Earnings Call Transcript
Aurora Cannabis Inc (ACB)
Earnings Call Transcript - ACB Q4 2020
Operator, Operator
Good afternoon, everyone and welcome to the Aurora Cannabis Fourth Quarter Fiscal 2020 Conference Call for the three months ending June 30, 2020. This is being recorded today, Tuesday, September 22, 2020. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora’s future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora’s annual information form and other periodic filings and registration statements. The company expects to file these documents before the end of this week and they may be accessed via the SEDAR and EDGAR databases. Since we are conducting today's call from our respective remote locations there may be brief delays, cross-talk or other minor technical issues during this call. We thank you in advance for your patience and understanding. I would now like to introduce Mr. Miguel Martin, Chief Executive Officer for Aurora Cannabis. Please go ahead Mr. Martin.
Miguel Martin, CEO
Thank you, operator, and good afternoon, everyone, and thank you for giving us your time. First, let me say that I greatly appreciate the board's confidence in appointing me to the CEO role. I'm pleased to work with the team on tactical plans to establish Aurora as a profitable growth-oriented leader in the global cannabinoid market. I take my fiduciary responsibilities to our investors very seriously and I am determined to do everything that I can to enhance shareholder value. This begins with managing the business with a high degree of fiscal discipline, especially in the midst of a global pandemic. Over the last several days, I've had an opportunity to speak to a few of you in the investment community. But for the broader audience, I think it would be helpful to provide a bit of my background. I've spent my entire career in sales, marketing, and leadership roles within the regulated consumer packaged goods product industry. I started my career with Altria and spent about 18 years there, ultimately leading their sales group. I then went on to become the President of one of the largest electronic cigarette companies, Logic, which was subsequently sold to Japan Tobacco, the third-largest tobacco company in the world. After that, I went to a startup and became CEO of Reliva CBD, currently ranked the number one CBD company in Nielsen, which was just recently acquired by Aurora. So, I've spent a lot of time working in fast-paced, constantly evolving, highly regulated and fluid environments where adherence to compliance and testing is essential to success. I accepted the CEO job because I see an opportunity to quickly leverage my skill set in regulated consumer goods product development here at Aurora. I’m fortunate to step into a company built with a dedication to science and a compliance-first approach. With strong execution, I expect to build a profitable business in Canada that we believe can be portable to larger global cannabinoid markets. Having spent four months now at Aurora, I've seen the talent and industry knowledge that makes this company innovative and agile. Aurora will be a global leader in cannabinoids when the largest markets open up, and my job is to ensure that Aurora executes on that plan. With that, I’d like to turn the call over to Glen Ibbott, our Chief Financial Officer, to walk you through our financial results for Q4 2020, and then I'll be back to discuss some of our business plans going forward. Glen?
Glen Ibbott, CFO
Yes. Thanks, Miguel. My pleasure to take our first earnings call together. I’m very excited about the vision you have for Aurora and the opportunity for Aurora to realize its full potential as we remain focused on becoming a profitable growth-oriented leader in the global cannabinoid market. So, good afternoon, everyone and thank you for joining us on today's call. As you know, on September 8, we provided a business update including certain unaudited preliminary fourth quarter 2020 results. Therefore, I can be a bit brief in my review of our financial results for the quarter. The figures I'll be going over today can be found in the press release we issued after the market closed today and they're all in Canadian dollars. For our fourth quarter fiscal 2020, the period from April 1 to June 30, 2020, our net revenue came in at CAD72.1 million while our total cannabis net revenue came in at CAD67.6 million. While our sales mix remains evenly split with the consumer cannabis segment delivering CAD35.3 million in net revenue and our medical cannabis segment delivering CAD32.2 million in net revenue. Total kilograms of dried consumer cannabis sold increased by 36% as compared to the prior quarter but this was offset by an approximate 30% decrease in the average selling price per gram of dried cannabis flower. Daily Special, our value brand, accounted for 62% of total net consumer revenue from flower in the quarter, as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried cannabis flower. Consumer cannabis extract net revenue decreased by CAD1.5 million compared to the prior quarter driven primarily by a decrease in sales of our vape products. During the fourth quarter, the increase in our medical cannabis net revenue was comprised of an increase in Canadian medical sales up CAD0.7 million and an increase in our international medical cannabis business by 14% or CAD0.6 million. Pricing in both markets stayed strong and steady. We produced over 44,000 kilograms of cannabis in Q4 compared to approximately 36,000 kilograms in the prior quarter. However, as we continue this aspect of our business reset, which consists of rationalizing our 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. Out of this production, 65% or more is expected to meet our top-quality flower standard. We expect our facility rationalization to be accretive to our gross margins over time while we continue to work on maximizing yields, potency, and other quality characteristics of our cultivation. Our forecast for inventory drawdown suggests that our flower production versus sale will reach a steady cadence over the next several quarters. While trim will also reach a steady state drawdown given our renewed focus on bait and other derivative categories. Our cash cost to produce per gram of dried cannabis sold improved to CAD0.89 down 27% from the previous quarter. This is a slightly modified method from previous quarters that reflects changes to our inventory costing methodology, which places a heavier weighting on our top-quality flower and less on byproducts. Our low cost per unit production is another lever that allows us to build a brand across multiple pricing tiers while maintaining strong and healthy sustainable margins. Our adjusted gross margin before fair value adjustments on Canada's net revenue is 50% in Q4 versus 43% in the prior quarter. As you're well aware, we have been focused on prudently managing SG&A costs down to our targeted run rate of CAD40 million to CAD45 million per quarter over the course of the second half of fiscal 2020. We are pleased to have successfully reduced SG&A costs, which includes R&D spending from over CAD100 million in Q2 2020 down to CAD64.6 million in Q4, excluding approximately CAD3 million of non-recurring costs related to the business reset. I am further encouraged to tell you that we are now operating at our targeted quarterly estimated run rate in the low CAD40 million range as of Q1. Thirdly, reducing the run rate to below CAD40 million range was very important to strive to deliver positive EBITDA. We also believe this level of SG&A is quite sustainable and very capable of supporting a much higher revenue margin. Our progress in continuing to reduce overall and per unit production costs, as well as the significant decrease in SG&A demonstrates our commitment to manage lower positive EBITDA for Q2 2021. These efforts were certainly necessary, and they have clearly been disruptive to the organization. So, while there is still more work to do, we’re now in a position where most of the team can focus their attention on delivering Miguel's plan for growth. Pulling all of this together, adjusted EBITDA in Q4 2020 was a loss of CAD34.6 million. At CAD30.7 million it excludes severance and non-recurring costs related to our business transformation. This is obviously a substantial improvement over the prior quarter adjusted EBITDA loss at CAD50.4 million and it is the second consecutive quarter of improvement in our adjusted EBITDA. We expect this trend to continue through our first half of fiscal 2021 as we remain dedicated to achieving positive EBITDA in Q2. Turning to our balance sheet, as of June 30, 2020, our consolidated cash position was CAD162 million compared to CAD230 million as of March 31, 2020. Cash used in Q4 was similar to that in Q3; however, the mix within cash use shows our significant positive progress. We used CAD53.3 million in cash to reduce our term debt and lease obligations and made additional debt payments subsequent to quarter-end. As of today, our outstanding term debt balance stands at about CAD110 million. In the quarter we used cash to pay capital expenditures invoices of CAD32.8 million, which includes work done in previous quarters. This is a CAD51.3 million reduction in CapEx quarter-over-quarter cash spend. Finally, cash used in operations for two quarters was CAD63.9 million. In the fourth quarter, we raised approximately CAD48 million under our aftermarket financing program and also financed a new prospectus supplement to enable us to raise an additional US$250 million under the ATM program. So as at the June quarter-end, we had approximately US$220 million available under our current ATM program and this provides us with additional balance sheet support if required as we drive towards achieving adjusted EBITDA profitability in the near term. During this environment, we believe that access to capital is of paramount importance. However we are focused on getting to profitability as quickly as possible to alleviate the need for additional equity capital as much as possible. We have multiple levers to pull to achieve this milestone including cost and efficiency opportunities in production and SG&A that we've identified that should continue to drive costs lower over time. Of course, the successful execution of our tactical plans will improve market share in the Canadian consumer market. As we have demonstrated with our progress on the operational reset, we will continue to prudently manage our liquidity as we strive for positive EBITDA in the second quarter of fiscal 2021. The material run rate reduction in our CapEx and SG&A costs should provide comfort to our investors. The health of our income statement and balance sheet is of primary importance to us. We expect that our current cash position should be sufficient to fund operations to the point where positive EBITDA and free cash flow are achieved and sustainable. The remaining capital available under our shelves perspective protects the company and our shareholders as a backstop in an uncertain environment. We'll use it judiciously for opportunities delivering near-term payback. We have in fact used it subsequent to our June quarter-end to fund the announced termination payment to the UFC. Since we are closing in on the end of Q1 2021, we thought it would be helpful to provide some forward-looking commentary on how the quarter is shaping up. Following the divestiture of non-core subsidiaries during fiscal 2020, our net revenue in Q1 2021 should be comprised exclusively of cannabis net revenue, which is expected to be between CAD60 million and CAD64 million compared to the CAD67.5 million of Q4. We expect adjusted gross margin before fair value adjustments on cannabis net revenue to be within a range of 46% to 50%. Our growth in consumer cannabis revenue was not expected in Q1 2021; our medical business is expected to remain steady, and we expect traction from our execution of consumer market share tactical plan as Miguel will outline for you shortly. To share our results beginning in Q2, however in terms of progress towards positive EBITDA, the Q1 consumer revenue level is more than offset by adjusted gross margin that continued to stay strong due to a favorable sales mix and a significant reduction in SG&A levels to the low CAD40 million range. Two housekeeping notes before returning the call back to Miguel. First, as we announced in our business update on September 8, Aurora and the UFC agreed to mutually terminate the partnership. We will therefore be making a one-time payment of CAD30 million to terminate the contract in Q1. This is expected to allow us to reallocate more than CAD150 million to our core markets that would have otherwise been spent in fees, research costs and marketing activation expenses over the next five years. Second, we’ve reached an agreement with our syndicate of banks regarding amendments to our secured credit agreement. These amendments provided us with additional flexibility including a reduction in the adjusted EBITDA milestone and shifting the impairment of positive adjusted EBITDA into Q2 2021, as well as the reduction in the size of the revolver facility to better align with our average receivables balance and thereby reduce standby fees. Finally, I want to conclude by saying that we have made many difficult decisions over the past few quarters and have leaned heavily on the talented and hardworking people in our organization. Although it's been disruptive, it was also absolutely necessary. Now we feel that the company is unencumbered from distractions and can execute on the vision and strategy being developed by Miguel. With that, I would like to turn the call back over to Miguel and have him share some of his thoughts.
Miguel Martin, CEO
Thanks for the financial summary, Glen. I strongly believe that the long-term outlook for cannabinoids is very exciting, both in THC and in non-THC variants. I think Aurora is uniquely positioned to realize opportunities in both segments. We're seeing the level of interest globally in medical systems grow, and Canada's consumer market is returning to a nice pace of growth. So, there continues to be positive momentum in the industry, and our job now is to prove to investors that we can achieve profitability in our core markets. Building a base of free cash flow in our core business today will also allow us to invest globally for the multi-year investment horizon we see in cannabinoids. The history of global consumer packaged goods brands is rooted in building capabilities and core competencies in their home markets that are then portable globally, and that is what we intend to continue to build here at Aurora. Having been with the company for about four months, I believe I have a reasonably firm grasp on what we need to accomplish across four main focus areas: first, the Canadian medical market; second, European and select international medical markets; third, Canadian consumer market; and fourth, U.S. CBD market to be successful. Our domestic and international medical businesses are operating well and continue to track the plan. We will continue to invest in these areas to maintain and grow our leading share in these markets. However, given the recent lack of growth we've been experiencing within the Canadian consumer markets, let me lay out our initial tactical plans within this core market before taking your questions. First, leveraging traditional CPG models of consumer insights and data sets, including feedback from more mature markets such as the United States, to identify consumer product opportunities. Second, reinvigorating Whistler, San Rafael, and Aurora, our super premium and premium brands. Third, continuing to innovate and launch new offerings in key known margin accretive consumer categories such as vaporizers, edibles, and concentrates. Fourth, tactical sales execution including addressing product availability, visibility, packaging, and a focus on higher margin product sizes and formats. We've made investments in both syndicated and proprietary data sets. This includes monthly information for more mature markets in the U.S. that assist us in modeling future ROI opportunities. These insights are expected to guide us in decision-making and effective execution. Second, I want to dispel the current thinking that the whole cannabis category will be commoditized. The data from Canada and other mature markets indicate that premium and super premium brands have been and will continue to be successful in all formats. We expect to refocus our dried flower business towards gross profit dollar pools and away from total revenue. One of the first steps we expect to take is building a more balanced portfolio offering across multiple pricing tiers. We already have a collection of great premium brands, Aurora, San Rafael, and Whistler, as a super premium offering. So we need to emphasize all of our strong premium brands to balance out the total offering to our consumers. We also intend to better position these three premium brands across various formats to foster greater brand visibility and provide greater choices to the consumers. For example, San Rafael pre-rolls or higher quality Whistler wave products. Third, we know that an important part of growth in such a new category, which is a direct experience that I've had during my days of Logic and then at Reliva, is that product innovation and leveraging technology need to be core competencies. Thankfully, we have a history of product development here at Aurora, and you should expect us to leverage that internal expertise into new segments of the market, particularly expanding our market-leading edible offerings into concentrates. Gummies represent a good example of where Aurora already has a leading market position, and we expect to allocate additional resources in the coming quarters to solidify and enhance our leading position and grow that format. These opportunities represent sources of strong gross dollar contribution where we have technical know-how that gives us an advantage over our competitors. Finally, we will be focusing on driving profitable growth, which means improving our execution with classic CPG sales, marketing, trade marketing, and customer engagement systems. This will improve in-stock conditions, visibility of key brands, and customer relationships that historically result in increased market share. Furthermore, we will explore aligning our packaging and sizing with regional demand to enhance our profitability, and where applicable, consider more flexible packaging options to reduce costs. Due to the appeal of the low-hanging initiatives that we’re executing in the coming months, we should continue to build strong brand awareness and affinity with consumers. While I've outlined just a few of the tactical plans we're putting to work for now in our Canadian consumer business, my focus is on ensuring that the entire Aurora team is executing to their respective plans. This includes continuously looking for more effective ways to connect with our consumers and opportunities to extract efficiencies from our operations. Throughout my career, I’ve implemented multiple examples of simple well-executed plans resulting in outsized gains in CPG categories. We operate in a category where market share is moving by 500 basis points in a few months. So I feel strongly that our plan, if executed correctly, should return us back to our leadership position in the Canadian consumer market. Glen has already provided an overview of Q4 financials including our focus on achieving EBITDA profitability in Q2. I can certainly appreciate the key stakeholders being skeptical of forward-looking statements from Aurora; all I can say is to look at the data in the coming months to see the trajectory of our success in the Canadian consumer market. We will see progress in our premium brands and adjacent key categories like vapor and pre-rolls, and now the plan is on the right track. Thank you for your time. I’d now like to ask the operator to open the call for questions.
Operator, Operator
[Operator Instructions] Our first question comes from the line of Vivien Azer with Cowan. You may proceed with your question.
Vivien Azer, Analyst
My question has to do, Miguel, with some of the portfolio initiatives that you just laid out, given the increasingly large role that value is playing both in your portfolio as well the category as a whole. As you look to improve your positioning and market share on Whistler, San Rafael, and/or Aurora, do you see the need for any pricing adjustments, up or down, to create a little more differentiation throughout your portfolio? Thanks.
Miguel Martin, CEO
Well, Vivien, good afternoon, and thanks for your question. I believe that having the experience of 20 years in the tobacco, vapor, and other regulated product experience, there really is an opportunity to have a more articulated portfolio. The focus on low-cost flower has created a lot of pressures. The reality is the Canadian consumer, like other consumers, really values the differentiation that this product can bring in some ways more than other categories that I've worked in, whether it's potency, terpenes, packaging, or background. I just think there's a greater opportunity, and evidence from more mature markets like Colorado or California shows that consumers are willing to pay more. So yes, adjustments do need to be made in order to ensure we take advantage of that, so that we do achieve premium margins. The other thing I will talk about, and you are quite familiar with, is the ecosystem of a brand and its equity. So Whistler, for example, I believe has been underserved. It's always been a super-premium flower product, organic in its very nature and finite. There is no reason that the cues we see with Whistler, Aurora, or San Rafael can't find their way to other formats such as vapor, pre-rolls, or concentrates. As long as those key notes of premiumness validate the economics, I think we can create a really strong ecosystem where you’re always going to have a certain amount of value but the consumer is given proper opportunities to work up that value chain. Given the economics of the difference in margin contribution between the super-premium and the value products, I believe I have a pretty strong background in finding a place for multiple brands throughout the portfolio. So we're excited about it. I will say, it's one of the things that really attracted me to the job. I am blessed with really great premium and super premium assets, and now we have to bring them to the consumers in the marketplace.
Vivien Azer, Analyst
That's perfect. And there's a quick follow-up for me. As you've indicated, we should keep an eye on month-to-month revenues and developments as benchmarks of success. But as you think about market share, what is the charge for your team? Is it to improve Aurora's overall market share, or are you more focused on market share by price segments? Thanks.
Miguel Martin, CEO
Thanks, Vivien. No, I'm absolutely focused on the latter. So, I've lived in worlds, and you've seen worlds, where overall market share is not a true indicator of a company's profitability. We will be much more interested in the market share of our premium and super-premium categories, and much more interested in the market share of categories such as vapor, pre-rolls, and concentrates that are margin accretive. If others want to play in that deep discount flower business, which really has compressed margins in order to boost their overall company market share, so be it. But this really is an effort to achieve profitability and higher margins, and so it will be the latter part of your example that will be a clear focus for us. Our target around EBITDA profitability is much more aligned with being margin-accretive than an overall company market share.
Operator, Operator
Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. You may proceed with your question.
Pablo Zuanic, Analyst
Can we just recap what has happened over the last six months? And the reason I asked that is you’re guiding for direct sales to be down 10% to 20% in the September quarter, right? If I do the math, medical is staying around 32%. So, the regular September quarter is falling 10% to 20%, and it fell about 10% in the June quarter, right? You talked about 60% of sales or more coming from your value brand, Daily Special. So just what happened there? Was it that the value segment lost share? It doesn’t seem to be the case. Why did Daily Special not work? That's one question. And then the second one: when I look forward, yes, you're going to focus on the premium side and given your background and the knowhow you’ve talked about. I’m sure that it can materialize, but you’re going to have 60% of sales or more that I suppose will be declining, right? Because of the trend we’re seeing in that value segment. So this transition could take place for a while. I mean, we could be looking at flat sales for more than just one quarter. If you could highlight that? Thank you.
Miguel Martin, CEO
Sure. Thank you, Pablo. I appreciate your kind comments. In my opinion, the company had tremendous success with Daily Special. If you look at the February to April time period, there was a massive amount of market share taken, and we were the first mover into that value segment. However, others quickly followed. When you're competing on price, it just becomes diminishing returns. So, I think the company got a bit distracted by the success it saw with that discount offering, which delayed other endpoints such as vapor and pre-rolls. There is a lot of growth in the category, but everyone else kept piling in, and because there was such reliance on the discount business, it became hard to pivot. Now, in terms of your point on timing, I would raise sort of three points. First, the category is growing. Aurora has not participated in that category growth in a way that meets my expectations. The good news is that consumers continue to enter the market and stores continue to open, particularly in Ontario, and Aurora needs to participate. The second point is, we all see brand shares moving very quickly. The consumer is in a very dynamic situation, unlike domestic tobacco or other categories I've been in, where you might see 20 to 30 share points moved in a month. Here, you're seeing 200 basis points, 300 basis points of share moving. So you can do it with the right products and the right execution. As for timing, we are going to be launching a stronger portfolio of vapor products. You'll see greater effort on our end for pre-rolls, and you’ll see a deeper focus on our premium flower products. That puts a stronger focus on sales execution and engagement with the provinces and trade marketing should allow for quick movement. I'm not here to debate the exact timing, nor do I think it's fair to predict exactly when you're going to see a specific amount of market share by category. But through headset data and other data that you clearly have access to, I'd keep pointing back to this. If you see progress from Aurora on its premium brands in the upcoming weeks and months, and if you see progress in those margin-accretive categories versus just overall market share led by a low-cost flower, then we’re on the right track. Everything I plan to do, and my background, puts me in a good position to drive that type of execution.
Pablo Zuanic, Analyst
Just a quick follow-up for Glen. So Glen, I mean, at BTO you have to use part of ATM to settle the UFC, but I suppose we can all understand that. Looking forward, how do you think about the convertible bonds? They're trading about a 50% discount, is that an opportunity? Would it make any financial or strategic sense to use part of the ATM to buy some of those bonds? I think in my math that would be a good idea. If you can touch on that, please. Thanks.
Glen Ibbott, CFO
Yes. Thanks, Miguel. So listen, I mean, there is an awful lot going on at Aurora, and in fact, about the business transformation and the significant effort and focus from the organization are now pivoting to much more of a focus on delivering on the commercial success that Miguel just outlined for you. I would suggest this: we have said before that one of the mindset changes we made within the organization is much more financial discipline and prudence with a kind of sophistication, if you will. So, it's not an immediate concern, but we will look at all opportunities if they make a positive sense for our company and our shareholders, and we will certainly consider them. We should know that most of the organization is focused on delivering what Miguel just outlined for you.
Operator, Operator
Our next question comes from the line of Michael Lavery with Piper Sandler. You may proceed with your question.
Michael Lavery, Analyst
Can you talk about some of the thinking around the profitability target and what some of the key hurdles are and things to watch? Specifically, coming close already to them in the first quarter, what's in place already? How much is there some things that you still need to achieve? Could you just provide a sense of progress along that and what the key variables are?
Glen Ibbott, CFO
Yes. Miguel, would you like to take it?
Miguel Martin, CEO
Yes. Why don’t you, Glen, and then I’ll talk a little bit forward-looking, please.
Glen Ibbott, CFO
Yes. Absolutely. Listen, we've done a lot of heavy lifting over the last few quarters. You know SG&A and continuing to maintain some healthy margins in place, we fixed a number of components in the business that drive the EBITDA, but we do have the consumer piece of the business that needs to be corrected as Miguel has told a little bit about that, and I'm happy to tell you more. 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 we were still carrying CAD64 million of SG&A costs. So as we stand in Q1, we're now running at about CAD40 million. You could see an immediate improvement in the EBITDA of CAD20 million just from our SG&A reset. We do expect continued strong performance in Canadian and European medical markets. So really the positive EBITDA is exactly as Miguel has outlined. You can watch that in the data over the coming months. Our continued focus on fiscal prudence, we've done a lot of hard work on our cost structure, but we will continue to focus on new incremental opportunities because the whole company is in a different mindset now, and I know they are looking for places where we can save costs, and it adds up. So it’s a different company. We’re positioned well, and as I say, the route forward is to deliver on some of these premium categories, even within the flower market, and shift that product mix to something that delivers more dollars to the gross profit line than simply just delivering revenue.
Miguel Martin, CEO
Yes. I mean, Michael, the other thing I would say is that when I look at those companies that have been successful among our competitors, they’ve executed a pretty thoughtful plan, and the execution level was tremendous. It looks a lot like CPG, and I'm sure you can imagine which companies I'm discussing. So, I don't think that the approach has to be particularly advanced or take a long time. Simplistic is not the right word, because I have deep respect for our competitors as much as I want to be an aggressive competitor against them. But to Glen’s point, the company was previously distracted. In many ways, there was a lot of credence given to overall flower share, but there were some investments made that with the right direction and the right accountabilities and focus, you'll hear me say this repeatedly: we must push the company into focusing on its premium assets in flower, vapor, and pre-rolled categories and implementing classic CPG sales trade marketing and consumer engagement methodology. That’s what worked for others, and the rewards have been outsized. I believe we have the assets and the right people. With the right plan and increased accountabilities, and to Glen’s point, we have enough resources. We don’t need CapEx; we don’t need additional accountability. The reality is, Michael, as you know, there are roughly 1,000 stores in Canada. If you can execute your plan successfully, we can move quickly with the right products, and I can go through the 5Ps again, but that really is going to be about execution. I believe we have the product availability, quality, and strategy to achieve this. Is it ever going to be quick enough for everyone? No. But I think you'll find our steps to be thoughtful. If you look at what our competitors have done successfully, there is nothing within our portfolio or our capabilities that gives me pause that we don't have what they have.
Michael Lavery, Analyst
Just on the portfolio mix, you mentioned the 62% value in Q4. What does it look like in Q1 to date, and what do you target as a range from where you should be going forward?
Glen Ibbott, CFO
I don't have a specific target. I know some might say that is not very helpful. I can tell you, there will be a significant amount of focus put on Whistler, San Rafael, and Aurora, and that will be across the board. As you know, the most reputable brands in a market where there are marketing constraints, having the sales force, having the provinces, and having the right product distribution and availability aligned with potency does a lot. You're going to see progress. You're definitely going to see a more balanced portfolio and you're also going to start to see the development of this ecosystem. Whistler will stand for things in the core categories both in flower and adjacent sectors. San Rafael will represent attributes in those categories and so on for Aurora, in ways that the Daily Special doesn't. All those articulations should lead to progress and to having a defensible, articulated premium portfolio. I guess the only other thing I’ll say is when you look at things like vapor, concentrates, and pre-rolls, there’s a lot of opportunities to bring some classic CPG elements into packaging and alignment. With vapor, many elements you see in other categories like heat-not-burn units are consumer-connectivity products that allow consumers to see value and therefore pay higher margins in a way that might not lend itself to traditional flower. I’m very bullish on those opportunities, and I believe some of the experiences I've had with combustibles, smokeless products, and vapor lend themselves well to this regulated market.
Operator, Operator
Our next question comes from the line of David Kideckel with ATB Capital Markets. You may proceed with your questions.
Unidentified Analyst, Analyst
Congrats on the quarter guidance, and thanks for taking my question. How should we think about derivatives in terms of overall revenue mix that you're targeting, as well as in terms of margin potential compared to flower, maybe over the next fiscal year and also longer term?
Miguel Martin, CEO
Glen, you want to start with that, and I'll pick up the backside of it, or would you like me to start?
Glen Ibbott, CFO
Yes, Miguel, start and I'll add in some color.
Miguel Martin, CEO
I think, by indicating the mix and how we should think about adjacent categories, we need to recognize that so much production and capacity has been brought online. We’ve seen a lot of flower, particularly what we would call lower quality flower. This includes lower potency and lower terpenes, and large gram sizes. That’s always going to have a lower margin profile. There will be a place for that. As we consider higher margin offerings, it's not just about Whistler, San Rafael, and Aurora; it’s also about the packing sizes like 3.5 and 7 grams that give consumers additional value. We’ve laid out the historic margins and talked about our medical margins. When you think about adjacent margins, there are two things to really consider. I'm not going to give you precision on the answers we hope to achieve, but here’s a sense of it: When you look at pre-rolls, vapor, and edibles, they are margin-accretive, particularly as you strive to offer premium items. The second aspect is excellence in extraction and using byproducts from your flower production facility, creating economic value and margin-accretive opportunities. If you have a strongly articulated flower portfolio and can also derive an advantage from the byproducts in margin-accretive products, you can maintain a well-rounded portfolio. We believe we can drive the growth of our premium assets through strong execution. Yes, I'd like to add a bit more detail. For example, if we look at a 3.5 gram pack of our Whistler flower and compare it to 3.5 grams of typical discount flower, the package of Whistler will deliver 10 times or more the gross profit dollars that the discount flower would. So when we say we’re blessed with premium assets and focused on the margin-accretive segments, we are really trying to be a more sophisticated, higher-margin company. The dynamics of moving to premium across the brand but also within flower are incredibly important for our execution here over the next number of quarters. So, please pay attention to that mix in these categories rather than just pure revenue market share allocations; that will be the indicator of our success.
Unidentified Analyst, Analyst
Thank you. That's helpful. And just a follow-up for me, more of a broader question regarding international markets. You've talked a lot about the Canadian market, but how does the international market fit into your strategy right now?
Miguel Martin, CEO
From an international standpoint, our international revenue today continues to be largely from the German market, which has been a consistent performer for the past few quarters and we expect it to show growth into the future. We've had success in the German market, where we are actually the number one provider of flower. We’ll continue to see opportunities in the oil market and we're closer to achieving some really important regulatory milestones, including GMP certification in our operations in Denmark. This facility in Denmark will allow us to ship from Denmark to Germany and the rest of the EU as well as other parts of the world—particularly those regions that require GMP products. So we're quite bullish on the international market. We won't play everywhere. I think you will find us to be opportunistic. Additionally, I will say that the international market takes a lot of investment, compliance experience, and thought to be successful with the high standards these international markets necessitate. Once you build those capabilities, which we continue to enhance in the Canadian market and Germany, and in other markets, it becomes very portable. In my view, those companies that have shown success in the Canadian market and interacted with Health Canada have positioned themselves favorably to enter these highly compliant international markets. So, we will continue to be opportunistic. Our confidence in the international business continues to grow. Our medical market often leads to recreational opportunities, and we believe the operational muscle memory we acquire can be portable as these markets continue to open.
Operator, Operator
Our next question comes from the line of Andrew Carter with Stifel. You may proceed with your question.
Andrew Carter, Analyst
What you've seen in the markets so far, how should we think about derivatives in terms of overall revenue mix that you're targeting as well as in terms of margin potential compared to flower, maybe over the next fiscal year and also longer term?
Miguel Martin, CEO
Glen, would you like to take that, andI'll chime in after?
Glen Ibbott, CFO
Absolutely, please go ahead, Miguel.
Miguel Martin, CEO
I think it makes sense to talk about the mix of how we need to think about adjacent categories. Given that a lot of production capacity was brought online, we must recognize the potential of flower, particularly what we would call lower quality flower. This includes lower potency, terpenes, and sizes. These are always going to have a lower margin profile, but there's still a place for them. We must balance this by considering how much higher-margin offerings provide us with the best opportunities. These aren't limited to Whistler, San Rafael, and Aurora—offerings that align with consumer demand in sizes such as 3.5 and 7 grams that capture consumer value are crucial. Our margins have historically been clear and we've talked about our medical margins as well. It's essential to evaluate the margin potential of adjacent products. While I won't provide specific figures, let me say that pre-rolls, vapor, and edibles tend to generate higher margins, particularly when we offer premium items. Excellence in extraction is another route, using the byproducts from flower production to enhance our margins. Overall, we can have a well-articulated portfolio where our business flourishes along the premium lines. I want to add a bit of color here. For instance, if we take a look at a 3.5 gram pack of our Whistler flower and compare it to a pack of discount flower, Whistler’s package will deliver 10 times or more in gross profit dollars than the discount flower would. So when we talk about our strong premium assets and our focus on margin-accretive products, we aim to cultivate a sophisticated company that succeeds in its product offerings. The movement toward premium across our portfolio, particularly within flower, is critical for our overall execution over the coming quarters. Therefore, I encourage you to pay close attention to our category mix rather than just relying on pure revenue metrics, as I believe that will be the key indicator of our performance.
Unidentified Analyst, Analyst
Thank you. That’s helpful. Just a follow-up for me, a more broad question here in terms of international markets. I mean, you've talked a lot about the Canadian market, but how does that international market fit into your strategy right now?
Miguel Martin, CEO
From an international standpoint, our revenue continues to be largely from Germany, which has proven consistent over the past few quarters and we anticipate growth into the future. We've achieved a top provider status regarding flower in Germany, and we plan to continue our success in the oil market while reaching important regulatory milestones like GMP certification in Denmark. This facility will enable shipments directly to Germany and the EU, addressing markets needing high-grade products. We maintain a bullish outlook for the international space and intend to be selective and opportunistic. I want to emphasize that success in international markets requires heavy investments, strong compliance, and thorough assessments in navigating high standards. As we strengthen our compliance capabilities in Canada, Germany, and abroad, these assets become portable. Companies like ours that excel in navigating stringent regulations are best poised for the future. Hence, we will seize opportunities as they arise subsequently.
Operator, Operator
Our next question comes from the line of Andrew Carter with Stifel. You may proceed with your question.
Andrew Carter, Analyst
What you've seen in the markets so far, how should we think about derivatives in terms of overall revenue mix that you're targeting as well as in terms of margin potential compared to flower, both in the next fiscal year and longer term?
Miguel Martin, CEO
Glen, would you like to take that, and I'll add in some thoughts?
Glen Ibbott, CFO
Sure, Miguel, let me start. You know, we recognize that a lot of capacity has been brought online, and thus, we focus heavily on flower production while considering our lower-quality offerings, which produce lower-margin products. There must be demand that correlates with our higher-margin options. Our higher-margin offerings must include our traditional premium brands. We must evaluate product lines like 3.5 grams and 7 grams to provide that consumer value. We will analyze historical margins and our medical sales for guidance. We acknowledge that vapor and edibles could be margin-accretive when providing premium products. We must focus on using excess flowering in an efficient manner to derive added economic benefit.
Miguel Martin, CEO
For instance, take a 3.5 gram pack of our Whistler flower versus typical discount flower. Whistler will provide significantly higher gross profit dollars, expanding our ability to focus on the premium aspect of our offerings while exploring margin-rich segments through derived products. Our focus must be on demonstrating our strong manufacturing capabilities while building our portfolio. This competitive middle ground provides us with an edge against competitors. It's essential for you to be attentive to profitability versus just revenue; that will define our success.
Unidentified Analyst, Analyst
Thank you; that's helpful. And a follow-up for me, a broader question on international markets. Based on your statements, those segments have seen viability and growth, and how do they align with your ongoing strategy?
Miguel Martin, CEO
From the international perspective, our primary revenue comes from Germany, where we've shown strong success in flower allocation. We also pinpoint the oil market as a growth opportunity as we fulfill key regulatory obligations, including GMP certification in Denmark. This facility will enable shipments to Germany and beyond. We have a positive outlook for these international segments, ensuring that our investment in compliance, values, and capability shifts to meet market requirements is a focal point. We remain opportunistic while augmented international momentum can drive strong future gains.
Operator, Operator
Our next question comes from the line of Andrew Carter with Stifel. You may proceed with your questions.
Andrew Carter, Analyst
What you've seen in the markets to date, how should we be thinking about the contributions of derivatives to your overall revenue mix and their margin potential compared to flower both in the fiscal near-term and longer term?
Miguel Martin, CEO
Glen, would you like to take that, or should I start?
Glen Ibbott, CFO
Absolutely, Miguel go ahead. As you'll have noted, we have placed emphasis on maintaining our flower output while considering the long-term production capability. Our focus is aimed at higher-margin businesses as well, such as vapor, edibles, and solving for high-end offerings in various flower segments. Expectations for performance are bolstered through efficiency improvements and considered company-wide efforts to reduce costs continuously.
Miguel Martin, CEO
I will add that we can’t overlook the margin impact, and where it could potentially become a significant share of our portfolio. The move towards increased usage of products like vaporizers and edibles will ensure that our margins remain favorable. Added to this with operational consistency, our aim is to enhance our application among international markets, though there will be challenges facing that approach. It requires ongoing investment and capacity building. However, integrating these market frameworks as we operate in the cannabis framework will yield strong results for the bottom line in the end.
Unidentified Analyst, Analyst
Thank you; that's very helpful. As we proceed to the final lines of questioning here, I'd like to emphasize the need for robust planning against internal challenges. Can you shed light on existing material weaknesses in internal controls, as outlined in your recent press release, and what steps you’re pursuing to rectify these?
Miguel Martin, CEO
Of course, Tamy. This was our first year as a SOX reporter, and quite frankly, with a company such as ours that’s been built through multiple acquisitions, it has presented monumental challenges. Throwing in the complexities presented by the COVID pandemic, where team members began working remotely, made it incredibly complex. The material weaknesses appear in our MD&A, and for the most part, they center around the various legacy systems still in use and the need for system updates, though some were postponed as part of our business transformation. Consequently, we have been left using some outdated systems longer than expected. We've encountered some minor issues related to segregation of duties within these systems. I should clarify that none of these issues prompted major concern. In fact, the team in the initial attempt at achieving a good outcome did well given the circumstances. That said, a pathway to remediate these concerns is already being calculated with full implementation of our new ERP system moving forward.
Tamy Chen, Analyst
Regarding your premium strategy discussed earlier, what are you specifically eyeing regarding products consumers are willing to pay a premium for? Are there data analytics implying proprietary or defensible options in your offerings moving forward?
Miguel Martin, CEO
Yes, that's an excellent point! While there have been many companies maintaining premium offerings within this space, consumer willingness to pay for enhanced experiences must be noted, particularly in high-quality strains, better packaging, and product reliability. Beyond just consumer interest, the trade is eager to promote premium products as well, which could yield greater returns. So in terms of differentiation, if you consult the retailers and provinces involved, they want to sell more premium products. Our objective is to match that interest with our production capabilities. We want to drive home experience standpoints that are more appealing. As I previously mentioned, our premium brands have far more potential regarding long-term success. Overall, it’s up to us to promote this internally and refine quickly along our journey.
Operator, Operator
Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the call back over to Mr. Miguel Martin for closing remarks.
Miguel Martin, CEO
Thank you so much. I want to thank everybody for joining today's call. I’m honored to be part of this team, and I really look forward to leading Aurora to success. I hope you and all your families are safe in this world. We wish you all the best. Be good.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.