Greetings, and welcome to the Aurora Cannabis Inc. 3rd 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. 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, Hector, and good afternoon, everyone, Thank you for joining us for the Aurora Cannabis Third Quarter Fiscal 2021 Conference Call for the 3 months ended March 31, 2021. This is being recorded today, Thursday, May 13, 2021. With me today are Aurora's CEO, Miguel Martin and CFO, Glenn Imott. After the close of markets today, Aurora issued a news release announcing our financial results for the fiscal Q3. This news release and the accompanying financial statements and MD and A are available on our website or on our SEDAR and EDGAR profiles.
In addition, you can find a Q3 supplemental information deck on our IR website. Listeners are reminded that certain matters discussed in today's conference call Answers that may be given to questions 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 risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR and EDGAR databases.
Since we are conducting today's call from our respective remote locations, There may be brief delays, crosstalk or other minor technical issues during this call. We thank you in advance for your patience and understanding. Following prepared remarks by Miguel and Glen, we will conduct a question and answer session. To ensure we get to as many questions as possible, we ask the analysts to limit themselves to 1 question each. With that, I would like to turn the call over to Miguel.
Please go ahead.
Thank you, Anant, and good afternoon. I'd like to start with some brief thoughts on the quarter, including a discussion of our domestic and international medical businesses, And then I'll address our plans for the near term challenges in the Canadian adult use business. Afterwards, Glenn will provide his financial review. Finally, I'll talk more broadly about strategy and why we believe that Aurora is the largest Canadian pure play cannabis LP in the market has an incredible opportunity within the global cannabis space. I think it is clear from our results that Aurora benefits greatly from having built a diversified business across domestic medical, international medical and adult use recreational markets.
This provides us with both stability and growth no matter how the global cannabinoids industry evolves. First, let me say by talking about our domestic medical cannabis business, which is on very solid ground. We're number 1 by revenue in Canada's medical market, which as you know is the largest federally regulated medical market in the world. And Our estimated market share is nearly double that of our next largest competitor. Notably, our International Medical business also thrived during the period, demonstrating sequential growth even as many of our peers experienced declines.
It should be mentioned that both of these units exhibit approximately 60% gross margins. The domestic medical business is unique as it represents a direct to patient distribution model that is powered by sophisticated technology infrastructure, allowing for an end to end patient experience. This infrastructure covers patient querying, onboarding, medical consultation, straight through to prescription fulfillment. We are extremely proud of the investment in technology and infrastructure we've made to service the medical patient base and it provides a tangible barrier to entry to the medical channel. In an adult use environment with low barriers to entry in provincial middlemen Adding a layer of cost and complexity, the Canadian medical channels direct to patient model is a welcome, sustainable, high margin diversification piece to Aurora's business.
We believe we offer the most expansive product selection in a carefully curated portfolio to ensure wide coverage of patient conditions at a variety of price points. Under my leadership, Aurora will maintain its focus on providing unparalleled professional counseling and guidance to patients looking for assistance in navigating medical cannabis alternative treatments. This high touch approach to the medical channel is unique and is not easily replicated in the adult use retail experience. Further, we continue to exhibit success leveraging ACE core capabilities from Canadian Medical into our growing international medical platform. We sold medical cannabis into 12 countries during this quarter and the number of countries exploring medical cannabis continues to grow.
We've shown that we can take the expertise we gained in Canadian Medical and export that internationally. And we continue to believe that Companies with success operating in federally regulated medical systems like those governed by Health Canada or the German Health Industry are going to be advantaged when new markets open up to federal regulations, typically first for medical, then for recreational adult use. It should not be overlooked by anyone that on April 20, in response to a question from the journalist, the White House Press Secretary publicly President Biden supports legalizing medical cannabis. In a country like the United States, under a federally regulated system, We would fully expect the FDA to have significant influence in the federal medical cannabis program. And we think Aurora is uniquely advanced when that happens.
We view our enviable positioning in Medical Cannabis as a tailwind that over time will translate into success on a global scale. Taking this point one step further, as of March 31, Aurora was the 2nd largest Canadian LP in terms of global cannabis sales and a leader across multiple markets and segments. We have earned the credibility to pursue incremental M and A opportunities in Canada, the United States and around the world in support of shareholder value creation. Still consistent with our peers, the Canadian consumer business presented challenges during the quarter. In our view, these challenges were twofold.
1st, COVID related lockdowns in key provinces made it more difficult for consumers to access products at retail Despite curbside pickup and online ordering for delivery is available options. Additionally, COVID slowed construction and opening a newly licensed stores, which have been expected. 2nd, 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, it's undeniable that there exist Great retailer interest in having a more premium focused assortment and they are therefore taking more accretive approach to margin as it pertains to 2.0 products versus just low cost flower. This of course plays well into our strategy, even if it will take more time than we initially thought.
As we have seen in more mature markets, the strategy with centers on product quality, innovation and manufacturing excellence is the best path forward for adult use business. Our ability to build traction will be more achievable once the current COVID related lockdowns ease and provincial retail inventories are better aligned with product demand. Still, we are not simply waiting the process out in anticipation of normalization followed by an eventual rebound. Instead, we are determined to continue pulling the levers that we can to reduce our cost structure and extract further efficiencies from our operations and in doing so position ourselves for sustainable cash flow generation. More specifically, we have identified an additional $60,000,000 to $80,000,000 in annualized savings that are targeted primarily to our production costs, facility and logistic expenses and to a lesser extent SG and A.
These efficiencies are expected to be realized over the next 18 months. I'd like to remind you that our previous efficiency initiatives were delivered on time and provide more savings than originally expected. These identified efficiencies are incremental to the approximately $300,000,000 in 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 or our current revenue opportunity, but they will help to reduce our cash burn, solidify our margins and enhance our overall financial flexibility. To assist in the execution of our corporate plan, we have also hired 2 highly skilled individuals In the areas of operations and HR, Alex Miller and Laurie Schick are our team as we announced this afternoon in our press release. I'm not going to read their respective bios, but I think it is clear that we believe Laurie and Alex will have 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 in the margin accretive initiatives we laid out on previous calls. Ultimately, we have both 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 where it's going. This optimism is of course anchored by healthy balance sheet that supports organic growth as well as M and A on an opportunistic basis. Both will position Aurora for long term shareholder value creation. Before I turn the call over to Glenn, I want to address one more item.
As many of you know, when Aurora's founder stepped down in February of 2020, Michael Singer stepped up and took over the reins as Interim CEO, in addition to his continuing role as Executive Chairman. We all owe Michael a huge debt of gratitude for his leadership during that time. Ron Funk was the lead independent director over that period and has proven to be a consistent and reliable voice in the boardroom for years. Michael will transition back to a more traditional Board role and Ron will 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, Miguel, and good afternoon, everyone. Please note that the figures 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 and A and financial statements filed today on SEDAR and EDGAR. I would also note that the comparative period for our analysis today is Q3 2020. We believe this represents the best measure of the company's transformation and improved performance. Where appropriate, I will also note sequential period comparatives.
For context regarding our Q3 financial results, I'd like to take a moment to remind you of the plan we outlined to you in December 2020 February this year. Last quarter, we discussed A number of initiatives as part of our transformation of our consumer business. We talked about a focus on higher quality, higher margin products. So we reduced SKYY production to 25% of its previous run rate to allow for process and cultivation changes to Strengthen the flower standards there. A bit later Miguel will speak to the success at Sky so far.
But for now, I'll say that we are greatly encouraged under absorption of certain overhead costs at Sky, which then flow through to impact our cost of goods and gross margin in the quarter. So although it hurts our gross margin in the short term, it's clearly the right long term shareholder value creation decision As the improved quality results we're seeing from Sky should allow that facility to truly perform as a gem in this industry. In addition to allowing for the transformation of style into higher quality cannabis facility, we noted that the significant reduction in production volumes of style would allow us to align our And we expected our sales to production ratio in Q3 to be in the 90% range. In fact, in Q3, despite the challenges of the consumer business, we sold 93% of what we produced. We also discussed initiating targeted product returns in Q3 in order to open sales channels to premium product.
We did this. We're placing older lower potency flower pre rolls with the new standards that Miguel will outline, including San Raf brands that deliver higher THC potency and a very nice terpene profile without exception. Of course, the product swaps did result in returns per We also cleared all cannabis out of our network that did not meet the new specs for THC, terpenes and quality aspects. This action necessitated an inventory write down that impacted our reported Q3 gross margin before fair value adjustments by approximately $88,000,000 Now all of these actions impact short term reported revenue to gross margins, but they provide a sturdy foundation to support higher margins and accelerating cash for the coming quarters. So now to actual Q3 results and I'll start with a few high level comments.
Q3 2021 revenue demonstrated the importance of Aurora's diversified cannabis business. While the Canadian consumer business was being repositioned to a higher standard and Aurora and the general consumer market faced COVID and market development headwinds, Our leading medical businesses in Canada and Europe continue to perform exceptionally well, delivering growth and high margin revenues. In brief, our Q3 net revenue, all of it from cannabis businesses was $58,400,000 excluding the product return provisions of 3,200,000 Our Medical Cannabis segment continued to accelerate, generating $36,400,000 in sales and our Consumer Cannabis business delivered $21,300,000 Adjusted gross margin before fair value adjustments on cannabis net revenue remained strong at 44% compared to 43% in the comparative Excluding the short term impacts of unabsorbed overheads at Sky and the return provisions and the wholesale clear out of low Our normalized Q3 adjusted gross margin is 54%. SG and A remained low and well controlled at $41,900,000 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 in our International Medical 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, But this segment also carries our highest margins coming in at 59% in Q3 and this despite absorbing additional overheads from the reduced run rate in Sky. Our broad European footprint continued to show its strength in the quarter with Germany delivering revenue up 64% compared to the prior year and the U. K.
And Poland becoming Aurora's 2nd and third largest international medical markets respectively. I should note that while we did not recognize sales into Israel this quarter, we do expect further sales to Israel to resume in the near term as this market develops. We've been selling in Canadian and European Medical Markets for over 4 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 should be an important driver of future cash flow. Looking now at our Consumer business, Aurora's Q3 revenue was $21,300,000 Before we turn provisions, this is down from Q3 2020 as we work through the plan to reposition our consumer business and weather the COVID headwinds that Miguel has described. Consumer margins were 21% compared to 28% in the prior year comparative quarter.
This is mainly because of the company initiated increase in product return provisions and also because of the under absorbed overhead costs at Sky. Adjusting for just the return provisions, Q3 consumer gross margin would have been 33%. Thinking about the longer term profile of gross margins in our consumer business. With the changes we've made to cultivation processing techniques And the successful introduction of new and unique cultivars coming from our breeding program in Genetics Bank, we can now produce a high PHD, high terpene flower at Hi, without materially increasing the cost to produce that flower. So leaning hard into our expertise in science and cultivation to focus on premium flower production, We expect to see strengthening of our consumer margins over the next 12 to 18 months as 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 3,000 kilograms of low potency flour at TRIM pricing. This product was at risk of being written off, so we elected instead to turn it into $760,000 in cash that did impact reported margins. Now to SG and A, which includes R and D. We continue to operate at our targeted low $40,000,000 range coming in at $41,900,000 in Q3. This excludes approximately $3,200,000 of 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 of $16,700,000 and that's excluding revenue provisions and restructuring. This represents a continued improvement from the $44,600,000 adjusted EBITDA loss in the prior year comparative, It is a slightly larger loss than in the previous quarter. However, despite our overall net revenue being down $12,500,000 from the previous quarter, The strength of our diversified business and solid margins of our medical business show in the fact that EBITDA was only impacted by about $4,000,000 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 to positive EBITDA run rate Now a few important points regarding cash flow and cash position. We used $35,900,000 of cash to fund operations, excluding working capital and we used $5,400,000 for contract and employee termination costs.
We also paid a net $12,200,000 for capital expenditures in Q3, down from $83,900,000 in the prior year comparative. So we're on track to reduce CapEx spending to approximately $41,000,000 for this fiscal year. And that's before taking into account a further offset to come from an Net working capital used $25,000,000 in the quarter. With production and demand now roughly aligned, This change in working capital was mainly due to shifts in 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 $525,000,000 in the bank and less than $90,000,000 of outstanding term debt.
In the coming months, we expect to receive additional non dilutive cash inflows from non core asset sales and grants, which we plan to direct to term debt pay down. Before I wrap up, a couple of housekeeping notes. We received approval from NASDAQ to transfer our U. S. Listing to the NASDAQ Global Select Market, the highest listing tier on the NASDAQ Exchange.
This is expected to be effective on May 24 after the market closed and will not impact our TSX listing, No other trading opportunity for any of our shareholders. No action is required from any Aurora shareholder. This transfer is intended to result in cost savings and to align Aurora with our peers on an exchange known for innovative and growth oriented companies. We also announced today that we intend to file a new ATM supplement for a US300 $1,000,000 program. We do not exposure as we identify those opportunities.
To wrap up, what I believe people really need to take away from our Q3 financial results is the following. Aurora's financial health and path to growth and profitability are on track. We have had great success in 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've also taken important steps in rationalizing production. SG and A remains well controlled and we reiterate Our focus on cash flow and on maintaining a strong balance sheet.
I'd now like to turn the call back over to Miguel.
Thanks, Glenn. As I referenced earlier, Aurora's underlying strength is that we are a diversified business that can be broken down into 4 parts. First, the Canadian Medical Business, number 1 in fact 2, an International Medical Business 3, a U. S. CBD Business And 4, finally, our Canadian adult rec use business.
The latter is clearly facing some near term COVID related headwinds, but we're confident that when these conditions abate, 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, still believe that we have significant growth still ahead. First, I'd like to highlight that the top 5 LPs in the Canadian medical channel represent less than 40% of the market 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. That has a lot of potential for us to grow into.
2nd, there are further opportunities to leverage technology in our patient intake and user experience to lower wait times, improve service levels and increase product choices. We have made the requisite investments in infrastructure, have the necessary regulatory experience and compliance systems that effectively create a moat around our business and supporting key patient groups while enabling us to sustain approximately 60% gross margins for the foreseeable future. Our International 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 there. Additionally, we have made INROIDS in Israel through a strategic supply agreement with Cantech.
We are also involved in the French medical cannabis tender program with our partner Epipharm, where we won 3 of the 9 tenders, representing all of the dried flower tenders awarded to supply the French medical pilot program. As you know, Senator Chuck Schumer says in the Senate floor that fourtwenty is the unofficial American marijuana holiday and that he now supports legalizing cannabis on a national level. As I referenced before on that same day, the White House Press Secretary was asked this very question and replied that while the President supports leaving decisions regarding legalization for recreational use up to the states, At the federal level, he supports decriminalizing cannabis use, automatically expunging any prior criminal records and legalizing medical cannabis. In a federally regulated medical framework, I feel confident about Aurora's chances for success. We, of course, do not know the timeframe for if or when this will happen, But I can say with certainty that Aurora's ability to operate within a highly regulated framework supported by our commitment to science, Testing, labeling and EU GMP compliant cultivation puts us in enviable position to actualize this likely opportunity.
That's not to say the MSOs don't have their own advantages, but Canadian LPs like Aurora that have been successful around the world Have the wherewithal and experience to be successful in the U. S. As well. Turning to our U. S.
CBD segment, Valiva is Top ranked CBD brand for Nielsen, the largest cannabinoid market in the world. We are supplying some of the largest retailers and wholesalers nationally and have a footprint spanning over 23,000 stores. We've also recently extended our product line with a new brand focused on the sports market and now we'll launch on shelves this quarter. In the near term, we think this new distribution could offset softness related to COVID disruption affecting the U. S.
C store channel. However, long term, we believe that the single greatest sales catalyst for WAYLIVA going forward, given its already established critical distribution, regulatory experience And relationships in the U. S. Market is FDA regulation and the potential placement of CBD within a dietary supplement framework. So whether the U.
S. CBD business is a CAD 2,000,000,000 or CAD 10,000,000,000 a year over time, we believe that Reliable will be advantage under FDA protocols because of our regulatory expertise operating in brick and mortar stores even in the age of e commerce. Let me also add that we would not be surprised The non THC parts of our portfolio and are ultimately as big as the THC parts of our portfolio, particularly the positive FDA action in the U. S. Moving on to the Canadian consumer market, our 3 step approach to winning is as follows.
1st, we have made significant investments improving the quality of our products. This includes the addition of hand trimming, hand drying techniques and innovative packaging. Importantly, we have also improved the minimum potency specs of our 2 largest brands. Today, our daily special dried flower has a minimum 20% potency, up from 16% and we've increased both potency and terpenes in some of our best selling San Raf Secondly, leading with innovation. We continue to make increased investments that meet the rapidly evolving needs of our consumers.
Over the last 6 months, new product launches have accounted for over 18% of total revenue and we are excited about new launches throughout the Generation 2 and 3 categories over time. And 3rd, 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 EU GMP shipments to our key European medical business and the closing of inefficient cultivation and manufacturing stories. We are now going even further with today's efficiency initiatives to reduce complexity in our operations. We like our top line strategy, which we believe is appropriate for Current and future state market.
To accelerate our progress, we have a new Head of Marketing and a new Head of Brand Management to lead these initiatives. We'll be working closely with the team at Great North Distributors, our new contract sales force, who is the number one national broker for cannabis in Canada. Before we 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 cannabinoid molecules including minor cannabinoids will be huge as the regulations globally evolve.
In fact, our OLEVA business in the USA TODAY sells products to consumers that use CBD isolate and we are deeply interested in the evolution of other cannabinoids and the ability to commercialize them. With this, it is important to highlight to our stakeholders Aurora's connection to 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 through the acquisition of Amandria. Through licensing deals, Aurora and 22nd Century Group together share the global intellectual property rights to key aspects of cannabinoid biosynthesis. The 2 companies are working closely together to both defend our position on this IP from parties infringing on it, as well as actively exploring commercial development opportunities. This technology promises to be tremendously valuable as it potentially unlocks more efficient means to produce cannabinoids, particularly minor cannabinoids, which typically occur in the plant at very low levels less than 1%.
Let me end 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 and A and delivered $60 plus 1,000,000 in quarterly SG and A savings. We said we would align our production to current demand. We delivered that in Q3 with Sales to production ratio of 93%.
We said we would leverage external expertise in our supply chain. We've achieved that with multiple external cultivation sources onboarded and bringing in the Great North contract sales force. The upshot of all these initiatives plus the new expense reductions we announced today will enable us to reach breakeven EBITDA in the coming quarters without having to depend on incremental revenue. Thank you for your interest. And now, we'll turn it over to the operator for questions.
Operator?
Thank you. At this
time, we'll be conducting a question and answer A confirmation tone will indicate your line is in the question Your first question comes from the line of Vivien Aver with Cowen. Please proceed with your question.
Hi. How are you?
Good afternoon, Deb.
Good afternoon. So my question has to do with the competitive dynamic in the adult market in Canada. So well understood, COVID shutdowns, all of the store opening delays, all challenging for you and your peers to be sure. And then uniquely, perhaps a little bit more for you guys, the comp issue in terms of the 2.0 rollout. So I think a lot of peers were doing that and the introduction of daily special.
All of that aside though, there's a difference between revenue declines and changes in market Sure. And so, I'm curious to understand, Miguel, is your perspective on the competitive landscape? Because it looks like in the high fire data, which obviously doesn't include Quebec, There was sequential degradation in your market share. And when I look at kind of the top operators in aggregate, this year versus last year, It just seems like across the board, it is smaller operators that are picking up share, presumably Later entrants into the market. So kind of how are you thinking about the balance of benefits of being a 1st mover versus the way you have to compete against Smaller second movers who are displacing market share.
Long winded question, but thank you.
Great. Well, it's a great question. Let me just address The sort of macro issues that everybody faced because I think it's COVID is the sort of the top line answer, but I think everyone also has to understand this. You had the provinces, which act as wholesalers making massive cuts So there are days on hand as they reacted. So that's sort of a one time impact.
And we're talking about 7 and 8 figure pieces. We're also seeing provinces that had a massive 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 is a bit of Timing in a lot of different ways.
Now, Vivien, to your question about market dynamics, let me take it in two directions. So 1st and foremost, it is a very diluted market compared to what I'm used to and maybe what you're used to, where you have the top 5 LPs controlling 80%, 90% of a given category. You don't see that in the cannabis business in Canada today. So that's first. You may see top five Companies representing 40%, maybe 45% of a key category, dried flower, pre roll, vape, things like that.
Secondly, as everyone well knows, market share in isolation is really not a good bellwether. You're seeing a lot of market share picked up by value products and deep discount products and those margins are way lower than what we're seeing from a premium standpoint. I would say that you're starting to see the early days of premium products start to take hold. We've seen it a little bit. You've also seen some others.
You're also really seeing an acceleration of Gen 2 and Gen 3 products in Canada. So if you look over like the last 12 months, Flower might be up 30% to 40%. If you look at everything else, it might be up 3 times that. And I think everyone understands that there delay in the Canadian market with those Gen 2 and Gen 3 products. So when you think about concentrates and vapor and pre rolls, Those are going to have higher margins regardless of that.
Lastly, I think a lot of these competitive dynamics are a bit Temporary? There is, as you've seen, a glut of what I would describe as low cost flower In the market and that's causing some irrational pricing. I do believe having talked to the provinces and talking to retailers, There is an interest in holding margins up and people actually making money. Maybe it's take a little bit longer than people would have wanted Because of just the situation we're in with COVID. And then I guess lastly, Vivien, to be respectful of your question about our market share, I think, to be brutally honest, it's taking a little bit longer than I would hope.
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 had to do the provision you saw at 3.2. It takes a while to get that out of retail and get that in the system. But I think the changes that we've made across the board on potency and with new items is encouraging.
I think GND and retail coverage is really not talked about a lot. Just as one 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 SKU is only in 60% of the stores. That's an abysmally low number in any sort of traditional CPG. We think someone like GND that can make 3 times the number of calls for us has great data systems, has national coverage, will be really strong on the blocking and tackling.
So While we're not I'm not happy with the timing of it, we're definitely going to see improvements, but that really goes to the strength of the other parts of our business, which are way steadier and have way less compression and provide a lot of opportunities.
Your next question comes from the line of Pablo Zwanech with Cantor Fitzgerald. Please proceed with your questions.
Good afternoon, everyone. Miguel, can I just ask maybe following up on the last question, Talk about the relationships of Aurora with the boards and with the consumer? Because of all these issues, how those relationships been hurt With the boards, with the retailers and what about the brands, have the brands suffer in as a result of what's going on? And I'm asking that in the context of a company that's losing share, right? If you can comment on that.
Thanks.
Pablo, when you mean the boards, you mean the provincial boards?
Yes, Yes. Yes. So there's like 3 parties to the story, right? Your relationship with the boards, your relationship with the retailers, the stores and then the relationship with the consumer in terms of your brands. Because what I'm surprised is that we see all these new little companies being able to list new SKUs with the boards At the time that they are cutting SKUs, right?
So it just makes you wonder. Thanks.
Okay. You're very welcome. So let me see if I can take those In 3 parts. So obviously, the provincial boards operate as the wholesaler. I would say, They are evolving.
And I've got a tremendous amount of respect for the provincial boards. I mean, remember, this thing is only 3 years old. They're trying to do everything they're trying to do in the midst of COVID. And so I think, Pablo, we have a good relationship with them. I think in all cases, you always Can have it be better?
They really don't play favorites. So whether you're a small manufacturer or large manufacturer, You have the same opportunity. Now what is evolving, which I think will benefit a company like Aurora, particularly with my background, As you're now seeing very sort of sophisticated CPG and in many cases, the decision makers are coming from The beverage side, so scoring manufacturers on fill rates, in stock conditions, shipping provisions, All of those core things are going to start to make a difference in terms of what SKUs they take, How they fill them, how are those 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's treated the same, I think that's definitely changing. Also, we are hearing from the provincial boards That they are concerned about price compression and starting to put some floors in on key segments, whether that's a 3.5 gram flower Or a 28 gram and I think that also benefits bigger pieces.
Now in terms of the retailers, it's an interesting market. I'm used to, I think most are a chain business, a significant amount of chain or centrally controlled stores. And we don't have that Today in Canada, albeit there are some smaller chains out there, say that may number 80 to 100, which is not Insignificant. And they are also becoming more sophisticated, which is raising the overall game for us. I think GND gives us an advantage because of the importance in call coverage, particularly post COVID, And we're developing a series of connected events.
Now there is a ban on inducements, which you well know that restricts a manufacturer from a, say, a traditional CPG alignment program. But again, they're looking for profitability. And when I mentioned the number one SKU in the country is only 60% in stock. There's a ton of upside to blocking and tackling, You know why which is why we've made significant investments in our retail infrastructure. And so I think that's all going to evolve and be in 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, in the flower business, 200 basis points, 300 basis points swing in a week, we're seeing in vapor 400 basis points. So the consumer is moving around and is 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 that I think will benefit a company like Aurora that's made significant investments in there.
And I think in aggregate, what you're 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 5 LPs in the category do 60%, 70%. You're seeing in stocks in the 80s 90s. You're seeing national execution and you're seeing a more consistent brand experience even though there will always be a place For a regional brand, I just don't think at the level it's at today.
Your next question comes from the line of David Kideckel with ATB Capital Markets. Please proceed with your question.
Hi, guys. This is actually Frederic Koch, I mean in for Dave. Thanks for taking my questions. So Lucina M and A activity has really taken off here in Canada. I'm just wondering how do you guys see that environment?
What's your game plan there? Are you looking at anything M and A wise in Canada or maybe do you have other plans? And so that's not in the U. S, I mean specifically for Canada?
So, Frederico, it's an interesting question. Obviously, there's been some notable acquisitions of late. I think the way I would describe it is this without getting any specific details. We don't see anything in Canada that we got to have. Given the dynamic nature of market share, buying or renting market share, I think right now It's not a great play in Canada.
Now that being said, if we saw something that was accretive, a technology, Management team or something that was in a category that we didn't need, then maybe be of interest. I think as many of you know, Aurora It was on an absolute tear in terms of acquisition in the early days. And so whether it's an NANDIA as a lab or Coast and Comox in terms of IP and Technology, our manufacturing, we've got plenty of infrastructure and had plenty of acquisitions in order to fill it out. I think Given our strength in medical and international medical and with a little bit of softness in rec, we're going to focus in there, but I don't think you're going to see us chase In Canada, in order to what I would really describe as renting market share, unless there was a systemic or sustainable reason In order to add that to the portfolio, clearly, if we needed to do it through the $525,000,000 with a $300,000,000 ATM, we'd be in a position to do it if we saw it. That's how I would describe it, Frederico.
Your next question comes from the line of Michael Lavery with Piper
You laid out Some good color on the cost savings initiatives that you've got mapped out. And I guess I just want 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 some of the things like hand trim, Should we expect a 60 to 80 net number to flow through or is there going to be some, I guess, maybe reinvestment that that will fund as well?
I would tell you, Michael, we feel confident that we're going to be able to deliver that $60,000,000 to $80,000,000 straight up in efficiencies. I If you sort of unpack that, we've got the Nordic facility we've talked about in the past that is now producing EOGMP products for Europe and for Israel, so that creates some redundancies. We've seen some efficiencies in our current business. Obviously, rightsizing The overall infrastructure, for the business we have today as well as a little bit going forward means we have redundancies in efficiency. So I would tell you, from my point of view, the company has had a strong track record of when they say they're 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 in an 18 month period. And with that, as you know, we don't need to grow our way into EBITDA neutral or have to have to see anything happen on the margin. So I'd take it as is.
Your next question comes from the line of Heather Balsky with Bank of America. Please proceed with your question.
Hi. Thank you for taking my question. I'm curious about your thoughts around your balance sheet and cash and also the comment in your It's about your cost savings getting you, I guess, moving cash flow metric in a positive direction. I guess, how are you thinking about the timing of getting to cash flow positive in this environment, maybe if the environment improves? And also how do you feel about the cash On your balance sheet, especially as we hopefully inch closer to federal legalization in the U.
S?
Glenn, you want to kick that one off?
Yes. Thanks, Heather. So listen, a few things to unpack there. Certainly, what Miguel outlined in terms of operational cost savings, we think is a big part of that. If we look at Q3 and we look where the cash was consumed, There was some still being consumed in 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 maybe $15,000,000 to $20,000,000 a quarter and you think of our EBITDA of minus $16,000,000 or $17,000,000 this quarter that gets a long way towards Your positive cash flow from operations, working capital is a bit of an anomaly this quarter and we were the 20 $4,000,000 receivable that we collected just in April.
So let's just say we collected that during the course of March, We would have seen this single digit investment working capital. So we think with production and demand roughly aligns that our working capital should kind of stabilize And start to even out a little bit. So let's just say long term, there'll be a little bit of investment in working capital as we grow. But we think we've got that well under control and certainly as we manage our inventory tightly now, that should be fine. And finally, the CapEx piece of this, We talked about how much we've reduced that.
I mean, I know you're relatively new to our You've done your homework. You know what we were spending in CapEx a year ago. You know where we're at now. And we think we've got both of our projects complete. So Even going forward there, we spent $40,000,000 we're on track to spend $40,000,000 this fiscal year.
And I don't see us that's the top end for next year if that. So the pieces are in place and really what we want to do is on these cost reductions and operations and SG and A just in the way that Miguel 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 impart that We don't expect revenue growth? Absolutely.
Our international medical business continues to thrive, plans in Canadian medical to grow as Miguel And we believe that we've put that pieces in place to get consumer back on track. So we do expect growth, but we want to make sure that we pull the levers as we've talked about in the past to get us to at least a breakeven on EBITDA and cash flow without depending on that growth. So presumably when the growth shows up, It shows up as incremental earnings and cash flow. So that's the plan. That's how we think about how we're going to get there over the next 12 months to 18 months is on the back of continued rationalization of costs and then picking up additional cash flow as we see growth.
Thanks.
Your 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 in 4th quarter versus the 3rd, growth in the consumer business seems pretty contingent upon COVID disruptions normalizing, but you'd only have about a month and a half to make up for any Lost ground before the quarter ends and obviously the rationalization won't really have an impact I think on the Q4. So Should we expect improvements in the Q4 or should we think of this more as like 2022 before we would expect to see improvements?
Glenn, you want to add? Yes. No, I guess, we should have to stay on that. We're on the rec side, the trends are what the trends are, but we also have positive trends on a different side of the business. I don't want to get ahead and give guidance in the midst of the quarter.
I think you sort of heard what we're saying. There are other pieces that also are steady. There's other pieces on the cost side. So I'm sorry, I can't give the exact answer you want, but I think when you look at the aggregate of where the business was going from the point in time in which we laid out for you, plus some There are pieces there. I think that sort of is what it is.
It's hard when I talk about the provinces making a change 8 figures on POs, 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 trends have been pretty steady. So I think I'd sort of leave it there. Glenn, anything you want to add to that? No,
that's fine. We don't we recognize You just described the consumer market, we're doing what we can, but there are things that are kind of dynamics to the market right now. And We've seen over the last quarter that provinces are adjusting on the fly as well. So we will Focus on the plan we've laid out, which is over the next number of quarters and you continue to just look for improvement each quarter.
Your next question comes from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.
Hi. Thanks for the question. Miguel, I wanted to ask a bit more The production pivot and all the changes you've made at Sky. So if we just move aside all the COVID headwinds because I think that's pretty been well highlighted that that definitely made things very difficult for you guys on the premium pivot strategy. So if we just move that to the side here, could you speak a bit to the consistency now at which Sky Can produce that high quality flower because one of the things we keep hearing, COVID headwinds aside, Is that in the market right now, there's 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, once again COVID aside, would have been that perfect sort of opportunity for your strategy of Trying to tackle that apparent white space. So can you talk a bit about the production consistency? Because I'm also just thinking about your ability, right, to Tackle that white space and also the implications on inventory, possible impairment going forward. I know you did this big write down this quarter, but really want to understand the level of consistency you can hit at in terms of the higher potency and all the thresholds that are required for Premium Flower. Thanks.
Sure. It's a great question, Tammy. So let me go back a little bit. 1st and foremost, a year ago, The market was 1 in which you could have sold 16%, 16.5% potency with a low two level terp, Bud quality, moisture, none of other aspects on quality were not that as important. And at that time, As everybody knows, Sky was hammering out a lot of products.
Some of that was for daily specials, some of that was for some other things. And the consumer, as Is in the case in every other market has moved really quickly. Today, as an example, if you look at the wholesale market, You can access 19 potency product, maybe 20 potency product, anything above that is really hard to find. And you can sell all day long 22, 23 potency products in the retail market. It is a hard thing to make.
If it was easy, Everybody be making it, the flower market and pricing would be great, but it's a hard thing to do. So we had to pivot Sky. Now I'll talk about Sky in 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, the organic in soil production facility in the West Coast in DC, and they've been very consistent. And so, Tammy, to your question about Sky, We've been working on Sky. As you know, we announced we took it down to 25% and it is a still working through it.
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 what you're going to get out of Sky. 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 is we have redundancies in our overall infrastructure. And now that we have Nordic, we don't need to produce EU GMP domestically in Canada.
So we have options regardless of what happens With that Sky project, in order to delivering 2022, 2023 potency product at enough retail value and importantly at a cost structure that is right sized for the environment that we're in. So I think a little bit to follow on that. 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 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's not the only one, but it is one of them.
Your next question comes from the line of John Zamparo with CIBC. Please proceed with your question.
Thanks. Good evening. Miguel,
I wanted to follow-up on a comment you made. You referenced on competitors SKU and what I'm not sure if this is a number you have handy or willing to share and if not maybe you can just talk directionally, but I'm curious about How you look at your distribution and how many stores you're in countrywide and how that's trended over the past, let's say, year or couple of quarters? Thank you.
So John, I come from a world of incredible analytics, 242,000 stores. I get wholesale I had wholesale shipments weekly by SKU, both my business and competitive business. I had in stock conditions. I had retail takeaway. We had it all.
In Canada, that information is just starting to come online. You see it With some of the retail information, the provinces are starting to get there. It was one of the core reasons why we went with Great North And there are significant CRM systems. So what we are now and you can imagine you can't just snap your fingers and get it. We are visiting Of the roughly 1540 or 1600 stores that are open and are selling cannabis, we're visiting all of them on a monthly basis.
We'll visit the 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 it is the beginning blocks of where the cannabis industry is. First is overall distribution, say most commonly sold 46 to 50 SKUs. Secondly is pricing, both wholesale to retail and retail to consumer. 3rd would be in stock conditions, which in Canada come in 2 ways. 1, what is authorized or Listed, which potentially can go to the store and then secondly, what is physically in the location.
And as you can imagine with the speed, That's why those weekly calls matter. And then nice to have would be timing of new brand launches and Signage and share of space. So that information that I quoted to you is an internal piece of information and is not widely available Because even the large chains who do have sophisticated data systems, that doesn't encompass the independence where a lot of business is done and therefore the value of that overall retail takeaway data or CRM data. I think there's a ton of upside in that as a manufacturer. The other upside is for the retailers who in many cases are not having been in this business for a long time because they couldn't have.
And so us providing category insights and profitability optimization for new stores and existing stores It's a big opportunity. And I think all that, I'm sure it sounds like the basics for any CPG company, but it's really where we're at. And I think it will be wildly additive For Aurora, as we leverage that data and insights with our retail and provincial partners, which suit the consumer needs.
Your next question comes from the line of John Chu with Desjardins Capital Markets. Please proceed with your question.
Hi, good afternoon. So maybe just talking on the Canadian Medical and the European market, You're doing really well on both those fronts, but I guess I find those 2 markets maybe kind of small and just a little bit underwhelming at this point in time. So Can you just maybe give us a bit more color in terms of the market size, the market potential? I think the Canadian med market is maybe about a tenth of that Canadian rec Mark, if you can give me some indications otherwise. And then maybe just the outlook for Europe because right now just the growth we've seen so far has been pretty underwhelming.
So Maybe just talk about those 2 markets in general. Thanks.
Yes. I mean, John, 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, our next closest is half that. There's a ton of upside. We also see a movement from unions and benefits and carriers.
So we believe that there is an upside to medical. The other part of medical is the margins are steady and really solid at 60%. Internationally, it's a great business. And what we see is whether you're dealing with Germany or France or UK, it's a really high bar to get into and so there's a deep note around it And there's a lot of expansion. I think the reason to be interested in 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 rec and it is the same regulators And you have tremendous efficiencies in manufacturing, packaging, regulatory compliance, legal, all of those things. And so there is wonderful synergies in having a company that is strong both on medical and rec. And I think the Canadian quarter, This quarter is a great example. If you were just a rec business in Canada this quarter, you would have gotten hammered because of the overall macro environment.
Medical didn't see that, what happened in rec. And lastly, I really believe that the first steps we're going to see in the U. S. It's 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 is not going to have a piece 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 that have made big bets that stand again from interstate commerce, Highly regulated all of those things. So I think medical doesn't get anywhere near the attention. It's not just because we do well at it. It's just all of those economics and it is growing It is an important part of the Rack story, whether it's today's synergies or tomorrow's new markets.
Mikael, I'd like to add just a couple of things to that. Sure. You're talking about market sizing. So Canada would say maybe 1% of the Canadian population are medical cannabis consumers. In Germany, it's 1 tenth of that.
1 tenth of 1% of German population are currently medical cannabis patients. And so their leadership in 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 The benefits of medical cannabis, so you talked about growth opportunities just simply getting the same sort of penetration we've got in Canada. We could tenfold opportunity there. But more importantly, when we focus myopically on revenue, we missed an 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 the consumer dollars that somebody is operating at 20% or 30% in the consumer market. So we shouldn't lose sight of that. It's a massive part of our business. I think the growth opportunities are excellent. The ability to support a cash generating business is excellent.
And for all the reasons that Miguel said, It leads you into the future opportunities. So I don't want to sort of leave it as a poor cousin to the rest of the business is an incredibly
Ladies and gentlemen, we have reached the end of question and answer session. And I'd like to turn the call back to Mr. Miguel Martin for closing remarks.
Well, on behalf of all of us, we want to say Thank you and all of your interest in Aurora. We look forward delivering this plan. And I hope everyone is safe and well, both 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.