Greetings, and welcome to the Aurora Cannabis Inc. Second Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Thank you, Ananth. You may begin.

Thank you, John, and good afternoon, everyone. We appreciate you joining us today. With me are CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 second quarter financial results. This news release, accompanying financial statements and MD&A, are available on our IR website and can also be accessed via SEDAR and EDGAR. In addition, you will find the supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today's conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our analysts. We ask you to limit yourself to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Miguel, please go ahead.

Thank you, Ananth. First and foremost, we are very proud to have achieved what we set out to do several quarters ago, namely, reaching our objective of positive adjusted EBITDA by the end of the 2022 calendar year. We are confident that we can deliver positive adjusted EBITDA on an annualized basis going forward, although there may be some quarter-to-quarter variability due to the dynamic nature of the cannabis industry, and the seasonality we previously talked about at our Bevo business. Importantly, as part of our business transformation, we also completed the structural changes we had intended to make as part of our cost rationalization. These will certainly yield benefits for Aurora in both the near and long term. Annualized savings now total approximately $340 million since February 2020 and included substantial progress in cutting quarterly SG&A to well below $30 million. Our next financial milestone will be achieving positive operating cash flow as part of our plan to build long-term shareholder value. We expect this to be a multi-quarter initiative, and we will update the market on our progress to this new milestone. Looking forward, our enthusiasm for the future is anchored by our #1 position in global medical cannabis among Canadian LPs, and the growth we've been able to sustain despite some quarter-to-quarter variability. With loyal patients in existing markets and more developing countries poised to open, we think the top line growth trend should continue. As a reminder, medical cannabis is a business we want to invest behind, not only because of its growth characteristics, but because of its defensive nature and volatile times. It also enjoys enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis. Aurora is also ideally positioned because of our robust balance sheet and net cash position, which puts…

Thank you, Miguel, and good afternoon, everyone. Before reviewing our Q2 financial performance, let me take a couple of minutes to discuss our balance sheet and cash flow. I'd like to reinforce what I said a number of times before, and that is, we take great pride in having one of the strongest balance sheets among Canadian LPs and are one of a very few in the net cash position. Of course, we're always on the lookout for further opportunities to improve through smart and defensive capital allocation decisions. As of yesterday, February 8, we have approximately $310 million of cash, including $65 million of restricted cash, and we believe this is sufficient to fund operations into our cash flow positive. We have only CAD 149 million of principal remaining on our convertible loans due in 2024. During Q2, we repurchased $135 million in principal on our convertible notes at a total cost of $128.7 million cash, including accrued interest. The debt we repurchased during calendar 2022 has resulted in cash interest savings that now total approximately $17 million annually. We also continue to have access to significant capacity under our base shelf prospectus, including approximately $180 million remaining under our ATM program. During Q2, we issued 39.5 million shares for net proceeds of $68.8 million. The current shelf will expire in April, and we do expect to refile a new shelf and ATM program at that time. And we reiterate that the proceeds from share issuance are expected to be used only for strategic purposes. Our operating cash flow in Q2 consisted of a net lease of $60.6 million. But that included $15.5 million for a number of onetime payments related to our business transformation, $12.4 million for once a year payments such as insurance and Health Canada fees…

Thanks, Glen. At Aurora, our purpose is opening the world to cannabis as a global leader in this very exciting industry. In that spirit, let me share some final thoughts. First, we are very pleased to have completed our transformation plan delivering on approximately $340 million in annualized savings since February of 2020. Our entire team's hard work resulted in positive adjusted EBITDA while maintaining a strong balance sheet that will allow us to compete at a very high level and take advantage of future global opportunities. Second, we've done this without sacrificing growth opportunities in our high-margin domestic and international medical cannabis businesses, which remain one of the best places in the industry to invest. Third, we completed our plan during a period of volatility and uncertainty around the Canadian rec market. The good news is, it continues to rationalize, which will give us added opportunity for market share improvement. Finally, our future success will be enabled by science through continued plant genetics, improving yields and better crop quality. We believe this will drive high-margin new cultivar licensing opportunities in the future and place Aurora at the center of industry-wide innovation. Looking forward, we continue to focus on profitable growth opportunities across all segments, ongoing discipline in capital deployment and improving operating cash flow. Taken together, our ability to make progress in these areas will position our shareholders for significant value creation, especially from these levels. Thank you for your time and interest in Aurora. Operator, please open the line for questions.

[Operator Instructions] And our first question comes from the line of Vivien Azer with Cowen.

So, I wanted to dig in on medical cannabis gross margins, please, down a little bit year-over-year and sequentially. Clearly, it was not an impediment to you guys hitting your target for positive adjusted EBITDA, which is really, really nice to see, and congratulations on that. But given the call out that the margin dilution was coming from frontier market, do you see the kind of current gross margin levels for that business are an appropriate run rate? It seems like you've got a lot of opportunity ahead of you and your mix to frontier market might kind of stay at these levels and or climb a little bit until there's a real catalyst in Germany?

Yes. I mean -- so as it pertains to medical cannabis, I think structurally we don't see the margin compression that maybe you would see in the rec market. We're up to about 25% of the Canadian business and the reimbursed market, which represents about 80% of our revenues in Canada is at a healthy number that is part of the overall system. Some of that was mix, as you sort of mentioned in Canada. But structurally, we don't see anything there. When you look internationally, you also don't sort of see those impediments. And yes, there will be places maybe where lower cost items gain a little bit of traction, but because the model is structured in a manner that most of the supply chain takes their margin off of a percentage of the wholesale list and because you see reimbursement in those markets, there's not a structural reason to see margin compression. Secondarily, in the rec business in Canada, you're competing against hundreds of manufacturers and, in some cases, some that need to sell their product at a lower number. In most of the international markets, you really are competing against 3 or 4 other manufacturers because of the significant barriers to entry. So you don't see that competitive aspect where you play on price. And lastly, you really are seeing value from clinicians and physicians and patients as they are interested in quality, which comes at a cost. So overall, we see this as a steady business from a margin standpoint, and we see consistency in market to market. And while there was a little bit of mix change that affect the overall margins, there's nothing there structurally that gives us pause.

And the next question comes from the line of Michael Lavery with Piper Sandler.

Just wanted to come back to the ATM. You mentioned you've got the remaining amount to go there. And if I caught it right, I think you also said you would anticipate renewing that. Can you just give us a sense, given where your balance sheet is already, what the thinking is? And I guess, some amount of how much is enough, is there a point at which you would feel like you've exhausted what you need out of ATM? Or is that something that you feel like has got a longer runway? How are you thinking about that?

Yes. I think it's a great question because it's so much a point of interest right now, which is runway, use of cash, what's the right amount of cash. I think, first and foremost, people should look at a company's actions, maybe more so than even what they say. We've been very, very conservative in our balance sheet. Right from the beginning, when I got -- became CEO, the company worked extremely hard to have a strong balance sheet, and we saw a lot of this disruption and clearly understand what using the ATM means and what that means to others when you look at it. But first and foremost, we believe that it was important for external stakeholders to see the company to have enough cash to be able to run the business. And obviously, that goes into how much cash you're burning. So we worked extremely hard, and we've seen a progression from at one point, the company at over $100 million a quarter in SG&A now to below 30%. I'm sort of beating the drum about our cost savings. But overall, it is my belief that the company has to have a certain amount of cash, maybe more so the normal to give people the comfort that we will be here for this inevitable upside for global cannabis. I think there's no question that at some point, you're going to see a significant amount of profitability opportunities around the globe, we believe in medical first. And the question is, who's going to be there? And we think we're going to be there. So, the use of the ATM is used strategically. I think people have seen [ us been ] good stewards of the cash. We have sold assets quickly and at good prices. We've taken converts down in many cases below par. And Michael, I think we'll continue to do 3 things. First is, always focus on having a strong balance sheet, so that we will have the wherewithal to be there when these opportunities hit, as well as be there when potential M&A and other things happen, such as Bevo, which we thought was a great play. Secondly, we will be very judicious in our use of cash. And hopefully, people have seen that here. And third, where possible, we will use it to find margin accretive and profit opportunities. And we were really thrilled this quarter, if you look at our sort of cash use and where it went, in each of our 4 key businesses, we saw growth. And so, I think you put that all together and you can sort of see that the future will look very similar to how we've used cash in the past.

And the next question comes from the line of Andrew Carter with Stifel.

So, I guess what I want to know is, do you think you can achieve like strip out candidate adult use, do you think you can be positive EBITDA in that business considering kind of the difficult market? And just kind of a separate question, kind of how you, Miguel, and the Board are looking at the business. I think I've got right now, yes, $274 million of enterprise value. Do you think that captures what the sum of the parts potentially is on the medical business -- Canada medical annuity, Bevo, which you can do there, and then also just the genetics investment difficult to value in the markets. And is that a consideration and something you keep in mind that potentially is [ a floor ] to consider here?

And I think let me start with your last question first, I think absolutely not. We are strong believers in global cannabis as a macro movement and strong believers that medical cannabis in a regulated reimbursed compliant manner is going to be the first mover of all of that. And we are one of the leaders, if not the leaders, in that globally. So clearly, the valuation and where we see ourselves, we don't think is representative of that opportunity, but we don't have complete control over that. The medical business that was built in Canada and now is finding its way all across the globe in key markets is wonderfully portable, wonderfully defensible and has extremely high margins, as I've talked about. And as we see new markets coming on like Australia and Switzerland and Austria, those are tremendous opportunities that only a small subset of companies will take advantage of and how people value that. So be it the genetics piece and the science piece has been sort of sitting there on the side all along and with having what may be one of the largest cannabis genetic libraries and what may be sort of possessing some of the most important IP around biosynthetics and others, there's going to be value in that, particularly as you get into clinical research and more value. And we'll have to see, but I clearly think our value overall. Now, the rec piece, can you make money in rec as a stand-alone is sort of a tough question, because we see so many efficiencies and learnings and having both. And it would be an easy sort of answer to say, well, why don't you just get out of rec and focus on medical, which is really a strength for us. But you're starting to see that when you're in a market and you have both, there are significant advantages, and we see that with product lines, we see that with innovation, we see that with production. And I think really importantly, you will see that in Germany, and we're very bullish on not only the opportunities in the progression of medical, but also in rec, and having that key [indiscernible] facility and others and being able to be there at the beginning of medical and then transition in rec will offer significant advantages. And so, again, it's easy to sort of take the pieces of the business and compare medical and rec, but for us, and particularly the manufacturer working with science and genetics, we see significant efficiencies and advantages in being in bulk, even if we're not going to be a market leader in every market, say, in rec where we would be in medical.

And our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

This is Matthew Baker on for Pablo. I have a 2-part question. Firstly, what explains the stickiness of your market share in the Canadian medical market. And then, on the other hand, why is your medical market share in Germany so much less sticky? And then, as a follow-up, what are your latest thoughts of when German rec sales will begin and do you still think imports will not be allowed?

Canada is a hard market. They're all sort of hard, but the reason it's so sticky is, we've made really significant investments in this. We've been in a long time, and we think we're pretty good at it. We have roughly a 25% share. The next closest competitor is at about a 9% share. So this is a piece of business where you have to make a lot of investments, experience matters, particularly with clinicians and physicians, and we're clinics. And you have to continue to invest, call centers, innovation, support mechanisms, science, engagement with key stakeholders and veterans and others. And so, it's just a commitment we've made, and I think you have to hit on all cylinders. And I think without being sort of arrogant about it, I think we're pretty good at it, been that in a long time in Canada. In other markets, some other folks got there first. And it's not always a first-mover status matters, but I think it takes more time for the benefits of our program. So we're pleased with where we are in Germany. We don't have a 25 share and there are some other good competitors in there, but again it's 4 or 5 companies, so it's not like you're competing against 100 or 200. And so, I think, we're really pleased with that and where we sit in the German market. And as I mentioned in my prepared comments, we're 1 of only 3 companies that have a manufacturing license in Germany, which will play a significant role, we think, as they rollout legalization for the rec. Now in terms of rec, we're really excited about the German process. I think 3 primary reasons. First is, they're actively engaging with the EU. And the expectation is, with what they…

And the next question comes from the line of Frederico Gomes from AGB (sic) [ ATB ] Capital.

My question is just on [indiscernible] side here in Canada. You mentioned that much of your sales increase coming from higher sales of value brands. Should we read into that, that -- was that more opportunistic or is there any shift in strategy there, whereby you plan to rely a little bit more on the value segment to grow volume and maybe accelerate growth on the consumer side?

No, there's no change in strategy. But I will say one thing that people should take-away from this quarter is that Aurora has the unique ability to be opportunistic. So when there is a medical opportunity globally, we can take advantage of it. When there is a medical opportunity domestically in Canada, we can take advantage of it. And so, most of the change in what happened, and Glen referenced this in his comments, is we found ourselves in a very interesting situation, where we grew some flower for Daily Special, and it came in at a 28 or 29 potency, which is absolutely a super-premium potency band. But because it was already registered with the provinces, do we really have the choice? Do we want to sell it and see the benefit? Or do we want to hold onto it and relist it? We didn't want to relist it. And so, the reality was that product that was in extreme high potency and great quality went out under the Daily Special brand and had a little bit of compression in our overall margin. So, the Thrive team is doing an awesome job, and we do see incremental opportunities to continue to do what we said we're going to do, but where we see things hit in that rec market on the discount play because we're focusing on operating cash flow, we'll take those advantages as we can. So no change in strategy. It was opportunistic because of the unique situation. And listen, you're thrilled to have that and it's a testament to great genetics and good cultivation that we found ourselves in that situation, and we're thrilled to build out those sales.

[Operator Instructions] Our next question comes from the line of John Zamparo with CIBC.

I wanted to ask about the Canada Health acquisition. I know this isn't hugely material, but $20 million in cash is not meaningless in the space either. So I just would like an update on what this asset brings to the table and what the financial implications of it have been so far.

Sure, I'll be happy to. I've been talking for [ Dick ], Glen, do you want to talk about Canada Health in that deal?

Yes. The folks at Canada Health are very closely attached to some of the key vet influencers in that population. They've been extremely good at building relationships and supporting veteran patients in the medical system, finding the right medicines for them, and just actually kind of almost operating a little bit of a counseling service. We thought that they are a very important part of our supply chain. And we thought since that business was so incredibly important to our profitability, we needed to make sure that we had that relationship locked up for the long term. So, I think, the acquisition there is really about solidifying the long-term value for our medical business, in particular the funnel of veteran patients and our ability to get very close to those patients, which obviously is critically important to understand their needs. And it has started paying off. We actually launched a new product in our medical portfolio in the last month, a product called [ Valor ], which was the cultivars selected by veterans from our coast facility for a terpene profile and various attributes. They picked the name and it launched And again, just be that close to really critical patient population has been important for us, and that Canada Health is a big part of that equation.

[Operator Instructions] And the next question comes from the line of Matt Bottomley with Canaccord Genuity.

Just wanted to touch on the adjusted gross margin again. I know, Glen, you had some prepared remarks about this. But when you kind of look at the overall trend over the last 3, 4, even 5 quarters, it seems like the ratio of these types of adjustments are still fairly meaningful in relation to the size of your overall revenue. So, I understand the general buckets and categories and you have it in your press release here in terms of what those general categories are. But I'm wondering if you could speak to the changes of maybe what's going-in and out of there. I know historically, it was more inventory impairment. Now, there's more development costs, given that you're in a variety of different growing medical markets internationally. I would expect these types of costs and these types of opportunities and challenges to continue sort of indefinitely. So I'm just wondering how you're anticipating this adjusted line moving just given that your actual audited or reviewed statements have pretty nominal margins from unadjusted standpoint.

Yes. So, a couple of things going on in the market. There's certainly the mix across the categories. Market by market, the margins are holding up quite nicely. So, we still see a strong medical margin as we've seen over the past several years, a number of quarters in the Canadian medical. Consumer, the margin this quarter was generally mix-related as Miguel just described and opportunistic and certainly incremental, combine the extra gross profit. And then, the other key thing you were referring to, there are a couple of things in there that are hitting margins. What we adjust out of our margins are fair value adjustments of course because the non-IFRS thing, but it's confusing, and depreciation. We're trying to get to a cash margin that will allow you to understand the underlying ability of the business to generate cash. This quarter, there was an adjustment for a onetime effective level. I don't know if you're following natural gas prices, but they spike tenfold in December due to some weather in California and they came right back down in January. So, it was just the first time, never seen that before onetime transitory thing. That was very reflective about, true. Gross margin, so we will look at trying to paint a picture for you. The underlying ability of the company to generate cash flow. We think that we will see less. Adjustments through EBITDA as we go forward now that we've finished the business transformation or completed our objective there. There has been through that transformation with facility shutdowns and changes in transferring manufacturing lines as G&A reductions, so a fair amount of noise in our financials. But I think we're past that now in Q3, you should see the level of those sorts of adjustments coming down.

At this time, we have reached the end-of-the question-and-answer session. I would like to turn the floor back over to Miguel for any closing comments.

Well, first and foremost, let me thank everybody for your interest and time. We're thrilled with where we are. I would say this is absolutely not the finish line. If you take anything away from this call is that our strategic plan is working and we're thrilled with what we did here. But we're also thrilled with where we're going forward. I appreciate everybody for your interest and look forward to talking to you in the future. All the best. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.