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Although the quarterly results for Aurora Cannabis (ACB) have been decent, the focus on sales of recreational pots has, as usual, overshadowed the real potential of the industry in general, and specifically Aurora, which is well ahead of its competitors internationally.
In this article, I want to focus on the immense potential of the global cannabis market for Aurora in the short and long term, the specific markets that will pave the way in the short term, why the US does not have as much of importance for the moment. suggest, and why investors should focus primarily on medical cannabis rather than recreational cannabis.
Current overall performance
Looking at the figures from Aurora's latest earnings report, a quick glance at the results of sales from foreign markets seems somewhat anemic compared to the company's overall revenue. After all, as I have mentioned many times, the company is present in 24 countries and it seems that it will be able to generate significant sales in these markets.
According to the company's figures, Aurora sold 4 million Canadian dollars of dried cannabis to the EU. Although that's 40% more than the previous quarter, it was not really inspiring if you do not understand where the company is creating these markets. Overall, it accounted for less than 7% of revenues in the reporting period.
There is nothing wrong with what Aurora does with its international expansion. All that happens is the assembly of the different elements of its production and distribution network. Once in place, revenues and profits from these high-margin markets will skyrocket. The good news is that it's not very far, according to management. It is important to take into account this evolution, because the timing of the start of production corresponds to the pace of implementation of the infrastructure needed for significant growth.
In other words, it will be able to meet the growing demand for markets located outside of Canada.
The most important market of the EU at the present time
Without a doubt, the most important market of the EU at the present time and certainly for many years is Germany. This is due not only to the potential size of the cannabis market, but also to the potential of the medical market, according to Aurora 's management, from about 850,000 to "very short term".
Another key factor is that many patients also benefit from medical coverage for cannabis, making it a fairly predictable market on which to compete once clients have won.
Aurora reached the figure of 850,000 using the Canadian market as a baseline, where more than 1% of the population uses cannabis for medical purposes. In addition, the figure above represents only the German market and not the entire EU market. The inclusion of insurance coverage in Germany will accelerate growth and adoption rate to very high levels.
Supply constraints are a temporary problem, but with an estimated production of nearly 400,000 kilograms in Canada, the company should no longer have any problem supplying Germany and other markets. EU for many years. By 2020, cannabis production worldwide is expected to exceed 600,000 kilograms. It has the capacity of much more if it is necessary.
With higher margins and favorable exchange rates, this will be a powerful catalyst for strong profits.
The recent victory of the public auction market in Germany, where it was ranked first among 79 candidates, further strengthened its position in this important market.
Aurora will be able to provide at least 4,000 kilograms of medical cannabis in this market over a four-year period. Do not forget that this does not limit imports, but reflects the domestic production. The first shipments of the facility that construction is scheduled for this month will begin in October 2020.
Another positive element of this agreement is that it provides Aurora with a national basis in the event that restrictions are never imposed on cannabis imports.
In the short term, outside of Canada, Germany seems to be the market that will have the greatest impact on the company's performance. This should dramatically increase Aurora's revenues and profits in the future.
By using the Canadian market as a proxy, the company believes that it is necessary to have much more capacity to meet the growing demand for medical cannabis in global markets. Supply the German market is important because it is the largest market in Europe. By winning, the Aurora brand will gain recognition and confidence across the continent.
Australia is the second largest market for medical cannabis in the short term. Chief Executive Officer Terry Booth noted that the number of patients has grown from less than 500 in 2018 to more than 5,000 now. Since Australia does not have production facilities at this stage, it will depend for a long time on imports.
A last word on the European market. Many investors are unaware that the EU is a much larger market than the United States, although media coverage is largely related to the fact that cannabis companies find ways to enter or position themselves in the marketplace. United States.
The united EU not only has more inhabitants in the United States, with about 500 million people, but it is also the largest economic bloc in the world.
Thus, while the US market is large and interesting, Aurora devotes, as usual, time and resources to the most important growth sectors in the global cannabis market.
The American market
Having said that the size and potential of the EU are more convincing than the US market, that does not mean that the US does not matter to Aurora, but good. Despite this, there are enormous challenges in the United States, besides the obvious illegality of the pot at the federal level.
Here is how the company described it in its report on the results:
At present, they have several state operators, multi-state operators with small facilities in their different states. And that's not really the way to do the Aurora. And if we go to the United States, we will focus on large populations that are not yet fully established and that have regulations that allow us to operate with benefits. If they erase the status lines, the entire image changes. If you are able to cross these borders, the cannabis market becomes huge.
Cam Battley said something very interesting about importing a product into the United States every time cannabis is legalized by the federal government.
"We have a strategy to enter the United States and this strategy is obviously confidential, but I would expect that if we have overcapacity in Canada and the rest of the world, we would like to ship to the United States. But I do not think we will have this capacity depending on the moment, even if they announced they would have a legal system, it would take years for regulation to be in place and adequate capacity in place. "
There are two main conclusions of his comments. The first is that Aurora does not need the United States as part of its current production capacity to sell cannabis. This is another way of saying that its domestic market and its international sales outside the United States will absorb most of its offer. This is an extraordinary statement as to its demand for global demand.
While many financial points of view denounce the lack of a US strategy visible as being negative, the company reverses the logic again and reveals that it already has end markets for its vast production capacity. I do not think most investors or the market in general understand how rapidly the demand for cannabis in the world is growing.
Another element of the US cannabis market with Aurora is that, although the company does not currently plan to export to the US, Cam Battley gave a general overview of his thought processes. "The other thing to point out is that once the opportunity to build our production in the US exists, we build the best cannabis production facilities in the world, and I think we've clearly demonstrated that with the most high efficiency possible, the use of automation and technology, the result is a high-end product at a real economic cost.Once the opportunity arises, you can expect that we would consider to use our technological lead to build that capacity ourselves, countries around the world. "
Aurora is so far ahead of its competitors in terms of quality, productivity and efficiency of the facilities it builds, that the construction of these facilities in different markets is a competitive advantage unmatched for the moment. That means bigger harvests per square foot and lower costs.
It also means reducing risk exposure if countries decide to reduce the allowed amount of imports into their respective markets.
With much more potential to increase capacity, if Aurora is to rapidly increase production due to strong demand from the US market after legalization, it can already add about 200,000 to 300,000 additional kilograms on an annual basis with its existing holdings (beyond the planned 600,000). kilograms and more per year, it is planned to put it in place in a year or two).
But since it has already been said that it prefers to add facilities within the limits of different countries, it is likely that they will take this route before taking the time to increase production capacity in Canada, as US market.
The most likely scenario is that excess supply will have to be used and used to help meet US demand while building facilities in the country.
Conclusion
I do not think the market understands the implications of what the Aurora management has said. They basically say that even without the United States, its production capacity has enough demand worldwide to boost revenue and earnings growth for years.
Thus, while the idea that it must have an American presence to compete with its peers seems legitimate, in fact, as part of its current capacity strategy, demand is largely sufficient to achieve its objectives.
Of course, this does not mean that Aurora is not interested in the US market, it's just waiting to see first, when cannabis is legalized by the federal government, and then how it goes. by state. In the current state of affairs, it seems that Aurora seeks to play the role of market in specific strategic states rather than trying to impose on a market even more difficult than the Canada and its provinces. As noted by the company:
Will it be medically legalized by the state or by an adult state to declare all at once? We do not know Nobody knows. And I do not think the government knows it. So it's far away. It's one step at a time and we take the necessary steps to do it in an organized manner.
This is another way of saying that there is a lot of time left to prepare for the direction the US government will take with respect to cannabis. Those who make a splash in the media because of their aggression towards the American market are, in my opinion, doing it because they are so far behind Aurora at the international level. They know that there will not be a lot of income and profits for a long time in the United States, but they are positioning themselves as leaders there, while that will have only a few of them. 39, impact on the performance of companies outside the sector. WE
In the end, the most important markets for Aurora in the world are Canada, Germany, Australia and some other EU countries, such as Italy. These will drive the growth of the company in the future
Finally, it is the demand for medical cannabis that is fueling global demand, and even if the majority of newspaper headlines focus on the leisure pot, it is the least desirable of all market segments. cannabis because it is a low product reduces margins and puts downward pressure on profits.
Aurora is preparing to compete in the international medical cannabis market and I think it is well positioned to surpass all of its competitors, who are still struggling to conquer the market, let alone start selling them what they want. Aurora is now ready to sell. This is far more important to take into account than a shortfall.
Disclosure: I am / we are long ACB. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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