Home / World / Aurora Cannabis Inc. (ACB) CEO Terry Booth on Q3 2019 Results – Earnings Call Transcript

Aurora Cannabis Inc. (ACB) CEO Terry Booth on Q3 2019 Results – Earnings Call Transcript



Conference Call for Earnings from Third Quarter Results for 2019 Aurora Cannabis Inc. (NYSE: ACB) May 15, 2019 10:30 a.m. ET

Participants of the company

Cam Battley – Corporate Director

Glen Ibbott – Chief Financial Officer

Terry Booth – Executive Director

Participants of the conference call

Vivien Azer – Cowen and Company

Chris Carey – Bank of America Merrill Lynch

Tamy Chen – BMO Capital

Luke Perda – Seaport Global

Michael Lavery – Piper Jaffray

Jason Zandberg – PI Financial

John Chu – Desjardins Capital Markets

Doug Miehm – RBC Capital Markets

Rob Wertheimer – Melius Research

Operator

Good morning to everybody. Welcome to the Aurora Cannabis 2019 fiscal third quarter phone conference for the three months ending March 31, 2019. During today's call, Aurora will reference a profit presentation that listeners can download from the reporting section of the website for investors of the company. .auroramj.com.

Listeners are reminded that certain matters discussed in today's conference call or responses to questions raised may constitute forward-looking statements that are subject to the risks and uncertainties related to Aurora's future financial or business performance. Actual results may differ materially from those anticipated in these forward-looking statements. The risk factors that may affect the results are detailed in Aurora's annual information form and in other periodic filings and registration statements. These documents can be accessed through the SEDAR and EDGAR databases.

I would like to remind everyone that this call is being recorded today, Wednesday, May 15, 2019.

Now I would like to introduce Mr. Cam Battley, Corporate Director of Aurora Cannabis. Please, go ahead, Mr. Battley.

Cam Battley

Thanks chris Good morning everyone and thanks for joining today's conference call. It's a beautiful sunny day in New York. With me are Terry Booth, our Executive Director, Glen Ibbott, our Financial Director and our Executive President, Michael Singer.

For today's call, I will start by discussing some of our most outstanding operational aspects of the last quarter and Glen will analyze the financial aspects. Then I will briefly return to present our perspectives for the rest of the year and beyond. And then we will take your questions.

As we do each quarter, I'll start with some ad hoc observations to frame the conversation and then proceed to the formal comments. Now, our operator Chris mentioned that a brief presentation of earnings calls is now available in a financial section of our investor website, investor.auroramj.com, and I would like to draw your attention to something new that we have developed on slide three . It is a panel of key performance indicators. They really tell the story of our solid performance during the quarter, but the most important thing is that they make it very clear where we are headed, including our path to profitability.

So, for those of you who can see it and even for those who do not, I will simply analyze nine of these key performance indicators that we gather to simplify and clarify the snapshot of where we are and include some very important results for us in the quarter, including growth in all distribution channels. So our cannabis consumption income in Canada, 37% more. Our income for medicinal cannabis in Canada, 8% more. And our income for international medicinal cannabis, 38% more. And all that averaged 20% quarter-on-quarter growth.

In the next line, you will see that our cash cost to produce per gram was significantly reduced from $ 1.92 to $ 1.42. So that's 26% less. We knew this was going to happen. We knew that that would result from the scale, efficiency and technology of Aurora Sky, but it is very rewarding to see it.

The next point you'll see is that our average net sale price per gram is actually a little lower. It is the only one of these key performance indicators that we mark as yellow instead of green. And so, our average net sales price per gram was reduced by approximately 6% during the quarter. And the reason for that, later, we will see more in detail, it is essentially that we have not had time to scale or at least we did not at the beginning of the quarter. We had not had the time to expand our derivatives production. And the reason why it is yellow instead of red is because we already have indicators. So that's going to turn around in this quarter.

Our gross margin is up, a small amount of 1%. But our gross margin on cannabis income has increased and we are very, very proud of that. We have always empathized our gross margin. We will continue doing it this way. And also our active registered patients are quite remarkable because they increased 5% in the quarter to 77,000 and have gone up another 7% or 8% since then. This is significant because some companies in the sector have been indicating that they have seen a weakening of demand on the medical side. We have not seen that. In fact, we have been handling it very, very carefully so as not to add too many patients. Now that we have production, we can continue to increase that.

And then, the last two key performance indicators that I want to focus on are the kilograms produced and the selling expenses, since they really tell the story of our path to profitability. We double our production. It has risen 99% quarter by quarter to more than 15,000 kilograms. And the other key indicator of key performance here is our SG & A, only 1%. And this is more due to the commitment we made in January to change gear and focus on disciplined execution and cost management to ensure that this path to profitability becomes a reality. Therefore, I am pleased to say that we are still posting positive EBITDA this quarter.

So the snapshot here before moving on to formal comments is the industry's leading production and production efficiency, the industry's leading gross margin, the quality of industry-leading products, yield and crop loss. , the leading global footprint in the industry and technology without equal. At this stage in the development of the sector, I would absolutely say that the number one critical success factor is the ability to produce and sell a huge volume of cannabis. And we have it in this phase.

All good. And now in the formal comments. Looking back on the first three quarters of our financial year, we are very pleased with the progress we have made. We have consistently executed our growth and expansion strategy, which resulted in continuous revenue growth while improving efficiencies and scale to drive margin improvement. We are proud of this progress and we are very happy that while many in this sector are still trying to decide how to develop their cannabis business, we have already successfully built a solid and prosperous business with solid foundations that positions itself as a global leader.

Now let's look at our achievements in the third quarter. Our net income was $ 65.1 million, an increase of 20% over $ 54.2 million in the second quarter. We produce almost 16,000 kilos of cannabis, twice the volume compared to the previous quarter. With Aurora Sky increasing with great success, our cash cost to produce per gram was reduced by 26%, while the administrative and sales expenses remained relatively stable during the same period, due to the disciplined management of costs. In the quarter, Aurora continued to perform strongly in the Canadian consumer market with a leading market share and a strong brand awareness. Our consumer income has continued to exceed our expectations. We achieved a growth of 37% compared to Q2.

While the increase in production was the fundamental driver of growth, I think it is important to understand how well our products performed in terms of brand resonance. An analysis of more than 6,000 reviews on list.com conducted by a coverage analyst showed the performance of the Aurora brands in this regard. Two of the three most recognized brands were ours, with all our brands in the top 11. While in a market with little supply, the ability to produce remains the key, in the longer term we know that the strength of the brand will play a key role in the capture and maintaining market share and following these numbers, we are very well positioned in the consumer market.

We also expect an improved retail infrastructure throughout Canada, which will further increase consumer participation. There are still many consumers who still have to buy their cannabis legally. In addition, people who do not carry out transactions in the illegal market, but who are interested in cannabis, seem not to be involved due to the reported shortage and the physical retail infrastructure currently underdeveloped. The launch of physical stores in Ontario is a big step forward in this regard and, as the supply increases, we will see a growing network of retail stores. In this regard, I would like to mention our partner, Alcanna, who recently opened another of his beautiful Nova Cannabis dispensaries at 499 Queen Street West and Toronto. Sorry for the announcement, not really. In general, in line with what has happened in other consumer jurisdictions, a well-developed physical sales network should generate strong growth.

While we perform very well in the consumer market, medical cannabis remains the cornerstone of Aurora's identity. In the last quarter, we undertook many initiatives to strengthen our leadership position in this segment, both nationally and internationally. Some have suggested that the legalization of consumer cannabis in Canada would lead to a decline in the number of patients who buy into the medical system, since people go to stores to self-medicate. In our experience, nothing is further from the truth. Every day, the number of global doctors who prescribe cannabis to address real medical problems, from PTSD to palliative care, is increasing. Many of these patients would only seek treatment through traditional channels, such as their family doctor or trusted clinic, instead of seeking advice at a dispensary. In addition, through the medical channel, patients can request reimbursement of their expenses through reduced taxes and an increasing number of companies that include medical cannabis in benefit policies. Then, despite the introduction of consumer legalization, we continue to experience a growth in the number of patients, an increase of 5% this quarter to more than 77,000. As of yesterday, our number of patients in Canada has increased further to 82,745, in line with our production acceleration towards the end of the quarter and in the fourth quarter.

In addition, three of our brands were included in the online medicinal cannabis market Shoppers Drug Mart, which opened last January. In the quarter, we also introduced product identification numbers or pins to 78 of our medical cannabis products to make it easier for patients to request reimbursement under health insurance plans. We are recognized as leaders in medicinal cannabis. This is not only due to the high and constant quality of our products provided by our three medical brands, but also because as an organization we are integrated along the value chain to advance medical knowledge to support doctors and other professionals of health and to provide services to our patients With excellent products, customer service and information.

Through our knowledge, we have the broadest medical research program in the industry with more than 40 clinical trials and ongoing and completed medical case studies. This creates an incredible branding force with physicians around the world who continue to be the main drivers of growth for the medical sector. We own CanvasRx, which provides critical services to both patients and physicians seeking to understand medicinal cannabis and its uses. We interact with health authorities at the international level with networks of doctors and pharmacies. It is this rigor in our medicinal cannabis program that has allowed us to increase our presence in the medical cannabis markets, both nationally and globally. Currently, we are present in 24 countries on five continents.

Last February, we expanded our presence in Europe with the purchase of a 51% stake in Gaia Pharm, which was renamed Aurora Portugal. This new division has received the permission of the Ministry of Health of Portugal to build a cannabis cultivation plant compatible with good manufacturing practices of the European Union GMP of the EU. It is expected that the first phase of the installation will be completed in the third quarter of 2020 and will have a capacity of 2,000 kilograms per year, with another 2,000 kilos when the second phase is completed.

Another significant advance in Europe was our victory in the recent public tender in Germany to grow and distribute medicinal cannabis. Aurora was one of the three winners of the competition, which was evaluated based on the design, quality, safety and logistics of the growing facilities. Of the 79 applicants, we received the highest classification and we won the maximum number of lots in the tender. The lots will allow us to provide a minimum supply of 4,000 kilograms of medical cannabis over a period of four years. We will start building this month and we hope to send cannabis from the facilities as of October 2020. We are very pleased with this victory, which consolidates our leading position in Germany and reflects our industry-leading facility design. This was an important skill that we developed at the beginning with our acquisition of the facilities design business, Larssen in 2017.

Although the quantities of the tender are much smaller than we anticipate that the size of German medicinal cannabis will grow, it is a critical gain that will strengthen our brand in the local market and in the rest of Europe. Another development that strengthens our brand in Germany is the introduction of the full spectrum extract. Here we also established the advantage of the early engines and we are developing the market. Besides, use the Canadian medical market as a proxy of how other international markets will develop. This provides a good indication of the scale of the opportunity that was sought. In Canada, we already have more than 1% of the population registered in the medical system. By translating this to the international markets where we have a great initial and early advantage, it is clear that a very important additional capacity is needed. Therefore, our expansion of Aurora Sun in Medicine Hat and the construction of Aurora Nordic in Denmark.

With scientific studies increasingly increasing word-of-mouth and anecdotal evidence, we believe it is fair to assume that the destigmatization of cannabis and adoption by physicians will follow an accelerated curve compared to Canada. You must work to develop these markets, obviously, and for now, they are still a restricted offer, but the opportunity is there and we are executing extremely well in this regard.

In terms of our production facilities, in the third quarter, both MedReleaf Bradford and Aurora Sky in Edmonton received the Health Canada license. Bradford is now fully planted and offers a production capacity of 28,000 kilos of premium cannabis, air drying and hand care. We believe that Aurora Sky is the most advanced cannabis cultivation facility in the world. The 800,000-square-foot facility has a production capacity of more than 100,000 kilos per year. Sky, an indoor installation of a massive closed system with a glass roof, implemented state-of-the-art technology to produce constant high-quality cannabis and at the same time benefit from a high degree of automation to increase efficiency. This means an objective production cost of less than $ 1 per gram. Sky is now fully planted and is successfully increasing to its maximum capacity. The increase in production observed in the third quarter compared to the second quarter will continue with a greater availability of products for sale in the fourth quarter.

At Aurora Sun in Medicine Hat, our newest and most evolved Sky-class facility, the construction goes very well with the construction of the metal structure and the almost complete glass insulation. The design of Aurora Sun includes a series of technological advances compared to Aurora Sky and will further improve our economic efficiencies. As I mentioned, we announced an increase in the scale of Aurora Sun in the quarter. The facility will now measure 1.6 million square feet and, with the efficiency of the Sky class, it is expected to produce more than 230,000 kilograms per year. Sun also represents an advance in our production process with the installation focused solely on high and efficient production with dry cannabis sent to other facilities for further processing. In February, we announced a new Aurora Polaris facility that will focus on post-harvest processing. Polaris, strategically located next to Aurora Sky in Edmonton, will comply with the EU GMP norms and will serve as our Center of Excellence for the production of high added value and high added value products, such as groceries. Our product development team, in collaboration with our specialists in market development and forecasters of the domestic market, have identified these products, those products that we anticipate will sell better and have the best margins. These products include edible products such as baked goods, chocolates, mints, vape products, cosmetics and softgels that we will produce at Polaris. Products such as infused beverages are also in development. But considering the relatively low market share of these products, we are not rushing this, as we prefer to do well rather than quickly reach the launch of a product with a limited market resonance.

Taking advantage of its proximity to the Edmonton International Airport, Polaris will also serve as a national and international logistics and storage center. Polaris is expected to be completed by the end of this year. Meanwhile, anticipating the new regulations that allow these new products, we are installing production lines in our other licensing facilities to ensure that we will exceed the market demand with a wide complement of products and we will not have the level of scarcity that the industry He experimented on October 17 last year. Polaris demonstrates the scale we have achieved in our operations. We are not a domestic industry, but rather a pharmaceutical level in the industrialized operation that requires complex systems to boost operational efficiency, high quality production and consistent and high quality product innovation. You have heard today the progress we have made in the consumer and the medical business, both nationally and internationally. Polaris will help us to institutionalize our culture of innovation and maintain our global leadership.

Now Glen will analyze the most important financial aspects of the third quarter and more for you, Glen.

Glen Ibbott

Thanks Cam and good morning everyone. Aurora's financial performance in the third quarter of fiscal year 2019 reflected our solid and continuous execution in all market segments, as Cam has just described.

Our net income increased to $ 65.1 million for the quarter, compared to $ 54.2 million in the second quarter of fiscal year 2019 and only $ 16.1 million in the comparable period last year. Of this, cannabis revenues were $ 58.7 million, a sequential growth of 23% in the three market segments, driven mainly by a 37% increase in cannabis sales in the consumer market. Behind this growth was the increase in production that Cam discussed from Aurora Sky and our Bradford facilities. Medical cannabis sales in Canada increased by 8% or $ 1.9 million as a result of the continued growth of our patient base.

As indicated by Cam, we continue to support the growth of the Canadian medical market and, in line with our first patient culture, we have greater availability of the medications that patients need. We continue to take the position that medical cannabis, like all prescription drugs, should not be subject to excise taxes. For that reason, we continue to absorb the cost of tax for our patients. This negatively affected our revenues in the quarter by $ 3 million or 5%.

Extracts accounted for around 18% of cannabis revenue in the third quarter compared to 22% in the previous quarter. Our oil extraction facilities have been operated at their maximum capacity during the last two quarters and, as a consequence, the relative contribution of the extracts decreased slightly as our total revenues increased. During the quarter, we installed additional extraction capacity in some of our facilities and that capacity is already online. In addition, our extraction partner Radient Technologies has entered into commercial operations, which we anticipate will begin to make a notable contribution from the end of the fourth quarter onwards. Finally, the installation of EnWave's low-temperature, fast-drying technology at the Aurora Sky and Sun facilities will increase the extraction speed in the coming quarters, which will take from a matter of weeks to a day.

The average net sales price of cannabis decreased to $ 6.40 in the third quarter. This was partially the result of the combination of products, since we registered a 48% increase in cannabis sales in the consumer market, which has a lower wholesale price structure. The ASP was also affected by the first full quarter of special taxes on medicinal cannabis, which Aurora absorbs. And finally, and most importantly, the relative decrease in the contribution to the income of the extracts also affected the average sale price. In the future, with a significant additional online extraction capacity both internally and Radient, we anticipate that the relative contribution of products with higher sales prices will increase towards the end of the current quarter.

The significant improvement in our cash cost to produce cannabis more than offset the decrease in the average sale price. As noted by Cam, it is a key factor in our financial performance and the cost of production decreased $ 0.50 compared to the previous quarter, 26% to $ 1.42 per gram in the third quarter, as a result of the increase in production from Sky and Bradford, which generates significant economies of scale. and it was also the result of the reduction in temporary labor we had employed to prepare for the start of consumer sales in Canada. We expect production costs to continue to fall, as Aurora Sky produces at full capacity in the fourth quarter of 2019 and the first quarter of 2020, and we reiterate our expectation that production costs will be well below $ 1 per gram.

Then, when we put all this together, in the third quarter our consolidated gross margin was 56%, slightly higher than the second quarter of this year. This reflected the improvement in our cash costs offset by a lower percentage of sales of statements and the increase in sales of the consumer market. We expect gross margins to continue to improve as we introduce new product lines, expand our extraction capacity and increase international sales, all combined with continuous improvement in production efficiency.

The production of cannabis in the quarter increased by almost 100% to 15,590 kilograms, driven mainly by the increase in production at Sky and Bradford. A large part of this production increase occurred towards the end of the quarter. As of March 31, we had a WIP inventory that exceeded $ 45 million in fair value, reflecting significant harvests during March.

A few more words on our ramp with Sky. To achieve the production capacity of 100,000 kilograms, two parameters are critical, the frequency of harvests and yield per harvest. I am pleased to note that the frequency is close to our target rate. Sky is reaching a true cadence in production. This means that we will comfortably reach the declared capacity of more than 100,000 kilograms per year of harvest rate in the first quarter of the new fiscal year. I should also note that yield per harvest has actually been substantially above the target. The average of the last 10 harvests has been more than 20% above our target yields.

With the successful increase of Bradford and the increase in production yields at our other facilities, we anticipate a harvest of more than 150,000 kilograms per year for the first quarter of our fiscal year 2020. Based on rooms sown, our capacity already exceeds the 150,000 kilogram per year. For the fourth quarter, we expect to have more than 25,000 kilograms of cannabis harvested and dried. With the implementation of new regulations that allow the sale of a broader portfolio of derivatives at the end of this year, we plan to allocate a considerable fraction of this inventory production for additional processing to ensure that we have a broad portfolio of new products in sufficient quantity. Amounts available for sale when higher margin products will be allowed in Canada.

In recent quarters, we have invested significantly in building talent and infrastructure to lead the Canadian and international cannabis industry. Now, much of that infrastructure is in place and ready to support our growth. In the third quarter, administration and sales costs increased 1% compared to the second quarter of this year. Within sales expenses, sales and marketing decreased by 28%, since the reduction in the expense of the law before cannabis was partially offset by the higher shipping costs, which are related to the increase in sales volumes and the increase in the number of sales employees. For G & A, although we saw a 16% increase, more than 6% of this was due to a new Health Canada cost recovery rate that is estimated at 2.3% of sales. The third quarter of 2019 G & A also reflected the first full quarter of ICC integration and a partial quarter of Whistler's costs. In the future, we anticipate that sales and sales expenses will show increases in line with the growth of the organization, but certainly at a rate significantly lower than our expected revenue growth.

In the third quarter of 2019, our adjusted EBITDA loss decreased by 20% in the quarter to $ 36.6 million from the $ 45.5 million in the second quarter. I must bear in mind that we have defined the adjusted EBITDA in our third quarter of 2019 MD & A. Aurora, through the combination of a substantial growth in revenues, a decrease in the unit cost of production, a greater availability of higher margin derivatives, greater shipments to the EU and a continuous and disciplined management of operating costs, Aurora continues Moving towards the achievement of a positive EBITDA from this current fiscal quarter. 2019

Our financial position remains solid. As of March 31, we had almost $ 350 million in accessible cash and more than $ 70 million in accounts receivable. This compares to about $ 75 million in cash and $ 15 million in AR as of June 30, 2018. The increases are due in large part to the spins in the line of credit led by BMO, the issuance of senior guaranteed bonds in January. of 2019 and the increase of sales level in Our business. In addition, we recently completed the presentation of a base shelving prospectus and an ATM supplement, a long-term strategic measure that provides the flexibility to access growth capital, if necessary, to provide the gas to continue to execute our global expansion and association. strategy. Implementamos este prospecto de estantería base y el suplemento de ATM como parte de una estructura de capital de maduración prudente y parte normal de la limpieza del hogar al presentar nuestros resultados del tercer trimestre.

En conclusión, estoy muy orgulloso del equipo de Aurora. Felicitaciones a todos por entregar otro trimestre fuerte. Continuamos creciendo los fundamentos más fuertes cada trimestre, esperamos un crecimiento significativo y estamos financieramente sanos. Estamos ejecutando nuestra estrategia de crecimiento y, en consecuencia, creo que estamos muy bien posicionados para fortalecer aún más nuestra posición como líder claro en la industria global del cannabis.

Ahora pasaré la llamada a Cam.

Cam Battley

Gracias Glen Y como ha escuchado hoy, hemos construido una plataforma extremadamente sólida para el crecimiento que genera resultados sólidos continuos. Tenemos varias iniciativas implementadas que impulsarán un mayor crecimiento y asegurarán aún más nuestro liderazgo a nivel mundial.

Ahora veamos algunos. Un desarrollo emocionante ha sido el nombramiento de Nelson Peltz como nuestro asesor estratégico. Nelson tiene una larga trayectoria de décadas en la creación de negocios y la generación de un valor excepcional para los accionistas y tiene una amplia experiencia en el negocio de productos de consumo. Estamos trabajando con él en múltiples iniciativas, incluida nuestra estrategia de asociación. Como nos comunicamos en ese momento, nuestra estrategia de asociación es diferente. No creemos que haya una transacción de cambio de control en este punto con tanto crecimiento por venir en beneficio de nuestros accionistas.

Más bien, estamos bien posicionados para explorar los beneficios de múltiples asociaciones en una variedad de sectores verticales de la industria. La experiencia de Nelson y sus conexiones en estas áreas demostrarán, creemos, muy valiosas a este respecto. Estamos entusiasmados con las oportunidades en el cannabis y también con el espacio del cáñamo a nivel mundial y seguimos explorando múltiples oportunidades con Nelson. No queremos poner una línea de tiempo en las cosas en este momento, pero quiero enfatizar que estamos enfocándonos de manera muy estratégica, metódica y exhaustiva.

Un área importante de atención es Estados Unidos, que parece estar avanzando hacia una legalización más abierta, particularmente en las áreas de cáñamo industrial y CDB. Estamos evaluando en qué punto de la cadena de valor podremos generar el mayor valor. Estamos bien posicionados para perseguir múltiples ángulos a través de nuestras capacidades de investigación profunda y desarrollo de productos, nuestra experiencia reguladora, así como nuestra amplia infraestructura global de cáñamo que pretendemos expandir a través de la adquisición de acciones en HempCo, que aún no son propiedad de Aurora. El CDB para aplicaciones médicas y de bienestar tiene un potencial increíble y tenemos la intención de aprovechar al máximo nuestras capacidades, nuestra infraestructura y nuestro potencial de asociación para maximizar la creación de valor para los accionistas.

También puede mirarnos para continuar construyendo nuestro liderazgo en Europa. Además de nuestra entrada en Portugal y nuestras recientes licitaciones en Alemania, recientemente hemos sido seleccionados como proveedores exclusivos del Ministerio de Salud de Luxemburgo para el cannabis medicinal. Si bien este es un país pequeño, Luxemburgo ha demostrado que es un innovador en la legislación sobre cannabis en Europa. Por ejemplo, es el primer país de la Unión Europea en proponer una legislación que permita el consumo de cannabis por parte de los consumidores. Nuestra asociación con el Ministerio de Salud nos ayudará a estar a la vanguardia de las oportunidades que podrían traducirse en un mayor crecimiento en otros países europeos a medida que el mercado madura.

Como dije en la parte superior de la convocatoria, mientras que muchos en la industria aún están evaluando la mejor manera de desarrollar su negocio de cannabis, hemos construido un negocio sólido y en rápido crecimiento que está excepcionalmente bien posicionado para capitalizar las enormes oportunidades globales del cannabis. De hecho, construimos un líder global. Nuestros fundamentos están mejorando rápidamente y tenemos el know-how, la escala, la credibilidad y el alcance para ejecutar.

Éso concluye nuestras observaciones preparadas. Y ahora me gustaría pedirle a nuestro operador, Chris, que abra la convocatoria de preguntas.

Sesión de preguntas y respuestas

Operador

[Operator Instructions]. Su primera pregunta es de Vivien Azer con Cowen and Company. Tu línea está abierta.

Vivien azer

Hi. Good Morning.

Cam Battley

Hola vivian

Vivien azer

Entonces, al pensar en la rampa de capacidad y la expansión en Sun, cámara, creo que podría ser útil, simplemente vuelva a examinar la lógica para establecer tanta capacidad. Ciertamente, en el corto plazo, el mercado es claramente muy ajustado. Uno de sus competidores extendió su opinión sobre el desequilibrio de la oferta y la demanda de anoche, de 18 a 24 meses. Así que la pregunta de dos partes. Number one, the longer term rationale around building out all this capacity when ultimately we will go into an oversupply situation? And number two, if you could comment on your expectation for the switch to oversupply from a broader market perspective? Thank you.

Cam Battley

Sí. Por supuesto. So I will start this off and then maybe hand off to both Terry and Glen. Looking at our view of the need for capacity, the first thing is that you are right. The market is undersupplied in Canada and we see continued strong demand. We also were not necessarily in line with some people's expectations as to what max capacity will be, particularly given the advent of the new products as per the new regulations that will be coming up this year. So there is that.

Second thing is and we said this before, the central fact of the global cannabis sector is a massive excess of demand oversupply and we know that we are going to have to supply a lot of international markets with product that we have cultivated in Canada. So that's why we are doing this. And also, we have a massive cost advantage here. There are a lot of companies that are promising to have X capacity available in 12 or 18 or 24 months. We are delivering it now, but we are also delivering incredibly economically. So we are going to have massive capacity to supply the Canadian market, to supply international markets and we don't see any shortage anytime soon.

Terry or Glen, did you want to weigh in and add to that?

Terry Booth

Of course. Thanks Cam. I think I said last quarter that if there is one thing that I lose sleep about is our ability to supply the global demand for cannabis. I now lose a little bit more sleep with my two-week old baby. But it is definitely something that still is at the top of our agenda, increasing our capacity to feed the global need. It took Canada five years to meet its demand for the population 33 million. So you just put that math into perspective with the EU, with Australia, Mexico and other countries that are coming online, it would take nearly 50 years to meet that demand. But we are not going to take that long because of the scale, we are now able to build upon. The market is moving in a very, very fast pace. You are seeing what's happening in the United States with the bank SAFE Act, with the Farm Act, with the number of states that are now flipping over to medical and also picking on adult usage. There is no doubt in my mind the U.S. will be legalized in the next three to five years completely, albeit at a state level. So those types of demands are there. The East Coast of U.S.A. does not have the growth capacity at this point that the West Coast has. Add them all up, the demand will be significant for the product for many, many years to come.

Vivien azer

That's helpful. Thank you. And just to follow-up on the second part of the question. Any view on when the Canadian marketplace might be able to produce enough supply to meet demand?

Cam Battley

I will answer that. That's a bit of mug's game Vivien, I think, is putting those estimates out there. I think anybody who tells you they know when the market will be properly supplied is probably pulling your leg. We have seen a lot of predictions not be correct. From our perspective, all we need to do is keep executing the way we are and that's the way we look at it.

Vivien azer

Good. Very helpful. Thank you.

Operator

Your next question is from Chris Carey with Bank of America Merrill Lynch. Your line is open.

Chris Carey

Hi. Thanks very much. I just want to start off.

Cam Battley

Hi Chris.

Chris Carey

How are you? I have a near term question and then sort of a more longer term philosophical question. But on the near term, I think you said that you would anticipate that the 25,000 kilos that you have available for sale would actually go for value added product forms, potentially later in the year. So would you anticipate growing sequentially from a kilograms sold standpoint in fiscal Q4 relative to Q3?

Cam Battley

The answer is yes. I am going to let Glen go into more detail on this. Glen?

Glen Ibbott

Sí. I think what we said and hopefully you can hear it. I understand I am coming through a little bit quietly on this. But we said that we would allocate a portion of that to inventory for the value add products. Listen, what we are trying to do is learn from them the challenges of the industry last year in the initial launch of consumer legalization and we absolutely have to have sufficient inventory to launch these products properly. So if that means taking a little bit of revenue to Q4 and putting it into inventory into new products, then that's what we will do. But the other part of this, Chris, is we have today and in the past that we are tracking to EBITDA positive in Q4. So that does mean, definitely you can do the math, there has to be a significant increase in our sales volumes from Q3 to Q4. So we may trade those often to make sure that we are making the right decisions for the long term future and long term value of the company to establish ourselves properly in the new product portion of the consumer market in Canada, but also to meet our commitments in terms of EBITDA profitability. So you would expect to see continued significant growth on revenue and volume sold in Q4.

Chris Carey

Good. Makes sense. And then kind of longer term and somewhat connected to the prior question. So I guess based on what you put out there, you are going to get to roughly 400,000 kilos capacity in Canada over the next few years, potentially 40% plus or minus of the total market. We will see how things go with prevalence and new product forms. But when you think about that 400,000 kilos ram capacity, how are you thinking about the evolution of the ability to use international exports as a lever if you can find a home for that much supply in Canada? So said another way, how quickly will some of these markets open like Europe because even this quarter kilos sold to Europe are still very small? So just how do you see that evolution over time?

Cam Battley

Well, I mean the first thing to remember is that Germany, for example, where most of our international medical cannabis sales have gone thus far, has been constrained by supply. That market has been constrained by supply. And we are just at the point now, we are ramping up to the point where we will have a lot more to sell into Europe. Now, how quickly will these markets develop? Well, that's an interesting question. And we are actually actively involved in sharing best practices with governments around the world so what we see truly accessible systems for patients and to help them accelerate development. I think it will happen very fast, some market more than others. But if you take a look at Germany, for example, that's a really exciting market. We talked about Canada having more than 1% of the population with a script for medical cannabis. If we assume that that's going to happen in Europe and probably faster because most patients are getting insurance reimbursement, you are talking about very short term to like 850,000 patients in that one country alone. So these markets are opening up so fast. Recall what Terry said that our biggest nightmare is we just want to produce more cannabis and be able to supply these opportunities. So that's happening. Remember that when we emphasize we will have about 400,000 kilograms of production in Canada, we don't see any constraints for years and years on the ability to export and a lot of those export markets are premium priced. Europe, for example, we get the benefits of the currency differences.

Terry Booth

So just to add to that, Cam, the German market is one thing. We know that that's going to real soon start to take traction as we actually are able to send pharmaceutical reps around educating physicians and having seminars and courses. But countries like Australia, where Cam did a great job in working with the government in cutting some red tape, literally went from less than 500 patients last year went up to well over 5,000 now. So that's a country that will be importing for some time. They have no production facilities. People have to recall, Canada has had production facilities for over 15 years, if we include the MMAR program. So as these countries scaled up, we know the medicine is true, we believe the medicine 100% in different product forms and different means of administration and that's all coming online as this industry matures, this wave of cannabis required globally for medical purposes is significant and getting into these countries as first mover medically will set ourselves up excellent for any adult usage planned in those any other countries.

Cam Battley

I also want to add to that. Something that's really important about Aurora is that from the very beginning, we have taken an approach of emphasizing purpose-built highly economical facilities. And that's a critical part of this equation as well. There a lot of companies that are producing or trying to produce cannabis in Canada. Not everybody is able to do so economically. We are doing so more and more so economically. So low cost and premium quality is a very neat trick to pull off. We are doing that. And I like where that positions us in the Canadian market as well on a go forward basis.

Chris Carey

Got it. Thank you.

Operator

Your next question is from the Tamy Chen with BMO Capital. Your line is open.

Tamy Chen

Thank you. Hi everyone. My first question is, on this new potential accounting change, the IFRA 16, I am just wondering, do you have a view on if that will have a material impact in the way you recognize your operating leases and how that could affect the potential change in how you would report your EBITDA going forward?

Cam Battley

Glen?

Glen Ibbott

Sí. Tamy, of course, I am not sure if everybody on the call is aware, but under IFRS there is a new standard coming out and that's for us in next fiscal year, so Q1 2020, that will require essentially most leases to be capitalized and then amortized or depreciated over time. So that will effectively move some operating costs off the P&L and into depreciation. Tamy, right now, I mean, we own pretty much all of our facilities. We do have some lease cost for some land at the Edmonton International Airport and we do have office leases and those are likely to end up as capital asset. So there will be some sort of impact to EBITDA. I don't think it's significant for us as it might be for some others that are leasing a lot of their facilities. So we will see. That analysis is ongoing. It's a big project, as you might expect.

Tamy Chen

Good. So that means you would adopt, that would happen in your new fiscal year. It wouldn't happen next quarter.

Glen Ibbott

That's right, yes.

Tamy Chen

Good. Got it. And my second question is, I wanted to touch again on the more near term revenue outlook in the Canadian market. I am just trying to understand, from what you are seeing there, is there the ability to sell through materially into the current distribution channels in Canada as long as you have got the supply? Or would you need to see a material ramp of new retail store openings across the country to absorb the level of volume that you are seeking to in the fiscal Q4 quarter?

Cam Battley

The current infrastructure, everybody knows, is too small. But in addition to that, there hasn't been consistent supplies. So what we have heard from some stores is, different parts of the country, is that regular consumers know the day that new inventory is delivered and they all descend on those stores at that time with great big lineup. And as a result, the most in-demand product, sometimes sell out in an hour or two. What that shows is that even within the current infrastructure, there is not the consistency of supply of the most desired product yet. Now we also know that provinces are allowing for ramp up of brick-and-mortar stores. That's great. It will add infrastructure. We also know that the regulations will be in place this year to allow for new product form. So you put that altogether and we are very confident that we will continue to perform exceedingly well in the consumer system. And we think the consumer system will start to pick up speed and accelerate its growth. And then also, let's not forget the medical side. We anticipate a continued demand in Canada for Aurora products and MedReleaf and CanniMed products in the medical system. The picture altogether, I think for us, is very, very favorable.

Tamy Chen

Good. Got it. And on that consistent supply point, if I can just squeeze in one more. What sort of products are you seeing are the ones most in demand? And how is Aurora's product offering in comparison to that?

Cam Battley

Well, you heard earlier in the call that our products are exceedingly highly ranked, all of them in the top 11. So it's everything from certain kinds of dried flower, connoisseurs really like certain flowers, to oils as well. It's also across not just THC, high-THC, but also CBD products are very much in demand. So it's pretty consistent picture across the board and we anticipate that we will see the same thing for our concentrates and edibles as well.

Tamy Chen

Got it. Good. Thank you.

Operator

Your next question is from Brett Hundley with Seaport Global. Your line is open.

Luke Perda

Hi. This is Luke Perda, on for Brett Hundley. First question. So as we approach the legalization of value added products inside Canada later this year, there seems to be an overwhelming focus on the beverage side of the market as you have noted, in part given strategic partners that are in place for a number of the Canadian LPs. And it's interesting because if you look at certain parts of the legal U.S. market, beverages have lagged behind considerably relative to vapes. Part of this is because the American beverage products don't have the R&D and marketing support that we presume Canadian beverage products will have, but we are also wondering if common consumer desires are being overlooked here and whether or not the Canadian LPs and their partners are trying to force a square peg into a round hole. Can you talk a bit about your own views on how the value added product market might develop inside Canada and what kind of opportunity you see on the vape side?

Cam Battley

Sí. I will start and then I would like to hear from Terry on this as well. I don't want to be too much of a negative on beverages. It's just that we have made, what we think is, a pretty rational decision to focus our priorities in terms of the new product forms in areas where we know that there's strong demand, in part based on the model that we have seen in the U.S. consumer legal state and where we believe that we can deliver something that's highly differentiated and good for consumers and also where we think that we can generate the highest margins. Now, we said before with respect to beverages, that may turn out to be a great market segment. It's not yet in the U.S. consumer legal states.

As you point out, it's something like 2% or under of the market. And there are some good products out there that are well-formulated. It's just that perhaps it's going to take a little bit of time and some marketing and some experience to change consumer taste whereas, as you noted, vapes, vape pens are exceedingly popular and have rapid and high uptake. So we think that that's going to be a terrific market segment that doesn't need a lot of market development. That will be pretty much readymade.

They are so discreet. You can stick them in your pocket and your purse. They don't create smell, just a little bit of vapor. And I think that that will be very attractive to new consumers who just want to try it out. What's all the fuss about? Let me try one of these vapes. So we are focusing on what we think will be the best sectors or market segments for us but with the highest margin and where the demand is already clear.

Terry Booth

Right. So the proven market is certainly not in beverage. And there are some big players in the United States. Heineken, for example, did have some brands in California. It's a very different effect when you drink an intoxicating cannabis beverage. It's not like alcohol. It doesn't lead to another and another. It's actually the more you have, the less you want in a very short amount of time once it starts taking its effect. It also has the potential. It doesn't have the rapid onset that we think it has, to have adverse effects over time. There are not going to be any cannabis bars like there are alcohol bars anytime soon. You mentioned marketing in Canada. That's still not allowed and it won't be allowed for beverages either, as far as we know. The gummies and the vapes, they are the best sellers. They are the best margins in the states. Certainly, if we are leaning towards any beverage, it would be on the wellness side of that, which we think there's a tremendous market potential there. But on the intoxication side of the fence with respect to cannabis drinks, the market is just not there and it's not proven to be a popular item anywhere. And it's not able to market like typical beer companies or booze companies are allowed to market. So it's a small step for us. But certainly, we are going to be focused on what we feel sells best and provides the best margin.

Luke Perda

Thank you. And just one more for me. You have gone out and you have purchased Whistler. You also have an investment in TGOD. It seems that you really believe in the forward market opportunity for organic cannabis. Do you see Aurora becoming a big player on this side of the market? And can you talk about the forward market opportunity overall in your view?

Cam Battley

I will start and then pass this on to Terry. We see it obviously as a part of the picture. And so, yes, there's going to be a segment of the market of consumers and patients who prefer an organic product. It's not necessarily the be all and end all. Organic has advantages and disadvantages. It's just another piece of the market to us.

Terry?

Terry Booth

Sí. The organic market in cannabis is a popular one, as is the organic market in hemp. We have the largest organic producer of hemp under our wing now in Lithuania, Agropro and Borela. So we know that there continues to be a move to more organic products in the cannabis space and Whistler has the very best, for sure, in the Canadian licensed producer space. We will wait and see how TGOD executes on growing organic at scale. It is a difficult thing to do. We wish them the best of luck. We do still have a right to 20% of their production supply.

Where you run into some problems with organic is, of course, microbial. You have to watch the dirt very, very close. It's a growing and living breeding medium that if it gets out of control, even a little bit, you can have crop loss. Whistler have been doing it for five years. So they have eliminated crop loss over the years completely and know what they are doing with respect to organic with more grow room.

It also demands the highest price. They have done a tremendous job with the provinces and maintaining. They are not going to drop their prices of their cannabis and if you don't want it, you don't have to take it. But guess what, it flies off the shelf before everything else. So that we will watch and we will continue to increase organic supply, if indeed organics are the way to go.

On the food and beverage side, on the edibles, I think that that may be even a bigger picture for organic cannabis making organic edibles and sugar-free edibles. So I think that the organic supply of cannabis is an important piece of the puzzle. And it's just a matter of, if we can grow it at scale and continue to grow it at a smaller scale, much like the organic vegetable market.

Cam Battley

I will add that, you have heard me say before that we like to, on important strategic questions, we like to measure twice and cut once. So as Terry indicated, if we find there's an increasing appetite for organic cannabis products, we will be there. But we don't want to over-commit to that until we see that the demand is there. So measure twice and cut once. We think it's a prudent way to operate.

Luke Perda

Thank you.

Operator

Your next question is from Michael Lavery with Piper Jaffray. Your line is open.

Michael Lavery

Good Morning. Thank you.

Cam Battley

Hi Michael.

Michael Lavery

I just wanted to touch on the U.S. You expect legalization federally in a few years like roughly everybody. Can you just give us a sense of how you envision entering the market? And would I be hearing you right that you think some of your capacity you already have planned would be available for export to the U.S.? And if that's the case, what would be needed from a regulatory perspective to allow for that?

Cam Battley

So the first thing I want to do here is emphasize that we are not making any news on that point today. And then I want to reiterate what we have said before. We obviously will be in the U.S. and we will be in the U.S. in a big way at some point in the future. It will always be in a way that is consistent with U.S. federal law. We will enter when it is permissible on a federal level in the U.S. There are some ways to enter earlier. We will also do this in a way that is consistent with the requirements of our exchanges.

But Terry, I know, wants to speak to this. Terry?

Terry Booth

Of course. Yes, the U.S. is an interesting country, to say the least, with respect to cannabis. The states all have much different regulations, varying regulations from state to state. I feel Nevada is probably the best state for Canadian companies to enter into. And the regulatory changes that are forthcoming, we don't know what they will look like. If they don't erase the state to state line in the cannabis space, once it's legalized, then it's a very difficult market to operate at scale in.

Right now, they have multiple state operators, multistate operators that have small facilities in their various states. And that's not really the Aurora way of doing things. And if we do go to the states, we will be focusing on large populations that are not fully established that have regulations that we are able to operate in with profit. If they erase the state lines, that whole picture changes. If you are able to cross those state lines, then it becomes a massive cannabis market.

As far as the export into the states, again, we don't know when that will happen. We are allowed to export to a number of countries now. I don't know why we wouldn't be allowed to export into United States. The demand will certainly be there, if indeed we are allowed to export into United States. And we look forward to rudders down, the sails getting there, getting that going sooner rather than later.

The hemp industry in the United States, the Farm Act, allows for the usage of CBD derived from hemp with 0.00 THC. That's a limited market at this point, as it only includes topicals, if you really want to go to the letter of the law of federal legislation. The FDA is looking at the ingestible CBDs in the space and yes, I know, many states already sell it. They are selling it federally illegal, as the states that have legal cannabis selling statewide are selling federally legal. But it is something we have to figure very, very closely.

You have to understand, Aurora is not being blind to what's going on in the United States. Australis is doing well for a startup company. It's done four or five deals. It's our little brother. We have back-end rights with Australis and more to come on that later. But it's something we feel very confident as do most, will be legalized. It's how it's legalized is the question.

Is it going to be legalized medically state to state or adult usage state to state all at once? We don't know. Nadie lo sabe. And I don't think the government knows. So that's a ways away. It's one step at a time and we are taking the steps necessarily to do that in an organized fashion. As Cam said, measure twice, cut once.

Michael Lavery

That's really helpful color. Thank you. Just to follow-up sort of the flip side of the question. To what extent do you have any of your capacity plans, even sort of vaguely earmarked for the U.S.? And if you have the opportunity to export there, would you have to rethink a little bit how that gets put to use?

Cam Battley

Go ahead, Terry.

Terry Booth

Again, we don't know. That's certainly not in our capacity plans at this point. We have a strategy of entering into the U.S. and that strategy is obviously confidential. But I would expect, if we have an over capacity in Canada and the rest of the world, we would love to ship to the U.S. But I don't think we will have that capacity depending upon the timing. Even if they announced that they are going to have a legal system, it would take years to get the regulations in place and proper capacity in place.

And certainly, as first movers, it's natural to go to your MSOs just to really look at, there is cherry picking to do on the MSO side of things. But there is no need to rush into it. It's going to iron itself out. We have got some overvaluation there. And I think you will see a significant rise of valuation as they move towards legalization. But valuing these MSOs just based on their retail doors is, in my opinion, a mistake because you can always open more retail, states can always open the door to more retail.

We are seeing that in Canada. We are seeing the value of the retail stores that had got lottery wins drop significantly. So we are quite happy that we didn't jump into that fray. Does that answer your question? We don't have any plans to export anything into the United States at this point. It's not our future just yet.

Cam Battley

I think that's the key point. If I understood you correctly, you asked if we are counting on supplying the U.S. from Canada. Absolutamente no. We have not built that into our plans at this point. The other thing to emphasize is once the opportunity exists to build production in the U.S. for us, we build the best cannabis production facilities in the world. I think we have clearly demonstrated that with the highest efficiency, use of automation and technology that nobody else has thus far been able to touch. And the result of it is premium product at a real economical cost. So once the opportunity exists, you can expect that we are going to be looking at using our technological lead to build that capacity ourselves in countries around the world.

Michael Lavery

Thank you. That's very really helpful color. Thanks a lot guys.

Operator

Your next question is from Graeme Kreindler with Eight Capital. Your line is open.

Cam Battley

Hi Graeme. Graeme, you still there? Did you go to sleep?

Operator

Your next question is from Jason Zandberg with PI Financial. Your line is open.

Cam Battley

Hi Jason.

Jason Zandberg

Hi guys. I wanted to drill down a little bit on your medical cannabis sales. As an industry, we are starting to see medical sales decline and that's very typical in other regions that have adopted an adult use program that medical sales tended to trail off a little bit. You guys have seen a growth in your medical, although not a huge number, but nevertheless growth. What do you attribute that to? Is it your coverage of the excise tax? Is it providing product identification numbers? Can you sort of give your opinion as to why you are bucking that trend?

Cam Battley

Sí. It starts with the fact that we make great medical cannabis and everyone knows it. Listen, it ticked up a little bit and you are right. It only increased about 5% in terms of patient count in the last quarter, 8% increase in Canadian medical cannabis revenue sequentially. But let me emphasize, that was our choosing. We wanted to make sure that we had exactly the right product allocation for each of our distribution channels, Canadian medical, Canadian consumer and international medical. And so we actually could have turned on the taps and brought in a lot more patients.

Now why is it? I am not kidding when I say we produce great medical cannabis product. We also have an extremely good reputation across all of our brands, Aurora, MedReleaf and CanniMed among physicians. So our credibility supported by our clinical program in the medical community is outstanding. Now let's get to where medical can go in Canada. And obviously, for us, we see increased demand and increased patient counts and increased Canadian medical cannabis sales, which is great because medical cannabis patients tend to be sticky. Consumers, you never know. But with a medical patient, they are likely to stay with you as long as you keep them happy.

The other thing that would be a bit of a wild card to keep your eyes on would be the possibility that the excise tax which, as you point out, we have been absorbing for our patients, could be eliminated. I will remind everybody that we had a press conference not that long ago in Ottawa along with a patient advocacy group called Canadians for Fair Access to Medical Marijuana and also on the stage with us were members of parliament from the conservatives, the liberals and the New Democratic Party. And there is strong support in all three caucuses to start to treat medical cannabis the same as other prescription medicines. And if we get that excise tax and ultimately the GST and HST removed from medical cannabis, it will be, first of all, justice, but it will also be an appropriate reason for patients to stay in the medical system.

And before we stop on this point, I want to emphasize that patients who are using medical cannabis to manage the symptoms of a chronic health condition should be getting their medication by prescription. They should be getting their cannabis by prescription and consulting with their physician. Physicians and frankly pharmacists should know about all of the medications that patients are consuming. So there are good reasons for patients to stay patient and certainly good reasons for patients to come to Aurora.

Jason Zandberg

That's a great answer. Looking forward in upcoming quarters, would you expect to see that trend continue in terms of continued growth on your medical cannabis? Obviously, the rec market will continue to grow. But do you expect that to happen continually with your medical sales?

Cam Battley

Sí. I don't want to predict the whole market, although I think it will actually be good. But on an Aurora basis, yes, we expect our patient count and our Canadian medical cannabis revenue to continue to grow.

Terry Booth

Was your question global or a Canadian question? Because obviously the 22 countries that we are operating and do not have regulatory systems and those medical systems are just starting now to blossom.

Jason Zandberg

Sí. I was referring to the Canadian market.

Terry Booth

Good.

Cam Battley

Sí. And I understand the question because we have seen differential results across different companies in the sector. But we have always emphasized medical cannabis. We supported that with a great clinical program. We are really, really good to our patients as customers. And so yes, we do anticipate continued growth on the Canadian medical side.

Jason Zandberg

Good. Cool. Thanks very much.

Operator

Your next question is from John Chu with Desjardins Capital Markets. Your line is open.

John Chu

Hi. Good Morning. Maybe just a quick question on Europe and how you plan to allocate your increased production between Europe and we will call it the value added market. So the way I look is Europe is effectively fairly a limited competition to drive that many EU GMP sort of like facility. And then you also have edibles that has a lot of competition from a lot of smaller players here in Canada. So how would you try to prioritize the two? And maybe just talk about what the margins you get? Which ones are higher?

Cam Battley

Of course. Sí. Let me start and I know Terry will want to weigh in on this. Let me start by telling you how much we love Europe. Europe is a market where, as you point you, there is very little competition. There's only one producer in Europe right now and it actually is one of eight that are EU GMP-certified. And that is Bedrocan BV in the Netherlands. And of the remaining EU GMP-certified facilities, we have got two, two out of seven. And we are undergoing audits right now to add additional facilities. So very, very limited competition, very limited supply. It's a supply constrained market and we are really ramping up now to be able to supply that market.

So the bigger picture here is the question of product allocation. And we have developed a very sophisticated product allocation protocol and team that we are very proud of that works on demand planning so we know where the demand is going to be and helps us calculate where we are going to generate the highest margin. Now it's no secret that the Canadian consumer system is a lower margin distribution channel for us than Canadian medical and international medical.

The margins in Germany, for example, are extremely good, in part because of currency differences, but not completely. And you will see us allocating more of our product to Europe and frankly to other jurisdictions around the world as those markets open up. And again, we are going to be a big part of that simply by removing supply constraints. So we do make a constant series of decisions on a rolling basis with respect to product allocation.

Terry?

Terry Booth

Of course. Thanks Cam. It's interesting, the product allocation team, I have felt sorry for them for the last year for sure because we didn't have the products fro them to allocate. We are now definitely starting to have that product allocate. And certainly in the Canadian consumer usage market, it is lower. The provinces underestimated the demand. We underestimated the demand. And it continues to go up. We don't know what the demand is until it's met.

The European market, we have boots on the ground now in Italy, Germany, Malta, Portugal, the U.K., the Netherlands and these are our boots on the ground. These are not small contracts or small pieces of companies. We distribute cannabis ourselves in Germany. Now getting that contract, only three LPs of the 79 applicants were awarded that contract. Obviously the demand in that contract is going to go up. And obviously the first movers that successfully execute will have first crack at the expansion of facilities. That's when the dirt will really hit the road.

The fall of 2020, again I lose sleep over being able to supply this global market. The European market is going to go nowhere but up. We will start, maybe not this quarter on the hockey stick, but we will start shipping in bulk to Europe before too long. We are the first to sell high-value derivatives in Germany, which are now starting to get some traction with the doctors. We are going to educate the entire EU the best we can with our team of physicians and PhDs and thought leaders in the cannabis space. It is just waiting to be cracked. It's not even scratched the surface yet in Europe.

You are seeing the increases, they still will take whatever we can give them. So we have to take care of our medical patients here in Canada and we have to have a presence in the adult usage market in Canada. If it was a pure business decision on a mature industry, 20 years down the road, we might, at these prices have pulled the pin on the adult usage market in Canada 20 years from now.

But we are not going to do that. We are Canadians. It's Canadian medical patients first. It's European patients second. And it's the adult usage market third. But we will dominate in the adult usage market as well because of the quality of cannabis that we grow, because of the cost per gram of cannabis that we have and because the increased capacity that we continue to bring online.

Everybody remember, we are building a Sky class facility in Denmark as we speak. We are growing cannabis in Denmark quite well in our Phase I of Aurora Nordic. So once we can start supplying Europe from there, it will help with our international initiatives.

Cam Battley

Sí. And in terms of helping you understand, another reason why we love Europe so much, if you think about it, that's a population including the U.K. of around $500 million, okay. so a lot larger than the U.S. But whereas in the U.S., with its patchwork regulatory system, there are thousands upon thousands of producers. In Europe, there's one and us and a handful of other Canadian companies with high barriers to entry because they believe in tight regulation. So we will be in the U.S., obviously, as soon as that's permissible. And we are also prepared to operate in two very, very different markets. The U.S. and Europe appear for years and years to come to be very, very different. And so we want to be set up to succeed and win in Europe. And we are already building the infrastructure for that right now. We are very, very pleased with the direction Europe is going.

John Chu

Good. Cool. That's very helpful. And then just quickly, maybe just a quick update on EnWave. When do you think that's going to get integrated and can make a meaningful impact? And then same on the Radient? You received your first shipment. Are you happy with what you got? And then when can we start to see a more meaningful impact to your numbers around efficiency and everything? Thank you.

Cam Battley

Glen, we haven't heard from you in a bit. Do you want to address that one?

Glen Ibbott

Sí. Can you repeat that. Sorry, I just missed it.

Cam Battley

We are talking about when we anticipate contribution from the integration of the EnWave technology and also Radient's demonstrating commercial capabilities? And yes, we are very, very pleased with RTI. So when we would expect to see contributions?

Glen Ibbott

Sí. As you would have seen through press release, Radient has just been recently licensed and we have, I believe, received our first commercial batch back from them, still relatively small volumes. We expect to see that actually impacting our ability to produce derivative products toward the end of this quarter. So we are kind of in the last six weeks now. So I will say June, we will start to see some of their product making it into our production chain. Most of that extraction goes into products that still take a little bit of time to show up on the shelf. So towards the end of the quarter. EnWave will just shorten the drying time and allow us to speed up extraction, which in effect, does accelerate our capacity. That's still being implemented. So we won't see that in Q4. We will see that in Q1.

Terry Booth

The other point I will add with EnWave is they also reduce the risk of crop failure or production failure with a very short timeframe from off the plant to dry. There is risk in drying systems, where molds can come in and other bad creatures and more people are around it. When you shorten that time, it once again de-risks the process of the production of cannabis.

Cam Battley

Sí. And I do want to emphasize, we haven't had that problem, but we know it exists. And what we have just talked about here and you have got two great examples, RTI and EnWave, those are really consistent with our overall business strategy, which is to reduce all risks as much as possible and also to accelerate the entire process from cultivation through to production, getting it to market. That is consistently across the board our strategy. And so you picked two really good ones to focus on. And they are entirely in line with our global strategy.

Operator

Your next question is from Doug Miehm with RBC Capital Markets. Your line is open.

Doug Miehm

Good Morning.

Cam Battley

Hi Doug.

Doug Miehm

Sí. Hola. Just with respect to how we are thinking about the Q4, I know that you have indicated that you are going to show some positive EBITDA, so really part A and B there. How important is it that you actually do that? Is it more important that you have enough product for the value add launch? Or is this thing what you are going to do in terms of producing that EBITDA for Q4 the most important thing? And then part B of that is, just with respect to the recent acquisitions, so Whistler, HempCo and Chemi, are they contributing to you guys having positive EBITDA in Q4?

Cam Battley

I am going to start and then hand over to Glen. So actually, I would say that one of the most important things that we did when we put out that guidance in January that we were targeting positive EBITDA in the June quarter, in this current quarter, was we signaled our discipline and it's showing. If you take a look at our revenue growth compared to our SG&A growth, SG&A being relatively flat, it's showing. We have been just focusing on that disciplined execution. So setting that target on its own has been remarkably beneficial to us. And we have been getting that feedback from institutions as well.

It is important, I think, to differentiate by showing a clear path to profitability. And it's something that we have made a commitment to that differentiates us from a lot of our peers. And so it is very important to us. But the nice thing is, with where our production has gone, we can kind of have our cake and eat it too. So we can continue to track towards positive EBTIDA in this current quarter and have sufficient product supply to have the inventory to produce those new higher value added products that will be allowed by regulation. It's a great, great situation to be in and it's happing at exactly the right time for us.

Now the second question that you had was with respect to the recent acquisitions and whether they are anticipated to contribute to achieving positive EBITDA, I will defer to Glen on that, but certainly not substantially. We were tracking that way before these things.

Glen?

Glen Ibbott

Sí. Thanks Cam. So just for the first part of your question though on the Whistler and the Chemi and those, they are not running negative. They are running positive. They will contribute but not substantially, as Cam said. We based our EBTIDA positive forecast on our core cannabis business. We do have this quarter about $6.5 million of revenue from other business lines that are non-core cannabis and they do contribute at least a 50% or greater margin on average. So that will help, but we are really trying to drive the discipline and the growth in the core cannabis piece of this.

The allocation decision, there are some really healthy debates internally. But as you would expect, a lot of this is dependent on when Health Canada is going to allow the introduction of these new products into the market. You see various signals at times from the regulators as to when LPs will actually be able to start shipping products to eventual distribution centers. So should that happen towards the end of the year, should we get clarity that those sales won't start towards the end of the calendar year, we may have more product to allocate into revenue in Q4 and Q1.

Should it be available earlier, then we will have some decisions to make. How much of that actually goes into inventory as opposed to revenue? But as Cam said, at least we have got the production now coming to make those decisions. The EBITDA piece of this is very important to us, not only in terms of the commitments we have made to the market but also as internal guidance as to our priorities. But we still have a focus on the long term value that we are creating and it's very important to launch properly into those product segments that we want to capture towards the end of the year.

Doug Miehm

Good. That's very helpful. And then just my follow-up question. Cam, with respect to the basically capabilities that you are putting in place outside of Aurora Polaris in anticipation of the launch of the value add product, could you just give us a little bit more detail because as I think about this marketplace and the sort of the problems that we observed in Q4 of 2018, the rec launch, I just want to make sure that you guys are following the proper steps to ensure that you are going to have products? So do you have all your vape lines going? And where are they going in? Where do they stand? Licensing and that sort of stuff. And then I am finished. That's great. Thank you.

Cam Battley

Good. So you asked for a little bit more detail. We can give you a little bit, but not a lot. We don't want to show necessarily all our cards. But what I can tell you is that all of the capabilities for the market segments that we prioritize, it's all in place. And as Glen had indicated in his comments, we wanted to make sure that from an Aurora perspective anyway, we won't be seeing some of the challenges that the entire industry faced not being ready for consumer legalization in October of last year. So we have across multiple facilities, we have got the capabilities in place to produce those products. Polaris is going to be amazing. It will be world class and I think there will be nothing like it once it's opened up. But we do not need to wait for it to be online for us to deliver those product forms.

Doug Miehm

Good. Thank you.

Operator

Your next question comes from Rob Wertheimer with Melius Research. Your line is open.

Rob Wertheimer

Hi everybody. Your production ramp has been impressive so far with no real material hiccups and stumbles and so forth. And the question is a little bit, if you can give us anymore background on just how you do it. But other people in the industry have had crop failures and the product hasn't grown as well as yours. And so how do you evaluate the risk of that? Do you see little issues pop up and quickly mitigate them and fix them so there's no risk of a larger issue? Or you do not have the issues pop up because there is more automation because of more, anyway I am wondering if you could just expand on that a bit.

Cam Battley

Sí. I really want to speak to this. And I am going to start by making Terry blush because the first and greatest credit for this is Terry's vision. Terry went in a different direction from every other founder and CEO in this sector when he decided that cannabis production should be purpose-built. So north of Calgary, our mountain facility, that's the first purpose-built cannabis production facility in the world, to our knowledge.

And what that does is it gives you GMP, by the way, GMP standard, everything from the cultivation rooms to the airflow inside and the ability to manage all of the environmental variables, the lighting, the temperature, the humidity, the CO2, the nutrients. And every other peer of ours that is producing at mass scale has done something different again as we have all scaled up. Whereas we have gone with these massive indoor facilities with a glass roof, the Sky class facilities. All of our peers producing at mass scale are doing it in retrofitted greenhouses.

And you can argue there are advantages and disadvantages to each approach. We really like our approach because as you have heard me say earlier, at this phase in the sector's development, the number one critical success factor is the ability to consistently produce and move and sell a large amount of cannabis. And our entire business strategy is set up to do exactly that. So you control the environment, that reduces the risk of pathogens and pests and therefore crop loss. And touch wood, we have never had a crop loss and I hope we never do.

Terry, you probably want to weigh in on this because you are the expert here.

Terry Booth

I do want to weigh in. You nailed it on the head. And to most respects, with respect to environmental control, CO2, micro mold, humidity, temperature, when all of those factors in, we have to stay within a certain band or you will lose control of your facility. One thing affects the other. With a typical greenhouse, you have environmental risks, with the roofs opening to cool them down. You have risks with the variable temperatures, whether it be raining or snowing or hot and sunny. So environmental control is a short phrase but a very, very difficult thing to do right.

Secondly, you mentioned automation and you nailed it on the head a bit there because automation takes the human being out of the picture with direct contact to the plants. That is one of your highest risks of disease are the human beings.

And then the last one is GMP. And GMP is the direction of the really, essentially, it's the direction of the product flow. You never go backwards. You never go from a dirty room to a clean room. It's a flow process. It's a pharmaceutical process. It's highly recognized throughout the world in the pharma industry.

And those three factors along with 40 PhDs and the top QH team in the world and some very experienced horticulturists and growers equate to no crop loss.

Cam Battley

And by the way, I have got to add this before we wrap up and I know we have only a couple of minutes left. We truly believe we have invented 2first century cannabis cultivation and we also believe and this is central to our business strategy that you have to do that if you want to build a global enterprise. You have got to have that consistency. You have got to mitigate risk. You have got to do it economically. And it's got to be scalable and replicable on a global basis. That's what we set out to do from the beginning. And now, at Aurora Sky, we think that we have validated that Sky class concept to do exactly what we have been planning to do from the beginning.

Rob Wertheimer

Thanks so much.

Operator

This concludes the Q&A portion of today's call. I will now turn things back over to Cam Battley for any closing remarks.

Cam Battley

Sí. I just want to thank everybody for joining us for the call. And obviously, we are really looking forward to the next one as well for our year-end. So take care and everybody have a great rest of the day.

Operator

This concludes today's conference call. You may now disconnect.


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