Greetings. Welcome to the Aurora Cannabis Third Quarter and Full Fiscal 2023 Conference Call. As a reminder, fiscal 2023 is comprised of three quarters ending March 31, 2023. All participants will be in listen-only mode and a question-and-answer session will follow the formal presentation. This conference call is being recorded today, Wednesday, June 14, 2023. I would now like to turn the conference over to your host, Ananth Krishnan, Vice President, Corporate Development and Strategy. Please go ahead.

Thank you, Rob. We appreciate you all joining us this morning. With me today are Aurora's CEO, Miguel Martin; and CFO, Glen Ibbott. Prior to market open today, Aurora issued a news release announcing our fiscal 2023 third quarter and year-end financial results. This news release accompanying financial statements and MD&A will be available on our IR website and will also be accessed on SEDAR and EDGAR shortly after this call. In addition, you will be able to 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. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our covering analysts. We ask that you limit yourself 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. Q3 marks the end of our abbreviated fiscal 2023. We're very pleased with our strategic and financial progress. First and foremost, our business transformation plan is working as we have now generated positive adjusted EBITDA for two consecutive quarters. Part of that plan included a commitment to rationalizing expenses. We've done so over the last three fiscal years by approximately $400 million. Today, we're announcing an additional $40 million annualized savings that we believe can be achieved by March 31, 2024, the end of our fiscal 2024 year. This incremental reduction puts us squarely on the path to reach our next financial milestone, which is positive free cash flow. Glen will provide more context on this in his remarks. Milestones aside, the cannabis industry is still full of challenges, but we've not taken our eyes off what we view as Aurora's greatest opportunity, solidifying our position and focusing on resources on the global medical segment will remain the number one Canadian LP. There is and will continue to be real and profitable growth opportunities in the global medical market for companies such as Aurora. We have been able to sustain and grow our high margin medical cannabis revenue over time and our diversified presence affords us some resilience to macroeconomic and regulatory risks. Our view is that the momentum for top line expansion and profitability remains very strong. And as we've said many times, Aurora's expertise in managing the complexity of multiple jurisdictions regulatory frameworks, our unwavering commitment to science, breeding and genetics sets us apart in this industry. And these are the capabilities that will position us to win new business in medical and for that matter, recreational markets as they open up. Our ability to invest and grow is supported by our strong balance sheet,…

Thank you, Miguel. Good morning, everyone. I will walk through the Q3 P&L momentarily, but first, let's review our balance sheet. Aurora already has one of the strongest balance sheets among Canadian LPs. As of Monday, June 12th, we have approximately $230 million of cash and cash equivalents. And this should be more than sufficient to fund operations until we reach positive free cash flow, which we are working to achieve by the end of calendar year 2024. Miguel noted our plan to capture an additional $40 million in annualized cash flow savings this fiscal year. We've already put into motion most of the actions to achieve these savings, including the closure of production at our facility in Denmark, further targeted reductions to external SG&A and operations costs and a number of other initiatives and investments. In Q3 2023, our operations used a net $15.1 million, excluding changes in working capital. The $15.1 million includes about $2.1 million in nonrecurring termination costs. So our rate of operating cash use for planning purposes is approximately $13 million per quarter. To be a bit more prescriptive, this fiscal year we're working on taking out a minimum of $5 million quarterly from operations as we eliminate less efficient operations and focus on supplying the globe from our very low-cost yet high-quality production facilities. Removing a minimum of $5 million quarterly through a number of defined and targeted efficiency and cost reduction initiatives in operations and in SG&A. Combined, these will bring us down to low single-digit quarterly cash used in operations during this fiscal year, with nine months remaining for the end of the calendar 2024 to achieve the remainder. Of course, this is all before considering revenue growth. In addition, compared to Q3, we'll also save approximately $2 million a quarter in…

Thanks, Glen. Several years ago, we embarked on a journey to bring the company to sustainable positive adjusted EBITDA. This has since been accomplished through our focus on the highest margin opportunity within cannabis, global medical, as well as a substantial reduction in cost that have resulted in significant operating efficiencies. We have now set another ambitious target of removing a further $40 million of cost during this fiscal year to support our goal of being free cash flow positive by the end of calendar 2024. In the big picture, we believe our accomplishments to date coupled with our near term goals, becoming convertible debt free and cash flow positive truly sets us apart from our peers. And as industry rationalization takes hold, we think it is important for our investors to appreciate that we have the necessary capital, business plan and by extension the staying power to not only endure, but emerge stronger than these competitors as the global cannabis industry develops. Our growth and profitability focus is on the high margin medical business that continues to expand globally, supported by innovation and development of quality products for a loyal patient base. We have and will continue to pull all levers at our disposal to create equity value for our shareholders. And that includes smartly allocating capital between organic growth, strategic M&A and continuing to focus on all the details that build a world class company. Thank you for your time and interest in Aurora. Operator, please open the lines for questions.

Thank you. We’ll now be conducting the question-and-answer session. [Operator Instructions] Thank you. And our first question is coming from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.

Thank you. Good morning.

Good morning, Michael.

I just wanted to ask a little bit of a portfolio strategy question with a thread of capital allocation in it. Basically, just you mentioned strategic M&A at the end of your prepared remarks and also talked about paying down the convert. I guess, maybe some of it is -- with the cash balance you have now, is there any reason to not pay that down sooner than later? Do you want to keep some dry powder? Is that part of your thinking? And on those little bit more strategic side, how do you think about the portfolio evolution? Are there things proactively on your radar? Obviously, you're focused on global medical, but obviously did the Bevo acquisition as well, so clearly open to some adjacencies. How do you think about maybe what the optimal portfolio looks like? Or if there's additions you're looking for or what it would take to be make something interesting to you?

Great. Listen, good morning. We appreciate the question. So I think first and foremost, as we think about the portfolio, we continue to focus on those areas in the cannabis business where you can make money. And right now, that's almost predominantly in the medical aspects, so Canada and in Western Europe. And so we continue to make investments in those areas, which is definitely paying dividends. I mean the margins are 2 times what we see in rec. It's a much more consolidated piece of business. And importantly in Europe, we're seeing a sort of a normalization of what the regulations are. EU GMP product that is allowed to be imported from facilities like ours in Canada. And while the regulations are really high, you get a lot of values and scale with those markets. So we're going to continue to expand there. We're seeing positive movement in Switzerland and Austria most recently. And obviously, the strength that we have in places like Germany and Poland and Czech Republic and whatnot to make that an obvious piece of expansion. On the product side, what we're seeing is incredible advancements in the genetic work that we're doing in our -- we think one of the strongest facilities in the world out of Vancouver Island in bringing high-quality genetics, high potency, incredible yields to the medical channel, but also to the rec channel. And so, there is great efficiencies in that from a portfolio standpoint. Beyond cannabis as we see things that are an obvious adjacency like Bevo, which was a wonderful acquisition and a great team, it allowed us to do a couple of things. One is, the consistency and sort of value of a great company like Bevo, but also utilize world-class facilities like we mentioned with Sky, to get value out of that. So we'll continue to look at that. In terms of the balance sheet and the debt, as we stated, it is our goal to take out the rest of the converts before their maturity next year, which obviously has a pretty significant impact on interest savings, but the balance sheet is an important one. And we worked really hard to be one of the few companies in a net cash position and we look forward to being opportunistic. There are -- in this time of consolidation, we continue to see things that are of interest. But as you know, we've been really, really patient. And I think that's paid off in not chasing some of the higher valuations you saw a couple of years ago. And importantly, for us not chasing on the U.S., which just wasn't a core setup and I think right now poses a challenge, particularly Canadian companies.

Our next question is from the line of Frederico Gomes with ATB Capital Markets. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. Just on your consumer cannabis segment, we have seen a positive market share trend recently or at least stabilization and some gains according to some data providers. So can you talk a little bit about that segment? Is there any chance that you could accelerate market share gains there, especially on edibles. We think we're seeing a good pickup there. What is it that you're seeing in that market? Could that surprise for the upside? Thank you.

Well, Fred, thank you for the question. So as you recall, we made an acquisition just about a year ago with a company called Thrive that had a wonderful portfolio of products, including a very super premium product line called Gray Beard. And that team, which is really why we went after that asset was wonderfully adepts at navigating the rec market. And the rec market still presents a lot of challenge. We still see price compression, we still see the growth of value flower at pricing that doesn't make sense. But we do see spots where you can perform and make some money, concentrates, pre rolls and to your point, ingestibles, which we had some considerable success in. So as we look at the landscape, right now we have a little bit less than a three share and it does not appear that if you had a larger share, you would have greater profitability. So we're being very, I think, thoughtful in how we look at all of our opportunities in rec. And as opportunities present itself, we're able to take advantage because of our low cost of production and innovation. I think we're a little bit of a ways off where there will be strong economics across all aspects of the rec portfolio, but it's definitely getting better. And we see some glimmers of hope with provincial entities such as the OCS putting in pricing floors and we do see a little bit of the rationalization on pricing, particularly on flower that gives us some hope that in the future you could see more profit opportunities. And with that we'll definitely take advantage of it because with the genetics and science and innovation that we have implemented in our medical channel that there's an easy crossover into rec.

Our next question is from the line of Pablo Zuanic with Zuanic & Associates. Please proceed with your question.

Good morning. Thanks. Look, regarding the German market, Miguel, it's a two-part question. What I'm hearing is that, the sources of growth there is mostly coming from the online pharmacy business, right? So the reimbursable business is pretty much flat to down. And even the cash business in brick-and-mortar is flattish. So it's online pharmacy driving growth. And that could be significant because we know that in terms of patients that's under penetrated end market. So first of all, is that true? The second question is that the concern I have when I check all the websites of those online pharmacies, they have a significant number of SKUs and they pride themselves in that variety they have there. And if you are a LP shipping a few SKUs, maybe you have a disadvantage. I mean, tell me about that? I know you talked about some new [indiscernible], but if you can stress this assumption. Thank you.

Yes. Well, thanks for the question, Pablo. I would say it's not just online pharmacies. And so, what we're seeing is a growth in the overall prescriber base. Now right now in Germany, it is a bit challenging because of the classification of cannabis as a narcotic for a traditional physician or clinician to prescribe cannabis. But that is starting to expand. And one of the things that's been lost in all of the noise about what's happening with the German rec business has been stated position of the German government to reduce bureaucracy and to open up the medical cannabis business. Right now in Germany, it's about 0.1% of the adult population is in the cannabis system where I say in Canada, it's 1%. So we are seeing some expansion outside of the online pharmacies. And you mentioned the point about their catalog and how many brands are in there. A couple of things on that. First and foremost, one of the great challenges in the German market is the incredible rigor that they have with the testing to have products be acceptable in the market. It has to be in roughly around 10% of the state of potency in their lab. So product quality and availability that meets that spec is one of the key competitive drivers in Germany as opposed to say the distribution system that you're referencing. The second thing in Germany what we're seeing is an interest in more premium quality and higher potency medications. And so therefore, we've introduced two proven cultivars from Canada into Germany and the early read is that, they're well received. The last thing is, we saw a lot of investment as people were getting excited about a possible rec solution and now without being a bit off, we're going to see consolidation. And so, unlike the rec business in Canada with the top 10 LPs only do 30% of the business. The top five LPs in the medical business in Germany might do two-thirds of the overall business. So there are efficiencies there for the LPs that can navigate that high bar and that can consistently connect with patients. And that will be a benefit both in the online system as well as the brick and mortar. And lastly, we do think that with the progression of some of the regs, traditional brick and mortar through a pharmacy is going to be much more the prevailing application as opposed to today's execution that's somewhat skewed.

Our next question comes from the line of Vivien Azer with TD Cowen. Please proceed with your question.

Good morning. This is Robin Holby on for Vivien Azer. And thank you for taking the question. Given the pivot away from the Nordic facility, can you dimensionalize any near term gross margin headwind you might expect from moving supply for Europe back to Canada? And you mentioned this should increase gross margins over time. Could you explain what gives you conviction in the ability to increase gross margins above the 60% gross margin target over time? Thank you.

Sure. Thanks for the question. So one of the challenges with that facility, there are probably three primary challenges. The first is the regulations on what would be traditional remediation of pathogens, whether that's powdery mildew or other things in that facility made it a bit difficult to achieve the same yield in production that we get out of Canada. So that's one. Secondly, the size of that greenhouse facility did not really lend itself to the same sort of production efficiencies that we get out of our traditional indoor facilities that we have in Canada. And third, because there is no difference in terms of the ability to ship that product into that market when you're able to utilize the scale and the sophistication and to be honest, the experience that we have with the Canadian facility into that European market, it's a benefit. The other thing I'll mention is that we started in the European markets with Canadian flower particularly. And in the German market and some other European markets, they value for whatever reason the Canadian product as having a higher quality and being more sort of valuable to them. And so, it is a margin increase for us, but also the predictability because of our knowledge and experience with those indoor facilities in Ontario is so much higher that it's just an overall better system, which is why we think we can grow margins. Now in terms of the overall margin profile, we don't see any added costs. And because the economics run through the wholesale list price for the overall system, you're not seeing the same pricing compression that you would see say in the rec market in Canada. And as we get greater efficiencies in our production as well as in other aspects of the distribution and sales and marketing in those markets, we do see the opportunity to have an accretive margin situation. So we're excited about that.

Our next question is from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for the question. I wanted to step back a bit and talk about your cost structure. And I suspect, you may also, as a result touch on the new cost savings plan that you mentioned. But I just wanted to understand, if I look at your business now, the majority is in the medical side. Canada as well as International, though Canada is the bigger part. And with respect to the consumer or recreational segment, over the last several while you've really narrowed down that business and your focus to be profitable. I'm just wondering at this point now, when I look at your quarterly SG&A on an adjusted basis, it's about, as you said, around $30 million a quarter. So that's still $120 million a year of adjusted SG&A, which is a decent amount versus your total revenue figure. So I'm just wondering, at this point now, what -- why is it so significant? What are the biggest cost components there that you feel can still be worked down going forward? Thanks.

You got it. Let me -- I'll make a couple of comments and then I'll turn it over to Glen. So, first and foremost is [indiscernible], Tamy, and we appreciate the question. We took about $400 million out over the in the past three years and we've announced another $40 million to $30 million that you're describing in SG&A, there's still complexity and general cost to the cannabis system that looks a little different than say what I'm used to from a CPG standpoint. The production, the medical, the regulation, the shipping, all of that is complex and therefore creates cost. It's something we look at a lot and I think people should have great confidence that when we say we're going to get to this $40 million within the time period, we're going to get there, but that doesn't mean we're going to stop there and as we see other opportunities. In terms of rec, about $14 million or $15 million a quarter in revenue there and we've made significant improvements in terms of the cost profile of that. But as you mentioned, the vast majority of our focus and where we think the real upside is on the medical business which scale does benefit you there, which will help with sort of the scaling of the SG&A versus future growth because we can produce out of those common facilities in Canada and ship around the world. Glen, maybe I can turn it over to you and you could talk a little specifically about the cost structure for Tamy.

Yes. Thanks, Miguel. I think you covered it quite well. Tamy, as you know we're in four different businesses, all cannabis related plus Bevo So, supporting global medical in Europe, and becoming quite a nice business in Australia, Canadian medical, Canadian rec and Bevo is complex. And so, we've got maybe heavier than you might expect sort of legal regulatory [indiscernible] sort of framework, and certainly shipping, which we run through our SG&A shipping to the provinces, to Europe, to Australia, et cetera, et cetera, runs through our SG&A. This is about serving the globe. So we think we've built a good platform. We will continue to see crossroads to kind of say normal course of businesses continue to look for efficiencies every year. And on top of that, we do have public company costs. So we are looking and we have defined plans that are already in progress to reduce the cost by about $5 million a quarter. But just realizing that we've got a platform that's quite capable of scale. So as we add incremental revenue through some of the opportunities that’s right in front of us we don't need to scale up SG&A. We believe we can continue to support it at this level and add topline revenue. We'll start to see those metrics looking a little bit more or less [indiscernible] might expect. Thank you.

Our next question is from the line of John Zamparo with CIBC. Please proceed with your question.

Thank you very much. I wanted to ask about the consumer segment and in particular on edibles, and you've gained considerable share in that category according to Hifyre data. I wonder if you can frame how much of that has come from glitches or any other brands that offer chewable extracts? And what's your view on how that matter plays out with regulators?

Yes, John, thanks for the question. Yes, we look at the quarter and obviously the decision by Health Canada on glitches, it was considerable. It's probably was a couple of $1 million of revenue in the quarter associated with glitches. I think it's an interesting piece, we were really excited about the innovation on glitches and navigating that. We obviously made our submission to Health Canada six months before we launched it and then Health Canada had a concern or questions, I guess, say, on ours and other products. I know that's an industry fight and we're going to be talking to Health Canada about that 10 milligram limit. On glitches, and I'm not going to -- I'm not saying it's going to be the same amount of volume. But the prohibition was having more than 10 milligram in one package. And so, we're going to continue to have glitches in the market going forward, but it will just be one unit at 10 milligrams as opposed to the 10 by 10 that we had out there. This has been raised I think by a variety of different entities in Canada, the competition bureau and a variety of other industry entities that this is a real sort of gap for the legal regulatory forward license producers versus the illicit market where you see what I would describe as an irresponsible representation of edibles at high potency's, youthful presentations. And so I think over time this is one that's going to resolve itself. But for us, I think this is an example of our ability to pivot. Within six months, we identified that opportunity we're able to launch it and did seven figures in sales in the quarter, that's not the last innovative item we're going to have. We're launching infused pre rolls, we're launching other minor cannabinoid gummies which have done really well as well as innovations that we've seen in flower and other core aspects that have done well. So in this market, you've got to be very agile as Glen mentioned in his comments. We've done that. And I think what we've done really well that I'm really proud of is we take what's there and we don't chase what I would call unprofitable market share and we're still not in a place in the rec business, we're having a 10 plus share is going to guarantee that we're going to have greater profitability. So as I mentioned before, we're about a three share, we're finding the spots that we think are sustainable and profitable and we are seeing some positive movements, the OCS price wars and other provinces decisions on flower and so we'll get there. And as we look forward in the future quarters, we'll see things like glitches that we're excited about. And I do think as I mentioned before that the 10 milligram cap will be addressed at some point.

Next question is from the line of [Yewon Kang] (ph) with Canaccord Genuity. Please proceed with your question.

Hi. Good morning. This is Yewon Kang on for Matt Bottomley. Thanks for the question. Just wanted to touch on the adjusted gross margins for the quarter. Under the wholesale bulk cannabis business, as well as the Bevo Farms business, adjusted gross margins for these segments ticked up this quarter pretty significantly. So I guess, could you speak to any of the drivers that caused the sequential growth in these margins? Thanks.

Of course. Glen, you want to take that one?

Yes. Absolutely. So in the plan propagation business, as I mentioned in my prepared remarks, it's seasonal. And so what's really happening in the first half of this fiscal year, but it's all in our reported Q3 this evening and our reported Q1 is that, just a fully utilized stuff to stuff to the rafters facility that's really cranking out a ton of plants and therefore revenue. So you're getting a completely utilized cost structure in that -- in those two quarters. That's why the margins are higher. Through the remainder of the year, we expect them to be a little bit lower, more similar to what we saw in our Q2. I guess, the one of the beauties I think of what Bevo is doing with the Sky facility is the orchid business that's being launched at Sky is a little less seasonal to start to smooth some of those comps out in our time propagation margin. Beyond that, the bulk sale cannabis, as we just said, have a lot less excess cannabis. And we're finding a spots to sell some of our higher potency volume and [indiscernible] some nice margins on some of the core bulk sales. That's not a segment that we're leaning on there, depending on what we have talked about at [indiscernible]. And that's really just seen as an outlet after we've got four different channels that are all kind of fighting for cannabis right now. If there's a little bit left at the end also through the bulk sale process. Thank you.

Thank you. At this time, we've reached the end of the question and answer session. I'll turn the call over to Miguel Martin for closing remarks.

Well, listen, we are thrilled with this quarter and more importantly thrilled about where the company is going. We appreciate everybody's interest in us and we look forward to sharing the story as we go forward. On behalf of everyone in Aurora, thank you for your interest and take it from there. All the best. Thanks.

This will conclude today's call. Thank you for your participation. You may now disconnect your lines at this time.