February 22, 2019

Aurora Cannabis Inc (TSE:ACB | NYSE:ACB) Q2 Revenues Surge 83 Percent

Midas Letter
Midas Letter
Aurora Cannabis Inc (TSE:ACB | NYSE:ACB) Q2 Revenues Surge 83 Percent

Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) CCO Cam Battley provides an overview of the company’s latest financials and recent achievements. Battley is thrilled to shift gears to an era of disciplined execution and highlights that Aurora’s revenue growth outpaces its losses. The company is still on target to achieve positive EBITDA in Q2 of the calendar year. Aurora is passionate about cannabis social justice issues and Battley discusses the company’s commitment to the elimination of tax from medical cannabis. Battley notes that Aurora has been fighting for this cause for several years and it now has tripartisan support at the federal level. While crop loss plagues industry competitors, Battley praises the Aurora team and the company’s high tech facilities like Aurora Sky, for its consistent, high-quality product. Aurora is beginning commercials sales of derivative products in Germany this quarter and Battley indicates the company expects higher margins on these premium products.


James West:   Joining me now is Cam Battley, Chief Corporate Officer of Aurora Cannabis Inc. Cam, welcome back.

Cam Battley:  Nice to see you, and that’s a very restrained shirt that you’re wearing today.

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James West:   Thank you. I have adopted new standards of conservatism in the interest of many thing, but let’s not dwell on that; let’s talk about Aurora. Recently your financials, you more or less delivered on what you said you were going to do.

Cam Battley:  We did.

James West:   And the only thing I would challenge you on is that the losses are still not insubstantial.

Cam Battley:  No, you’re right; the losses for the leading company in the sector, us, Canopy and a few others, are still pretty high. But what you’ll see is something very important: as the rate of growth in our revenues is far outpacing the rate of growth in our expenses. And so we put out guidance, as you remember, in January, indicating that we were shifting gears from an era of rapid M&A to a period of buckle-down, focus on disciplined execution and cost management.

And the bottom line on that was something really important, and that is, we put a stake in the ground that we believe that we’ll achieve positive EBITDA in the second calendar quarter of this year. And that’s critically important, you know; we met with hundreds of institutional investors over the months prior to our most recent convertible note, and what we heard from them very clearly is that they need to hear more about the pathway to profitability. And we gave them what they were looking for, along with some very clear insights to guide analysts’ estimates with respect to our production, culminating with what we said that we would achieve in the second calendar quarter of this year, would be our year-end, our Q4 fiscal.

And that will be 25,000 kilograms of saleable product. So production is ramping up fast; we have a clear pathway to profitability, and we think that puts us in the driver’s seat.

James West:   That’s great. Do you see that the path to profitability is going to ramp from there, or is it going to be a case of where you hit one quarter and then you’re going to have to take a dip, or is it just going to continue to scale up?

Cam Battley:  Yeah, I think people’s expectations are, we need to be focusing as a sector on sustained profitability. So that’s what we see happening. And given the production forecast that we have, it’s pretty clear: we’re going to be entering into a period of sustained profitability in the middle of 2019. So beyond what we’ve already said with respect to achieving positive EBITDA in the second calendar quarter, I anticipate that we’ll also be looking at positive cash flow from operations in the third calendar quarter of this year. And then it’s just up from there.

James West:   Now, you held a press conference this week essentially advocating for the elimination of taxes for medical cannabis. And you had a bipartisan participation in that.

Cam Battley:  Tripartisan.

James West:   Tripartisan? Okay! So what should we take away from that? Are you going to prevail, do you think, in getting the government to remove taxes from medical cannabis? Or is that going to be something that you’re banging your head against a brick wall?

Cam Battley:  We have been fighting for taxation to be removed from medical cannabis for a long time, for a couple of years and more. So long before the Federal government in October, October 17th, started to apply the excise tax on top of medical cannabis, in the period before that, it was about the GST and HST, which was also wrong; the reason being, it is the only prescription medicine, medical cannabis, the only prescription medicine in Canada for which any tax applies. And that’s simply wrong.

We’re talking about people with chronic illnesses, vulnerable people dealing with all the burdens of their illness, also many of them in an income-constrained situation, and the idea of applying tax on top of that, discriminating against them, is ridiculous, especially if you consider the fact that opioids have no taxes applied to them. These are other prescription drugs, across the board there’s no taxation; so, why medical cannabis?

We know it’s wrong. We believe we’re going to win that, and we’re going to win it this year. And something very important that happened, you mentioned we had tripartisan support. So we had members of Parliament from the Liberals, the Conservatives and the NDP on the stage with us along with Canadians For Fair Access to Medical Marijuana, the advocacy group, and some individual patients.

And we all feel the same way, that it’s an injustice, and it’s punitive to chronically ill patients. But what really has changed: if you paid attention to what the Conservative health critic, Marilyn Gladu said, she said that Conservatives believe that there should be no taxation on prescription medicines, and to be consistent, there should be no taxation on medical cannabis. Well, that’s an important policy development; it suggests that the Conservatives have now moved ahead of the Liberals with respect to the taxation of medical cannabis. And I think that the Liberals are going to respond.

There’s very strong support from the discussions that we’ve had among all three caucuses. I think that this is something that we’re going to achieve in 2019, and it’ll be a great thing for patients.

James West:   But won’t they have to eliminate the taxation on recreational cannabis at the same time, otherwise risk recreational users obtaining prescriptions just in an effort to circumvent that requirement and pay a little less for their cannabis?

Cam Battley:  You know, we’ve heard those arguments before, and I think that they’re entirely specious, and I’ll tell you why: with a medical patient, the process of receiving a prescription for medical cannabis is exactly like the process for, you know, achieving a prescription for any other medicine. You come in, you discuss your symptoms with your physician; you talk about the potential appropriateness of medical cannabis as an alternative. And remember that physicians have access to patients’ medical records and to their treatment records, so they know when they’re dealing with a patient who actually has a chronic illness.

And no Canadian physician is going to want to put their license at risk in order to be writing fraudulent prescriptions for medical cannabis. And this is incredibly important, because it also discriminates against lower income and middle-income Canadians, the taxation of medical cannabis. If you think about it, currently, you can write off the cost of your medical cannabis on your Federal taxes every year, according to Canada Revenue Agency Rules.

But that’s not available to people of lower incomes, who don’t even pay enough tax to actually have, you know, any write-offs. So it’s a question of unfairness; it’s a question of achieving justice, and I think that there is a strong momentum towards righting a wrong here.

And I also want to emphasize, like I said, this is not a partisan issue, because we’ve got support from all three caucuses. But also want to give credit to the Federal government for the way that they have managed the cannabis file overall. I think it’s okay to say, You’re doing a good job overall, but on this particular point, you’re offside, so let’s fix it. Let’s all get together on this.

James West:   Wow. Sort of taking a bit of a curve, now, I also noticed in your recent financial statements that your production is at an all-time high in terms of cannabis output itself. Other companies, without, you know, pointing any fingers, have suffered a decrease in productivity and in fact, the incidence of crop loss is becoming more prevalent in the sort of rumour mill of the cannabis industry.

So, how is it that Aurora is able to continue to sort of break its own records in terms of cannabis output, while others are starting to fail more frequently?

Cam Battley:  What we’ve always said is that our production, our cultivation and production style, is very specifically designed to avoid risks such as disease and pests that lead to crop loss. And touch wood, we’ve never lost a crop, and I hope that we never do.

If you take a look at our Sky-class facilities, starting with Aurora Sky at Edmonton International Airport, it is a closed system with over-pressure, positive pressure, just like in pharmaceutical manufacturing, that keeps nasty things out of the facility.

That’s a very, very big step. And so the consistency of the production that we’re able to achieve, and the predictability and the risk mitigation are some of the advantages that I think that we have in this sector. And in the last quarter, you know, if you dig down a little bit into companies’ earnings, you will see that Aurora actually had the highest production of any company in the sector, and that’s very gratifying to see.

James West:   Okay. Finally, with EBITDA profitability just around the corner, what other milestones do investors in Aurora have to look forward to this year?

Cam Battley:  So you’re talking about what kind of catalysts?

James West:   Yeah.

Cam Battley:  Well, we previously indicated, and we hope to have an announcement soon, about our beginning commercial sales of our derivative products in Germany. And as you know, Canadian companies that sell dried flower in Germany receive a premium, in part because of the currency differences between the Euro and the Canadian dollar. And you can expect that the same ethic will apply to derivative products. So even higher margins on these oils and eventually capsules and so on, and we’re going to be selling those products in Germany in this current quarter; that’s novel.

Something else that I think is driving really positive developments for our company is that we continue to evolve and mature, and evidence of that came out this week, starting with an announcement a couple of days ago that we’ve made some changes to our Board to further enhance governance, and we’re going to continue to do that.

Our chairman has now become our Executive Chairman; that’s my friend Michael Singer. He’s moved into the Executive Chairman role on the management side, but we’ve also added a really great independent Director: her name is Shan Atkins, with a lot of experience with large public companies, including Shoppers Drug Mart. And she’s come in, and she is a CA, and she’ll be heading our Audit Committee. And then Ron Funk, another extremely experienced Director, is our now lead independent Director. And then beyond that, we have Norma Beauchamp, another very experienced Director, and she is the head of our governance committee.

So, very, very strong moves with respect to the Board. And then today we’ve also announced a couple of very well-earned promotions to further strengthen our management team: Darren Karasiuk has been promoted to Chief Commercial Officer, and he’ll be heading up our branding, sales and marketing on a global basis, and Jill Swainson, who was our General Counsel and SVP has been promoted to Chief Legal Officer and Corporate Secretary. And these are very, very strong individuals. And I’d put our senior management team – actually, our overall management team – up against anybody in the sector.

James West:   Wow, that’s great, Cam. Awesome update as per usual. I’ll come back to you again soon; thanks for joining me today.

Cam Battley:  Thanks.

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