Earnings Call Transcript - ACB Q1 2022

Operator, Operator

Greetings, and welcome to the Aurora Cannabis Inc. First Quarter 2022 Results Conference Call. As a reminder, this conference is being recorded today, Tuesday, November 9, 2021. I would now like to turn the conference over to your host, Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Please go ahead.

Ananth Krishnan, Vice President, Corporate Development and Investor Relations

Thank you, and thank you all for joining us. With me today are Aurora's CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed today, Aurora issued a news release announcing our financial results for the first quarter of fiscal '22. The release, accompanying financial statements, and MD&A are available on our IR website and via SEDAR and EDGAR. In addition, you can find a supplemental information deck on our IR website. Listeners are also reminded that certain matters discussed in today's conference call could constitute forward-looking statements, which 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 and 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 be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session. For retail investors, we have compiled questions submitted to us prior to the call. With that, I would like to turn the call over to Miguel. Please go ahead.

Miguel Martin, CEO

Thank you, Ananth. We are pleased that our track record of strategic and financial progress from fiscal 2021 has carried into the first quarter of fiscal 2022 and in our efforts to build shareholder value and gain momentum. Our transformation plan is on track, and we continue to expect to achieve adjusted EBITDA profitability sometime in the first half of fiscal 2023. We focus on four areas to achieve this goal. First, we're the number one Canadian LP in global medical cannabis revenue with leading margins of over 60%. This is nearly double what the industry generates in adult recreational cannabis. It's our competitive advantage, and it's why we're allocating further resources to the Canadian, European, and Israeli medical markets. Long term, we see medical cannabis continuing to expand globally, and we strongly believe the leader in medical will be the key beneficiary of recreational cannabis when legalized. Second is redesigning the company to create a more efficient and effective enterprise. A significant part of this is expense reduction. We've already achieved run rate savings of approximately $33 million from our announced plan in September, which puts us on target to achieve $60 million to $80 million in cost savings without impacting planned growth investments. Third is our strong balance sheet and improved cash burn of only $16.6 million this quarter. This not only supports our organic growth but also provides us with the means to evaluate M&A opportunities. To be clear, if and when we make an acquisition, it will be accretive, with managerial talent we don't currently possess and align with our premiumization strategy. Fourth, our Science and Innovation business unit. This business unit is focused on launching a strong pipeline of new releases globally to leverage our intellectual property in genetics and biosynthesis. But first, let's briefly discuss medical cannabis and adult recreational cannabis. In Canada, we represent about 23% of the medical market, almost twice that of our closest peer, but only 1% of the population are currently patients. Given the fragmented nature of this channel, we have a clear opportunity to expand our presence through education and by helping patients navigate medical cannabis alternative treatments through our proprietary end-to-end experience, and this represents a great long-term opportunity for us. Our International Medical business continued to show exceptional growth, growing by 146% over the prior year comparative period. We shipped a total of $8 million during Q1 to our partner in Israel, Cantek, which we believe is the largest single shipment of cannabis that Israel has ever received. While we may still see month-to-month fluctuations of purchase orders from our Israeli partners, this is a tremendous vote of confidence in the quality of Aurora's products and is a proof point of our ability to profitably navigate a complex and evolving regulatory environment. Also contributing to International Medical during Q1 was our continued success in Germany, where we have a leading position in dry flower and a growing share of its oil market. We also saw over 50% sales growth in both the U.K. and Australian markets this quarter, which we expect to become significant profit drivers for us in the future. In France, we delivered our first shipment in August for their pilot program, under which we will supply the entire medical cannabis dried flower range. Our expertise in medical cannabis and the ability to operate within a highly regulated framework gives us a great opportunity to expand in the global recreational market when those markets open up. This has been proven repeatedly over time, and now we are seeing this in the Netherlands, which, based on today's global regulatory framework, we expect to become the largest federally regulated recreational market outside of Canada. Yesterday, we announced an agreement to invest in Netherlands-based Growery, one of ten license holders entitled to participate in the Controlled Cannabis Supply Chain experiment, the CCSC. Although we are providing Growery with a secured loan to construct a facility and fund early operations, our cash investment upfront is minimal, and the remainder of our investment is dependent on achieving certain milestones. During the CCSC, approximately 80 out of the nearly 600 coffee shops in the country will only sell legally produced cannabis from the ten approved federally licensed producers. Should the trial be expanded nationally, we estimate a market size of about $10.8 billion annually, which is about the same size as the Canadian market. In Canadian adult recreational, we believe this segment is still in the process of bottoming. That's why our focus on recreational is on higher quality, higher potency, higher margin products that drove a 29% sequential revenue increase in our premium and super-premium dry flower products. In contrast, the overall segment was relatively steady in Q1. It's important to note that the discount segment of recreational cannabis is largely a commodity, almost completely driven by price. This will certainly create issues for the foreseeable future, which is why we're pleased to have focused on premium recreational products. More generally, our strategy centers on high-margin, high-growth medical cannabis as a key differentiator. Finally, regarding our Science and Innovation business unit, we believe it provides Aurora with a strong right to win in premium consumer categories. Within this unit is our world-leading genetics and breeding program, which we expect to become a real differentiator for Aurora with the ability to bring new high-cannabinoid cultivars to market that are more customer-focused, sustainable, and profitable. The breeding program located at Aurora Coast, a state-of-the-art facility in Vancouver Island's Comox Valley, is expected to drive revenues through genetic rotation into our product pipeline and greatly improve the efficiencies of cultivation through our higher-yielding plants, higher cannabinoids, and better disease resistance. We are also expecting revenue growth through genetic licensing agreements for these novel cultivars. Four new proprietary cannabis cultivars with distinct terpene profiles and high THC potency have already been developed. These include our three San Raf Cultivars launched in September and Farm Gas, which we launched licensed in North 40, the Saskatchewan-based premium micro-producer. While we are just building out this part of our business, and you'll hear much more about it soon, we view genetic licensing as a capital-light long-term revenue growth opportunity for Aurora and one that will ultimately bring a wide array of products to the market. Finally, we also believe that our intellectual property includes the most efficient pathway for cannabinoid biosynthetic production, which puts us in a pivotal position with nearly all cannabinoid biosynthetic work being undertaken in the industry today. We're actively working to build, partner, enforce and protect this valuable intellectual property. I would now like to turn the call over to Glen so that we can provide his financial review.

Glen Ibbott, CFO

Thanks, Miguel, and good afternoon, everyone. I appreciate you all joining us today. I will now review our Q1 2022 financials, which I believe show both the distinctive strengths of our business and our progress on our business transformation program. Let me point out a few of the highlights. We have one of the stronger balance sheets among Canadian LPs. This consists of approximately $424 million in cash, no term debt, and access to $1 billion through a shelf prospectus, including a $300 million US ATM. Our capacity to raise capital is available to us as financial firepower to be used for strategic and accretive M&A opportunities. Our cash flow also continues to substantially improve year-over-year. In Q1, cash use was $16.6 million, down from $142.8 million in the comparable period a year ago. We have plenty of cash to fund our operations as we move towards profitability and positive free cash flow. Our core medical businesses continued to deliver overall growth and a normalized gross margin in the 60% range with 64% in Q1 2022. This strong margin profile has held steady over the past few quarters and is an important gross profit driver that both distinguishes us from our competitors and is critical to reaching positive EBITDA. Of course, our SG&A is also a fraction of what it used to be in prior years. And upon continued execution of our business transformation plan, it will be coming down further. At a summary level, our Q1 results benefited from our broad diversification across international medical, domestic medical, and adult recreational segments. Overall, Q1 net cannabis revenue was $60.1 million, 10% higher than last quarter. Our medical cannabis segment continues to excel, generating $41 million in sales and a gross margin of 64%. Medical represents about 68% of our Q1 revenue and about 81% of our gross profit. Our consumer cannabis business delivered $19.1 million and a gross margin of 32%. Overall, Q1's adjusted gross margin before fair value adjustments was 54%. This compares favorably to 48% a year ago and 53% last quarter. The increase in adjusted gross margin is due primarily to a shift in sales mix towards the medical market, which delivers higher average net selling prices and margins. On a related note, our average net selling price per gram of dry cannabis rose 21% to $4.67 from $3.86 in Q1 of last year, reflecting the increasing prominence of our medical cannabis business. Now a bit more detail on each of our business segments. Our Canadian medical revenue was $25.1 million in Q1 and reflected the consistent performance in the face of the continued consumer retail industry rollout. As we have said previously, our Canadian medical patients can be segmented into two groups: Those with cost reimbursement coverage and those without a reimbursement program. Our success is really driven by our high-volume insured patient groups, whose reimbursement makes them consistent and reliable buyers. And this is why we have made patient groups with reimbursement coverage a high-focused priority in our medical business. That said, we may see some migration of price-sensitive non-reimbursement patients from the medical channel to the adult recreational channel as that market continues to develop over time. Our international medical revenue was $15.9 million, which reflected a 146% growth versus the prior year and 84% sequentially. Q1 revenue included $7.9 million of sales to Israel. As I said on our last conference call, BDS Analytics estimates the market size of about $3.2 billion by 2025 for just Germany, Poland, U.K., France, and Israel. Clearly, International Medical is worthy of our focus on investment and demonstrates why Aurora's leadership internationally is an important driver of long-term shareholder value. Our Q1 consumer revenue was $19.1 million, which was relatively consistent compared to the prior quarter. Our premiumization strategy gains traction as evidenced by a 29% sequential revenue growth in our premium dry flower category, largely driven by the launch of three new cultivars. Consumer margins were healthy at 32%, up over last quarter as we saw the shift in our sales mix towards the premium margin side of our portfolio. Put it together and we see the directional change we'd like to see with consumer gross profit up 5% from last quarter, benefiting from our purposeful mix shift towards premium. Now for SG&A, which includes R&D, it remains well controlled coming in at $44 million in Q1, excluding restructuring and prior period adjustments. While we've made a lot of progress in driving down SG&A, we are also implementing measures to take out further costs. These efforts should get us well below our $40 million quarterly run rate by the time we exit this fiscal year. So pulling all of this together, we generated an adjusted EBITDA loss in Q1 2022 of $11.5 million, excluding $600,000 of termination restructuring charges. The $4 million decrease in EBITDA loss compared to last quarter was primarily driven by Q1's 10% increase in revenues while adjusted gross margin remained strong and steady. For clarity, in our adjusted EBITDA, we do not include the benefit of $14.4 million of government wage subsidy grant that we report in other income as this program has now been phased out by the Canadian Federal Government. Now let me remind you of the timing along our path to EBITDA profitability. Approximately 60% of cash savings under the business transformation program are expected to be realized on the P&L and our cost of goods as inventory is drawn down following the implementation of our lower production cost structure. We would expect to see those savings in our P&L beginning late this fiscal year and into the next. The remaining 40% of cash savings will show up in SG&A as they are executed beginning with Q2 of this fiscal year. So to wrap up, two key takeaways from these financial results. We have a clear path forward to being adjusted EBITDA positive by some point in the first half of our next fiscal year through actions that we control. And our balance sheet remains strong with a healthy cash balance and improved working capital and cash flow.

Miguel Martin, CEO

Thanks, Glen. Before we go to Q&A, let me leave you with these final thoughts. We are very pleased that our transformation plan is on track, and it's important to note that the foundation of that plan is medical cannabis where we expect continued revenue growth with very high margins. Aurora remains the number one Canadian LP by medical cannabis revenues globally, and we've been able to differentiate ourselves in Canada through investment in our proprietary end-to-end patient infrastructure, which creates barriers to entry in a sticky insured patient base. We expect to be a market leader as jurisdictions around the world continue to open up. Our number one position in Medical also paves the way for success in global adult recreational cannabis. As medical-only jurisdictions evolve, our most recent proof point is in the Netherlands, but others will surely follow. Our regulatory compliance, testing, and commitment to science, make Aurora the ideal partner in both medical and recreational over the next decade. As far as adult recreational in Canada, we believe the market is in the process of bottoming, and we are encouraged that our premiumization strategy is gaining traction. We also expect continued innovation in our product pipeline, supported by our Science and Innovation program. Most importantly, any softness related to the discount segment will impede our ability to reach profitability. To that point, we've already achieved $33 million run rate cost savings, but more on the way. This positions us to achieve EBITDA profitability in the first half of fiscal 2023, and our team is aligned and energized to get there. Thanks for your time today. We're excited about the secular opportunity that continues to be very significant. We look forward to updating you on our progress. Before we take questions from our analysts, I will turn the call over to Ananth to ask a few questions from our retail shareholders who were invited to submit questions ahead of today's call. Ananth, please go ahead.

Ananth Krishnan, Vice President, Corporate Development and Investor Relations

Thanks, Miguel. Let's begin their questions. The first one here is the following. When do you expect to enter the U.S. market?

Miguel Martin, CEO

So Ananth, it's a great question. First and foremost, know that we are spending a lot of time focused on the U.S. and paying attention to the U.S. I personally have over 25 years working in the U.S. with the FDA, ATF, DEA, and have a very keen perspective on this topic. What I will say is that our strategy of being thoughtful and patient has clearly paid off. If you look at assets in the U.S., they have declined in overall value by 60% to 70%. Taking our time from a valuation standpoint has clearly been the right play. And secondly, the Biden administration has been consistent, medical first plus decriminalization. With that, we expect that as the number one Canadian medical company and one of the largest Canadian LPs medically globally, we will have something to say about that. When you think about our overall goal of EBITDA profitability, we're not going to put that at risk by looking for a nontraditional investment. That being said, with the right opportunity, we have the balance sheet and financial flexibility to be opportunistic when we see the right transaction. As we go forward with that, we'll continue to keep an eye on it. We understand the news of this week and what's been put forth, and obviously, we'll pay attention. But I'll leave you with this: the work that we do in Germany, the Netherlands, the U.K., and Israel, all around the world within a regulatory compliant framework is what best positions us to be successful in the U.S.

Ananth Krishnan, Vice President, Corporate Development and Investor Relations

Great. Thanks, Miguel. Our next question is: can you tell us more about your upcoming product launches and new innovation initiatives?

Miguel Martin, CEO

Absolutely. First and foremost, as a company that has a globally diversified business, we benefit from innovation and scientific progress, both in the medical business and in the recreational business, which is probably more of the gist of your question. If you look at our full year 2022 innovation calendar, it includes over 80 new SKUs. In Q4 full year '21, we delivered 25 compelling new products to the market, followed by another 22 SKUs in Q1 of 2021. This has clearly been our most significant and successful innovation push since legalization. Those innovation SKUs are performing extremely well and are driving almost 40% of our wholesale revenue, reflecting strong customer and consumer interest. These SKUs are heavily skewed towards new flower rotations powered by our genetics breeding facility mentioned previously, as well as new concentrate and edible SKUs driven by historical investments in new capabilities and competencies. Beyond that, we're also seeing great value in limited runs and seasonal offerings. This winter, we'll be offering a special edition for the holiday season under our drip rain that we believe will be well received. We're also introducing hash for the first time, which we've re-launched under the Whistler branding with new packaging and price points and are planning on releasing a new lineup of rotational genetics that come from our Coast facility. Overall, there is a big focus on innovation. We benefit from it in both our recreational and medical businesses, and we see it as a key component of our premiumization strategy.

Ananth Krishnan, Vice President, Corporate Development and Investor Relations

Perfect. And our third and final question from the retail shareholders is: which international markets do you view as the most important for the business? And how are you planning on staying ahead of the competition in those markets?

Miguel Martin, CEO

Well, Ananth, yes, that's a great question. I think everybody has been so focused on the U.S. that people forget that there's a huge world out there with positive cannabis legislation and regulations evolving. We've talked about Germany. We've talked about the U.K. We've talked about key markets like Australia. But the reality is these are really big markets with huge opportunities. Each market has core conditions, including regulatory compliance and significant hurdles in manufacturing, packaging, sales, and marketing. We see huge potential in our ability, and we've had great success historically. There are several core markets that we're really excited about; I mentioned some during the call. Israel was a large driver for us in Q1 and continues to show promise. Our partnership with the IMCA under the leadership of Yuval Landschaft has been significant. We believe the investments and work we have done there will yield dividends globally. We've also announced our entry in the Netherlands, which we expect will be significant, about a $2.8 billion market in the future. For European Medical, which is projected to become a $5 billion market by 2025, we're excited about our leadership in key areas. As of September, we were the number one supplier of flower in Germany with almost a 35% market share, growing our share in the oils market. We also believe we are number one in the U.K. dry flower business where we had an exceptional quarter. Additionally, we're the exclusive flower supplier for three of the nine tenders in the French medical cannabis pilot program. What sets us apart from the competition is our consistent regulatory expertise, science, testing, and compliance, which have been recognized globally. We won't rest on our laurels; our aim is to maintain and grow our market share as these markets develop. The expertise and experience we have will be relevant worldwide, including the U.S.

Ananth Krishnan, Vice President, Corporate Development and Investor Relations

That's great. Thanks, Miguel. So that's the end of the retail shareholder questions. Operator, I'll turn it over to you for questions from the analysts.

Operator, Operator

The first question today comes from Vivien Azer with Cowen.

Vivien Azer, Analyst

I wanted to highlight the consumer business in Canada because the shift in the mix is clear and represents a positive development for your portfolio. The Hifyre data indicates you are experiencing similar success and sequential market share gains. Miguel, I have one question with two parts. First, considering your market share gains up to the end of October, could you specify which was the bigger driver, San Raf or Whistler? As a follow-up, how do you view the impact of these third-party craft brands, not only in relation to top-line growth but also in terms of margins?

Miguel Martin, CEO

You're welcome. So Viv, if you look overall at the Canadian recreational business, just a couple of points. One is we're only three years into it, and it's a bit of an irrational market. Most of the market share gains from competitors are coming from the large pack size, which is really a value play. As we've talked about, we're focused on premium. As an example, the discount 28 grams, which in some cases might even have a negative margin in specific provinces, are being pursued because of excess inventories and other factors. We're exiting that. When you look at Quebec, we see an extremely strong response. Specifically to answer your question, we are seeing most of our premium growth in San Raf. This was a strategy we announced about a year ago, and you're definitely seeing others follow it. If you want to have really large market shares, I just don't think it's a profitable strategy in the short term, and this market will rationalize a bit. The other thing, as you talked about Hifyre data and clearly, syndicated data is evolving and improving, but it's not there yet in a way that maybe others would look to say in the U.S. of IRI, Nielsen, or in tobacco like MSA. While we look at Hifyre data, it's only 50% coverage in Ontario and only 30% to 40% coverage in Alberta, British Columbia, and Saskatchewan. There is virtually no coverage in the SQDC where we see a lot of our overall business. I don't think it's the end-all and be-all. At the end of the day, there are places where you can make money in Canadian recreational premium aspects, in some premium categories. We're focused on that. For those that are really hard set on overall market share, I just don't think there's a direct correlation between overall market share. We are going to stay focused on San Raf and Whistler, and we've seen a great response from our new cultivars. We can also leverage some of those assets and incorporate them into the medical channel. I believe that in Colorado and California, as an example, you see premium categories starting to evolve. I have to believe that we'll see that in Canada. It's just not there yet; therefore, we won't chase down the rabbit hole with lower margins, particularly in the discount category.

Operator, Operator

The next question comes from Pablo Zuanic with Cantor Fitzgerald.

Pablo Zuanic, Analyst

I'm going to focus on the export business. You mentioned the stickiness, compliance, your science, and your innovation. Could you elaborate more on the cost aspects? From what I understand, you're shipping to Europe from Denmark. We hear other producers claiming they can enter the European market at a lower cost. I'm sure it's not that straightforward. Please discuss the stickiness further because if being compliant with the regulatory framework in those countries is a significant competitive edge, it makes me question whether others could easily replicate that and break into the market with lower costs and possibly better distribution than you have. If you could expand on this, that would be great.

Miguel Martin, CEO

Sure, I'll be happy to, Pablo. It's absolutely an advantage. Take a look at Germany. The reality is the standard in Germany is you must have within a 10% deviation on core components, particularly potency. That's a really hard standard to meet, and you need a pretty advanced facility to consistently achieve that. This has played a significant role in us gaining almost one-third of the entire flower business. Another example would be Israel. I talked about the IMCA and Yuval Landschaft's leadership. They have the highest standards of any regulatory body, including about 44 pesticides that no one else has even considered testing for. It's not only about having CUMCS certification, which is unique beyond EU GMP; it's also about the ability to test, package, ship, and meet all of those criteria, which has made a significant difference in Israel. While there may be places around the world where you can produce cannabis at a lower cost, the overall certification, reporting, consistency of production, and entering those markets make that less viable. Remember, we are dealing with medical patients, not just recreational users. Medical patients and their healthcare providers are looking for the highest possible quality, consistently available. The same companies have been successful in markets like Germany, U.K., France, Netherlands, and Israel because of compliance, regulatory foresight, and infrastructure. While in the short term there may be some advantage to lower-cost products, it's not a sustainable approach, and those companies recognize that. We may compete with some of the larger LPs, but we all agree on the importance of having a proper regulatory framework and adherence to compliance measures. So there's a high barrier to entry, and that standard makes a huge difference. Regarding shipping costs, yes, we ship from Denmark, and particularly with Israel, we ship from Canada. While it's not insignificant, it's manageable; often, you're shipping bulk and transitioning to finished goods in the market.

Operator, Operator

The next question comes from Michael Lavery with Piper Sandler.

Michael Lavery, Analyst

Actually, I just want to go back to the recreational business as well. Just trying to understand some of the context and outlook, specifically with San Raf and Whistler, in particular, having 29% sequential growth and all of medical, even with the international boost from Israel, being up, I think it was 17% sequentially. It was clearly a very strong performer in the quarter. You've made it very clear; your emphasis is on the medical side. So how should we think about this? Is it just that you can walk and chew gum, or were there some more one-off things driving that that aren't sustainable? Can you give us a sense of whether recreational is really just a matter of premiumizing, that you can handle that focus within that piece, or is it a little bit more lumpy and medical is really the focus?

Miguel Martin, CEO

I think, Michael, right now, if you look at margins and overall profit opportunities globally, it's medical. Medical margins are in the mid-60s, really sticky, meeting all the infrastructure and high hurdles to enter. The skills needed for medical cannabis are unique, and we excel in that area. With recreational, you have to remember that in Canada, we're only three years into this experiment. In the discount arena, which is a significant portion of the overall business, it really is a commodity. Pricing is driving major decisions there. We won't chase that at the expense of profitability. In the premium categories, unique differentiated and innovative products really matter. Those unique cultivars make a big difference, and we see that being realized with Whistler and San Raf. The benefit of our system is we can take those products and leverage them for medical. You will find Whistler products we have now placed into our medical channel doing exceedingly well with our patients. The same applies to San Raf products. So, yes, we can walk and chew gum at the same time. I think that in focusing on profitability and sustainability, you should focus on the areas that are more consistent, which right now is medical. However, we are not turning our backs on recreational. We want to rightsize it appropriately while also identifying asset-light opportunities. The genetics business we've invested in historically is remarkably accretive. Biosynthetics and genetics will be important as the world recognizes the need. I think our approach is steady. Over time, I believe the recreational business in Canada will become more rational. The efficiencies that companies like us possess will become clearer. Those chasing the discount avenue are likely to face challenges. However, premium business is rational. For those who claim the recreational business is in disarray, I would encourage looking at Colorado and California that are about 18 months ahead of Canada, where you're witnessing success in margin-accretive categories and premium brands.

Operator, Operator

The next question comes from Andrew Carter with Stifel.

W. Andrew Carter, Analyst

I wanted to inquire about the Canadian Medical business. I think it was down 8% year-over-year. There are some patients that are sticky with government reimbursement and some that are more fluid. Could you provide insights on where that business should stabilize, and how you anticipate it will start to grow from either market share or patient growth perspectives?

Miguel Martin, CEO

Sure, I’d be happy to answer that, Andrew. Thank you for your question. I’ll start and then let Glen elaborate. We are currently observing some interaction between the recreational and medical markets, particularly among patients who are not receiving reimbursement, which is evident from our market share growth despite a decline. Predicting a steady state is challenging; however, we are hearing some positive developments regarding unions and groups that can facilitate access to cannabis. Currently, only about 1% of the adult population in Canada is connected to that system. We see an opportunity not only to grow our market share but also to improve as things begin to normalize.

Glen Ibbott, CFO

Yes, thanks. Quarter-over-quarter, sales to reimbursement groups, especially veterans, have been absolutely consistent. There was only a $3,000 difference quarter-to-quarter. This shows strong performance. The decline you've mentioned is solely with those non-reimbursement patients. As Miguel indicated, we are targeting patient groups with reimbursement coverage as a priority in our medical business, along with a robust launch of new products aimed at our existing patient population. You might have noticed a recent launch, I think, in the last few days as part of the PAC system, offering a good bundle for veteran patients at great pricing to continue to attract and engage these key patients. We believe we can enhance our current patient base while also identifying steps to engage associations and unions.

Operator, Operator

The next question comes from John Zamparo with CIBC.

John Zamparo, Analyst

I was hoping you could help us better understand how you expect the Netherlands market will play out. Generally, Miguel, you prefer medical-only markets. It seems you're excited about the Netherlands transitioning to recreational. Your performance globally has been better in medical markets than in consumer. Is your excitement for the Dutch system primarily due to the limited licenses and barriers to entry, and can you talk about your confidence in why it will remain that way long-term?

Miguel Martin, CEO

John, that's a great question. I had the pleasure of visiting and spending time with our teams and particularly with our partner, the Growery. I think everyone knows that this cannabis experiment in the Netherlands is 50 years in the making. Today, there's a very formal and legalized structure for coffee shops with over 600 retail outlets; however, the production part has been somewhat of a black hole. The government wants to clean that up and create a much more legitimate market. I get excited about the financial incentives involved. There are only 10 licenses for this experiment, and we are one of them. We're excited about our partnership. There will be substantial advantages for those 10 during this period leading up to legalization. All economic incentives align. While we prefer a medical-only market due to our expertise and past approaches, we believe that medical is a precursor to recreational. A strong relationship with regulators enables us to understand the marketplace and become familiar with acceptable product portfolios. Thus, we believe we have a significant edge. This is a massive market, and we've discussed it being potentially as large as Canada. Early participation will give defined advantages. For that reason, we are optimistic about this opportunity. We have a lot of infrastructure in the region and established success.

Glen Ibbott, CFO

I'm going to add a couple of comments. As Miguel mentioned, it's 50 years in the making. This is an established market; hence, there is no guesswork on market size. A number of the cities require participation of all coffee shops, and importantly, this aligns perfectly with our strategy. Premium pricing and margins will align well with our international pricing structure, making this a compelling opportunity. We're excited to be one of the leading companies involved.

Operator, Operator

The next question comes from Tamy Chen with BMO.

Tamy Chen, Analyst

The 29% sequential increase of sales in your premium consumer brands is impressive. Can you help us understand if this growth is coming from activating more store fronts to carry new cultivars? Or is some of this growth in new orders due to good consumer traction? Additionally, when do you expect to see actual sequential growth in your consumer segment? I know the decline of daily specials offsets your premium strategy.

Miguel Martin, CEO

You're welcome, Tamy. Thanks for the question. The growth we're seeing is likely due to four key reasons. First and foremost, the products are better. The unique attributes, potency, and genetics of the new cultivars we're seeing across San Raf are more compelling. Second, you mentioned distribution; we have engaged what I consider to be the best and largest broker in Canada with national coverage. Southern Glazer does a great job for us, allowing us to touch about 90% of the volume every month. This enables the introduction of new brands. Third, navigating provincial buyers is challenging. Positive consumer traction has enhanced our success rate in getting products through that process, especially in Ontario. Lastly, there is a steady rollout, and these factors are bringing renewed focus on San Raf, evidenced by social media engagement and store owner response. We're on pace to rollout these new cultivars and genetics consistently. We're excited about our partnership with North 40; they're one of the top craft growers. Their selection of Farm Gas is indicative of our ability to produce high-quality niche flower. For those who believed that larger cannabis companies couldn't successfully grow high-quality flower, I think we're proving otherwise.

Glen Ibbott, CFO

Yes, sure. Tamy, we were up in most provinces, with a good 50% or more in Alberta, British Columbia, and Quebec, which has been a strong point for us. I think 33% of our consumer revenue came from Quebec in Q1. Ontario has not been as successful, but we have made substantial progress with recent product calls. Miguel mentioned earlier, and I think this innovation will be key to our future. I expect that it remains a challenge in the consumer market, but our product innovation and recent successes put us in a good position for recovery in the near future.

Operator, Operator

The next question comes from Doug Miehm with RBC Capital Markets.

Douglas Miehm, Analyst

My question relates to the international medical business. You mentioned the large order from Israel during the quarter, about $16 million. Do you see this as sustainable, or should we expect some volatility over the next several quarters? Will other countries offset any decreases perhaps seen in Israel quarter-to-quarter?

Miguel Martin, CEO

That's a great question. Certain markets are steadier than others; Germany and the U.K. are more stable. In contrast, Israel's market is evolving, making it difficult to predict consistency. We perform extremely well when the market is open, but I can't provide guidance on Israel. Speaking about other markets opening, we're hopeful to achieve that; we always encourage positive developments. The big markets include France and our recent activities in the Netherlands. While I can't give specific quarter-over-quarter guidance, I can assure you that conditions like meeting standards, product specs, packaging, and testing remain consistent. When we capitalize on profit opportunities, we consistently succeed. Stakeholders note that we've been able to navigate complex regulations, and that's part of the reason behind our success.

Glen Ibbott, CFO

Doug, the diversification across international markets is key. As Miguel noted, when one market fluctuates, others can help compensate for declines. Recently, we faced regulatory hurdles in Poland, leading to temporarily limited shipments, but our sales in the U.K. and Australia soared by 50%. Having a diverse range of international markets is crucial as they grow and develop.

Operator, Operator

The next question comes from Frederico Gomes with ATB Capital Markets.

Frederico Yokota Gomes, Analyst

Regarding your investment in the Netherlands, when should we expect sales to start there? How long until your partners begin operations? And regarding margins, how do they compare with your international medical shipments?

Glen Ibbott, CFO

Yes, thanks, Fred. I believe this is a very exciting market. I anticipate seeing Aurora brands in coffee shops when visiting Amsterdam or other participating cities. We expect sales to start in calendar '23, a little over a year from now. In the interim, the licensees are finalizing approvals and building out facilities. Regarding margins, we expect them to align closely with the type of international margins we currently experience. The pricing in highly regulated markets tends to remain robust, allowing us to anticipate healthy margins comparable to medical markets.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Miguel Martin for any closing remarks.

Miguel Martin, CEO

I want to thank everybody, and I hope you and your families are safe this season. We're excited about where we stand as a company. Our transformation plan is on track. We look forward to sharing that success with you in the upcoming quarters, and we appreciate everything you do to cover Aurora. All the best. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.