Aurora Cannabis Inc.

Good afternoon, everyone. Welcome to the Aurora Cannabis First Quarter Fiscal 2020 Conference Call for the three months ending September 30, 2019. During today's call, Aurora will be referring to an earnings presentation which listeners are encouraged to download from the Financial Reports section of the company's investor website, investor.auroramj.com. Thank you for joining us today. These documents may be accessed via CDAR and EDGAR databases. I'd like to remind everyone that this call is being recorded today, Thursday, November 14th, 2019. I would now like to introduce Mr. Cam Batley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Batley.

Thank you very much. Good evening, everyone, and thank you for joining today's call. With me today are our Executive Chairman, Michael Singer. Terry Booth, our Chief Executive Officer, and Glenn Ibbitt, our Chief Financial Officer. As we're doing today's call a little later than usual, for today's agenda, I'll do a quick review of the quarter, including our operational highlights, and discuss our upcoming next generation products, and then Glenn will discuss our financial results. We will then take your questions. I would like to point out what the operator referred to, and that is our presentation that's available in the financial reports section of our website, investor.aurora.com. In particular, if you go to that site, you will see an innovation that we began using a couple of quarters ago, and that is our dashboard with key performance indicators for the quarter. This quarter, all the bad news is in the top left-hand corner, and that is that our Canadian consumer cannabis revenues are down 33%. Obviously, not the number we were hoping for. However, If you take a look at the other eight key performance indicators that we've been tracking now for three quarters, they're all green. They're all positive. Our Canadian medical revenue is up. Our international revenue is up. Our cash cost to produce is actually down 25%. We've moved under $1, and we came in at $0.85 per gram, the cash cost to produce. Our average net selling price per gram is up 7%. Our gross margin, our industry-leading gross margin, remains stable at 58%, which is head and shoulders above our peers. Our kilograms produced were up 43%, and even our SG&A, which we promised that we would control as part of our path to profitability, is actually down 3%, including the impact of a one-time out-of-period adjustment. And then finally, a number of active registered patients is up 8% to a record of 91,000. Now, I'd like to briefly address the current state of the market. The past few months have been challenging for the broader cannabis industry. Between issues of governance, evolving consumer demand, and provincial retail bottlenecks, there's been no shortage of negative news. That said, I want to reiterate that our view of the opportunity in the Canadian and global cannabis industry is still extremely robust. It's important to remind ourselves that the Canadian consumer market is just over a year old. These issues will take a little time to resolve, but in the end, we'll be a stronger business because of it. At Aurora, our objective is to continue to define the future of cannabis worldwide and positively and significantly impact the lives of millions of people by cementing our leadership position in the medical, consumer, and hemp-derived cannabinoid markets. As we indicated on our Q4 call, we expected to see growth plateau in the market in Q1 2020. And in fact, as we reported today, our consumer market revenues declined as a result of changes in customer preferences, and particularly challenges in retail and provincial distributors. I want to emphasize that we view these as short-term headwinds. And despite them, Aurora has continued to maintain our position as the leading producer and supplier of high-quality medical and consumer cannabis products. Our non-wholesale cannabis net revenue declined 19% this quarter, totaling in at $60.5 million at the end of Q1. To that, we added a further $10.3 million for wholesale transactions. We believe that the wholesale market continues to represent an opportunity for Aurora, and we will be opportunistic We are in a unique position to capture a greater share of that market in the coming quarters with potential white labeling strategies and other bulk sale opportunities. Our strong cultivation capability, highlighted by our record 41,436 kilograms of production in fiscal Q1, is part of what gives us the confidence in our ability to capitalize on this market. Our industry-leading Q1 2020 gross margins remain stable at 58%, providing $53.7 million in gross profit to fund our operations. I'm also proud to report that our high-tech cultivation facilities delivered on our promise to provide industry-leading indoor cash costs to produce below $1 a gram. And in fact, this quarter we came in well ahead of our expectations at $0.85 a gram. While we continue to leverage our coast-to-coast supply agreements to offer a broad range of premium consumer products Aurora also remains focused on supplying medical patients with consistent premium products. In Q1 2020, the total number of active registered patients increased by 8%, demonstrating the value of Aurora's products and patient loyalty to the Aurora family of brands. Turning to the consumer side, the Ontario Cannabis Store, Ontario's online retailer, recently announced their top-selling dried flower products after the first year of consumer legalization. I'm very proud to report that our products performed exceptionally well with San Rafael 71 Pink Kush in the number one selling spot followed by Aurora Blue Dream in second place and San Rafael 71 Tangerine Dream taking third position. This is excellent confirmation that our premium cannabis products continue to resonate extremely well with Canadian consumers We continue to be successful because Aurora has built a product development strategy that focuses on strengthening our competitive advantage with innovative product forms, enhancing the experience of existing customers, and capitalizing on opportunities to attract new consumers and new patients. Great examples of this One great example of this is how we've continued to address the demand from medical patients for alternative delivery formats and dosing options. A couple of the unique products that we've brought to market include the recent launch of Aurora Oral Dissolve Strips, a sublingual strip, which were created together with CTT Pharmaceuticals. Dissolve strips are a discreet, easy way to use the product that is ingested sublingually to provide more rapid bioavailability of the cannabinoids to the body. We're also excited to have recently reintroduced Aurora Cloud for our medical patients. It's the first and only legal concentrated CBD vape product in the Canadian market today. In addition, with the second wave of legalization coming into effect shortly, Aurora's insights and product innovation teams have done tremendous work to formulate new products in the right formats that we think will exceed customer expectations and drive category growth. Aurora's Cannabis 2.0 strategy focuses on four key pillars. Using quality extracts, leveraging proprietary extraction technologies to produce high-potency concentrates, providing a range of superior products to suit different consumer preferences, and using our expertise to produce consistent and reliable products at scale. The initial suite of new products that we will launch include vapes, concentrates, gummies, chocolates, mints, and cookies. We've selectively partnered with a variety of organizations, prioritized our resources, and built the inventory to help ensure consumers across Canada will have access to our high-quality derivative products. We're ready to ship product as soon as the regulations allow and are excited for consumers and patients to finally have access to a greater selection of product forms. As well, in advance of our new product forms being available to the market, we've launched Ready for Edibles. It's a campaign dedicated to educating new and experienced cannabis consumers on responsible consumption and safe storage of edibles products before they become available for sale in December. We want to ensure that Canadians have the information that they need to understand these new products, how to consume them responsibly, and most importantly, that they should be kept away from children and pets. Educational content will also focus on identifying signs of overconsumption, understanding the differences in onset times and effects, cautions around mixing with alcohol and driving while intoxicated. This, we believe, is the behavior of the industry leader. So as you can see, we're looking ahead, continuing our focus on strategy and execution, Serving our medical patients and consumers with premium, safe, affordable products and gaining consumers' confidence and brand awareness. I'd now like to turn the call over to Glenn, who'll discuss the financial highlights of the first quarter, and then we'll open up the line of questions.

Thanks, Cam, and good evening, everyone. The figures I'll be going over today can be found in our financial statements and in our MD&A, and all are in Canadian dollars, unless I know it otherwise. For our first quarter fiscal 2020, for the period July 1st to September 30th, we reported net revenue of just over $75 million. Our total cannabis net revenue, including wholesale, came in at $71 million for the quarter. Non-wholesale cannabis net revenue was down 19% at $61 million. The decrease attributed primarily to a decline in consumer cannabis revenues. Of note, demonstrating our continued commitment to the medical market, Our medical cannabis revenues grew 3% even in the faces of challenges from the consumer system cannibalization. Finally, we did add a further $10 million in wholesale revenue at a very attractive 58% gross margin. I'll now go into a bit further detail on each of these revenue streams. During Q1 2020, our medical cannabis net revenue increased 3% quarter over quarter to over $30 million driven by our continued success in growing our patient base, which currently stands at just over 91,000 clients. Our revenue was affected by a slight decrease in the average net selling price of medical cannabis of 6%, but more than offset by patient growth. The decline in selling price was the result of temporary pricing incentives designed to support the move of valuable long-term medical patients to Aurora and away from LPs that were not servicing them well. As usual, Our medical cannabis sales and gross margins were impacted by our decision to absorb the cost of excise taxes. We continue to lobby the government to remove these taxes from medical products. Our international medical cannabis sales during Q1 increased 11% to 5 million, comprising 7% of our total consolidated net revenue. We expect a higher rate of growth in our international markets, and over the last quarter, have been adjusting strains under cultivation at our ECGMP facilities to better meet the needs of the European markets. We have also been growing our sales force in Germany and believe we continue to have the leading market share of natural medical cannabis. Consumer revenue was $30 million, a decrease of $15 million, or 33%, from the prior quarter. This decline, as we all know, was driven by constraints in the distribution networks that have caused a temporary decline in ordering of the provincial distributors as they allow inventory levels to normalize. With adequate consumer choice now available, we are also seeing consumers exercise that choice to select those products that they prefer. We monitor the sell-through rates from the provinces to the retailers very carefully as we believe that to be a strong indicator that our products are meeting the needs of consumers for both quality and pricing. We are pleased that the Aurora family of brands continues to show strength across the major provinces for sell-through. We expect headwinds to persist through the next quarter before Canadian consumer infrastructure develops and matures throughout the back half of our fiscal 2020, with the licensing of new retail stores across Canada and the introduction of the new product formats. I do want to emphasize that our average net selling price of $5.68 was a sequential improvement of 7%, further highlighting that demand for high-quality recreational cannabis is strong and premium product can capture better pricing. During Q1, Aurora generated $10 million in wholesale revenues compared to $20 million in the prior quarter. Although the selling price per gram declined from the previous quarter, we considered that selling excess extraction-grade product at a 58% margin was a very prudent decision. As we noted on our last conference call, we expect our wholesale revenues to continue to be uneven, but with our reliable production of quality cannabis at a very low cost, Aurora is uniquely positioned to capitalize on this wholesale revenue opportunity. We do have line of sight to further wholesale revenues in Q2 2020 and are actively pursuing the development of a white label business as well. Aurora produced over 41,000 kilograms of cannabis in Q1 as compared to 29,000 kilograms in the prior quarter. This increase in output was primarily due to our production levels achieving a steady cadence of targeted capacities in our continued operational optimization at our sky and ridge facilities. In Q2, we expect production to return closer to our targeted annual capacity of 150,000 kilograms. as we undertake certain R&D initiatives designed to enhance the cultivation process and as we introduce into our cultivation with certain higher potency but lower yielding strains that are in high demand as consumer preferences evolve and become evident. Our cash cost to produce per gram of dry cannabis decreased 85 cents per gram, down 25% from the previous quarter. As Cam mentioned, we delivered on a very important milestone that we've been talking to you about for several quarters. Sub $1 cost to produce. In an industry where reliable and quality supply is critical to building the revenues and brands that will drive the company forward, we have a suite of production assets that deliver very high quality cannabis on a consistent basis and with the lowest production costs among those of our peers that are operating at scale. It is hard to overstate how important this is for Aurora's success over the next several years. To set out an example, $100 of revenue at Aurora will deliver almost $60 to fund growth of the business without having to access external financing sources. It also allows us to move quickly to profitability as revenues recover. Let's consider two comparable companies, each with $80 million of quarterly SG&A. Aurora would need to generate about $130 million in revenue to flip to profitability. A comparable company at, say, a 30% gross margin made almost $270 million in revenue break-even. Our fundamental business leverage with these gross margins is incredibly important to building a long-term healthy business. It should be evident that Aurora can compete strongly in any market situation and would still deliver healthy returns at pricing that would not be sustainable for others.