Aurora Cannabis Inc. (NASDAQ:ACB) Q2 2024 Earnings Call Transcript

Aurora Cannabis Inc. (NASDAQ:ACB) Q2 2024 Earnings Call Transcript November 9, 2023

Operator: Good day, ladies and gentlemen. And welcome to Aurora Cannabis Inc. Second Quarter 2024 Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Ananth Krishnan. Please go ahead.

Ananth Krishnan: Thank you, Chris. We appreciate you all joining us this afternoon. On the line with me today are CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2024 second quarter financial results. This news release, accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you will find the 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 are detailed in our annual information form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our covering analysts. We ask that you limit yourself to one question and then return to the queue. With that, I will turn the call over to Miguel. Please go ahead.

Miguel Martin: Thank you, Ananth. Glen and I are hosting this call today from the Sky facility in Edmonton, Alberta, the home province of Aurora and where our story began. We are very pleased to be here at this 800,000 square foot facility that is being repurposed by Bevo Farms for orchid cultivation as part of their expansion plans. More importantly, we’re here today to discuss our quarterly results, which demonstrate the strength of Aurora’s business model. This quarter, we achieved strong revenue growth, record positive adjusted EBITDA and maintained our leadership in key markets, all of which will help us achieve our target of positive free cash flow in calendar 2024. Starting with the topline, we grew total net revenue by 30% in Q2, but the real story was the 42% growth in our medical cannabis segment, which included 122% growth in medical cannabis outside of Canada.

Adjusted gross margin was 51% and increased across three of our four business segments, while adjusted EBITDA grew to $3.4 million, a $9.6 million improvement year-over-year, and our highest result on record. Q2 also marked our fourth consecutive quarter generating positive adjusted EBITDA. Our balance sheet is similarly in great shape and one of the strongest of Canadian LPs, with a cash position of over $200 million. Our convertible senior notes are down to about US$5.3 million and will be settled at maturity in February 2024. Following this repayment, Aurora’s only remaining debt will be approximately $40 million of non-recourse financing at Bevo. This healthy balance sheet is going to allow us to play offense going forward, without the weight of a heavy debt load.

It is truly an exciting time for Aurora, our shareholders and our employees. Let’s now take a deeper dive into our business. In Canada, where Aurora already has the number one position in the market, we grew our medical cannabis net revenue compared to the year ago quarter through a broad and attractive product assortment, positive sales mix and innovation. With our leadership position in medical, we believe we can find opportunities for growth due to the ongoing disruption in the Canadian marketplace. We view investment in innovation as critical to our long-term success, which is why we are committing to launching a steady stream of exciting new products to the Canadian market. Innovation in Canada provides a roadmap for new product launches in our international markets.

We have seen great success launching cultivars in Europe and Australia that first found success in Canada. Next generation cultivars launched in Canada in spring 2022 are now available to patients globally. In Europe and Australia, these strains provide patients with some of the highest potency and most appealing offerings in those markets. Domestically, our latest launches are now available in our medical channel and set to launch in the Canadian consumer channel in the coming quarters. Aurora made a conscious decision to focus our production network on indoor EU GMP certified facilities managed by teams who have deep experience in pharmaceutical production. We view ourselves as a medical company providing a pharma-grade product to our global patients.

This focus on pharma-grade EU GMP production is a clear competitive advantage in the highly regulated medical markets evolving across the globe. In September, we introduced Honour, a new cannabis cultivar designed for veteran Aurora medical patients by veterans as part of our Strain for Heroes portfolio, 5% of net profits from the sale of Strain for Heroes products support veteran organizations across Canada. Internationally, through recent enhancements to our supply chain, we have been able to meet the increased patient demand for our pharma-grade medical cannabis across Europe and Australia while driving our per gram and per unit costs lower. In Germany, we’ve been operating since 2017 and are one of only three companies with a German production facility.

This is our largest European market and we are gratified that the country is moving in the right direction with the potential for de-scheduling of cannabis from the narcotics list in the near future. We are very supportive of this effort and believe that with its passage, the German medical market could expand significantly. In Poland, our second largest European market, our regulatory expertise sets us apart, allowing us to benefit from high barriers to entry and regulatory challenges to serve our patients. Aurora held the number one market position by volume in Poland in Q2 and we are confident in our ability to meet increasing demand in the country. In Australia, which we believe is becoming the largest medical market in the world outside of the U.S., we are encouraged by our significantly higher sales volumes, as our local partner is invested in clinician education and is leveraging Aurora’s vast product portfolio to provide best-in-class medicine and support for this rapidly growing patient base.

Aurora’s model — Australia’s model, led primarily by clinician engagement, represents a more traditional pharmaceutical approach to new medication rollouts with clinicians and one we expect will be exported to other new medical cannabis markets globally. Turning back briefly to Canada, and more specifically Canadian adult use, we are benefiting from our historical investment in efficient cultivation and manufacturing and see opportunities for our Canadian adult use business to move to profitability as other market participants exit. During Q2, we introduced a bold new brand, Tasty’s, designed to deliver on taste, potency and price to the Canadian adult market. Tasty’s launched in two primary formats, vapes and infused pre-rolls, which is now ranked second behind the flower category and expected to deliver further growth.

Early interest from cannabis retailers across Canada has been strong and Tasty’s represents a format with crossover appeal between channels. Leveraging an omnichannel global innovation portfolio with appeal to multiple end user groups is yet another way Aurora’s model is expected to drive profitability in the cannabis segment. Finally, our business model is starting to show the financial benefits of diversification as Bevo’s vegetable and plant propagation business continues to generate steady, predictable revenue and earnings, albeit on a seasonal cadence. By leveraging purpose-built but underutilized cannabis facilities, Bevo’s team of cultivation experts is undertaking a transformational product line extension, moving into the profitable cultivated orchids market, while continuing to grow the geographic reach of their base business.

By expanding our reach in the controlled environment agricultural industry, Aurora’s shareholders can expect to benefit from the compelling long-term value creation attributes of this sector. Over the next two years to three years, we expect the acceleration of Bevo’s business plan to potentially double their current revenue and EBITDA. In short, our business model focused on global medical cannabis is succeeding across multiple categories and geographies, and we’re just getting started. I’m very proud of our team and what we are accomplishing and look forward to fulfilling our commitments with respects to topline growth, cost savings, EBITDA generation, convertible debt retirement, and importantly, positive free cash flow. And with that, I would now like to turn the call over to Glen for a detailed financial overview.

Glen Ibbott: Thank you, Miguel, and good afternoon, everyone. We’re obviously very pleased with our Q2 performance and gratified that the substantial progress we have made in executing our business transformation continues to yield tangible results for our company. Our mission to further improve our financial condition is well on track, as highlighted by our commitment to deliver $40 million in annualized savings by the end of this fiscal year. Today, our total cash balance sits at over $200 million in cash and equivalents, which is more than sufficient to reach positive free cash flow in calendar 2024. And I’ll also highlight our progress in cleaning out debt. During Q2, we repurchased approximately $41 million of our convertible senior notes through the issuance of approximately 54 million common shares.

Subsequent to Q2, we repurchased a further approximately $23 million of our convertible senior notes and that was with cash. Before the end of fiscal Q4, we’ll pay off the final US$53 million of these convertible senior notes. This is a monumental improvement to our balance sheet, where we have reduced debt by approximately $531 million over the last three years. That’s an achievement that we are very proud of. Now, looking to our Q2 revenue line, we delivered growth of 30% over the comparable year ago period. Specifically, we generated a sharp increase in sales from our higher margin global medical cannabis segment, which coupled with a larger contribution from plant propagation more than offset a slight decrease in consumer cannabis. On profitability, consolidated adjusted gross margin held steady at 51% and adjusted EBITDA rose to $3.4 million, reflecting a $9.6 million improvement from last year and our highest quarterly result in adjusted EBITDA to-date.

Let’s now go into our Q2 results in greater depth. Net revenue rose to $63.4 million, up solidly compared to $48 million in the year ago period. Overall, medical cannabis generated $43.8 million in net revenue, up 42% from last year. By segment, International Medical revenue was $18.4 million, up 126% from last year. And Canadian medical cannabis was $25.4 million, up 11% year-over-year. The performance of our high margin medical channels was largely due to the positive market reaction to the launch of our new Canadian-grown high-potency cultivars in our key European markets and to the continued growth of the Australian medical market. Adjusted gross margin for medical cannabis was 63%, compared to 61% sequentially and 68% in the year ago quarter.

The change from last year is a result of higher revenue from our exports to Australia, where we sell in bulk to our distributor partner, as opposed to Europe, where we own the sales and distribution chain and pick up that margin as well. As usual, driven by our focus and leadership in global medical markets, medical cannabis represented about 85% of our total cannabis adjusted gross profit, an increase of 31% at $27.4 million in Q2, compared to $20.9 million in the year ago period. Consumer net — consumer cannabis net revenue was $12 million, down 8% from a year ago. The change is partially due to our exit from the U.S. CBD business, but predominantly driven by the timing of new innovation launches. Adjusted gross margin for consumer cannabis was 27%, compared to 25% in the prior year period, with the increasing margin due to higher cultivar yields and continued efficiency improvements in production that are driving unit costs lower.

In plant propagation, you may recall from our last earnings call that the revenue in Q2 and Q3 would decrease relative to Q1, due to the seasonality of this business. Normally, Bevo earns about 25% to 35% of annual revenues in the second half of a calendar year. So, with this in mind, net revenue for Bevo in Q2 is $7.2 million. That’s up from $3.3 million last year at this time. But note that the year ago period is not a perfect comparison, as we acquired Bevo in August 2022, so it did not capture a quarter of revenue last year. But Bevo performed as we expected in Q2. Plant propagation adjusted gross margins were 22%, up from 16% last year. The increase was due to product mix between vegetable and ornamental plant sales. Our consolidated adjusted SG&A was well controlled at approximately $27.7 million, down from $29.8 million in the year ago period and reflecting our ongoing commitment to keeping SG&A below $30 million.

So, taken together, the solid Q2 revenue performance and well-controlled costs combined to deliver an adjusted EBITDA of $3.4 million. That’s a record for Aurora and is our fourth consecutive quarter of positive adjusted EBITDA. Turning now to cash flow, we made progress in fiscal Q2 towards our goal of positive free cash flow. As our operations, excluding changes in working capital, used a net $13 million. This is down modestly sequentially and well down from the $37.3 million used in the year ago period. Fiscal Q2 met our expectations and keeps us on track to achieving the goal of generating positive free cash flow in calendar 2024. This is an important topic, so let me dive in a bit deeper. In our fiscal Q1 results, we explained that our target of $40 million in annualized expense reductions is expected to be realized mainly in fiscal Q3 and Q4.

The efficiency initiatives and operations, including the shutdown of our Nordic production site and the sale of our Dutch assets, are now complete, and we expect to see these actions benefit us in fiscal Q3. In SG&A, we’ve already achieved some initial reductions year-to-date and many actions affecting corporate costs, which we’ve already taken, are expected to be fully realized in the second half of this fiscal year. We remain firmly on track to achieve the cost savings we’ve committed to and that support our drive to positive free cash flow. We are focused on balancing the working capital needs of both investing and growth, and executing disciplined financial management. We had a net working capital investment in fiscal Q2, due mainly to our payment of a number of annual and one-time cash items.

In the quarter, annual payments totaled over $10 million for Health Canada fees, insurance expenses and employee incentive bonuses. We also paid one-time costs of approximately $3.4 million for severance and restructuring activities. Inventory and biological assets are quite stable, with demand and supply aligned and they contributed a net $2.5 million in fiscal Q2. Accounts receivable are in very good shape, but in line with the strong growth we’re seeing in international markets, we made the decision to invest about $7 million in Q2 accounts receivable. Looking forward, we expect working capital investment to improve significantly compared to fiscal Q2, as inventory remains in check, AR investment is thoughtful and annualized payments are normalized.

For CapEx, we invested approximately $4 million this quarter, split evenly between maintenance and growth initiatives. Looking forward to our next quarter, fiscal Q3 2024, we expect cannabis net revenue to be similar to fiscal Q2, with the geographic mix slightly further toward the International Medical segment. For plant propagation, we expect to see seasonally reduced revenues and gross profit in Q3 that will be consistent with Q2 and in line with historical performance. To conclude my remarks, Aurora’s strong financial condition is directly related to all the hard work this team has done over the past several years and we’re pleased that our efforts are bearing fruit. We are leveraging our diversified global cannabis business with a plan to deliver dependable revenue growth and leading gross profit.

We stand to benefit from a burgeoning plant propagation business and we remain committed to well-controlled SG&A. Even as we pursue M&A opportunities, we will thoroughly protect our balance sheet and continue to work towards our target of delivering positive free cash flow. Thanks very much for your interest. I’ll now turn the call back to Miguel.

Miguel Martin: Thanks, Glen. Looking back over the last three years, Aurora has delivered $400 million in cost efficiencies, executed on our key priority of positive adjusted EBITDA and withstood the challenges and headwinds that have faced our industry. Our world-class diversified company is on a stronger footing than ever before. We are on track to deliver positive free cash flow and we will build on this foundation over the coming quarters and year to come. Operator, please open the lines for questions.

Operator: Thank you, sir. [Operator Instructions] Our first question is from Vivien Azer of TD Cowen. Please go ahead.

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Q&A Session

Vivien Azer: Hi. Thank you. Good evening.

Miguel Martin: Good evening, Vivien.

Vivien Azer: So, Miguel, since you and Glen are at the Sky facility, I figured it’d be appropriate to ask a Bevo question. Good to hear you reiterate the target to double revenue and cash flow from that business. Last quarter, you said two years to three years, given that you are on site and the conversion is clearly underway. Any opportunity to kind of refine that timing or talk about kind of the cadence to get to that aspiration of a double? Thank you.

Miguel Martin: Yeah. Well, thank you. I think we’re not going to give any forward looking guidance on this, but having been here and having seen this planned conversion and where it’s at for this 800,000 square foot facility, we definitely think that Bevo can expand that. Early conversations with customers and large bid box customers that you’re well familiar with have been encouraging and the market size and pricing is also encouraging. And the percentage of orchids that this facility could put online and the pricing that we’re seeing in North America versus traditional Southeast Asia all give us a lot of confidence. What I’d like to do is have a couple more months of the early read of these products in the market and see what those early selling is.

Once we have that, I think we’ll provide some more guidance. I don’t want to get over my skis in terms of what this may mean, but we’re very booked on it. And if you look at other outcomes for the Sky facility particularly, this is really a good one. So, I’d ask you to wait a little bit as we try not to overpromise on what this is. But once we have clarity on it, we definitely will provide it.

Operator: Thank you. The next question is from Michael Lavery of Piper Sandler. Please go ahead.

Michael Lavery: Thank you. Good evening.

Miguel Martin: Good evening, Michael.

Michael Lavery: Just wanted to unpack the Tasty’s launch a little bit more and I forget the exact wording, but you characterized it as I think a value to the consumer. It’s clearly medical is your focus, the higher margin and some of the other attractive elements of that. But can you explain how this fits strategically just a little bit more of why the launch and kind of what you expect going forward?

Miguel Martin: Yeah. I mean, it’s a great question. As a company that is innately focused on medical and unapologetically is what we’re leaning into, we are seeing a lot of benefits of having both systems be healthy. And in my prepared remarks I talked about our focus on EU GMP flower, which is an incredibly important resource if you look globally, whether that’s product going into Europe or going to Australia. So, the question then becomes on rec, where we have roughly about a 1.7 share, what assets do we have that can not only help with the fixed cost of the medical system, but also give us insight and be relevant to the consumer and be able to find spots where we can make some money. So, instead of focusing on premium GMP flower in the very challenged margins of the rec business, we focused on high potency infused pre-rolls that leverage our genetics, our science, our execution and our extraction capabilities and allow us to put a product in the market that doesn’t take any resources away from those significantly higher margin businesses.

The other aspect of Tasty’s is on the vape side, which obviously we have a lot of experience with and we have found what we believe to be a nice niche on vapor. And again, the resources to make those products and to achieve those margins doesn’t take anything away from what we’re doing. So, we’re trying to learn how to maximize all the fixed infrastructure that we have and produce the best company-wide margins, while allowing products to live between both segments, which is really where we maximize our overall profitability. So, we haven’t given up on rec. I mean, rec is a challenge in Canada right now, particularly in certain geographies, but there definitely are spots and pre-rolls are the fastest growing segment once again, second behind only flower at this point.