Production at Edmonton facility helps drive revenue growth at Aurora Cannabis – Edmonton Journal

Production at Edmonton facility helps drive revenue growth at Aurora Cannabis - Edmonton Journal
Aurora Cannabis says its killing it in Canada, so why arent analysts excited?
Cam Battley, Auroras chief corporate officer, stands in one of the ten marijuana grow rooms at its production facility near Cremona, Alberta. Gavin Young/Postmedia

Edmonton-based Aurora Cannabis Inc. announced the company’s revenues went up to $98.9 million from $65 million in its latest fiscal quarter, due in part to a higher production capacity and more efficient growing at Aurora’s Sky facility near the Edmonton International Airport.

The marijuana sector presents a rare opportunity for investors. With sales and revenues going through the roof, some companies will win big in the future and reward their shareholders in the process. However, many others will be losers, and it isn’t easy to know which is which at the moment.

“The work out of Sky is exciting. This is a very big deal for Aurora,” said chief corporate officer Cam Battley in a phone interview. Counting six growth cycles per year, Sky is achieving higher yields than the company anticipated, and hasn’t lost any crops, he said.

Note that for the second quarter in a row, the company was able to post record high revenue figures, and its sequential revenue growth was unprecedented. Green Thumb pointed to several factors to explain this performance, including increasing store traffic and a few strategic acquisitions. 

Aurora sold 17,793 kilograms of cannabis in the most recent quarter ending June 30, 2019, while a leading Canadian competitor, Canopy Growth, reported sales of 10,549 kilograms and kilogram equivalents in that company’s first quarter of its fiscal 2020 year, which also ended June 30, 2019.

With solid (and growing) footprints in the largest market in the world and strong top line growth, Green Thumb looks relatively attractive right now. Of course, a lot can still go wrong, but those interested in investing in pot stocks should strongly consider Green Thumb Industries. 

“We set out to be a high-margin company, and in this sector that’s been a difficult thing. So maintaining those margins, while growing and expanding our international footprint has been huge for us,” said Battley.

Aurora’s net revenues were up 52 per cent, and production costs, measured in cash cost per gram, went down by 20 per cent from the previous quarter to $1.14 per gram from $1.42. The Sky facility, however, was able to grow cannabis at an even cheaper $1 per gram, according to the report.

Overall, Green Thumb operates across 12 US states, has over 30 stores and 13 manufacturing facilities, and holds licenses for 95 retail locations. With plans to open even more new stores by year-end, the company’s presence will likely continue growing. 

“It’s outperforming, and we think that we can take that even lower,” said Battley, who added they’d like to get it “well below a dollar a gram.”

Aurora’s revenue growth was mostly fuelled by additional production capacity and supply available for sale from Aurora Sky, Aurora River in Bradford, Ont., and Aurora Ridge in Markham, Ont., according to the quarterly report.

Green Thumb’s financial results look competitive by industry’s standard. During its latest reported quarter — Q2 2019 — Green Thumb posted revenues of about $44.7 million — a more than 220% increase year over year.

The company hit most of the quarterly targets it laid out in August, but fell just shy of one major milestone, reporting $98.9 million in net revenue rather than the anticipated $100 million-$107 million.

The Golden State is one of the dozen (or so) in which both medical and recreational uses of pot are legal. Green Thumb also operates in its home state of Illinois, which happens to be one of the latest states to legalize recreational marijuana.

“We anticipated that there would be a bigger retail footprint in Canada. More stores open equals more revenue,” said Battley. Executives said the company turning a profit next year could depend on the timing and approval of new retail outlets across the country.

And the legalization of new product formats to the Canadian market this fall, including vaporizers and edibles, represents a significant opportunity for the company, CEO Terry Booth said in a Thursday morning conference call.

Like many of its peers, though, Green Thumb isn’t yet consistently profitable. The Illinois-based marijuana firm posted a net EBITDA loss of $9.4 million, although adjusted EBITDA was a net profit of $5 million.

“We have invested the time to study consumer habits in legal U.S. markets, which have driven the development of products that consumers will desire,” he said.

Already in commercial production of vape pens, mints, gummies and chocolates, Aurora will be ready by December 17 to put those new products on store shelves, said Booth.

The company’s gross profit margin also increased to 52%, up from 46% year over year. Sequentially, Green Thumb’s revenues increased by about 60% and its gross profit margin grew by 5%.

While the company is monitoring health concerns that linked vape pen use to fatalities in the U.S., suspicion is focusing on the black market, and no product in Canada goes out to patients or consumers without passing the requirements of Health Canada, Booth pointed out.

The second wave of legalization is likely to “disproportionally” benefit larger and more sophisticated operators like Aurora who have invested in high-quality product development, said Battley.

The company did not report a positive adjusted earnings before interest, tax, depreciation and amortization (EBITDA), often used as a measure of profitability, but said in its quarterly report that it expects adjusted EBITDA to continue to improve in the future. For the entire fiscal 2019 year, Aurora’s net revenue was $247.9 million, a 349 per cent increase from 2018.

“We’re not backing off our focus on our pathway to profitability. We’re not taking our eyes off the ball,” said Battley.

Speaking on a conference call with analysts on Thursday, chief corporate officer Cam Battley said Aurora is killing it in the Canadian consumer market with leading share.

Canopy Growth (CGC) (WEED) reported its first-quarter earnings results on August 14. The company missed on both its top and bottom line estimates, which led its stock to fall 17.6% from August 14 to September 12. However, today, the company was up 3% as of 2:00 PM ET. Investors appear optimistic about the second phase of legalization, or Cannabis 2.0, which is expected to happen later this year.

The Edmonton-based company now commands a 22 per cent slice of the recreational market, up from 19 per cent previously, according to GMP Securities.

Aurora reported $98.9 million in net revenue for the quarter, which missed the $100 to $107 million range the company had projected. Aurora blamed the miss on ancillary businesses such as analytical testing and patient counselling.

The company also missed its target of achieving positive EBITDA in its latest quarter, reporting a loss of $11.7 million, an improvement from a loss of $36.6 million in the third quarter.

Core cannabis revenues for the three-month period ended June 30 came at $94.6 million, roughly 60 per cent higher than the previous quarter, and the largest quarterly core cannabis revenue figure that any producer has recorded.

The ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) were trading 0.5% and 1.0% higher, respectively. Also, the majority of the cannabis stocks were trading in the green.

However, management warns quarter-to-quarter sales volumes and revenues may be volatile given the unpredictable expansion of retail stores in key regions like Ontario.

Jim Chanos, the founder and president of Kynikos Associates, is a long-time short-seller of Tesla stock. Tesla stock has fallen 17.5% in the last year.

We specifically for us just want to call out the fact that there are constraints on the consumer system right now, and the provinces are starting to show that as well. We have seen in July and August where theyre trying to work through some of the inventories that they have, and slowed their buying, Aurora chief financial officer Glen Ibbot said on the call.

Apple Arcade (AAPL) is a subscription gaming service that was unveiled at Apples annual event last week. The service will launch on September 19.

We expected [growth] to pick up and continue to pick up through the next quarter, but…may take a bit of a pause just due to industry dynamics.

In Q4 2018, legendary investor George Soros sold all his holding in Apple (AAPL). In Q3 2018, Apple represented around 0.2% of his total portfolio.

Were anticipating that there may be a bit of a plateau between now and the advent of the cannabis legalization 2.0 products, anticipated somewhere around the end of the year, Battley added, referring to the release of edibles, vapes and other cannabis products expected to hit the market in December.

Canaccord Genuity analyst Matt Bottomley said Auroras record-setting quarter was overshadowed by the headline revenue miss.

Cannabis legalization is gaining traction not only in the US but also globally. The third presidential Democratic debate was held on September 12.

The company expects to see growth rates plateau into the coming quarters before reaccelerating heading into 2020, he wrote in a research note. Although the company believes that inflecting into adjusted EBITDA territory is still a near-term event, the company appears less certain if it will be able to cross this threshold by the end of the calendar year.

Bottomley lowered his full-year 2020 gross revenue and adjusted EBITDA estimates. He maintains a speculative buy rating on the stock with an unchanged $13.50 price target.

Barnes & Noble Educations (BNED) financial struggles suggest that its digital transformation still hasnt taken off. But is it too late?

GMP Securities analyst Ryan Macdonell notes Auroras quarterly revenue would need to top $157 million to achieve break-even EBITDA, given current selling, general and administrative expenses.

He lowered his target price to $12 from $15, dropped revenue and profitability forecasts, and maintained a buy rating.

BMO Capital Markets analyst Tamy Chen said Auroras share price remains elevated despite execution uncertainties, prompting her to cut her price target to $9 from $11.

We have reduced our F2020 EBITDA forecast to a loss of $81 million from positive $33 million to reflect the reset in our revenue projections and our view that initial manufacturing costs for value-added products may pressure margins further due to the associated learning curves in the ramp period, Chen wrote in a research note.

Toronto-listed Aurora shares climbed 2.32 per cent to $7.93 at 2:51 p.m. ET. New York-listed shares added 1.44 per cent to $5.97.