Aurora Cannabis fiscal third-quarter results gave welcome news on the state of the global cannabis market. Net revenue of 65.1 million Canadian dollars came in 20% above Auroras sales three months ago and more than quadrupled its year-earlier revenue totals. As weve seen recently, net losses once again ballooned, climbing eightfold to CA$158.4 million.
The biggest sign of Auroras success came from its production and sales volume numbers. The pot producer said that it grew 15,590 kilos of cannabis during the quarter, which was double what it produced just three months earlier and up almost 13 times from its production figures a year ago. On the sales front, 9,160 kilos sold was a more modest 31% rise from the fiscal second quarter, but it was still up more than 575% from year-ago levels.
Auroras sales mix was balanced. Revenue from medical marijuana was only CA$500,000 less than sales from recreational cannabis. Auroras budding European Union-based business also did well, seeing dried medical cannabis sales climb 40% since the previous quarter. In terms of growth, Canadian recreational consumer sales jumped 37%, compared to just an 8% rise on the medical side in Canada. Yet to some extent, thats to be expected with the legalization of recreational cannabis, as those who want to use marijuana products for health reasons but dont want to jump through the hoops of working with a medical professional to obtain medical marijuana can simply self-medicate with similar recreational products.
CEO Terry Booth was pleased with the results. “Im exceptionally proud of our company and team,” Booth said, “as Aurora continues to deliver on our domestic and international growth strategy.” The CEO noted that even with some challenges from the rollout of recreational marijuana in Canada, he believes Aurora can still build a sustainable business over the long run.
One of the most promising aspects of Auroras quarter, though, was the evidence that its growth initiatives are starting to reap rewards beyond simply boosting revenue. Aurora also managed to cut its costs dramatically, as average cash cost to produce its cannabis plunged more than 25% to $1.42 per gram. The company attributed the drop to the size and efficiency of the Aurora Sky facility near Edmonton International Airport in Alberta, and its likely that Aurora will be able to build even more economies of scale as Aurora Sky and the Bradford facility have reached full capacity.
Aurora sees its capacity paying off in the coming quarter. The cannabis company set a production target of 25,000 kilos for the fourth quarter, and it wants to go beyond leaf to have more vaping products and edibles ready for launch later in 2019.
Yet acquisitions and partnerships will still play a major role going forward. In particular, cannabis oil production has been a chokepoint for Aurora, but its working with Radient Technologies to reverse that problem and boost extra-based product availability in the coming months. Meanwhile, recent acquisitions of Hempco Food and Fiber as well as Chemi Pharmaceuticals should help flesh out Auroras corporate profile while adding lucrative new product lines.
Few marijuana stocks have the capacity to be in the same league as Aurora Cannabis, and many of those that do still face significant competitive disadvantages against the early mover. Given the rapid evolution in the cannabis space, Aurora is far from having a lock on the marijuana market going forward. However, with important initiatives in place to bolster its already strong position in the industry, Aurora Cannabis has the potential to sustain its leadership role among cannabis companies well into the future.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Legal marijuana is one of the fastest growing industries in North America right now, and theres a very good chance itll stay this way for at least a few more years. Having generated $12.2 billion in global sales last year, per Arcview Market Research and BDS Analytics, legal pot sales are expected to surge to more than $31 billion worldwide by 2022.
This rapid growth has been the impetus behind aggressive capacity expansion initiatives and consolidation since the beginning of 2018. But its also gotten the full and undivided attention of the traditionally slower-growing food and beverage industries, which are always looking for ways to enhance top-line growth and bolster profitability.
The potential of partnering a brand-name company with a world-class cannabis stock was first noted in October 2017, when Modelo and Corona beer maker Constellation Brands made the first of what would become three investments into Canopy Growth. Although Constellation has motives here that extend beyond a simple partnership (i.e., it holds a 37% equity stake in Canopy), the initial stake signaled that the duo would be working on new products, including nonalcoholic cannabis-infused beverages.
In early August, the market was surprised when Molson Coors Brewing announced that it would be forming a 57.5%-42.5% joint venture with Quebec-based grower HEXO to develop nonalcoholic cannabis-infused beverages under the name Truss. These beverages are expected to hit dispensary shelves in Canada by this coming October.
The point being that big-name deals are happening, but were ultimately still in the early innings of the legal cannabis rollout in Canada and throughout much of North America.
The bigger question is: Which brand-name food and beverage companies are next to seek out a partner in the marijuana industry?
About the only company we know that wont be is Coca-Cola (NYSE:KO). Aside from getting a finger-wag from large shareholder Warren Buffett, Coca-Cola has reiterated on numerous occasions since the fourth quarter that its looked at the pot industry, but currently has no intention of seeking a partner or creating its own products. As a reminder, Coca-Cola was in talks with both Aphria (NYSE:APHA) and Aurora Cannabis (NYSE:ACB) last year about a possible equity stake and/or partnership, but nothing wound up materializing from these discussions.
That leaves three prominent food and beverage companies that do appear interested in getting in on the cannabis craze.
First up is alcoholic beverages maker Diageo (NYSE:DEO), which hasnt been shy about its interest in the cannabis industry. Although Diageo has done well with its portfolio of Johnnie Walker, Crown Royal, Captain Morgan, and Guinness beer, to name a few of its top brands, theres always room for sales improvement throughout North America. Thats where dipping its toes into the cannabis pond could come in handy.
Like Coca-Cola and its peers, Diageo has been monitoring the marijuana industry closely and might currently be hesitant to strike a deal because of early stage teething pains being experienced in Canada right now. Supply shortages, especially for premium-quality cannabis products, could extend for another 24 months. Plus, cannabis derivatives, such as infused beverages, wont be given the green light by Health Canada until October.
But if Diageo does take the plunge, Aphria would be one of the most logical partnership opportunities. Thats because Tom Looney, an addition to Aphrias board of directors late last year, was previously the president of Diageos U.S. Spirits and Canada division. Looney is the perfect person to bridge the gap between both companies and bring Aphrias superior production under the same umbrella as Diageos premier marketing and deep pockets.
Whereas Coca-Cola has made clear that its on the outside looking in when it comes to marijuana, PepsiCo (NASDAQ:PEP) hasnt been as committal. Although the company did say it had no plans to enter the cannabis space in its late October quarterly conference call, CFO Hugh Johnston noted in a CNBC interview that cannabis was still on the table the same day as PepsiCos earnings release. With sales growth stagnating over the past five years, its pretty clear that PepsiCo needs a spark to reignite a floundering portfolio of beverages and snacks.
One possible solution could be to dive right in with a leading producer like Aurora, which has plain-as-day suggested that it wants to enter the infused beverage market. Aurora may not have been able to strike a deal with Coca-Cola, but PepsiCo would, in a rare instance, be able to one-up its primary rival by landing an equity deal, joint venture, or partnership with Canadas largest aggregate weed producer. Not to mention that Auroras focus is on the higher-margin medical marijuana community, which is far more willing than adult-use consumers to buy derivative products.
PepsiCo could also take a safer route and dabble only in cannabidiol (CBD)-based products. CBD is the nonpsychoactive cannabinoid best known for its perceived medical benefits. Should it choose to go this route, a major, but more under-the-radar pot stock might be a smarter choice. For instance, OrganiGram Holdings, which is actively looking for a beverage partner, would probably cede all control of beverage development to a company like PepsiCo, which PepsiCos management would probably appreciate given its marketing and product development expertise.
A third brand-name food and beverage company that looks to be ready to join the marijuana craze is Mondelez International (NASDAQ:MDLZ). As with Coca-Cola, Mondelez initially stated that it looked at the cannabis space but chose to keep its distance. Now, just months after its initial decision to stay on the sidelines, the company looks ready to be a prime participant.
Although Mondelez has an entire field of cannabis companies to consider for possible partnership opportunities, Aurora Cannabis may again make the most sense. Aurora hired billionaire activist investor Nelson Peltz in mid-March to act as its strategic advisor. The thing is, Peltz has hands-on experience in trying to extract shareholder value in the food and beverage industry, and currently owns a sizable position in Mondelez, with Trian Fund President Peter May on Mondelezs board of directors. Just as Looney is the perfect facilitator between Diageo and Aphria, Peltz is potentially a perfect intermediary between Mondelez and Aurora Cannabis.