Earlier this week, Aurora Cannabis Inc. (ACB.TO) (ACB) issued a progress update on its business transformation plan and the announcement included a number of developments caught our attention.
The Canadian cannabis producer has been in the middle of a transformation and is highly focused on cutting costs and improving efficiencies. The market has not responded too favorably to the recent developments and we will monitor how the company continues to execute on this strategy.
As part of the transformation, Aurora Cannabis has undertaken a strategic realignment of its operations to protect its position as a leader in key cannabis markets. Through this initiative, the company expects to generate positive cash flow and for gross margins to significantly improve.
During the last few months, Aurora Cannabis has executed a material reduction in both corporate and production level employees as well as third-party consulting and professional spending across the organization. After these cuts, the company expects to have a run-rate of approximately $42 million and expects to be able to support significantly higher levels of revenue.
Aurora Cannabis has initiated a plan to close operations at five facilities over the next two quarters in order to focus production and manufacturing at its larger scale and highly efficient sites. The affected facilities are the smaller scale facilities and Aurora Cannabis expects that part of the Aurora Vie facility in Quebec to remain operational to allow for the manufacturing of certain higher margin products.
By the end of the fiscal second quarter of 2021, Aurora Cannabis intends to consolidate Canadian production and manufacturing at Aurora Sky, Aurora River (EU-GMP certified), Whistler Pemberton, and Polaris. As part of the transition, the company also intends to immediately ramp up cannabis production at its Nordic facility in Europe from which it believes can adequately service the European market with EU-GMP certified product.
Aurora Cannabis’ production and manufacturing consolidation plan represents a new, incremental cost reduction opportunity that was not previously considered in the original SG&A target and we find this to be of importance. In the fourth quarter of 2020, the company expects to record production asset impairment charges of up to $60 million. Aurora also expects to record a charge of up to $140 million in the carrying value of certain inventory in order to align inventory on hand with near term expectations for demand.
Going forward, Aurora Cannabis expects the production facility closures to be accretive to gross margin as the move to large scale operations is expected to result in a material reduction in per unit cost of goods by the third quarter of 2021. The reduction in inventory carrying value is also expected to be modestly accretive to future gross margins and we will monitor how the management team is able to execute on this transformation.
Following the reverse stock split, Aurora Cannabis has been under pressure and this is a trend that we continue to closely follow. The company has been pretty active since the split and we will monitor how the story continues to evolve.
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