Greetings, and welcome to the Aurora Cannabis Inc. Third Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you, Hector, and good afternoon, everyone, and thank you for joining us for the Aurora Cannabis third quarter fiscal 2021 conference call for the 3 months ended March 31, 2021. This is being recorded today, Thursday, May 13, 2021. With me today are Aurora's CEO, Miguel Martin; and CFO, Glen Ibbott. After the close of markets today, Aurora issued a news release announcing our financial results for the fiscal third quarter. This news release and the accompanying financial statements and the MD&A are available on our website or on our SEDAR and EDGAR profiles. In addition, you can find a Q3 supplemental information deck on our IR website. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements that are subject to the risks and uncertainties related to the Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora's annual Information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR and EDGAR databases. Since we are conducting today's call from our respective remote locations, there may be brief delays crosstalk or other minor technical issues during this call. We thank you in advance for your patience and understanding. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session to ensure we get to as many questions as possible, we ask the analysts to limit themselves to one question each. With that, I would like to turn the call over to Miguel. Please go ahead.

Thank you, Ananth, and good afternoon. I would like to start with some brief thoughts on the quarter, including a discussion of our domestic and international medical businesses, and then I'll address our plans for the near-term challenges in the Canadian adult-use business. Afterwards, Glen will provide his financial review. Finally, I'll talk more broadly about strategy and why we believe that Aurora, as the largest Canadian pure-play cannabis LP in the market, has an incredible opportunity within the global cannabis space. I think it is clear from our results that Aurora benefits greatly from having built a diversified business across domestic medical, international medical and adult-use recreational markets. This provides us with both stability and growth no matter how the global cannabinoids industry evolves. First, let me say by talking about our domestic medical cannabis business, which is on very solid ground. We're #1 by revenue in Canada's medical market, which, as you know, is the largest federally regulated medical market in the world. And our estimated market share is nearly double that of our next largest competitor. Notably, our international medical business also thrived during the period, demonstrating sequential growth even as many of our peers experienced declines. It should be mentioned that both of these units exhibit approximately 60% gross margins. The domestic medical business is unique as it represents a direct-to-patient distribution model that is powered by sophisticated technology infrastructure, allowing for an end-to-end patient experience. This infrastructure covers patient clearing, onboarding, medical consultation straight through to prescription fulfillment. We are extremely proud of the investment in technology and infrastructure we've made to service the medical patient base and it provides a tangible barrier to entry to the medical channel. In the adult-use environment low barriers to entry, provincial middlemen, adding a layer of cost and…

Thanks, Miguel, and good afternoon, everyone. Please note that the figures I'll be reviewing are all in Canadian dollars and can be found in the press release we issued this afternoon or in the Q3 MD&A and financial statements filed today on SEDAR and EDGAR. I would also note that the comparative period for our analysis today is Q3 2020. We believe this represents the best measure of the company's transformation and improved performance. Where appropriate, I will also note sequential period comparatives. For context regarding our Q3 financial results, I'd like to take a moment to remind you of the plan we outlined to you in December 2020 and February of this year. Last quarter, we discussed a number of initiatives as part of our transformation of our consumer business. We talked about a focus on higher quality, higher-margin products. So we reduced Sky production to 25% of its previous run rate to allow for process and cultivation changes to strengthen the flower standards there. A bit later, Miguel will speak to the success at Sky so far. But for now, I'll say that we are greatly encouraged by the significant improvement in quality performance at Sky and in fact, across all of our operations. The reduced run rate has resulted in under absorption of certain overhead costs at Sky, which then flow through to impact our cost of goods and gross margin in the quarter. So although it hurts our gross margin in the short term, it's clearly the right long-term shareholder value creation decision. As the improved quality results we're seeing from Sky should allow that facility to truly perform as a gem in this industry. In addition to allowing for the transformation of Sky into a higher quality cannabis facility, we noted that the significant reduction…

Thanks, Glen. As I referenced earlier, Aurora's underlying strength is that we are a diversified business that can be broken down into 4 parts. First, the Canadian Medical business, #1, in fact; 2, an international medical business; 3, a U.S. CBD business; and 4, finally, our Canadian adult rec use business. The latter is clearly facing some near-term COVID related headwinds, but we're confident that when these conditions abate, we will have a strong business across all 4 key platforms. Although we are already the #1 medical cannabis company in Canada by revenue, we still believe that we have significant growth still ahead. First, I'd like to highlight that the top 5 LPs in the Canadian medical channel represent less than 40% of the market, with Aurora being roughly half of that. This means that there are plenty of LPs out there that make up 60% of the medical market. That is a lot of potential for us to grow into. Second, there are further opportunities to leverage technology and our patient intake and user experience to lower wait times, improved service levels and increase product choices. We have made the requisite investments in infrastructure, have the necessary regulatory experience and compliance systems that effectively create a moat around our business and supporting key patient groups, while enabling us to sustain approximately 60% gross margins for the foreseeable future. Our international medical segment generates revenue across 12 countries and has been a consistent winner. We have a leading position in Germany in dry flower, but are also bullish on the large and growing oil market there. Additionally, we have made inroads in Israel through a strategic supply agreement with Cantek. We are also involved in the French medical cannabis tender program with our partner, Ethypharm, where we won 3 of…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Your first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Hi, how are you?

Good afternoon, Vivien.

Good afternoon. So my question has to do with the competitive dynamic in the adult-use market in Canada. So well understood, COVID shutdowns, all of the store opening delays all challenging for you and your peers, to be sure. And then uniquely, perhaps a little bit more for you guys, the comp issue in terms of the 2.0 rollout. So I think a lot of peers were doing that and the introduction of Daily Special. All of that aside, though, there's a difference between revenue declines and changes in market share. And so I'm curious to understand, Miguel, is your perspective on the competitive landscape. Because it looks like in the high buyer data, which obviously doesn't include Quebec, there was sequential degradation in your market share. And when I look at kind of the top operators in aggregate this year versus last year, it just seems like across the Board, it is smaller operators that are picking up share, presumably later entrants into the market. So kind of how are you thinking about the balance of benefits of being the first mover versus the way you have to compete against smaller second movers who are displacing market share? Long-winded question, but thank you.

Great. Well, it's a great question. Let me just address the sort of macro issues that everybody faces because I think it's -- COVID is the sort of the top line answer. But I think everyone also has to understand this. You had the provinces, which act as wholesalers making massive cuts to their days on hand as they reacted. So that's sort of a one-time impact. And we're talking about 7 and 8-figure pieces. We're also seeing provinces that had a massive reduction in terms of new SKUs that they allowed to be brought to the market. So just to say that curbside delivery and stores not opening, that's only a portion of the revenue story. And I would say that is a bit of timing in a lot of different ways. Now Vivien, your question about market dynamics, let me take it in two directions. So first and foremost, it is a very dilutive market compared to what I'm used to and maybe what you're used to, where you have the top five LPs controlling 80%, 90% of a given category. You don't see that in the cannabis business in Canada today. So that's first. You may see top five companies representing 40%, maybe 45% of the key category, dry flower, pre roll, vape, things like that. Secondly, as everyone well knows, market share in isolation is really not a good bellwether. You're seeing a lot of market share picked up by value products and deep discount products. And those margins are way lower than what we're seeing from a premium standpoint. I would say that you're starting to see the early days of premium products start to take hold. We've seen it a little bit. You've also seen some others. You're also really seeing an acceleration of…

Your next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

Miguel, can I just ask -- maybe following up on the last question. Talk about the relationships of Aurora with the boards and with the consumer. Because of all these issues, how those relationships have been hurt with the boards, with the retailers? And what about the brands? Have the brands suffered in -- as a result of what's going on? And I'm asking that in the context of a company that's losing share, right? If you can comment on that. Thanks.

Pablo, when you mean the boards, you mean the provincial boards?

Yes. Yes. Yes. So there's like three parties to a story, right? Your relationship with the boards, your relationship with retailers, the stores, and then the relationship with the consumer in terms of your brands. Because what I'm surprised is that we see all these new little companies being able to list new SKUs with the boards at the time that they are cutting SKUS, right? So it just makes you wonder. Thanks.

Okay, you are very welcome. So let me see if I can take those in three parts. So obviously, the provincial boards operate as the wholesaler. I would say they are evolving, and I've got a tremendous amount of respect for the provincial boards. I mean, remember, this thing is only three years old, they're trying to do everything they're trying to do in the midst of COVID. And so I think, Pablo, we have a good relationship with them. I think in all cases, you always can have it be better. They really don't play favorites. So whether you're a small manufacturer, a large manufacturer, you have the same opportunity. Now what is evolving, which I think will benefit a company like Aurora, particularly with my background, is you're now seeing very sort of sophisticated CPG and in many cases, the decision-makers are coming from the beverage side. So scoring manufacturers on fill rates, in stock conditions, shipping provisions. All of those core things are going to start to make a difference in terms of what SKUs they take, how they fill them, how are those put out to the retailers. And we're spending a lot of time and effort on that. So I know right now, it just seems like a free for all in terms of everybody's treated the same. I think that's definitely changing. Also, we are hearing from the provincial boards that they are concerned about price compression and starting to put some floors in on key segments, whether that's a 3.5-gram flower or a 28-gram. And I think that also benefits bigger pieces. Now in terms of the retailers, it's an interesting market. I'm used to, I think, most are a chain business, a significant amount of chain or centrally controlled stores. And we…

Our next question comes from the line of David Kideckel with ATB Capital markets.

This is actually Frederico, chiming in for Dave. So we've seen M&A activity has really taken off here in Canada. I am just wondering how you guys see that environment, what's your game plan there, are you looking at anything M&A wise in Canada or maybe do you have other plans then? So that's not in the U.S., I mean, specifically for Canada.

So Frederico, it's an interesting question. Obviously, there's been some notable acquisitions of late. I think what I -- the way I would describe it is this, without giving any specific details. We don’t see anything in Canada that we got to have. Given the dynamic nature of market share buying or renting market share, I think right now, is not a great play in Canada. Now that being said, if we saw something that was accretive, a technology, a management team, or something that was in a category that we didn’t need, then maybe it would be of interest. I think as many of you know, Aurora is -- was on an absolute tear in terms of acquisition in the early days. And so whether it's in India as a lab or [indiscernible] in terms of IP and technology or manufacturing we got plenty of infrastructure and have plenty of acquisitions in order to fill it out. I think given our strength in medical and international medical and with a little bit of softness in rec, we're going to focus in there, but I don't think you're going to see us chase in Canada in order to, what I would really describe as renting market share, unless there was a systemic or a sustainable reason in order to add that to the portfolio. Clearly, if we needed to do it through the $525 million, with the $300 million ATM, we'd be in a position to do it if we saw it. So that's how I would describe it, Frederico.

Your next question comes from the line of Michael Lavery with Piper Sandler.

You laid out some good color on the cost savings initiatives that you've got mapped out. And I guess I just want to maybe make sure I understand how you think about that in terms of gross versus net. And by that, I mean, you also touched on some things like the high-touch approach on the medical side. It sounds like increasingly so. And some of the things like hand trim, should we expect a 60% to 80% net number to flow through? Or is there going to be some, I guess, maybe reinvestment that, that will fund as well?

I would tell you, Michael, we feel confident that we're going to be able to deliver that $60 million to $80 million in straight up in efficiencies. I mean, if you sort of unpack that, we've got the Nordic facility we talked about in the past that is now producing EU GMP products for Europe and for Israel. So that creates some redundancies. We've seen some efficiencies in our current business. Obviously, rightsizing the overall infrastructure for the business we have today as well as a little bit going forward means we have redundancies, inefficiency. So I would say, from my point of view, the company has had a strong track record of when they say they're going to see straight up savings. And I expect this to be no different. And it's my expectation that we'll deliver the 60% to 80% in that 18-month period. And with that, as you know, we don't need to grow our way into EBITDA neutral or have to have see anything happen on the margin. So I'd take it as is. Did that answer your question, Michael?

I'm curious about your thoughts around your balance sheet and cash and also the comment in your press release about your cost savings getting you, I guess, moving cash flow metric in a positive direction. I guess, how are you thinking about the timing of getting to cash flow positive in this environment, maybe if the environment improves? And also, how do you feel about the cash on your balance sheet, especially as we hopefully inch closer to federal negotiation in the U.S.?

Glen, you want to kick that one on?

Yes. Thanks, Heather. So listen, yes, a few things to unpack there. Certainly, what Miguel outlined in terms of operational cost savings, we think, is a big part of that. If we look at Q3 and we look where the cash was consumed, there was some still being consumed in operations. So we're not there yet on operations. But we believe that if we can achieve these cost savings, and so that equates to maybe $15 million to $20 million a quarter and you think of our EBITDA at minus $16 million or $17 million this quarter. That gets a long ways towards your positive cash flow from operations. Working capital, there is a bit of an anomaly this quarter. We were the $24 million receivable that we collected just into April. So let's just say we collected that during the course of March, we would have seen the single-digit investment in working capital. So we think with production and demand roughly aligns that, our working capital should kind of stabilize and start to even out a little bit. So let's just say, long term, there'll be a little bit of investment in working capital as we grow. But we think we've got that well under control and certainly as we manage our inventory tightly now that should be fine. And finally our CapEx piece of this, we talked about how much we've reduced that, I mean as we -- now, I know, you are relatively new to our store, but you've done your homework. You know what we were spending on CapEx a year ago. You know where we're at now, and we think we've got 1 or 2 of our projects complete. So even going forward there, we spent $40 million over -- we're on track to spend…

Our next question comes from the line of Matt McGinley with Needham & Company.

My question is on what changes about the financial performance in the fourth quarter versus the third. Growth in the consumer business seems pretty contingent upon COVID disruptions normalizing, but you'd only have about 1.5 months to make up for any lost ground before the quarter ends. And obviously, the rationalization won't really have an impact, I think, on the fourth quarter. So should we expect improvements in the fourth quarter? Or should we think of this more as like 2022 before we would expect to see improvements?

Glen, do you want on that?

No, I guess, here's what I'd say on that. We're -- on the rec side, the trends are what the trends are, but we also have positive trends on different sides of the business.

I don't want to get ahead and give guidance in the midst of the quarter. I think you sort of heard what we're saying. There are other pieces that also are steady. There's other pieces on the cost side. So I'm sorry, I can't give you the exact answer you want, but I think when you look at the aggregate of where the business was going from the point in time in which we laid out for you, plus some other pieces there, I think that sort of is what it is. It's hard. When I talk about the provinces making a change of 8 figures on POs I really don't want to get ahead of myself in terms of what happens on that side of it. And then on the medical and the international side, those trends have been pretty steady. So I think I'd put -- sort of leave it there. Glen, anything you want to add to that?

No, that's fine. We don't -- we recognize, as you just described, the consumer market there. We're doing what we can, but there are things that are kind of dynamic to the market right now. And we've seen, over the last day in our quarter that the provinces are adjusting on the fly as well. So we'll focus on the plan we've laid out, which is over the next number of quarters and continue to just look for improvement each quarter.

Our next question comes from the line of Tamy Chen with BMO Capital Markets.

Miguel, I wanted to ask a bit more on the production pivot and all the changes you've made at Sky. So if we just move aside all the COVID headwinds because I think that's pretty been well highlighted that, that definitely made things very difficult for you guys on the premium pivot strategy. So if we just move that to the side here, could you speak a bit to the consistency now at which Sky can produce that high-quality flower? Because one of the things we keep hearing, COVID headwinds aside, is that in the market right now, there's a lot of the average quality stuff, but there's not enough of the high-quality stuff. And I just would have thought that, that sort of dynamic, once again, COVID aside, would have been that perfect sort of opportunity for your strategy of trying to tackle that apparent white space. So can you talk a bit about the production consistency? Because I'm also just thinking about your ability right to tackle that white space and also the implications on inventory, possible impairment going forward. I know you did the big inventory write-down this quarter, but I really want to understand the level of consistency you can hit at in terms of the higher potency and all the thresholds that are required for premium flower?

Sure. It's a great question, Tamy. So let me go back a little bit. First and foremost, a year ago, the market was one in which you could have sold 16%, 16.5% potency with a low 2-level terp, bud quality, moisture, other aspects on quality were not that as important. And at that time, as everybody knows, Sky was hammering out a lot of products. Some of that was for Daily Special, some of that was for some other things. And the consumer as is in the case in every other market has moved really quickly. Today, as an example, if you look at the wholesale market, you can access 19 potency product, maybe 20 potency product. Anything above that is really hard to buy in. And you can sell all day long, 22, 23 potency products in the retail market. It is a hard thing to make. If it was easy, everybody will be making it, the flower market and pricing would be great, but it's a hard thing to do. So we have to pivot Sky. Now I'll talk to you about Sky in 1 second, but I don't want anyone to lose sight of the fact that we also have other really consistent, high-quality manufacturing facilities, River, Ridge, Whistler, the organic in-soil production facility in the West Coast in D.C., and they've been very consistent. And so Tamy, to your question about Sky, we've been working on Sky. As you know, we announced, we took it down to 25%, and it is a -- still working through it. Some of the early reads coming out of there are encouraging, but you have to be able to cycle through and be able to see the totality of what you're going to get out of Sky. And to Glen's point, it was painful in order to apply those fixed costs across the whole system to ascertain what we can get. We're close to understanding what we have with Sky. The good news for us, though, is we have redundancies in our overall infrastructure. And now that we have Nordic, we don't need to produce EU GMP domestically in Canada. So we have options regardless of what happens with that Sky project. In order to delivering 22, 23 potency product that is enough retail value, and importantly, at a cost structure that is rightsized for the environment that we're in. So I think a little bit to follow-on that. We expect to give you an update coming soon. But either way it goes, it's not like we don't have an option because of the historical production at River, Ridge and Whistler, which are not at 100% in terms of their overall utilization. And that's why when we talk about aspects of the redundancy, that's not the only one, but it is one of them.

Next question comes from the line of John Zamparo with CIBC.

Miguel, I wanted to follow-up on a comment you made -- you referenced on competitors' SKU and what percent of retail is that. I'm not sure if this is a number you have handy, or are willing to share. And if not, maybe you can just talk directionally, but I'm curious about how you look at your distribution and how many stores you're in countrywide and how that's trended over the past, let's say, year or a couple of quarters.

So John, I come from a world of incredible analytics. Our 242,000 stores, I get wholesale -- I mean I had wholesale shipments weekly by SKU, both my business and competitive business. I had in stock conditions, I had retail takeaway. We had it all. In Canada, that information is just starting to come online. You see it with some of the retail information, the provinces are starting to get there. It was one of the core reasons why we went with Great North and their significant CRM systems. So what we are now -- and you can imagine, you can't just snap your fingers and get it. We are visiting the roughly 1,540 or 1,600 stores that are open and are selling cannabis. We're visiting all of them on a monthly basis. We'll visit the higher volume stores, which account from anywhere between 70% to 75% of the business twice a month, and we're starting to gather the following information, which I know is going to seem mundane and basic to all of you, but is the beginning blocks of where the cannabis industry is. First is overall distribution, say, most commonly sold 46 to 50 SKUs. Secondly is pricing, both wholesale to retail and retail to consumer. Third would be in stock conditions, which in Canada will come in 2 ways. One, what is authorized or listed, which potentially can go to the store. And then secondly, what is physically in the location. And as you can imagine, with the speed, that's why those weekly calls matter. And then nice to have would be timing of new brand launches and signage and share of space. So that information that I quoted to you is an internal piece of information and is not widely available because even the large chains who do have sophisticated data systems, that doesn't encompass the independence where a lot of business is done and therefore, the value of that overall retail takeaway data or CRM data. So I think there's a ton of upside in that as a manufacturer. The other upside is for the retailers who, in many cases, are not having been in this business for a long time because they couldn't have. And so us providing category insights and profitability optimization for new stores and existing stores is a big opportunity. And I think all that, I'm sure, it sounds like the basics for any CPG company, but it's really where we're at. And I think it will be wildly additive for Aurora as we leverage that data and insights with our retail and provincial partners, which suit the consumer needs.

Our next question comes from the line of John Chu with Desjardins Capital Markets.

So maybe just talking on the Canadian medical and the European market. You're doing really well on both those fronts. But I guess I find those 2 markets, maybe kind of small and just a little bit underwhelming at this point in time. So can you just maybe give us a bit more color in terms of the market size, the market potential, I think the Canadian med market is maybe about 10th of that Canadian rec market, if you can give me some indications otherwise? And then maybe just the outlook for Europe because right now, just the growth we've seen so far has been pretty underwhelming. So maybe just talk about those 2 markets in general.

Yes. I mean, John, I find it -- I understand exactly the sentiment, but I think if you have to look at the broader picture of medical, so we represent roughly 19% of the Canadian medical business. As I mentioned, our next closest is half that. There's a ton of upside. We also see a movement from unions and benefits and carriers. So we believe that there is an upside to Medical. The other part of Medical is the margins are steady and really solid at 60%. Internationally, it's a great business. And what we see is whether you're dealing with Germany or France or U.K. it's a really high bar to get into. And there's a deep moat around it, and there's a lot of expansion. I think the reason to be interested in medical would be probably threefold. One is it's going to continue to grow, and the same people that are winning today are going to win tomorrow, and it is really significant from a margin standpoint. Secondly is, medical typically is the pathway forward on rec, and it is the same regulators, and you have tremendous efficiencies in manufacturing, packaging, regulatory compliance, legal, all of those things. And so there is wonderful synergies in having a company that is strong, both on medical and rec. And I think the Canadian quarter, this quarter is a great example. If you were just a rec business in Canada this quarter, you would have gotten hammered because of the overall macro environment. Medical didn't see that, what happened in rec. And lastly, I really believe that the first steps we're going to see in the U.S. is going to be medical. And I also think it's going to be at the federal level. I just don't see a scenario where the federal government is not going to have a piece of this taxation revenue. I don't see a scenario where the FDA says this is the one category, we're not going to regulate and with all due respect to the MSOs, you have some really large multibillion-dollar global CPG companies that have made big bets that stand to gain from interstate commerce, highly regulated, all of those things. So I think medical doesn't get anywhere near the attention. It's not just because we do well at it. It's just all of those economics, and it is growing, and it is an important part of the rec story, whether it's today's synergies or tomorrow's new markets.

Miguel, I'd like to add just a couple of things to that.

Sure.

A follow-on about the medical thing. Just you're talking about market sizing. So let's -- Canada I would say maybe 1% of Canadian population are medical cannabis consumers. In Germany, it's 1/10 of that. It's 1/10 of 1% of German population are currently medical cannabis patients. And so as our leadership in Germany would tell you there's 90% of the patients out there don't realize they're medical patients yet. And so it's our job is to go help them understand the benefits of medical cannabis because -- so you talked about growth opportunity, just simply getting the same sort of penetration we've got in Canada. We could 10-fold opportunity there. But more importantly, and when we focus myopically on revenue, we miss an important point, 60% margins, and I'll just kind of reiterate that, I don't see anybody in our industry delivering 60% margin. So to me, 60% margin is worth twice the consumer dollars that somebody operating at 20% to 30% in the consumer market. So we shouldn't lose sight of that. It's a massive part of our business. I think the growth opportunities are excellent. I think the ability to support a cash-generating business is excellent. And for all the reasons that Miguel said, it leads you into the future opportunities. So I don't want to, sort of leave it as the poorer -- a poor cousin to the rest of the business. It's an incredibly important part of the business.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I'd like to turn the call back to Mr. Miguel Martin for closing remarks.

Well, on behalf of all of us. We want to say thank you in all of your interest in Aurora. We look forward to delivering this plan. And I hope everyone is safe and well with you and your families. All the best. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.