Perfect. Yeah, good morning everyone for joining us Fireside Chat with Simona King, Chief Financial Officer at Aurora Cannabis. It's couple of years milestone period for you guys. Completed multi-year restructuring, included the right sizing of the production capacity and exiting some unpromising markets, cleaned up the balance sheet, and your cannabis operations are debt-free, and you got a strong net cash position. You've also grown substantially in Europe, Germany in particular, now one of your biggest international markets. Before we jump in, maybe just give a just a couple minute intro of what you guys have been focused on right now and maybe just maybe one misconception that investors have with your business.
Great. Well, hello everyone, and thanks Derek for your opening comments. It's great to be here again at a TD Cowen Healthcare Conference. Over the past couple of years, we've delivered on significant milestones for the company, strengthened our balance sheet, delivered record revenue and Adjusted EBITDA growth and generated free cash flow for our shareholders. You know, over the last couple of years, we've pivoted and changed our strategic direction to focus primarily on the medical cannabis business where we see the highest margins in this industry, and especially focusing our resources and investments in the high-growth international markets. This has been solidified most recently by our decision to divest our plant propagation business, as well as our lower scale back our lower margin consumer segment as well.
We, you know, we know that winning on a global scale requires time and careful and thoughtful execution, and we do believe that investors are paying more attention now to the medical cannabis space as they see a lot of the growth opportunities and potential there. In the past or it's been more focused on the consumer/recreational market, especially in North America, and perhaps underappreciated the tremendous growth that's coming especially out of Europe and Australia. You know, to be successful in these markets, I mean, they are highly regulated markets, very much patient and physician-focused, so like a traditional pharmaceutical market and require consistent GMP manufactured supply.
We believe that our operational excellence, commercial execution, along with regulatory expertise that we've put in place over many years, has really positioned us well, currently. We are ready to optimize the opportunities that are arising from these markets. Quite frankly, we're one of the few companies that have the manufacturing capabilities as well as the people on the ground in order to capitalize on this, future growth.
Awesome. That's a good introduction. Maybe we'll focus on the sort of your medical cannabis-first strategy. You touched a little bit in your opening remarks, but, maybe just talk about your two or three biggest advantages that make this strategy more durable versus your peers.
You're right, our medical cannabis business is our growth engine for the company. That's, you know, shown even in our most recent results, where we delivered CAD 94 million in overall revenue, representing about 7% year-over-year growth. Our global medical cannabis revenue on a year-to-date basis is CAD 212 million compared to CAD 177 million from last year. Already reflecting strong growth coming from these from this market. Firstly, we believe there's tremendous growth in the medical cannabis space.
Expect to or the estimated addressable market is over CAD 9 billion and especially coming from Europe and beyond. There's significant opportunity there. Our strategy to focus primarily and now solely on medical cannabis is really, you know, the right strategy. Second, it is very much a pharmaceutical traditional approach. What this means is that, you know, as you think about the pricing compression is less so than what we've seen in the consumer space. Then along with that are the margins. We have shown some of the highest margins in the industry in the mid-to-high 60s%. Again, that's a reflection of the strategic shift that we've made.
Finally, it also reflects the need for continuous GMP manufacturer supply, as it's really important from both the physician and patient standpoint to ensure that the right product, quality product and supply is available to patients, when they need that. We're positioned very well from the manufacturer capabilities we've put in place over the years to deliver on that.
You brough`t up the GMP certification. Just maybe, I guess, within your operating model, how does that translate into pricing power or even share gains?
Yeah, our focus is to continue to invest and expand our internal capacity for GMP manufactured product.
Okay.
Which we have our, out of our facilities in Canada as well as in Germany. That's been a big driver for our investments. One thing that's important to note is that this allows us to rely less on third-party suppliers.
Where there's also not only uncertainty, but also impact in terms of the cost. Over the years, we've been able to put a lot more operational efficiencies in place in our manufacturing facilities, improved our yields as well, and this resulted in lower cost of goods sold for the company and hence impacting our margins, which allows us then to invest the profitable the profits into driving continuous profitable growth.
Awesome. I just want to maybe spend some time, not a lot of time, 'cause it is a smaller part of your business, but you guys did discuss recently exiting select areas of the Canadian recreational business, to prioritize the higher-margin medical. How should investors think about the end state?
That's a great question. You know, the priority on medical cannabis has been ongoing for a couple years, and it continues to do so, and even more so, with the announcements that we've made. Generally, we've seen lower returns in the consumer business, which led to the decision to focus our resources and investments in the higher-margin medical cannabis market. As we think about the scale back of the consumer business is looking at the different provinces and where the profitability is there. It's, you know, we do expect some one-time costs to hit, this quarter.
After the transition or the scale back, we do expect our EBITDA margins to improve, both absolute and margins.
Okay. I guess what are the biggest execution dependencies that you're thinking about?
Yeah. It's ensuring that it's wind down of the products, obviously, that go to the provinces and thinking about the allocation where it makes sense to the medical cannabis space. By scaling back on the consumer business, it does allow us to then focus our investments, especially on the international markets in the medical cannabis area.
That includes, like, things like SKU rationalization?
It does. It does.
Okay.
We're monitoring closely our inventory levels across the markets in consumer in Canada.
Okay. let's switch back gears, go back to your main business. you've called out doubling production in at the German manufacturing facility. doing so, what does that unlock?
We're one of the few, one of 3 companies actually, that have the license to manufacture and cultivate cannabis in Germany, and this was part of a tender that was done by the government to sell the product to the government. After the scheduling in Germany, which opened up the market tremendously, we're able now to provide supply from this facility to support the German market growth. As a result of that, we are adding more capacity and CapEx investments to increase the capacity in the German facility to support this market growth and also looking at opportunities to bring the operational efficiencies and yield improvements that we've seen in Canada to this facility as well. This gives us also a lot more flexibility if we think about how our product moves around the world.
Right.
In thinking through, you know, how we best utilize both our Canadian and now our German facility as well.
Okay. just maybe adding to that, how are you planning around sort of the potential telehealth framework changes?
Yeah. There are ongoing conversations at the government level in Germany, just in general overall regulatory conversations, including potential changes to telehealth platforms. At this stage, it's probably too early to make an assessment on where it's going one way or another. We do have a very strong regulatory affairs team on the ground in Germany that is very knowledgeable about the changes or how the developments might be occurring in parliament. They're also industry advocates and regularly discuss with regulators there. This does give us an advantage in terms of better having a better understanding of potentially what may change. I can tell you, we would be able to look at ways to pivot, as we have in other markets as well when regulatory uncertainty comes our direction.
In the meantime, you know, we're focusing on ensuring that the consistent GMP supply is available for patients, and ensuring that that access is there. That's, that's where our focus is on, you know, executing on what we do well and ensuring the right product to the patients is there, while at the same time monitoring developments from a regulatory standpoint.
I want to hit on Australia a little bit. You guys noted that it's still very value-heavy, while you're working through, you know, sort of that shift towards that shift in mix towards core and premium. What are the leading indicators that are telling you that the transition's working?
Yeah, Australia's a interesting market, and our focus is a lot now driving the portfolio mix towards core and premium product.
Right
Where we also see that, there are fewer players in that segment as well as it also has higher margins. That is, you know, a very big focus for us, is on driving the portfolio mix there. We're also working very closely with our teams on the ground to ensuring that the patient education and access to these varying products are there for our patients. That's also where the clinical supply is, the supply and TGA manufactured product is available, as that's absolutely critical to ensure that the patients have the product when they need it. That's a big focus for us, quite frankly. We're constantly innovating, you know, through looking at products-
It never stops.
Yeah, it never stops. Looking at products that work well in other markets and what, may play well in Australia as well.
Okay. I guess, you know, as you think about it, as you make that transition to the core premium, where do you expect some of the pressure points or the short-term pressure points to occur?
Yes. As the market continues to evolve and mature, we do expect those pressure points to come from the value segment where that's always sensitive to prices from patients, and where a lot more competition is in that, value segment. That's something we're monitoring very closely, and again, with the focus on the more premium product.
Where we believe we also have an advantage. That allows us to kind of shift our resources to where we think we can drive the most value in the Australian market.
Okay. I'm curious on how the Leafio partnership came to fruition, you know, sort of how the process is coming along since the partnership was announced.
Leafio is the parent company for Montu, who's a significant player in the Australian market, and they've grown significantly in the last couple of years. It's really fantastic that we're able to partner with Montu, and this allows us to have access to more patients. It's important to expand our distribution partnerships beyond what we had originally, because that opens up the market a lot more for us. That's something that we're assessing very closely, looking at other distributors. It's also, you know, just in general, the Australian market is very much physician-led and traditional. Very much traditional pharmaceutical market. Distribution pathways are not all the same, so that just expands the market significantly for us.
Yeah. Just maybe talking about Poland here, you guys really navigated sort of that regulatory-driven channel shifts quite successfully and actually much quicker than I had anticipated. Maybe just talk about some of the capabilities that matter most to you.
Yeah. Poland is probably the highest regulated market in Europe, and again, to keep using pharmaceutical, since we're at a healthcare conference, is the one that's probably the most traditional. The regulators really spend a lot of time and focus from a regulatory, a regulatory standpoint. Having been in the market for quite some time, we've built, you know, a strong reputation in the market. We're actually number one in Poland.
Yep.
That's also a testament to how we've navigated the latest change with the telehealth platforms in Poland. We're able to pivot very, very quickly. It was really a function of both commercial execution, ensuring that we not only had the supply, but also introducing new cultivars that were well-received in the Polish market and staying very close to the regulatory headwinds or changes there. It's been a combination of things, but partnering with our distributors, understanding what the physicians need as well, and ensuring that the right products are in the hands of patients by ensuring that the supply is there.
The lessons that we've learned from Poland, we do think they're transferable and applicable, you know, in the event, like things change in Germany, for example, to be able to take some of those lessons and pivot appropriately. Yes, it's been a rather smooth transition.
Yeah. It's, it's very nice to see. Yeah. plant propagation, and sort of the Bevo divestiture recently announced. Can you guys hear me? Yeah, there we go. you're divesting of that plant propagation business. I guess the main question is: what does that enable you guys to do going forward?
Yes. This decision, as I mentioned earlier, it's in line with the strategic direction to focus on the medical cannabis growth.
Right.
That continues to emphasize, our prioritization of the medical business, where our investments are now focused on that. The plant propagation business, similar to the consumer segment, lower margins and impact on our bottom line. It made a lot of sense, and it was the right time for the company to pivot away from that business. It also took out some of the noise in terms of understanding our financials, our growth profile, and better able to articulate the impact to our bottom line. By divesting this business, we do expect that then the focus will be on our margins, at the higher margins, and it will be a lot, a lot cleaner. We don't anticipate any one-time costs from this...
Okay
I do wanna point out that as a result of this, we would now be consolidating the plant propagation business into our core financials.
Okay.
That, that would be a change.
Awesome. You established recently an ATM up to $100 million and said the proceeds would be used for strategic, accretive uses, so capacity potential M&A. What type of opportunities or fit, are you thinking about potentially down the road?
Yeah. Our primary objective is to continue to drive profitable growth and continue to generate the capital to drive that growth. As we think about potential M&A opportunities, we take a very patient, thoughtful approach to that to ensure that it fits strategically with our core business and also that it's accretive to our business. So we wanna be in a position that it's, you know, we're financially in a better position post-acquisition with any potential acquisitions. So as we think about possibilities, you know, whether they're, you know, strategically aligned adjacent businesses or thinking through how we expand our cultivation as well to ensure that internal supply is available to support the future growth, these are, you know, potential considerations for us.
We're very thoughtful on how we deploy the capital from an M&A perspective. We're blessed with a very strong balance sheet that supports our ongoing operations and allows us to focus on our core business and driving that forth.
That focus, what would be a no-go?
Well, if it's not strategically, I would say, aligned to our business or not adding financial value or accretive to our business, that would be things that we take into consideration.
My final question on the M&A front is, like, how would you balance M&A with maintaining that strong balance sheet that you guys have worked really hard at getting to?
We look for opportunities to not only expand in existing markets, as we believe that there's tremendous growth across the region in Europe, especially in Germany still. It's not fully penetrated from a patient standpoint, especially when you look at the more mature Canadian market as a reference. That's where we think the, you know, balancing in terms of driving the investments towards that growth is gonna be, you know, important for us. Like I said, we have the strong balance sheet to be able to support delivering against that.
Absolutely. I agree with that as well. You updated your full year outlook, still strong growth and an improvement in the balance sheet. You also mentioned some headwinds in some markets. Without getting overly granular, where do you see some of the biggest swaying factors?
A couple factors come into play when we think about guidance. What we've tried to capture in our annual guidance is really some of the risk factors as it relates to the regulatory framework, as there are uncertainties on that in any particular quarter. For example, you know, the timing of when we get the import or export licenses and permits can really affect a quarter or calendar year. 'Cause one day that shifts out into another quarter impacts how we're thinking about our planned revenue.
Yeah.
That guidance range is really trying to capture that, those potential unplanned risks from a regulatory standpoint. It is not about changes in market dynamics or how we're seeing our position or reflection of demand in those regions. It is really to capture the regulatory uncertainty. As we think about how we're monitoring that closely, you know, we look at on a weekly, sometimes daily basis, look at the trends at inventory levels. We look at shipment timing, sell-through data, and also tracking product launches as well as the timing of permits, which again, some of it is limited data that we can get. That's something that we monitor very closely, which comes into play in terms of our decision-making and how we think about overall guidance.
You got some pretty good confidence in that path.
We do. We do.
Okay. talking a little bit on the regulatory front, you mentioned looking at additional markets coming online, parts of Europe, and that you prefer science-based regulatory frameworks. What's your market entry checklist, so to speak?
Yeah. The first thing we really do try to assess is the regulatory framework, because in some markets it can be fickle, positive one day and not so another day. That's really important to understand, especially if we think about emerging markets and new markets, to understand where the winds might be blowing from a regulatory standpoint. The fact that we have a very strong government affairs, and regulatory affairs team both in Canada as well as Europe really does give us an advantage in terms of better understanding, some of the movements there. That's one of the first things we do is really try to understand that aspect of it. Then we may take a, as we've done, a asset-light approach, every market is different.
Where we may decide to make a bigger investment or not, or partner with distributors, as we think about some of the emerging markets. That's how we've approached even the existing markets that we're in. For example, the Australian market, we initially had a partnership with MedReleaf Australia, eventually ended up buying the entire stake, or the remaining stake in that business a couple of years ago once we saw how the market was doing and execution on the ground as well. That was an approach that we've applied in some of the markets. You know, as an example, we're monitoring France very closely. We're in the pilot program with France.
They're very much focused from a medical standpoint, which is great that they're rigorously focusing on that and, you know, may be a little bit delayed. It's potentially a timing.
Okay.
That's an example where we're monitoring closely, we're in the pilot, and we're waiting to see how things are developing in that market. That's a huge market for Europe because of the population size.
Absolutely.
I guess how do you sort of avoid tourist expansion, like just getting to a market that might not be profitable or just trying it out?
Yeah, I would say we're very much focused on creating profits for the company and focusing on profitable markets and using the lessons that we're learning from being a leader or, you know, leading position in some of the markets like Germany and Poland, and be thoughtful about entering other regions, not just to say we're in that market, but if it's gonna be profitable for us and regulatory environments are also optimistic or conducive to that, then that's something that we would assess. We have a strong team on the ground in Germany, also in Poland. We're leveraging those people on the ground that we've been there for a long time.
Yeah
To see how we can partner then to support the other regions as well.
Focused on profitable growth...
Absolutely
... expansion. maybe as a quick follow-up on that, how do GMP standards and certification timelines either constrain or maybe even protect your opportunity?
Yeah, we see this as a competitive advantage for us. In these medical markets, you need GMP manufacture product.
Right
To be able to sell. It is a pharmaceutical-type product. That's what's required by the governments. The fact that we have GMP-manufactured facilities with large capacity to supply that type of product, gives us a serious competitive advantage, where some of the other competitors or other companies are not able to get consistent supply of GMP product. Keeping in mind that what's really important is when a patient goes to fill the prescription, they want the product that the prescription has called for, otherwise it creates a lot of issues for that patient. We've shown over and over that we're able to supply that quality product when it's needed. For us it's a competitive advantage to have the ability to do so.
How should we think about the impact of increased competition, you know, whether it's domestic, which you are exiting, but or as it pertains to recent acquisitions in the space most likely? Well, I'm speaking to Germany in particular.
How do you, how do you guys react to the increased competitive intensity in those markets?
Yeah. As these markets mature, it's, you know, does attract more competition, as more players see these as potential growth engines as well.
Some from Canadian LPs.
Some from Canadian LPs, absolutely, and some MSOs as well from here, from the States. We do feel that we do have a competitive advantage in, especially in Europe and Australia, as we've been in these markets for a long time. It does take time to set up not your, not only your commercial, your commercial infrastructure on the ground and build those relationships with physicians, with pharmacies, with distributors, but also ensuring that the supply gets to the market rather quickly. Again, we provide the supply from Canada, and in the case of Germany, also from Germany as well.
That commercial execution combined, like I've said earlier, with the regulatory expertise to be able to pivot as quickly as we may need to, along with the supply really is, we call it the trifecta of what really sets us apart from competitors. We continue to lead in these markets, either number 1 or number 2, in some cases have some of the top cultivars in the regions. The other thing to point out is that we have science and plant some of the strongest science and plant genetics, and that allows us to really work on cultivars that not only prove yields, but it's what patients and customers want and sets us apart, I would say, from the competition.
Maybe looking at it another way, does, you know, does a recent competitor, we all know who they are, like their acquisition in the space signal that there's a pickup in potential M&A opportunities in the market?
We do see that as a positive because there's a better understanding of the benefits of medical cannabis, and seeing more play in that space just highlights the importance of this market segment and solidifies the strategy that we've put in place as a company and are continuing to focus on even more immensely. You know, those are good signs that this is where the value is, and not only competitors, but investors are better appreciating the medical cannabis space because in the past a lot of the acquisitions were in the consumer.
Right
The consumer business, both in Canada as well as the U.S.
Okay.
There was a little bit of a shift and that is positive and promising.
Yeah. Maybe just with the last couple of minutes we have, last question is if you could leave investors and the audience here with one takeaway from the last couple of quarters about where the company's headed over the next 12-18 months, what would it be?
We've shown over and over that we're able to deliver on results, both top line and profitable growth, and we've shown significant growth quarter-over-quarter and year-over-year. Our strategy on the medical cannabis focus has allowed us to have the highest margins in the industry and fuel that profitable growth. That combined with our commercial execution, really great understanding and knowledge of what the market needs are, along with the regulatory expertise, manufacturing muscle behind it, really sets us apart from the competition. Quite frankly, that's why we continue to be leaders in the markets that we service across Canada, Europe, Australia, New Zealand, and look for other emerging markets that will fuel that growth.
We believe there is a tremendous growth coming from especially the international cannabis space, where the addressable market is estimated over CAD 9 billion, as I mentioned earlier, significant opportunity for us as a company to capitalize on that growth.
You're significantly undervalued.
That is correct.
Right. maybe open it up if there's any questions from the audience. All right. Thank you, Simona.
Great. Thank you very much. Thanks, thanks for being here.