Aurora Cannabis Inc (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) CEO Cam Battley is our guest for this segment of Midas Letter Live, where he discusses the ongoing discussions with MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF) (FRA:MEW) or at least alludes to the idea that they are ongoing, and talks about the company’s earnings reported earlier today.
James West: Hey, welcome back to Midas Letter Live. My guest this segment is a well-known figure from the cannabis space. Cam Battley is the Chief Corporate Officer of Aurora Cannabis Corp. Cam, welcome back.
Cam Battley: Nice to see you again.
James West: Cam, let’s start with an update. What is happening, what is about to happen and can I say, with MedReleaf?
Cam Battley: You can ask me all the questions you like about MedReleaf.
James West: I see.
Cam Battley: You won’t get any answers.
James West: [laughs] Fantastic. Thanks for your input, thanks for coming. Next up, we’ve got – no, just kidding. Okay, so let’s not talk about MedReleaf; everything’s been said publicly that can be said publicly. Driving around that, let’s talk about what’s new with Aurora. Since we last had you here, you announced the Medicine Hat project, Aurora Sun.
Cam Battley: Big.
James West: We still haven’t heard what’s going on – or I haven’t talked to you recently about what’s going on at Aurora Sky, so spill.
Cam Battley: Let’s start with, today is earnings day for us, and it was another great quarter. It’s the third quarter in a row with around 40 percent quarter-over-quarter growth; our annual revenue growth was 211 percent. So we’re killing it, and that’s all out of one facility’s output: our Aurora Mountain facility north of Calgary.
Now Aurora Sky, this is where we’re going to change the game, and it is on track, it’s on budget, in fact most of it’s been paid for now. And we’re anticipating still having our first harvest at the end of June this year. We’ve got all of our technology in there, from the robotic cranes to really critically important is the overpressure system, because remember, it’s a closed system; it’s really an indoor facility with a glass roof.
James West: Right.
Cam Battley: So we’ve got our overpressure system in there, and the air filters. It’s a Merv Level 13 filtration level in the whole facility, and Level 14 in the flower rooms. So that’s full speed ahead.
Also in June, we’re going to be bringing the first of our partner Micron Waste Technology’s digesters. This is a digester for organic waste; we’re going to be moving that to our Mountain facility, and we’re going to be starting to optimize that for cannabis. Our other partners, from Radiant Technology to Hempco to CannGroup in Australia are all doing well, and these have been great investments of shareholder money, because they’ve all appreciated significantly in value.
So this is going to be the year where we go from being the fastest-growing company in the cannabis sector over the past couple of years, to the company that really defines the future of the industry, because our Sky-class facility – the facilities like Aurora Sky, like Aurora Sun, like Aurora Nordic, the million-square-foot-facility in Denmark, and like the TGOD, the green organic Dutchman facility we’re building for them in Valleyfield, Quebec – these things really are 21st century production, and we’re the first ones to define that.
So remember, we acquired a company called Larssen Limited –
James West: I met Tom Larssen.
Cam Battley: And Thomas is the best in the world at what he does: he designs advanced greenhouses. And so he’s now heading Aurora Larssen Projects, which has turned out to be a revenue generator for us, it’s turned out to be a great way to open doors…this is how we found our partner in Denmark. And he’s now designing and building and overseeing construction of about 15 facilities around the world.
So all of this is happening incredibly quickly. Oh, and by the way, last week we completely closed the acquisition of Cannimed, and that integration of going remarkably well.
James West: We know they delisted because it screwed up our index for the last couple days. We were like, why is the index screwed up? Oh, Cannimed has been delisted finally. Well, that’s great. So you guys are moving very quickly. Now, going back to what you were saying, what does the first crop out of Aurora Sky look like in terms of size?
Cam Battley: It’ll be smaller than the full capacity of the facility. We think that we’ll be at full capacity, which will be in excess of 8,000 kilograms per month, aggressively December; conservatively, more likely, I would say January or February. And that’s when we’ll be at full capacity at that facility. So we’re going to be ramping up over the course of 2018, and just adding capacity month by month. And let’s not forget that we’ve also had our first three harvests out of our Aurora Vie facility on the island of Montreal, so that will, as soon as we have our sales license, immediately add another 4,000 kilograms per year.
So multiple facilities, multiple jurisdictions, we’re doing amazing stuff in Germany – we’re selling 100 kilograms a month through our distributer, Pedanios, in Berlin. And the demand in the German market is absolutely unquenchable, and also in neighbouring Italy, we’ve sold our first product in Italy as well, through Pedanios.
James West: Great.
Cam Battley: So Europe is where we’re focusing a lot of our attention; at the same time, we’re getting ready for consumer legalization, we’re preparing all our brand plans, because we are going to have a very strong, very admired brand in Canada as well. So, three market segments: Canadian medical patients, Canadian consumer, international medical, and of course, people are coming to us about the opportunities to be acquired. That’s the interesting thing, is that they’re coming to us.
James West: So MedReleaf came to you and asked you to acquire them?
Cam Battley: Let’s just say that we’ve spoken with everybody in the sector. We’ve spoken with everybody in the sector, and there’s a lot of speculation, a lot of rumours going around, and I actually want to caution people not to trade on these rumours. We saw in the Cannimed experience that there were small investors who got hurt trading on news that was reported by reputable sources that turned out not to be true.
James West: Sure.
Cam Battley: It was based on rumour. So people need to be very, very careful, and more broadly, those of us operating in this industry, we need to grow up ourselves. We need to operate professionally; we can’t be having this kind of stuff going on, we need to think about those investors getting hurt, and that’s not right.
James West: All right. I have to ask, because I’ve been asking all of the ACMPR growers this, and in the interest of credibility, I do have to ask the odd tough question…
Cam Battley: Sure.
James West: Your cost of sales relative to your reported revenue, was the –
Cam Battley: Our cost of sales was up a little bit.
James West: It was up?
Cam Battley: Yeah, it was up just a little bit.
James West: Okay, but was your cost of sales negative?
Cam Battley: Oh, you mean because of the biological asset?
James West: Right.
Cam Battley: So this has been – it’s funny, I talk about this with our CFO Glen Ibbott, who’s amazing, all the time. It’s something that makes zero sense in this industry; the accounting rule under IFRS, where we’re required to report the fair value of our biological assets, but you can actually end up with your gross profits being higher than your revenues, which makes no sense. That’s why good CFOs like Glen, they add a lot more information. So Glen breaks out, for example, sales of dried cannabis versus oils, sales in Canada versus Europe, he breaks it down in other ways, in fact, he actually puts in grams produced, and I think we’re the only ones who actually report our grams produced.
So you can accurately and fairly and transparently track our performance, whether it’s good, bad or indifferent.
James West: Wow, that’s one of the better answers I’ve had.
Cam Battley: Good.
James West: Great. So then, in terms of patient growth, how has that been inclining over time?
Cam Battley: Well, it’s a little bit misleading in our most recent quarter, because although we only had a couple of weeks of Cannimed to consolidate, we actually did include their patient numbers. So right now, Aurora’s patient numbers are, I think, in excess of 45,000.
I should emphasize this, though: we’re de-emphasizing that as a metric. It was really important because we lacked other metrics over the early years of the ACMPR and the MMPR. These days, especially with European sales coming online, the Canadian patient numbers is becoming a less valuable metric.
For example, we’re selling anywhere from 20 to 25 percent of our revenues now are being generated in Europe. We don’t know exactly how many patients there are because it’s a different system that goes through pharmacies in both Germany and in Italy. So I think that that metric itself will become less useful over time, but it’s a big number to start with.
James West: Sure. In your view, what is the most important metric to measure cannabis companies by as an investor?
Cam Battley: By next year, it’s got to be the fundamentals.
James West: So, the balance sheet?
Cam Battley: Yeah. So you’re going to ask me about profitability?
James West: I was going to ask about profitability, but since you’ve introduced the concept, tell me about the profitability and the earnings per share that you’ve reported.
Cam Battley: So we’re not profitable yet; we know we’ve been in a powerful growth phase, not just in Canada but around the world, but we’ve gotten to the point now where we’ve got good cash flow projections. Subject to the usual caveats about the possibility of an asteroid hitting the earth, I think we’re going to be profitable by the end of calendar 2018.
James West: Okay, well, that’ll be a feather in your cap. Now, I’ve been seeing more and more Power Points, for want of a better explanation, of companies that are, you know, proposing to grow huge, huge acreages of hemp and lesser-grade THC products, suggesting that the –
Cam Battley: Don’t tell Vic Neufeld that his greenhouse-grown product is lesser grade. It will hurt his feelings, and I like Vic, he’s a friend.
James West: Boy oh boy. At least that response, I know I’m going to have Vic back in the chair soon enough.
Cam Battley: You’ll have him tomorrow, and I’ll be watching, because I like Vic.
James West: Probably. You know I’ve been messing with the idea of getting Aurora, Canopy and Aphria in this environment to have a conversation with –
Cam Battley: Well, why would you leave out MedReleaf?
James West: Well, MedReleaf, well, I’m sure actually Neil wouldn’t have a problem with that.
Cam Battley: Neil’s awesome too.
James West: Yes, he is.
Cam Battley: He and I have been on the Board of Cannabis Canada together for a lot of years.
James West: Yeah. Actually there’s always a discussion about which companies I should invite, which ones I shouldn’t; there’s about six, I guess, that are sort of all above $1 billion at this point, and probably that would be the best case, but for now, so there’s no plan on Aurora’s part to decrease the cost of production of raw material input into extract-based products by externalizing growth in a low-product-quality environment?
Cam Battley: I see where you’re coming from. We actually don’t have to do that. We don’t have to make a choice between quality and scale, or price. In fact, that’s why we chose the facility design that we did, this sky-class design, because it’s a closed system, because it has a glass roof, because it makes use of the sun, we get to do all three of the things that we wanted to do, without compromise.
So, massive scale; extremely high quality product, and that’s important to us, because we’re going to be serving everybody, right up to the connoisseurs who really care about the quality of the bud and the terpene profile. They’re like wine connoisseurs, and we’re not going to give up our reputation for high quality.
So massive scale, high quality of product, and ultra-low cost of production.
So right now I guess you’d say among the large players, Aphria is the cost leader, but we think that we can actually get below their benchmark at our new facilities, these hybrid greenhouses, and that is very specifically the point: we think that we’re going to get well below $1.00 per gram in our production costs.
James West: Sure. Your European strategy is a matter of the public record at this point; what is the US strategy for Aurora?
Cam Battley: It’s a few things. One, we are intensely observing that market, and we’re identifying what technologies are really great there, because whereas Canada is still the leader, and I think will be for quite some time in terms of overall scale of production and certainly market cap, access to capital and the ability to expand around the world, in the US, there are so many companies operating in the space, and there are some really cool technologies with respect to ancillary processes and formulations and so on.
So we’re watching that very, very carefully. As soon as we can find a way legally, and without ticking off the TSX, then we will move into the US market, and that probably means some regulatory changes in the US, but maybe not. We’re going to make sure that we find our way into the US market as early as possible. It’s almost like we’re poised on the border, just waiting to get in. There’s tremendous opportunities there.
James West: Right, okay. We’ve well exceeded the attention span of the average internet viewer, so we’re going to leave it there, Cam. Much as I’d like to talk to you all day long and ask you all kinds of questions and try to trick you into giving me inside information.
Cam Battley: I don’t want to go to jail, man.
James West: No, neither do I! We’ll leave it there, and thanks so much for coming in today. I appreciate it.
Cam Battley: Thanks, James.
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