far legalized medical cannabis where to reach similar adoption levels to Canada, 1% of the adult population.
The patient pool can expand to $3 5 million people.
This fiscal year, we expect the number of new medical markets to come online in several governments have announced plans for recreational schemes, most notably Germany. So it is a massive opportunity we.
We believe our success in medical cannabis provides us with a significant first mover advantage and our leadership will be portable to rec markets as they open up.
Turning to the Canadian medical market, our leading market share was over 24%, while insured patients comprised 81% of our domestic medical sales up from 79% in Q3.
Our net revenue per order and per participating patients and both significantly increased over the past year due to a shift towards higher value insured patients while our direct to consumer approach continues to drive industry, leading margins overall.
Overall revenue was flat in Q4 compared to Q3, but we attribute our share gain to the best in class service, we offer along with new premium products and innovations.
We note that acquiring retaining and moving the patients through the process requires significant resources and experience and much of that same infrastructure and knowhow with patients in Canada is directly applicable to our success in Europe .
Switching to Canadian adult Rec, our Q4 revenue increased by $2 $3 million as compared to the prior quarter the.
The increase was primarily due to our strength in product offerings in certain categories.
Along with seven weeks of results from thrive.
Their premium consumer cannabis net revenue added about $1 $4 million.
While the environment of Canadian Iraq has seen prolonged macro challenges we are beginning to see signs of stabilization and we remain focused on maximizing profitability through low cost production and by entering higher margin categories.
The market also continues to highlight the importance of innovation and the SKU lifecycle with a typical skew generating 80% of its lifetime value in the six months following launch.
13, Skus were launched across a rec and medical channels in June alone and we have a stack pipeline that should serve us well over the coming quarters.
More broadly we believe that our scientific leadership in cannabis breathing and genetics provides aurora with a unique advantage that drives value in all tiers of the consumer and medical categories.
Our breeding program has delivered nine new proprietary cultivars through our product pipeline since June of 2021 as.
As well as bringing new products to consumers they deliver meaningful improvements in yield which will allow us to boost top quality flower and industry leading margins for.
For example, our new firm gas cultivar delivers nearly double the yields of our traditional staple cultivars and does so in an average of 26, 5% THC.
I would now like to turn the call over to Gwen for our financial review, let me quickly say that we've made incredible strategic progress during the year. We are on track with our transformation plan and we feel very optimistic about the future of the business.
Thank you Miguel and good afternoon, everyone.
We are proud to have one of the strongest balance sheet, among Canadian LP and I am pleased that we strengthened and deepened further during Q4.
But at the same time that we've been executing our cost reduction plan.
<unk> repurchased $155 $3 million in principal on our convertible notes and the <unk>.
Total cost of $149 $2 million in cash and thats, including accrued interest.
As of yesterday, we had approximately $370 million Canadian of available cash and we have $209 million U S. Principal remaining on our convertible notes.
We believe that debt reduction, even though maturity is still more than a year round is a smart and defensive capital allocation decision that reducing balance sheet risk, especially important during turbulent markets.
The debt reduction activity, so far saving cash interest cost of $9 $5 million annually.
We continue to have access to a shelf prospectus with $713 7 million U S still available.
<unk> $186 $2 million remaining under our ATM program, which remain utilized from time to time for strategic purposes.
Our cash flow continues to improve with $22 $5 million used in operations and working capital in Q4 compared to $39 3 million in the prior quarter.
Q4 includes restructuring and severance payments of $6 $8 million.
We're moving closer to our positive adjusted EBITDA target as we reduced our loss by $8 $9 million versus key point of last year.
If we compare to last quarter Q3, our adjusted EBITDA loss increased by about $1 5 million and that's driven mostly by a change in the company's sales channel mix.
As Miguel mentioned, we also expect a positive contribution from our controlling stake in <unk>, which delivered EBITDA of $9 million for the year ending June 32022.
I should note that the <unk> business is the strong seasonal cadence with the period from January to June .
It could deliver roughly two thirds of the full annual revenue and EBITDA.
So overall <unk> remains on track to achieve a positive a positive adjusted EBITDA run rate as we exit Q2.
Q4, net cannabis revenues $52 million, not as compared to $54 million last quarter Q.
Q4 revenue included a non routine $1 million provision for returns from prior periods. So excluding that prior period adjustment revenue was $51 2 million.
Medical cannabis fell modestly while consumer cannabis rose due mostly the contribution from our <unk> acquisition.
Let me now address each of our core businesses in a bit more detail.
Canadian Medical revenue was $24 9 million in Q4.
<unk> hundred $18000 from Q3, and reflecting the stability of this business.
Our focus and traction with the insured patient population is certainly beneficial to us because it provides greater consistency each of the segments in any economic environment.
While the higher margin nature of this business compared to the consumer cannabis business contribute substantially more to our bottom line.
Our international Medical revenue was $11 6 million and that reflected 35% growth versus the same quarter a year ago.
20% decrease sequentially.
The increase compared to Q4 last year was due to our strong presence in key international growth markets, including Australia, Poland and U K.
The decrease relative to last quarter resulted from a temporary situation of limited supply of high demand cost of ours in Europe , coupled with the weakened euro we expect these supply issues to continue through Q1, but to improve in the following quarters.
Taken together, our leading Canadian and global medical businesses performed well.
<unk> $36 $6 million in sales.
And adjusted gross margins of 62% down only slightly from 64% in the prior quarter.
Medical represents about 73% of our Q4 revenue.
And about 86% of our adjusted gross profit.
This segment best distinguishes us from our competitors and is critical to us.
Our path to deliver a positive adjusted EBITDA run rate as we exit December 2022.
Q4, consumer revenue was $12 6 million or $2 $3 million increased compared to last quarter.
Consumer cannabis represented about 27% of our keep our revenue and about 14% of our adjusted gross profit.
The revenue increase was due mainly to $1 $4 million from the addition of price consumer business starting may six.
And the relative stabilization of our Canadian consumer business now that being said, we do expect some short term disruptions to Q1 consumer cannabis revenue due to the cyber attack on the Ontario cannabis store distribution system.
And a significant labor strike at BC liquor and cannabis distribution centers.
As our revenue exposure from these events being as much as $3 million in Q1.
We do not expect this to impact our timelines to profitability as I just mentioned our medical business is responsible for about 86% of our adjusted gross profit.
SG&A, which includes R&D came in at $49 $3 million in Q4. However.
However, this included $6 $7 million in restructuring costs and $2 $3 million in prior period.
Related accrual this restructuring related to the significant staffing reductions we took in June 2022, as part of our business and cost transformation plan. Excluding these costs Q4, SG&A at $39 1 million.
And this is our lowest level of SG&A in almost four years ultimately, we expect to drive SG&A for the existing candidates business to below $30 million with a meaningful reduction expected in Q1, and the full savings being realized by December 2022.
So pulling all of this together.
We generated an adjusted EBITDA loss in Q4, 2020 to $12 9 million compared to $11 $4 million in previous quarter.
This is driven mostly by a change in the company sales mix, so more consumer revenue and sales in Q4, which yielded lower average net selling prices.
Looking forward into Q1 fiscal 2023, we do expect to see an improvement to adjusted EBITDA, but that will be driven primarily by a reduction in SG&A to under $35 million in Q1.
I would like to reiterate our commitment to annualized cost savings of $150 million to $170 million. These savings are evenly split between cost of goods sold and SG&A, we're seeing them reflected in our P&L either to occur for the SG&A savings.
<unk> has drawn down with production related.
Since the decisions we've taken we're working toward a leaner more agile operating model and that is expected to provide strong EBIT leverage as future revenues increase.
During Q4, we also recognize noncash impairment charges of $505 1 million.
This is relating to goodwill intangible assets and other time.
The impairment represents the full remaining goodwill balance associated with Aurora cannabis operations in.
And the impairment was partially due to changes in cannabis market conditions, but most importantly, the changes in the current capital market environment, including higher rates of borrowing and lower foreign exchange rates.
And finally, just a minor housekeeping item.
Upcoming fiscal year 2023 will only have three quarters as we are changing our fiscal year end March 31 announced in order to achieve certain internal cost and staffing efficiencies.
To conclude there are three key points for my financial review that I would like to leader.
First our balance sheet is stronger than ever and supported by a healthy cash balance reduced convertible debt level and improving working capital and cash flow.
Second.
Our medical businesses in Canada, and globally provide us with a competitive advantage and are critical to us generating sustainable profitability.
Finally, we've taken the actions to meet our targeted range for cross selling by December 2022.
These will have a materially positive impact on our bottom line and reflect a leaner operating model that positions us well for future growth.
Thanks for your interest in Aurora, and I will now turn the call back to you Joe.
Thanks, Glenn here for brief takeaways before we take your questions.
One we're better positioned than ever to achieve our goal of positive adjusted EBITDA run rate as we exit the quarter and in December of 2022, and we have lifted out several data points that support that here today.
Two our medical cannabis business is a formidable force in the industry, both domestically and internationally. It remains the smartest Canada segment to invest behind today, given the long term growth opportunities the high margins and the defensive nature of the segment described earlier.
Three the Canadian Rec market is in the process of correcting.
As the recovery is complete we will have added opportunity for market share and pricing.
Our science and innovation program represents another high margin opportunity. That's just started.
To conclude we are making significant strategic progress with each passing quarter. We're nearing the completion of our business transformation plan and have done so while strengthening our balance sheet. In addition, we've made two acquisitions in the past few months drive and then <unk>, which underscores our ability to grow organically and through M&A.
And we feel confident that we can create significant.
Long term shareholder value, particularly at these levels. We appreciate your time and interest in Aurora and now I'll be happy to take your questions. Operator, Please open the lines for questions.
Thank you and 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 <unk> questions you.
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Participants using speaker equipment and may be necessary to pick up your handset before Christmas classes. We also asked all participants that are currently in the question queue to please limit yourselves to one question.
One moment, please loan pool for questions.
And our first question comes from the line of Vivien.
<unk> with Cowen.
Please proceed with your question.
Hi, good evening.
Good evening.
So I just want to take.
Thank you.
Digging into some of the revenue versus volume dynamics that you guys experienced in the quarter.
Maybe it's as simple as FX headwinds, which were very familiar with covering large cap staples, but usually your revenues and volumes at least directionally move in tandem and it seems like there was a bit of a divergence there im wondering if theres any.
Traffic mix or other price mix considerations to callout play. Thank you.
Glen.
But I think what we saw was a bit of a mix change between consumer and medical are European medical.
It did take a step down in the quarter, particularly in Germany, or the cost of our third producing and ran into a few production problems. They are correctable during the protest and corrected but we then saw if youre looking at our average pricing or something.
Consumer, particularly with the addition of.
Driving stuff.
<unk>.
The greater impact from the consumer pricing than we'd normally see in the mix.
That might be where you are looking at.
But other than that I think it was just.
In a business as usual in terms of volume. So can you get back to that impact from more volume going through on the consumer business and a lower average pricing.
Okay. Thank you.
Our next question comes from the line of.
Michael Lavery with Piper Sandler. Please proceed with your question.
Okay.
Thank you and good evening.
Michael.
Just wanted to understand some of your thinking on the portfolio strategy a little bit more.
The greenhouse synergies with vivo makes sense and take advantage of just your particular situation and obviously add.
How bad some EBITDA, but.
Are there any other adjacencies you would be considering or that are on your radar.
I guess, just one part of it and maybe related is just also as you think about the EBITDA target is any more expected to come from M&A.
Yes, So let me try to unpack that a little bit.
As it pertains to M&A.
Our center of the plate or where we sort of levers in our medical cannabis global medical cannabis and so for that reason certain things that have been of interest to others that are probably not as much of interest to us secondly.
Our position on the U S. I think is one that's been validated its going to take longer I'm of the strong belief that it's going to be if it's federal it's going be a medical construct with the FDA involved and clearly given our.
Dominance internationally of medical cannabis, where there are a lot of options. There. So if you take the U S out of the mix and you take maybe some other things out of the mix you find certain things that maybe are more attractive to us and others. We liked thrive and we've talked about that because of the management team and the ability to really support what I think's important synergies between rack.
And medical Tableau, we think is just an absolute.
And then the Ralph.
Incredible.
<unk> science has really come.
<unk> use.
Tax benefits as it pertains to Sky and has a big upside of growth or what we thought was a fair value both for us and for their shareholders. So I think Michael will continue to look at things like that we've been terribly patient.
Latin was pretty allocating about the balance sheet. It is importantly that we have a really strong balance sheet. So we're not going to chase there, but if things come up we've got the firepower to go after them the only other place that maybe.
More interest to someone like us can maybe others are those things that connect into medical cannabis.
The opinion and I think it's been proven out.
And that you can make investments around medical cannabis and those investments in some cases, our portable around the world infrastructure systems understandings around patients and science, which is something we've made a lot of investments and are now just starting to pay dividends. So steady as we go.
We're pretty good shape in terms of the the EBITDA part.
The reality is.
If we can hold revenues and margins flat from the current level and we can get SDA under 30.
You can get there and so we expect to reap that reach that type of SG&A.
By Q2, and we've shown a lot of progress and I think while some.
You may have other questions. When we said, we're going to do something around efficiencies, we've done it and that SG&A would clearly be consistent with that.
Okay really helpful. Thank you thank.
Thank you Michael.
Our next question comes from the line of Pablo <unk> with Cantor Fitzgerald. Please proceed with your question.
Thank you good afternoon.
I am looking at it brings released tillery issue on September six Tilbury initiated on table, we gentlemen, regulators sticky Gulf, Jeff legislation to legalize cannabis in Germany.
And I'm wondering when I saw the press release, you say well I mean, I suppose that Aurora will soon issue a similar press release. So I guess a question on the very basic question is can you tell us or give us some color.
You are lobbying capabilities.
Underground potential seat at the table.
In helping drive the gentleman program, because again I was surprised still ratio. Please release and we didn't hear from you.
Part B to the question.
Where do you guys stand today versus where they were Germany will allow imports. We're just going to be initially mostly just domestic production. Thank you.
Got it so the first thing is I'm not here to comment on anybody I have tremendous respect for my competitors.
And what they do is what they do but so I really have any comment on that in terms of the German market. We've made a significant investment in Germany. We have what we think might be one of the leading government relations government affairs executives and Germany.
He is.
Having good conversations with the regulators I've spent my whole career working on things like this in both tobacco and alcohol and they are never a straight line.
As it pertains to Germany. There is two things going on as you well know and you've written a lot about.
As both enhancements.
To the medical business, which we're very excited about is one of the leaders in medical cannabis in Germany, and secondly, as the legalization of the rack business. So my understanding and our understanding is that industries.
What industry needs in order for that to be successful is being considered by the German government is almost always are being very thoughtful about the stakeholders and the timing in which this can be done in a compliant way I would expect their learnings from medical will color our <unk>. So go about.
The implementation of our rack business, which is why we think those companies that.
Have facilities.
With the medical business will have advantages and rack and as we've said earlier one of only three companies that have a license to produce in Germany.
Now specific to your question about <unk>.
In country.
I think the going in position I think for most folks should be that because of the the UN conventions and just because of the way the rigs are going to work.
Or rack is dead.
<unk>.
Most obvious path for rack would be in country manufacturing now clearly whether the number is 200 tons or 300, thousands of 400 times in order to service that rack market that is simply more capacity than the three of us have.
But clearly that would be an opportunity. There. We've also would say that while rack most likely will be an in country production exercise medical continues to be allowed within EOG M. P certification to have products brought into Germany, we do that successfully today from both our Nordic facility as well as our <unk>.
Gideon facilities, and we think it's one of our core competencies so more to follow on Germany, I understand the interest in it.
I think what I would tell people is its going to move thoughtfully.
Not always be estimate line.
But we have tremendous respect for the regulators they are and what we've seen from the medical business and I think my expectation is that it will be a robust rack business I just can't predict when but at the time it will be compliant companies experienced companies and thoughtful companies will have an advantage in Germany, and then clear.
<unk>, Germany implement this that will be a beacon for other key markets around the world in terms of how you can go for medical cannabis into recreational cannabis.
Understood. Thank you.
You got it.
Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.
Yes, hey, thank you focusing on the basketball business, which we certainly have experienced with covering site. One number one do you see this platform to go deeper in this given the statistic.
It's a very fragmented space and you know how that team to run that and then the second you had the decision to repurpose sky versus selling it which that's an opportunity cost if you will kind of at the cost of acquisition.
Kind of timeline are you, giving the <unk> team to get this up to speed achieve a return versus if it didn't go well kind of returning to that original selling the facility and also getting rid of all of the costs associated with.
You got Andrew So first on <unk>.
<unk> is a tremendous business and you guys did cover it and so did others I think it is it is a fallacy to say that <unk> didn't work in that previous construct when it was connected to another cannabis company.
So good work, it's just that combination did not work we are not combining <unk>.
Where the Aurora from cannabis assets and non Kansas assets, So theres that secondly bell.
<unk> is a tremendous business they have significant big box contracts, both in Canada and U S. And there is a lot of opportunity right now in North America for them to expand that business, both in Canada, and the U S because of shipping costs and many of the items that they produce.
Our produced offshore in Asia and Southeast Asia.
And so they have tremendous opportunities there and we're excited about that particularly since it can be done in a very capital light manner, it's not going to draw down cash resources from an award it would expand that and the team that has successfully run it is going to continue to run. It. This is not award is not pretend to have excellence in Oregon.
Propagation. So it was key for us to have those key folks layoffs and Andrew in those key guys over there to run it and we're thrilled about that as it pertains to the sky.
Listen I don't want to get you bumped up about this but the combination of the tax benefit the repurposing the changes in the tax designation and the upside that it presents very quickly for <unk> was a way better deal than being caught up with everybody else trying to sell cannabis assets and at the end of the day.
If they can't get there.
We can always solid net key Edmonton market, but the beauty.
There is such a thing of all the money. That's been spent on Sky is theres not a lot of capex or opex required by <unk> in order to generate revenue. So as Glenn mentioned, the <unk> business is a bit seasonal contributes more in our Q2 Q3 than it does in Q1, but to answer your question I think we'll know in the <unk>.
Next nine to 12 months exactly what sky means for Belo and.
If it doesn't work out we still have that optionality, but the offset of all the things I've mentioned make that play significantly better advantage for Aurora than just selling it for pennies on the dollar.
Thanks ill pass it on.
Welcome. Thank you.
And our next question comes from the line of Andrew Baum with Jefferies. Please proceed with your question.
Hey, good evening, Andrew bottom line for Owen Bennett. Thank you for taking our question.
From us on the international segment.
Can you give us some more detail on our performance between markets not looking for an exact breakout, but I think last earnings call you all discussed.
<unk> to launch extracts in the U K and <unk> and also some top market share positions in the other key markets like Australia, and Germany, Poland. So any detail on where sit where sales came from in <unk> and where there might have been some weakness relative to <unk>.
And if I could just sneak in maybe more broadly how you would characterize growth ahead in fiscal 'twenty three thank you.
Sure let me take.
Topline comment about international and some of those key markets and I'll, let Glenn get into some of the details about it. So as we said in our prepared remarks is really important to be operating in a lot of countries.
That operate in the right countries and so the reason for that is these sales are still a bit lumpy. We've all seen that in what's happening with Israel, but whether it's import permits our shipments or the rags sort of evolving and get these sort of months where.
Sales into this month's you don't secondly, a lot of these investments can play out and really generate incremental margins and revenue.
If theyre laid over a broader system. So the same production system. The same cultivars. The same genetics. The same a lot of things are similar to what we do in Germany, Czech Republic, Poland on and on and on now you have to have different distribution models to take advantage of those different pieces and we've done that and so in most markets where just the manufacturer.
In other markets, we have a sales force in the wholesale piece.
The western European or the international market as a whole.
He is absolutely growing and clearly is the fastest growing segment of global candidates, which is this medical piece and I will say that the regs are quite similar whether thats packaging stability testing manufacturing EU GMP. There has been sort of consistently an evolution that advantages our companywide.
Now in terms of the actual specifics on the country breakout Glenn I'll turn it over to you.
Yeah. Thanks, So I mean, we keep calling out the same countries is kind of the dominant ones for us in our in our.
<unk> network, and that's Germany, Poland, and the UK and Australia, but can we go point and they definitely are lumpy like Australia for instance from Q4 was up 75% from the previous quarter, but then as you look at Q1, and then I'll kind of it will come down again in Q2 looks looks good again.
We've called it a lumpy or something Thats why its really important to have that portfolio because for the most part of our international businesses is fairly predictable, but country by country.
<unk> and <unk>.
If they find where those barriers are that need to be knocked down patient assets things like that no investment story in Australia, and Europe came back.
Improved patient accessibility and the market seems to be really taking off in terms of our extract in Germany. We did launch in Q4 late in Q4. So we don't see much in terms of revenue in Germany in Q4, but it is an important part of the competitive landscape. There. So we are in that market now and we'll report more.
As we go forward.
And how that piece of our business is doing so again, Germany, Australia, UK, Poland being the predominant to international medical markets for US right now, but I'd say theres, probably at least four or five others that are contributing revenue in Q4.
Got it thanks Glen Thanks, I appreciate it I'll pass it on.
Thank you.
Our next question comes from the line of.
Matt Bottomley with Canaccord Genuity proceed with your question.
Good evening, everyone. Thanks for taking the questions just two questions from me on the revenue side of things.
First just on the consumer.
Sales in Canada, there's a bit of a divergence. So I think it was noted with respect of ourselves relative to the macro level data on some of these point of sale subscription services. We all look like so Glenn you had mentioned some of the headwinds related to maybe the ocs website or some others. So I'm just wondering if you can give us a little more color on that and the second question on revenue is just related to your international sales as the current.
11% to $12 million that you did in Q4, if that just stays flat for the sake of argument is that sufficient to get you to your profitability targets on an adjusted EBITDA considering a lot of your margin does come from those self thanks guys.
Yes.
I won't comment on the syndicated data.
And then Glenn because obviously give you the background.
One of the gaps in some of the syndicated data that everybody looks at US, Quebec, Quebec is our largest province in terms of sales.
So in other ways.
What we're doing I think generally the <unk>.
<unk> business overall for an LP is generally challenging.
It was referenced before what happened with the hack. Unfortunately in the Ocs that caused about two weeks of disruption. They did an unbelievable job to get back up and running we also saw the strike out in BC that had a pretty significant effect for a long period of time, that's been cleaned up as well.
Combination of that and retail stores feeling a lot of pressure plus compress margins. Overall means you really have to be sort of.
Focused and where we went in the thrive team has done a tremendous job and you can still there are some places you can find to make money.
Premium flower, obviously, but vapes concentrates and some of the other things that they are particularly good at so I think we're going to be in this wash a little bit longer.
In terms of what the macro sort of issues are with rack, but when it comes out.
There is tremendous amount of efficiencies where someone that does as well as we do in medical and rack to.
To have some of those items, particularly as patients are starting to look for more premium items and clinicians are starting to be more open to variety. So Glenn you want to pick up the rest of it.
Yes, thanks very much Neil.
So certainly consumer revenue.
Current levels, we'd be more than adequate to get us to our profitability goal.
Certainly picking up the message that most of our gross profit has been generating of our out of our.
Medical business, so 86% in Q4 and that was the quarter, where where our international medical it a little bit of a pause so.
Normal quarter before Q3 was 90% of our gross profits were coming out of our medical system. So absolutely as we see growth picking up again in Europe in Australia over the next number of quarters Canadian business objective is to stabilize it.
Getting on good footing and give it to keep the launch pad for growth in the future, but the short term plan is to really get to our profitability go on the back of our medical businesses.
I appreciate all that thanks, guys.
No.
Our next question comes from the line of.
Preclinical Gomez with ATB capital markets. Please proceed with your question.
Hi, Good evening guys. Thanks for taking my questions.
As far as just.
Yes.
On the international side.
No.
<unk> seen some increased competition in some markets, namely Israel.
Several other.
<unk> is an international company is exporting to different markets. So can you talk about how you see that competition coming.
Are you seeing any margin pressure in international and <unk>.
What sort of advantage do you have to compete.
Our main markets like Germany, and Poland. Thank you.
Sure. So listen I've spent a lot of time in Israel in Israel is obviously, a key market for a lot of bumps the challenges we've talked about it in Israel is they have a significant amount of local production.
And clearly that has advantages so the import permits and the process.
And the certification of Israel is sort of an evolving one what we've said.
That is that we're not going to give any forward looking guidance on Israel, but when we have a shipment we always let people know because of the size of it I'm not we haven't had a shipment and a bit on Israel I don't think Thats, a forever situation, but right now it's not as big a focus because to your point there has been a little bit of margin.
Pressure and a lot of people are fighting for that including the local growers that have a lot of advantages and <unk> got tremendous respect for that overall internationally because of the medical setup, we haven't seen the type of margin compression that you've seen.
In the Canadian Rec business or in the U S. Overall.
And these are really hard markets to get into Germany, which everybody talks about is about a six or 12 month process in order to even qualify a cultivar the variance on the potency can only be 10% in their lab, which is a very difficult standard to get you.
And there was a significant amount of other work that you have to do around stability testing and whatnot. The other piece of this.
Is the fact that patients are quite sticky once they find something they like.
Whether it's ours or a competitive product unlike rack, where you see massive share movements between top Skus you don't see that in the medical business and Theres clearly first mover advantage there is clearly.
Our consistency advantage to those companies that can keep stuff in stock.
And our rolled out of the medical markets So international candidates.
In most markets Youre seeing maybe four companies, possibly five companies, making up the <unk>.
<unk> share of sales as we've all talked about.
Gideon rack as an example, the top five companies do less than a third of the overall business and so I think the international business has proven to be sticky.
And as you go forward.
With the advent of things such as clinical research partnership with clinicians these systems getting bigger I think youre going to still see.
Most markets, particularly big markets like Germany that three or four companies will do the lion's share of the business.
For a long time, and we expect award would be one of them.
Got it thank you Neil.
You're very welcome.
Our next question comes from the line of John <unk>.
D C.
With your question.
Thanks, Good evening I wanted to get back to that though and if we think about the evolution of Aurora over time, it used to be a pretty broad expansive business at multiple segments.
And then narrow down to be purely candidates.
And certainly outside the core strategy of what the company was but what I'm wondering is should we view. This as <unk> was trying to optimize the decision with with Sky or do you want to further diversify the business away from just pure candidates at this point.
I think.
John I'm, sorry did I know, we talked about this you and your folks this week.
Here's how I would think about <unk> everything that we do.
Is about being a global leader in medical cannabis in order to do that there are two things that we've been innately focused on one is profitability and secondly is strengthening some core underpinnings that we think will be an advantage too.
That pursuit of global.
Leadership in medical cannabis Dabo was really interesting to us where a couple of reasons one is about sky and so the the tax option there the use of sky the ability for it to very quickly without capex produce a significant amount of predictable.
Profitable revenue was important to US secondly, there are synergies and efficiencies, we haven't gotten into them, yet and we're not going to do it in a disruptive way, but propagation has always been.
There is sort of interesting play in Canada, and while it's done in the U S. It's not really done.
And Canada. So the excellence of 80 plus years around propagation science, there will be things that will come out of the <unk> system or the Aurora system that will be additive and as we look at agriculture as a general sort of play in things around it we do see it's additive.
<unk>.
The concept of adjacency I do believe and staying close to the core.
But if there are things there.
Our profitable is a good value for our shareholders and as additive both financially and thematic lead, particularly from a science standpoint to our overall.
<unk> I think we're going to be interested in that and I'm pretty proud of this deal.
So a lot of different reasons, but proofs in the pudding and I don't want to get over my skis too much on it but this is a really great team a really good use of assets Capex light.
And produces a lot of strength for us.
That's helpful. Thank you.
Very welcome.
And our last question comes from the line of Henry Chen with BMO Capital markets. Please proceed with your question.
Hi, Thanks for squeezing me in my question is on the sign side, particularly the licensing of genetics.
Was just curious.
There are aspects of design business.
Do you see that.
Within the overall business.
I think just in areas that we're very focused on and we do want to expand on like what's the opportunity size that you see and I guess.
Lastly, I had a question I have.
Whatever genetics that to come out of R&D and innovation that RK I'm just wondering like why don't you just keep that for yourselves and globe for your own business, whether it's medical or consumer segment. Thank you.
Very welcome. So it is something we're focused on Aurora has spent an inordinate amount of time and effort on this and it may be I don't want to say.
It is but it may be one of the largest genetic facilities connected to cannabis in the world and so as it pertains to that there are significant advantages not just around variety and uniqueness of the call device say chasing potency and <unk> levels.
Hell I referenced yield current gas is twice two X the yield per square meter than some of our historical cultivars that totally changes footprint and all types of different things that are going on there is incredible work being done on things like powdery mildew.
And so what I've seen is that when you look at other agricultural categories. There are companies that are not branded that are not participating from a manufacturing standpoint are selling their items, but theyre genetics their science and they are participate in those markets and we're all familiar with them no one's really doing that today.
<unk>.
On a global scale, and we think Theres a space. There I also don't view it as a client as a conflict we have about a three share in the rack business. We have a 24 share in the Canadian medical business and we have enough assets in order to serve our pipeline.
Both domestically and internationally as well as sell that and some of these licensing deals are very innovative and to be honest are not overly creative and you see them in other categories, such as soybean in vegetables, and Tomatoes, and other things that were around because of some of our partnerships.
And so like I said, we're excited about this the last part of this while there are some Lps doing this there is a huge gap.
From particularly Canadian Lps and accessing.
World Class genetics, they just haven't done the work and it's not something you can snap your fingers and startup. This is a five or 10 year process in breeding and genetics and training in order to be there and so we're excited about what it means for us and you see some of those some of that stuff in the market. We're also excited about what it means.
For being able to sell it and generating revenue streams because the reality is we're not going to have a 50 share of the rack business.
Unlike past businesses, where we've been having these massive market shares. So there's plenty of place to do it and as this stuff evolves. It is our hope will be able to sell genetics internationally as well so I think its a great play.
Or is the entirety of that spend is already accounted for and we think there's huge upside in not only for us both for others in accessing those genetics in those incredible sort of science innovations.
Okay. Thank you.
You're very welcome I appreciate the question.
We have reached the end of the question and answer session now I'll turn the call back over to Martin for closing remarks.
Well listen I appreciate everybody's interest.
Our plan is absolutely on track and I understand as I mentioned with the regulations that the progression of our successful canvas company is not a straight line, but in terms of the cost efficiencies, we've done and we'll do what we said we focused on those areas of the business that is profitable and we do see an upside and as these market.
Continue to come online.
It's been medical first and then rack and we think Aurora is in a great position. So we appreciate your support we appreciate your interest and we look forward to sharing our progress as we move forward best all in your family's wish you all but the best and we'll go from there. Thanks everybody.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yes.
[music].