Q3 2021 Aurora Cannabis Inc Earnings Call
And on April 20th and response to a question from journalists. The Whitehouse Press Secretary publicly confirmed that president <unk> and supports legalizing medical cannabis and a country like the United States and a federally regulated system, we would fully expect the FDA and significant influence and a federal medical cannabis program and we think Aurora is unique.
Equally advantage when that happens.
We view, our enviable positioning and medical cannabis as a tailwind over time will translate into success on a global scale taken. This one step further as of March 31, Aurora was the second largest Canadian LP and terms of global cannabis sales and a leader across multiple markets and segments.
We have earned the credibility to pursue incremental M&A opportunities and Canada, the United States and around the world and support of shareholder value creation.
Consistent with our peers, the Canadian consumer business presented challenges during the quarter and our view of these challenges were twofold.
First COVID-19 related Lockdowns and key problems has made it more difficult for consumers to access products at retail despite curbside pickup and online ordering for delivery is available options.
Additionally, COVID-19 slowed construction and opening of newly licensed stores, which have been inspected.
Second due to the volatile environment all of the provincial distributors have become more attuned to managing their inventory to limit returns rationalizing, our skus and focusing on profitability per SKU. However.
However, it is undeniable that there exists great retailer interest and having a more premium focused assortment and they are therefore, taking a more accretive approach to margin as it pertains to two point and our products versus just low cost flower and this of course plays well into our strategy, even if it will take more time and we initially thought.
As we have seen and more mature markets and strategy, which centers on product quality innovation and manufacturing excellence is the best path forward for our adult use business.
Our ability to build traction with more achievable once the current COVID-19 related lockdown Ges and provincial retail inventories are better aligned with product demand.
Still we are not simply waiting and process out in anticipation and normalization followed by an eventual rebound and instead, we are determined to continue pulling the levers that we can to reduce our cost structure and extract further efficiencies from and operations and enjoying sales positioning ourselves for sustainable cash flow generation.
More specifically, we have identified an additional 60 million to $80 million and annualized savings that are targeted primarily at our production cost facility and logistic expenses and to a lesser extent SG&A.
These efficiencies are expected to be realized over the next 18 months and I'd like to remind you that our previous efficiency initiatives and delivered on time and provide more savings than originally expected. These identified efficiencies are incremental to the approximately $300 million annual savings already realized and will enable us to meet our financial objectives.
While the Canadian adult use market normalizes, which may take a few quarters still.
We anticipate that these expense reductions will not inhibit any of our strategic growth plans across our businesses for our current revenue opportunities, but they will help to reduce our cash burn and solidify our margins and enhance our overall financial flexibility.
To assist and the execution of our corporate plan and we've also hired two highly skilled individuals and the areas of operations and HR, Alex Miller and Lori shipped to our team as we announced this afternoon and our press release I'm not going to read their respective buyers, but I think it is clear that we believe Laurie and Alex one of the requisite experiences and skill sets to positively impact.
All of our business segments.
So to sum things up our Canadian and international medical businesses are performing well and we maintain our confidence and the margin accretive initiatives. We laid out on previous calls ultimately we are above the plan and ability to pursue profitable growth opportunities and create a unique economic model that strikes the balance between where the industry is today and where it's going.
This optimism is of course anchored by a healthy balance sheet and supports organic growth as well as M&A on an opportunistic basis, both will position Aurora for long term shareholder value creation.
Before I turn the call over to Glenn and I want to address one more items as many of you know when Aurora founder stepped down in February of 2020, Michael singer stepped up and took over the range as interim CEO. In addition to his continuing role as executive Chairman.
I'll, let Michael a huge debt of gratitude for his leadership during that time.
<unk> for the lead independent director over that period and has proven to be a consistent and reliable voice and the boardroom for years, Michael and transition back to a more traditional board role and Ron and move to independent chairman effective immediately.
We look forward to oversight from both of these directors as well as the broader board as Aurora continues to grow and expand with that I'll turn it over to Glenn.
Thanks, Michele and good afternoon, everyone.
Please note that the figures and I'll be reviewing are all in Canadian dollars and can be found in the press release, we issued this afternoon or in the Q3, MD&A and financial statements Pops day on SEDAR and Edgar.
I would also note that the comparative period for analysis today as Q3 2020. We believe this represents the best measure the company's transformation and improved performance where appropriate I'll also note sequential period Comparables.
For context regarding our Q3 financial results I'd like to take a moment to remind you of the plan. We outlined for you in December 2020 and February of this year.
Last quarter, we discussed a number of initiatives as part of our transformation of our consumer business.
Talked about our focus on the higher quality higher margin products. So we reduced scarring and auction to 25% of its previous run rates to allow for proceeds from cultivation changes to Franklin.
Strengthened and the flower standard.
But later and Magellan will speak to the success of <unk>, so far but for.
For now I'll tell you that we are greatly encouraged by the significant improvement and quality performance and its impact across all of our operations for reduced run rate has resulted and under absorption and certain overhead costs and sky, which then flow through and impact our cost of growth and gross margin quarter for although it hurts, our gross margin and the <unk>.
Short term is clearly the right long term shareholder value creation decision at the Inc.
Prove quality of results were seeing from Sky should allow that facility to truly perform as a channel and that's industry.
In addition to allowing for the transformation are starting to hire quality cannabis facility. We noted that the significant reduction and production volume with sky and would allow us to align our overall production levels with demand and we expect our sales to production ratio in Q3 to be and the 19, 90% range and for.
And Q3, despite the challenges of the consumer business, we sold 93% of what we produced.
We also discussed initiating targeted product returns and Q3 and order to open sales channels to premium product. We did this replacing older lower potency flower and pre rolls with the new standards, and Magellan and online, including San RAF brands that deliver higher THC potency and a very nice Turkey profile without exception.
And of course, the product swaps bid results and returns provision of $3 $2 million, which impacted our Q3 net revenue and margin numbers.
We also cleared all candidates out of our network that did not meet and leasebacks for THC turbines and quality aspects.
And action necessitated and inventory write down and that impacted our reported Q3 gross margin before fair value adjustments by approximately $88 million.
Now all of these actions impact short term reported revenue gross margins, but they provide a foundation for support higher margins and accelerating cash flow these coming quarters.
And so now to actual Q3 results and I'll start with a few high level comments.
Q3, 2021 revenue demonstrated the importance of Aurora diversified cannabis business.
And the Canadian consumer business would be repositioned to a higher standard and Aurora and the general consumer market faced COVID-19 and market development headwinds and leading medical businesses, and Canada, and Europe continued to perform exceptionally well and delivering growth and high margin revenues and.
And breathe for Q3 net revenue all of it component of this businesses was $58 4 million, excluding the product return provisions of $3 2 million.
And our medical cannabis segment continued to accelerate generated $36 $4 million and sales and our consumer cannabis business delivered $21 3 million and net revenue prior to the return provisions.
Administrating the value of our diversified cannabis business, our overall average selling price for medical and consumer businesses combined rose to $5 per Gram and dry flower and an increase of 8% year over year and 12% sequentially.
Adjusted gross margin before fair value adjustments on cannabis net revenue remained strong at 44% compared to 43% and the comparative quarter excluding.
Excluding the short term impacts of and absorbed overheads at Sky and and return provisions and the wholesale clear out of low potency cannabis on a normalized Q3 adjusted gross margin was 54%.
SG&A remained low and well control and $41 $9 million, excluding restructuring. So now let me dig a bit deeper into our Q3 financial results.
Medical revenue was up 17% year over year, primarily because of the strong performance and our international medical and business, which was up 134% year over year.
And of course from the continued resilience of our leading Canadian medical business, which has delivered stable revenues even in the face of challenges from the opening of the consumer market.
Not only was medical revenue growth significant growth.
Segment also carries our highest margins coming in at 59% and Q3 and this despite absorbing additional overheads from the reduced from maintenance time.
Our broad European footprint continued to show its strength and the quarter with Germany, and delivering revenue up 64% compared to the prior year and the U K and Poland, becoming Aurora second and third largest international medical markets respectively.
Note that while we did not recognize sales and Israel. This quarter. We do expect further sales teams real to resuming and near term for this market develops.
And we've been selling and Canadian and European medical market for over four years and have seen little to no price compression.
Delivering over 60% of our revenues in Q3, and with exceptional and resilient margins, it's clear that our medical business is a key differentiator for Aurora and.
And should be an important driver of future cash flow.
Looking now at our consumer business for Q3.
Revenue was $21 $3 million and core return provisions. This is down from Q3 2020, as we work through the plan to reposition our consumer and business and whether the COVID-19 headwinds and Magellan has described.
Consumer margins were 21% compared to 28% from the prior year comparative quarter and missed.
It is mainly because of a pumping company initiated increase and product return provisions and also because of the under absorbed overhead cost and sky adjusting for just the return provisions Q3 consumer gross margin would have been 33%.
And thinking about the longer term profile, our gross margins and our consumer and business.
With the changes we've made the cultivation and processing techniques and the successful introduction of new and health of our coming from our breeding program and genetics Bank. We can now produce a high THC high, Turkey, and Florida Sky without materially increasing the cost per day by far so leaning hard into our expertise and science.
From cultivation to focus on premium power production.
Expect to see strengthening of our consumer margins over the next 12 to 18 months and we successfully pivot our consumer business to a greater proportion of premium product.
I should also note in the quarter that we did take the opportunity to clear out about 3000 kilograms of low potency flower and trim pricing.
Product is at risk of being written off so we have elected instead to turn it into 760000 and cash did impact reported margins.
Now to SG&A, which includes R&D.
We continue to operate at our targeted loan $40 million range coming in at $41 9 million and Q3, and this excludes approximately $3 $2 million per employee and contract termination costs related to our business transformation.
Although we continue to deliver on the run rate that we previously targeted as Miguel noted, we see a path to further improvement over the coming quarters.
So pulling all of this together we generated adjusted EBITDA loss in Q3, 2021, $16 $7 million and Thats, excluding revenue provisions restructuring.
This represents a continued improvement from the $44 $6 million adjusted EBIT loss from the prior year comparative and it is a slightly larger loss spending the previous quarter.
However, despite our overall net revenue being down $12 $5 million from the previous quarter, the strength of our diversified business and solid margins of our medical business show and the fact that EBITDA was only impacted by about $4 million.
So with the continued business transformation efficiencies. We believe we can realize within the next 18 months. We are confident that we can get Aurora positive EBITDA run rate without having to rely and revenue growth and margin expansion and.
And growth when it comes and they will show up as incremental positive earnings.
Now a few important points regarding cash flow and cash position.
We used $35 $9 million of cash to fund operations, excluding working capital and we used $5 4 million for contract and employee termination costs.
We also paid and net $12 2 million for capital expenditures in Q3 down from $83 9 million from the prior year comparatively.
And we're on track to reduce capex spending for approximately $41 million for this fiscal year and that's before taking into account for further offset to come from and expected $9 $4 million government grant to be received related to our cogeneration project completed and the river.
Net working capital used $25 million from the quarter.
And with production and demand now roughly aligned with change and working capital was mainly due to shifts and the levels of accounts receivable and accounts payable, which we expect to settle out over time.
Finally as of today, we have a very strong cash position with about $525 million from the bank and.
And less than $90 million of outstanding term debt.
And the coming months, we expect to receive additional non dilutive cash inflows from noncore asset sales and grants, which we plan to direct to term debt paydown.
Before I wrap up a couple of housekeeping notes we.
And we received approval from NASDAQ to transfer our U S listing to the NASDAQ global select market, our highest lifting tier and the non stock exchange. This.
And is expected to be effective on may 24th after the market closed and will not impact our <unk> ex listening knowing the trading opportunity for any of our shareholders. No action is required from any of our shareholder.
And this transfer is intended to result in cost savings and to align Aurora with our peers on and exchange known for innovative and growth oriented companies.
We also announced today that we intend to file and new ATM supplement for a U S $300 million program, we do not expect to need the ATM for our current business operations, but we do believe we need to be prepared for strategic acquisition opportunities, including U S exposure as we identify those opportunities.
So to wrap up what I believe people related to takeaway from our Q3 financial results for the following.
Aurora financial health and path to growth and profitability are on track.
<unk> had great success.
<unk> success, and our high margin medical businesses and the transformation of our consumer business that while facing industry headwinds, which may take some time to pass is well underway.
We have also taken important steps and rationalizing production.
<unk> remains well controlled and we reiterate our focus on cash flow and are maintaining a strong balance sheet.
I'd now like to turn the call back over to Noel.
Thanks, Glenn as I referenced earlier Aurora is underlying strength is that we are a diversified business that can be broken down into four parts first the Canadian medical business number one in fact, two and international medical business three U S CBD business and for filing our Canadian adult Rec and use <unk>.
And the latter is clearly facing some near term COVID-19 related headwinds, but we're confident that when these conditions abate and we will have a strong business across all four key platforms.
Although we are already the number one medical cannabis company in Canada by revenue, we still believe that we have significant growth still ahead.
First I would like to highlight that the top five Lps and the Canadian medical channel represent less than 40% of the market and with Aurora being roughly half of that this means that there are plenty of Lps out there that make up 60% of the medical market Theres a lot of potential for us to grow into it.
Second there are further opportunities to leverage technology, and our patient intake and user experience lower wait times improved service levels and increase product choices. We have made the requisite investments and infrastructure have the necessary regulatory experience and compliance systems and effectively create a moat around our business and supporting key patient group.
While enabling us to sustain and approximately 60% gross margins for the foreseeable future.
Our national Medical segment generates revenue across 12 countries and has been a consistent winner we have a leading position in Germany and dried flower, but are also bullish on the large and growing oil market debt. Additionally, we have made inroads and Israel through a strategic supply agreement can check we're also involved and the French medical cannabis tender program.
And with our partner Abbvie farm, where we won three of the non tenders, representing all of the dry flower tenders awarded to supply the French medical pilot program.
As you know Senator Chuck Schumer sales and incentive floor that for 'twenty is the artificial America and marijuana holiday and then he now supports legalizing cannabis on a national level as I referenced before on that same day. The White House Press Secretary was asked is very question and applied that while the president and supports leaving decisions regarding legalization for recreational use.
Up to the states at the federal level. He supports decriminalizing cannabis use automatically expunging and and prior criminal records and legalizing medical cannabis and Ah.
Federally regulated medical framework I feel confident about Aurora is chances for success we.
We of course do not know the timeframe for if or when this will happen, but I can say with certainty that Aurora has ability to operate within a highly regulated framework supported by our commitment to science testing labeling and EOG E&P comply and cultivation puts us in an enviable position to actualize this likely opportunity.
That's not to say the Msos don't have there are advantages for Canadian Lps like Aurora and successful around the world have the wherewithal and experience to be successful and U S as well.
Turning to our U S. CBD segment will lever is the top ranked CBD brand per Nielsen and the largest Canada market and the world. We are supplying from the largest retailers and wholesalers nationally and the footprint spanning over 23000 stores. We've also recently and extended our product line with the new brand focused on the sports market and now the launch on shelves this quarter.
And the near term with this new distribution with offset softness related to COVID-19 disruption affecting and U S. C store channel. However, long term, we believe that the single greatest sales catalyst for relief going forward given its already established critical distribution regulatory experience and relationships and the U S market is FDA regulation.
And the potential placement of CVD with and a dietary supplement framework.
And so whether the U S. CBD business is a CAD 2 billion and a CAD $10 billion a year over time, we believe that will leave will be advantage and our FDA protocols because of our regulatory expertise operating and brick and mortar stores, even and the age of E Commerce, let.
Let me also add that we would not be surprised that the non CNC parts of our portfolio and are ultimately is bigger for THC parts of our portfolio, particularly and a positive FDA action and the us.
Moving on to the Canadian consumer market, our three step approach to winning is as follows first we have made significant investments improving the quality of our products. This includes the addition of hand, trimming and driving techniques and innovative packaging and importantly, we have also improved the minimum potency stacks of our two largest brands.
Today, our daily special dried flower as a minimum 20% potency up from 16% and we've increased the potency and Turkey and some of our best selling sand wrath of Skus.
Secondly, leading with innovation.
And we continue to make increased investments that meet the rapidly evolving needs of our consumers over the last six months, new product launches and accounted for over 18% of total revenue and we are excited about new launches throughout the generation two and three categories over time.
And third optimizing our manufacturing and production network. This includes leveraging third parties as needed across our supply chain to increase speed to market the ramp up of Aurora Nordic to streamline EOG and <unk> shipments to our key European medical business and the closing of inefficient and cultivation and manufacturing facilities. We are now going even.
Further and today as efficiency initiatives to reduce complexity and our operations.
We like our topline strategy, which we believe is appropriate for the current and future state market to accelerate our.
Progress, we have a new head of marketing and a new head of brand management and lead these initiatives there'll be working closely with the team a great deal of distributors and new contract sales force, who is the number one national broker for cannabis and channel.
Before I wrap up I want to take a moment to talk about our strategy to commercialize our deep intellectual property and science program.
The production and isolation of cannabinoid molecules is a topic that generates a tremendous amount of airtime, particularly as it relates to biosynthesis. We believe the use of the candidate our molecules and queuing, including minor cannabinoids will be huge as the regulations globally evolved and <unk> business and the U S. USA today.
Sales price to consumers that use CBD isolate and we're deeply understood and the evolution of other cannabinoids and the ability to commercialize that.
With this it is important to highlight to our stakeholders Aurora as connection the biosynthetic production of cannabinoids, which goes back to the work carried out by our plant science team on the discovery of plant pathways and licenses for this IP was brought to Aurora and through the acquisition of and Andrea.
For licensing deals Aurora and 20, <unk> century group together share of the global intellectual property rights to key aspects of candidate oil biosynthesis for two companies are working closely together to bulk defend our position on this IP from parties and fringing on it as well as actively exploring and commercial development opportunities. This technology promises.
Tremendously valuable and potentially unlocks more efficient means to produce cannabinoids, particularly minor cannabinoids, which typically occur and the plant and very low levels less than 1%.
Let me and with this since first announcing our business transformation about a year ago, we have accomplished a great deal.
Specifically, we said that we would cut G&A and delivered 60 plus million and quarterly SG&A savings. We said, we would align our production to current demand we delivered that in Q3 with our sales and production ratio of 93%.
We said, we would leverage external expertise and our supply chain, we've achieved that with multiple external cultivation sources on boarded and bringing in the great and our contract sales force.
The upshot of all of these initiatives plus the new expense reductions announced today will enable us to reach breakeven EBITDA in the coming quarters without having to dependent on incremental revenue.
Thank you for your interest and are now we will turn it over to the operator for questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue. As a reminder, please limit to one question per caller. If you have additional questions. Please reenter.
For the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question comes from the line of Vivien <unk> with Cowen. Please proceed with your question.
Hi, how are you.
Good afternoon.
Good afternoon and.
And so my question has to do with the competitive dynamic and the adult use market in Canada, So well understood COVID-19 shutdown and all of that.
Store opening delays all challenging for it for you and your peers to be sure and then uniquely perhaps a little bit more for you guys.
Comp issue in terms of and it should point out rollout. So I think a lot of peers for doing that and the introduction of daily special all of that aside though.
There is a difference between revenue declines and changes and market share and and so I'm curious to understand the Gal is your perspective on the competitive landscape because it looks like at the high fire data, which obviously doesn't include Quebec.
There was sequential degradation and your market share and when I look at kind of the top operators and aggregate this year versus last year.
Across the board.
Smaller operators that are picking up share presumably.
Later, and turning first to the market, so kind of how you're thinking of it and found the balance of.
And on benefit for being a first mover versus.
And the way you have to compete again.
Smaller second movers for displaced market share along with your question. Thank you.
Great well.
It's a great question, let me just address the sort of macro issues that everybody face because I think it's.
COVID-19 is.
Sort of a top line and answer but I think everyone. Also has to understand this and you add the provinces, which act as wholesalers, making massive cuts to their days on hand, as they reacted so thats sort of a one time impact and were talking about seven and eight figure pieces. We also seeing provinces that had a massive and our.
A reduction in terms of new skus that they allowed to be brought to the market. So just to say that curbside delivery and stores not opening that's only a portion of the revenue story and I would say that as a bit of timing and a lot of it and waste now moving to your question about market dynamic.
Let me take it and chew interactions. So first and foremost it is a very dilutive market compared to what I'm used to and maybe what youre used to where you have the top five Lps controlling 80, 90%.
And of a given category you don't see that and the canvas business in Canada today.
So thats price Nike top five companies and are representing 40%, maybe 45% of our key category dried flower and pre roll date.
Things like that.
Secondly, as everyone well knows and market share and isolation is really not a good bellwether youre seeing a lot of market share picked up.
By value products, and deep discount products and those margins are a way lower than what we're seeing from a premium standpoint.
And I would say that youre starting to see the early days of premium products start to take hold and we've seen it a little bit you've also seen and some others. Youre also really seeing an acceleration of gen. Two and Gen three products and Canada. So if you look over the last 12 months flower might be up 30% to 40%. If you look at it and everything else and might be up.
And three times that and I think everyone understands that there was a delay and the Canadian market with those Gen. Two and Gen. Three products. So when you think about concentrates and vapor and pre rolls sales are going to have higher margins regardless of.
And that lastly, I think a lot of these competitive dynamics are a bit camp.
Temporary.
There is as you have seen a glut of what I would describe as low cost flower.
And the market and that's causing some irrational pricing I do believe having talked to the provinces and talking to retailers and there isn't the interest and holding margins up and people actually making money, maybe it's taking a little bit longer than people would have warranted because of.
Just the situation we're in with COVID-19 and then I guess lastly, moving to be respectful of your question about our market share I think it'd be brutally honest, it's taking a little bit longer than I would've hoped and and so let me talk a little bit about that we had to make as Glenn mentioned and I talked a bit about massive changes to the quality of our products and unlike.
Other CPG items, you can't just snap your fingers and flush wholesale flush retail so we have to do the provision we saw $3. Two it takes a while to get that out of retail and you get that and the system, but I think the changes that we've made across the board and potency and.
And with new items is encouraging I think <unk> and retail coverage is really not talked about a lot just as one and our data point for you from our data we see that the number one SKU, which I won't say what it is in Canada.
In terms of in stock is around 60%, so that one ask us all and 60% and the stores, that's and a digitally low number and any sort of traditional CPG. We think someone like <unk> that can make three times and number of calls for US has great data systems has national coverage will be really strong on the blocking and tackling and so while we're not.
Im not happy with the timing of it.
For gambling and to see improvements, but that really goes to the strength of the other parts of our business.
Your way steadier and have way less compression and.
And provide a lot of opportunities.
Your next question comes from the line of Pablos Wanick with Cantor Fitzgerald. Please proceed with your question.
And then everyone.
And can I just ask and.
And maybe following up on the video and the last question.
Talk about the relationships.
We the board and with the consumer.
And so all these issues have those relationships and shirt with awards with the retailers.
And the brands.
The brand and suffer and.
And as a result, and what's going on and I'm asking that in the context of a company, that's losing share and right. If you can comment on that thanks, Pablo when you mean the board you mean, the provincial boards, yes, yes, yes. So this is lee.
Three parties to a story right and your relationship with the board and your relationship with retailers and stores and then the relationship with the consumer and industrial and brands.
And I'm sort of price and so we see all these new little companies being able to lease new skus with the boards and at the end.
They are cutting skus right. So it just makes you wonder.
Thanks for guidance.
Very welcome so let me see if I can take those and three parts. So obviously the provincial boards operators. The wholesaler I Wouldnt say they are evolving and I have done a tremendous amount and respect.
For the provincial boards and remember there's things like three years old. They are trying to do everything they're trying to do in the midst of COVID-19 and so I think Pablo we have a good relationship with them I think and all cases, you always can have it would be better they really don't play favorites. So whether you are a small manufacturer and large.
And factor you have the same opportunity now what is evolving which I think will benefit a company like Aurora, particularly with my background is youre now seeing very sort of sophisticated CPG and in many cases the decision makers are coming from the.
And the beverage side, so scoring manufacturers on fill rates and stock conditions shipping and revisions.
All of those four things are going to start to make a difference in terms of what else skus they take.
How they fell them.
How it is.
Put out to the retailers and we're spending a lot of time and effort on that so I know right now it just seems like a free for all in terms of everybody is treated the same I think thats definitely changing also we are hearing from the provincial boards that they are concerned about price compression and starting to put some floors and R&D.
Segments, whether that's a three and app gram flour or 28 Gram and I think that also benefits <unk>.
Bigger pieces now in terms of the retailers.
Interesting market unused too and I think most of our chain business, a significant amount of chain or centrally controlled stores and we don't have that today and Canada, albeit there are.
And some smaller change out there and say that May number 80 to 100, which is not insignificant and they are also becoming more sophisticated which is raising the overall.
And game for US I think <unk> gives us an advantage because of the importance and call coverage, particularly post COVID-19 and we are developing.
A series of connectivity events now there is a ban on inducements, which you will know that restricts a manufacturer from a say a traditional CPG alignment program, but again theyre looking for profitability and when I mentioned before that the number one SKU and the country is only 60% and stock there is a ton of upsides and <unk>.
<unk> and tackling why which is why we've made significant investments and our retail infrastructure and so I think that's all going to evolve and B and a better place and I think lastly, your point to the consumers is an important one.
Today.
We really had to step up our game in terms of quality I will say, though unlike other mature categories that you all folks cover we're seeing say and the flower business.
200 basis points 300 basis points swing and a weak we're seeing and vapor for 100 basis points. So the consumer is moving around and as respecting quality and value in terms of what they get as well as innovation and we are seeing a significant amount of receptivity to new items.
Like concentrates and hash and horizons and resins and that I think we'll benefit a company like Aurora Thats made significant investments in there and so.
I think and aggregate what youre seeing here is not going to be the future state I would expect that you'd start to see more traditional trends, where the top five Lps and the category due <unk>.
And 60, 70% Youre seeing and stocks and the Eighty's Ninety's youre seeing national execution, and Youre seeing a more consistent brand experience.
Even though there will always be a place for.
For a regional brand I just don't thing is at the level it's at today.
Your next question comes from the line of David <unk> with <unk> capital markets. Please proceed with your question.
Hi, guys. This is actually.
And as Gregory co chairman and for days.
Thanks for taking my question so.
And.
And that activity has really taken off here in Canada, and just wondering how do you guys see that environment Whats your game plan there.
Are you looking at anything M&A wise in Canada, or maybe do you have other plans and then.
So thats not 90 day, you ethylene and specifically for Canada.
So it's an interesting question obviously, there's been some notable acquisitions of late.
Thanks.
Way I would describe it as this without getting into any specific details.
We don't see anything in Canada that we got to have.
And given the dynamic nature of market share buying or renting market share I think right now is not a great play in.
And Canada now that being said, if we saw something that was accretive.
Technology.
And our management team or something that was in a category that we didnt need then and maybe be of interest I think as many of you know Aurora.
It was on an absolute share in terms of acquisition and the early days and so whether it's in India as a lab or coast and Comox in terms of IP and technology, our manufacturing we've got.
Plenty of infrastructure and.
And plenty of acquisitions in order to fill it out I think given our strength and medical and international medical and.
Little bit of softness and Iraq, we're going to focus and there, but I don't think youre going to see us Chase.
In Canada in order to what I would really describe as renting market share and last night. There was a systemic growth sustainable reason and in order to add to the portfolio clearly if we needed to do it through the 525 and $300 million hei and we'd be in a position and do it. If we saw so that's how I would describe it triggered growth.
Your next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Thank you and good afternoon, Greg.
And Michael you.
And you laid out some good color on the cost savings initiatives that you've got mapped out and.
And I guess I just wanted to maybe make sure I understand how to think about that in terms of gross versus net and by that I mean, you also touched on some things like the.
High touch approach on the medical side, it sounds like increasingly so and.
And some of the things like hand to trim.
Should we expect a 60 to 80 net number to flow through or is there going to be some.
And then maybe reinvestment that that'll fund as well.
I would tell you Michael we feel confident that we're going to be able to deliver that $60 million to $80 million and our straight up and efficiencies I mean.
Sort of unpack that we've got the Nordic facility, we've talked about it and passed.
And is now producing ear GMP products for.
Europe and for Israel, So that creates some redundancies, we've seen some efficiencies and in our current business, obviously right sizing the overall infrastructure for.
For the business, we have today and as well as a little bit going forward and because we have redundancies and efficiency. So I would tell you from my point of view. The company has had a strong track record and when they say theyre going to see straight up savings and I expect this to be no different and it's my expectation that we'll deliver the 60 to 80 and an 18 month period.
And with that as you know, we don't need to grow our way and to EBIT neutral or have to out and see anything happened on the margin. So I would take it as is.
Did that answer your question Michael.
Your next question comes from line of Heather Belsky with Bank of America. Please proceed with your question.
Hi, Thank you for taking my question.
I'm curious about your your thoughts around your balance sheet and cash and and also the comment in your press release about your cost savings getting you.
Moving cash flow metric and a positive direction.
How are you thinking about the timing of getting to cash flow positive.
In this environment and maybe if the environment improves.
And also how do you feel about the cash on your balance sheet, especially as Lee.
Hopefully inch closer to federal legalization and the last.
Glenn you want to kick that one off.
Yeah. Thanks Heather.
So listen yes.
A few things.
And you saw impact there certainly was.
<unk> outlined in terms of operational cost savings, we think it's a big part of that if we look at Q3, and we look where the where the cash was consumed there is some still being consumed and operations. So we're not there yet on operations, but we believe that if we can achieve these cost savings and so that equates to nearly 15% to $20 million a quarter.
<unk> and you think of our EBITDA minus 16 or 17 this quarter that gets you a long ways towards your your positive cash flow from operations.
Working capital was a bit of an anomaly this quarter and we for the $24 million receivable that we collected just into April. So, let's just say we collected that during the course of March we would have seen the single digit investment working capital. So we think with production and demand roughly aligned that our working capital.
Kind of stabilize and.
And start to even out a little bit.
So, let's just say long term there will be a little bit of investment investment and working capital as we grow but but we think we've got that well under control and certainly as we manage our inventory tightly now.
No it should be fine and finally, the capex piece for this.
And we talked about how much we reduced that meaningfully.
I know you're relatively new to our historically you've done your homework you know, what we were spending and Capex a year ago, you know where we're at now and we think we've definitely for our projects complete so here and going forward. There we spent $40 million box for.
On track and 40 million Bucks for this fiscal year and I don't see.
And so.
And the top end for next year, if that so so the pieces are in place and really what we wanted to do is execute on these cost reductions and operations and SG&A interest and the way that <unk> described it over the next number of quarters.
To make sure that we've got a plan to get us there without having to depend on revenue growth and when we say that by no means do we want to want to impart that we don't expect revenue and growth absolutely our international medical business continues to thrive.
<unk> and Canadian medical kit to grow as we go outlined and we believe that we have put the pieces in place to get consumer back contracts. So we do expect growth, but we wanted to make sure that we pulled believers and as we've talked about and passed.
To get us to at least breakeven on EBITDA and cash flow without depending on that growth so for.
And when the growth shows up and shows up is incremental earnings and cash flow. So that's the plan and that's how we think about how we're going to get there over the next day 12.
12 to 18 months is that on the back.
Continued rationalization of cost and then picking up additional cash flow as we see growth.
Thanks.
Yeah.
And next question comes from the line of Matt Mcginley with Needham and company. Please proceed with your question.
Thank you my question is on what changes about the financial performance and the fourth quarter versus the third growth and the consumer business seems pretty contingent upon COVID-19 disruptions normalizing, but it only had about a month and a half to make up for any lost ground before the quarter ends and obviously that rationalization won't really have an impact I think on the fourth quarter.
Should we expect and treatments in the fourth quarter should we think of this more like 2022 before we would expect to see improvements.
Yeah.
Glad you want and then.
And I guess I would say on that.
On the rack side the trends are what the trends are but we also have positive trends on different sides of the business I don't want to get ahead and give guidance and and you mentioned the quarter I think you sort of occurred what we're saying there are other pieces that also are steady there is other pieces on the cost side. So I'm, sorry, I can't give the exact answer you want but I think when you are.
And the aggregate of where the business was going from a point in time, and which we laid out for Ya plus some other pieces there.
I think.
And that sort of is what it is it's hard.
When I talk about the provinces, making a change.
Eight figures on <unk> I really don't want to get ahead of myself in terms of what happens on that side of it.
And then on the medical and the international side those.
And those trends have been for these studies I think I'd sort of leave it there.
When anything on EBITDA.
No expense.
Brian we recognize that you just described the consumer market and we're doing what we can but there are things that are kind of dynamics for the market right now and we are.
Well for.
On the plan, we've laid out which is over the next number of quarters and continued and just look for improvement each quarter.
Your next question comes from the line of Tami Chen with BMO capital markets. Please proceed with your question.
Alright, thanks for the question.
And look out.
I wanted to ask a bit more on.
And the production per rig and all the changes we've made are sky. So if we just move aside all the COVID-19 headwinds because I think that's pretty been well highlighted that that definitely made things very difficult for you guys and on.
On the premium pivot strategy and move that to the Si here could you speak a bit too.
For consistency now at which sky can produce that high quality flower because one of the things we keep hearing COVID-19 headwinds and Shai is that in the market right. Now there is a lot of the average quality stuff, but there's not enough of the high quality stuff and I just would have thought that that sort of dynamic.
And once again, COVID-19 assai would've been that perfect sort of opportunity for your strategy of trying to tackle that white space. So can you talk a bit about the production consistency because I'm also just thinking about your ability to.
Tackle that white space and also the implications on inventory.
Possible impairment going forward I know you get this big inventory write down this quarter, but really want to understand that the level consistent with and hit us in terms of the higher potency and all of those thresholds that are required for a premium flower. Thanks sure.
Sure. It's a great question Terry so.
Let me go back a little bit and first and foremost a year ago. The market was one and which you could have sold 16 16, 5% potency with a low two level term.
But quality and moisture.
For us.
Other aspects are required we're not that is important and at that time, because everybody knows sky was hammering out a lot of products and.
Some of that was for daily specials, and some of that was for some other things and the consumer.
And the case and every other market has moved really quickly today as an example, if you look at the wholesale market.
And access 19 potency product Navy 20, potency product anything above that is really hard to buy and and you can sell all day long and 22 23 potency product and the retail market and is a hard thing to make if it was easy everybody would be banking at the flower market and pricing would be great.
But it's a hard and it is so we had to pivot sky now I'll talk about Sky and one second but I don't want anyone to lose sight of the fact that we also have other really consistent high quality.
Manufacturing facilities River Ridge Whistler, and the organic and is now in soil and production facility and the West Coast and D C and they've been very consistent and so Jamie to your question about Scott we've been working on Sky as you know, we announced we took it down to 25% and it is a and are still working through at some of the early reads.
Coming out of there are encouraging, but you have to be able to cycle through and be able to see the totality of what youre going and get out of sky and to Glenn's point. It was painful in order to apply those fixed costs across the whole system to ascertain what we can get we're close to understanding what we have with sky. The good news for us though.
And as we have redundancies and our overall infrastructure and now that we have Nordic we don't need to produce and your JMP domestically and in Canada. So we have options regardless of what happens with that Sky project.
In order to delivering 'twenty two 'twenty three potency product that is not retail value and importantly at our cost structure and that.
And that is right sized for the environment that we're in.
So I think.
A little bit to follow on that and we expect to give you an update coming soon but either way. It goes it's not like we don't have an option because of the historical production at our River Ridge and Whistler, which are not at 100% in terms of their overall utilization and that's why when we talk about aspects of the redundancy that is not the only one but it is one of them.
Your next question comes from the line of John as Amparo with CIBC. Please proceed with your question.
Thanks, Good evening.
I wanted to follow up on a comment you made.
You referenced one competitor SKU and what percent of retail and Im not sure. If this is the number you have andy or willing to share and if not maybe you can just talk directionally, but I'm curious about how you look at and your distribution and how many stores year and countrywide and how that's trended over the past, let's say your for couple of quarters. Thank you.
So John and I come from a world of incredible analytics.
And 242000 stores I get wholesale and wholesale shipments weekly by asking you about my business and competitive business and in stock conditions I had retail takeaway.
We had it all.
And Canada that information is just starting to come online and see it with some of the retail information.
Provinces are starting to get there. It was one of the core reasons, why we went with great north and there.
Significant CRM systems. So what we are now and you could imagine you can't just snap your fingers and get it we are visiting the roughly $540 or 1600 stores that are open and are selling candidates. We're revisiting all of them on a monthly basis will visit the and a higher volume stores, which account from anywhere.
Between 70% to 75% of the business twice a month and we're starting to gather the following information, which I know is going to seem mundane and basic to all of you but is the beginning blocks of where the cannabis industry is first is overall distribution say most commonly sold.
46% to 50, Skus secondly, as price savings.
Both wholesale and retail and retail to consumer third would be in stock conditions, which in Canada come in two ways. One what is authorized or lifted which potentially can go to the store and then secondly, what is physically and the location and as you can imagine with the speed and Thats why those weekly call.
<unk> matter.
And then and a nice to have would be timing.
New brand launches and signage and share of space.
That information that I quoted to you as an internal piece of information and it is not widely available because even the large chains who.
Do have sophisticated data systems and that doesn't encompass the independents, where a lot of business is done and therefore the value of that overall retail takeaway data our CRM data so.
I think there's a ton of upside.
And that is a manufacturer and the other upside is for the retailers who in many cases are not.
Haven't been and this business.
And for a long time, because they couldnt and so ours, providing category insights and.
And profitability optimization for new stores in existing stores is a big opportunity and I think all of that I'm sure sounds like the basics for any CPG company, but it's really where we're at and I think it'll be wildly additives for Aurora as we leverage that data and insights with our retail and provincial partners, which.
The consumer needs.
Your next.
Question comes from the line of John Chu with does <unk> capital markets. Please proceed with your question.
Hi, good afternoon, so maybe just talking on the Canadian medical and the European market.
Doing really well on both those fronts.
I guess I find those two markets, maybe kind of small and there's just a little bit underwhelming at this point in time so.
Just maybe give us a bit more color in terms of the market size and market potential I think the Canadian net market, maybe about a 10th from the Canadian Rec market. If you can give me some indication otherwise and then maybe just the outlook for Europe, because right now.
For the growth we've seen so far it's been pretty underwhelmed and so maybe just talk about those two markets and general thanks.
Yeah, John it's a.
I find it I understand exactly the sentiment, but I think if you have to look at the broader picture of medical so we represent roughly 19% of the Canadian medical business as I mentioned and our next closest.
Is half that there is a ton of upside we also see a movement from unions and benefits and and carriers. So we believe that there is an upside to medical the other part and medical is the margins are steady and really solid at 60% internationally, it's a great business and what we see is whether youre dealing with.
Germany, or France, or U K, and it's a really high bar to get into and so theres a deep moat around it and Theres a lot of expansion I think the reason to be interested and medical would be probably threefold. One is it's going to continue to grow and the same people that are winning today are going to win tomorrow and it is really significant.
From a margin standpoint.
Secondly is medical typically is the pathway forward on rack and it has the same regulators and you have tremendous efficiencies and manufacturing packaging and regulatory compliance legal all of those things and so there is wonderful synergies and having a company that has strong both on medical.
<unk> and I think the Canadian quarter. This quarter is a great example, if you were to just a rack business in Canada. This quarter, you would've gotten hammered because of the overall macro environment.
Medical didn't see that what happened and rack.
And lastly, I really believe that the first steps, we're going to see and the U S is going to be medical and I also think it's going to be at the federal level I, just don't see a scenario where the federal government and is not going to have a piece of this taxation revenue I don't see a scenario where the FDA says this is the one category, we're not going to regulate.
And with all due respect to the Msos you have some really large multibillion dollar global CPG companies and it made big batch and stand to gain from Interstate commerce highly regulated and all of those things. So I think medical doesn't get anywhere near the attention and it's now just because we do well at it is just all of those economics and it is grow.
<unk> and it is an important part of the rack story, whether it's today's synergies are tomorrow's new markets.
Let me kind of looked like that and just a couple of things for sure.
And both of them.
Medical Inc.
You're talking about market sizing and so.
And Canada would say, maybe one percentage of Canadian population or medical cannabis consumers.
And Germany is 110th of that it's 110th of 1% of German population are currently medical.
Cannabis patients and so as our leadership and Germany would tell you.
90% of the patients out there don't realize their medical patients yet and so it's our job is to go help them understand the benefits of medical cannabis.
From a growth opportunity just simply getting the same sort of penetration, we've got and Canada.
Ken for opportunity, there, but more importantly, and we focus myopically on revenue weakness and important point, 60% margins and I'll, just kind of reiterate that I don't see anybody in our industry delivering 60% margins. So to me 60% margin is worth twice.
Twice the consumer dollars from B.
And the operating in 2030% from the consumer market. So so we shouldnt lose sight of that.
It's a massive part of our business and I think the growth opportunities are excellent.
And the ability to support a cash generating business is excellent and for all the reasons for Magellan.
And it leads you into the future opportunity.
And I wanted to sort of leave it at that.
For poor cousin to the rest of the businesses and incredibly important part of the business.
Thanks.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back to Mr. Miguel Martin for closing remarks.
Well on behalf evolve as we wanted to say, thank you and all of your interest and Aurora, We look forward delivering this plan and I hope everyone and <unk>.
And well you and your families all the best Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
[music].