Aurora Cannabis Q2 Financial Results: Desperately Seeking Cannabis 2.0

Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), one of the Canadian marijuana stocks, reported Q2/20 financial results on February 13, 2020

SmallCapPower | February 18, 2020: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), one of the Canadian cannabis stocks, reported Q2/20 financial results on February 13, 2020, before markets opened. Results were highlighted by an adjusted EBITDA loss of $80.2M on revenue of $52.7M. Results saw no major surprises, given that management pre-released results on February 6, 2010, with the announcement of the resignation of CEO Terry Booth.

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Revenue declines for second quarter in a row. Canadian recreational revenues dropped by 24%, following a 33% drop in the first-quarter wholesale revenue. However, recreational revenues were inclusive of $10.6M in return provisions. Excluding returns, Aurora Cannabis saw recreational revenue grow 11% sequentially. During the quarter, production volumes decreased to 30,691 kg (was 41,436 kg, during Q1/20), a slip of 26%. Of note, management mentioned that Cannabis 2.0 shipments began on December 23, 2019, and that Cannabis 2.0 sales accounted for $3M of sales this quarter.

Cannabis volume sold decreased during the quarter. Aurora Cannabis sold 9,501 kg of cannabis, a 24% decrease over Q1/20 (volumes were 12,463 kg in Q1). Average selling price of recreational cannabis decreased by 10% to $4.76/gram (was $5.28/gram), average selling of medical cannabis remained flat at $7.99/gram, wholesale cannabis price decreased by 45% to $1.90/gram (from $3.46/gram), which was due primarily to larger amounts of trim being sold at wholesale prices.

Plans to launch a cannabis line for value-based consumers. On the call, management also mentioned that Aurora’s market share decline was mainly a result of consumer preferences moving towards value-orientated products. Aurora Cannabis plans to launch a product line targeting value customers called “Daily Special” in Q3. The product is aimed to compete directly against HEXO’s value brand “Original Stash,” which currently sells for ~$150/ounce and is only available in the one-ounce format.

Gross margins contract by 12%. Gross margins declined to 44%, from 56% in the previous quarter. The contraction in gross margins was due primarily to an increase in cash costs to produce a gram of cannabis to $0.88 from $0.85, coupled with the 10% decline in average selling price of recreational cannabis.

Balance sheet and liquidity. Aurora Cannabis ended the quarter with a cash position of $156M, and $602M in debt. Prior to quarter end, the Company has utilized $7.5M of its $200M at the market (ATM) financing program. Management believes that they will likely draw down the entire $200M, implying an additional ~100M shares added to Aurora’s total common shares outstanding, which currently sits at 1.15B shares.

Still expensive when compared with peers. Aurora Cannabis trades at a NTM EV/sales multiple of 8.0x, which is premium compared to large-cap peers, which trade at a consensus median multiple of 4.8x. With near-term dilution expected and further risks of asset write downs, Aurora’s multiple has room to slide more before being considered to be trading in-line with peers.

Key Takeaways. Overall, it was a quarter in transition for Aurora Cannabis. With the recent departures of CEO Terry Booth, COO Cam Battley, and $1B in asset write downs, the Company is implementing sweeping changes. Aurora Cannabis has begun a Business Transformation Plan and a search for a new CEO, likely someone with experience in a high-growth CPG environment. ACB remains focused on cost reduction targets and reaching positive EBITDA by Q1F21 (ending Sept 31/20, results reported ~November 15/20). In the meantime, Aurora expects that derivatives will contribute 20% towards Q3/20 revenue and investors will be looking to see a boost in revenue from Cannabis 2.0 products next quarter. However, management guided that revenue will likely remain flat Q2 to Q3, so investors may have to wait until Q4 to see substantial increases in revenue from Cannabis 2.0. In our view, management is likely being modest in forecasting sales given industry headwinds. Aurora is expected to report Q3/20 results on or about May 15, 2020.

Shares of Aurora Cannabis ended Friday’s trading session 5% higher at C$2.06. Aurora Cannabis stock trades at a market cap of $2.3B.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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