Aurora Cannabis sees revenue decline, pauses southern Alberta facility – Edmonton Journal

Aurora Cannabis sees revenue decline, pauses southern Alberta facility - Edmonton Journal
Aurora expects it will beat peers to profitability, but when?
The company, headquartered in Edmonton, released its financial results late Thursday, reporting net revenue of $75.6 million for the quarter ending Sept. 30, compared to $94.6 million in the previous quarter.

An employee at Edmonton's Aurora Sky facility checks on marijuana plants, in Friday July 26, 2019. Aurora and the UFC have announced the launch of a clinical research study on the use of CBD by MMA athletes. David Bloom / Postmedia

Aurora Cannabis Inc.’s latest financial results show the company’s revenue has declined nearly $20 million compared to the previous quarter and, in an effort to limit costs, it is hitting the pause button on a facility in southern Alberta.

Het Shah, managing director for New Leaf Data Services, a cannabis data consultancy, said that the major producers results show that cannabis consumption in Canada is not keeping pace with the accelerated growth in supply. Shah told BNN Bloomberg in an interview the total amount of cannabis produced in the quarter by the big four producers reporting this week – Tilray, Cronos, Aurora, and Canopy – rose nearly 20 per cent, while sales volumes only increased 5.6 per cent.

The company, headquartered in Edmonton, released its financial results late Thursday, reporting net revenue of $75.6 million for the quarter ending Sept. 30, compared to $94.6 million in the previous quarter.

“That is something that we’ve seen across licensed producers and it seems to be associated with the fact that province’s loaded up on inventory and they have to work through that,” said Cam Battley, Aurora Cannabis’ chief corporate officer, on Friday.

The results were staggering: Half of those companies – including leading producers Canopy Growth Corp. and Aurora Cannabis Inc. – reported sequential revenue declines, and no publicly-traded company was immune from a broad investor selloff in the space. The top five cannabis companies on the market – Canopy, Aurora, Aphria Inc., Tilray Inc., and Cronos Group Inc. – saw a total of $5 billion in market capitalization disappear, according to Bloomberg data.

But other key performance indicators are in the green, Battley notes. The company’s gross margin on cannabis net revenue was steady at 58 per cent and the cost of production came down 25 per cent to 85 cents per gram, a milestone the company long predicted.

After more than a dozen Canadian-based pot companies reported quarterly results over the past five days, it became increasingly clear the risks that had faced the industry have manifested themselves, resulting in what one analyst described as a bloodletting. A lack of legal retail stores, notably in Ontario, combined with a glut of cannabis held by provincial wholesalers and a decline in prices, led to a series of disappointments for investors.

“That is telling the story of a long-term sustainable business model and that’s what everyone in the sector is striving for,” Battley said.

To keep cannabis flowing to consumers while competing with a still-thriving black market, producers have drastically lowered the price of their pot. Both Tilray and Cronos have slashed their price-per-gram by almost half, while Village Farms International Inc. – a produce maker which has quickly emerged as a leading low-cost producer of cannabis – slashed wholesale prices from $4 to $2 per gram in its latest quarter.

In what Battley describes as an “intelligent and rational move,” the company is “pressing pause” on the construction of its Aurora Sun facility in Medicine Hat.

We truly believe the challenges faced here in Canada are short term. Stores will come. Cannabis 2.0 will come. Provincial accumulated inventory is getting to the right spot, Zekulin said in a phone interview with BNN Bloomberg. If were a little bit delayed, through adjustments well still be able to meet our objectives.

“Until the retail infrastructure expands and until the demand increases, it’s very valuable for us to have that flexibility to be able to hit pause on some of our production capacity,” said Battley.

Zekulin said Canopy pays close attention to consumer behaviour and pricing, noting the company just launched its value brand called Twd. However, he stated there could be some artificial impact caused by the retail shortfall in Ontario that may be skewing the price of cannabis on the open market.

“We’re timing it correctly. To be able to hit that pause button and then switch it back on the minute the demand justifies it is a very, very valuable element of flexibility for us.”

Aurora Cannabis is also hitting the brakes on the construction of its Nordic 2 facility in Denmark. Battley said it will be more clear in the new year on when they might flip the switch to start construction again, once they see what the retail landscape looks like.

The introduction of edibles and vapes into the market will also play a role in that decision. Those products will be available for shipping after Dec. 17.

Neptune Wellness is different from other marijuana corporations in that it sells hemp-derived nutrition products. The marijuana industry has taken a few hits recently, beginning with lung injuries from THC vaping products. Neptune has been largely shielded from this tragedy because it markets ingestible chewables, soft gels, roll-ons, sprays, and oils.

“People can anticipate the new sweep of product forms hitting the shelves some time after that,” he said.

This week’s earnings didn’t turn out quite as well as shareholders would have hoped. Instead of continued surges in revenue, cannabis stocks, including Neptune Wellness (TSX:NEPT) and Canopy Growth (TSX:WEED)(NYSE:CGC), reported declines in revenue, which sent the stock prices lower. What happened?

Battley also responded to the announcement this week from Municipal Affairs Minister Kaycee Madu who said towns, counties and other municipalities will be allowed to charge cannabis growers commercial property tax rates in 2020.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” said Mark Zekulin, the CEO of Canopy Growth.

Aurora is very much an agricultural business and hopes there will be an opportunity to discuss the decision with the province, said Battley.

Cannabis stocks are popular among many TSX investors in Canada, and for a good reason. High revenue growth is a crucial driver for strong price performance on the stock exchange. Because the marijuana industry is new, cannabis companies should experience increasing revenue growth post-legalization.

“It’s high-tech agriculture, it’s innovative, there’s no question. We’ve actually established at Aurora Sky, hands down the most technologically advanced agricultural facility of any kind in the world and so we’re very, very proud of what we’ve done,” he said.

“I think this is an opportunity to discuss this with the provincial government and I think it would be a friendly discussion, but we certainly hope there will be an opportunity to revisit that decision because we absolutely are in the business of agriculture.”

Neptune Wellness reported a year-over-year decrease in revenue on Monday for the quarter ended September 30, 2019. Net revenue was 8% lower at $6.52 million compared to $7.1 million for the same quarter last year, right after the first wave of marijuana legalization.

The Edmonton-based licenced producer announced its first-quarter 2020 earnings after the closing bell on Thursday, reporting an EBITDA loss of $39.7 million for the period ended Sept. 30. Analysts had expected a narrower negative $19.5 million figure.

The quarter, which also saw a 33 per cent decline in Canadian recreational sales, sunk Auroras shares to the lowest level in two years. 

Back in January, the company targeted sustained earnings before interest, taxes, depreciation and amortization in the reporting period ended June 30. Battley said those hopes were dashed in large part because cannabis stores were slow to open in key markets.

The company credits the timing in the orders for the decrease in revenue. Order timing can affect orders between quarters, which is why six-month and yearly averages can be more helpful when assessing changes in demand for a specific brand.

We, and everybody else, anticipated that there would be more retail infrastructure developed in the country, he told Yahoo Finance Canada in an interview on Friday. Its very frustrating.

The dearth of brick-and-mortar stores, and its impact on financial results, has been a unifying theme as the sector reported quarterly results this week.

Organigram (OGI.TO)(OGI), Tilray (TLRY), and Canopy Growth (WEED.TO)(CGC) were among the scores of licenced producers pointing the finger at weaker-than-expected retail openings, particularly in Ontario. Canadas most populous province has just 24 cannabis stores open for business. Alberta has over 300.

Battley has quit issuing timelines for profitability while stores remain sparse. Hes confident the situation will be short-lived.

Were not making projections for the moment because of a very significant variable over which we dont have direct control, he said. Were just being cautious for the time being. We hope to be able to provide greater clarity soon. But were very pleased with our progress relative to our peers. We know we are going to get there.