Aurora Cannabis Inc. (NYSE: ACB) is the latest cannabis company to destroy the job argument as a reason for legalization. The Canadian cannabis company laid off 25% of Aurora’s SG&A staff, most of those to take place immediately and a roughly 30% reduction in production staff over the next two quarters. The cuts went to the highest levels including a restructuring of the executive leadership team and the recently announced retirement of President Steve Dobler.
“Across our organization, we continue to take decisive action and execute on our previously announced Business Transformation Plan,” stated Michael Singer, Executive Chairman and Interim CEO of Aurora. “With today’s announcement, we have achieved our stated SG&A run-rate target and expect to operate at approximately $42 million for the first quarter of fiscal 2021. The further cost savings and margin improvement to be realized from our facility rationalization plan is another example of our commitment to deliver greater efficiency throughout the business.”
Mr. Singer further elaborated, “This has not simply been a cost-cutting exercise. We have undertaken a strategic realignment of our operations to protect Aurora’s position as a leader in key global cannabinoid markets, most notably Canada. Both the Canadian facility rationalization and inventory revaluation are expected to improve gross margins and accelerate our ability to generate positive cash flow. We believe that we now have the right balance for the long-term success of Aurora – market leadership, financial discipline, operational excellence, and strong execution. We remain focused on making Aurora a profitable and robust global cannabinoid company.”
The company said that with a new SG&A run-rate of approximately $42 million the company could still support significantly higher levels of revenue in the future without a corresponding level of growth in SG&A.
Consolidation of Production Activities
Aurora said it has initiated a plan to close operations at five facilities over the next two quarters in order to focus production and manufacturing at the Company’s larger scale and highly efficient sites. The company will take a charge of $60 during the fourth quarter in order to make these changes. The affected facilities are the smaller scale facilities, Aurora Prairie, Aurora Mountain, Aurora Ridge, Aurora Vie and Aurora Eau. Aurora expects that part of the Aurora Vie facility in Quebec will remain operational to allow for the manufacturing of certain higher-margin products.
By the end of fiscal Q2 2021, the company said it intends to consolidate Canadian production and manufacturing at Aurora Sky, Aurora River (EU-GMP certified), Whistler Pemberton, and Polaris. As previously stated, the Aurora Sun production facility has been scaled back to six grow bays and will allow for efficient scale production on an as-needed basis as market demand grows. 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 products. The company also said it expects to record a charge of up to $140 million in the carrying value of certain inventory, predominantly trim, in order to align inventory on hand with near term expectations for demand. Approximately 40% of the expected inventory provision relates to the non-cash IFRS fair value adjustment within the inventory.
In addition to the company’s continued focus on production efficiencies and yield improvements, Aurora expects that the production facility closures will 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 Q3 2021. The reduction in inventory carrying value is also expected to be modestly accretive to future gross margins as older, higher-cost inventory is replaced with newer, lower-cost inventory and consequently reflected in gross margins.
Aurora plans to deliver its Q4 2020 full financial results in early September.