Earnings Call Transcript
Aurora Cannabis Inc (ACB)
Earnings Call Transcript - ACB Q1 2023
Operator, Operator
Greetings and welcome to the Aurora Cannabis Incorporated Fiscal 2023 First Quarter Conference Call. All participants will be in a listen-only mode, and a question-and-answer session will follow the formal presentation. This conference call is being recorded today, Thursday, November 10, 2022. I would now like to turn the conference over to your host, Ananth Krishnan. Vice President, Strategic Finance. Thank you, sir. Please go ahead.
Ananth Krishnan, Vice President, Strategic Finance
Thank you, John. We appreciate you all joining us this afternoon. With me today are CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 first quarter financial results. This news release, accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you can find a supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today’s conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Lastly, I want to remind everyone that we will be holding our annual general and special meeting of shareholders on November 14th, and the meeting materials have been mailed out to shareholders or can be found on SEDAR or on our IR website. We encourage you to review the meeting materials before voting your shares at the meeting and look forward to your participation in the virtual-only format. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our covering analysts. However, we ask that you limit yourselves to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Please go ahead.
Miguel Martin, CEO
Thank you, Ananth. We will keep our remarks brief as our Q4 conference call was held recently, but I want to reiterate a few key items before I turn the call over to Glen for an in-depth financial review. We are very close to achieving our primary objective of reaching positive adjusted EBITDA by the end of the calendar year. This will be an incredible achievement that we believe is also sustainable. In fact, the structural changes we have made over the past several quarters have resulted in long-term benefits for Aurora, and we look forward to demonstrating consistent financial performance in the coming quarters. Our enthusiasm is anchored by our position as the number one Canadian LP in global medical cannabis, and the underlying top-line trend is undeniable, upwards and to the right with a loyal base of patients within existing medical markets and more developed countries poised to open up. Beyond revenue, medical cannabis also commands enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis. For these reasons, along with its defensive nature in volatile times, we believe medical is the best segment to invest behind. The second anchor of our enthusiasm has been our ability to rationalize the business to the current environment. The annualized cost savings of $150 million to $170 million will be complete by the end of the calendar year, at which time we will have materially reduced our cash burn and become EBITDA positive, as I said a moment ago. A third anchor of success is our balance sheet, which is stronger than ever. It's enabled us to repurchase approximately $217 million in convertible debt since Q3 2022, and has resulted in considerable savings on cash interest costs, about $12 million annually. We are further benefiting from improved working capital and cash flow and are fortunate to be one of only a handful of companies within the cannabis industry to have a net cash position. In turbulent and uncertain times, this is imperative. Finally, our investments in science, breeding, and genetics are really beginning to pay off. Proprietary cultivars launched from our breeding program in the last 12 months were responsible for almost a third of our revenue in Canada during Q1, have driven meaningful improvements to yields, and are now generating incremental, high-margin revenue through license agreements. We have recently signed royalty-based agreements to license genetics to two of the largest Canadian LPs by cannabis revenue and expect more to follow. So, with those key strengths as a backdrop, let's take a deeper dive into our global medical cannabis business. During Q1, international medical revenue fell compared to Q4 last year. This was largely due to timing of shipments to the Australian market, which resulted in lower sales in Q1. Although, we expect a solid delivery and recovery in Q2, as we have long said, international is somewhat unpredictable on a quarter-to-quarter basis and revenue contributions from individual countries can ebb and flow as these new markets develop. This is why it is so important for us to be operating across many countries, nearly a dozen outside of Canada. A broad reach affords us relative insulation to the economic climate and conditions in specific markets across Europe, Israel, and Australia, and means the overall trend is towards growth. Our regulatory expertise, compliance protocols, testing, and science capability support our leadership position. Now, let's discuss developments in a few select countries. In Germany, the largest market in the EU with 83 million citizens, but only about 100,000 to 120,000 medical cannabis patients, the Health Minister presented a cornerstone paper on planned recreational legislation on October 26th. The plan is designed to regulate the controlled distribution and consumption of cannabis for recreational purposes among adults, and he said it could become law in 2024. We believe Aurora's position as one of only three companies with a medical domestic production license and our current position as the number two LP in the dry flower segment will give us a significant advantage as the regulatory framework continues to be developed. In Poland, we are maintaining our leadership position by continuing to invest in marketing to support our flower and extract products, despite new entrants. We completed two shipments during Q1 and submitted dossiers for three new products for regulatory review, with a timeline to market of approximately one year. In France, a market that we believe could be as big as Germany, authorities have announced that the French medical cannabis pilot program is going to be extended by another year, until March of 2024. After internal assessment as well as discussions with our distribution partner, we decided to continue participating as the sole supplier of dry flower to the country to ensure Aurora’s position for success following the French pilot. In the Czech Republic, beyond our continued success in the dry flower segment, regulators approved the import of new extract products including THC-dominant and balanced extracts. We also hold leadership positions in other key markets including the UK and Australia and expect continued growth in these markets as the number of prescribers and patients steadily grow. The cannabis growth story continues to play out across international medical and recreational markets, with growing acceptance acting like a domino effect. The bottom line is this: as we said many times, our success in medical cannabis provides us with a significant first-mover advantage, and we believe our leadership will be portable to recreational markets as they open up. Turning to the Canadian medical market, we saw some churn of non-insured patients, but we continue to improve the contribution of this business through finding efficiencies. Importantly, the absolute level of revenue from insured patients has not declined, and insured patients comprise 83% of all medical sales, compared to 81% in Q4, while our leading market share is approximately 24%. We are very optimistic about the future of this segment as we continue to increase the number of patients in the insured category and have seen consistent increases in basket size and participation rates over the past few quarters as we continue to improve our offerings. Switching to Canadian adult recreational market, our Q1 revenue increased sequentially by 9% compared to Q4, primarily because of our strength in product offerings made possible through our Thrive acquisition. In Q1, we benefited from an extra month of Thrive contributions versus the previous quarter. However, the Aurora business declined slightly due to the OCS cyberattack and a strike in B.C. But thankfully those issues are now fully resolved. In addition, margins were roughly flat quarter-over-quarter. Looking ahead to Q2, we will miss a shipping week due to the December holidays. As our Canadian recreational business continues to evolve despite a long and continuing period of macro challenges, our focus remains on maximizing profitability through low-cost production and high-margin categories. We continue to believe our investment in science and innovation drives a significant competitive advantage. This quarter, we debuted an unprecedented fall lineup of cannabis products across adult use and medical markets. These new products were developed from a deep understanding of consumer and patient interests and needs and contain all the critical components necessary to compete: intense and exciting aromas, key visual and tactile attributes, and high-potency THC. In fact, beginning last month, Aurora patients were given access to the largest-ever selection of products and formats on Aurora Medical. During Q1, we launched 24 SKUs in the medical channel, and we'll be launching another 78 in Q2. The products from our full portfolio of adult-use cannabis brands including Being Quickstrips, Greybeard premium flower, a wider selection of pre-rolls, new concentrates, and a new offering of minor cannabinoid oils. This online rollout is then followed by availability in Canadian adult-use retailers, with select products available in certain regions. The synergies related to innovation and the leveraging of infrastructure in developing and launching medical and adult recreational products are clear, and our ability to be competitive in both provides us with inherent advantages. Turning to our scientific leadership in cannabis breeding and genetics, we think these attributes will provide us with a distinct advantage to drive value across all tiers of the consumer and medical categories as our new product launches demonstrate. We continue to drive meaningful improvements in yield through new proprietary cultivars, while our breeding program enables us to produce top-quality flower and industry-leading margins. As an example, our Farm Gas cultivar delivers nearly double the yield of our traditional cultivars and does so at an average of 26.5% THC. We also remain committed to furthering medical cannabis clinical research in Canada, with the first shipment of product to a palliative care study occurring last August. Finally, let's discuss Bevo, which is one of the largest suppliers of propagated vegetables and ornamental plants in North America. Recall that we purchased a controlling interest in Bevo back in August and anticipate that it will drive significant shareholder value to us in the long run. As part of the transaction, we are repurposing the Aurora Sky facility for orchid and vegetable propagation with minimal capital investment. This will greatly increase Bevo's production capability and extended shipping range in Canada and the U.S. We will also enable us to generate incremental revenue and adjusted EBITDA while saving on previously announced wind-down and selling costs. For the approximately five weeks that we controlled Bevo in Q1, it contributed $3.3 million to our revenues and achieved adjusted gross margins of 16%. When we announced the controlling investment in Bevo, we highlighted the seasonal nature of their business with the January to June period representing the majority of the revenue and EBITDA generation for the business. Bevo is performing to internal expectations and is expected to be a positive contributor to our path for positive adjusted EBITDA. And with that, I'd like to turn the call over to Glen for our financial review.
Glen Ibbott, CFO
Thank you, Miguel, and good afternoon. I'd like to begin by reminding everyone that we're pleased to have one of the strongest balance sheets among Canadian LPs and this quarter is no different. As of yesterday, we have approximately $393 million of cash including $58 million of restricted cash. And we have US$186 million of principal remaining on our convertible notes that are due in 2024. Subsequent to our September 30th quarter-end, we repurchased US$23 million in principal on our convertible notes at a total cost of US$21.8 million in cash, including accrued interest. We believe that debt reduction, even though maturity is still more than a year out, is a smart and defensive capital allocation decision, which reduces balance sheet risk, especially important during turbulent markets. Our debt reduction since Q3 2022 has resulted in annualized cash interest savings of approximately $12 million, and we continue to have access to significant capacity under our base shelf prospectus, including US$156.8 million remaining under our ATM program. That reflects how we issued 23.7 million shares subsequent to September 30th for gross proceeds of $40.2 million, and that’s to be used for strategic purposes including debt reduction. Our cash flow is improving with $20.1 million used in operations and working capital in Q1, or $12.4 million excluding restructuring costs. That’s down from $22.5 million in Q4. In Q1, we reported approximately $5.5 million in capital expenditures, down from $7.8 million last quarter. Q1 CapEx was fully offset by proceeds from disposals of property and equipment and from government grants. Our ongoing cost transformation program is expected to continue to improve operating cash use over the next several quarters. Total revenue in Q1 was $49.3 million, and of that net cannabis revenue was $46 million compared to $50.2 million last quarter. This change was driven mainly by timing of shipments into Australia during the prior quarter and our ongoing strategic focus in our Canadian medical business on the higher margin insured patient base. It was partially offset by contributions from our Thrive acquisition to our consumer cannabis business. So now, let me address each of our segments in a bit more detail. At the core of our plan to achieve near-term positive EBITDA is our focus on protecting and growing the profitability of our industry-leading Canadian and international medical cannabis businesses. Canadian medical revenue was $23.4 million in Q1, down 6% from Q4. We continue to focus on growing the bottom line of this business by improving our portfolio, protecting our margins, and becoming a more efficient provider of medical cannabis to our patients. Our international medical revenue was $8.2 million and reflects the 30% decline versus Q4. The sequential decrease was due to the timing of shipments into certain international markets, particularly Australia, during the prior quarter. We do expect a rebound in our international medical segment next quarter, that being Q2, returning to levels more consistent with Q4 of 2022. Taken together, our medical businesses in Canada and internationally generated $31.6 million in sales and a gross margin of 67%, up from 62% in the prior quarter. The strong margin profile remains above our minimum target of 60% and is an important gross profit driver for us that distinguishes Aurora from our key competitors. In Q1, our consumer revenue was $13.7 million, a 9% increase compared to last quarter. The increase is mostly due to a full quarter of contributions from Thrive consumer cannabis brands, which more than offset the impact of the cyberattack at the Ontario Cannabis store and store closures due to an employee strike at B.C. cannabis stores. This is the second consecutive quarter of growth in our consumer business, which in the face of consumer market headwinds is very gratifying. Adjusted gross margin before fair value adjustments on our consumer cannabis net revenue is 25% in Q1, compared to 26% in the prior quarter. We recognized $3.3 million in net revenue during Q1 from our controlling stake in Bevo. As Miguel mentioned, Bevo has a seasonal cadence with a period from January to June expected to deliver roughly two-thirds of Bevo's full annual revenue and EBITDA, which is reliable, predictable, and supports our overall drive to positive EBITDA. Excluding restructuring and other normalizing costs of $10.4 million, our SG&A and R&D continued to be well controlled, down at $33.4 million during Q1 versus $37.8 million in the prior quarter, and in line with our previously stated range of being below $35 million. We are on track to deliver the Company's commitment to reducing SG&A to below $30 million by the time we exit December 2022. So pulling all of this together, we generated an adjusted EBITDA loss in Q1 of $8.7 million, compared to $11.6 million in the previous quarter. This improvement is driven mostly by reductions in SG&A and by a 3% increase in overall adjusted gross margin. Now, as part of our business transformation plan, you are aware of our commitment to annualized cash cost savings of $150 million to $170 million. Beyond posting positive adjusted EBITDA, we have been working hard to rationalize our operations footprint and continue to improve our cash flow. These actions are on track with annualized savings of $140 million already achieved and the remaining coming in Q2. With respect to cost of goods, these have been crucial initiatives for the Company, as you can see our gross margins continue to deliver value for us and to lead the industry. Finally, a quick reminder on an important housekeeping item, fiscal year 2023 has only three quarters as we're changing our fiscal year-end to March 31, 2023 in order to achieve certain internal cost and staffing efficiencies. So, to wrap my section up, the key drivers for Aurora to reach our positive adjusted EBITDA milestone by the end of this calendar year, starting from our Q1 loss of $8.7 million are as follows: first, we expect revenues to recover in Q2 as the negative impact of certain cultivar supply and wholesale distribution disruptions affecting our European medical and Canadian consumer business units have been resolved, and our non-new international segment revenue returns to normalized levels consistent with that of Q4 2022. Second, we expect a full quarter of revenue and positive adjusted EBITDA contributions from the Bevo business, albeit on a seasonally affected basis. Third, we expect adjusted gross margins to be consistent with fiscal Q1 2023. And finally, we expect to achieve our previously stated objective of quarterly SG&A expenses being below $30 million. So, thanks for your interest. I'll now turn the call back to Miguel.
Miguel Martin, CEO
Thanks, Glen. I'm going to leave me with four thoughts before taking your questions. First, we're just one quarter away from achieving our goal of positive adjusted EBITDA. Cost savings are nearly complete and going forward we'll have a lean and flexible operating model. Second, our medical cannabis business is a formidable force in the industry, both domestically and internationally. It remains the smartest cannabis segment to invest behind today with excellent growth opportunities. Third, the Canadian rec market is correcting and the two acquisitions we've made in Thrive and Bevo will be even more beneficial to us, once the recovery is upon us. And last, our science and innovation program as a high-margin opportunity is just starting, and we look forward to sharing more in the future as the business grows. To conclude, we're well on our way to becoming a leader in global cannabis and are making strategic progress to that end with each passing quarter. Our completion of the business transformation is near, on time and on budget, and we've done it without sacrificing our investments in growth. We've also done this while strengthening our balance sheet, which is critical in today's environment. The end result will be a positive and sustainable structural change to our business that will enable us to be successful in the long term and create significant shareholder value. Thank you for your time and interest in Aurora, and we look forward to sharing our progress. We’ll now be happy to take your questions. Operator, please open the line for questions.
Operator, Operator
Thank you. Our first question comes from Vivien Azer with Cowen.
Vivien Azer, Analyst
So, I wanted to touch on Europe, please. So, you guys have been really transparent about your expectations for fiscal Q2 and why you're expecting a recovery, and it all makes sense. But Miguel, I was just hoping to get some perspective on how you view that business's defensibility in a more challenged macro environment, certainly through kind of traditional consumer staples earnings, European weakness, especially the further east you go has been incredibly topical. So, I'd just love to get your perspective on that. Thanks.
Miguel Martin, CEO
It's a great question, Vivien. I think if you look at Canada as an example, you've got over 250, 300 LPs that compete in the recreational business, and we have a bunch of people that are facing some tougher times. If you look at the medical business, it's very concentrated. And why I bring that up is because it's been ongoing for a long time. So, we have a 24% share, which is the leader in Canadian medical by a mile, then you have 9%, which is the number two company and then it really falls off. There's just not a lot of companies participating. When you look at Europe, and I think Germany is a really good example, you've got basically four companies, maybe five companies that do the vast majority of the business. It's incredibly expensive to get in. It's incredibly challenging to continue to deliver. The regulatory thresholds are significant. So, there really is sort of a moat around medical. It’s not just Germany; you see this in other markets, where there are a consolidated number of companies, it takes a very specific skill set. What is interesting is that this challenge is starting to really come to the forefront now; that challenge, that difficulty is portable. So the best example I can give is if you look at the framework presented by Karl Lauterbach, who is the Federal Minister of Health in Germany, that's now going through the EU. You just saw that the Czech Republic, which is another great market and a really good market for us, talk about wanting to mirror or just get the learnings from the German experience. I think you're going to start to see consistency in these markets from a regulation standpoint, everything from manufacturing to testing to packaging to sales and marketing. While it’s going to be challenging and it's going to be difficult, there are definitely going to be advantages for those handful of companies that are really regulatory forward in those markets. That’s why we’re so thrilled about it. I think we'll be competing against four or five companies, not 200 companies. Does that answer your question?
Vivien Azer, Analyst
It does. Thank you.
Operator, Operator
And our next question comes from the line of Michael Lavery with Piper Sandler.
Michael Lavery, Analyst
I just wanted to come back to the profitability milestones, and you led with the revenue improvement, which makes perfect sense. Just curious if you could unpack that a little bit more, maybe a couple of things. One is how much maybe is it mix-driven or operating leverage? Does it need to be a big number or just the right product? And how much visibility do you have on that? We're close to halfway through the quarter. Do you have a line of sight on forward bookings or some things that give you a sense of that being on track?
Miguel Martin, CEO
Yes. I want to make a few remarks before handing it over to Glen. I won’t discuss the quarter in detail, but I’d like to provide some context for what Glen pointed out. The significant margins in the medical and international businesses greatly impact revenues. Fluctuations in a major market like Australia can have a substantial effect when they rebound, as it's primarily additional revenue without increased fixed costs since we've already expanded cannabis production. Additionally, we are pleased that the OCS responded effectively to the cyberattack, and similarly, the B.C. strike was managed well. I’ll let Glen address our comments on that and the quarter in general. Regarding costs, we've been fairly consistent. To reiterate Glen’s points, if we assess our revenue expectations and consider the margins, adding Bevo aligns us with our goals. The exciting part is we achieve this through a model that is poised for growth with potential opportunities in Western Europe and more. When discussing the mix, I believe it leans more towards business mix rather than just product mix. Glen, do you have anything to add?
Glen Ibbott, CFO
No, that's exactly right, Miguel. The cost reductions and the SG&A that we committed to and a bit of incremental Bevo cuts the Q1 EBITDA loss in half. The rest of this is coming from holding our margins up and then the business or market mix and with it being mainly focused on medical, a lot of that drops to the bottom line. So…
Miguel Martin, CEO
And Michael, I guess the point is we're not saying it goes beyond where it's been in the past. The comment of getting back to traditional levels in those two key businesses is why we're saying what we're saying. There's not some great promise of a new piece of business or some additional form of growth.
Operator, Operator
And our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.
Pablo Zuanic, Analyst
I have two quick questions, Miguel. First, you're one of the few companies that believes Germany will start with only domestic production and that imports won't be allowed, as indicated in the draft. In contrast, most companies think imports will be necessary because domestic production won't suffice. Could you explain your perspective, which seems to be less common? Most companies anticipate needing imports from the beginning. The second part is, if regulators only permit domestic production, how long would it take to ramp up a greenhouse or production capacity to meet market demand? When would you need to begin investing, and is this a one or two-year timeframe? Thank you.
Miguel Martin, CEO
Our stance on Germany is strong due to our significant on-the-ground resources and the presence of our dedicated team there. We have a robust government relations organization, and we've maintained this perspective consistently. I'm not here to criticize competitors; that's not my role. However, we've always been clear that importing recreational cannabis in Germany, particularly under various international agreements, seems unlikely. As one of only three companies currently producing cannabis under a medical license, we maintain a close relationship with regulators, who we respect deeply. Referring to Health Minister Mr. Lauterbach's statements, they're focusing on creating a science-based integrated framework. They've been proactive, engaging with regulators and industry players worldwide to gather comprehensive feedback. It’s important to note that developments in recreational cannabis won't detract from enhancements in the medical sector. Key aspects of their plan include the allowance of possession up to 30 grams, no THC limits, potential restrictions for those under 21, and a cannabis tax based on THC content. The goal for consumer pricing is to remain competitive with black market rates. There will also be advertising and marketing restrictions, and initially, edibles will not be permitted. They're interested in establishing clear regulatory standards for quality and production. Additionally, they've sought feedback from the EU, which is a crucial step in this process. The Czech Republic is observing Germany and may adopt similar regulatory approaches, indicating potential consistency in regulations. As for facility ramp-up, depending on the scale, we expect a timeline of about a year and a half to two years after initiating investments. The regulators understand this timeframe, and we've had fruitful discussions about the realistic implications. We're excited to participate in this market, as Germany is poised to be an important country for future developments. I encourage everyone to keep a close watch on these developments.
Operator, Operator
And our next question comes from the line of Andrew Carter with Stifel.
Andrew Carter, Analyst
I guess I wanted to ask that Canadian consumer came in well ahead of our estimate, or well ahead of what we were thinking. And I guess you guys have kind of a tepid guide around the disruptions, yet sequential growth. First off, can you tell us how much Greybeard contributed? And also maybe disaggregate the performances by channel. Quebec's been strong; love to hear that. And of course, the Headset data says you were down 13% POS, of course, could be backwards looking if things are just working their way through. So maybe also give us an aggregate of what shipments were outside of Quebec? Thank you.
Miguel Martin, CEO
Let me make a comment about Headset problems, isn't it, and I'll kick it over to Glen on the rest of the question. Quebec is our largest province in terms of shipments. We really value our partnerships with all the provinces, but Quebec has been particularly good for us. As you know, Andrew, many of the syndicated services do not include Quebec and the province on stores. It does skew the results a bit, particularly for us as someone who does the majority of their business there. I think Greybeard was a significant contributor, but also, we've had successes on two fronts that have helped us. One is our significant improvements in yield have allowed us to go back into some of the larger format sizes that now make sense for us in a way that they didn't make sense before. We're also participating at a much higher level in some of the faster growing, higher margin segments, such as pre-rolls and concentrates. Glen, do you want to take the rest of it?
Glen Ibbott, CFO
Yes. Greybeard and the Thrive brands are important brands to us. But they are our premium brands. So, they don't drive a ton of revenue. I'd say they're probably in the 15% range this quarter and certainly growing, but margin-wise, they're very important to us. As Miguel mentioned, the provincial distribution drives a lot of our bottom line, heading into the right provinces and the right products, with the distribution that Quebec offers you with the distribution and all-in stores. The provincial mix is as important as the product mix to us on our bottom line. It continues to be an important market for us. Ontario has a very big revenue market, but I'd say we are certainly choosy on what products we launch in Ontario to make sure that we continue to have that focus on protecting our margins and being able to drive profitability.
Andrew Carter, Analyst
Just to clarify, you mentioned getting back into large formats. Does this imply that the focus is no longer exclusively on premium products? Is it simply that a lower cost structure enables this shift? I wanted to confirm and clarify that statement.
Miguel Martin, CEO
Yes. We moved away from 14-gram and 28-gram formats when the costs didn't make sense. With our enhanced genetics sometimes yielding twice as much per square meter, it enables us to revisit those formats. The growth in 28-gram and larger formats has been quite significant, allowing us to be profitable. It's beneficial for our revenue. Additionally, regarding market fragmentation, the top five companies now represent about 36% of the market, down from 48% last year. There is notable consumer movement, and with our new offerings, the environment is favorable for quick gains. Overall, we are pleased with our progress, excluding Greybeard.
Operator, Operator
Thank you. And our next question comes from the line of John Zamparo with CIBC.
John Zamparo, Analyst
Thanks. Good evening. I also wanted to touch on the consumer channel but on gross margins. You've repositioned into premium and you've added Thrive but adjusted margins are down sequentially and year-over-year. Is that mostly a function of volume and you just need to increase that to get higher margins? I know the press release mentioned packaging costs, but is there any other color you can add there? Thanks.
Miguel Martin, CEO
Yes. I mean, John, as you know, the recreational business is really challenging right now. The pricing continues to drop. The macro environment makes it a challenge. You've talked about packaging. There are other inputs on the inflation side that push down the margin a little bit. Clearly, utilization and spreading the fixed across does make a difference. We are seeing some opportunities, as I said in my prepared remarks, leveraging common infrastructure for recreational and medical that we think will have some margin. Overall, I think the margin in the recreational business is going to be under pressure. As we look forward, we've been able to find spots where we've been able to keep it at where it's at through a little bit of mix, to Glen's point, a little bit of geography, and a little bit of introduction of new products, particularly premium products. But overall, I think for most manufacturers, you're going to be dealing with a challenging pricing environment in the meantime. Now, you make a big move on yield, you make a big move on something in a pre-roll or in a concentrate or in a premium or ultra-premium flower, you can make a move there. But I think overall, it's a little bit of the environmental catching up. Clearly, if you improve your overall production, and move through the fixed cost, you're going to improve your margin. I mean, Glen, I don't know, anything you want to add on margin and rec?
Glen Ibbott, CFO
Yes, John, that's a great question. You're exactly right. The contribution margin, which reflects the incremental margin on the next unit of sales, is quite compelling. There is volume present, which is why it's encouraging to see some stability and even growth in the consumer channel. We also have some exciting new products that have recently launched, and we're noticing a good response across various provinces. I'm eager to see how that impacts our margins. There are several challenges ahead, as Miguel mentioned, but we do have some measures we’re implementing to safeguard and potentially enhance those margins along with some increased volume.
Operator, Operator
Thank you. And our next question comes from the line of Matt Bottomley with Canaccord Genuity.
Matt Bottomley, Analyst
Good evening, everyone. Just wanted to take a step back just on the Canadian medical market, that side of the business. I think we chatted Miguel about this a couple of quarters ago. Given that this has essentially been a $100 million business for some time now, and I understand there's some strategy, and going after margin on insured patients versus just trying to grow the top line for the sake of it. I'm just curious if there's any other variables or elements other than insurability that might drive the overall industry growth and then if Aurora can keep its 25% share to see the commensurate growth with that. Is it just insurance or are there things that you guys can do that are in your control in the interim to try and help that? Then maybe another side of that question, just also related to just sort of the doctor acceptance or doctor uptake? Are we seeing more doctors prescribe cannabis? Where is sort of that segment of the market in terms of where the medical professionals are at? Really no other LP talks about this line of the segment, just given that most are focused on other things, or adult use? So I think just a lay of the land might be helpful.
Miguel Martin, CEO
Sure, I’d be happy to. Currently, only 1% of the Canadian adult population is involved in the medical cannabis sector. The key factors driving growth primarily stem from the attractive profit margins compared to recreational use, though not compared to pharmaceuticals or conventional medical practices. This market is quite consolidated. To enhance the overall medical cannabis industry, several factors will play a role. Firstly, for most healthcare providers, researchers, and patients, the clinical research and evidence supporting the efficacy of medical cannabis are just starting to emerge. We have been privileged to contribute to some clinical studies, and there has been notable activity in the U.S. and Israel. As these studies progress, they will alter the dynamics for all involved parties including insurers, clinicians, and patients. The findings from these studies are promising, especially concerning traditional applications of medical cannabis, such as treating anxiety, sleep disorders, PTSD, and neuropathic pain. Moreover, insurance companies and private entities are beginning to integrate cannabis coverage into their benefits programs, which is a significant development. Large union contracts are also influential in how this trend evolves. Additionally, there is a growing acceptance of cannabinoids outside of specific products like EPIDIOLEX, which is gaining increasing visibility. With only 1% of adults currently benefiting from this, any advancement will substantially impact the market, benefiting a select few companies involved. It requires an extensive investment of resources and efforts to support patients, especially those with insurance. I believe that adoption will rise, making medical cannabis more mainstream and scientifically driven, with advantages accruing to a limited number of companies. This development is also attracting attention from regulators in countries like Germany, France, the UK, and Israel, who are keen on understanding the scientific evidence and Canadian experience. We will continue to engage with regulators responsibly and hope for fruitful collaboration. We remain optimistic about true medical cannabis, as opposed to what may have been seen in certain markets. The global statistics surrounding medical cannabis are quite impressive.
Matt Bottomley, Analyst
Great. I'm curious about patient onboarding in the Canadian market. For those who are insured, it's one thing, but what about those who aren't? Is there any aspect of joining the medical market for them? There seems to be some hurdles with registering with licensed producers that aren’t typical in other industries. After a person places an order or two, do they just figure out their preferred products and head to their local dispensary? I know that in Ontario, there seems to be a dispensary on every corner now. Is this dynamic contributing to the challenges of ramping up patient numbers in the country?
Miguel Martin, CEO
No, I wouldn't say so. There has clearly been some interaction with the medical market to the evolution of the rec market. This is primarily a conversation that a patient has with a clinician or a physician or an advisor to go get medicine. For uninsured patients who find something and see some other reason to go get there, but when you're talking about those who are over-indexing on items like capsules, oils, and other things that aren’t the sort of flavor of the day in the rec business, you really find this is truly a medical construct and the medical infrastructure lends itself more to that than just serving as a surrogate. This doesn't lend itself to that.
Operator, Operator
And the next question comes from the line of Frederico Gomes with ATB Capital.
Frederico Gomes, Analyst
Thanks for taking my question. Just on the Netherlands, could you provide an update on your investment there? I know that you've talked a lot about Germany, but how do you view the opportunity in the Netherlands? Potentially in terms of timelines, when can we expect sales from that project to start? Thank you.
Miguel Martin, CEO
You got it, Fred. So, in the Netherlands, there are two aspects to it. There's the medical aspect that we continue to participate in, where the government is reviewing products and will make a final assessment probably in May or June of next year. From the recreational standpoint, there isn't really an update for us. We're still waiting to hear about a firm date and what the process is. There have been general details for those 10 licensees to service roughly 500 coffee shops in a variety of towns and cities throughout the country that would give everybody the opportunity to look at everything from data to service levels and whatnot. I don't really have an update for you right now. At the time in which we have one, we’ll give it, but we're still waiting for some information on exactly what it's going to be, and when it's going to kick off, and exactly what that all looks like. But to be clear, the information we've seen previously has been that there would be a test for those 10 licensees, and post that test after an undetermined period of time, they would then talk about a different construct.
Operator, Operator
Thank you. And the next question comes from the line of Tamy Chen with BMO Capital Markets.
Tamy Chen, Analyst
I was just curious in terms of inventory impairments, when do you expect that will get through past that? I know you've had Sky shutting down and all of that. I'm just wondering when we get past that and don't really see more of the impairments going forward. Thank you.
Glen Ibbott, CFO
Yes, sure. I'll take that. Tammy, thanks for the question. There's a few things going on here. Under IFRS, as I'm sure you're aware, there's a biological asset standard that ends up with some fair values in our inventory that when you have to write things down to net realizable value, at the end of the day, there's an ongoing sort of noise quarter-to-quarter of just provisioning down to realizable value on your inventory. More to the point, a lot of the footprint rationalization we've done with our production facilities is to get us to a better spot where we are producing high-quality, low-cost and very focused on what the consumer wants and minimizing excess production. Now it is an agricultural crop, and certainly in the consumer markets, we do find the consumer taste evolve. It's never going to be perfect. We expect that there would always be some hopefully small percentage of inventory that ages out a little bit. What we find, though, is that we’re developing more channels for our cannabis. It may fit the rec market in Canada. It may fit the medical market in Canada. It may be excellent for an export product to another medical jurisdiction. Within those international medical jurisdictions, we're starting to develop different tiers of product and what we call premium and value. Two things we can do here is continue to rationalize our production footprint and produce high-quality cannabis and continue to develop more channels for the outlet of that cannabis. So, expect it to improve over time, Tamy, but being agricultural, there will always be a bit of noise in the inventory.
Operator, Operator
Thank you. There are no further questions at this time. I would like to turn the floor back over to Miguel for any closing remarks.
Miguel Martin, CEO
Well, I appreciate everybody's interest in our business and in this quarter. We're thrilled about where we're at and we're looking forward to the next call. We look forward to having conversations with many of you. I wish everyone a safe and for those celebrating Remembrance Day tomorrow, which is obviously an important day for everyone, we have all wishes on that. Thanks to all. We look forward to talking to you in the future. All the best.
Operator, Operator
Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.