Q1 2023 Aurora Cannabis Inc Earnings Call
[music].
Greetings and welcome to the Aurora cannabis incorporated fiscal 'twenty twenty-three first quarter conference call.
All participants will be in a listen only mode and a question and answer session will follow the formal presentation.
This conference call is being recorded today Thursday November 10th of 2022.
I would now like to turn the conference over to your host an announce Krishnan Vice President strategic strategic finance. Thank you. Sir. Please go ahead.
Thank you John we appreciate you all joining us this afternoon with me today are CEO , Miguel Martin and CFO Glenn EBIT.
After the market closed Aurora issued a news release announcing our fiscal 2023 first quarter financial results. This news release and accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and Edgar.
In addition, you can find the supplemental supplemental information deck on our IR website.
Listeners are reminded that certain matters discussed on today's conference call could constitute forward looking statements that are subject to risks and uncertainties related to our future financial or business performance actual results could differ materially from those anticipated in these forward looking statements the risk factors that may affect actual results.
<unk> are detailed in our annual information form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and Edgar.
Lastly, I want to remind everyone that we will be holding our annual general and special meeting of shareholders on November 14th.
And the meeting materials have been mailed out to shareholders or it can be found on SEDAR or on our IR website <unk>.
We encourage you to review the meeting materials before voting your shares at the meeting and look forward to your participation in a virtual only format.
Following prepared remarks by Magellan, Glenn we will conduct a question and answer session with our covering analysts. However, we ask that you limit yourselves to one question and then get back in the queue for follow ups.
With that I will turn the call over to Miguel. Please go ahead.
Thank you.
We will keep our remarks brief as our Q4 conference call was held recently, but I wanted to reiterate a few key items before I turn the call over to Glenn for an in depth financial review.
We are very close to achieving our primary objective of reaching positive adjusted EBITDA.
EBITDA by the end of the calendar year. This will be an incredible achievement that we believe is also sustainable.
In fact, the structural changes we have made over the past several quarters have resulted in long term benefits for Aurora and we look forward to demonstrating consistent financial performance in the coming quarters.
Our enthusiasm is anchored by our position as the number one Canadian LP and global medical cannabis and the underlying topline trend is undeniable upwards into the right with a loyal base of patients within existing medical markets and more developed countries poised to open up.
Beyond revenue medical cannabis also commands enviable adjusted gross margins that consistently exceed 60% twice that of consumer cannabis.
For these reasons along with it's defensive nature in volatile times, we believe medical is the best segments invest behind.
The second anchor of our enthusiasm has been our ability to rationalize the business to the current environment.
The annualized cost savings of $150 million to $170 million will be complete by the end of the calendar year at which time, we will have materially reduced our cash burn and become EBITDA positive as I said a moment ago.
A third anchor of success as our balance sheet, which is stronger than ever and has enabled us to repurchase approximately $217 million in convertible debt. Since Q3, 2022 and has resulted in considerable savings on cash interest cost about $12 million annually.
We are further benefiting from improved working capital and cash flow and are fortunate to be one of only a handful of companies within the cannabis interest or a net cash position and turbulent and uncertain times. This is imperative.
Finally, our investments in science breathing and genetics are really beginning to pay off.
Proprietary cultivars loss from our breeding program in the last 12 months were responsible for almost a third of our revenue in Canada during Q1.
Driven meaningful improvements to yields are now generating incremental high margin revenue through license agreements.
We originally signed royalty based agreement the license genetics two of the largest Canadian Lps by canvas revenue and expect more to follow.
So with those key strengths as a backdrop, let's take a deeper dive into our global medical canvas business.
During Q1 International medical revenue fell compared to Q4 last year. This was largely due to timing of shipments so the Australian market, which resulted in lower sales in Q1.
Although we expect a solid delivery and recovery in Q2 as we have long said international is somewhat unpredictable on a quarter to quarter basis and revenue contributions from individual countries can ebb and flow as these new markets develop this.
This is why it is so important for us to be operating across many countries nearly a dozen outside of Canada.
Rod reach affords us relative installation to the economic climate and conditions in specific markets across Europe , Israel, and Australia that means the overall trend is towards growth.
And our regulatory expertise compliance protocols testing and science capabilities support our leadership position.
Now, let's discuss developments in a few select countries.
In Germany, the largest market in the EU with 83 million citizens with only about 100 to 120000 medical cannabis patients the health Minister presented a cornerstone paper unplanned rec legislation on October 26.
The plan is designed to regulate the control distribution and consumption on cannabis for recreational purposes, among adults and he said it could become law in 2024.
We believe <unk> position as one of only three companies with the medical domestic production license and our current position as the number two L. P and the dry flower segment will give us a significant advantage as the regulatory framework continues to be developed.
In Poland, we are maintaining our leadership position by continuing to invest in marketing to support our flower and extract products. Despite new entrants. We completed two shipments during Q1 and submitted dossiers for three new products for regulatory review, but the timeline to market of approximately one year.
In France, our market that we believe could be as big as Germany authorities have announced that the French medical cannabis pilot program is going to be extended by another year until March of 2024 hour internal assessment as well as discussions with our distribution partner, we've decided to continue participating as the sole supplier of dry flower to the country.
To ensure our Aurora is positioned for success long in the French pilot.
In the Czech Republic beyond our continued success in the dry flower segment regulators approved the import of new extract products, including THC dominant and balance extracts.
We also hold leadership positions in other key markets, including the UK and Australia and expect continued growth in these markets is the number of prescribers and patients steadily grow.
And so the cannabis growth story continues to play out across international medical and recreational markets and growing acceptance acting like a domino effect the.
The bottom line is this as we said many times our success in medical cannabis provides us with a significant first mover advantage and we believe our leadership will be portable to rec markets as they open up.
Turning to Canadian the Canadian medical market, we saw some churn in non insured patients, but we continue to improve the contribution of this business through finding efficiencies importantly, the absolute level of revenue from insured patients does not decline and insured patients comprise 83% of all medical sales compared to 81%.
Q4, while our leading market share is approximately 24%.
We are very optimistic about the future of this segment as we continue to increase the number of patients in the insured category and have seen consistent increases in basket size and participation rates over the past few quarters as we continue to improve our offerings.
Switching to Canadian adult wrap our Q1 revenue increased sequentially by 9% compared to Q4, primarily because of our strength in product offerings made possible through our thrive acquisition.
In Q1, we benefited from an extra month of drive contributions versus the previous quarter.
Never the Aurora business declined slightly due to the ocs cyber attack on a strike in BC.
Thankfully those issues are now fully resolved. In addition margins were roughly flat quarter over quarter. Looking ahead to Q2, we will miss his shipping week due to the December holidays.
As our Canadian Rec business continues to evolve despite along and continuing period of macro challenges our focus remains on maximizing profitability through low cost production in high margin categories.
We continue to believe our investment in science innovation drives a significant competitive advantage in this quarter debuted in unprecedented fall lineup of cannabis products across adult use and medical markets. These new products were doubt developed from a deep understanding of consumer and patient interest and needs and contain all the critical components necessary to.
Compete intensely exciting enrollments E visual and tactile attributes and high potency THC.
In fact, beginning last month Aurora patients were given access to the largest ever selection of products and formats on Aurora medical.
During Q1, we launched 24 skus in the medical channel and will be launching another 78 in Q2.
The products from our full portfolio of adult use cannabis brands, including being clip strips graybeard premium flower a wider selection of pre rolls, new concentrates and a new offering of minor cannabinoid oils.
The online rollout was then followed by availability in Canadian.
Adult use retailers with select products available in certain regions.
The synergies related to innovation and the leveraging of infrastructure in developing and launching medical and adult products are clear and our ability to be competitive in both provide us with inherent advantages.
Turning to our scientific leadership in cannabis breathing in genetics. We think these attributes will provide us with a distinct advantage that drive value across all tiers of the consumer and medical categories as our new product launches demonstrate.
We continue to drive meaningful improvements in yield through new proprietary cultivars, while our breeding program enables us to produce top quality flower at industry leading margins.
As an example, our farm gas cultivar delivers nearly double the yield of our traditional cultivars and does so in an average of 26, 5% THC.
We also remain committed to further medical cannabis clinical research in Canada with the first shipment of product to a palliative care study occurring last August .
Finally, let's discuss <unk>, which is one of the largest suppliers of propagated vegetables and ornamental plants in North America.
Recall that we purchased a controlling interest in <unk> back in August and anticipate that will drive significant shareholder value to us in the long run as.
As part of the transaction, we are repurposing, the Aurora Sky facility for orchid and vegetable propagation with minimal capital investment. This will greatly increase <unk> production capability and extended shipping range in Canada and the U S. We will also enable us to generate incremental revenue and adjusted EBITDA, while saving on previously and.
<unk> wind down and selling costs.
For the approximately five weeks that we controlled <unk> in Q1, and contributed $3 $3 million to our revenues and achieve adjusted gross margins of 16%.
When we announced the controlling <unk> and Balco, we highlighted the seasonal nature of their business with the January to June period, representing the majority of the revenue and EBITDA generation of the business.
<unk> is performing to our internal expectations and is expected to be a positive contributor to our path to positive adjusted EBITDA and with that I'd like to turn the call over to Glenn for a financial review.
Thank you Miguel and good afternoon I'd.
I'd like to begin by reminding everyone that we are pleased to have one of the strongest balance sheet among Canadian Mlps and this quarter is no different.
As of yesterday, we have approximately $393 million of cash, including $58 million of restricted cash.
About $186 million of principal remaining on our convertible notes that are due in 2024.
Subsequent to September 30 at quarter end, we repurchased $23 million in principal on our convertible notes at a total cost of $21 $8 million in cash including accrued interest.
We believe that that reduction even though maturity is still more than a year out is a smart and defensive capital allocation decision, which reduces balance sheet risk.
Especially important during turbulent markets our debt reduction since Q3 2022 has resulted in annualized cash interest savings of approximately $12 million.
And we continue to have access to significant capacity under our base shelf prospectus, including $156 8 million U S dollars remaining under our ATM program, but.
So that reflects having issued $23 7 million shares subsequent to September 30 for gross proceeds of $40 $2 million and thats can be used for strategic purposes, including debt reduction.
Our cash flow is improving.
With $20 $1 million used in operations and working capital in Q1 for a $12 $4 million, excluding restructuring costs and thats down from $22 5 million in Q4.
In Q1, we reported approximately $5 $5 million of capital expenditures down from $7 8 million last quarter.
Q1, Capex was fully offset by proceeds from disposals of property and equipment and from government grants are ongoing cost transformation program is expected to continue to improve operating cash use over the next several quarters.
Total revenue in Q1 was $49 3 million.
And of that net cannabis revenue was $46 million compared.
Compared to $52 million last quarter.
This change was driven mainly by timing of shipments into Australia during the prior quarter.
And our ongoing strategic focus and our Canadian medical business on the higher margin mature patient base.
It was partially offset by contributions from our thrive acquisition or consumer cannabis business.
So now let me address each of our segments in a bit more detail.
At the core of our plan to achieve near term positive EBITDA is our focus on protecting and growing the profitability of our industry, leading Canadian and international medical cannabis businesses.
Canadian medical revenue was $23 $4 million in Q1 down 6% from Q4.
<unk> to focus on growing the bottom line of this business by improving our portfolio protecting our margins and becoming a more efficient provider of medical cannabis patients.
Our international Medical revenue was $8 2 million and reflects a 30% decline versus Q4.
<unk> decrease was due to the timing of shipments to certain international markets, particularly Australia during the prior quarter we.
We do expect a rebound in our international Medical segment next quarter being Q2, returning to levels more consistent with Q4 of 2022.
Taken together, our medical businesses in Canada, and internationally and generated $31 $6 million in sales and a gross margin of 67% up from 62% in the prior quarter.
Strong margin profile remains above our minimum target of 60% is an important gross profit driver for us that distinguishes <unk> from our key competitors.
In Q1, our consumer revenue was $13 7 million, a 9% increase compared to last quarter <unk>.
The increase is mostly due to full quarter contributions from slides consumer cannabis brands, which more than offset the impact of the cyber attack with the Ontario cannabis store and store closures due to an employee strike in PC counterpart stores.
This is the second consecutive quarter of growth in our consumer business, which in the face of consumer market headwinds is very gratifying.
Adjusted gross margin before fair value adjustments on our consumer cannabis net revenue was 25% in Q1 compared to 26%.
Prior quarter.
We recognized $3 3 million in net revenue during Q1 from our controlling stake in Buffalo has.
As Bill mentioned several has the seasonal cadence with the periods from January to June expected to deliver roughly two thirds of Douglas full annual revenue and EBITDA, which is reliable predictable and supports our overall drive positive EBITA.
Excluding restructuring and other normalizing costs of $10 $4 million or SG&A and R&D continue to be well controlled down at $33 4 million.
During Q1 versus $37 8 million from prior quarter.
And in line with our previously stated range of being below $35 million. We are on track to deliver the company's commitment to reducing SG&A to below $30 million by the time, we exit December 2022.
So pulling all of this together we generated an adjusted EBITDA loss in Q1 of $8 7 million.
Third to $11 6 million in the previous quarter.
This improvement is driven mostly by reductions in SG&A and by a 3% increase in overall adjusted gross margin.
Now as part of our business transformation plan, you are aware of our commitment to annualized cash cost savings of $150 million to $170 million.
Beyond posting positive adjusted EBITDA, we have been working hard to rationalize our operations footprint and continuing to improve our cash flow. These actions are on track with annualized savings of $140 million already achieved and the remaining coming in Q2 with.
With respect to cost of goods. This has been a crucial initiatives for the company as you can see our gross margins continue to deliver value for us and to lead the industry.
Finally, a quick reminder, on an important housekeeping item fiscal year 2023 has only three quarters as we are changing our fiscal year end to March 31 2023.
In order to achieve certain internal cost and staffing efficiencies.
So to wrap my section of the key drivers for Aurora.
To reach our positive adjusted EBITDA milestone by the end of this calendar year.
Starting from our Q1 loss of $8 7 million.
As follows.
We expect revenues to recover in Q2 as the negative impacts of certain cultivar supply and our wholesale distribution disruptions affecting our European medical and Canadian consumer business unit have been resolved.
And our non EU International segment revenue returns to normalized levels consistent with that of Q4 2022.
Second we expect a full quarter of revenue and positive adjusted EBITDA contributions from the <unk> business, albeit on a seasonally affected basis.
We expect adjusted gross margins to be consistent with fiscal Q1 2023.
And finally.
We expect to achieve our previously stated objective of quarterly SG&A expense as being below $30 million.
Thanks for your interest I'll now turn the call back to Adele.
Thanks, Glenn I'm going to leave you with four thoughts before taking your questions first we're just one quarter away from achieving our goal of positive adjusted EBITDA cost savings are nearly complete and going forward, we will have a lean and flexible operating model.
Second 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 with excellent growth opportunities.
Third the Canadian Rec market is correcting and the two acquisitions, we've made and thrive and Belo will be even more beneficial to us once the recovery is Bob is upon us.
And last our science innovation program is a high margin opportunity is just starting and we look forward to sharing more in the future as the business grows.
To conclude we are well on our way to becoming a leader in global candidates and are making strategic progress to that and with each passing quarter.
Our completion of the business transformation was near on time and on budget and we've done that without sacrificing our investments in growth.
<unk> also done this while strengthening our balance sheet, which is critical in today's environment.
The end result will be a positive and sustainable structural change to our business that will enable us to be successful in the long term and create significant shareholder value.
Thank you for your time and interest in Aurora, and we look forward to sharing our progress.
Now I'll be happy to take your questions. Operator, Please open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on the telephone keypad.
Information tone will indicate that Youre line is in the queue. You May press star two if you would like to remove your question from the queue.
And for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, we ask that you. Please limit yourself to one question only and if you have a follow up please reenter the queue.
One moment, please pull for questions.
Our first question comes from the line of Vivien <unk> with Cowen. Please proceed with your question.
Thank you and good evening.
Good evening Brian .
No.
Just touch on Europe . So you guys have been really transparent about your expectations for fiscal Q and why you're expecting a recovery in it all mix.
Let me go I was just hoping to get some perspective on how you view that business as defensibility.
In a more challenging macro environment, certainly through kind of traditional consumer staples earnings in European weakness.
The part of our ECL has been incredibly topical so I just want to get your perspective on that thanks.
Great question I think if you look at Canada as an example, <unk> got over 200, 5300 Lps that compete in Iraq business and you've got a bunch of people.
That are facing some tougher times when you look at the medical business is very concentrated and why I bring that up is because it's been going on for a long time. So we have a 24 a share.
As the leader in Canadian medical by a mile than you have 9%, which is the number two company and then it really falls off.
And there's just not a lot of companies participate when you look at Europe , and I think Germany is a really good example, you.
<unk> got basically four companies, maybe five companies that do the vast majority of the business, it's incredibly expensive to get in it's incredibly challenging.
To continue to deliver and the regulatory thresholds are significant and so there really is sort of a moat around medical and it's not just Germany you see this in other markets, where it's a consolidated number of companies. It takes a very specific skill set and what is interesting that is starting to really come to the.
<unk> front now is that that.
Challenge that difficulty is portable so the best example, I can give is if you look at the framework presented by our call Lauder box.
We're just sort of the federal Minister of health in Germany, That's now going through the EU you just saw the Czech Republic, which is another great market in a really good market for us talk about wanting to mirror or just get the learnings from the German.
Experience and so I think youre going to start to see consistency in these markets from a regulation standpoint, everything from manufacturing to testing the packaging the sales and marketing and so I think.
While it is going to be challenging and it's going to be difficult. There is definitely going to be advantages for those handful of companies that are regulated really regulatory forward in those markets. So I think that's why we're so thrilled about it and I think we'll be competing against four or five companies not 200 companies.
Does that answer your question.
Okay. Thank you.
Thank you.
And our next question comes from the line of Michael elaborate with Piper Sandler. Please proceed with your question.
Thank you good evening.
Good evening Michael.
I just wanted to come back to the.
Profitability milestones and you led with the revenue improvement, which makes perfect sense. Just curious if you could unpack that a little bit more maybe a couple of things.
One is how much maybe is it mix driven or operating leverage.
Does that need to be a big number or just the right the right product and how much visibility do you have on that we're close to halfway through the quarter.
We have a line of sight on forward bookings or some things that that gives you a sense of that being on track.
Yes, I mean, let me make a couple of comments and then I'll turn it over to Glen I mean, I'm not going to give comments about the quarter, but let me sort of add some color to what Glen mentioned, so clearly with <unk> the margins in the medical business and in most cases, the international business those revenues mix.
Huge difference and so when you have sort of these one time.
Ebbs and flows in our key markets like Australia, and get it back and makes a really big difference because.
Almost entirely upside because we've already grown the cannabis and we don't have increased sort of fixed cost for it. So thats. One secondly, we're really thrilled that the ocs wished <unk> Jack on anyone but they're drastic quickly and the same thing with the BC strike Joe.
No.
I'll, let you take our comments about that and where we are in the quarter sort of bear from the cost side I think we've been pretty consistent in terms of that so not to rehash lands words, but if you go back to where we think we should be on revenue and you look at the margin and then you add backhaul.
You are there and I think the part that is sort of powerful about all this.
As we get there in the model that can grow in those future growth opportunities and whether thats western Europe or some other aspects that will be there. So I think when you described mix.
I would say its more business mix than it is say product mix.
Glenn anything you want to add to that.
No thats exactly right.
The cost reductions on the SG&A that we committed to in a bit of incremental balco.
C C.
C Q1, EBIT loss in half so the rest of this is coming from holding our margins up in the business or market mix with a b mainly focused on medical a lot of that drops to the bottom line. So.
And Michael I guess, the point is we're not saying that goes beyond where it's been in the past so the comment of getting back to traditional levels in those two key businesses.
I think.
Is why we're saying what we're saying there's not there's not some great promise of a new piece of business or some additional form of growth.
That's great helpful color. Thank you.
Hey, Michael.
And our next question comes from the line of Pablo <unk> with Cantor Fitzgerald. Please proceed with your question.
Thank you good evening everyone.
Good question site, a two part question if I've done my.
Firstly I think one of the few companies that.
Has start to this view that Germany will start only with domestic production and the inputs, but won't be allowed I mean, obviously the draft.
What the drop SaaS, but most other companies are talking about inputs will be needed because domestic production wont be enough. So maybe if you can just explain your point of view of which seems to be in the minority.
Most of the companies expect input from day, one and then the second part of the equation is that in the event that the regulator only allows domestic production how long will it take you to ramp up I don't know a greenhouse or production to supply the market.
When would you need to start investing in that are we looking at a one year or two year timeframe. Thank you.
You got it so.
I think our position on Germany is led by having.
Significant resources on the ground, we have full time people there we have a tremendous.
Government relations organization, and we've been consistent in that opinion and I'm not here to disparage any of my competitors because I really that's not my place, but we've been very consistent that for medical cannabis.
And that part of the world in Germany, particularly you'll be able to imports, but recreational cannabis whether it was around the UN convention or a variety of other to party agreements.
It did not seem to be a pathway for that and as one of only three companies that are currently producing cash.
Cannabis and market under a medical license, we're very close to the regulators and we have incredible respect so going back to what we've seen and this is me referencing what Mr. Lauterbach said he is the health Minister.
What they're really talking about is that they are going to have a science based integrated framework and I give them a lot of credit we're talking to regulators across the world in different markets. There talking a variety of people and they are talking to the industry.
Get sort of this consolidated opinion and I would not lose the topic that what's happening with rack is not also.
Not taking away from what's happening in the medical channel. There's also enhancements being made to that critical medical channel. So what are the key elements of this and what did he say possession up to 30 grams no limit on THC.
Which is a really important piece potential limits for those under 21 candidate SaaS being applied on th content. The aim of the final consumer price try to keep that close to the black market to create that attraction.
Clearly there'll be advertisement sales marketing prohibitions and at least in the initial draft edibles are not allowed in as you mentioned, Bob So clearly domestic production and they've been very interested in understanding what's that clear regulatory framework around quality security and production standards to still be there I would also mention there.
Been very proactive in getting the feedback from the EU.
That doesn't happen in a vacuum we're thrilled about that type of.
The process they have such a critical country then go through the year and as I mentioned in my other comments, having the Czech Republic be looking towards Germany in trying to in some cases mimic or mirror those learnings.
Has do indicate that youre going to see consistency and these regulations, so that sort of a general overview more to follow.
We're thrilled with what we've seen so far.
Terms of timing.
Depending on the magnitude of the facility Pablo you are talking about a year and a half to two years from the moment you say go and write the check in and have these items.
They are high quality. They are aware of that the regulators clearly are aware of that and theres been some tremendous I would say.
<unk> back and forth about the realities of what that looks like and we will continue to be respectful of that.
We're thrilled to be end market, but Germany is going to be a really important bellwether country and a lot of different ways and I would encourage folks to stay close to it.
And our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.
Yes, Thanks, I guess I wanted to ask the Canadian consumer came in well ahead of our estimate are well ahead of what we were thinking and I guess you guys have kind of a tepid guide around the disruptions you had sequential growth first off can you tell us how much graybeard commit are contributed and also maybe disaggregate. The performance is by channel, Quebec has been strong love to.
Here that and of course, the headset data says you were down 13% Pos and of course could be backwards looking if things are just working their way through so maybe also give us an aggregate of what shipments were outside of Quebec. Thank you.
Let me make a comment on the brought about I guess headset provinces, and then I'll kick it over to gladly on the rest of the question.
<unk>, our largest province in terms of shipments.
Really value our partnerships with all the provinces, but Quebec has been particularly good for US as you know Andrew many of the syndicated services do not include Quebec.
And the province on the stores and so it does skew the results have been particularly for us as someone who does the majority of their business and their.
I think <unk> was it was a significant contributor but also we've had successes on two fronts that has helped US one is our significant improvements in yield has allowed us to go back into some of the.
Say larger format sizes that now makes sense for us in the way that they didn't make sense for us before and were also participating at a much higher level and some of the faster growing higher margin segments, such as pre rolls and concentrates.
Brian do you want to take the rest of it.
Yes, Great Britain and the drive brands are.
<unk> brands to us, but they are on premium brands, because they don't Brian as a percent of revenue I'd say, they're probably in the <unk>.
15% range this quarter and certainly growing but.
Margin wise, there is certain very important to us.
If we don't mention the provincial distribution that actually drives a lot of our bottomline integrate provinces and the rate type products.
The distributions that Quebec offers here quickly distribution at all.
Stores.
Provincial mix is as important.
As the product mix to us on our bottom line. So I think.
I think it continues to be an important market for us.
Ontario.
Very big revenue market.
But I'd say we.
We certainly are choosy on what products, we launch in Ontario to make sure that we continue to have that focus on <unk>.
Protecting our margins and the drive to profitability.
Just to clarifying in there you said getting back into large formats.
Does that mean I thought the focus was 100 and 100% premium is it just a lower cost structure allows you to do that I just wanted to make sure and clarify that.
So, particularly on discounting and value, we got out of spots, where 14 grams 28 Gram just didn't make any sense.
And what we because of the cost structure that we had with this would be the enhanced genetics and in some cases getting two extra yield per square meter. It allows you to go back into some of that in the new covered by an idea of the growth of 28 Gram and some of those larger formats have been pretty significant so you can do.
Get in there and actually make some money on it.
It's a win from a revenue standpoint, the other points I guess I would make is.
The fragmentation and whether we're at the bottom or not.
<unk> got the top five companies that right now or I don't know, 36% of the business and last year. There were 48%. So there is a lot of consumer movement, Andrew which are doing it.
So when you come out with new things like we have the environment is pretty right to make some quick gains and so we've been pretty pleased with that.
Outside of <unk>.
Thank you and our next question comes from the line of John <unk> with CIBC. Please proceed with your question.
Thanks, Good evening I also wanted to touch on the consumer channel, but but on gross margin and we've repositioned into premium and you've added thrive, but adjusted margins were down sequentially and year over year is that mostly a function of volume and you just need to increase that to get higher margins I know the press release mentioned packaging.
Costs, but is there any other color you can add there. Thanks.
Yes.
And John as you know the rack business is is really challenging right now and so the pricing continues to drop so the macro environment.
The challenge you're talking about packaging and there are other sort of inputs on the inflation side that pushed down the margin a little bit clearly.
Utilization of spreading the fixed across Doug.
Does make make a difference we are seeing some opportunities and as I said in my prepared remarks, leveraging common infrastructure for rec and medical that we think will have some margin, but I think the margin in the rack business overall is going to be under pressure.
We look forward, we've been able to find spots, where we've been able to keep it at where its at through little bit of mix to glenn's point, a little bit of geography, and a little bit of introduction of new products, particularly premium products, but overall I think for most manufacturers youre going to be dealing with a challenging pricing.
Environment.
In the meantime, now you can make a big move on yield you make a big move on something in a pre roll or in a concentrate or in a premium or ultra premium flower. You can you can make a move there, but I think overall I.
I think it's a little bit of the environmental catching up but yes, clearly if you improve your overall production and you move through the fixed cost you can improve your margin.
Glad I don't I think it's anything you want out of margin and rack.
Yeah, John It's a great question Youre exactly right. So I mean, what we see in contribution margin so that incremental margin on the next unit of sale is quite compelling. So I think there is a volume there and that's why it's nice to see a.
A little bit of both.
Stability and even a bit of growth in the consumer channel. So as we do and we've got some exciting new products that have dropped recently.
But we're seeing nice pickup across some of the provinces.
Im excited to see what that does in terms of margins lots of headwinds as Magellan tablets, but at least we got some levers we're pulling to protect and maybe even grow some of those margins with a bit of volume.
Thank you and our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.
Good evening, everyone. Just wanted to take a step back just on the Canadian medical market that side of the business I think we chatted Mcgill about this a couple of quarters ago, but just given that this is essentially been a $100 million business for some time now and I understand there is some strategy.
Going after margin uninsured patients versus just trying to grow the top line for the sake of it but I'm just curious if theres any other variables are elements other than insurability that might drive the overall industry growth and then if Aurora can keep it 25% sure to see the commensurate growth with that is it just insurance or are there sort of anything that you guys can do.
That's in your control and in the interim to try and help that and then maybe another side of that question. Just also related to just sort of the doctor acceptance or doctor uptake or are we seeing more doctors prescribe cannabis where is sort of that segment of the market in terms of where the medical professionals are at.
Really no other LP talks about this line of the segment just given that most are focused on other things or adult use. So I think just a lay of the land might be helpful.
Sure sure I'd be happy to.
Right now when you look at the Canadian Medical business, you've got 1% of the Canadian adult population that participates in it.
And if you're looking for drivers of it first and foremost because the margin is so compelling.
Compared to rack.
<unk> compare to pharma or other traditional sort of forms of medical you get a lot of folks playing around it as I mentioned, it's a pretty consolidated piece of business.
What are the what are the aspects that will improve the overall medical business, well first and foremost.
I would remind people out early we are in essence promote most clinicians physicians and patients clinical research and advocacy and the real science behind medical cannabis is just coming online and so we're been honored to participate in some clinical research youre seeing stuff in the U S are you seeing old a ton of stuff in Israel.
And as that comes online you're going to really start to change the equation for all the key stakeholders everything from the insurance companies to the clinician to the patient around.
Around that and some of those stuff, that's coming out as pretty compelling around some of the traditional.
Use cases that you see around metal medical cannabis, whether thats anxiety or sleep or PTSD are neuropathy or whatever those things may be so that's a very important driver.
I think the next driver.
Is that youre, starting to see some of the insurance companies and the private companies and those that have coverage, bringing candidates come coverage into the more into the mainstream in terms of the benefits program.
<unk>, including companies like ours, with a direct billing and that really migs.
Big difference and obviously some of these large union contracts make a lot of noise in terms of how they are coming online and I think third Matt is this general sort of increasing acceptance around cannabinoids.
And their use beyond things like Epibiotic, when you're really starting to see that come to the forefront.
And that definitely changes the overall equation when you only have 1% of the adult population.
<unk> that benefit any sort of movement makes a massive difference and I think the benefits will be outsized to a very small subset of companies that participate in it and it's a very.
Extensive program and it takes an incredible amount of.
Work and nuances efforts to support patients.
And insured patients and obviously the veteran patients who we also much too so.
I think in all of that as people try to model. What this is it.
It's going to grow it's going to become more mainstream it is going to become more clinical it's going to become more science driven.
And the benefits will fall down to a small group of companies.
And that sort of progression is portable the German regulators are deeply interested in science and in the history of what's happening in the Canadian medical experience.
Same thing with France, UK, Israel and on and on and on so it really is a global network and our global sort of line up and I think for companies like us we're going to continue to participate.
In those and hopefully that alignment allows us to be able to respectfully in response, we worked with the regulators and so we're very bullish on on medical cannabis true medical cannabis not.
What you may see in certain markets and I think if you look at the overall global numbers on medical cannabis even being considerably.
While it's hard on a market by market, but the overall <unk>.
<unk> is quite significant.
Did I answer your question Matt.
Okay, and actually not to try and put another second question, but just on what you were saying.
Im curious in terms of the patients that are on boarding in the Canadian market is there any element of obviously if its insured that's different but for people that arent insured is there any element of them joining the medical market. Obviously there is some.
Friction with registering with Lps and things that arent really typical and a lot of a lot of industries, but once they ship an order or two do they then just go and know the products. They like and then just for the sake of ease go to their local dispensary I know in Ontario, Theres. One on every corner now so is that part of the dynamic thats, making it hard to ramp up patients in the country.
No I wouldn't say so I mean, there is clearly been some interaction with the medical market to the evolution of the rec market.
But this I think is maybe where in certain markets. This gets misconstrued. This is primarily a conversation that a patient has with a clinician or a physician or an advisor to go get medicine.
And so obviously from an insurance standpoint, there is no economic advantage to go into the rack, but for the vast majority of the patients we interact with this is a medical.
<unk> medical case that is connected to a physician or clinician or an advisor.
And that interaction in the same way you would have with other form of medications.
This doesn't lend itself.
To that and then maybe an uninsured patient.
Find something and sees some other reason to go get there, but when you're talking about people that are over indexing on things like capsules.
Oils and other things that maybe are.
That is sort of the flavor of the day and the rack business you really find this is truly a medical.
Construct and the medical infrastructure that lends itself to that more so.
Then just a surrogate for rec use.
Thank you and the next question comes from the line of Frederico Gomez with ATV capital. Please proceed with your question.
Hi, good evening, Thanks for taking my question.
Just on the Netherlands could you provide an update on the investment there and I know that you talked a lot about Germany.
But how do you view the opportunity in the Netherlands.
And.
Potentially in terms of timelines when can expect sales from that project to start thank you.
You got it Brad so in the Netherlands, there are two aspects of it there there is the medical aspect that we continue to participate in where the government is reviewing products and we will make a final assessment probably in may or June of next year about that is from the rack standpoint.
There really isn't an update for us we're still waiting to hear about.
Firm date, and what is the process and there had been general details for those 10 licensees to service roughly 500 coffee shops, and a variety of towns and cities throughout the country that would give everybody the opportunity to look at everything from data too.
Service levels and whatnot. So I don't really have an update for you right now.
At the time in which we add one we'll give it but we're still waiting for some information on exactly.
What it's going to be in that when it is going to kick off and exactly what that all looks like but to be clear. The information that we've seen previously has been there would be a test.
For those 10 licensees and I know Fred you are well aware of how that all worked out.
And then post that test after an underpinning undetermined period of time. They would then talk about a different construct.
Thank you and the next question comes from the line of Tami Chen with BMO capital markets. Please proceed with your question.
Hi, Thanks for taking my question.
Just curious.
In terms of inventory.
Herman why do you expect that will kind of get through past that because I know you've had sky shutting down and all of that so I'm just wondering when we get.
Get past that and don't really see more of the impairments going forward. Thank you.
Brian .
Yes, Charles I'll take that Tammy thanks for the question.
There's a few things going on here one under offer us as I'm sure you're aware, there's a biological assets and if that ends up with some fair value center inventory that when you have to write things down to net realizable value at the end of the day, there is an ongoing sort of noise quarter to quarter.
Just provisioning down to realizable value on your inventories.
More to the point.
The footprint rationalization that we've done with our production production facilities are to get us to a better spot, where we're producing high quality.
Low cost and very focused on what the consumer wants.
And minimizing excess production now it is an agricultural crop and certain consumer markets, we do find that consumer case to evolve.
So it's never going to be perfect I think in terms of aligning with you think we would expect that there would always be some.
Hopefully small percentage of inventory that.
She is out a little bit what we do decline, though is that we are developing more and more channels for our cannabis. So it may fit the rec market in Canada. It may hit the medical market in Canada. It may be excellent over the next port product too.
Other medical jurisdiction, even within those international medical jurisdictions, we're starting to develop different tiers of product and an appropriate core premium and value. So.
Two things that we continue to hear us continue to rationalize our production footprint can really focus on producing high quality cannabis and team continue to develop more and more channels for outlet that Ken vessel and expect it to improve over time, Tony but being agricultural there'll always be a little bit of noise in the inventory.
Thank you there are no further questions at this time and I would like to turn the floor back over to Mcgill for any closing remarks.
Well I appreciate everybody's interest in our business and in this quarter, we're thrilled about where we're at and we're looking forward to the next call and we look for that in the conversations with many of you.
So wish everyone of you.
Same thing for those who are celebrating Remembrance day Tomorrow, which is obviously an important day for everyone.
Well wishes on that thanks to all and we look forward to talking to you in the future all the best.
Thank you everyone. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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