Aurora Cannabis (ACB) is crashing following another disappointing quarter and another strategy reset for the Canadian cannabis producer. The company still has goals for reaching positive EBITDA in FQ2, but the market rightfully isn’t convinced Aurora Cannabis can reach this goal. My investment thesis is more neutral here until the new CEO can execute on these plans of shifting the strategy to focus on premium brands.
Image Source: San Rafael website
Strategy Shift
Along with announcing the new CEO, Aurora Cannabis had already warned on weak revenues during the quarter. The company has failed miserably in a shift to the value segment, as pricing has only become more competitive and management apparently lost focus on the premium brands in the process. The medical cannabis segment now generates over 64% of gross profits despite the consumer cannabis market being much larger.
Source: Aurora Cannabis FQ4’20 earnings release
Aurora Cannabis guided to FQ1 revenues falling another 14% to C$60-64 million as the company shifts out of the value segment into more premium products. The goal is to focus on the San Rafael, Aurora Cannabis and Whistler premium brands via dried flower, pre-roll and vapes. The goal is to grow sales, and more, importantly raise consumer cannabis margins above the 35% range achieved in the last quarter.
This strategy shift didn’t solve another major problem in the quarter where the Canadian cannabis company still overproduced cannabis. Aurora Cannabis produced 44K kg in the quarter, up an astonishing 22% over the prior quarter, when the goal was lower production. The company didn’t even sell 17K kg in the quarter. Per the CFO on the FQ4 earnings call:
We produced over 44,000 kilograms of cannabis in Q4 and that’s compared to approximately 36,000 kilograms in the prior quarter. However, as we continue this aspect of our business reset, which consists of rationalizing your production footprint and closing a number of our smaller facilities, we expect our total production going forward to average about 35,000 kilograms per quarter. And out of this production, 65% or more is expected to meet our top-quality flower standard.
Aurora Cannabis remains an operating nightmare. For the June quarter, the company used an insanely large C$64 million in cash from operations. The amount actually rose during the quarter despite the company improving the EBTIDA loss by C$15.8 million from the prior quarter.
Source: Aurora Cannabis FQ4’20 earnings release
Positive EBITDA Goal
The company doesn’t have many more opportunities to reset its go-to-market strategy and goals of reaching positive EBITDA. Absent hitting these new EBITDA positive targets in FQ2, the future will become very bleak for Aurora Cannabis.
The key components of the adjusted EBITDA goal are gross margins in the 50% range and quarterly SG&A costs in the low C$40 million range. The numbers quickly suggest the company has to generate FQ2 revenues in the C$80 million range to even approach positive EBITDA levels.
According to CFO Glen Ibbott on the FQ4 earnings call, Aurora Cannabis is closer to the EBITDA positive goal than most think:
But if you look at what we’ve delivered in terms of EBITDA in Q4 it was just over a negative CAD30 million you know taking out the severance cost, but that was well we were still carrying CAD64 million of SG&A cost. So as we stand in Q1 we’re now running in the CAD40 million. So you could see an immediate improvement in the EBITDA CAD20 million just simply from our SG&A reset. We do expect continued strong performance in Canadian and European medical markets.
Based on the lower SG&A numbers, the company should already have the EBITDA loss whittled down to only C$10 million per quarter. The big doubt is whether a new CEO can implement a new premium strategy in just a few months to generate the revenue upside needed to reach EBITDA positive.
Takeaway
The key investor takeaway is that Aurora Cannabis continues taking positive steps to reset the business. Unfortunately, the company and the Canadian sector still haven’t shown any ability to correctly predict trends to justify owning the stock based on achieving the goal of consistent positive EBITDA.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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