Earnings Call Transcript - ACB Q4 2022

Operator, Operator

Greetings. Welcome to the Aurora Cannabis Inc. Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Ananth Krishnan. You may begin.

Ananth Krishnan, Host

Thank you, operator, and we appreciate you all joining us this afternoon. Today with me are, Miguel Martin, CEO; and Glen Ibbott, CFO. After the market closed, Aurora issued a news release announcing our fiscal 2022 fourth quarter and full year financial results. This news release, accompanying financial statements and MD&A will be available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you will 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. Following the prepared remarks by Miguel and Glen, we will conduct a question-and-answer session for our covering analysts. We ask that you limit yourself to one question and then get back in the queue please. With that, I will turn the call over to Miguel. Miguel, please go ahead.

Miguel Martin, CEO

Thank you, Ananth. Before discussing the business more broadly, let me begin with a brief discussion of our latest acquisition, a controlling interest in Bevo, one of the largest suppliers of propagated vegetables and ornamental plants in North America. This transaction first and foremost underscores a disciplined approach to capital allocation; and second, is consistent with both our immediate needs and our vision of becoming a leader in global cannabis. Bevo will be managed by its existing management team who have over 85 years of agricultural experience and have consistently demonstrated growth in revenue and earnings over the past decade. Collectively, they retain a substantial equity ownership position as they embark on a robust growth plan. As part of the transaction, we have identified a profitable opportunity to repurpose the Aurora Sky facility for orchid cultivation and vegetable propagation with minimal capital investment. This will greatly increase Bevo’s production capability and extended shipping range in Canada and the United States. It will also enable us to generate incremental revenue and adjusted EBITDA, while saving on previously announced wind-down and selling costs. The transaction is immediately accretive to Aurora, adding approximately $9 million of annual adjusted EBITDA, and importantly is another tangible step towards our goal of adjusted EBITDA profitability on a run rate basis by December the 31, 2022. We are pleased to have Bevo as our partner and expect our investment to drive significant shareholder value over the long run. Beyond the acquisition, we feel very good about our position in the market. Our optimism is based on the inherent strength of our global medical cannabis business where we remain the number one Canadian LP. Medical cannabis remains the best segment to invest in as is both defensive and stable in turbulent times and commands enviable adjusted gross margins that consistently exceed 60%, two times that of consumer cannabis. And while our Canadian medical cannabis business is steady, our international business saw revenues increase by over 70% this fiscal year with notable progress in Germany, Poland, the UK and Australia. The second reason for our enthusiasm is we continue to excel at rationalizing the business to the current environment. As you know, our annualized cost savings of $150 million to $170 million will be completed within the next two quarters; and once complete, will materially reduce our cash needs and get us closer to EBITDA breakeven. Our balance sheet is also a key differentiator and has enabled us to repurchase $155 million in convertible debt during Q4, which will result in considerable savings on cash interest costs. Additionally, we have approximately $370 million in cash as of yesterday, which makes Aurora one of only a handful of companies within the cannabis industry to have a net cash position. Finally, we feel great about our investment in science, which is beginning to pay off. Specifically, our breeding program has delivered nine new proprietary cultivars through our product pipelines since June of 2021, delivered meaningful improvement to yields and is expected to generate incremental high-margin revenue through license agreements for these genetic innovations to other licensed producers. In fact, I’m excited to announce that we signed our first agreement to license genetics to a major Canadian LP during Q4, and we expect more to follow. So, let’s take a deeper dive into our global medical cannabis business. During Q4, international medical revenue was up 35% compared to last year as our regulatory expertise, compliance protocols, testing and science capabilities supported our leadership position. While revenue contributions for individual countries can certainly ebb and flow as these new markets develop due to various factors, including the timing of government approvals and import permits, we believe our exposure to nearly a dozen countries outside of Canada affords us relative insulation as it relates to the economic climate and conditions in specific countries across Europe, Israel and Australia. In Poland, revenues nearly doubled year-over-year and we maintained our number one market share position. We continue to invest in marketing efforts there to support our planned launch of new flower and extract products. In the UK, our revenues increased by 25% compared to Q4 last year, and we believe we’re the market leader in the flower segment. The UK witnessed rapid growth in patient population over the last year, and we hope to see this continue as new clinics open up. Turning to Germany, we received EU GMP certification for our state-of-the-art domestic medical cannabis production facility in May, and made our first shipment to German pharmacies that same month. Recall that we hold one of only three licenses in Germany and are number two in medical flower with a 17% volume share. Our market share is also growing steadily in the extract market, thanks to new product innovation. During Q4, we also launched three sizes of dronabinol making our first step into that category. While growth in patients has moderated during the year, Germany remains the largest market in the EU with 83 million citizens with only about a 100,000 to 120,000 medical cannabis patients. We are certainly well aware of some of the economic challenges that Germany is facing at the present time as it grapples with the war in Ukraine and the impact that is having on energy prices and inflation. Still, we are hopeful the growth will pick back up this fiscal year, even against this backdrop, driven by doctor education and a simplified reimbursement process. We expect to begin generating revenues in France in 2023, where we are currently the only supplier of dry flower in the pilot program. Finally, in Australia, our Q4 revenue rose 700% year-over-year, driven by a record number of patients. Let me reiterate that we believe that the cannabis growth story will center on international medical and recreational over the next several years. Right now, we believe there are about 150,000 patients in Europe alone. And if the countries that have so far legalized medical cannabis were to reach similar adoption levels to Canada, 1% of the adult population, the patient pool could expand to 3.5 million people. This fiscal year, we expect a number of new medical markets to come online. And several governments have announced plans for recreational schemes, most notably Germany. So, it’s a massive opportunity. We believe our success in medical cannabis provides us with a significant first mover advantage and our leadership will be portable to recreational markets as they open up. Turning to the Canadian medical market. Our leading market share was over 24% while insured patients comprised 81% of our domestic medical sales, up from 79% in Q3. Our net revenue per order and per participating patient have both significantly increased over the past year due to a shift towards higher value insured patients, while our direct-to-consumer approach continues to drive industry-leading margins. Overall revenue was flat in Q4 compared to Q3, but we attribute our share gain to the best-in-class service we offer along with new premium products and innovations. We note that acquiring, retaining and moving the patients through the process requires significant resources and experience, and much of that same infrastructure and know-how with patients in Canada is directly applicable to our success in Europe. Switching to Canadian adult recreation, our Q4 revenue increased by $2.3 million as compared to the prior quarter. The increase was primarily due to our strengthened product offerings in certain categories, along with seven weeks of results from Thrive. Their premium consumer cannabis net revenue added about $1.4 million. While the environment of Canadian recreation has seen prolonged macro challenges, we are beginning to see signs of stabilization, and we remain focused on maximizing profitability through low-cost production and by entering higher-margin categories. The market also continues to highlight the importance of innovation and the SKU lifecycle, with the typical SKU generating 80% of its lifetime value in the six months following launch. Thirteen SKUs were launched across our recreational and medical channels in June alone, and we have a stacked pipeline that should serve us well over the coming quarters. More broadly, we believe that our scientific leadership in cannabis breeding and genetics provides Aurora with a unique advantage that drives value in all tiers of the consumer and medical categories. Our breeding program has delivered 9 new proprietary cultivars to our product pipeline since June of 2021, as well as bringing new products to consumers, they deliver meaningful improvements in yield, which will allow us to boost top-quality flower and industry-leading margins. For example, our new Farm Gas cultivar delivers nearly double the yield of our traditional staple cultivars and does so at an average of 26.5% THC. And with that, I would now like to turn the call over to Glen for our financial review. But let me quickly say that we’ve made incredible strategic progress during the year. We are on track with our transformation plan. And we feel very optimistic about the future of the business.

Glen Ibbott, CFO

Thank you, Miguel. Good afternoon, everyone. We have one of the strongest balance sheets among Canadian LPs, and I’m pleased that we strengthened it even further during Q4. While executing our cost reduction plan, we repurchased $155.3 million in principal on convertible notes for a total cash cost of $149.2 million, including accrued interest. As of yesterday, we had about C$370 million in available cash and US$209 million principal remaining on the convertible notes. We believe that reducing debt, even with maturity still over a year away, is a smart and defensive capital allocation decision that lowers balance sheet risk, especially in turbulent markets. The debt reduction we have executed so far will save us interest costs of $9.5 million annually. We still have access to a shelf prospectus with US$713.7 million available, including US$186.2 million remaining under our ATM program, which we may use for strategic purposes. Our cash flow continues to improve, with $22.5 million used in operations and working capital in Q4, compared to $39.3 million in the previous quarter. Q4 includes restructuring and severance payments of $6.8 million. We are moving closer to our positive adjusted EBITDA target, having reduced our loss by $8.9 million compared to Q4 last year. Compared to Q3, our adjusted EBITDA loss increased by about $1.5 million, primarily due to a change in the company’s sales channel mix. We also anticipate a positive contribution from our controlling stake in Bevo, which delivered EBITDA of $9 million for the year ending June 30, 2022. The Bevo business has a strong seasonal cadence, with the period from January to June expected to generate roughly two-thirds of the full annual revenue and EBITDA. Overall, Aurora remains on track to achieve a positive adjusted EBITDA run rate as we execute it. Q4 net cannabis revenue was $50.2 million, compared to $50.4 million in the last quarter. Q4 revenue included a non-routine $1 million provision for returns from the prior period; excluding that adjustment, revenue would have been $51.2 million. Medical cannabis saw a modest decline, while consumer cannabis rose, mainly due to contributions from our Thrive acquisition. Canadian medical revenue was $24.9 million in Q4, an increase of $118,000 from Q3, reflecting the stability of this business. Our focus on the insured patient population provides greater consistency to the segment across economic environments, and the higher margin of this business compared to consumer cannabis significantly boosts our bottom line. Our international medical revenue was $11.6 million, reflecting a 35% growth compared to the same quarter last year, but a 20% decrease sequentially. The increase year-over-year was driven by our strong presence in key international growth markets, including Australia, Poland, and the UK. The sequential decrease stemmed from a temporary supply limitation of high-demand cultivars in Europe and a weakened euro. We anticipate these supply issues to persist through Q1, but to improve in upcoming quarters. Together, our leading Canadian and global medical businesses performed well, generating $36.6 million in sales and adjusted gross margins of 62%, only slightly down from 64% in the prior quarter. Medical sales represent about 73% of our Q4 revenue and about 86% of our adjusted gross profit. This segment is critical to Aurora’s strategy to achieve a positive adjusted run rate by December 2022. Our Q4 consumer revenue was $12.6 million, which is a $2.3 million increase compared to the previous quarter. Consumer cannabis represented about 27% of our Q4 revenue and about 14% of our adjusted gross profit. The revenue increase was primarily due to $1.4 million from Thrive’s consumer business, which started on May 6th, and the stabilization of our Canadian consumer business. However, we do expect some short-term disruptions to Q1 consumer cannabis revenue due to the cyber attack on the Ontario cannabis store distribution system and a significant labor strike at BC’s liquor and cannabis distribution centers. These events could expose our revenue to a potential impact of up to $3 million in Q1, but we do not expect them to affect our profitability timelines. As previously mentioned, our medical business accounts for about 86% of our adjusted gross profit. SG&A, which includes R&D, amounted to $49.3 million in Q4; however, this included $6.7 million in restructuring costs and $2.3 million in accrued employee-related costs from prior periods. This restructuring was related to significant staffing reductions made in June 2022 as part of our business transformation plan. Excluding these costs, Q4 SG&A was $39.1 million, marking our lowest SG&A level in nearly four years. We expect to drive SG&A for the existing cannabis business below $30 million, with significant reductions anticipated in Q1 and full savings realized by December 2022. In summary, we reported an adjusted EBITDA loss of $12.9 million in Q4 2022, compared to a loss of $11.4 million in the previous quarter. This increase was mainly due to a shift in the company’s sales mix towards more consumer revenue in Q4, which yielded lower average net selling prices. Looking ahead to Q1 fiscal 2023, we anticipate an improvement in adjusted EBITDA, primarily driven by a reduction in SG&A to below $35 million in Q1. I want to reaffirm our commitment to achieving annualized cost savings of $150 million to $170 million. These savings are split evenly between the cost of goods sold and SG&A, and we are starting to see them reflected in our income statement as they materialize. With the decisions we have made, we aim to create a leaner and more agile operating model, expected to provide strong EBITDA leverage as revenues grow. In Q4, we also recorded non-cash impairment charges of $505.1 million related to goodwill, intangible assets, and other tangible assets. This impairment represents our entire remaining goodwill balance associated with Aurora’s cannabis operations and was impacted by changes in market conditions and current capital market environments, including higher borrowing rates and lower foreign exchange rates. Lastly, I would like to mention that our upcoming fiscal year 2023 will comprise only three quarters as we are changing our fiscal year-end to March 31st to achieve certain internal efficiencies. To summarize, our balance sheet is stronger than ever, supported by a healthy cash balance, reduced convertible debt, and improving working capital and cash flow. Our medical businesses in Canada and internationally provide us a competitive advantage essential to achieving sustainable profitability. We are taking steps to meet our targeted cost savings by December 2022, which will positively impact our bottom line and reflect a leaner model that positions us well for future growth. Thank you for your interest in Aurora. I’ll now turn the call back to Miguel.

Miguel Martin, CEO

Thanks, Glen. Here are four brief takeaways before we take your questions. One, we’re better positioned than ever to achieve our goal of a positive adjusted EBITDA run rate as we exit the quarter in December of 2022, and we have listed out several data points that support that here today. Two, 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, given the long-term growth opportunities, the high margins and the defensive nature of the segment described earlier. Three, the Canadian recreational market is in the process of correcting. And as the recovery is complete, we will have added opportunities for market share and pricing. Four, our science and innovation program represents another high-margin opportunity that’s just started. To conclude, we are making significant strategic progress with each passing quarter, we’re nearing the completion of our business transformation plan, and have done so while strengthening our balance sheet. In addition, we’ve made two acquisitions in the past few months, Thrive and then Bevo, which underscores our ability to grow organically and through M&A, and we feel confident that we can create significant long-term shareholder value, particularly from these levels. We appreciate your time and interest in Aurora, and now I’d be happy to take your questions. Operator, please open the lines for questions.

Operator, Operator

Thank you. And our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Vivien Azer, Analyst

I would like to explore the relationship between revenue and volume dynamics that you experienced during the quarter. It could be attributed to FX headwinds, which is something we often discuss with large cap staples. Typically, your revenues and volumes align closely, but it seems there was some divergence this time. I'm curious if there are any geographic or pricing mix factors that should be highlighted. Thank you.

Miguel Martin, CEO

Glen?

Glen Ibbott, CFO

Viv, what we observed was a shift between consumer and medical segments. Our European medical sector experienced a decline this quarter, especially in Germany, where a specific cultivar encountered some production issues. These problems are manageable and currently being addressed. Additionally, when we analyze our average pricing, it's noticeable that consumer pricing has a more significant impact than we usually see due to the new driving products. This could explain some of what you're noticing. Aside from that, it was largely typical business in terms of volume, with the effects of increased consumer volume alongside lower average pricing.

Operator, Operator

Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery, Analyst

I wanted to gain a deeper understanding of your portfolio strategy. The synergies with Bevo seem beneficial and could contribute to EBITDA. Are there any other opportunities you are considering? Additionally, regarding your EBITDA target, do you expect any further contributions from mergers and acquisitions?

Miguel Martin, CEO

Yes. Let me break that down a bit. Our primary focus is on global medical cannabis, which is why some interests that appeal to others might not be as relevant to us. Regarding the U.S., our viewpoint has been confirmed—progress will take time. I strongly believe that if it becomes federally regulated, it will operate as a medical framework involving the FDA. Given our strong international presence in medical cannabis, we will have numerous options. By excluding the U.S. and some other factors, we find certain opportunities that are more appealing to us. We value Thrive because of their management team and their potential to create synergies between recreational and medical cannabis. We also see Bevo as a hidden gem, a remarkable contributor to science, effectively utilizing tax benefits and offering significant growth potential at a fair value for our shareholders and theirs. We’ll keep looking for investments like these. We've been very patient. As Glen emphasized regarding our balance sheet, maintaining a strong financial position is crucial, so we won't pursue unwise deals. However, if suitable opportunities arise, we have the resources to pursue them. Additionally, we are particularly interested in ventures connected to medical cannabis. I believe it has been demonstrated that investments in this area can be adapted globally—covering infrastructure, systems, patient understanding, and scientific research—which we have heavily invested in, and those investments are beginning to yield returns. We are on a solid path. To achieve our EBITDA goals, if we can maintain our current revenue and margins while keeping SG&A below 30, we can get there. We expect to reach that SG&A target by Q2 and have made significant progress. While there may be various questions, we have consistently delivered on our commitments to improve efficiencies, and this SG&A goal aligns with that.

Operator, Operator

Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

Pablo Zuanic, Analyst

Miguel, I’m looking at a press release Tilray issued on September 6th, stating that they are starting a roundtable with German regulators to kick off draft legislation for legalizing adult-use cannabis in Germany. When I saw this, I thought Aurora would soon release something similar. So, my basic question is, can you provide some insight into your lobbying efforts, your presence on the ground, and your potential role in helping shape the German program? I was surprised that Tilray issued a press release and we didn't hear from you. Additionally, where do you currently stand regarding whether Germany will permit imports or if the focus will primarily be on domestic production? Thank you.

Miguel Martin, CEO

You got it. So, the first thing is I’m not here to comment on anybody. I have tremendous respect for my competitors, and what they do is what they do. So I don’t really have any comment on that. In terms of the German market, we’ve made a significant investment in Germany. We have what we think might be one of the leading government relations, government affairs executives in Germany. He is having good conversations with the regulators. I’ve spent my whole career working on things like this in both tobacco and alcohol, and they’re never a straight line. I think, as it pertains to Germany, there are two things going on as you well know and you’ve written a lot about, is both enhancements to the medical business, which we’re very excited about as one of the leaders in medical cannabis in Germany, and secondly, is the legalization of the recreational business. So, my understanding and our understanding is that the industry needs in order for that to be successful is being considered. The German government is — almost always are being very thoughtful about the stakeholders and the timing in which this can be done in a compliant way. I would expect their learnings from medical will color how they go about the implementation of the recreational business, which is why we think those companies that have facilities with the medical business will have advantages in recreational, and as we said earlier, we’re one of only three companies that have a license to produce in Germany. Now specific to your question about in-country, I think the going-in position I think for most folks should be that because of the UN conventions and just because of the way the regulations are going to work for recreational is that the most obvious path for recreational would be in-country manufacturing. Now, clearly whether the number is 200 tons or 300 tons or 400 tons in order to service that recreational market, that is significantly more capacity than three of us have. But clearly, that would be an opportunity there. We also would say that while recreational most likely would be an in-country production exercise, medical continues to be allowed with EU GMP certification to have products brought into Germany. We do that successfully today from both our Nordic facility as well as our Canadian facilities. And we think it’s one of our core competencies. So, more to follow in Germany, I understand the interest in it. I think what I would tell people is it’s going to move thoughtfully. It might not always be a straight line, but we have tremendous respect for the regulators there in what we’ve seen from the medical business. And I think, my expectation is that it will be a robust recreational business. I just can’t predict when, but at the time it will be compliant companies, experienced companies, and thoughtful companies will have an advantage in Germany. And then clearly Germany implements this, that will be a beacon for other key markets around the world in terms of how you can go from medical cannabis to recreational cannabis.

Operator, Operator

Our next question comes from the line of Andrew Carter from Stifel.

Andrew Carter, Analyst

Focusing on the Bevo business, which we have experience with through Site One, do you see this platform as an opportunity to deepen our involvement in this fragmented space now that you have a dedicated team? Additionally, considering your decision to either repurpose Sky or sell it, is there an opportunity cost that adds to the acquisition expenses? What timeline are you setting for the Bevo team to become operational and generate returns, and what would be the plan if things do not go as expected, particularly regarding selling the facility and addressing associated costs?

Miguel Martin, CEO

You got it, Andrew. First on Bevo, it is a great business, and as you mentioned, others have covered it too. It's a misconception to say that Bevo didn’t succeed in its previous setup with another cannabis company. Bevo was effective; it was just that particular combination that failed. We are not merging Bevo with Aurora's cannabis and non-cannabis assets. Bevo has significant big-box contracts in both Canada and the U.S., and there's a lot of potential for them to grow right now due to shipping costs. Many of their products are manufactured overseas in Asia and Southeast Asia, providing them with substantial opportunities. We're excited about this expansion since it can be achieved with minimal capital investment, not putting pressure on Aurora's cash resources. The team that has successfully managed Bevo will continue to lead it. Aurora does not claim expertise in orchids or propagation, so it's crucial to have experienced individuals like Leo and Andrew in charge, and we are delighted with that. Regarding Sky, I don't want to overstate things, but the tax benefits, repurposing, and tax designation changes offer considerable advantages for Bevo compared to being stuck with others trying to sell cannabis assets. Ultimately, if they can’t make it work, we can always sell it in the key Edmonton market. The upside of the investment in Sky is that Bevo won’t require substantial capital or operational expenditures to generate revenue. As Glen mentioned, Bevo’s business tends to be seasonal, contributing more in Q2 and Q3 than in Q1. To answer your question, I believe we’ll have clarity within the next 9 to 12 months regarding what Sky means for Bevo. If it doesn’t pan out, we still have options. However, the benefits I’ve mentioned enhance this opportunity for Aurora compared to simply selling it for a fraction of its value.

Operator, Operator

And our next question comes from the line of Andrew Bond with Jefferies. Please proceed with your question.

Andrew Bond, Analyst

Hey. Good evening, Andrew Bond on the line for Owen Bennett. Thank you for taking our question. So, from us, on the international segment, can you give us some more detail on performance between markets? Not looking for an exact breakout, but I think last earnings call, you all discussed plans to launch extracts in the UK in 4Q and also some top market share positions in the other key markets like Australia, Germany, Poland. So, any detail on where sales came from in 4Q and where there might have been some weakness relative to 3Q? And if I could just sneak in maybe more broadly, how you would characterize growth ahead in fiscal ‘23? Thank you.

Miguel Martin, CEO

Sure. Let me take a top-line comment about international and some of those key markets, and I’ll Glen get into some of the details about it. So, as we said in our prepared remarks, it is really important to be operating in a lot of countries. You got to operate in the right countries. And so the reason for that is these sales are still a bit lumpy. We’ve all seen that in what’s happened with Israel. But whether it’s import permits or shipments or the regulations sort of evolving, you get these sort of months where have these sales and you have these months you don’t. Secondly, a lot of these investments can play out and really generate incremental margins and revenue, if they are laid over a broader system. So, the same production system, the same cultivars, the same genetics, the same a lot of things are similar to what we do in Germany, Czech Republic, Poland, and on and on. Now, you have to have different distribution models to take advantage of those different pieces, and we have done that. In most markets, we are just the manufacturer, but in other markets, we have a sales force and a wholesale piece. The Western European or the international market as a whole is absolutely growing and clearly is the fastest-growing segment of global cannabis, which is this medical piece. And I will say that the regulations are quite similar, whether that’s packaging, stability testing, manufacturing, EU GMP, there has been this sort of consistency and evolution that advantages a company like us. Now, in terms of the actual specifics on the country breakouts, Glen, I’ll turn that over to you.

Glen Ibbott, CFO

Yes, thank you. We continue to identify the same countries as the key markets for us in our network, which include Germany, Poland, the UK, and Australia. However, as Miguel mentioned, there is definitely some variability. For instance, Australia experienced a 75% increase in Q4 compared to the previous quarter. Looking ahead to Q1, we expect a decline, but Q2 appears promising again. This variability is why it's essential to maintain a diverse portfolio; while our international business is generally predictable, it can vary significantly from country to country as they address specific barriers to patient access and other challenges. Australia, for example, saw significant improvements in patient accessibility over the past couple of years, which has led to substantial market growth. Regarding Germany, we launched late in Q4, so we did not see much revenue from that market during that quarter, but it is a critical element of the competitive landscape. We will provide more updates on progress in Germany as we move forward. Currently, Germany, Australia, the UK, and Poland are the primary international medical markets for us, but there are at least four or five other countries contributing revenue in Q4.

Operator, Operator

Our next question comes from the line of Matt Bottomley with Canaccord Genuity.

Matt Bottomley, Analyst

Just two questions for me on the revenue side of things. First just on the consumer sales in Canada, there’s a bit of a divergence I think was noted with respect to Aurora sales relative to the macro level data on some of these point of sales subscription services we all look at. So, Glen, you had mentioned some of the headwinds related to maybe the OCS website or some others. So, I’m just wondering if you can give us a little more color on that. And the second question on revenue is just related to your international sales. is the current $11 million to $12 million that you did in Q4. If that just stays flat for the sake of argument, is that sufficient to get you to your profitability targets on an adjusted EBITDA considering a lot of your margin does come from those sales. Thanks guys.

Miguel Martin, CEO

Yes. Let me comment on syndicated data, and then Glen can obviously give you the background. One of the gaps in some of this syndicated data that everybody looks at is Quebec. Quebec is our largest province in terms of sales. And so, it underweights what we’re doing. I think, generally the rec business overall for an LP is generally challenging. It was referenced before what happened with the hack, unfortunately in the OCS that caused about two weeks of disruption. They did an unbelievable job to get back up and running. We also saw the strike out in BC that had a pretty significant effect for a long period of time. That’s been cleaned up as well. I think, the combination of that and retail stores feeling a lot of pressure plus compressed margins overall means you really have to be sort of focused in where we went and the Thrive team’s done a tremendous job. And you can still — there’s still places you can find to make money, premium flower obviously, but vapes, concentrates, and some of the other things that they’re particularly good at. So I think, we’re going to be in this wash a little bit longer in terms of what the macro sort of issues are with recreational. But when it comes out, there is a tremendous amount of efficiencies for someone that does as well as we do in medical and recreational to have some of those items, particularly as patients are starting to look for more premium items, and clinicians are starting to be more open to variety. So, Glen, you want to pick up the rest of it?

Glen Ibbott, CFO

Thank you very much, Miguel. Consumer revenue at current levels is more than sufficient to help us achieve our profitability goal. It's clear that most of our gross profit comes from our medical businesses, with 86% in Q4, even though our international medical experienced a slight pause during that quarter. In the previous quarter, Q3, 90% of our gross profits were derived from our medical system. As we anticipate growth resuming in Europe and Australia over the upcoming quarters, our Canadian business aims to stabilize and establish a solid foundation for future growth. However, our immediate plan focuses on reaching our profitability goal primarily through our medical businesses.

Operator, Operator

Our next question comes from the line of Frederico Gomes with ATB Capital Markets.

Frederico Gomes, Analyst

So, just on the international side, we are seeing some increased competition in some markets, namely Israel, several other LPs and international companies exporting to different markets. So, can you talk about how you see that competition coming? Are you seeing any margin pressure in international? And what sort of advantages do you have to compete in your main markets, like Germany and Poland?

Miguel Martin, CEO

I've spent a significant amount of time in Israel, which is an important market for many. The challenges we've previously mentioned include a considerable level of local production, which obviously presents some advantages. The import permits, processes, and certifications in Israel are continuously evolving. We are not providing any forward-looking guidance regarding Israel at this time. However, whenever we have a shipment, we inform stakeholders due to its significance. We haven't had a shipment to Israel in a while, but I don't think that's a permanent situation. Currently, it's not our main focus, especially since there has been some margin compression, with many players, including local growers who have distinct advantages, competing for market share. I have great respect for them. On the international front, due to the medical framework, we have not experienced the same level of margin compression seen in the Canadian recreational market or the broader U.S. market. Entering these markets is quite challenging. For example, in Germany, the qualification process for a cultivar can take six to twelve months, and labs have strict potency variance limits of only 10%, making compliance difficult. There is also extensive work required for stability testing and other assessments. Additionally, patients tend to remain loyal once they find a product they like, whether ours or a competitor’s. This is not the case in recreational markets, where there is significant share movement among top products. There is a clear first-mover advantage and consistency benefits for companies that maintain stock and operate in the medical market. In most international markets, a handful of companies tend to dominate sales, unlike the Canadian recreational market, where the top five companies account for less than a third of overall sales. Hence, the international cannabis sector has shown to be stable, and with the growth of clinical research partnerships and expanding systems, it is likely that a few companies will continue to capture the majority of business in significant markets like Germany, and we anticipate that Aurora will be among them.

Operator, Operator

Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.

John Zamparo, Analyst

Thanks. Good evening. I wanted to get back to Bevo. And if we think about the evolution of Aurora over time, it used to be a pretty broad, expansive business as multiple segments, then narrowed down to be purely cannabis. And Bevo is certainly outside the core strategy of what the company was. But what I’m wondering is, should we view this as Bevo was trying to optimize the decision with Sky, or do you want to further diversify the business away from pure cannabis at this point?

Miguel Martin, CEO

I appreciate your question, John. I missed you and your team this week. To address Bevo, our goal is to lead globally in medical cannabis, and we're focusing on two main areas: profitability and strengthening our foundational elements that will support this global leadership. Bevo caught our interest for several reasons. Firstly, there's the aspect of Sky, which offers a tax advantage and allows us to quickly generate significant, predictable, and profitable revenue without capital expenditure. Secondly, we see potential synergies and efficiencies. While we haven't delved deeply into those yet, we plan to approach it carefully. Propagation is an intriguing area in cannabis; it's more common in the U.S. than in Canada. With over 80 years of excellence in propagation science, we expect valuable outputs from the Bevo system and our Aurora system. As we consider agriculture more broadly, we believe it can complement our efforts. I support the idea of staying close to our core while exploring profitable opportunities that enhance shareholder value and align with our scientific mission. I'm proud of this deal for several reasons, but the real test will be the results. This is a strong team with a smart use of assets that require little capital expenditure and strengthen our position. We will see how it develops.

Operator, Operator

And our last question comes from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.

Tamy Chen, Analyst

Hi. Thanks for squeezing me in. My question is on the science side, particularly the licensing of genetics. Miguel, I was just curious, this particular aspect of the science business, how do you see that fit within the overall Aurora business? Like, is this an area that you’re very focused on you do want to expand? Like, what’s the opportunity size that you see? And I guess, the last part of the question I have is, whatever genetics that do come out of your R&D and innovation that are good, I’m just wondering why don’t you just keep that for yourselves and grow it for your own business, whether it’s your own medical or consumer segment? Thank you.

Miguel Martin, CEO

You’re very welcome. So, it is something we’re focused on. Aurora has spent an inordinate amount of time and effort on this. And it may be, I don’t want to say it is, but it may be one of the largest genetic facilities connected to cannabis in the world. And so, as it pertains to that, there are significant advantages, not just around variety and uniqueness of the cultivars, say chasing potency, and terpene levels. Plant health, I referenced yield, Farm Gas is twice the yield per square meter than some of our historical cultivars that totally changes footprint and all types of different things that are going on. There’s incredible work being done on things like powdery mildew. And so, what I’ve seen is that when you look at other agricultural categories, there are companies that are not branded that are not participating from a manufacturing standpoint of selling their items, but they’re genetics, their science, and they are participating in those markets. We’re all familiar with them. No one’s really doing that today on a global scale, and we think there’s a space there. I also don’t view it as a conflict. We have about a 3% share in the recreational business. We have a 24% share in the Canadian medical business. And we have enough assets in order to serve our pipeline, both domestically and internationally as well as sell that. Some of these licensing deals are very innovative and to be honest are not overly creative. You see them in other categories such as soybean, vegetables, and tomatoes and other things that are around because of some of our partnerships. And so, like I said, we’re excited about this. The last part of this, while there are some LPs doing this, there is a huge gap from particularly Canadian LPs in accessing world-class genetics. They just haven’t done the work, and it’s not something you can snap your fingers and start up. This is a 5 or 10 year process in breeding and genetics and in training in order to be there. And so, we’re excited about what it means for us. You see some of that stuff in the market. We’re also excited about what it means for being able to sell it and generating revenue streams. Because the reality is we’re not going to have a 50% share of the recreational business. And unlike some of my past businesses where we’ve been having these massive market shares, there’s plenty of places to do it. As this stuff evolves, it’s our hope we’ll be able to sell genetics internationally as well. So, I think it’s a great play. Almost the entirety of that spend is already accounted for. And we think there’s huge upside in not only for us but for others in accessing those genetics and those incredible sort of science innovations.

Operator, Operator

We have reached the end of the question-and-answer session. I’ll turn the call back over to Miguel Martin for closing remarks.

Miguel Martin, CEO

Listen, I appreciate everybody’s interest. Our plan is absolutely on track. And I understand, as I mentioned with the regulations that the progression of a successful cannabis company is not a straight line. But in terms of the cost efficiencies we’ve done and will do what we’ve said. We’ve focused on those areas of the business that is profitable. And we do see an upside. And as these markets continue to come online, it’s been medical first and then recreational, and we think Aurora is in a great position. So we appreciate your support. We appreciate your interest. And we look forward to sharing our progress as we move forward. Best to all and your families, wish you all the best. And we’ll go from there. Thanks, everybody.

Operator, Operator

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.