Aurora Cannabis Inc.

Greetings, and welcome to the Aurora Cannabis Inc. Fourth Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Anand Krishnan, Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you, John, and thank you all for joining us for Aurora Cannabis' fourth quarter fiscal 2021 conference call. This is being recorded today, Monday, September 27, 2021. With me today are Aurora's CEO, Miguel Martin, and CFO, Glenn Ibbitt. After the close of markets today, Aurora issued a news release announcing our financial results for the fiscal fourth quarter and fiscal year 2021. The release and the accompanying financial statements and MD&A will be available on our website or on our CDAR and EDGAR profiles. In addition, you can find a supplemental information deck on our IRWealth website. Listeners are reminded that certain matters discussed in today's conference call could constitute forward-looking statements that are subject to the risks and uncertainties related to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risks to 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 by the CDAR and EDGAR databases. Since we're conducting today's call from respective remote locations, we may experience technical issues. We thank you in advance for your patience. Following the prepared remarks by Miguel and Glenn, we will conduct a question and answer session. We ask that analysts limit themselves to one question. For retail and institutional investors, we will review questions through the chat function of the webcast link. With that, I would like to turn the call over to Miguel. Please go ahead.

Thank you, Dan. We made significant strategic and financial progress during fiscal year 2021. In fact, as a fiscal Q4, I can safely say we're in the best shape the company has ever been in. While there's certainly more work to do, Aurora is on the right course to build shareholder value, particularly from these levels. Building value starts with profitability on an adjusted EBITDA basis. The entire team is focused on this effort, and additional facility closures we announced last week is another proof point to show that these actions are well underway. Building on that, let me speak to a few more data points that underscore our progress into 2021 and how that sets the table for value creation in 2022. First, Aurora is and remains the number one Canadian LP in global medical cannabis revenue, with margins over 60%. This is nearly double what we see in the adult rec segments. For that reason, we will happily continue to allocate resources to the Canadian, European, or Israeli medical markets, where our regulatory expertise, science, testing, and compliance combine to create a portable and profitable model. The second level we're pulling is expense reduction. As you know, we're on track to deliver another $60 million to $80 million in incremental cost savings, and it's important to note that these savings won't affect any planned growth initiatives. These additional savings will also clear our path to being adjusted EBITDA positive by the first half of our next fiscal year, even if revenue was to remain constant with our fiscal 2021 fourth quarter levels. That said, we do not expect revenue. That said, we do expect revenue growth in 2022. Another value creation data point that complements our P&L is the balance sheet. In a growing, dynamic, and fragmented market, our regulatory expertise and number one position in Canadian medical are at further advantage with a strong balance sheet. I'm pleased to say that we have vastly improved ours with approximately $400 million of cash as of Friday, no secured term debt, and access to U.S. $1 billion of capital under our shelf prospectus. We've also gotten better at managing our operating cash flow, reducing the need for incremental capital. We also expect to leverage our significant investments in R&D and monetize a world-leading science and innovation program. The foundation of this is what we believe to be the world's largest dedicated cannabis breeding and genetics facility located in Comox, British Columbia. And lastly, we've strengthened our executive team by bringing in two highly skilled individuals in the areas of operations and HR, Alex Miller and Lori Schick, respectively. With that as a backdrop, I want to remind our listeners that Aurora is comprised of four distinct yet complementary components. First, a number one ranked Canadian medical business by revenue in the largest federally regulated medical market in the world. Second is our international medical business, which ranks as the second largest Canadian LP by revenue. Net revenue from these two businesses increased 18% during fiscal 2021. Third is our science and innovation business unit. We're monetizing our intellectual property in genetics and biosynthesis. And finally, fourth, our Canadian adult rec business, where we've already made progress, although challenges remain. Let's take a deeper dive on medical cannabis as it really serves as a solid foundation for our future. Domestically, we represent about a fifth of the Canadian medical market, but only about 1% of the population are currently medical cannabis patients. While our market share is roughly double that of our next closest peer, the top five LPs within the Canadian medical channel represent less than 40% of the market. This gap represents Aurora's opportunity to expand our presence, and we have done so through significant investment to help doctors and patients fully appreciate the benefits of medical cannabis. That outreach includes education. Aurora's investments in sophisticated technology, coupled with unparalleled professional counseling and guidance in navigating medical cannabis alternative treatments, have enabled us to provide an end-to-end patient experience for our growing clientele of recurring Canadian patients. About 80% of our Canadian medical cannabis net revenue is constituted by cannabis-insured and or subsidized patient groups, which sets up the medical channels, a very solid core revenue group. Also, our infrastructure to support a direct-to-patient distribution model, which begins with patient querying and then transitions to onboarding, medical consultation, and finally prescription fulfillment across a variety of price points, all being a key factor of our success. To improve our Canadian medical business further, we are now leveraging technology in our patient intake and user experience to lower wait times, raise service levels, and increase product choices. This is a key driver of margins. In its totality, our market position in Canadian medical, our innovation and tactical execution have created a tangible barrier to entry, which is good news for shareholders, as we grow other parts of the business. In terms of international medical, we're leveraging core capabilities from Canada as new countries look at launching medical cannabis. This is a distinct advantage over our peers, creating a deep mode around our business. A data point here is our leading position in Germany in dried flour, with a growing share of the oil market there. In France, Aurora and Ethifarm were selected in October of 2020 by the National Agency for the Safety of Medicines and Health Products to supply the entire medical cannabis pilot program with dried flower. We won three of the nine tender lots, which included all available dried flower lots, and just delivered our first shipment in August. In Israel, we delivered an $8 million cannabis shipment in July as part of our supply agreement with CanTech. We believe this is the largest single shipment of cannabis that Israel has received. Speaking of Israel, we are excited to announce an extended supply agreement with CanTech, under which we just received a PO for a further $9 million shipment, which we expect to deliver in fiscal Q2. Our compliant expertise was responsible for the extension. All good news. Of course, our expertise in medical cannabis and ability to operate within a highly regulated framework gives us a great opportunity to expand in the global adult rec. History demonstrates that medical regimes eventually evolved to adult rec as companies like Aurora that have a proven ability to operate in federally regulated systems will have an advantage when new markets open up. Let's pivot to Canadian adult rec. Those who follow the market are well aware of industry-wide challenges, but I'll bring up two points. First, while fixing this segment will clearly take longer than expected, we did grow 8% sequentially compared to fiscal Q3 and are seeing early signs that our focus on higher quality, higher potency, higher margin products is beginning to pay dividends. Specifically, our sales mix was positively impacted by a growth of about 400 basis points in Sanraf, offset by a modest decline in daily special. The growth in Sanraf represents over a 20% increase in dollar terms. We believe this momentum should continue with additional premium product introductions and a focus on innovation throughout all categories. Second, we believe the adult reg segment is in the process of bottoming out and is now poised to rebound, given new store openings and rising consumer demands. The dried flower REC category in Canada is a tale of two markets. First, the high-margin premium dried flower category, where margins are 50% or higher, and second, the discount flower category, where many SKUs are break-even or even negative margin. Our strategy centers on that premium category. We are not going to be chasing unprofitable market share. We're going to be chasing profitable dollars. Furthermore, our focus on product innovation and manufacturing excellence is squarely aligned with the expectation of our retail partners. So with our segment discussion out of the way, let me pivot to our P&L and our primary goal of adjusted EBITDA profitability. Aurora has identified cash savings in the midpoint of our previous guidance, $60 million to $80 million. We plan to deliver $30 million to $40 million of those savings within the next 12 months and the remainder within 15 months. We expect approximately 60% of the savings will come from asset consolidation, operational, and supply chain efficiencies. For example, last week we announced internally a plan to centralize much of our Canadian production at our river facility in Bradford, Ontario, and the resulting closure of our Polaris facility. We expect the remaining 40% of savings to be sourced through SG&A, and keep in mind that these efficiencies are incremental to the approximately $300 million of total cost reductions achieved since February of 2020. Again, expense reductions, margin improvements, and sustainable cash flow generation won't inhibit our growth plans. To be clear, to reach adjusted EBITDA profitability by the first half of the next fiscal year, we do not expect any revenue growth in the Q4 2021 levels. But I hope you can tell we are positioned for top-line growth in 2022, and with that, adjusted EBITDA profitability should follow.