Greetings and welcome to the Aurora Cannabis Incorporated Fiscal 2023 First Quarter Conference Call. All participants will be in a listen-only mode, and a question-and-answer session will follow the formal presentation. This conference call is being recorded today, Thursday, November 10, 2022. I would now like to turn the conference over to your host, Ananth Krishnan. Vice President, Strategic Finance. Thank you, sir. Please go ahead.

Thank you, John. We appreciate you all joining us this afternoon. With me today are, CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 first quarter financial results. This news release, accompanying financial statements and MD&A are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you can find a supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today’s conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Lastly, I want to remind everyone that we will be holding our annual general and special meeting of shareholders on November 14th, and the meeting materials have been mailed out to shareholders or can be found on SEDAR or on our IR website. We encourage you to review the meeting materials before voting your shares at the meeting, and look forward to your participation in the virtual only format. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our covering analysts. However, we ask that you limit yourselves to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Please go ahead.

Thank you, Ananth. We will keep our remarks brief as our Q4 conference call was held recently, but I want to reiterate a few key items before I turn the call over to Glen for an in-depth financial review. We are very close to achieving our primary objective of reaching positive adjusted EBITDA by the end of the calendar year. This will be an incredible achievement that we believe is also sustainable. In fact, the structural changes we have made over the past several quarters have resulted in long-term benefits for Aurora, and we look forward to demonstrating consistent financial performance in the coming quarters. Our enthusiasm is anchored by our position as the number one Canadian LP in global medical cannabis, and the underlying top-line trend is undeniable, upwards and to the right with a loyal base of patients within existing medical markets and more developed countries poised to open up. Beyond revenue, medical cannabis also commands enviable adjusted gross margins that consistently exceeds 60%, twice that of consumer cannabis. For these reasons, along with its defensive nature and volatile times, we believe medical is the best segment to invest behind. The second anchor of our enthusiasm has been our ability to rationalize the business to the current environment. The annualized cost savings of $150 million to $170 million will be complete by the end of the calendar year, at which time we will have materially reduced our cash burn and become EBITDA positive, as I said a moment ago. A third anchor of success is our balance sheet, which is stronger than ever. It's enabled us to repurchase approximately $217 million in convertible debt since Q3 2022, and has resulted in considerable savings on cash interest costs, about $12 million annually. We are further benefiting from improved working…

Thank you, Miguel, and good afternoon. I'd like to begin by reminding everyone that we're pleased to have one of the strongest balance sheets among Canadian LPs and this quarter is no different. As of yesterday, we have approximately $393 million of cash including $58 million of restricted cash. And we have US$186 million of principal remaining on our convertible notes that are due in 2024. Subsequent to our September 30th quarter end, we repurchased US$23 million in principal on our convertible notes at a total cost of US$21.8 million in cash, including accrued interest. We believe that debt reduction, even though maturity is still more than a year out, is a smart and defensive capital allocation decision, which reduces balance sheet risk, especially important during turbulent markets. Our debt reduction since Q3 2022 has resulted in annualized cash interest savings of approximately $12 million, and we continue to have access to significant capacity under our base shelf prospectus, including US$156.8 million remaining under our ATM program. That reflects how we issued 23.7 million shares subsequent to September 30th for gross proceeds of $40.2 million, and that's to be used for strategic purposes including debt reduction. Our cash flow is improving with $20.1 million used in operations and working capital in Q1 or $12.4 million excluding restructuring costs. And that's down from $22.5 million in Q4. In Q1, we reported approximately $5.5 million in capital expenditures, down from $7.8 million the last quarter. Q1 CapEx was fully offset by proceeds from disposals of property and equipment, and from government grants. Our ongoing cost transformation program is expected to continue to improve operating cash use over the next several quarters. Total revenue in Q1 was $49.3 million, and of that net cannabis revenue was $46 million compared to $50.2 million last…

Thanks, Glen. I'm going to leave me with four thoughts before taking your questions. First, we're just one quarter away from achieving our goal of positive adjusted EBITDA. Cost savings are nearly complete and going forward we'll have a lean and flexible operating model. Second, our medical cannabis business is a formidable force in the industry, both domestically and internationally. It remains the smartest cannabis segment to invest behind today with excellent growth opportunities. Third, the Canadian rec market is correcting and the two acquisitions we've made in Thrive and Bevo will be even more beneficial to us, once the recovery is upon us. And last, our science and innovation program as a high margin opportunity is just starting, and we look forward to sharing more in the future as the business grows. To conclude, we're well on our way to becoming a leader in global cannabis and are making strategic progress to that end with each passing quarter. Our completion of the business transformation is near, on time and on budget, and we've done it without sacrificing our investments in growth. We've also done this while strengthening our balance sheet, which is critical in today's environment. The end result will be a positive and sustainable structural change to our business that will enable us to be successful in the long-term and create significant shareholder value. Thank you for your time and interest in Aurora, and we look forward to sharing our progress. We’ll now be happy to take your questions. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Vivien Azer with Cowen.

So, I wanted to touch on Europe, please. So, you guys have been really transparent about your expectations for fiscal 2Q and why you're expecting a recovery, and it all makes sense. But Miguel, I was just hoping to get some perspective on how you view that business's defensibility in a more challenged macro environment, certainly through kind of traditional consumer staples earnings, European weakness, especially the further east you go has been incredibly topical. So, I'd just love to get your perspective on that. Thanks.

It's a great question, Vivien. I think if you look at Canada as an example, you've got over 250, 300 LPs that compete in the rec business, and we got a bunch of people that are facing some tougher times. If you look at the medical business, it's very concentrated. And why I bring that up is because it's been going on for a long time. So, we have a 24 share, which is the leader in Canadian medical by a mile, then you have 9%, which is the number two company and then it really falls off. And there's just not a lot of companies participating. When you look at Europe, and I think Germany is a really good example, you've got basically four companies, maybe five companies that do the vast majority of the business. It's incredibly expensive to get in. It's incredibly challenging to continue to deliver. And the regulatory thresholds are significant. And so, there really is sort of a moat around medical. And it's not just Germany, you see this in other markets, where it's a consolidated number of companies, it takes a very specific skill set. And what is interesting that is starting to really come to the forefront now is that that challenge, that difficulty is portable. So the best example I can give is if you look at the framework presented by Karl Lauterbach, who is sort of the Federal Minister of Health in Germany, that's now going through the EU, you just saw that Czech Republic, which is another great market and a really good market for us, talk about wanting to mirror or just get the learnings from the German experience. And so, I think you're going to start to see consistency in these markets from a regulation standpoint, everything from manufacturing, to testing, to packaging, to sales and marketing. And so, I think, while it's going to be challenging and it's going to be difficult, there's definitely going to be advantages for those handful of companies that are regulated -- really regulatory forward in those markets. So, I think that's why we're so thrilled about it. And I think we'll be competing against four or five companies, not 200 companies. Does that answer your question?

It does. Thank you.

Thank you.

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

I just wanted to come back to the profitability milestones, and you led with the revenue improvement, which makes perfect sense. Just curious if you could unpack that a little bit more, maybe a couple of things. One is how much maybe is it mix driven or operating leverage? Does it need to be a big number or just the right product? And how much visibility do you have on that? We're close to halfway through the quarter. Do you have a line of sight on forward bookings or some things that give you a sense of that being on track?

Yes. I mean, let me make a couple of comments, and then I'll turn it over to Glen. I mean, I'm not going to give comments about the quarter, but let me sort of add some color to what Glen mentioned. So clearly with 2x the margins in the medical business and in most cases the international business, those revenues make a huge difference. And so, when you have sort of these 1 time ebbs and flows in a key market like Australia and you get it back, it makes a really big difference. Because it's almost entirely upside because you've already grown the cannabis and you don't have increased sort of fixed costs for it. So, that's one. Secondly, we're really thrilled that the OCS -- and I don't wish the cyberattack on anyone, but they addressed it quickly and the same thing with the B.C. strike. So, I'll let you take our comments about that and where we are in the quarter sort of bear. From the cost side, I think we've been pretty consistent in terms of that. So, not to rehash Glen’s words, but if you go back to where we think we should be on revenue and you look at the margin and then you add Bevo, you're there. And I think the part that is sort of powerful about all this is we get there in the model that can grow and has future growth opportunities, and whether that's Western Europe or some other aspects that will be there. So, I think when you describe mix, I would say it's more business mix than it is say product mix. But Glen, anything you want to add to that?

No, that's exactly right, Miguel. The cost reductions and the SG&A that we committed to and a bit of incremental Bevo cuts the Q1 EBITDA loss in half. So, the rest of this is coming from holding our margins up and then the business or market mix and with it being mainly focused on medical, a lot of that drops to the bottom line. So that's…

And Michael, I guess the point is we're not saying it goes beyond where it's been in the past. So, the comment of getting back to traditional levels in those two key businesses, I think, is why we're saying what we're saying. There's not some great promise of a new piece of business or some additional form of growth.

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

Two quick questions. Two-part question if I can, Miguel. First, I think you're one of the few companies that has tied to this view that Germany will start only with domestic production and that the imports won’t be allowed. And obviously the draft -- that's what the draft says. But most other companies are talking that imports will be needed because domestic production won't be enough. So, maybe if you can just explain your point of view, which seems to be in the minority. Most of the companies expect the imports from day one. And then the second part to the equation is that in the event that the regulator only allows domestic production, how long will it take you to ramp up, I don't know, a greenhouse or production to supply the market? When would you need to start investing? And are we looking at a one year or two year timeframe? Thank you.

You got it. So, I think our position on Germany is led by having significant resources on the ground. We have full time people there. We have a tremendous government relations organization. And we've been consistent in that opinion. And I'm not here to disparage any of my competitors, because I really -- that's not my place. But we've been very consistent that for medical cannabis, in that part of the world, in Germany, particularly, you'd be able to import for recreational cannabis, whether it was around the UN convention or a variety of other two-party agreements, there's just did not seem to be a pathway for that. And as one of only three companies that are currently producing cannabis in market under a medical license, we're very close to the regulators, and we have incredible respect. So, going back to what we've seen, and this is me referencing what Mr. Lauterbach said, he's the Health Minister. What they're really talking about is that they are going to have a science-based integrated framework. And I give them a lot of credit. They're talking to regulators across the world in different markets. They're talking to a variety of people. And they are talking to industry to get sort of this consolidated opinion. And I would not lose the topic that what's happening with rec is not also --- is not taking away from what's happening in the medical channel, there's also enhancements being made to that critical medical channel. So what are the key elements of this? And what did he say? Possession up to 30 grams, no limit on THC, which is a really important piece, potential limits for those under 21, cannabis tax being applied on TH content. The aim of the final consumer price, try to keep that…

And our next question comes from the line of Andrew Carter with Stifel.

I guess, I wanted to ask that Canadian consumer came in well ahead of our estimate, or well ahead of what we were thinking. And I guess, you guys have kind of a tepid guide around the disruptions, yet sequential growth. First off, can you tell us how much Greybeard contributed? And also maybe disaggregate the performances by channel. Quebec's been strong, love to hear that. And of course, the Headset data says you were down 13% POS, of course, could be backwards looking if things are just working their way through. So maybe also give us an aggregate of what shipments were outside of Quebec? Thank you.

Let me make a comment about I guess Headset problems, isn't it, and I'll kick it over to Glen on the rest of the question. Quebec is our largest province in terms of shipments. We really value our partnerships with all the provinces, but Quebec has been particularly good for us. As you know, Andrew, many of the syndicated services do not include Quebec and the province on stores. And so, it does skew the results a bit, particularly for us as someone who does the majority of their business in there. I think, Greybeard was a significant contributor but also, we've had successes on two fronts that has helped us. One is our significant improvements in yield has allowed us to go back into some of the say larger format sizes, that now makes sense for us in a way that they didn't make sense for us before. And we're also participating at a much higher level in some of the faster growing, higher margin segments, such as pre-rolls and concentrates. Glen, do you want to take the rest of it?

Yes. Greybeard and the Thrive brands are important brands to us. But they are our premium brands. So, they don't drive a ton of revenue. I'd say they're probably in the 15% range this quarter and certainly growing, but margin wise, they're very important to us. As Miguel mentioned, the provincial distribution, that actually drives a lot of our bottom line, heading into the right provinces and the right products, and with the distribution, say Quebec offers you with the distribution and all in all stores. The provincial mix is as important as the product mix to us on our bottom line. So, I think it continues to be an important market for us. Ontario's got a very big revenue market. But I'd say, we certainly are choosy on what products we launch in Ontario to make sure that we continue to have that focus on protecting our margins and being able to drive the profitability.

Just clarifying in there, you said getting back into large formats. Does that mean -- which I thought the focus was 100% premium. Is it just a lower cost structure allows you to do that? I just wanted to make sure and clarify that comment.

Yes. So, we -- particularly on discounting and value, we got out of spots where 14 grams and 28 grams just didn't make any sense. And what we -- because of the cost structure that we had with this -- with the enhanced genetics, and in some cases, getting 2x the yield per square meter, it allows you to go back into some of that. And then you covered about an idea of the growth of 28-gram, and some of those larger formats have been pretty significant. So, you can get in there and actually make some money on it. It's a win from a revenue standpoint. The other point I guess I would make is the fragmentation and whether we're at the bottom or not, you've got the top five companies that right now are, I don't know, 36% of the business, and last year there were 48%. So, there is a lot of consumer movement, Andrew, which I know you know. But so when you come out with new things like we have, the environment is pretty ripe to make some quick gains. And so, we've been pretty pleased with that, outside of Greybeard.

Thank you. And our next question comes from the line of John Zamparo with CIBC.

Thanks. Good evening. I also wanted to touch on the consumer channel but on gross margins. And you've repositioned into premium and you've added Thrive but adjusted margins are down sequentially and year-over-year. Is that mostly a function of volume and you just need to increase that to get higher margins? I know the press release mentioned packaging costs, but is there any other color you can add there? Thanks.

Yes. I mean, John, as you know, the rec business is really challenging right now. And so, the pricing continues to drop. So, the macro environment makes it a challenge. You've talked about packaging. There are other sort of inputs on the inflation side that push down the margin a little bit. Clearly, utilization and spreading the fix across does make a difference. We are seeing some opportunities, as I said in my prepared remarks, leveraging common infrastructure for rec and medical that we think will have some margin. But I think the margin in the rec business overall is going to be under pressure. As sort of we look forward, we've been able to find spots where we've been able to keep it at where it's at through a little bit of mix, to Glen's point, a little bit of geography and a little bit of introduction of new products, particularly premium products. But overall, I think for most manufacturers you're going to be dealing with a challenging pricing environment in the meantime. Now, you make a big move on yield, you make a big move on something in a pre-roll or in a concentrate or in a premium or ultra-premium flower, you can make a move there. But I think overall, I think, it's a little bit of the environmental catching up. But yes, clearly if you improve your overall production, and you move through the fixed cost, you're going to improve your margin. I mean, Glen, I don't know, anything you want to add on margin and rec?

Yes. John, that's a great question. You're exactly right. So I mean, what we see in contribution margin, so that incremental margin on the next unit of sales is quite compelling. So, I think there is a volume there and that's why it's nice to see us kind of getting a little bit of stability and even a bit of growth in the consumer channel. So, as we do -- and we've got some exciting new products that have dropped recently and that we're seeing nice pickup across some of the provinces. So, I'm excited to see what that does in terms of margins. Lots of headwinds as Miguel said, lots to -- but at least we've got some waivers we're calling to protect and maybe even grow some of those margins with a bit of volume.

Thank you. And our next question comes from the line of Matt Bottomley with Canaccord Genuity.

Good evening, everyone. Just wanted to take a step back just on the Canadian medical market, that side of the business. I think we chatted Miguel about this a couple of quarters ago. But just given that this has essentially been a $100 million business for some time now, and I understand there's some strategy, and going after margin on insured patients versus just trying to grow the top line for the sake of it. But I'm just curious if there's any other variables or elements other than insurability that might drive the overall industry growth and then if Aurora can keep its 25% share to see the commensurate growth with that. Is it just insurance or there's anything that you guys can do that's in your control in the interim, to try and help that? And then maybe another side of that question, just also related to just sort of the doctor acceptance or doctor uptake? Are we seeing more doctors prescribe cannabis? Where is sort of that segment of the market in terms of where the medical professionals are at? Really no other LP talks about this line of the segment, just given that most are focused on other things, or adult use? So I think just a lay of the land might be helpful.

Sure, I'd be happy to. Right now, when you look at the Canadian medical business, you got 1% of the Canadian adult population that participates in it. And if you're looking for drivers of it, first and foremost, because the margin is so compelling, compared to rec, not compared to pharma or traditional sort of forms of medical, you get a lot of folks playing around it. And as I mentioned, it's a pretty consolidated piece of business. So, what are the aspects that will improve the overall medical business? Well, first and foremost, I would remind people how early we are in this. And for most clinicians, physicians and patients, clinical research and efficacy and the real science behind medical cannabis is just coming online. And so, we've been honored to participate in some clinical research, you've seen stuff in U.S., you're seeing a ton of stuff in Israel. And as that comes online, you're going to really start to change the equation for all the key stakeholders, everything from the insurance companies, to the clinician, to the patient around that. And some of the stuff that's coming out is pretty compelling around some of the traditional use cases that you see around medical cannabis, whether that's anxiety, or sleep, or PTSD, or neuropathy, or whatever those things may be. So, that's a very important driver. I think the next driver is that you're starting to see some of the insurance companies and the private companies and those that have coverage, bringing cannabis coverage into the -- more into the mainstream in terms of the benefits program, up to including companies like ours that have direct billing, and that really makes a big difference. And obviously, some of these large union contracts make a lot of noise in terms…

Great. And actually not to try and put another second question, but just on what you were saying, curious in terms of the patients that are onboarding in the Canadian market. Is there any element of obviously, if it's insured, that's different, but for people that aren't insured, is there any element of them joining the medical market? Obviously, there's some friction with registering with LPs and things that aren't really typical in a lot of industries. But once they ship in order or two, do they then just go and know the products they like, and then just for the sake of ease go to their local dispensary? I know, in Ontario, there's one on every corner now. So, is that part of the dynamic that's making it hard to ramp up patients in the country?

No, I wouldn't say so. I mean, there has clearly been some interaction with the medical market to the evolution of the rec market. But this I think is maybe where in certain markets this gets misconstrued. This is primarily a conversation that a patient has with a clinician or a physician, or an advisor to go get medicine. And so, obviously, from an insurance standpoint, there's no economic advantage to go into the rec. But for the vast majority of the patients we interact with, this is a medical aspect and medical case that is connected to a physician or clinician or an advisor. And that interaction in the same way you would have with, others form of medications, this doesn't lend itself to that. Now, maybe an uninsured patient that finds something and sees, some other reason to go get there. But when you're talking about people that are over indexing on things like capsules, and oils and other things that maybe aren't the sort of the flavor of the day and the rec business, you really find this is truly a medical, construct and the medical infrastructure that lends itself to that more so, then just a surrogate for rec use.

And the next question comes from the line of Frederico Gomes with ATB Capital.

Thanks for taking my question. Just on the Netherlands, could you provide an update on your investment there? And I know that you've talked a lot about Germany. But how do you view the opportunity in the Netherlands? And potentially in terms of timelines, when can we expect sales from that project to start? Thank you.

You got it, Fred. So, in the Netherlands, there are two aspects of it. There's the medical aspect that we continue to participate in where the government is reviewing products and will make a final assessment probably in May or June of next year about that is. From the rec standpoint, there really isn't an update for us. We're still waiting to hear about a firm date and what is the process. And there have been general details for those 10 licensees to service roughly 500 coffee shops in a variety of towns and cities throughout the country that would give everybody the opportunity to look at everything from data to service levels and whatnot. So, I don't really have an update for you right now. At the time in which we have one, we’ll give it, but we're still waiting for some information on exactly what it's going to be, and when it's going to kick off, and exactly what that all looks like. But to be clear, the information that we've seen previously has been -- there would be a test for those 10 licensees, and I know, Fred, you're well aware of how that all worked out, and then post that test after an un undetermined period of time, they would then talk about a different construct.

Thank you. And the next question comes from the line of Tamy Chen with BMO Capital Markets.

I was just curious, in terms of inventory impairments, when do you expect that will kind of get through past that? Because I know you've had Sky shutting down and all of that. So, I'm just wondering when we get past that and don't really see more of the impairments going forward. Thank you.

Glen?

Yes, sure. I'll take that. Tammy, thanks for the question. There's a few things going on here. One under IFRS as I'm sure you're aware, there's a biological asset standard that ends up with some fair values in our inventory that when you have to write things down to net realizable value, at the end of the day, there's an ongoing sort of noise quarter-to-quarter of just provisioning down to realizable value on your inventory. But more to the point, a lot of the footprint rationalization that we've done with our production facilities are to get us to a better spot where we are producing high quality, low cost and very focused on what the consumer wants and minimizing excess production. Now it is an agricultural crop and certainly in the consumer markets, we do find the consumer taste do evolve. So, it's never going to be perfect, I think in terms of alignment. We think we would expect that there would always be some hopefully small percentage of inventory that ages out a little bit. Now what we do find though is that we're developing more and more channels for our cannabis. So it may fit the rec market in Canada. It may fit the medical market in Canada. It may be excellent of an export product to another medical jurisdiction. Even within those international medical jurisdictions, we're starting to develop different tiers of product and what we call a premium and value. So, two things that we can do here is continue to rationalize our production footprint and really focus on producing high quality cannabis and to continue to develop more and more channels for outlet of that cannabis. So, expect it to improve over time, Tamy, but being agricultural, there will always be a little bit of noise in the inventory.

Thank you. There are no further questions at this time. And I would like to turn the floor back over to Miguel for any closing remarks.

Well, I appreciate everybody's interest in our business and in this quarter. We're thrilled about where we're at and we're looking forward to the next call. And we look forward to having the conversations with many of you. So, I wish everyone a safe -- and for those that are celebrating Remembrance Day tomorrow, which is obviously an important day for everyone, we have all wishes on that. Thanks to all. And we look forward to talking to you in the future. All the best.

Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.