Aurora Cannabis Inc. (NYSE:ACB) Q4 2020 Earnings Conference Call September 22, 2020 5:00 PM ET
Miguel Martin – CEO
Glen Ibbott – CFO
Conference Call Participants
Vivien Azer – Cowan
Pablo Zuanic – Cantor Fitzgerald
Michael Lavery – Piper Sandler
Andrew Carter – Stifel
Tamy Chen – BMO Capital Markets
Matt McGinley – Needham
Good afternoon, everyone and welcome to the Aurora Cannabis Fourth Quarter Fiscal 2020 Conference Call for the three months ending June 30, 2020. This is being recorded today, Tuesday, September 22, 2020.
Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to the Aurora’s future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora’s annual information form and other periodic filings and registration statements. The company expects to file these documents before the end of this week and they may be accessed via the SEDAR and EDGAR databases.
Since we are conducting today’s call from our respective remote locations there may be brief delays, cross-walk or other minor technical issues during this call. We thank you in advance for your patience and understanding.
I would now like to introduce Mr. Miguel Martin, Chief Executive Officer for Aurora Cannabis. Please go ahead Mr. Martin.
Thank you, operator, and good afternoon, everyone, and thank you for giving us your time.
First, let me say that very much appreciate the board’s confidence and appointing me to the CEO role. I’m pleased to be working with the team on tactical plans to establish Aurora as a profitable growth-oriented leader in the global cannabinoid market. I take my fiduciary responsibilities to our investors very seriously and determined to do everything that I can to enhance shareholder value.
This begins with managing the business for the high degree of fiscal discipline, especially in the midst of a global pandemic. Over the last several days, I’ve had an opportunity to speak to a few of you in the investment community. But for the broader audience, perhaps it would be helpful to provide a bit of my background.
I’ve spent my entire career in sales, marketing and leadership roles within the regulated CPG product industry. I started my career with Altria and spent about 18 years there ultimately leading their sales group. I then went to become the President, one of the largest electronic cigarette companies Logic which was then sold to Japan Tobacco, the third largest tobacco company in the world. After that, I went to a startup and became CEO of Reliva CBD, currently ranked the number one CBD company in Nielsen which was just recently acquired by Aurora. So I spent a lot of time working in fast pace, constantly evolving, highly regulated and fluid environments where adherence to compliance and testing is essential to success.
I accepted the CEO job because I see an opportunity to quickly leverage my skill set in a regulated CBG product development here at Aurora. I’m fortunate to step into a company built with a dedication to science and a compliance first approach. With strong execution I expect to build a profitable business in Canada that we believe can be portable to other larger global cannabinoid markets.
Having spent four months now at Aurora, I’ve seen the talent and industry knowledge that makes this company innovative and agile. Aurora will be a global leader in cannabinoids when the largest markets open up and my job is to make sure that Aurora executes on that plan.
With that, I’d like to turn the call over to Glen Ibbott, our Chief Financial Officer to walk you through their financial results for Q4 2020, and then I’ll be back to discuss some of our business plans going forward.
Yes. Thanks, Miguel.
My pleasure to take our first earnings call together, I’m very excited about the vision you have for Aurora and the opportunity for Aurora to realize its full potential as we remain focused on becoming a profitable growth oriented leader in the global cannabinoid market.
So, good afternoon, everyone and thank you for joining us on today’s call. As you know, on September 8 we provided a business update including certain unaudited preliminary fourth quarter 2020 results. Therefore I can be a bit brief in my review of our financial results for the quarter. The figures I’ll be going over today can be found in the press release we issued after the market closed today and they’re all in Canadian dollars.
For our fourth quarter fiscal 2020 the period from April 1 to June 30, 2020 our net revenue came in at CAD72.1 million while our total cannabis net revenue came in at CAD67.6 million. While our sales mix remains evenly split with the consumer cannabis segment delivering CAD35.3 million in net revenue and our medical cannabis segment delivering CAD32.2 million in net revenue.
Total kilograms of dried consumer cannabis sold increased by 36% as compared to the prior quarter but this was offset by an approximate 30% decrease in the average selling price per gram of dried cannabis flower.
Daily Special our value brand accounted for 62% of total net consumer revenue from flower in the quarter as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried cannabis flower.
Consumer cannabis extract net revenue decreased by CAD1.5 million as compared to the prior quarter driven primarily by a decrease in sales of our vape products. During the fourth quarter, the increase in our medical cannabis net revenue was comprised of an increase in Canadian medical sales up CAD0.7 million and an increase in our international medical cannabis business by 14% or CAD0.6 million. Pricing in both markets stayed strong and steady.
We produced over 44,000 kilograms of cannabis in Q4 and that’s compared to approximately 36,000 kilograms in the prior quarter. However as we continue this aspect of our business we’re used at, which consists of rationalizing your production footprint and closing a number of our smaller facilities, we expect our total production going forward to average about 35,000 kilograms per quarter. And out of this production, 65% or more is expected to meet our top quality flower standard.
We expect our facility rationalization to be accretive to our gross margins over time, while we continue to work on maximizing yields, potency and other quality characteristics of our cultivation. Our forecast for inventory drawdown suggests that our flower production versus sale will reach a steady cadence over the next several quarters. While trim will also reach a steady state drawdown given our renewed focus on bait and other derivative categories.
Our cash cost to produce per gram of dried cannabis sold improved to CAD0.89 down 27% from the previous quarter. This is a slightly modified method from previous quarters that reflects changes to our inventory costing methodology, which places a heavier waiting on our top quality flower and less on byproducts. Our low cost per unit production is another lever that allows us to build a brand across multiple pricing tears while maintaining strong and healthy sustainable margins.
Our adjusted gross margin before fair value adjustments on Canada’s net revenue is 50% in Q4 versus 43% in the prior quarter. As you’re well aware we have been focused on prudently managing SG&A cost down to our targeted run rate of CAD40 million to CAD45 million per quarter over the course of the second half of fiscal 2020. We are pleased to have successfully reduced SG&A cost, which includes R&D spending from over CAD100 million in Q2 2020 down to CAD64.6 million in Q4 excluding approximately CAD3 million of non-recurring costs related to the business reset.
I am further encouraged to tell you that we are now operating at our targeted quarterly estimated run rate in the low CAD40 million range as of Q1.
Thirdly, reducing the run rate to below CAD40 million range was very important that has strived to deliver positive EBITDA. We also believe this level of SG&A and is quite sustainable and very capable of supporting a much higher revenue margin.
Our progress in continuing the reduced book overall and per unit production costs, as well as the significant decrease in SG&A demonstrates our commitment to manage or lower positive EBITDA for Q2 2021. These efforts were certainly necessary that’s clearly been disruptive to the organization. So while there is still more work to do, we’re now in a position where most of the OR team can focus their attention on delivering Miguel’s plan for growth.
But pulling all of this together adjusted EBITDA in Q4 2020 was a loss of CAD34.6 million. At CAD307 million it excludes severance and non-recurring costs related to our business transformation. This is obviously a substantial improvement over the prior quarter adjusted EBITDA loss at CAD50.4 million and it is the second consecutive quarter of improvement in our adjusted EBITDA. We expect this trend to continue through our first half of fiscal 2021 as we remain dedicated to achieving positive EBITDA in Q2.
Turning to our balance sheet as of June 30, 2020 our consolidated cash position was a CAD162 million compared to CAD230 million as of March 31, 2020. Cash used in Q4 was similar to that in Q3, however the mix within cash use shows our significant positive progress. We used CAD53.3 million in cash to reduce our term debt and lease obligations and we made additional debt payments subsequent to quarter end.
As of today our outstanding term debt balance stands at about CAD110 million. In the quarter we used cash to pay capital expenditures invoices of CAD32.8 million which includes of course work done in previous quarters. This is the CAD51.3 million reduction in CapEx quarter-over-quarter cash spend. Finally cash used in operations for two quarters were CAD63.9 million.
In the fourth quarter we’ve raised approximately CAD48 million under our aftermarket financing program and also financed a new prospectus supplement to enable us to raise an additional US$250 million under the ATM program.
So as at the June quarter end we had approximately US$220 million available under our current ATM program and this provides us with additional balance sheet support if required as we drive towards achieving adjusted EBITDA profitably in the near term.
During this environment we believe that access to capital is of paramount importance. However we are focused on getting the platform positive as quickly as possible to alleviate the need for additional equity capital as much as possible. We have multiple levers to pull to achieve this milestone including cost and efficiency opportunities and production and SG&A that we’ve identified that should continue to drive cost well over time and of course the successful execution of our tactical plans to improve market share in Canadian consumer market.
As we have demonstrated with our progress on the operational reset we will continue to prudently manage our liquidity as we strive for positive EBITDA in the second quarter of fiscal 2021.
The material run rate reduction in our CapEx and SG&A costs should provide comfort to our investors but the help of our income statement and balance sheet is of primary importance to us. We expect that our current cash position should be sufficient to fund operations to the point where positive EBITDA and free cash flow are achieved and sustainable. The remaining capital available under our shelves perspective protects the company and our shareholders as the backstopping in uncertain environment.
We’ll use it judiciously for opportunities for delivering near-term payback. We have in fact used that subsequent to our June quarter end to fund the announced termination payment to the UFC. Since we are closing in, on the end of Q1 2021 we thought it would be helpful to provide some forward-looking commentary on how the quarter is shaping up.
Following the divestiture of non-core subsidiaries during fiscal 2020, our net revenue in Q1 2021 should be comprised exclusively of cannabis net revenue, which is expected to be between $60 million and $64 million, compared to the $67.5 million of Q4. We expect adjusted gross margin before fair value adjustments on cannabis net revenue to be within a range of 46% to 50%.
To our growth in the consumer cannabis revenue was not expected in Q1 2021, our medical business is expected to remain steady, and we expect traction from our execution of consumer market share tactical plan as Miguel will outline for you shortly.
To share our results beginning in Q2, however in terms of progress positive EBITDA the Q1 consumer revenue level is more than offset by adjusted gross margin that continued to stay strong due to a favorable sales mix and a significant reduction in SG&A levels to low $40 million range.
So two housekeeping notes before returning the call back to Miguel. First, as we announced in our business update on September 8th Aurora and the UFC have agreed to mutually terminate the partnership. We will therefore be making a one-time payment of $30 million to terminate contract in Q1. This is expected to allow us to reallocate more than €150 million to our core markets that we’re CAD150 million to our core markets that would have otherwise been spent in fees, research costs and marketing activation expenses over the next five years.
Second, we’ve reached an agreement with our syndicate of bank regarding amendments to our secured credit agreement. These amendments provided us with additional flexibility including a reduction in the adjusted EBITDA milestone and including shifting the impairment of positive adjusted EBITDA into Q2 2021. And finally a reduction in the size of the revolver facility to better align with our average receivables balance and thereby reduce standby fees.
To further conclude that we have made many difficult decisions over the past few quarters and have leaned heavily on the talented and hardworking people in our organization. Although it’s been disruptive, it was also absolutely necessary. And now we feel that the company is unencumbered from distraction and can execute on the vision and strategy being developed by Miguel.
So with that, I would like to turn the call back over to Miguel and have him share some of his thoughts.
Thanks for the financial summary, Glen.
I strongly believe that the long-term outlook for cannabinoids is very exciting both in THC and in non-TCH variance. And I think Aurora is uniquely positioned to realize opportunities in both segments. We’re seeing the level of interest globally and medical systems grow and Canada’s consumer market is returning to a nice pace of growth. So there continues to be positive momentum in the industry and our job now is to prove to investors that we can achieve profitability in our core markets.
Building a base of free cash flow in our core business today will also allow us to invest globally for the multiyear investment horizon we see in cannabinoids. The history of global CPG brands is rooted in building capabilities and core competencies in their home markets that are then portable globally and that is what we intend to continue to build here at Aurora.
Having been with the company for about four months I believe I have a reasonably firm grasp on what we need to accomplish across four main focus markets. First the Canadian medical, second European and select international medical, third Canadian consumer, and fourth US CBD to be successful.
Our domestic and international medical businesses are operating well and continue to track the plan. We will continue to invest in these areas to maintain and grow our leading share in these markets. However given the recent lack of growth we’ve been experiencing within the Canadian consumer markets let me lay out our initial tactical plans within this core market before taking your questions.
First leveraging traditional CPG models of consumer insights and data sets including feedback from more mature markets such as the United States to identify consumer product opportunities. Second reinvigorating Whistler, San Rafael, and Aurora our super premium and premium brands.
Third continue to innovate and launch new offerings in key known margin accretive consumer categories such as vapor edibles and concentrates. And fourth tactical sales execution including addressing product availability, visibility, packaging and a focus on higher margin product sizes and format.
On the first part we’ve made investments in both syndicated and proprietary data sets. This includes monthly information for more mature markets in the US that assist us in modeling future ROI opportunities. These insights are expected to guide us in decision making and effective execution.
Second I want to dispel the current thinking that the whole cannabis category will be commoditized. The data from Canada and other mature markets indicate that premium and super premium brands have been and will continue to be successful in all formats.
We expect to refocus our dried flower business towards gross profit dollar pools and away from total revenue. One of the first steps we expect to take is building a more balanced portfolio offering across multiple pricing tiers. We already have a collection of great premium brands, Aurora, San Raf and then Whistler as a super premium offering.
So we need to emphasize all of our strong premium brands to balance out the total offering to our consumers. We also intend to better position these three premium brands across various formats to foster greater brand visibility and provide greater choices to the consumers. For example, San Raf pre-rolls or higher quality Whistler wave.
Third, we know an important part of growth in such a new category and this is a direct experience that I’ve had for my days of Logic and then at Reliva is that project innovation and leveraging technology needs to be a core competency. Thankfully, we have a history of product development here at Aurora and you should expect us to see us leverage that internal expertise into new segments of the market particularly expanding our market-leading edible offerings into concentrates.
Gummies represents a good example of where Aurora already has a leading market position and we expect to allocate additional resources in the coming quarters to solidify and enhance our leading position and grow that format. These opportunities represent sources of strong gross dollar contribution and where we have technical knowhow that gives us an advantage over our competitors.
And finally, we’ll be focusing on driving profitable growth that means making sure that we’re improving our execution with classic CPG sales, marketing, trade marketing and customer engagement systems. This will improve in-stock conditions, visibility of key brands, customer relationships and that is historically result in increased market share.
Furthermore, we will explore aligning our packaging, sizing with that regional demand to enhance our profitability And where applicable consider more flexible packaging options to reduce costs. Due to just appeal of the low hanging initiatives that we’re executing in the coming months should continue to build strong brand awareness and affinity with consumers.
While I’ve outlined just a few of the tactical plans we’re putting to work for now in our Canadian consumer business my focus is on ensuring that the entire Aurora team is executing to their respective plan. This includes continuously looking for more effective ways to connect with our consumers and opportunities to extract efficiencies from our operations.
Throughout my career I’ve implemented multiple examples on simple well executed plans resulting in outside gains in CPG categories. We operate in the category where market share is moving 500 basis points in a few months. So I feel strongly that our plan executed correctly should return us back to our leadership position in the Canadian consumer market.
Glen has already provided an overview of Q4 financials including our focus on achieving EBITDA profitability in Q2. And I can certainly appreciate the key stakeholders to be skeptical of forward-looking statements from Aurora.
So all I can say is looked at the data in the coming months we see the trajectory of our success in the Canadian consumer market. We will see progress in our premium brands and adjacent key categories like vapor and pre-rolls you know now the plan is on the right track.
Thank you for your time. I’d now like to ask the operator open the call for questions.
[Operator Instructions] Our first quarter comes from the line of Vivien Azer with Cowan. You may proceed with question.
My question has to do, Michael with some of the portfolio initiatives that you just laid out, given the increasingly large role that value is playing both in your portfolio as well the category as a whole. As you look to improve your positioning and market share on Whistler, San Rafael or – and/or Aurora, do you see the need for any pricing adjustments up or down to create a little more differentiation throughout your portfolio. Thanks.
Well, Vivien, good afternoon, and thanks for your question. I believe having the experience of 20 years in the tobacco vapor and other regulated product experience that there really is an opportunity to have more articulated portfolio. The focus on low cost flower I think has created a lot of pressures.
The reality is the Canadian consumer and other consumers really value the differentiation that this product can bring in some ways more or so than other categories that I’ve worked in, whether it’s potency, terpenes, packaging or background, I just think there’s a greater opportunity and there is evidence when you look at more mature markets like Colorado or California that consumers are willing to pay more. And so yes adjustments do need to be made in order to make sure we take advantage of that so that we do get a premium and premium margins.
The other thing I will talk a little bit about that you’re quite familiar with is the ecosystem of a brand and its equity. So Whistler as an example I believe has been underserved it’s always been a super-premium flower product organic in its very nature and finite. There are no reason that the cues that we see with the Whistler or Aurora or a San Raf can’t find its way to other formats such as vapor, such as pre-roll, such as concentrates.
And as long as those key notes and premiumness validate the economics I think you can have a really strong ecosystem where you’re always going to have a certain amount of value but that the consumer is given, proper opportunities to work up that value chain. And given the economics of the difference in margin contribution between the super-premium and the value products given my background with brands such as small grown company again [indiscernible] Logic and even parts of the Reliva portfolio I think I have a pretty strong background in finding a place for multiple brands throughout the portfolio.
So we’re excited about it. I will say it’s one of the things that really attracted me to the job. I am blessed with really great premium and super premium assets and now we have to bring them to the consumers in the marketplace.
That’s perfect. And there’s a quick follow-up for me. As you’ve indicated we should keep an eye on just month to month to month revenues and development there as benchmarks of success. But as you think about market share, what is the charge for your team, is it to improve Aurora’s overall market share or are you more focused on market share by price segments? Thanks.
Thanks, Vivien. No, I’m absolutely it’s the latter. So I’ve lived in worlds and you’ve seen worlds where overall market share is not a true indicator of a company’s profitability. We will be much more interested in the market share of our premium and super premium categories, much more interested in the market share of categories such as vapor and pre-rolls and concentrates that are margin accretive and if others want to play in that deep discount flower business that really has compressed margins in order to boost their overall company market share so be it.
But this really is an effort to achieve profitability to higher margins. And so it will be the latter part of your example, that will be a clear focus to us and it’s our target around EBITDA, profitability and being margin accretive that is much more the focus of the company than an overall company market share.
Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. You may proceed with your question.
Can we just recap in terms of what’s happened over the last six months? And the reason I asked that, you’re guiding for direct sales to be down 10% to 20% in the September quarter, right, if I do the math, medical staying around 32. So regular September quarter is falling 10% to 20%, it fell about 10% in the June quarter, right. And you talked about 60% of sales or more coming from your value brand Daily Special.
So just what happened there, was it that the value segment lost share and it doesn’t seem to be the case. Why did Daily Special not work? And that’s one question. And then, the second one, when I look forward, yes, you’re going to be focused on the premium side and given your background and the knowhow you’ve talked about. I’m sure that it can become materialize, but you’re going to have a 60% of sales or more that I suppose is going to be declining, right, because of the trend that we’re seeing their value.
So this transition could take place for a while. I mean we would be looking at flat sales for more than just one quarter. If you can highlight that? Thank you.
Sure. Thank you, Pablo. And I appreciate kind comments. My opinion is the company had a tremendous success with Daily Special. And if you look at the February say through April time period there was a massive amount of market share. That was taken and they were first mover into that value segment. However, others quickly followed. And when you’re displaying on price it just becomes diminishing return.
And so, I think the company got a bit distracted by the success that they saw with that discount offering which was Daily Special, which sort of delayed other endpoints such as vapor and pre-rolls. There is a lot of growth in the category and then everyone else kept piling in and because there with such a reliance upon that discount business and a lot of different ways both on the gross side, on the sales side, on the trade marketing side when that was just completely you know pressed against by competitive pricing pressure it became hard to pivot.
Now in terms of your point on timing, I guess I would raise sort of three points. First is the category is growing. Aurora has not participated in that category growth in a way that you know I think is respective of what I would expect of the company. And so, the good news is that consumers continue to come in, stores continue to open particularly in Ontario and the Aurora needs to participate.
Second thing is, we all see brand shares moving very quickly. The consumer is in a very dynamic situation unlike say domestic tobacco or other categories I’ve been in where 20 to 30 share points are basis points of share of moved in a month you’re seeing 200 basis points, 300 basis points of share moving them on.
So you can do it with the right products with the right execution. And so, in terms of timing, we are going to be launching a stronger portfolio of vapor products, you’re going to see a greater effort from us on pre-rolls, and you’re going to see a deeper focus on our premium flower products. That puts a stronger focus on sales execution and engagement with the provinces and trade marketing should allow for quick move.
I’m not you know here to debate exact timing and I don’t think it’s fair to predict exactly when you’re going to see X amount of market share by category. But through headset data and other data that clearly is available to you, I would keep going back to this. If you see progress from Aurora on its premium brands in the upcoming weeks and months and if you see progress in those categories that are margin accretive versus just overall market share led by a low cost flower, then we’re on the right track. And everything I am going to do, and everything on my background, I think puts me in a good price to drive that type of execution.
And just a quick follow-up for Glen. So Glen, I mean at BTO you have to use part of ATM to settle the UFC but I suppose we can – we all understand that. But looking forward how do you think are the convertible bonds, right, they are trading about a 50% discount, is that an opportunity that will it make any sense financial sense and strategically also to use part of ATM to buy some of those bonds. I think in my math that would be agreed if you can touch on that please. Thanks.
Yes. Thanks, Miguel. So listen I mean there is an awful lot going on at Aurora and in fact about the business transformation and the significant effort and focus factor from the organization now we’re pivoting to much more of a focus on delivering on the commercial success that Miguel just to outlined for you but I suggest this.
I mean we’ve said before that one of the mindset changes we made within the organization is much more financial discipline and prudence and with a kind of sophistication if you will, so if not it’s not an immediate concern I recognize exactly what you’re talking about, but it’s not an immediate concern but we will look at all opportunities if they make a positive sense for our company and our shareholders and we will certainly consider them, but we should know that there were certainly mostly, most of the organization is focused on delivering what Miguel just outlined for you.
Our next question comes from the line of Michael Lavery with Piper Sandler. You may proceed with your question.
Can you talk about some of the thinking around the profitability target and what some of the key hurdles are and things to watch and specifically coming close already to them in the first quarter what’s in place already? How much is there some things that you still need to achieve, could just kind of a sense of progress along that and what the key variables are?
Yes. Miguel would you like to take it.
Yes. Why don’t you Glen and then I’ll talk a little bit forward-looking please.
Yes. Absolutely. Yes. You know listen, I mean, we’ve done a lot of heavy work over the last few quarters. And you know you know SG&A and continuing to maintain some – keep some healthy margins in place, we fixed a number of pieces in the business that drive the EBITDA, but we do have the consumer piece of the business that needs to be corrected that Miguel told a little bit about that and I’m happy to tell you more.
But if you look at what we’ve delivered in terms of EBITDA in Q4 it was just over a negative CAD30 million you know taking out the severance cost, but that was well we were still carrying CAD64 million of SG&A cost. So as we stand in Q1 we’re now running in the CAD40 million. So you could see an immediate improvement in the EBITDA CAD20 million just simply from our SG&A reset. We do expect continued strong performance in Canadian and European medical markets.
So really the positive EBITDA is exactly as Miguel has outlined. You can watch that in the data over the coming months. And our continued focus on fiscal prudence, I mean, we have done a lot of hard work on our cost structure, but we will continue to focus on new incremental opportunities because the whole company in a different mindset now and I know they are looking for places we can save cost and it adds up.
So it’s a different company. We’re positioned, I think, well and as I say the root forward is to deliver on some of these premium categories and even within the flower market and ship that product mix up to something that delivers more dollars to the gross profit line that it goes to simply just delivering revenue.
Yes. I mean, Michael, I guess the other thing I would say is when I look at those companies that have been successful of our competitors they’ve executed a pretty thoughtful plan, but the execution level was tremendous. And it looks a lot like CPG and I’m sure you can imagine who I’m talking about.
So I don’t think that the approach has to be particularly advanced or take a long time and simplistic is not the right word because I have deep respect for our competitors as much as I want to be an aggressive competitor against them. But, to the Glen’s point, the company really was distracted. I think in a lot of ways by reset, both on the people side and on the production side. I think there was a lot of credence put together around overall flower share.
But there were some investments made that with the right direction and with the right accountabilities and focus and you’re going to hear me say this over and over again, pushing the company into focusing on its premium assets in flower, vapor and pre-rolled and implementing classic CPG sales trade marketing, consumer engagement methodology, that’s what worked for others and the rewards have been outsized.
So I think we have the assets. I believe we have the right people and with the right plan and accountabilities, and to Glen’s point we have enough resources, we don’t need CapEx, We don’t additional accountability. Because at the end of the day, Michael as you know there is only roughly a 1,000 stores in Canada. So, if you can execute you know this plan successfully, we can move quickly with the right products, in the right availability and I could rattle off you know the 5ps on and on, but that’s really going to be about execution.
But I’m confident that we have the product availability, the product quality and the plan. Now is it ever going to be quick enough for everybody? No. But I think you’ll find our steps to be thoughtful. And if you look at what our compares have done successfully there is nothing sort of in our portfolio or in our capabilities that gives me pause that we don’t have what they have.
Just on the portfolio mix you mentioned the 62% value in 4Q. What does it look like 1Q to-date and when do you on a target range from where you should be going forward?
I don’t have a specific target. I know some might say well that’s helpful. I can tell you that there’ll be a significant amount of focus put on Whistler San Raf and Aurora and that will be across the board. And as you know the most great brands particularly in a market where there’s dark marketing or dark marketing you know provisions having the sales force, having the provinces, having the product distribution and availability and potency be focused on that does a lot of it. So you’re going to see progress. You’re definitely going to see a more balanced portfolio and you’re also going to start to see the development of this ecosystem.
You know Whistler will stand for things in the core categories both in flower and adjacency. San Rafael will stand for things in those other categories and so Aurora in ways that maybe daily special doesn’t it all those articulations. So my goal is to make progress and to have a defensible articulated portfolio.
And you’re obviously well aware As we all are of Marlboro Friday creating a scenario where you so advance the discount business that it creates structural advantage of the premium and super-premium is really not a great place to be and so we’re going to start to reverse that and those percentages and allocations will definitely advantage the higher ends of those purchases in those three or four primary categories.
And I guess the only other thing I will say is when you look at things like vapor concentrates and pre-rolls there’s a lot of opportunity to bring some classic CBG elements in packaging and alignment.
And on vapor many of the things that you’re seeing in other categories are heat not burn into consumer connectivity that allows the consumer to see value and therefore pay higher margins in a way that maybe traditional flower doesn’t lend itself. So I’m pretty bullish on those opportunities and I believe some of the experiences I’ve had on combustibles and smokeless and vapor and other categories lend itself well to this regulated market.
Our next question comes from the line of David Kideckel with ATB Capital Markets. You may proceed with your questions.
[Frederico], actually chiming in for Dave. So congrats on the quarter guidance, thanks for taking my question. So just to start I mean, what you’ve seen in the markets so far, how should we think about derivatives in terms of overall revenue mix that you’re targeting as well as in terms of margin potential compared to flower maybe over the next fiscal year and also longer term?
Glen, you want to start that, and I’ll pick up the back side of it or would you like me to start?
Yes, Miguel start and I’ll add in some color.
I think by indicating the mix and how we should think about adjacent categories So from a mixed standpoint you have due to the fact that so much production and capacity was brought online we clearly were going to see a gripe of flower and particularly what we would call lower quality flower. And that would be lower potency and terpenes and then the high grams sizes.
And that’s always going to have a lower margin profile. And there’ll be a place for that. But as we think about you know higher margin offerings it’s not just you know Whistler, San Raf, and Aurora but also those you know packing sizes like 3.5 and 7 gram that went down right give the consumer additional value.
And so you know we’ve laid out the historic margins and obviously talked about our medical margins. I think as you think about adjacent margins there’s two things really to consider and I’m not going to give you the precision of the answer that may wop but I’ll give you a sense of it. When you look at pre-rolls vapor and edibles they are margin accretive particularly as you offer premium items.
The second aspect of it is excellence around extraction or in other ways to use the byproduct of your flower production facility also creates economic value and margin accretive opportunities. So that environment when you can be having a you know a strongly articulated flower portfolio as well as also being in a situation where the byproduct can find its way in to the margin accretive products and you can have a fully articulated portfolio where you know you’re doing you know a decent amount of your business and in super premium a strong amount of your business and in the premium and you have a necessary amount in the discount that clearly should have significant margin impact as well as the impact of selling higher margin items such as premium vape pre-rolls and concentrates.
And if you look at the U.S. we see a wonderful opportunity and you know and that’s not a national framework. We see brands developing in California and Colorado in some tough markets and so clearly brands developing in California and Colorado in some tough markets.
And so, clearly, if they can do what they are, it definitely demonstrates that we can do it in Canada and you know we feel good about our opportunity. And if you look at the equity scores and if you look at sort of the awareness of those premium brands we’re blessed with, I’m bois that we can move up the margin chain and flower and then those other adjacent categories.
Yeah. I just want to add a little bit of maybe an example, but as little bit of flavor you heard Miguel talk about margin accretive and premium asset. If we use a like a 3.5 gram pack of our Whistler flower and compares that to 3.5 grams of the typical discount flower for what we see in the market that package of Whistler will deliver 10 times or more the gross profit dollars that the discount flower would.
So when we say we’re blessed with some premium assets and we’re focused on the margin accretive, particularly it doesn’t mean that we have to replace all the daily special revenue with an equal amount of Whistler revenue, although I’ll be delighted if we did.
But we’re really you know trying to be a more sophisticated and bring out that margin CPG oriented company that is really focused on delivering EBITDA, I mean, gross profit dollars. So, that margin accretive and premium across the brand but also within flower, I mean, incredibly important our execution here over the next number of quarters and so, it’s a mix I think if I can direct you to anything please pay attention. The mix as we go outlined in those categories rather than just pure sort of revenue market share allocation that will be the indicator of our success.
Okay. Thank you. That’s helpful. And just a follow up for me, more of a broader question here in terms of international markets. I mean, you’ve talked a lot about the Canadian market, so – but how does that – how does international market doing to your strategy right now?
So from an international standpoint, the international revenue today continues to be largely from the German and now has been a consistent performer for the past few quarters and we expect it to show growth into the future.
We’ve had success in the German market where actually, number one provider of flower we’ll continue to see opportunities in the oil market and we’re closer to achieving some really important regulatory milestones, including GMP certification in our operations in Denmark. Now, that facility in Denmark will allow us to ship from Denmark to Germany and the rest of the EU and other parts of the world, particularly those parts of the world that really look for GMP products.
So we’re bullish on the international market. We’re not going to play everywhere. I think you’re going to find us to be opportunistic. But the one thing I will say about the international market that also I think speaks to other opportunities is, it takes a lot of investment and it takes a lot of compliance experience and it takes a lot of thought to be successful with the high standards that these international markets have. Once you build those capabilities which we continue to do in the Canadian market and Germany and other markets it becomes very portable. And I know everybody wants to talk about the high potential of US and these other markets.
But clearly as the larger markets come online, those companies particularly the successful Canadian LPs that have demonstrated expertise in the Canadian market, interacting with Health Canada and then these other markets that are highly compliant and require a lot of infrastructure and thought, puts us in a great position.
So we’ll continue to be opportunistic. We feel good about the international business. We feel that medical in many cases leads to rack opportunities, and that muscle memory that we’re developing there can be portable in a way that is definitely advantageous to us as these markets continue to open.
Our next question comes from the line of Andrew Carter with Stifel. You may proceed with your question.
So, my question is just kind of going back to what was implied in the consumer performance. You got a stable medical business and perhaps you might want to comment on Reliva as well as how that’s trending in line with acquisition? It’s pretty significant step down and the step down is well-head is kind of what we’re seeing in the consumption data. So a couple questions that are you know are you seeing anything? Is there any disruption in the orders from the provinces about Ontario would be taking up with stores? Are you missing orders because you talked a lot about execution on pre-rolls, concentrates, et cetera. Could you help us with any more clarity kind of what’s going on beyond that?
Sure, Andrew. I’ll be happy to. So, I mean, you can see it in the headset data. You know the company made a big push in the discount you know in that February to April time period, built a lot of share. Everybody piled in. It became sort of a bit of a race. You know we got the lowest priced product. The company did not have you know other products whether it’s in the premium flower business or vapor or pre-rolls. And because those categories also grew at an exceptional rate, Aurora did not keep pace with category growth loss share and therefore the step down.
So I don’t you know I’m not trying to be defensive. I think you can see what the opportunities were. You can see one competitor in particular that did really well. They had a fully articulated portfolio, high levels of availability and visibility. They did well in a finite number of those adjacent categories particularly vapor and pre-rolls and that’s the model we’re going to follow.
So it’s going to be you know I don’t want to sound repetitive, but it has worked. It will work. I think the benefit we have now is we had a bit of distraction with the reset and the factory stuff going on. We do have great brands. We do have the products coming online and at the same time that you see Ontario and others.
So, when you look at the provinces, the provinces operate like any other wholesaler in the US. They don’t play favorites. They want to make money. They want to have a certain amount of days on hand and they want to service their retailers. So, as brands, in this dynamic category, they’ve done a pretty big job particularly Ontario and others.
And so, when you don’t have the offerings and your brand is declining share, it’s less about the execution and we are worried about that. If you have the right offerings and the right product categories particularly in premium and super premium, which they have also incentivized to push, to make more money on it then we’ll be there.
So, I’m not worried about that. If we can take care of what we need to take care of and I feel good we will, we’ll have the support of the provinces who operate as wholesalers and we’ll have the support of the retailers. And again, I just highlight the finite number of retailers, I mean I’ve worked in systems where you’re talking about hundreds of thousands of retailers. This is about a thousand.
And so, with proper sales execution which I have a long history of and engagement, I don’t think there’s anything systemic or systematic in the provinces or the retailers that holds us back. We just did not participate. We lost share because we didn’t have the right premium offerings in flower and we weren’t there on vape and frills. Those things will be fixed.
As for Reliva, sorry, go ahead.
No. That’s good. I was going to Reliva next but you go ahead.
Correct. The product sale of Reliva, Reliva 99 plus percentage of sales are brick and mortar. And you might ask, during a COVID environment, why. Two reasons, one is because the retailers that we partner with and we’re exclusive with some of the largest retailers in the country with over 23,000 stores, which I think may be the most. They’ve taken a really dim view of those that have pivoted to online sales. And so, we decide to place of long ball and not do that.
Secondly, we’re very bullish on you know what we’ve heard out of the FDA and I don’t think that hinges on the November political decision. You have Senator McConnell you know on the Republican side who is the biggest cheerleader of industrial hemp. And obviously, it’s been a good issue for the Democrats. But the reality is as a retail-driven company, COVID you know really hurts Reliva. Now given its variable nature and now a lot of fixed costs, it’s not losing money, but it’s not making a material amount of money.
Now the deal as was announced contemplated a performance-based metric, so if Reliva doesn’t you know perform that back into the payment to the shareholders, obviously we’ll not be there, but it’s a wonderful optionality and I will remind people that to this day Reliva is the number one ranked Nielsen Company.
And number two in IRI. And so it’s wonderful optionality. And when the FDA goes forward those companies with the history of compliance and in brick-and-mortar will win and I think Reliva will be a wonderful asset and EBITDA at its most conservative estimate CBD represents over CAD1.8 billion or CAD2 billion in retail revenue.
So the real hidden gem in this whole thing and when we talk about global cannabinoids is leveraging Aurora science and innovation on the non-TCH parts of the portfolio, which could be bigger than the THC parts of the portfolio particularly with positive FDA action in the US.
Fair enough. And some of the – some of this core obviously was – was some cuts and the focus on cost savings. So in terms of as you’re trying to get back in the game I guess you got another round of restructuring kind of what comfort can you give that you – did you have the right investments in place and perhaps investments don’t need to go higher from here and that you can successfully execute the restructuring and grow market share here and that’s one.
We don’t – there’s not – if you look at CapEx or other investments, I mean, what I’ve described it can be handled by the production facilities, the marketing and sales organization and everything that we have. So we’re going to be nimble and more agile, but we from an infrastructure standpoint I don’t see an added investment required and as the category continues to move I think you’ll find us to be pretty agile around it.
My background has been lower fixed and higher variable. Obviously this category and this company it’s a little bit different, but we’ll do what it takes to be competitive in the marketplace. But a simple to your question is, there’s no big investments we need to make to be competitive in premium flower, vapor pre-rolls or concentrates.
I mean, it’s been a massive change from where we were a number of quarters ago and call into question where we had a sustainable level. We absolutely believe that current level is sustainable and certainly capable of supporting a much bigger revenue business. What happened, I think is that, we had to strip it down to the core markets. There was a whole lot of non-core outsets and distraction.
So stripping away as we said we go divested a number in non-core taking complexity of the business and rationalizing a production footprint again taking complexity out of the business and really focusing on – focusing on something that should be fairly straightforward. We produce and deliver a number of brands across the categories, so the better best in Miguel’s world. And we complain a number of different categories that all derive from cannabis and extract.
So it’s a fairly simple conceptual business and as we meet it very complicated because of all the optionality we’ve given all over the years. So time to take hold that out. We’re down in a nice kind of rate now, I think is very sustainable over the next number of quarters.
Our next question comes from the line of Tamy Chen with BMO Capital Markets. You may proceed with your questions.
First I just wanted to ask can you elaborate a bit more on some of the material weaknesses in certain internal controls that was referenced in an earlier press release and how you will run up with these.
Yes. Absolutely, Tammy. This was our first year as a SOX reporter and quite frankly with a company such as ours that’s been built through, through acquisition it was a monumental challenge. And then you throw the COVID pandemic in on top of that where everybody then had to scatter and start working remotely, it was – it was incredibly complex.
The material witnesses and you’ll see them in our MD&A that we’ll file in a couple of days for the most part revolve around the number of IP systems that we have. Many of them scheduled for decommissioning but that were slowed down as part of business transformation and quite frankly through COVID and things like that.
So we ended up at the year-end still using some systems we hadn’t expected to use. So there are some, some issues or like minor issues and not issues in minor but issues of segregation the duties within the system. So there was nothing in there that caused those pause.
We were actually how to say somewhat dumped with it but a lot of it’s been remediated already and the remediation plan for the remainder for the most part revolves around sales and the full implementation of the ERP system that’s been underway for a while now. They did not result in any material error, there’s no restatement.
So, it allowed the outcome of that given the environment in the first year sort and incredibly complicated, the company behind the scenes at that time was a pretty good outcome no errors, no – no restatement and a clear path forward during [indiscernible] this year.
And my follow up is, just going back to the premium strategy, Miguel, that you’re talking about. I’m just wondering when we talk about this, what is it specifically that you have your eye on that consumers are willing to pay up for? And you know what are your data analytics telling you because, I mean, every company are licensed producer sort of says a similar thing that is the high-THC, a lot of terpenes on the vaps, good quality hardware. No leakage. And its surely won’t be the only one that can potentially succeed on this. So I’m just trying to understand going forward when you’re trying to push this premium strategy, I mean, is there something more to it that sets up a more proprietary or defensible mode for you in this segment?
Yes. I mean, I think while first and foremost it’s being done today right. Not everyone is just selling discount products. So, the environment, the consumer, the trade all have had an aptitude for premium products.
Now the trade is an important one and it’s one I’ve spent most of my career on. If you talk to the retailers and the provinces they want to sell more premium products. So there is finite space in the retail stores. There is a finite delivery windows. So everyone sort of wants that.
In terms of what we’re going to do different, Aurora has a long history in strong cultivation and you know a variety of other things that bring there. So when you look at the consumer cues of what they’re willing to pay more for higher potency, higher terpenes, consistency, brand quality, strains some of that IP and genetics that you know we see those being positives with other companies and us in past iterations.
So Whistler for a long time has been a super-premium brand while the company has been able to sell everything it’s been able to make because of that strong organic nature. And so we’re going to do more with that and bring those SKUs into vapor.
Now I’d be more than happy to spend a lot of time on all the reasons why someone is more willing to pay more for our super-premium, premium vapor experience. You can see it in packs. You can see it in non-THC products whether it’s the technology, the materials the ecosystem the software those are all things that have a long history with.
On pre-rolls you see in California and Colorado the premiumness of the import, the paper, the packaging the branding I mean these are all sort of things you can do but it’s being done today. I mean so if you look across the environment in Canada there are companies being successful both big and small with premium offerings and in all the core categories.
I think the sort of stable brands we have, the quality and the consistency where we’re going to be able to put out a really laser focus on the trade which I spent a lot of time on in a finite number of stores given where we were which was not a focus on those items, and a real push on daily specials and discount proposition. And the results we had I think you’re going to see a big delta and we’ll see. I mean take a look at the headset type data and I think you’ll know quickly how we’re doing.
Our next question comes from the line of Matt McGinley with Needham. You may proceed with your questions.
You took CAD135 million in inventory impairments in the fourth quarter but you’ve produced 34,000 kilograms in that quarter and you alluded to the fact that you expect inventory to continue to build for a number of quarters, I think you said it around 35,000 kilograms per quarter but you’re selling it in the fourth quarter under 17,000 kilogram.
So I guess, there seems – still seem to be a disconnect between the inventory build and what the sales levels will be especially given the shift to premium product which presumably would mean it would be self-selling get a kilogram. So I guess, what causes you to reach equilibrium on the inventory and do you feel you’re any risk of taking additional impairments in the future given a such a disconnect between what you’re – what do you think is basically what you’re selling?
A couple of things really impact that as we look forward. One, there is a note kind of that we may add in our press release may alluded to it in my remarks. And then, be more of course in the MD&A and financials. But we took a look at – we continue to understand the market better and better and we exclude the products that are in demand which need how much we need on hand.
So a lot of the write-off at June 30th was – there was some older slower moving product from a number of quarters ago. But as the lot go was trim. And so, we took that down. And then we also took a look at the way we allocate our cost within our inventory.
So we’ve changed the methodology to put a much heavier waiting on flower and a much reduced waiting on trim. I mean that’s makes probably a lot of sense and I know one or two of our peers take another step and expect everybody will have to at some point.
But what it does for us is a couple of things. In terms of volume we do expect that with some of the execution and operational improvements that we’re in the midst of making that we should see traction across the categories that they use flower and don’t misread the remark I think it’s not that we don’t expect to continue to ship volumes of into a discount market. And so we just need a much more balanced portfolio.
And I think as Miguel said, is maybe take a look at which pack sizes are delivering the most profit and things like that. But it’s not that we exit that. We just need a balance in our portfolio. So we still expect that to consume volume and quite honestly Miguel said, we didn’t participate in category growth. I won’t say that this market is starting to get is getting plenty big enough and our expectation and certainly what we’ve seen from market expectations is that it should continue to grow.
So we think by simply just stepping up, executing better, and participating in market growth and maybe over participating in those categories we want to be, we should see an increase in the volumes consumed. But the other, just subtle point is that we won’t be building up much in terms of dollar value on our balance sheet related to trim because it’s got a very low cost allocation now.
And the EBITDA guidance for the second quarter, you expect that to be positive. And I assume the SG&A doesn’t have any big variance there but what gives you the confidence that the revenue or the gross margin is going to increase given that both of the current and the prior quarters, did you see trends improve in September or is this kind of all on that comes the portfolio is repositioned in the year at fiscal second quarter.
Yes. Well, let me start and then Miguel will I’m sure add some support to this. So Miguel arrived in the CTO chair beginning in July and then was promoted to CEO shortly thereafter. He’s the right guy with the right experience and certainly a track record of executing in exactly this situation.
So we have to and we are in process as kind of just make arresting as – the decline is all over the last few months and getting back to the even kilo there. And then there is a number of initiatives – specific initiatives that are focused more on higher marketing solid.
So let me call it – let me use the term [indiscernible] the future quality revenue. So as opposed to this revenue quality revenue to me is that to deliver the healthy gross profit dollar as opposed to essentially just you know a gross margin percentage.
I use the example of Whistler and that’s the extreme example where it delivers 10 times the gross profit dollars that the discount brand might but I look forward in putting dollars on the bottom line is not to sell more a large pack discount brand which delivers at some dollars but not a ton is to play in that category deliver real dollars to the gross profit line.
So the initiatives that we have underway are those. They are the ones that deliver real gross profit dollars not just percentage. So that means quality healthy revenue and that’s the focus. And that’s the piece that needs to be we need traction there. And as Miguel said, you can watch the headset data or other markets data that you get and you should see us performing in those categories. And that’s a different revenue dollar than the stuff that the discount category delivers. All revenue dollars are not created equally and that’s an important part of our reset and refocus on going forward.
Yes I mean I guess the only thing I’d add is, you see where the SG&A is going. You’ve heard what the plans are. I mean I will still say I mean even when the amount of discount business the company did in the previous quarter to have the margins land where they landed, is a good indicator that there’s upside there. And so you know the math isn’t too complicated. I think our indication now is we execute the premium plan with these adjacent products, we should get what we need on that side of it.
Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn the call back over to Mr. Miguel Martin for closing remarks.
Thank you so much. And I want to thank everybody for joining today’s call. I’m honored to be a part of this team and I really look forward to leading Aurora to success. I hope you and all your families are safe in this world. We wish you all the best. Be good.
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.