'COVID hurt us': Aurora CEO says premium pot shift disrupted by pandemic

Weeks after stepping into the top job at Aurora Cannabis (ACB.TO)(ACB), Miguel Martin announced a bold new strategy to push the battered Edmonton-based producer towards profitability: Sell more "premium and super premium" pot products that command higher margins. Let Aurora's rivals focus on the cheaper weed that has surged in popularity with consumers.

Touting his years of consumer goods experience in the tobacco industry, Martin told analysts on his first earnings call as CEO in September 2020 that overall market share is a poor measure of profitability. Targeting consumers willing to pay more for Aurora's upper-tier San Rafael '71 and Whistler Cannabis brands, he said, would see the company turn a profit in its second fiscal quarter of 2021.

So far, it hasn't gone as planned. In its latest quarter, the third fiscal period of 2021, Aurora drifted further away from turning a profit, booking an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $24 million.

In a phone interview with Yahoo Finance Canada, Martin says the challenging quarter was the result of a number of factors, including tougher competition in Canada's recreational market that's eaten away at the company's once formidable slice of non-medical sales. The reason his planned pivot to premium didn't come to the rescue, he says, was largely due to COVID-19.

"COVID hurt us," said Martin, who's been unable to travel to Canada from his home in the United States due to the border closure. "It's had a significant impact."

The pandemic has caused a number of headaches for the cannabis industry at large. In April, Aphria CEO Irwin Simon complained that lockdown measures prompted smaller orders from the provincial wholesalers that buy pot to be sold in the retail market. In May, BNN Bloomberg confirmed this was the case in Ontario, Canada's most populous province.

Martin says provincial buyers have also altered the way they handle new product listings.

"It used to be that if you had say a new concentrate or edible or whatever, you could get it in. It would have to sell at a certain threshold, but you could get it in. We all sort of counted on that," he said. "That process has changed. In some cases, provinces are only taking 20 to 25 per cent of presented new items."

These challenges were felt across the industry, but it was particularly poor timing for Aurora. The company recently spent millions on raising the potency and overall quality of its cannabis to attract more discerning buyers. It also removed lower-quality pot it had grown from its inventory, at a cost of $3.2 million. To make matters worse, Martin says, consumers are less likely to try new pot products when they buy through click-and-collect or delivery, the only sales options for several months in many jurisdictions.

He sees the COVID-related headwinds as a temporary problem, albeit a serious one. He notes the buzz he's hearing from budtenders at the retail level, and through social media, that suggest the product changes he's made have been well-received.

Not everyone has supported Martin's plan. Bill Kirk, executive director at MKM Partners, doubted the success of the strategy when it was first announced.

"We believe Aurora's attempt to 're-premiumize' its portfolio will be difficult given industry inventory levels and lack of mainstream pricing power," he wrote in a research note last September.

On Aurora's latest earnings call, analysts peppered Martin and his executive team with pointed questions about the company's waning market share in recreational pot, uncertain path to profitability, and overall lacklustre financial performance. Some retail investors who feel burned by the once high-flying pot firm have been consistently vocal on social media.

Martin is confident that his profitability plan is on track. The company said last week that it's targeting between $60 million and $80 million in annualized cost efficiencies over the next 12 to 18 months. This, the company says, will allow it to achieve positive adjusted EBITDA without relying on revenue growth and stronger margins.

While remaining optimistic about Aurora's future, Martin is also sympathetic to those who lost money on his company's stock. The Toronto-listed shares have fallen more than 95 per cent since their peak in October 2018, the month Canada became the first G7 nation to legalize recreational cannabis.

"I understand, particularly for long-term investors, what the [company's] original thesis was, where the stock traded, and where the market cap of the company was. I get that. I really am respectful of that," Martin said. "We're doing everything we can with their best interests at heart."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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