Aurora Cannabis Inc.

Good afternoon, everyone, and welcome to the Aurora Cannabis Fourth Quarter Fiscal 2020 Conference Call for the three months ending June 30, 2020. This is being recorded today, Tuesday, September 22, 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 risk 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. The company expects to file these documents before the end of this week, and they may be assessed via the CDER or EDGAR databases. Since we are conducting today's call, from our respective remote locations. There may be brief delays, cross talk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. I would now like to introduce Mr. Miguel Martin, Chief Executive Officer for Aurora Cannabis. Please go ahead, Mr. Martin.

Thank you, operator, and good afternoon, everyone, and thank you for giving us your time. First off, let me say that I very much appreciate the board's confidence in appointing me to the CO role. I'm pleased to be working with the team on tactical plans to establish Aurora as a profitable, growth-oriented leader in the global cannabinoid market. I take my fiduciary responsibilities to our investors very seriously and am determined to do everything that I can to enhance shareholder value. This begins with managing the business with a high degree of fiscal discipline, especially in the midst of a global pandemic. Over the last several days, I've had an opportunity to speak to a few of you in the investment community But for the broader audience, perhaps it would be helpful to provide a bit of my background. I've spent my entire career in sales, marketing, and leadership roles within the regulated CPG product industry. I started my career with Altria and spent about 18 years there, ultimately leading their sales group. I then went to become the president of one of the largest electronic cigarette companies, Logic, which was then sold to Japan Tobacco, the third largest tobacco company in the world. After that, I went to a startup and became CEO of Oliva CBD, currently ranked the number one CBD company in Nielsen, which was just recently acquired by Aurora. So I spent a lot of time working in fast-paced, constantly evolving, highly regulated, and fluid environments where adherence to compliance and testing is essential to success. I accepted the CEO job because I see an opportunity to quickly leverage my skill set in a regulated CBG product development here at Aurora. I'm fortunate to step into a company built with a dedication to science and a compliance first approach. With strong execution, I expect to build a profitable business in Canada that we believe can be portable to other larger global cannabinoid markets. Having spent four months now at Aurora, I've seen the talent and industry knowledge that makes this company innovative and agile. Aurora will be a global leader in cannabinoids when the largest markets open up, and my job is to make sure that Aurora executes on that plan. With that, I'd like to turn the call over to Glenn Ivet, our Chief Financial Officer, to walk you through the financial results for Q4 2020. And then I'll be back to discuss some of our business plans going forward. Glenn?

Yeah, thanks, Miguel. My pleasure to take our first earnings call together. I'm very excited about the vision you have for Aurora and the opportunity for Aurora to realize its full potential as we remain focused on becoming a profitable, growth-oriented leader in the global cannabinoid market. So good afternoon, everyone, and thank you for joining us on today's call. As you know, on September 8th, we provided a business update, including certain unaudited preliminary fourth quarter 2020 results. Therefore, I can be a bit briefer in my review of our financial results for the quarter. The figures I'll be going over today can be found in the press release we issued after market closed today and are all in Canadian dollars. For our fourth quarter fiscal 2020, the period from April 1st to June 30th, 2020, Our net revenue came in at $72.1 million, while our total cannabis net revenue came in at $67.6 million. Our sales mix remains evenly split, with the consumer cannabis segment delivering $35.3 million in net revenue, and our medical cannabis segment delivering $32.2 million in net revenue. Total kilograms of dried consumer cannabis soil increased by 36% as compared to the prior quarter. But this was offset by an approximate 30% decrease in the average selling price per gram of dried cannabis flower. For Daily Special, our value brand accounted for 62% of total net consumer revenue from flower in the quarter as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried cannabis flower. Consumer cannabis extract net revenue decreased by $1.5 million as compared to the prior quarter, driven primarily by a decrease in sales of our vape products. During the fourth quarter, the increase in our medical cannabis net revenue was comprised of an increase in Canadian medical sales of $0.7 million and an increase in our international medical cannabis business by 14% or $0.6 million. Pricing in both markets stayed strong and steady. We produced over 44,000 kilograms of cannabis in Q4 as compared to approximately 36,000 kilograms in the prior quarter. However, as we continue this aspect of our business reset, which consists of rationalizing our production footprint and closing a number of our smaller facilities, we expect our total production going forward to average about 35,000 kilograms per quarter. And of this production, 65% or more is expected to meet our top quality flower standards. We expect our facility rationalization to be accretive to our gross margins over time, while we continue to work on maximizing yields, potency, and other quality characteristics of our cultivation. Our forecast for inventory drawdown suggests that our flower production versus sales will reach a steady cadence over the next several quarters, while trim will also reach a steady state drawdown given our renewed focus on bait and other derivative categories. Our cash cost to produce per gram of dried cannabis sold improved to 89 cents, down 27% from the previous quarter. This is a slightly modified metric from previous quarters that reflects changes to our inventory costing methodology, which places a heavier weighting on our top quality flour and less on byproducts. Our low cost of per unit production is another lever that allows us to build brands across multiple pricing tiers while maintaining strong, healthy, and sustainable margins. Our adjusted gross margin before fair value adjustments on cannabis net revenue was 50% in Q4 versus 43% in the prior quarter. If you are well aware, we have been focused on prudently managing SG&A costs down to our targeted run rate of $40 to $45 million per quarter over the course of the second half of fiscal 2020. We are pleased to have successfully reduced SG&A costs, which includes R&D spending, from over $100 million in Q2 2020 down to $64.6 million in Q4, excluding approximately $3 million of non-recurring costs related to the business reset. I'm further encouraged to tell you that we are now operating at our targeted quarterly SG&A run rate in the low $40 million range as of Q1. Clearly, reducing the run rate to the low $40 million range was very important as we strive to deliver positive EBITDA. We also believe this level of SG&A is quite sustainable and very capable of supporting a much higher revenue line. Our progress in continuing to reduce both overall and per-unit production costs, as well as the significant decrease in SG&A, demonstrates our commitment to manage Aurora to positive EBITDA for Q2 2021. These efforts, while certainly necessary, have clearly been disruptive to the organization. So while there is still more work to do, We're now in a position where most of the Aurora team can focus their attention on delivering Miguel's plan for growth. So pulling all of this together, adjusted EBITDA in Q4 2020 was a loss of $34.6 million. That's $30.7 million if we exclude severance and non-recurring costs related to our business transformation. This is obviously a substantial improvement over the prior quarter adjusted EBITDA loss of $15.4 million, and it is the second consecutive quarter of improvement in our adjusted EBITDA. We expect this trend to continue through our first half of fiscal 2021 as we remain dedicated to achieving positive yields on Q2. Turning to our balance sheet, as of June 30, 2020, our consolidated cash position was $162 million, compared to $230 million as of March 31, 2020. Cash use in Q4 was similar to that in Q3. However, the mix within cash use shows our significant positive progress. We used $53.3 million in cash to reduce our term debt and lease obligations, and we've made additional debt payments subsequent to quarter end. As of today, our outstanding term debt balance stands at about $110 million. In the quarter, we used cash to pay capital expenditure invoices of $32.8 million, which includes, of course, work done in previous quarters. This is a $51.3 million reduction in CapEx quarter-over-quarter cash spend. Finally, cash used in operations for Q4 was $63.9 million. In the fourth quarter, we raised approximately $48 million under our at-the-market financing program and also financed a new prospective supplement to enable us to raise an additional $250 million U.S. dollars under the ATM program. So, as at At the June quarter end, we had approximately $220 million U.S. available under our current ATM program. And this provides us with additional balance sheet support if required as we drive towards achieving adjusted EBITDA profitability in the near term. So in this environment, we believe that access to capital is of paramount importance. However, we are focused on getting the cash flow positive as quickly as possible to alleviate the need for additional equity capital as much as possible. We have multiple levers to pull to achieve this milestone, including cost and efficiency opportunities in production in SG&A that we've identified that should continue to drive costs lower over time. And of course, the successful execution of our tactical plans to improve market share in the Canadian consumer market. As we have demonstrated with our progress on the operational reset, we will continue to prudently manage our liquidity as we strive for positive EBITDA in the second quarter of fiscal 2021. The material run rate reduction in our CapEx and SG&A costs should provide comfort to our investors that the health of our income statement and balance sheet is of primary importance to us. We expect that our current cash position should be sufficient to fund operations to the point where positive EBITDA and free cash flow are achieved and sustainable. The remaining capital available under our shelf perspectives protects the company and our shareholders as a backstop in an uncertain environment. will use it judiciously for opportunities that deliver near-term payback and have in fact used it subsequent to our June quarter end to fund the announced termination payment to the UFC. Since we are closing in on the end of Q1 2021, we thought it would be helpful to provide some forward-looking commentary on how the quarter is shaking up. Following the divestiture of non-core subsidiaries during fiscal 2020, Our net revenue in Q1 2021 should be comprised exclusively of cannabis net revenue, which is expected to be between $60 billion and $64 million compared to the $67.5 million of Q4. We expect adjusted gross margin before fair value adjustments on cannabis net revenue to be within a range of 46% to 50%. So while growth in the consumer cannabis revenue is not expected in Q1 2021, Our medical business is expected to remain steady. And we expect traction from our execution of consumer market share tactical plan, as Miguel will outline for you shortly, to show results beginning in Q2. However, in terms of progress files of EBITDA, the Q1 consumer revenue level is more than offset by adjusted gross margin that continued to stay strong due to a favorable sales mix and a significant reduction in SG&A levels to the low $40 million rate. So two housekeeping notes before I turn the call back to Miguel. First, as we announced in our business update on September 8th, Aurora and the USC have agreed to mutually terminate the partnership. We will therefore be making a one-time payment of U.S. $30 million to terminate the contract in Q1. This is expected to allow us to reallocate more than $150 million to our core markets that would have otherwise been spent in fees, research costs, and marketing activation expenses over the next five years. Second, we reached an agreement with our syndicate of banks regarding amendments for a secured credit agreement. These amendments provided us with additional flexibility, including a reduction in adjusted EBITDA milestone and including shifting the attainment of positive adjusted EBITDA into Q2 2021. And finally, a reduction in the size of the revolver facility to better align with our average receivables balance and thereby reduce standby fees.