Aurora Cannabis Inc.

Good afternoon, everyone, and welcome to the Aurora Cannabis third quarter fiscal 2020 conference call for the three months ending March 31st, 2020. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to 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 CDAR and EDGAR databases. I'd like to remind everyone that this call is being recorded today, Thursday, May 14, 2020. I'd also like to note that we're conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or other minor technical issues during this call. Thank you and good afternoon everybody for joining me on today's call. With me today is Glenn Ibbitt, our Chief Financial Officer.

I would like to start by extending my deepest gratitude to all of our employees who have worked incredibly hard to keep Aurora fully operational throughout the COVID-19 pandemic. More than ever, I am proud to work alongside the people who make this organization great. As we've stated, our number one priority has always been to keep our employees safe, and this continues to be the foundation of all of the decisions we make. The highest measures of safety are enforced as we continue to operate and work to serve the many people who rely on our products in these challenging and unprecedented times. I would like to first take a moment to address our response to COVID-19. Our facilities in Canada and internationally continue to be fully operational and we are working closely with local, national, and international authorities to ensure we are following or exceeding the stated guidelines within each region. Thank you for joining us today. We have also introduced a special bonus pay program for active facility-based staff and we continue to maintain regular communications with government representatives, suppliers, customers, and business partners to identify and monitor any potential risks to our ongoing operations. Turning to the quarter, while COVID-19 will likely have a greater effect on Q4, it did not materially disrupt our business in Q3. The production and sale of cannabis have been recognized as essential services across Canada and Europe, and consumer cannabis sales are primarily with government bodies, which continue to offer end customers online ordering and home delivery. And consumer market retail stores are generally permitted to remain open, subject to adhering to the required social distancing measures. With that said, we are pleased to report that our cannabis net revenue, excluding provisions, increased 15% over the prior quarter to $72.6 million. We maintained a leading cannabis market share in key consumer categories, continue to lead the Canadian medical market, and we have significant share in Germany. Our focus is to continue to gain market share, and we remain well positioned to capture more share of the revenue growth in key categories over time. We continue to leverage our coast-to-coast supply agreements to offer a broad range of premium consumer and medical products across Canada. In the third quarter, the number of total active registered patients exceeding 86,000 was a slight decrease compared to the second quarter, which in the face of market challenges demonstrates the value of Aurora's products and patient loyalty to the Aurora family of brands. We are pleased with the progress we made on our business transformation plan that we announced in February. As a reminder, that plan detailed our intention to better align the business financially with the realities of the current cannabis market in Canada. Success here will allow us to conserve resources and still position Aurora to build a sustainable growth platform longer term. As part of this reset, we committed to an SG&A run rate of $40 million to $45 million per quarter by the end of the fiscal fourth quarter of 2020. and also stated our intention to reduce capital expenditures for the second half of fiscal 2020 to below $100 million. Let me take SG&A first. For Q3, we had roughly $80 million of SG&A expense and slightly over $5 million of RMD expense. After adjusting for severance costs, this represented a material reduction of 24% or roughly $26 million from Q2. Results would have been even better for the period, but many cost reduction initiatives were only initiated midway through the third quarter based on our transformation plan as announced on February 6th. Therefore, the number that's more important and the one that you should all pay attention to is $60 million, which is our current SG&A and R&D run rate today in Q4. This is about a 45% reduction from Q2. To achieve these savings, we targeted non-core initiatives which Glenn can speak to, which reductions also realized from certain divestitures that carry heavy SG&A burden. This progress is very encouraging, and we feel very confident reiterating our intent to manage the business to an SG&A run rate of between 40 and 45 million as we exit the fourth quarter. Now turning to CapEx, which was another main pillar of our business transformation plan. We committed to reduce spending to below $100 million for the second half of fiscal 2020. We are pleased to report that we are on track to achieve that goal. This significant reduction in cash outlay really highlights the focus of our team in terms of achieving our goals and underscores the fact that we are viewing all capital spending through the filter of generating near-term revenues and preserving financial flexibility. Another important takeaway here is this. We have approved capital spending plans of less than $25 million for the fourth quarter, which includes LP license amalgamations, the completion of the joint venture arrangement to co-locate treatment within our Polaris facility, and the completion of the first six rooms at Aurora Sun to produce high-demand cultivars. All of these projects are expected to be largely complete in the fourth quarter, allowing first quarter 2021 CapEx to be well below fourth quarter 2020 levels. Another key takeaway. In summary, since announcing the business transformation plan at the beginning of February, the team at Aurora has taken a number of concrete steps to put the company firmly on track to meet or exceed our previously announced targets. These steps are designed to strengthen Aurora's balance sheet and reduce go-forward costs to fuel profitability and positive cash flow. And while revenues in this current operating environment can be difficult to predict, we believe there are cost levers at our disposal to put us on a path to be EBITDA positive in Q1. We remain optimistic about our future growth potential in Canada and internationally. With that overview, I'd like to now turn the call over to Glenn, who will discuss our Q3 financial highlights in more detail. I will then provide a brief update on our long-term growth initiatives, then we'll open up the line to questions. Glenn?

Thanks, Michael. Good evening, everyone. Firstly, I would like to echo Michael's comments in thanking our employees who have done a tremendous job of navigating our company through the complications of this pandemic. is this level of commitment that demonstrates why we are all proud to be on the Aurora team. With that said, we'll now spend a few minutes reviewing our financial results for Q3 2020. Of course, the figures I'll be going over today can be found in our financial statements in MD&A, and they're all in Canadian dollars, unless otherwise stated. For our third quarter, the period from January 1st to March 31st, 2020, we saw our net revenue excluding provisions of $2.9 million. come in at $78.4 million. Our total cannabis net revenue excluding provisions came in at $72.6 million for the quarter. To get into a bit more detail, during the third quarter, our Canadian medical cannabis net revenue was $27 million, up from $25.6 million last quarter. Our patient base exceeded 86,000, which although down slightly quarter over quarter, is indicative of our strong medical position. as that market faces continued headwinds from cannibalization into the consumer market and also challenges with prescription renewals as many patient aggregators move to an online model during the pandemic. We continue to work at maintaining and growing our market-leading position and maximizing lifetime value of our key patients. The good news is that to date in Q4, Canadian medical revenues remain steady. Our international medical sales increased from $1.8 million in the second quarter to $4 million in Q3. Due to the resumption of sales operations in Europe in February following an administrative permit issue in Germany, similar to the Canadian market, we expect our European business, particularly in Germany, to grow sequentially, but in the short term with modest expectations. With the EU GMP certification our company received in February at our River facility, which are the capacity of approximately 30,000 kilograms annually, we are able to allocate significantly more product to our export markets as they develop. Consumer cannabis net revenue, excluding provisions, was $41.5 million, up 24% from the prior quarter. In Q3, we did record a provision of $2.9 million against revenue, which captured the impact of actual unexpected returns and price adjustments for sales in prior quarters. The significant majority of this provision was related to products sold in calendar 2019. During the previous quarter, Q2, we did see a drop off in our market share in flour as the market shifted significantly towards value brands, which we define as retailing for less than $9. In February, we launched our competitive brand in this category, Daily Special. Their price point, average potency, and pack sizes that we think are a very compelling proposition for the consumer. In fact, we believe it competes well with the grey market and will help grow the overall size of the legal segment. We'll clearly be monitoring our performance here closely. Data from Ontario indicates the daily special with the top-selling flower brands in March and April and that Aurora brands had the leading market share in flower and overall. While Ontario retail sales have been impacted by the government-mandated move to curbside pickup, we are pleased with today's announcement at Ontario retail stores with outside entrances will be allowed to reopen fully as soon as next week. Our average Q3 net selling price for consumer cannabis at $4.33 per gram represented a decrease from the $4.76 reported prior quarter, again primarily attributable to the impact of the lower average pricing of daily special in the value segment. Medical cannabis average ASP increased a couple of percent as our German sales came back online. In the quarter, we produced over 36,000 kilograms of cannabis. This is as compared to approximately 31,000 kilograms in the prior quarter. With our facilities fully scaled up, we have focused the last several quarters on optimizing the performance of these facilities. For instance, our top-quality flour, which has strong market demand in segments like San Ras and Daily Special, now represents approximately three-quarters of sky production. from just over 50% several quarters ago. A forecast for inventory drawdown show that our top quality flower production versus sales will reach a steady cadence over the next several quarters, and our mid-quality flowering frame will take slightly longer than that for steady state and drawdown. Growth and product categories like the value segment that Daily Special leads are a high-volume play and require the scale and output of top-quality flowers that our facilities are now delivering. Speaking with production for a minute, we also continue to innovate operationally, both in efficiency and in cultivation. For example, plant R&D with potential new high THC cultivars is progressing nicely with several cultivar candidates showing both high yield and delivering consistently above 20% THC. Our cash cost to produce per gram of dry cannabis improved to 85 cents per gram, down 3 cents from the previous quarter. are pleased that we continue to deliver on a very important key metric for our operations, sub $1 cash flows to produce. This is the leverage that allows us to launch such a powerful new entry into the value market while maintaining strong, healthy, and sustainable margins. In Q3, we had $84.1 million of S&A expense and $5.6 million of R&D expense. As Michael noted, SG&A included $5 million of one-time termination costs related to our reset. After adjusting for these severance costs, SG&A and R&D combined declined about $26 million or 24% in the second quarter, gaining and reflecting the partial quarter impact of decisions taken in February. But more importantly, our current run rate for SG&A is about $55 million and for R&D is approximately $5 million. Our reset was meant to bring focus to the organization on the parts of our business that will deliver meaningful short- and long-term value. As such, we reduced expenses across the board, including canceling or delaying numerous information technology projects, the elimination of projects that required significant external professional fees, renegotiation of several key marketing or research contracts, reduction in certain marketing programs, and the elimination of headcount across all of the FD&A functions. The expenses were also reduced as a result of the divestiture of several non-core subsidiaries that had low gross margins and carried a heavy SG&A burden. This progress demonstrates our commitment to manage our positive EBITDA for Q1 2021, including a run rate of $40 to $45 million SG&A, which now includes RMD as we exit the fourth quarter of 2020. As noted earlier, this reset is particularly important in the context of the current COVID-19 environment. While the near-term growth of the consumer market is difficult to predict, we can control our production and SGMA costs. Looking forward, as an example, further reductions will come from completion of several projects by the end of June 2020, including the amalgamation of our four separate licensed producer legal entities held by Aurora, Megalith, and Canamab. We anticipate that this will provide for significant sales fulfillment in SG&A efficiencies. Another example of cost reduction to come is the completion of our year one Sarbanes-Oxley implementation, which has consumed significant effort in external expense in the current fiscal year. And finally, we do anticipate further SG&A reductions as we complete the profitability review of several parts of our business.