Aurora Cannabis Inc (TSE:ACB | NYSE:ACB) “Highest Revenue Industry Has Ever Seen”
Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) CCO Cam Battley is ecstatic about the company’s Q1 2019 financial results, which saw Aurora’s pro-forma revenue increase 333 percent to $35.8 million. According to Battley, Aurora’s earnings are “by the far the most powerful revenue quarter that any cannabis company has delivered.” He’s impressed with how the company has performed at the advent of the legal recreational market in Canada and is effusive in his praise for Aurora’s logistics team, which ensured the company’s 250 SKUs were shipped to 12 different jurisdictions across the nation. This allowed Aurora to achieve 30 percent of all rec sales in Ontario and have the four top-selling products in British Columbia since legalization occurred. Battley isn’t worried about future oversupply and believes Aurora’s status as one of four companies with EU GMP certification will allow the company to continue its rapid growth.
James West: Welcome back, everybody. You won’t believe who’s here: it’s Cam Battley, CCO of Aurora Cannabis joining us for the, I don’t know, 256th time?
Cam Battley: It’s been a few times.
James West: It’s been a few times. Cam, you just got back from Las Vegas.
Cam Battley: Did I? Yes, yes I did.
James West: Sin City.
Cam Battley: Sin City, and we didn’t commit a lot of sins, though; it was basically coffee and Red Bull the whole time.
James West: Really?
Cam Battley: There was a lot of business to be done.
James West: There are some interesting news items about, you know, some Aurora items.
Cam Battley: Well, tell me what’s on your mind.
James West: Well, I mean, the interesting sort of story in the Financial Post was a criticism, I would say, of CEO Terry Booth’s discourse during his panel presentation at the conference.
Cam Battley: So seriously, if people don’t know by now that Terry is an Alberta entrepreneur – he’s not a banker, he’s not a lawyer, he’s an Alberta entrepreneur and he’s a straight shooter, I don’t think they should really be surprised.
James West: Right.
Cam Battley: So now, the other thing to bear in mind is, look: now, we were in the kind of atmosphere that has froth and fun, it’s a casual atmosphere at the MJBiz Conference. This is where, you know, people come together with different perspectives and ideas and positions; that’s what’s supposed to happen. That’s what makes the whole conference a success.
And the other thing is, you know, Terry spoke very specifically about what, for example, Ontario has done right in terms of the new government, the Ford government came in and very decisively said You know, the previous vision for retail in Ontario was a government monopoly; we don’t think that’s the way to go. We’re going to do something different. So they shifted gears and they did it fast, and they did it decisively, and I think you’ll find that Terry said some very positive things about them.
James West: He did, he did. And we actually looked at the comments in the Financial Post and said, well, the bottom line here is, this is a guy who’s created so much wealth for so many people –
Cam Battley: And fast, too.
James West: And if he wants to cuss and swear, I’m good with that.
Cam Battley: I think most people have heard these words before.
James West: That’s right.
Cam Battley: But that is the point, too. This is the guy with the vision who, in less than three years from the sale of our first gram of medical cannabis, has taken us from the 24th company to get licensed, to delivering last week, and I hope we can talk about this, the highest revenue number with, I bet, that the industry has ever seen.
James West: Well, let’s talk about it.
Cam Battley: Yeah, let’s do that. Let’s talk about our earnings.
James West: Okay, so you reported earnings of $30 million.
Cam Battley: Well, actually better than that. About 30 million, but on a pro forma basis. If we had wrapped in all three months of MedReleaf, it actually would have been ever better: about 35.8 million. And that is, by far, the most powerful revenue quarter that any cannabis company has delivered thus far, and we’re very proud of that.
James West: Sure. The other item in your financials that intrigued me was the one-time win of $85 million from, what was that?
Cam Battley: Oh, from appreciation in our capital investments. So these are our marketable securities.
James West: Oh, so you didn’t sell a block of stock.
Cam Battley: We didn’t sell that much, no. so what we’ve done with our accounting is acknowledge the fact that we’ve made strategic investments in certain companies, and those investments have appreciated. So the shareholders have done well, the company has done well, and our partners have done well, and so that’s what you’re seeing reflected there.
And the rest of it, across the board, I was very, very proud of the way the company delivered, particularly on a logistical level. Because you know, everybody had a lot of questions as to how licensed producers were going to be able to hit the ground running or not, upon the launch of consumer legalization. There were so many skus, and we had 250 skus that we had to ship to 12 different jurisdictions, and I think we’ve got 12 of 13 jurisdictions in the country covering 98 percent of the population.
James West: Right. You were one-third of the sales across Canada.
Cam Battley: No, we can’t say that, because we don’t have those kind of metrics. What we did report in our earnings was Ontario, because Ontario’s website, the Ontario Cannabis Store website, did provide some early insights, and what we were able to measure was that we had about 30 percent of the sales in Ontario upon the launch of consumer legalization, and also did exceedingly well in British Columbia, where we had the top four selling brands and products in British Columbia, and five of the top ten.
So I think we impressed out of the gate, I think we did very, very well, and I want to give a lot of credit to our logistics and operations team, because that’s a very complex operation. They had to carry it out in a very short period of time, and they did it nearly flawlessly, and I’m very, very pleased.
James West: Interesting. So let’s talk a bit about what’s happening at Aurora Sky. We visited you recently, we’re going to release a video very shortly on that visit, and it was very impressive. I’m curious as to whether, has it started to actually pump out product now that’s matured and dried and shipping into the market?
Cam Battley: Oh, yes. It has. Remember we got our sales license on October 17th, or we announced it then, so we announced it on the day of consumer legalization.
James West: Right. So here’s the conundrum I have, is that, you’ve got all these companies that are producing at maximum capacity, and I’ve visited most of these things with warehouses full of product ready to go, yet across the country –
Cam Battley: Where did it go?
James West: Everybody’s out.
Cam Battley: I know, I know, and that puzzles us.
James West: Where did the weed go?
Cam Battley: I know, that puzzles us too, because we kept hearing the same thing, that there were some companies that said that they were, you know, stockpiling product for up to or even over a year, and then it didn’t seem to materialize when it was needed upon the launch.
Now, maybe companies are holding some back, and they’re going to be shipping it over a different period of time; I don’t have insight into that, but we were puzzled by that outcome as well, because –
James West: Is it conceivable that perhaps the shelf life of cannabis, it’s not something, even though you vacuum-pack it, it’s not going to be in a condition that you would qualify as premium dried flower one year after it’s been harvested and packaged?
Cam Battley: I would put it this way: I would not want us sending products to the retail markets that had been stockpiled for too long.
James West: Well, we’ve been smoking a lot of your product around here, which is very – we can’t keep it in stock either.
Cam Battley: [laughter] Thank you very much.
James West: Particularly Ed is very fond of Aurora’s product.
Cam Battley: So you’ve been satisfied customers?
James West: Well, I’ve been relatively happy – more happy than normal.
Cam Battley: [unintelligible] [laughter]
James West: Okay, so then, now, what are the big – so everybody’s looking at these earnings that have come out since November 1st.
Cam Battley: Especially our stellar earnings.
James West: Well, your stellar earnings, but they’re underwhelming as a whole. I look at the valuations, relative to the earnings at this point, and there are some easy answers here that we have to bring to light.
Cam Battley: Justifying valuations?
James West: Yeah, justifying valuations, especially in terms of, if you’re trying to use a, you know, earnings multiple valuation technique, it doesn’t work.
Cam Battley: No, we’re not a bank. We’re not a mature industry that’s been around for 20 or 40 or 50 or 100 years.
James West: Sure. So that has catalyzed a revaluation of the whole sector to the downside by, call it, 30 percent, since, you know, the onset of the weakness in the S&P and the broader markets totally.
Cam Battley: But I question that. Is it a revaluation, or is it just one of the pullbacks that we see? Look, we’ve been, you and I, we’ve been watching this sector since it was born four years ago, or five years ago. And one of the things that thus far has characterized the cannabis sector is a lot of volatility. So big run-ups and then pullbacks, run-ups and then pullbacks. And we’ve seen that as a constant pattern.
I do find that we have to reassure people who haven’t been in it for that many cycles of ups and downs, that this seems to be the nature right now, and of course, we understand the reasons why. You and I have discussed many times that we will get to a point, very soon – I would say within, you know, let’s say 18 months at the outside – where we’re going to be valuing cannabis companies based on their fundamentals, right, based on their revenues and their EBITDA.
We can’t do that yet, so people are projecting forward and they’re valuing the leading companies like us and Canopy and a few others, based on an estimate of a multiple on future earnings. So that’s what’s happening, and it’s realistic. It’s realistic, because you can’t use the traditional measures, the traditional metrics of fundamentals, in an industry that is not just nascent but also growing incredibly fast. And one measure of that is, take a look at what happened in our earnings in our year-over-year. On a pro forma basis, our earnings were up, or our revenues were up, more than 300 percent.
Some of that came from organic growth, some of that came from the addition of CanniMed, some of that came from the addition of MedReleaf and Anandia and some of our other companies. But the bottom line is, these leading companies in this sector, Aurora included definitely, are growing incredibly fast – and we know where we’re going. And so the projections are not pulled out of anybody’s hindquarters, they’re coming from the metric that we’re using right now of funded capacity.
So if we know what the funded capacity is today, and in 12 months’ time, and in 18 months’ time, you can then calculate a rough estimate as to what the top line revenues for the leading companies are going to be. And with Aurora and Canopy, for example, both companies have more than 500,000 kilograms, or 500 million grams, of funded capacity. Which suggests that by early 2020, that’s going to be the annual run rate of production, of sales, and therefore, with a number in front of that, whatever number you choose in front of 500 million, that’ll give you an idea as to what the top line revenues will be.
So it’s not perfect, it is a little rough, it is early days, but boy, this industry has been validated as real, legitimate, and long term.
James West: Sure. What would you say to the idea that that much funded capacity might represent over-capacity and thus induce a price competition in the price of the cannabis itself, rendering the projected margins of companies like Aurora and Canopy a little bit less than accurate?
Cam Battley: You know what, I always really love your compound questions. [laughter] But I’m going to stick with that.
James West: This is how I usually convince people that i know what I’m talking about.
Cam Battley: So I’m going to track that. So there’s two answers to your question: the first is, is 500,000 kilograms per year over-capacity, and the answer to that is an emphatic NO, and here’s the reason why: I’ve said this before, but the central fact of the global cannabis sector is a massive excess of demand over supply for legal, regulated cannabis. There’s no shortage of cannabis in the world, obviously; there never has been. But legal, regulated cannabis is in short supply.
In even more short supply is legal, regulated cannabis that comes out of facilities that meet the standard of European Union Good Manufacturing Practices, EU GMP. And that bodes well for us because we have two of the six facilities that are certified as EU GMP, and our European distributor, formerly Pedanios, now Aurora Deutschland, is also EU GMP certified. So big picture, there’s massive demand and not even close to enough supply and there won’t be, for years and years, long time.
The second thing is, I think more specified to Canada, and you’re saying, will we end up with a price competition situation where there’s just a lot of supply in Canada and pressure on margins. If that’s the case, we’ve planned for that. That is a specific scenario that we’ve planned for with Terry, with our CFO, Glen Ibbott. And the nice thing is, we’re low-cost producers. We’re already among the lowest cost producers in the industry, and with our sky-class facilities coming online, starting with Aurora Sky, which is up and running at Edmonton International Airport, we’re going to be producing a lot of cannabis at under $1 a gram, and we think we’re well under $1 a gram.
Now, if you’ve got the ability to produce for such a low cost, and you’re highly recognized for the quality of your products and you’re producing premium products that are obviously in demand, then you’re not looking at any problems in the domestic market, and you’re certainly not looking at any challenges in the international markets, where demand is going to exceed supply for a long time.
That’s a long-winded, compound answer to a compound question.
James West: I’m shocked. No, that’s great!
Cam Battley: Okay, so 500,000 kilograms per year, and you’re involved right now in 40 clinical trials, 40 that we’ve either completed or are currently underway, plus seven pre-clinical studies that we have underway. So our science program is very strong, and I actually would venture to say it’s the strongest in the world, because we’ve added Aurora, strong in science, to CanniMed, strong in science, to MedReleaf, strong in science, and Anandia Labs, and I don’t know if there’s a stronger, in-deep cannabis company in the wold.
Remember, that was co-founded by Dr. Johnathan Cage, who now last week was appointed our Chief Science Officer, and he led the team that was the first to sequence the cannabis genome. The level of science underlying our work has increased dramatically over the last 12 months. We have more than 40 PhD’s and Masters of Science working in the company right now. The level of research maybe indicated the number of studies either completed or underway, is very significant, and it’s happening not just in Canada but all over the world, and we intend to expand on that further in 2019.
And the level of new product development, which is also tied into the science, I should have mentioned Dr. Kelly Narine, who’s also a PhD, she’s our head of research. She works closely with Dr. Shane Morris, one of our other PhDs. We have what I call a PhD row, and he heads up our new product development; he’s the one who, to get their with his team, was responsible for launching the first vape cartridge in the Canadian medical system. We call it Aurora Cloud, and this is – but it’s actually I’m sorry to tell you, or maybe I’m not, it’s a CBD cartridge.
James West: Oh, no, that’s right up my alley right now.
Cam Battley: I know. So it’s very, very elegant and in-demand product, and it’s a vape cartridge that fits in one of the standard gauges to the batteries that people can buy in many places, and it’s a 55 percent concentration of CBD and as soon as we launched it, it absolutely flew off the shelves.
James West: Okay. At this point, is Aurora finding itself in a position where it’s able to supply more cannabis than it can produce, or is it the opposite, that you’re building up a surplus of cannabis globally?
Cam Battley: Are we able to supply more cannabis than we can produce? We’re ramping up; there’ no question.
James West: So at this point, though, you’re still finding that everything you produce is still swept off the shelves by demand?
Cam Battley: Yeah, well, and if you think about that, that’s pretty much always going to be the case. We’re not going to be putting cannabis on shelves to get aged, as we talked about earlier; we’ve got three market segments that we’re selling into right now, and the demand is powerful in all of them in the Canadian medical system, and we have to meet their needs. And we’ve also been making sure that we have a diversity of products on our menu at all times, so their needs can be met.
We’ve got the Canadian consumer system, we’ve got our partners, the provinces and the retail systems, and we need to supply them and make sure those systems work as well as possible. And I want to circle back and deal with some of the criticisms the provinces have taken, because I think it’s out of line, and remind me about that.
And then the third market segment that we’re serving, obviously, is our growing number of international markets. We don’t favour the second two over the first; the first is our responsibility, and that’s a matter of trust, and we have to meet their needs first.
Second and third are the consumer markets and the international medical markets. We’ll have to do a very, very good and wise job of product allocation to make sure that nobody is left down.
Cam Battley: Okay. And we were going to come back and talk about the criticism of the provinces themselves, and I think it is out of line, because as I’ve been saying for several months –
James West: We’ve been criticizing the provinces rather egregiously ourselves. Well, just this province, this is the one where we have –
Cam Battley: Everybody’s looking for, you know, in the media they say they don’t really report the planes land, right? Meaning, everybody’s always looking for the anomaly, and that would be the bad news. I don’t think there’s any bad news, here. I think the provinces are doing a pretty darn good job of putting together a hurry-up concept with respect t their respective retail systems. It will take some time to adjust and it’s to be anticipate that there will be some bumps in the road when you’re launching a nationwide, very complex new system with 13 different jurisdictions and a whole lot of skus.
James West: You bet. All right, Cam, well, we would go on forever but our time is up, and thank you once again for joining me, that was great.
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