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spk14: Greetings and welcome to the Aurora Cannabis Incorporated first quarter 2022 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded today, Tuesday, November 9th, 2021. I would now turn the conference over to your host, Anant Krishnan. Vice President, Corporate Development and Investor Relations.
spk02: Please go ahead.
spk12: Thank you, Betsy, and thank you all for joining us. With me today are Aurora's CEO, Miguel Martin, and CFO, Glenn Ibbitt. After the market closed today, Aurora issued a news release announcing our financial results for the first quarter of fiscal 22. The release, accompanying financial statements, and MD&A are available on our IR website and via CDAR and EDGAR. In addition, you can find a supplemental information deck on our IR website. Listeners are also reminded that certain matters discussed in today's conference call could constitute forward-looking statements which 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, and 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 be accessed via CDAR and EDGAR. Following prepared remarks by Miguel and Glenn, we will conduct a question and answer session. For retail investors, we have compiled questions submitted to us prior to the call. For analysts, we will ask that you limit yourselves to one question and then get back in the queue. With that, I would like to turn the call over to Miguel. Please go ahead.
spk04: Thank you, Ananth. We are pleased that our track record of strategic and financial progress from fiscal 2021 is carried into the first quarter of fiscal 2022, and that our efforts to build shareholder value are gaining momentum. Our transformation plan is on track, and we continue to expect to achieve adjusted EBITDA profitability sometime in the first half of fiscal 2023. We focus on four areas to achieve this goal. We're the number one Canadian LP in global medical cannabis revenue, with leading margins of over 60%. This is nearly double what the industry generates in adult rec. It's our competitive advantage, and it's why we're allocating further resources to the Canadian, European, and Israeli medical markets. Long-term, we see medical continue to expand globally, and we strongly believe the leader in medical will be the key beneficiary of recreational cannabis when legalized. Second is redesigning the company to create a more efficient and effective enterprise. A big part of this is expense reduction. We've already achieved run rate savings of approximately $33 million from our NAPPS plan in September, which puts us on target to achieve $60 million to $80 million in cost savings without impacting planned growth investments. Third is our strong balance sheet and improved cash burn of only $16.6 million this quarter. This not only supports our organic growth, but also provides us with the means to evaluate M&A opportunities. To be clear, if and when we make an acquisition, it will be accretive, bring managerial talent we don't currently possess, and align with our premiumization strategy. Fourth, our science and innovation business unit. This business unit is focused on launching a strong pipeline of new releases globally to leverage our intellectual property in genetics and biosynthesis. But first, let's briefly discuss medical cannabis and adult rec. In Canada, we represent about 23% of the medical market, almost twice that of our closest peer, but only 1% of the population are currently patients. Given the fragmented nature of this channel, we have a clear opportunity to expand our presence through education and by helping patients navigate medical cannabis alternative treatments through our proprietary end-to-end experience. And this represents a great long-term opportunity for us. Our international medical business continues to show exceptional growth, growing by 146% over the prior year comparative period. We shipped a total of $8 million during Q1 to our partner in Israel, Cantech, which we believe is the largest single shipment of cannabis that Israel has ever received. While we may still see month-to-month fluctuations of purchase orders from our Israeli partners, this is a tremendous vote of confidence in the quality of Aurora's products and as a proof point of our ability to profitably navigate a complex and evolving regulatory environment. Also contributing to international medical during Q1 was our continued success in Germany, where we have a leading position in dried flower and a growing share of its oil market. We also saw over 50% sales growth in both the UK and Australian markets this quarter, which we expect to become significant profit drivers for us in the future. In France, we delivered our first shipment in August for their pilot program, under which we will supply the entire medical cannabis dried flower range. Our expertise in medical cannabis and ability to operate within a highly regulated framework gives us a great opportunity to expand in the global adult rec when those markets open up. This has been proven repeatedly over time, and now we are seeing this in the Netherlands, which based on today's global regulatory framework, we expect to become the largest federally regulated recreational market outside of Canada. Yesterday, we announced an agreement to invest in Netherlands-based Growery, one of 10 license holders entitled to participate in the Controlled Cannabis Supply Chain Experiment, the CCSC. Although we are providing Growery with a secured loan to construct a facility and fund early operations, our cash investment up front is minimal, and the remainder of our investment is dependent on achieving certain milestones. During the CCSC, approximately 80 out of the nearly 600 coffee shops in the country will only sell legally produced cannabis from the 10 approved federally licensed producers. Should the trial be expanded on national, we estimate a market size of about $2.8 billion annually, which is about the same size of the Canadian market. On Canadian adult REC, we believe this segment is still in the process of bottoming. That's why our focus on REC is on higher quality, higher potency, higher margin products that drove a 29% sequential revenue increase in our premium and super-premium dry flower products. In contrast, the overall segment was relatively steady in Q1. It's important to note that the discount segment of REC is largely a commodity, almost completely driven by price. This will certainly create issues for the foreseeable future, which is why we're pleased to focus on premium REC, but more generally a strategy that centers on high-margin, high-growth medical that's a key differentiator. And finally, in terms of our science and innovation business unit, we believe it provides Aurora with a strong right to win in premium consumer categories. Within this unit is our world-leading genetics and breeding program, which we expect to become a real differentiator for Aurora, with the ability to bring new high cannabinoid cultivars to market that are more customer-focused, sustainable, and profitable. The breeding program, located at Aurora Coast, the state-of-the-art facility in Vancouver Island's Comox Valley, is expected to drive revenues through genetic rotation into our product pipeline and greatly improve the efficiencies of cultivation through higher yielding plants, higher cannabinoids, and better disease resistance. We are also expecting revenue growth through genetic licensing agreements for these novel cultivars. Four new proprietary cannabis cultivars with distinct terpene profiles and high THC potency have already been developed. These include our three sand raft cultivars launched in September, and FarmGas, which we licensed in North 40, a Saskatchewan-based premium microproducer. While we are just building out this part of our business, and you'll hear much more about it soon, we view genetic licensing as a capital-light, long-term revenue growth opportunity for Aurora, and one that will ultimately bring a wide array of products to the market. Finally, we also believe that our intellectual property includes the most efficient pathway for cannabinoid biosynthetic production, which puts us in a pivotal position with nearly all cannabinoid biosynthetic work being undertaken in the industry today. We're actively working to build, partner, enforce, and protect this valuable intellectual property.
spk03: I would now like to turn the call over to Glenn so that we can provide his financial review. Thanks, Miguel, and good afternoon, everyone.
spk06: I appreciate you all joining us today. I will now review our Q1 2022 financials, which I believe show both the distinctive strengths of our business and our progress on our business transformation program. Let me point out a few of the highlights. We have one of the stronger balance sheets amongst Canadian LPs. This consists of approximately $424 million in cash, no term debt, and access to $1 billion US through a shelf prospectus including a $300 million U.S. ATM. Our capacity to raise capital is available to us as financial firepower to be used for strategic and accretive M&A opportunities. Our cash flow also continues to substantially improve year over year. In Q1, cash use was $16.6 million, down from $142.8 million in a comparable period a year ago. We have plenty of cash to fund our operations as we move towards profitability and positive free cash flow. Our core medical businesses continue to deliver overall growth in a normalized gross margin in the 60% range, with 64% in Q1 2022. This strong margin profile has held steady over the past few quarters and is an important gross profit driver that both distinguishes us from our competitors and is critical to reaching positive EBITDA. Of course, our SG&A is also a fraction of what it used to be in prior years, and upon continued execution of our business transformation plan, we'll be coming down further. At a summary level, our Q1 results benefited from our broad diversification across international medical, domestic medical, and adult recreational segments. Overall, Q1 net cannabis revenue was $60.1 million, 10% higher than last quarter. Our medical cannabis segment continues to excel, generating $41 million in sales and a gross margin of 64%. Medical represents about 68% of our Q1 revenue and about 81% of our gross profit. Our consumer cannabis business delivered $19.1 million and a gross margin of 32%. Overall, Q1's adjusted gross margin before fair value adjustments was 54%. This compares favorably to 48% a year ago and 53% last quarter. The increase in adjusted gross margins is due primarily to a shift in sales mix towards the medical market, which delivers higher average net selling prices and margins. On a related note, our average net selling price per gram of dried cannabis rose 21% to $4.67 from $3.86 in Q1 of last year, reflecting the increasing prominence of our medical cannabis business. Now a bit more detail on each of our business segments. Our Canadian medical revenue is $25.1 million in Q1 and reflected the consistent performance in the face of the continued consumer retail industry rollout. As we have said previously, our Canadian medical patients can be segmented into two groups, those with cost reimbursement coverage and those without a reimbursement program. Our success is really driven by our high volume insured patient groups. whose reimbursement makes them consistent and reliable buyers. And this is why we have made patient groups with reimbursement coverage a high-focus priority in our medical business. That said, we may see some migration of price-sensitive non-reimbursement patients from the medical channel to the adult recreational channel as that market continues to develop over time. Our international medical revenue is $15.9 million, and that reflected 146% growth versus the prior year and 84% sequentially. C1 revenue included $7.9 million of sales to Israel. As I said on our last conference call, BDS analytics estimate the market size of about $3.2 billion by 2025 for just Germany, Poland, UK, France, and Israel. Clearly, international medical is worthy of our focus and investment, and demonstrates why Aurora's leadership internationally is an important driver of long-term shareholder value. Our Q1 consumer revenue is $19.1 million, which was relatively consistent compared to the prior quarter. Our premiumization strategy gained traction as evidenced by a 29% sequential revenue growth in our premium dry flower categories, largely driven by the launch of three new cultivars. Consumer margins were healthy at 32% up over last quarter as we saw the shift in our sales mix towards the premium margin side of our portfolio. Put it together and we see the directional change we'd like to see. The consumer gross profit up 5% from last quarter, benefiting from our purposeful mixed shift towards premium. Now for SG&A, which includes R&D. it remains well controlled, coming in at $44 million in Q1, excluding restructuring and prior period adjustments. And while we've made a lot of progress in driving down SG&A, we are also implementing measures to take out further costs. These efforts should get us well below a $40 million quarterly run rate by the time we exit this fiscal year. So pulling all of this together, we generated an adjusted EBITDA loss in Q1 2022 of $11.5 million. excluding $600,000 of termination and restructuring charges. The $4 million decrease in EBITDA losses compared to last quarter was primarily driven by Q1's 10% increase in revenues, while adjusted gross margins remain strong and steady. For clarity, in our adjusted EBITDA, we do not include the benefit of $14.4 million of government-wage subsidy grants that we report in other income, as this program has now been phased out by the Canadian federal government. Now, let me remind you of the timing along our path to profitability. Approximately 60% of cash savings under the Business Transformation Program are expected to be realized on the P&L and our cost of goods as inventory is drawn down following the implementation of our lower production cost structure. We would expect to see those savings in our P&L beginning late this fiscal year and into the next. The remaining 40% of cash savings will show up in SG&A as they're executed, beginning with Q2 of this fiscal year. To wrap up, two key takeaways from these financial results. We have a clear path forward to being adjusted to EBIT deposit by some point in the first half of our next fiscal year through actions that we control. And our balance sheet remains strong with a healthy cash balance and improved working capital and cash flow.
spk03: I'll turn the call back to Miguel. Thanks, Glenn. Before we go to Q&A, I want to leave you with these final thoughts.
spk04: We're very pleased that our transformation plan is on track, and it's important to note that the foundation of that plan is medical cannabis. We expect continued revenue growth with very high margins. The world remains the number one Canadian LP by medical cannabis revenues globally, and we've been able to differentiate ourselves in Canada through investment in our proprietary end-to-end patient infrastructure, which has created barriers to entry and a sticky insured patient base. We expect to be a market leader as jurisdictions around the world continue to open up. Our number one position in medical also paves the way for success in global adult recreational cannabis. As medical-only jurisdictions evolve, our most recent proof point is the Netherlands, where others were surely followed. Our regulatory compliance, testing, and commitment to science make Aurora the ideal partner in both medical and rec over the next decade. As far as adult rec in Canada, we believe the market is in the process of bottoming, and we are encouraged that our premiumization strategy is gaining traction. We also expect continuing innovation in our product pipeline, supported by our science innovation program. Most importantly, any softness related to the discount segment will impede our ability to reach profitability. To that point, we've already achieved 33 million run rate cost savings with more on the way. This positions us to achieve EBITDA profitability in the first half of fiscal 2023, and our team is aligned and energized to get there. Thanks for your time today. We're excited about the secular opportunity that continues to be very significant. We look forward to updating you on our progress. Before we take questions from our analysts, I'll turn the call over to Ananth to ask a few questions from our retail shareholders.
spk03: We're invited to submit questions ahead of today's call. Ananth, please go ahead. Thanks, Miguel. Let's begin their questions. The first one here is the following. When do you expect to enter the US market?
spk04: So, Ananth, it's a great question. First and foremost, know that we are spending a lot of time focused on the US and paying attention to the US. I personally have over 25 years working in the US with the FDA, ATF, DEA, and have a very keen sort of perspective on this topic. What I will say is that our strategy of being thoughtful and being patient has clearly paid off. If you look at assets in the U.S., they have declined in overall value by 60% to 70%. And so taking our time from a valuation standpoint clearly has been the right play. Secondly, the Biden administration has been consistent, medical first plus decriminalization. And so with that, we expect that the number one Canadian medical company and one of the largest Canadian LPs medically globally will have something to say about that. So when you think about our overall goal of EBITDA profitability, we're not going to put that into risk by looking for a non-traditional investment. That being said, with the right opportunity, we have the balance sheet and financial flexibility to be opportunistic when we see the right transaction. And so as we go forward with that, we continue to keep an eye on it. We understand the news of this week. in what's been put forth, and obviously, you know, we'll pay attention, but I'll leave you with this. The work that we do in Germany, the Netherlands, the UK, and Israel, all around the world in excellence in a regulatory compliant framework is what best positions us to be successful in the U.S.
spk03: Great. Thanks, Miguel.
spk12: Our next question is, can you tell us more about your upcoming product launches and new innovation initiatives?
spk04: Absolutely. So first and foremost, as a company that has a globally diversified business, we get benefits out of innovation, out of our scientific progress, both in the medical business, but also in the rec business, which is probably more the gist of your question. If you look at our full year 2022 innovation calendar, it includes over 80 new SKUs. In Q4 of full year 21, we delivered 25 compelling new products to the market, followed by another 22 SKUs in Q1 of 2021. And this has clearly been our most significant and successful innovation push since legalization. Those innovation SKUs are doing extremely well. Right now, they're driving almost 40% of our wholesale revenue, reflecting really strong customer and consumer interest. Those SKUs are heavily skewed towards new flower rotations that are powered by our genetics breeding facility that I mentioned previously. as well as new concentrate and edible SKUs that have been driven by historical investments and new capabilities and competencies. Beyond that, we're also seeing great value in limited runs and seasonal offerings. This winter, we'll be offering a can of cane mints and cranberry vape for the holiday season under our drift brand that we think will be received very well. And we're also introducing hash for the first time. which we've relaunched under the WISSA branding with new packaging and price points, and we're planning on releasing a whole new lineup of rotational genetics that come from our COAST facility. So overall, there's a big focus on innovation. We get benefit out of it both in our rec and medical businesses, and we see it as a key component of our premiumization strategy.
spk12: Perfect. And our third and final question from the retail shareholders is, which international markets do you view as the most important for the business? And how are you planning on staying ahead of the competition in those markets?
spk04: Well, that's a great question. I think everybody's been so focused on the U.S. that people forget that there's a huge world out there with positive cannabis legislation and regulations evolving. We've talked about Germany. We've talked about UK. We've talked about key markets like Australia. But the reality is these are really big markets with huge opportunities. But each and every market has these core conditions, highly regulatory markets. deep compliance, significant hurdles in everything from manufacturing to packaging to sales and marketing. So we see huge potential in our ability, and we've seen great success historically. But there are a couple, several core markets that we're really excited about, and I mentioned some of those on the call. Israel was a large driver for us in Q1, and we continue to know the bulk sales that we'll have with our partner, Cantech, to continue. Also, our partnership with one of the most Forward regulatory agencies, the IMCA, under the leadership of Yuval Landshaft, has been really important. And we think the investments and work we've done with Yuval and his team definitely will play dividends globally. We've also announced our entry in the Netherlands yesterday, which we expect to be a significant, about a $2.8 billion market in the future. And in terms of European medical, which is set to become about a $5 billion market by 2025, you know, we're really excited about our leadership in a couple of key areas. The number one supplier of flour in Germany is in September, almost a 35-share growing share of the oils market, and we've doubled that share since September. We also believe we're the number one in the U.K. dry flour business, where we have an exceptional quarter. And as we've mentioned, we're the exclusive flour supplier, three of the nine tenders in the French medical cannabis pilot program. And as for what sets us apart from the competition, you know, our consistent regulatory expertise, science, testing, and compliance, has been recognized all around the world as our ability and real differentiator in our ability to succeed in those key markets. We're not going to rest on our laurels, and we're aiming to maintain and grow our market share as these markets develop. And we know that the expertise and experiences that we have there will play well all around the world and including the U.S.
spk03: That's great.
spk12: Thanks, Miguel. So that's the end of the retail shareholder questions. Operator, I'll turn it over to you for questions from the analysts. Thank you.
spk14: We will now begin the question and answer session. To ask your question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. In the interest of time, please limit yourself to one question. If you have a follow-up, we kindly ask that you jump back in the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Vivian Adzer with Cowan.
spk02: Please go ahead. Hi. Thank you. Good evening.
spk03: Good evening, Bev.
spk11: So I wanted, for as important as the medical business is, and we've talked a lot about it on prior quarters, I actually wanted to focus on your consumer business in Canada because the mix shift is apparent and it's certainly a positive evolution of your portfolio. And then in looking at the high fire data, it looks like you're having some similar success in sequential market share gains for your portfolio. So Miguel, one question, but two parts. The first is, if you look at the components of your market share gains, and perhaps you can comment through the end of October, since we've already closed out that month, which is the bigger driver, Sanraf or Whistler? And then as a follow-up to that, how do you think about these third-party craft brands sitting in, in driving not just top-line growth, but also not being diluted to your margins? Thank you.
spk04: Very welcome. So, you know, Viv, if you look overall in the Canadian rec business, just a couple points. One is we're only three years into it, and it's a bit of an irrational market. Most of the market share gains from competitors are coming from the large pack size, which is really a value play. And as we've talked about, we're focused on premium. So as an example, the discount 28 gram, which in some cases might even have a negative margin in certain provinces is you know, people are chasing because of excess inventories and a bunch of other things. We're exiting that. When you look at Quebec, you know, we see, you know, extremely strong response. So specifically to answer your question, we're seeing most of our premium growth, you know, in San Rap. And this was a strategy we announced about a year ago. And you're definitely seeing others follow it. If you want to have really large market shares, I just don't think it's a profitable strategy in the short term. This market is, you know, will rationalize a bit. The other thing, you know, as you talked about high-fire data, and clearly syndicated data is evolving and is getting better, but it's just not there yet in a way that maybe others would look and say in the U.S. of IRI, Nielsen, or in tobacco like MSA. And so while we look at, you know, high-fire data, it's only 50% coverage in Ontario. It's only 30% to 40% coverage in AB, BC, and Saskatchewan. And, you know, there really is little coverage in, you know, in the SQDC where we see a lot of our overall business. So I don't think it's the end all to be all. The end of the day, you know, there are places where you can make money in Canadian RAC. Premium aspects and some of those premium categories definitely are that. We're focused on that. And I think for those that, you know, are really of their heart set or looking at overall market share, I just don't think there's a direct correlation between overall market share. So we're going to stay focused on Sanraf and Whistler. We've seen great response there of our new cultivars. We also think can take some of those assets and put it into medical. And I do think if you look at Colorado and California as an example, you do see premium categories, you know, start to evolve and really articulate. I got to believe that. that we're going to see that in Canada.
spk03: It's just not there yet, so we're not going to chase down the rabbit hole with lower margins, particularly in the discount category.
spk02: The next question comes from Pablo Zuanek with Cantor Fitzgerald.
spk14: Please go ahead.
spk09: Thank you. I'm going to focus on the export business. You talked about the stickiness, right, compliance, your science, your innovation. But can you just discuss more the cost side of things? I mean, my understanding is you're shipping in Europe from Denmark, right? You know, we hear of other producers that claim to be low cost and that they could enter Europe. I'm sure it's not as simple as that. But just talk a little more about stickiness because the idea that compliance, being compliant with the regulatory framework in those countries is a key competitive advantage. It makes me wonder whether, you know, others could easily emulate that and just break in with lower cost and maybe more distribution than you have. If you can expand on that, please. Thank you.
spk04: Sure, I'd be happy to, Pablo. So it's absolutely an advantage. And, you know, take a look at Germany. The reality is, you know, the standard in Germany is you have to have within a 10% deviation on the core components, particularly potency. That's a really hard thing to do. And so you have to have a pretty advanced standard facility in order to be able to consistently meet that, that had a big role in us gaining almost a third of the entire flower business. So that would be one example. The second example would be Israel. You know, I talked about the IMCA and Yuval Lanchas leadership. They have the highest standards of anyone in the world and include about 44 pesticides that no one else has even tested for. So it's not only having CU MCS certification, which is a pretty unique certification beyond the UGMP, but also your ability to test, package, ship, and have all of that has made a significant difference in Israel. I don't think, even though that there are places around the world where you can produce cannabis cheaper, that the overall certification, reporting, consistency of production, and entering those markets make that as viable. I mean, remember, we're talking about medical patients. We're not talking just about reps. medical patients and their clinicians and their physicians will find an item that they like. They want it to be of the highest possible quality and consistently available to them. And so that is the same situation over and over and over. And there's a reason why the same companies are being successful in Germany, UK, France, Netherlands, Israel. And it's about compliance, regulatory forward, all of that infrastructure that you need And while maybe in the short term there's a little bit that you can do on low-cost product, it's not there. And I will say also that this is a place where like-minded companies agree. And so while we may be competing against some of the larger other LPs, we all agree that having a proper regulatory framework and adherence to compliance measures makes sense. So there's no disagreement on that. So there's absolutely a high bar to get in. It makes a huge difference. And it's absolutely the reason why we've done so well in some of these key markets. You mentioned shipping costs. Yes, we do ship from our Denmark facility. And in some cases, particularly with Israel, we ship from Canada. It's not, you know, it's not insignificant, but it's not a prohibitive cost because in many cases you're shipping bulk and getting into finished goods in market.
spk02: The next question comes from Michael Lavery with Piper Sandler.
spk14: Please go ahead.
spk03: Thank you. Good evening.
spk10: Good evening, Michael. I actually just want to go back to the REC business as well and just understand some of the context and outlook. And specifically with Sanraf and Whistler in particular having 29% sequential growth. and all of medical, even with the international boost from Israel being up, I think 17 sequentially, it was clearly a really strong performer in the quarter. You've made it very, very clear your emphasis on the medical side. So I guess just how to think about this, you know, is it, is it just that you can walk and chew gum or, you know, is it, was there some more one-off things driving that, that aren't as sustainable? Can you just give us a sense of, you know, is, Is REC really just a question of premiumizing and that you can do that and it's the focus within that piece? Or is it just a little bit more lumpy and medical is really the focus?
spk04: Well, I think, Michael, right now, clearly, if you look at margins and you look at overall profit opportunities globally, you know, it's medical. So, you know, margins in the mid-60s, really sticky markets. You know, needing all the infrastructure, high hurdles to get in, all the compliance stuff I mentioned internationally. You know, medical, you know, takes a unique skill set, and it's one that we have. I think on REC, you know, it really, right now, you have to remember that in Canada, we're only three years into this experiment. And in the discount arena, which is, you know, a decent part of the overall business, it really is a commodity. And so pricing is really driving all of those major decisions. And so we're just not going to chase that at the expense of profitability. In the premium categories, you know, new, differentiated, and innovative really matters. And so those unique cultivars make a big difference. And we see that articulate itself with, you know, Whistler and San Rap. The benefit of our system is we also can take those same products and put it into the medical business. And so, you know, you find Whistler products, which we've now put into our medical channel doing exceedingly well, with our patients. You see the same thing with Sanraf products. So there are efficiencies. So the point of chewing gum and walking at the same time is clearly an opportunity to get benefits out of both. But I think if you're laser focused on profitability and sustainability, you know, you're going to focus on those areas that are more consistent, which are right now is medical. Now, we're not taking our eye off a rack. I just think right-sizing and doing it in an appropriate way. And also finding areas where, you know, they're more asset-like. The genetics business that we've invested in historically is wonderfully accretive. Biosynthetics and other aspects of genetics we think will be really important in a global environment as people are looking for that. So I think, you know, as we've laid out our strategy, we're right on track where we want to be, steady as we go. And I think, you know, over time, the REC business in Canada will become more rational and And in that, the efficiencies that companies like us will have will come more to bear. But right now, those that are chasing the discount business, I think they're in for a little bit of more of a rocky road. But the premium business is rational. And for those that say that the REC business is broken, I would ask them to take a good look at Colorado and California, which appear to be about 18 months ahead of Canada. And you are seeing good success there.
spk03: not only in margin accretive categories, but in premium brands.
spk14: The next question comes from Andrew Carter with Stifel. Please go ahead.
spk01: Hey, thanks. Good evening. I wanted to ask about the Canadian medical business. I think it was down 8% year over year. So I know that there's some patients that are sticky, the government reimbursement, some that are more fluid. But could you kind of give us a sense of where that business should stabilize and you should see that start to grow from either market share, patient growth standpoint? Thanks.
spk04: Sure. I'd be happy, Andrew, and thank you for the question. So I'll kick it off and then let Glenn come in on the backside of it. But, you know, right now we're seeing a little bit of interaction, as Glenn mentioned, between the rec business and the medical business. I think it's mostly in those that aren't receiving reimbursement. Most evidence by the fact that we grew share recently. yet you saw a little bit of decline. It's hard to say what the steady state is. We're hearing some positive news about unions and different groups that will be bringing cannabis on. Right now, it's only about 1% of the adult population in Canada, you know, is connected to that system. So we do see an opportunity to not only see the pie grow a little bit as things normalize, but also continue to grow share. Glenn?
spk06: Yeah, thanks. Quarter over quarter, the sales to the reimbursement groups and veterans in particular was absolutely consistent. I think there's $3,000 difference quarter to quarter. So it continues to be very strong. Little of the decline that you talked about, well, all of the decline, it came from those non-reimbursement patients. So we, as Miguel mentioned, there are groups out there that we have targeted and continue to work towards kind of reeling in contracts in that way. We're also launching a number of products and innovations that we believe will appeal to our existing patient population, particularly the reimbursement ones. You might have seen something launched, I think, in the last couple of days. The PACS system, a nice bundle for our veteran patients, CAMO, and great pricing to continue to reward and engage those really important patients. So we think we can get more out of the current patient population. and then continue to look for some of those stepwise changes in bringing in associations and unions.
spk14: The next question comes from John Zamparo with CIBC. Please go ahead.
spk13: Thanks. Good evening. I was hoping you could help us better understand how you expect the Netherlands market will play out. And generally, Miguel, you prefer medical-only markets, but it sounds like you're excited about the Netherlands transitioning to REC. I would say your performance globally has been better in medical markets than consumers. So is the reason for excitement on the Dutch system that it seems like it's limited license with barriers to entry? And can you talk about your confidence in why it'll stay that way over the long term? Thanks.
spk04: Very happy to, John. It's a great question. So I had the pleasure of being out there and spending time with our team, spending time in the market, and more importantly, spending time with our partner, which is the growery. I mean, as I think everyone knows, this is, you know, the cannabis experiment in the Netherlands is 50 years in the making. The reality today is it's a very sort of formal and legalized structure for the coffee shops, the over 600 retail outlets, but the production part has been sort of a black hole. The government particularly wants to clean that up and create much more of a legal market. So I get excited when there's financial incentives. There are only 10 licensees in this experiment, and we're one of them. And we're excited about the partner that we have. Clearly, there are going to be advantages for those 10 at a time in which we expect this goes legal. All the economic incentives line up. And yes, we do like a medical-only market. given our expertise and given sort of how we've gone about it. But I believe that medical is a step towards rec. When you have a strong relationship with the regulators, you can understand the marketplace, you have a sense of what product portfolios are doing well, it gives you a significant advantage. This is a massive market. We've talked about it being, when it all goes, potentially even as big as Canada, and there's going to be a clear advantage for those that participate early. So for that reason, we're excited about it. We clearly have a lot of infrastructure in that part of the world and success. And so I clearly believe that countries like this, success begets success in a lot of different ways. And so this is an example, I think, of where, you know, we are bullish on the opportunity to have it participate both in the medical and rec business. And so, you know, more to follow on that, but, you know, This is really one of only 10 licensees. We've got one of them. We've got a great partner. It's a big, big market, and all of the incentives from the government, the regulators, the retail owners all line up well here, and so we think we're in a good spot.
spk06: I'm going to add just a couple of comments. As Miguel said, 50 years in the making. This is an established market, so there's not sort of a guesswork on how big the market will be. There's a number of cities that are required. All the coffee shops in those cities are required to faith in this trial. And one of the things I like is this is right on strategy for us. I mean, we'll call it premium margins, premium pricing. So this is typical pricing, international pricing and margins for us. So it's a very compelling opportunity, and we're excited to be, we think, one of the leading companies involved there.
spk03: Thank you.
spk02: The next question comes from Tammy Chen with BMO. Please go ahead.
spk08: Thanks. Good evening. The 29% sequential increase of sales in your premium consumer brands, I mean, that's pretty impressive. But can you help us understand, like, is this growth from activating more storefronts to carry your new cultivars? Or, like, is some of this growth reorders because these products are seeing good consumer traction? And I'm also just curious, like, when do you, expect to actually be in a state of sequential growth in your consumer segment? Because I know the decline of Daily Special sort of puts an offset to your premium strategy. Thank you.
spk04: You're welcome, Sam. Thanks for the question. I'll take the first part and let Glenn take the sequential quarters. So I would say that there's, you know, as with all things with a consumer product, there are probably four primary reasons why we're seeing growth. First and foremost, the products are better. So if you look at the uniqueness of the attributes, if you look at the potency, if you look at the genetics and those new cultivars and what we're seeing on sand raft across the board are better. Took longer than I would like for this reset to take hold. But so the overall proposition, I would say, is more compelling. Secondly, you correctly brought up distribution. We've partnered with what I consider to be the best and largest broker in Canada that has national coverage. Southern Glazer does a wonderful job for us and every month we're able to touch about 90% of the volume, which allows these new brands to get in. Third is, as you know, navigating the provincial buyers is hard. And so the fact that these new cultivars are differentiated, unique, higher potency has given us a higher success rate of getting them through that process, which particularly in Ontario, You know, I think it's a challenge, and you hear it from everyone. And I think, you know, lastly, the overall sort of consistency, as we see new being the most important thing that people are buying, the steady sort of rollout of these and seeing not only a flower, but other brands, has started to bring some of the shine back to Sanraf, particularly with bud tenders and store owners. And so we're going to continue to roll this out. We're really pleased with the coverage, so to speak, of our genetics. You're going to see everything from, continue doing cultivars and new genetics on Sanraf and Whistler, but you're also going to see a lot of seasonals, and you're going to see what we call collaborations. The North 40, you know, for those that are familiar with Gord and that company, they're one of the preeminent craft growers, and for him to select farm gas and to be so positive about it and do so well speaks to our ability to produce cutting-edge genetics, and I think for a lot of people that, you know, thought that big cannabis can't grow you know, great, nichey, high-quality flour, I think that's a testament that we absolutely can and will. Glenn, you want to pick up on the run rates in quarter over quarter?
spk06: Yeah, sure. Tammy, we were up in most provinces. A good, you know, 50% or more in Alberta, B.C., and Quebec is a strong point for us, for sure. I think 33% of our consumer revenue came out of Quebec in Q1. You know, Ontario is the nut to crack, obviously. And, you know, I think we've put a great foot forward with the recent product call and the innovation that Miguel was talking about. I think it's the route forward there. So I expect that, you know, as Miguel's outlined, it's a continuing challenge in the consumer market. But the innovation that we've been putting forward and the success that we've seen with that innovation to date, I think, is positioning us well. to get this back on track over the next little while. And again, I think Ontario is the key for us because we are seeing the pickup in the other provinces where we've been able to get product into market. Quebec, for instance, is interesting in that, you know, if you're selling it to Quebec, it's in all the stores and it's all also, you know, there's not as many LPs in Quebec because it's just a different market and there's certain constraints and only certain LPs can operate in Quebec effectively. So, It's a great market for us. San Rapids has been there since the beginning and has a great reputation. So when we renew the brand with new cultivars and especially the type of cultivars we put in there, we see the pickup and we see the response. You see it in social media and things like that.
spk03: So that's the route forward for sure.
spk02: The next question comes from Doug Meehan with RBC Capital Markets.
spk14: Please go ahead.
spk05: Yeah, good evening. My question just has to do, you talk about the stickiness of the international medical business. I'm just curious, the 16 million or so, you know, and with the larger order coming out of Israel during the quarter, is this sustainable? Or are we going to see a little volatility over the next several quarters? Or are we going to have a benefit from other countries offsetting maybe a decrease in Israel quarter to quarter?
spk04: Yeah, so it's a great question. So certain markets are steadier than other markets. Germany, UK are steadier. When you see other markets, say like Poland as an example, this last quarter we saw a bit of a regulatory hitch there. for a lot of companies, including us, and that caused a delay in timing. Israel is a bit of an evolving market. And so, you know, it's hard for us to say it's going to be steady. But, you know, when it's open, we do extremely well. So we don't really give guidance on Israel. Now, to your point about other markets opening up, we always hope for that. You know, you'll know about the big ones. So France is obviously in their process. We talked about the Netherlands. And so, you know, I can't give you an exact sort of guidance quarter over quarter there. But what I can tell you, though, is that it is the same conditions that either open or close a market. Can you meet the standards? What's happening with your overall product specs? What's going on with the packaging? What's happening with the testing? All of that, you know, is sort of consistent. And so when you win, you win consistently. And while there are timing points or hiccups or whatever you want to describe it, we've done really well. I think more so than almost anybody, when there are profit opportunities to be had, we're there. Israel is a really good example. I've spent time in Tel Aviv. I have incredible respect for Yuval Landshaft, who's the lead regulator with the IMCA. We were one of the first companies to be able to navigate that process and ship what we think is the largest amount of cannabis into Israel. Three of the nine flower tenders in France. And so I wish it was steadier and sort of more formulaic about us being able to project it out. But I think if you're bullish on the macro theory of global cannabis and you understand the high regulatory hurdles and you understand that these regulators all talk to each other and there's a lot of interaction, you're going to see the same companies win time after time after time. And I absolutely believe the FDA is going to be running a similar process and they're going to take a deep interest in what's happened you know, with agencies such as the IMCA in Israel or Health Canada in Canada. Glenn, anything you want to add?
spk06: Doug, the diversification of the country, so I'm going to get all loaded to it. It's really important to have a basket of countries as they're all developing. Poland, for instance, we sold almost nothing until last quarter as we had to re-register our Danish production facility for shipments into Poland. Now we've got that registration and we're shipments into Poland restarted in October. So Poland down, but the UK was up 50% and Australia was up 50%. So for us, the diversified basket of international markets is important as they develop. To your point, Doug, some will offset others as we grow and it makes it a little bit more predictable, a little bit more consistent to have that portfolio.
spk02: The next question comes from Frederico Gomes with ATB Capital Markets.
spk14: Please go ahead.
spk07: Good evening, guys. Thanks for taking my question. I just want to go back to your investment in the Netherlands. When do you expect sales to start there? Just how long will it take for your partner there to start operating? And then in terms of margins there as well, I know you touched on the premium strategy there, but I imagine that those margins, they wouldn't be as good as your international medical shipment. Thanks.
spk04: Glenn, you want to kick it off, and then I'll come back?
spk06: Yeah, thanks. Yeah, Fred. Yes, listen, I... really interested in this market. I think it's really cool to see a well-established market like that that will actually have Aurora brands in the coffee shops when they go to Amsterdam or some of the cities that are participating there. So I look forward to that. We expect sales to start in calendar 23, so a little over a year from now. And in between now and then, the licensees are getting their final sort of approvals and building up their facilities in country. So That's what's happening before. So it starts kind of beginning at calendar 23. We expect to see sales just after that. The margins are similar to the type of international margins we see. The pricing, like most regulated markets, is fairly strong. And we expect to get healthy. Think of them kind of medical-like margins, which is why we're keenly interested in it. It's not a consumer market like you see in Canada or more of a premium side. So
spk03: So that's how I think of margins and the economy of the revenues. Thanks.
spk02: This concludes our question and answer session.
spk14: I would like to turn the conference back over to Miguel Martin for any closing remarks.
spk04: Well, I want to thank everybody, and I hope you and your families are safe this season. We're all excited about where we are as a company. Our transformation plan is on track. We look forward to sharing that success with you as we come in the upcoming quarters, and we appreciate everything that you do in covering Aurora. All the best. Thank you.
spk02: The conference is now concluded.
spk14: Thank you for attending today's presentation. You may now
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