Aurora Cannabis Q1 2025 Earnings Call Transcript

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August 7, 2024

There are 5 speakers on the call.

Operator

Hello, everyone, and welcome to the Aurora Cannabis Incorporated Fiscal First Quarter 2025 Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. This conference call is being recorded today, Wednesday, August 7, 2024. I will now turn the conference over to your host, Kevin Nyland, Director, Strategic Finance and Investor Relations.

Operator

Please go ahead.

Speaker 1

Hello, everyone, and thank you for joining us. On the line with me are Miguel Martin, CEO and Sonae King, CFO. This morning, Aurora issued a news release announcing our fiscal 2025 Q1 financial results. Our financial statements, MD and A and this news release are available on our IR website and can also be accessed via SEDAR Plus and ACAR. In today's conference call, listeners are reminded that certain matters could constitute forward looking statements that are subject to risks and uncertainties related to our future financial or business performance.

Speaker 1

Actual results could differ materially from those anticipated in those 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 Plus and EDGAR. On prepared remarks by Miguel and Simona, we'll conduct a question and answer session that are covering analysts. With that, I'll turn the call over to Miguel.

Speaker 1

Please go ahead.

Speaker 2

Thank you, Kevin. Having reported our previous fiscal quarter just a few weeks ago, we'll be relatively brief in our prepared remarks. Q1 2025 was a milestone period for Aurora and we cannot be more pleased with the results that we'll be sharing with you today. We grew our top line to $83,400,000 which included record revenue in Canadian medical cannabis, international medical cannabis and plant propagation during Beboe's seasonally strongest quarter. We take great pride in Aurora being global medical cannabis leader within nationally legal markets.

Speaker 2

This enables us to capitalize on rapidly evolving opportunities in countries around the world. And through our investment in Bebo 2 years ago, we've also become an important player within North America's controlled environment agricultural industry. This generates a steady predictable financial performance on a seasonal cadence and we foresee more value creation through an acceleration of Beboe's business plan. Turning back to Q1, we also generated substantial growth in adjusted EBITDA to a near record high and reached positive free cash flow 6 months earlier than we had projected, both incredible outcomes. Note that our ability to maintain free cash flow is not linear.

Speaker 2

And as Simona will explain, we do not foresee reaching positive free cash flow in Q2, but expect to be positive again in the Q3. We also maintained our balance sheet strength through a large cash balance and no debt on our cannabis business, which provides us with maximum flexibility. These accomplishments in Q1 position us to have a record year at Aurora led by our flagship global medical business. Let me now highlight some specific metrics related to our quarterly performance. 1st, net revenue rose 12% compared to the same period last year inclusive of 24% growth in international medical cannabis.

Speaker 2

2nd, adjusted gross margin was 43%, while medical cannabis adjusted gross margin reached a record 69%. 3rd, adjusted EBITDA rose 87% and free cash flow was positive for the first time. And finally, we held about $182,000,000 in cash on our balance sheet and had no cannabis debt. Our prime positioning within Global Medical Cannabis increasingly enables us to serve the diverse needs of patients globally. Our Global Medical business grew 13% year over year and delivered record margins.

Speaker 2

It generated 57% of our total revenue and 91% of our adjusted gross profit. Most of that growth stemmed from international markets. Recall also that medical cannabis has the highest gross margin of any segment within the cannabis industry. In Canada, we grew our medical cannabis market share while upholding our number one position. Revenue rose nearly 7% due to higher sales from both insurance covered patients and self paying patients.

Speaker 2

We not only appreciate our broad product assortment, but also the steady stream of exciting next generation cultivars. This consistent supply of innovative products is a direct result of our continued investment in science and innovation at our world class breeding and genetics facility in Comox, British Columbia. We believe that constant innovation is an important element of why we have achieved and maintained our dominant position in our home market and frankly other global markets too. Our primary focus with respect to the Canadian medical market is serving insured patients, a generally stable group, but we were also encouraged by increased interest from unions and other entities that are either already or at least considering adding medical cannabis as a member benefit. We think this development coupled with the traditional medical establishment conducting more clinical trials on a regular basis provides great upside to opening the addressable usage market, which currently encompasses only about 1% of the Canadian adult population.

Speaker 2

To capitalize on increased interest in medical cannabis as part of healthcare options made available to Canadians, last week we announced a commercial collaboration with Vectura Fertin Pharma, an innovator in wellness and healthcare to launch a newly developed CBD lozenge on our leading Canadian medical cannabis platform. Our intention through this launch which requires minimal additional capital investment on our part is to gather patient feedback, validate the product proposition and build real world patient data. Following the launch later this year, we expect to explore additional opportunities to commercialize other victorafurten medical cannabis products. Let's now turn to the Australian market, which rapidly becoming the largest medical market in the world outside of North America. Estimated of AUD400 1,000,000 annually, Australia is our largest single market excluding Canada.

Speaker 2

During Q1, we generated a little over $9,000,000 in revenue in Australia, up 67% from the year ago period as we benefited from a full quarter contribution from our MedReleaf Australia subsidiary, the number 2 player in the market. MedReleaf Australia's product portfolio has broadened significantly, thanks to Aurora's innovation platform. Since the acquisition, we have become one of the first companies to offer both past deals and live resin cartridges in Australia. These breakthrough innovations are also being combined with expanded range of high quality cultivars. As I referenced in our last conference call, Australia's clinician led product distribution model and high regulatory standards are significant barriers to entry, providing a distinct advantage for Aurora.

Speaker 2

Aurora was actually one of the first Canadian LPs to receive good manufacturing practice certification from the Australian Regulatory Authority, TGA, for River and Ridge, our largest Canadian manufacturing facilities. 90% of our annual production comes from these EU GMP and TGA GMP certified facilities, enabling us to pursue growth opportunities in Australia and other key global markets. All of Aurora's markets require EU or TGA GMP certification. So Aurora's network of close to 28 tons of GMP certified manufacturing capacity is a significant advantage over our competitors. Turning to New Zealand, we celebrated our first shipment of Aurora branded premium dried flowers during Q1.

Speaker 2

This was a significant milestone for medical cannabis accessibility and we believe our leadership in Australia gives us an advantage in this emerging market. Let's now discuss our European operations. In Germany, a country that we've been operating in since 2018, our credentials are very strong. We hold the number 2 market share for flowers, the number one market share for self payers and have 2 of the top 10 cultivars by volume sales. While Germany is in the early stages of cannabis descheduling and we do not know with certainty how quickly the market will grow, what we can say is that descheduling will continue to fuel the expansion of medical cannabis for some time and that we expect these changes to benefit the self payer segment the most as it is the fastest growing channel.

Speaker 2

We are seeing more patients get prescriptions including telemedicine and this is beginning to positively impact volumes. We'll be able to support increased volumes through our EU GMP Canadian facilities, but also through our EU GMP facility in Leune, Germany, which just recently was granted an expanded cultivation and unique research license under Germany's new medical cannabis act. We are one of the select few companies to receive ENHANZE licenses, which we view as a result of our commitment to high quality manufacturing practices and a testament to our long established regulatory expertise and unparalleled commitment to compliance in Europe. Our leadership in Germany has an outsized influence on other emerging European markets given the confidence and rigor we demonstrate to meet their high regulatory requirements. Moreover, the changes in Germany should have a broader effect on the expanding acceptance of medical cannabis and future modern frameworks across Europe.

Speaker 2

And we are poised to fulfill that growing patient demand through our expertise in developing novel, high quality and innovative products. Let's now turn to Poland, our 2nd largest European market. Sales softened in Q1 compared to the same period last year due to the import permit process, but we remain bullish on the long term opportunity. In the UK and Switzerland, we are gaining traction with patients through our proprietary cultivars and widen distribution channels, resulting in significant revenue growth in the UK and a record quarter in Switzerland. And so our plan for fiscal 2025 is to thoughtfully execute our medical first cannabis strategy and build on what was accomplished in Q1 and the previous year as the leader in global medical markets.

Speaker 2

By doing so, we are best able to deliver ongoing and sustainable improvements to performance. I would now like to turn the call over to Simona for a detailed financial overview.

Speaker 3

Thank you, Miguel, and good morning, everyone. Q1 is certainly indicative of how we are fulfilling the mission that Miguel laid out, as I will now discuss in detail. Revenue of $83,400,000 represented 12% growth versus the year ago period and included a 47,200,000 dollars contribution from our high margin Medical Cannabis segment. Quarterly profitability consisted of consolidated adjusted gross margin at 43%, resulting in adjusted gross profit of CAD36 1,000,000 compared to CAD32,600,000 in the year ago period. Medical cannabis comprised 57 percent of total net revenue and 91% of total adjusted gross profit during the quarter.

Speaker 3

This marks an increase from 56% of net revenue and 77% for adjusted gross profit from the year ago period, reflecting higher medical margins in the current year quarter. Adjusted EBITDA was $4,900,000 for the quarter, resulting in our 7th consecutive quarter of positive adjusted EBITDA and grew 87% compared to the year ago period. Let's now discuss the results in more detail. Medical cannabis net revenue rose by 13% to $47,200,000 which consisted of nearly 7% growth in the Canadian medical cannabis and more than 24% growth in international medical cannabis. The increase in Canadian medical revenue was due to increased sales to both insurance covered and self paying patients.

Speaker 3

The increase in international medical cannabis revenue was primarily due to higher sales Australia and Germany, driven by significant overall growth in those markets as well as increased distribution in the UK. Adjusted gross margin for medical cannabis was 69%, up from 61% in the year ago period. This was the highest margin we have ever generated, far exceeding our 60% target and the result of several factors. 1st, sustainable cost reduction 2nd, higher selling prices in Australia, which represents a growing component of our international business and third, improved efficiency in our production operations with our shift to supplying the European markets from Canada. Going forward, we do expect quarterly variability in our adjusted gross margin due to seasonality and changes to geographic sales mix, but we still are confident that we can consistently meet or exceed a 60% or greater margin.

Speaker 3

Consumer cannabis net revenue was $11,500,000 down from $12,800,000 a year ago. The decline was the expected result of our decision to prioritize the supply of our GMP manufactured products to our high margin international business. Adjusted gross margin for for consumer cannabis was 24% compared to 26% in the prior year period due to sales of higher margin products a year ago. Plant propagation net revenue was $23,100,000 up from $19,900,000 in the year ago period due to a combination of organic growth and a shift in revenue from the most recent quarter due to seasonality. You will recall that Beboe delivered higher revenue in the late winter and spring months.

Speaker 3

Plant propagation adjusted gross margin was Plant propagation adjusted gross margin was 18%, down from 22% in the year ago period due to changes in product mix and the prolonged growing season this spring. Our consolidated adjusted SG and A rose to $31,400,000 up from $29,000,000 last year due to the incremental SG and A following the acquisition and full ownership of MedReleaf Australia. This additional expense is now being offset by increased revenue and EBITDA contribution and we expect to see the full incremental benefit in Q2. Now let's turn to our balance sheet, which remains one of the strongest in the global cannabis industry. We held approximately $182,000,000 in cash and cash equivalents as of June 30th.

Speaker 3

Recall that our cannabis operations are completely debt free, while our BEEFOLD business holds $52,400,000 in non recourse debt. Net cash provided by operating activities was $8,900,000 a remarkable turnaround from last quarter when net cash used was $20,400,000 The improvement was due to both increased revenue and improved contribution margin and changes in working capital. This resulted in us reaching our free cash flow goal 2 quarters ahead of our original projection with free cash flow of $6,500,000 Finally, let me now provide some thoughts on Q2 and Q3. We expect to see continued strong net revenue and adjusted gross margins across its cannabis business supported by net revenue growth in Europe and Australia. For plant propagation, we expect to see seasonally reduced revenues and gross profit in Q2 that will be in line with historical performance as 25% to 35% of revenues are normally earned in the second half of a calendar year.

Speaker 3

Positive adjusted EBITDA is expected to continue, while our free cash flow anticipated to be impacted negatively by several significant annual and one time cash payments that typically occur in Q2. We will continue to target improvements to operating cash use and we expect to generate positive free cash flow in Q3 based upon the following. 1st, continued increases in global medical cannabis, driven in part by the full recognition of revenue in Australia and further growth in our key European markets. 2nd, operating expenditure and adjusted gross margins in line with previously stated targets, leading to continued strong positive adjusted EBITDA and finally, disciplined working capital management and maintenance capital expenditure of approximately $2,000,000 per quarter. To conclude, we are very pleased with our performance in our Q1 and believe that we have set the foundation for a strong fiscal 2025.

Speaker 3

We are giving our full attention to executing our expansion strategy across key markets and combining that with operational excellence to further strengthen our financial condition. Thank you for your time. I'll now turn the call back to Miguel.

Speaker 2

Thank you, Simona. Aurora is firmly in growth mode, ready and able to capitalize on the opportunity for global medical cannabis, the most attractive segment of our industry as patient access is increasing at a rate like never before. The openings provided by evolving regulatory environments in key international markets positions just a few companies like Aurora to take advantage of this once in a generation opportunity. As we expand and deepen our presence in these markets, we will not only benefit from an increase in our top line, but also from the high margin contribution that flows from the medical cannabis segment. This will result in long term EBITDA and free cash flow growth for the benefit of our shareholders.

Speaker 2

And with that, thank you for your interest in Aurora and we will now take your questions. Operator, please open the lines.

Operator

We will now begin the question and answer session. The first question comes from Pablo Zuwanich with Zuwanich and Associates. Please go ahead.

Speaker 4

Good morning. Miguel, can we just discuss Germany? If you can just it's a 2 part question. 1st, if you can give some sense of underlying trends, right? Like some people have talked about growth from April to July, local companies there have talked about doubling or tripling in doctor visits, scripts.

Speaker 4

Any color you can give about underlying trends would help. And the second part to the question is really remind us of the strength of your franchise in Germany, because from outside sometimes we wondered about the barriers to entry. There seems to be a lot of companies there, wholesalers, importers. So just remind us of the strength of your franchise and why we should assume that you will continue to benefit from strong market share there? Thanks.

Speaker 2

Great. Well, thanks and good morning, Pablo. Appreciate it. So when we look at Germany and you look at the passing of the Cannabis Act, which took effective in April really there were sort of 3 aspects of it that we're encouraged by. First has been the increased access to patients, the ease in which patients can get a prescription through a variety of means, say telemedicine and others.

Speaker 2

And so it has dramatically grown the sort of the overall pie of available patients and the ease in which that process is say compared to what it used to be. Secondly, as you're well aware of the ease of distribution there, because now you can ship cannabis products like other pharmaceutical products through the mail, which allows an expansion beyond what was the traditional face to face interaction that you would see at a pharmacy. And then 3rd is, we have not seen margin or pricing compression. And the reason for that is that the wholesale list price of the manufacturer drives the economics for both the wholesaler and the retailer, which in this case is the pharmacy. So now as to projections of 2x or 3x of the German market, I think that is a bit premature.

Speaker 2

I think roughly 30 percent on an annualized basis is still very healthy, but we'll have to see given the overall sort of recency of that and the trends that we're going to see not only in the registrations, but in the overall sort of pharmacies and what's happening with the actual prescriptions themselves. I think in terms of what are the strengths for Aurora, what people I think need to understand is that medical cannabis operates like traditional pharmaceutical product. You have a clinician or a doctor prescribing a specific product for a need of a specific patient. And once they find a medication that they like, they stick with it. And so unlike say the RAC market in Canada where you see great swings in market shares, once you've established a presence with innovative and well made products, they're going to be sticky, so to speak.

Speaker 2

So that's the first thing. The second thing is that the registration process for new products and the testing protocols in Germany is incredibly stringent. So as an example, you have to be within 10% of their testing of your potency and on some of the other key terp scores. And so that's very hard to do with an agricultural product. Company like Aurora that's been doing it for such a long time is a for a company like Aurora that's been doing it for such a long time is a significant advantage.

Speaker 2

Now in market having infrastructure around wholesalers and distribution and connectivity to those pharmacists is something that takes a while and takes investment and is something that Aurora has and I think does well. And then lastly, as you also know, we're one of only 3 companies that have in country manufacturing. And so the connectivity of not only selling products made from offshore into Germany, but also growing them and potentially selling them in market, all are significant advantages in such a key market.

Speaker 4

Thank you.

Speaker 2

Very welcome.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Miguel Martin for any closing remarks.

Speaker 2

Thank you very much. And listen, we appreciate everybody's interest in Aurora. As we said, this was a milestone quarter and we're incredibly excited about their future and we look forward to sharing those results with you as the year goes along. All the best. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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