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Tuesday saw three of the industry’s most significant LPs report earnings. The picture was mostly positive, although the rate of growth slowed following the one-time boost from recreational legalization recorded in the preceding quarter. Aurora Cannabis Inc. and Tilray, Inc. both managed to grow recreational revenue, despite an ongoing shortage across the system and lack of retail stores. CannTrust Holdings Inc., by contrast, sold less into the recreational market, but posted improvements to gross margin and increased production.


Aurora, which waited several hours after market close to release its results, saw a 20 per cent jump in sales in the quarter, with its strongest growth happening on the recreational side. The Edmonton-based LP posted a net income of $65-million, with $29.6-million coming from recreational sales (up 37 per cent quarter over quarter), and $29.1-million from medical sales (up 8 per cent). The company, however, continues to lose significant amounts of money as it ramps up production, posting an operational loss of $77.6-million (compared to an $80.2-million operational loss last quarter) and a net loss of $160.1-million.

Production increases and costs decline: Aurora Sky, the company’s massive facility in Edmonton, is now operating at full capacity. The increase in production numbers reflect this. The company grew 15,590 kilograms of cannabis in the quarter, nearly double the 7,822 kilograms produced in the previous quarter. As the scale of production ramped up, cost per gram came down: from $1.92 in Q2 to $1.42 in Q3. The company is targeting cash costs per gram of less than $1.

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Price continues to drop: Aurora continues to see a drop in price, with the average net selling price per gram dropping from $6.80 to $6.40.

“Average selling price per gram decreased marginally due to product mix effects (higher contribution from wholesale consumer), extraction capacity constraints resulting in extract-based products comprising 18% of net cannabis sales, and the first full quarter impact of excise tax on medical cannabis,” the company said in a news release.

Non-cash loss: For the second quarter in a row, Aurora’s net loss included significant non-operational expenses. The company recorded a $102-million non-cash loss due to changes in the fair value of conversion options tied to its convertible debentures.

“In January 2019, Aurora completed a US$345-million Convertible Notes offering.... IFRS accounting standards require a mark-to-market adjustment at each period end for the derivative portion of these notes. Due to the increase in Aurora’s stock price since the issuance of the notes, the Company recorded a $102-million non-cash fair value loss in the Q3 2019 profit and loss statement,” the company explained.


CannTrust’s quarter to quarter revenue growth was slight, with sales increasing only 4 per cent, from $16.16-million to $16.85-million. However, the company did improve gross margins (excluding changes to biological assets) on a quarterly basis from 35 per cent to 46 per cent. This change was driven by a lower cash cost per gram, $2.77 compared to $2.94, and a lower cost of sales per gram, $3.03 compared to $3.08.

Kilos sold down, production up: CannTrust actually sold less cannabis on a kilogram basis than in the previous quarter, although made up the difference by selling a more lucrative product mix with an average net price per gram of $5.47. While sales volumes were down, production increased from 4,816 kg in the previous quarter to to 9,500 kg.

This increased output will begin to show up in sales numbers in the next quarter, said CFO Greg Guyatt on Tuesday morning’s earnings call: “Roughly, from the time of harvest till it gets sold into the market is about 60 days, so you'll see that we had a significant increase in our inventory levels during the [next] quarter.”

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Drop off in rec sales, while medical increases: On a quarterly basis, CannTrust sold around $1-million less into the “wholesale” market, which includes rec sales, international sales and LP-to-LP sales. Its revenue increase came on the medical side, where sales increased by $1.6-million, in conjunction with a 10,000-person jump in patient count, from 58,000 to 68,000 patients. Fully two-thirds of total sales were medical.

“With some degree of limited supply, we prioritize our medical patients," said CEO Peter Aceto. He added that in 12 months’ time, “we definitely see a shift from a revenue perspective to the wholesale or recreational market from medical.”

Doubling down on outdoors: In April, the company acquired 81 acres of land in B.C. for outdoor cultivation. While the site is not licensed, CannTrust is targeting 75,000 kilograms of outdoor production this year. This cheaper outdoor production is expected to start showing up in CannTrust’s financials early next year, Mr. Aceto said.

“Today our cost of harvest is between $0.70 and $0.75 to the point of harvest. Whereas for outdoor we estimate that the cost is going to be roughly $0.15. So just by virtue of that cost improvement, we’re going to see margin improvement going forward, mostly starting in early 2020 as we start to sell through the product that we create through the extraction.”


Tilray revenues popped 48 per cent quarter-over-quarter from $20.9-million to $30.1-million, although most of that increase (roughly $7.5-million) came from hemp food sales from Manitoba Harvest, which Tilray acquired in February.

Actual sales of cannabis increased more modestly, from $20.9-million to around $23.5-million, a quarterly increase of around 12.5 per cent. Recreational sales were up around 80 per cent, from $5.9-million to around $10.6-million, but medical sales declined, as the company allocated scarce supply to recreational channels. Net loss for the quarter was roughly $40-million.

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Gross margins remain low: Tilray continues to lag behind its competitors on gross margins. The gross margins for the quarter were 23 per cent, only a slight improvement from the 20 per cent gross margins in the previous quarter.

“Gross margin continues to be impacted by increased costs incurred with the ramping up of cultivation facilities in Canada and Portugal and acquiring third party supply. Additionally, food product margins were impacted by an approximately $0.7-million non-cash charge related to purchase accounting for the fair value of inventory,” the company wrote in a news release.

Getting squeezed by product shortages: One of the main drivers of the company’s poor margin performance is its reliance on scarce and expensive third-party cultivation. Tilray, more than other large LPs, appears to be getting squeezed by the shortage of legal supply in Canada.

“We haven’t seen a whole lot of supply out there, and when our team goes out to inspect the supply that is there, we’re not finding the greatest quality... We do see some progress, we see some very nice facilities coming online, but I think we’re still expecting several quarters of supply imbalance here in Canada,” CEO Brendan Kennedy said on the Tuesday evening earnings call.

“If I could go back 18 months, or 12 months, I would have invested another $100-million to $200-million in terms of Canadian cultivation. That was a mistake. But we believed all the hype 18 months ago [from other LPs promising massive amounts of supply]. Based on what I’ve seen, I think we’re still 12 to 24 months out from reaching some sort of demand supply equilibrium," he added.

Portugal production and U.S. CBD: While Tilray is investing over $40-million to expand its Canadian facilities, most of the company’s expansion of growing space is happening in Portugal. Tilray’s Portugal facility harvested its first crop late last year, but still needs licenses to process and sell it. Mr. Kennedy expects to start realizing revenue from the Portugal facility in the second half of the year, likely from exports to the German market. He also expects to start seeing revenue from U.S. CBD sales in the second half of the year, although this will depend on how long it takes for the U.S. Food and Drug Administration to finalize its rules around CBD.

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