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2 Reasons Aurora Could Recover From Significant Pruning

Aurora Cannabis (NASDAQ: ACB) announced in early June an additional round of cost-saving measures as part of its business transformation plan that has already brought on major adjustments to the company in the past two years. Aurora's shares dropped throughout June after it bought back millions of dollars in convertible debt, announced it would close a major facility, and laid off a huge chunk of its workforce. All this is bad news for the international cannabis operator -- but a strong showing in Europe's medical cannabis market, and its major presence in Canadian medical cannabis, should provide long-term hope amid the short-term gloom.

Aurora's plan to shake up the company

Aurora unveiled its business transformation plan in February 2020, and updated them four months later, announcing that it was:

  • Closing five smaller-scale growing facilities across Canada
  • Working toward cutting 30% of its production staff and 25% of its sales and marketing staff
  • Changing its leadership team, including the retirement of President Steve Dobler

Even as the company closed some of its Canadian operations, it increased production in its Denmark facility in an effort to supply the EU medical market. These moves were just the beginning of its actions over the next two years.

The company got rid of $82.9 million in old, obsolete inventory in Q3 2021, and another $31.6 million worth in Q2 2022 -- products it made but could never sell, and ultimately lost money on.

Aurora's also been selling stock to raise money -- $112 million in the most recent quarter -- which waters down existing investors' holdings. During and after Q3, it spent that exact same amount in cash to buy back its own convertible debt. Those loans' holders could convert the dollar amount of the company's debt into shares of Aurora if the company didn't pay back that debt first. The lower a company's share price, the more shares it has to issue in order to cover the dollar amount of such debt whenever it comes due. Buying back shares early could suggest that Aurora believes its shares will be worth less in the future, and is buying the debt back now to avoid diluting current investors worse later on.

The company also revealed in Q3 that it's fully closing its flagship grow facility in Edmonton, Alberta, bringing its total workforce reduction to 12% of its previous headcount. Aurora believes these changes, however painful, will pay off handsomely. In Q3, it increased its estimate of how much it'll be saving on costs each year by 2023 by roughly $72 million, to $120 million-$136 million.

2 reasons to catch the rebound

Although the facility closures and layoffs are devastating for workers and their communities, Aurora's overall position in the global cannabis market looks stable. Excluding lower sales in the Israeli market , its global medical cannabis net revenue rose 55% year over year. By investing heavily in genetics at its Vancouver facility, and acquiring Thrive, a premium well-established Canadian medical cannabis brand, Aurora has set itself up to remain the No. 1 Canadian medical cannabis company, noting in its Q3 2022 investor call that its Canadian medical cannabis gross revenue is more than its closest competitors' entire gross revenue.

Furthermore, ramping up production at its Nordic facility has paid off, since Aurora has an exclusive contract to produce medical cannabis for the French market. It also has a significant presence in the U.K., Czech Republic, Malta, Germany, Denmark, Poland, and in Australia, where it saw a 300% increase in its Down Under medical cannabis revenue alone.

After its Q3 2022 report on May 12, Aurora shares fell roughly 50%, though they've since risen slightly from their lowest point. However, those early convertible stock buybacks suggest that even the company thinks its shares could go lower.

But as Aurora sheds its debt obligations, and facility and personnel costs continue to fall as the business transformation plan develops, the company's presence in lucrative medical cannabis markets could begin to pay off in the form of increased profits and operational cash flows.

That extra cash could eventually give Aurora room to begin expanding into more countries in Europe. The company has burned cash in three of the last four quarters. If cost cuts help its free cash flow rise, cannabis stock investors should monitor whether it uses those funds to move into new medical cannabis markets in Spain and Switzerland. That would signal the company's readiness to grow again, building on its new premium brand and more efficient footprint.

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Lukas Barfield 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.


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