Aurora Cannabis Inc. (ACB) Q1 2022 Earnings Call Transcript

Aurora Cannabis Inc. (NYSE: ACB) Q1 2022 earnings call dated Nov. 09, 2021

Corporate Participants:

Ananth Krishnan — Vice President, Corporate Development & Investor Relations

Miguel Martin — Chief Executive Officer

Glen Ibbott — Chief Financial Officer

Analysts:

Vivien Azer — Cowen and Company — Analyst

Pablo Zuanic — Cantor Fitzgerald Securities — Analyst

Michael Lavery — Piper Sandler & Co. — Analyst

W. Andrew Carter — Stifel Financial Corp. — Analyst

John Zamparo — CIBC Capital Markets — Analyst

Tamy Chen — BMO Capital Markets Corp. — Analyst

Douglas Miehm — RBC Capital Markets — Analyst

Fredrico Gomes — ATB Capital Markets, Inc. — Analyst

Presentation:

Operator

Greetings and welcome to the Aurora Cannabis Incorporated First Quarter 2022 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 & Investor Relations

Thank you, Betsy. 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. For analysts, we will ask that you limit yourselves to one question and then get back in the queue.

With that, I would like to turn the call over to Miguel. Please go ahead.

Miguel Martin — Chief Executive Officer

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 have gained 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 rec.

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 continuing to expand globally, and we strongly believe the leader in medical will be the key beneficiary of recreational cannabis when legalized. Second, is redesign the company to create a more efficient and effective enterprise. The big part of this is expense reduction. We’ve already achieved run rate savings of approximately CAD33 million from our announced plans of December, which puts us on target to achieve CAD60 million to CAD80 million in cost savings without impacting planned growth investments.

Third is our strong balance sheet and improved cash burn of only CAD16.6 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, bring managerial talent we don’t currently possess and align with our premiumization strategy. Four, 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 rec. 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 CAD8 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 in growing share of its oil market.

We also saw over 50% sales growth in both the UK and Australian market 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 the pilot program under which we will supply the entire medical cannabis dried flower range. Our expertise in medical cannabis and ability to operate with a highly regulated framework gives us a great opportunity to expand in the global adult rec 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 10 license holders entitled to participate in the Controlled Cannabis Supply Chain Experiment, the CCSC. Although we are providing Growery with the 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 10 approved federally licensed producers. Should the trial be expanded on nationally, we estimate a market size of about CAD2.8 billion annually, which is about the same size of the Canadian market.

On Canadian adult rec, we believe this segment is still in the process of bottoming. That’s why our focus on rec 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 rec 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 focus on premium rec, but more generally a strategy that centers on high margin, high growth medical that’s a key differentiator.

And finally in terms of our science and innovation business unit, we believe it provides Aurora with a strong right to win in premium consumer category. 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, the 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 to North 40, a 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 that puts us in a pivotal position with nearly all cannabinoid biosynthetic work being undertaken in the industry today. We are 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 — Chief Financial Officer

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 amongst Canadian LPs. This consists of approximately CAD424 million in cash, no term debt and access to $1 billion through a shelf prospectus, including a $300 million 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 used was CAD16.6 million, down from CAD142.8 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 continue to deliver overall growth in 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 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 CAD60.1 million, 10% higher than last quarter. Our Medical Cannabis segment continues to excel generating CAD41 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 CAD19.1 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 medical market, which delivers higher average net selling prices and margins. On a related note, our average net selling price per gram of dried cannabis rose 21% to CAD4.67 from CAD3.86 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 CAD25.1 million in Q1, reflected a consistent performance in the face of the continued consumer retail industry roll out.

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. These reimbursement make some consistent and reliable buyers, and this is why we’ve made patient groups with reimbursement coverage a high focus 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 CAD15.9 million and that reflected a 146% growth versus the prior year and 84% sequentially. Q1 revenue included CAD7.9 million of sales to Israel. As I said on our last conference call, BDS Analytics estimate the market size of about $3.2 billion by 2025 for just Germany, Poland, UK, France and Israel. Clearly, International Medical is worthy of our focus and investment and demonstrates why Aurora’s leadership internationally is an important driver of long-term shareholder value. Our Q1 consumer revenue was CAD19.1 million, which was relatively consistent compared to the prior quarter.

Our premiumization strategy gained 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 would 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 CAD44 million in Q1 excluding restructuring and prior period adjustments.

And 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 CAD40 million quarterly run rate by the time we exit this fiscal year. By pulling all of this together, we generated an adjusted EBITDA loss in Q1 2022 of CAD11.5 million excluding CAD600,000 of termination and restructuring charges. The CAD4 million decrease in EBITDA loss compared to last quarter was primarily driven by Q1’s 10% increase in revenues while adjusted gross margins remained strong and steady. For clarity, in our adjusted EBITDA we do not include the benefit of CAD14.4 million of government wage subsidy grants that we reported in other income, as this program has now been phased out by 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.

Now I’ll turn the call back to Miguel.

Miguel Martin — Chief Executive Officer

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 was medical cannabis. We expect continued revenue growth with very high margins. We will remain 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 case in infrastructure with discrete barriers to entry and 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 Netherlands, where others will surely follow. Our regulatory compliance, testing and commitment to science make Aurora the ideal partner in both medical and rec over the next decade. As far as adult rec 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 CAD33 million run-rate cost savings with 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.

Questions and Answers:

Ananth Krishnan — Vice President, Corporate Development & 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 — Chief Executive Officer

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 U.S. I personally have over 25 years working in the U.S. with the FDA, ATM, DEA and have a very keen sort of perspective on this topic. What I will say is that our strategy of being thoughtful and being patient has clearly paid off. If you look at assets in U.S., they have declined in overall value by 60% to 70% and so taking our time from a valuation standpoint clearly has been the right play. Secondly, the Biden administration has been consistent.

Medical first plus decriminalization and so with that, we expect that the number one Canadian medical company and one of the largest Canadian LPs medically globally will have something to say about that. So when you think about our overall goal of EBITDA profitability, we’re not going to put that into risk by looking for a non-traditional 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. And so as we go forward with that, we’ll continue to keep an eye on it. We understand the news of this week in 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 UK and Israel all around the world in excellence in a regulatory compliant framework is what best positions us to be successful in the U.S.

Ananth Krishnan — Vice President, Corporate Development & 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 — Chief Executive Officer

Absolutely. So, first and foremost as a company that has a globally diversified business, we get benefits out of innovation, out of our scientific progress, both in the medical business, but also in the rec business, which is probably more 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 markets followed by another 22 SKUs in the Q1 of 2021 and this has clearly been our most significant and successful innovation push since legalization.

Those innovation SKUs are doing extremely well and right now, they’re driving almost 40% of our wholesale revenue reflecting really strong customer and consumer interest. Those SKUs are heavily skewed towards new flower rotation that are powered by our genetics breeding facility that I mentioned previously, as well as new concentrate and edible SKUs that have been driven by historical investments in new capabilities and competencies.

Beyond that, we’re also seeing great value in limited runs and seasonal offerings and this winter we’ll be offering a Canna Cane Mints and Cranberry Vape for the holiday season under our Drift plan that we think will be received very well and we’re also introducing hash for the first time, which we’ve relaunched under the Whistler branding with new packaging and price points and planning on releasing a whole new lineup from rotational genetics that come from our Coast facility. So overall, there is a big focus on innovation. We get benefit out of it, both in our rec and medical businesses and we see it as a key component of our premiumization strategy.

Ananth Krishnan — Vice President, Corporate Development & 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 — Chief Executive Officer

Ananth, yeah, it’s a great question. I think everybody has been so focused on the U.S. that people forget that there is a huge world out there with positive cannabis legislation and regulations evolving. We’ve talked about Germany, we’ve talked about UK. We’ve talked about key markets like Australia, but the reality is, these are really big markets with huge opportunities. But each and every market has these core conditions, highly regulatory, de-compliance, significant hurdles in everything from manufacturing to packaging, to sales and marketing.

So we see huge potential in our ability, and we’ve seen great success historically. But there are a couple of several core markets that we’re really excited about and I mentioned some of those on the call. Israel was a large driver for us in Q1, and we continue — the bulk sales that we’ll have with our partner Cantek to continue. Also, our partnership with one of the most forward regulatory agencies, the IMCA under the leadership of Yuval Landschaft has been really important, and we think the investments and work we’ve done with Yuval and his team definitely will play dividends globally.

We’ve also announced our entry in the Netherlands yesterday, which we expect to be a significant, about a CAD2.8 billion market in future and in terms of European medical, which is set to become about a CAD5 billion market by 2025, we’re really excited about our leadership in a couple of key areas. The number one supplier of flower in Germany as of September, almost a 35 share — growing share of the oils market and we doubled that share since September. We also believe we’re the number one in the UK dry flower business where we had an exceptional quarter.

And as we’ve mentioned, we’re the exclusive flower supplier, three of the nine tenders in the French medical cannabis pilot program. And so what sets us apart from the competition — our consistent regulatory expertise in science, testing and compliance have been recognized all around the world as our ability and real differentiator in our ability to succeed in those key markets. We’re not going to rest on our laurels and we’re aiming to maintain and grow our market share as these markets develop and we know that the expertise and experiences that we have there will play well all around the world and including the U.S.

Ananth Krishnan — Vice President, Corporate Development & 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

Thank you. [Operator Closing Remarks] First question today comes from Vivien Azer with Cowen. Please go ahead.

Vivien Azer — Cowen and Company — Analyst

Hi, thank you. Good evening.

Miguel Martin — Chief Executive Officer

Good evening Viv.

Vivien Azer — Cowen and Company — Analyst

I wanted — for as important as the medical business is and we talked a lot about it on prior quarters, I actually wanted to focus on your consumer business in Canada because the mix shift is apparent and it’s certainly a positive evolution of your portfolio. And then in looking at the Hyfire data, it looks like you’re having some similar success and drive sequential market share gains for your portfolio. So, Miguel one question, but two parts. The first is, as you look at the components of your market share gains and perhaps you can comment through the end of October, since we’ve already closed out that month, which is the bigger driver, San Raf or Whistler? And then as a follow-up to that, how do you think about these third-party craft brands sitting in, in driving not just topline growth but also not being dilutive to your margins? Thank you.

Miguel Martin — Chief Executive Officer

Very welcome. So Viv, if you look overall in the Canadian rec 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. And as we’ve talked about, we’re focused on premium. So as an example, the discount 28-gram, which in some cases might even have a negative margin in certain provinces — people are chasing because of excess inventories and a bunch of other things. We’re exiting that.

When you look at Quebec, we see strong extremely strong responses. Specifically to answer your question, we’re seeing most of our premium growth in San Raf and 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. This market will rationalize a bit. The other thing, as you talked about Hyfire data and clearly syndicated data is evolving and is getting better but it’s just not there yet in a way that maybe others would look and say in the U.S. of IRI and Nielsen or in tobacco like MSA.

And so while we look at Hyfire data, it’s only 50% coverage in Ontario, it’s only 30% to 40% coverage in AB, BC and Saskatchewan. And there really is little coverage in the SQDC where we see a lot of our overall business. So I don’t think it’s the end-all to be-all. The end of the day, there are places where you can make money in Canadian rec, premium aspects and some of those premium categories definitely are that we’re focused on that. And I think for those that really have their heart set or looking at overall market share, I just don’t think there is a direct correlation to an overall market share.

So we’re going to stay focused on San Raf and Whistler. We’ve seen great response there of our new cultivars. We also can take some of those assets and put it into medical and I do think if you look at Colorado and California, as an example, you do see premium categories start to evolve and really articulate. I got to believe that we’re going to see that in Canada, it’s just not there yet. So we’re not going to chase down the rabbit hole with lower margins, particularly in the discount category

Operator

The next question comes from Pablo Zuanic with Cantor Fitzgerald. Please go ahead.

Pablo Zuanic — Cantor Fitzgerald Securities — Analyst

Thank you. I’m going to focus on the export business. You talked about the stickiness, right, compliance, your science, your innovation, but can you just discuss more the cost side of things? I mean, you are — my understanding you’re shipping in Europe from Denmark, right? We hear of other producers that claim to be low cost and that they could enter Europe, I’m sure is not as simple as that. But just talk more about stickiness because the idea that compliance or being compliant with the regulatory framework in those countries is a key competitive advantage, makes me wonder whether others could easily emulate that and just break in with lower cost and maybe more distribution than you have, if you can expand on that please? Thank you.

Miguel Martin — Chief Executive Officer

Sure, I’d be happy to, Pablo. So it’s absolutely an advantage and you have — take a look at Germany, the reality is the standard in Germany is you have to have within a 10% deviation on the core components, particularly potency, that’s a really hard thing to do. And so you have to have a pretty advanced facility in order to be able to consistently meet that. That had a big role in us gaining almost a third of the entire flower business, so that would be one example. The second example would be Israel. I talked about the IMCA and Yuval Landschaft’s leadership.

They have the highest standards of anyone in the world and include about 44 pesticides that no one else has even tested for. So it’s not only having CUMCS certification, which is a pretty unique certification beyond the EU GMP but also your ability to test, package, ship and have all of that has made a significant difference in Israel. I don’t think even though that there are places around the world where you can produce cannabis cheaper that the overall certification, reporting, consistency of production and entering those markets make that as viable.

I mean, remember we’re talking about medical patients. We’re not talking just about recs. Medical patients and their clinicians and their physicians will find an item that they like. They want it to be of the highest possible quality and consistently available to them and so that is a same situation over and over and over and there is a reason why the same companies are being successful in Germany, UK, France, Netherlands, Israel and it’s about compliance, regulatory forward, all of that infrastructure that you need and while and maybe in the short term, there is a little bit that you can do on low-cost product, it’s not there.

And I will say also that this is a place where like-minded companies agree and so while we may be competing against some of the larger other LPs, we all agree that having a proper regulatory framework and adherence to compliance measures makes sense. So there is no disagreement on that. So there is absolutely a high bar to get in. It makes a huge difference and it’s obviously the reason why we’ve done so well in some of these key markets. You mentioned shipping costs, yes we do ship from our Denmark facility and in some cases, particularly with Israel, we ship from Canada. It’s not insignificant, but it’s not prohibited cost because in many cases, you’re shipping bulk and getting into finished goods in market.

Operator

The next question comes from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery — Piper Sandler & Co. — Analyst

Thank you. Good evening.

Miguel Martin — Chief Executive Officer

Good evening, Michael.

Michael Lavery — Piper Sandler & Co. — Analyst

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

Glen Ibbott — Chief Financial Officer

Well, I think, Michael right now, clearly if you look at margins and you look at overall profit opportunities globally, it’s medical. So margins in mid-60 is really sticky, meeting all the infrastructure, a high hurdles to get in, all the compliance stuff I mentioned internationally, medical takes a unique skill set and it’s one that we have. I think on rec, it really right now you have to remember that in Canada we’ve only three years into this experiment and in the discount arena, which is a decent part of the overall business, it really is a commodity and so pricing is really driving all of those major decisions and so we’re just not going to chase that at the expense of profitability.

In the premium categories, new, differentiated and innovative really matters. And so those unique cultivars make a big difference and we see that articulate itself with Whistler and San Raf. The benefit of our system is we also can take those same products and put it into the medical business and so you find Whistler products which we’ve now put into our medical channel doing exceedingly well with our patients. You see the same thing with San Raf products. So, there are efficiencies, so to the point of chewing gum and walking at the same time it is clearly an opportunity to get benefits out of both.

But I think if you’re laser focused on profitability and sustainability, you’re going to focus on those areas that are more consistent which right now is medical. Now, we’re not taking our eye off of the rec, I just think rightsizing and doing in an appropriate way and also finding areas where they are more asset-light. The genetics business that we’ve invested in historically is wonderfully accretive. Biosynthetics and other aspects of genetics we think will be really important in the global environment as people are looking for that.

So I think as we laid out our strategy, we’re right on track where we want to be, steady as we go. And I think over time, the rec business in Canada will become more rational and in that the efficiencies that companies like us will have will come more to bear. But right now, those that are chasing the discount business, I think they’re in for a little bit of — more of a rocky road but the premium business is rational. And for those that say that the rec business is broken, I would ask them to take a good look at Colorado and California, which appear to be about 18 months ahead of Canada and you are seeing good success not only in margin accretive categories but in premium brands.

Operator

The next question comes from Andrew Carter with Stifel. Please go ahead.

W. Andrew Carter — Stifel Financial Corp. — Analyst

Hey, thanks. Good evening. Wanted to ask about the Canadian medical business. I think it was down 8% year-over-year. So I know that there are some patients that are sticky. The government reimbursement, some that are more fluid. But could you kind of give us a sense of where that business should stabilize and you should see that start to grow from either market, share patient growth standpoint? Thanks.

Miguel Martin — Chief Executive Officer

Sure, I’d be happy, Andrew, and thank you for the question. So I’ll kick it off and then let Glen come in on the back side of it. But right now, we’re seeing a little bit of interaction as Glen mentioned between the rec business and the medical business. I think it’s mostly in those that aren’t receiving reimbursement most evidenced by the fact that we grew share yet you see — saw a little bit of decline. It’s hard to say what the steady state is. We’re hearing some positive news about unions and different groups that will be bringing cannabis on. Right now it’s only about 1% of the adult population in Canada is connected to that system. So we do see an opportunity to not only see the pie grow a little bit as things normalize but also continue to grow share there. Glen?

Glen Ibbott — Chief Financial Officer

Yeah, thanks. Quarter-over-quarter the sales to the reimbursement groups and veterans in particular was absolutely consistent. I think it was CAD3,000 difference quarter-to-quarter. So it continues to be very strong. Little of the decline that you talked about it or well, all of the decline came from those non-reimbursement patients. So we as Miguel mentioned there are groups out there that we have targeted. We continue to work towards kind really end contracts in that way.

We’re also launching a number of products and innovations that we believe will appeal to our existing patient population, particularly the reimbursement ones. You might have seen something launched, I think in the last couple of days. The PAC system, a nice bundle for a veteran patient, Camel [Phonetic] and great pricing to continue to reward and engage those really important patients. So we think we can get more out of the current patient population and then continue to look for some of the stepwise changes and bringing in associations and new leaders.

Operator

The your next question comes from John Zamparo with CIBC. Please go ahead.

John Zamparo — CIBC Capital Markets — Analyst

Thanks. Good evening. I was hoping you could help us better understand how you expect the Netherlands market will play out? And generally, Miguel you prefer medical only markets. But it sounds like you’re excited about the Netherlands transitioning to rec. I would say, your performance globally has been better in medical markets than consumer. So is the reason for excitement on the Dutch system that it seems like its limited license with barriers to entry. And can you talk about your confidence in why it will stay that way over the long term? Thanks.

Miguel Martin — Chief Executive Officer

Very happy to John. It’s a great question. So, I had the pleasure of being out there and spending time with our teams, spending time in the markets and more importantly spending time with our partner, which is the Growery. I mean as I think everyone knows this is the cannabis experiment in the Netherlands is 50 years in the making. The reality today is it’s a very sort of formal and legalized structure for the coffee shops, over 600 retail outlets. But the production parts has been sort of a black hole. The government particularly wants to clean that up and create much more of a legal market.

So I get excited when there is financial incentives. There are only 10 licensees in this experiment and we’re one of them and we’re excited about the partner that we have. Clearly, there are going to be advantages for those 10 at a time in which we expect this goes legal. All the economic incentives line up. And yes, we do like in medical-only markets given our expertise and given sort of how we’ve gone about it. But I believe that medical is a step towards rec.

When you have a strong relationship with the regulators you can understand the marketplace. You have a sense of what product portfolios are doing well. It gives you a significant advantage. This is a massive market. We’ve talked about it being when it all goes potentially even as big as Canada and there’s going to be a clear advantage for those who participate early. So for that reason we’re excited about it. We clearly have a lot of infrastructure in that part of the world and success.

And so I clearly believe that countries like this that gets success in a lot of different ways. And so this is an example I think of where we are bullish and the opportunity to have it participate both in the medical and rec business. And so more to follow on that, but this is really one of only 10 licensees. We’ve got one of them. We’ve got a great partner. It’s a big, big market and all of the incentives from the government, the regulators, the retail owners all line up well here. And so we think we’re in a good spot.

Glen Ibbott — Chief Financial Officer

I’m going to add just a couple of comments. As Miguel said, 50 years in the making. This is an established market. So there is not sort of guess on how big the market will be. There is a number of cities that are required all the coffee shops in those cities are required to participate in this trial. And one of the things I like is, this is right on strategy for us. I mean it is — we’ll call it premium margins, premium pricing. So this is typical pricing — international pricing and margins for us. So it’s very compelling opportunity and we’re excited to be we think one of the leading companies involved there.

Operator

Next question comes from Tamy Chen with BMO. Please go ahead.

Tamy Chen — BMO Capital Markets Corp. — Analyst

Thanks. Good evening. The 29% sequential increase of sales in your premium consumer brands, I mean that’s pretty impressive. But can you help us understand, like is this growth from activating more storefronts to carry your new cultivars or I think some of this growth in new orders because these products are seeing good consumer traction? And I’m also just curious like when do you expect to actually be in a state of sequential growth in your consumer segment, because I know the decline of daily special sort of puts — offsets your premium strategy. Thank you.

Miguel Martin — Chief Executive Officer

You’re welcome Tamy. Thanks for the question. I’ll take the first part and let Glen take the sequential quarters. So I would say that there is — as with all things with the consumer product there are probably four primary reasons why we’re seeing growth. First and foremost, the products are better. So if you look at the uniqueness of the attributes, if you look at the potency. If you look at the genetics and those new cultivars and what we’re seeing on San Raf across the board are better. It took longer than I would like for this reset to take hold but so the overall proposition I would say is more compelling.

Secondly, you correctly brought up distribution. We partnered with what I consider to be the best and largest broker in Canada that has national coverage. Southern Glazer does a wonderful job for us and every month we’re able to touch about 90% of the volume, which allows these new brands to get in. Third is, as you know navigating the provincial buyers is hard. And so the fact that these new cultivars are differentiated, unique, higher potency has given us a higher success rate of getting them through that process, particularly in Ontario, I think is a challenge you hear from everyone.

And I think lastly the overall sort of consistency as we see new being the most important thing that people are buying steady sort of rollout of these and seeing a — not only in flower but other brands has start to bring some of the shine back to San Raf particularly with bud tenders and store owners. And so we’re going to continue to roll this out. We’re really pleased with the coverage, so to speak, of our genetics. You’re going to see everything from continue doing cultivars and new genetics on San Raf and Whistler. But you’re also going to see a lot of seasonals and you’re going to see what we call collaborations.

The North 40, for those that are familiar with Gord and that company, they’re one of the pre-eminent craft growers. And for him to select Farm Gas and be so positive about it and do so well speaks to our ability to produce cutting edge genetics. And I think for a lot of people thought the big cannabis can’t grow great, nichey, high quality flower. I think that’s a testament that we absolutely can and will. Glen, you want to pick up on the run rates and quarter-over-quarter?

Glen Ibbott — Chief Financial Officer

Yeah, sure. Tamy we were up in most provinces, a good 50% or more in Alberta BC and Quebec is a strong point for us for sure. I think 33% of our consumer revenue came out of Quebec in Q1. Ontario is a nut to crack obviously, and I think we’ve put a great foot forward with a recent product call and the innovation that Miguel was talking about, I think is the route forward there. So I expect that, Miguel’s old line, it’s a continuing challenge in consumer market, but the innovation that we’ve been putting forward and in the success that we’ve seen with that innovation to-date I think is positioning us well to get this back on track over the next little while.

And again, I think Ontario is the key for us because we are seeing the pickup in the other provinces where we’ve been able to get product into market. Quebec, for instance is interesting in that if you’re selling your Quebec it’s in all the stores. Also there is not as many [Indecipherable] in Quebec. It’s just a different market and there are certain constraints and only certain LPs can operate in Quebec effectively. So, it’s a great market for us. San Raf has been there since the beginning and has a great reputation. So when you put — when we renew the brand with new cultivars and especially the type of cultivars we put in there we see the pickup and we see the response. You see it in social media and things like that. So that’s the route forward for sure.

Operator

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

Douglas Miehm — RBC Capital Markets — Analyst

Yeah, good evening. My question just has to do, you talk about the stickiness of the International Medical business. I’m just curious, the CAD60 million or so and with the large order coming out of Israel during the quarter, is this sustainable or are we going to see a little volatility over the next several quarters or are we going to have a benefit from other countries offsetting maybe a decrease in Israel quarter-to-quarter?

Miguel Martin — Chief Executive Officer

Yeah. So it’s a great question. So, certain markets our steadier than other markets, Germany, UK are steadier. When you see other markets say like Poland as an example, this last quarter we saw a bit of a regulatory hitch with a lot of companies including us and that caused a delay in timing. Israel is a bit of an evolving market and so it’s hard for us to say it’s going to be steady. But when it’s open, we do extremely well. So we don’t really give guidance on Israel. Now, to your point about other markets opening up, we always hope for that. You’ll know about the big ones.

So France is obviously in their process. We’ve talked about the Netherlands. And so I can’t give you an exact sort of guidance quarter-over-quarter there, but what I can tell you though is that it is the same conditions that either open or close a market. Can you meet the standards? What’s happening with the overall product specs? What’s going on with the packaging? What’s happening with the testing? All of that is sort of consistent. And so when you win you win consistently. And while there are timing points or hiccups or whatever you want to describe it, we’ve done really well.

I think more so than almost anybody, when there are profit opportunities to be had, we’re there. Israel is a really good example. I’ve spent time in Tel Aviv. I have incredible respect for Yuval Landschaft. He is the lead regulator with the IMCA. We were one of the first companies to be able to navigate that process and ship what we think is the largest amount of cannabis into Israel, three of the nine flower tenders in France. And so I wish it was steadier and sort of more formulaic about us being able to projected it out.

But I think if you’re bullish on the macro theory of global cannabis and you understand the high regulatory hurdles and you understand that these regulators all talk to each other and there is a lot of interaction, you’re going to see the same companies win time after time after time. And I absolutely believe the FDA is going to be running a similar process and they’re going to take a deep interest in what’s happened with agencies, such as the IMCA in Israel or Health Canada in Canada. Glen, anything you want to add?

Glen Ibbott — Chief Financial Officer

Yeah, I mean, Doug, the diversification of the county, Miguel alluded to it is truly important. You have a basket of countries as they are all developing Poland, for instance, we sold almost nothing to it last quarter as we had to re-register our Danish production facility for shipments into Poland. Now we’ve got that registration and shipments into Poland restarted in October, but that — so Poland down but the UK was up 50% and Australia was up 50%. So for us, the diversified basket of international markets is important as they develop to your point Doug. Some will offset others as we grow it makes it a little bit more predictable, little bit more consistent that portfolio.

Operator

The next question comes from Fredrico Gomes with ATB Capital Market. Please go ahead.

Fredrico Gomes — ATB Capital Markets, Inc. — Analyst

Yeah, good evening, guys. Thanks for taking my question. I just want to go back to your investment in the Netherlands. When do you expect sales to start there? Just how long will it take for your partners there to start operating? And then in terms of margins there as well. I know you touched on the premium strategy there but I imagine that those margins, they wouldn’t be as good as your International Medical shipments. Thanks.

Miguel Martin — Chief Executive Officer

Glen, you want to kick it off and then I’ll come back?

Glen Ibbott — Chief Financial Officer

Yeah, I’ll start. Yeah, thanks. Yeah, Fred, listen, I’m really interested in this market. I think it’s really [Indecipherable] well established market like that that we’ll actually have Aurora brands in the coffee shops when you go to Amsterdam or some of the cities that are participating there. So I look forward to that. We expect sales to start in calendar ’23. So, a little over a year from now. And in between now and then the licensees are getting their final sort of approval and building out their facilities in the country. So that’s what’s happening before. So it starts kind of beginning of calendar ’23, and we expect to see sales just after that. The margins are similar to the type of international margins. We see that the pricing like most regulated markets is fairly strong and we expect to get healthy, I think around kind of medical link margins, which is why we’re keenly interested in. That’s not a consumer market like you see in Canada or more of a premium. So that’s how I think of margins and the timing of the revenues. Thanks.

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 — Chief Executive Officer

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

Operator

[Operator Closing Remarks]