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Aurora Cannabis Inc. (NASDAQ:ACB)
Q3 2021 Earnings Call
May 13, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Aurora Cannabis, Inc. third-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.

[Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ananth Krishnan, vice president, corporate development and investor relations. Please go ahead.

Ananth Krishnan -- Vice President, Corporate Development and Investor Relations

Thank you, Hector, and good afternoon, everyone, and thank you for joining us for the Aurora Cannabis third-quarter fiscal 2021 conference call for the three 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, Glen Ibbott. After the close of markets today, Aurora issued a news release announcing our financial results for the fiscal third quarter.

This news release and the accompanying financial statements and MD&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 or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. 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 the call. We thank you in advance for your patience and understanding.

Following the 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 one question each. With that, I would like to turn the call over to Miguel. Please go ahead.

Miguel Martin -- Chief Executive Officer

Thank you, Ananth, and good afternoon. I'd like to start with some brief thoughts on the quarter including a discussion of our domestic international medical businesses. And then I'll address our plans for the near-term challenges in the Canadian adult-use business. Afterward, Glen will provide our financial review.

Finally, I'll talk more broadly about strategy. And while 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 in how we 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 one 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 exhibited 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 infrastructure we've made in the service to the medical patient base, and it provides a tangible barrier to entry to the medical channel.

In an adult-use environment, with low barriers entry, and provincial middlemen adding a layer of cost and complexity, the Canadian medical channel's 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 and a carefully curated portfolio to ensure wide coverage of patient conditions and 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 our civic success, leveraging these core capabilities from Canadian medical into our growing international medical platform. We sold medical cannabis in the 12 countries during this quarter and the number of countries exporting medical cannabis continues to grow. We've shown that we can take the expertise we gain in Canadian medical and export that internationally. And we continue to believe that this expertise represents a key success factor for Aurora as new countries look at launching medical cannabis regimes.

Companies with success operating and federally regulated medical systems like those governed by Health Canada or the German health ministry are going to be an advantage for 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 28th, in response to a question from the journalist, the White House press secretary publicly confirmed that President Biden supports legalizing medical cannabis. In a country like the United States and its federally regulated system, we fully expect the FDA does 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 31st, Aurora was the second-largest trading LP in terms of global cannabis sales and a leader across multiple markets and segments. We have earned the credibility to pursue incremental M&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. First, COVID-related lockdowns and key problems have made it more difficult for consumers to access products at retail despite the curbside pickup and online ordering delivery is available options. Additionally, COVID slowed construction in opening a newly licensed store, which should have been expected. Second, due to the volatile environment, all of the provincial distributors have become more attuned to managing their inventory to deliver returns, rationalizing our SKUs, and focusing on profitability per SKU.

However, it's undeniable that there is this great retailer interest in having a more premium-focused assortment and therefore taking a more creative approach to the 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 previously thought. As we have seen in more mature markets a strategy that centers on product quality, innovation, and manufacturing excellence is the best path forward for the 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 for 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 positioned ourselves for a sustainable cash flow generation. More specifically, we have identified an additional 60 million to 80 million in 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 were delivered on time and provide more savings than originally expected. These identified efficiencies are incremental to the approximately 300 million 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've also hired two highly skilled individuals in the areas of operations in HR, Alex Miller and Lori Schick to our team, as we announced this afternoon in our press release.

I'm not going to read their respective bios but I think it's clear that we believe Lori and Alex will have the requisite experiences and skillsets to positively impact all our business segments. To sum things up, our Canadian international medical businesses are performing well and we maintain our confidence in the margin accretive issues we laid out in previous calls. Ultimately, we have both the plan and ability to pursue profitable growth opportunities and creating 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 that 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 Glen, I want to address one more item. As many of you know, when Aurora's founder stepped down in February 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, reliable voice in the boardroom for years. Michael would transition back to a more traditional board role and Ron would 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 Glen.

Glen Ibbott -- Chief Financial Officer

Thanks, Miguel. 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&A and financial statements filed today on SEDAR and EDGAR. I would also note that the comparative period for 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 the sequential period comparatives. For the 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 and February of this year. Last quarter we discussed a number of initiatives as part of the transformation of our consumer business.

We talked about a focus on higher-quality, higher-margin products so we reduced the Sky production to 25% of its previous run rate to allow for process and cultivation changes to strengthen the flowers standards there. A bit later, Miguel will speak about the success of Sky so far. But for now, I'll say that we are greatly encouraged by the significant improvement in quality performance at Sky and in fact, across all of our operations. The reduced run rate has resulted in the 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 that we're seeing from Sky, it should allow that facility to truly perform as a gem in this industry. In addition to allowing for the transformation of Sky into a higher-quality cannabis facility, we noted that the significant reduction in production volumes at Sky would allow us to align our overall production levels with demand 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 a premium product. We did this, replacing older, lower potency flowers and pre-rolls with the new standards that Miguel will explain, including San Rafael brands that deliver higher THC potency and a very nice terpene profile without exception. Of course, the product swaps did result in the provision of a return of $3.2 million, which impacted our Q3 net revenue and margin numbers. 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 writedown 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 and gross margins but they provide a sturdy foundation to support higher margins and accelerating cash flows in 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 in 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 Canada's businesses, was $58.4 million, excluding the product return provisions of $3.2 million. Our medical cannabis segment continued to accelerate, generating $36.4 million in sales, and our consumer cannabis business delivered $21.3 million in net revenue prior to the return provisions. Demonstrating the value of our diversified cannabis business, our overall average selling price for medical and consumer businesses combined rose to $5 per gram of dried flower, 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% in the comparative quarter. Excluding the short-term impacts of unabsorbed overheads at Sky and return provisions and the wholesale clearout of low potency cannabis, our normalized Q3 adjusted gross margin was 54%. SG&A remained low and well-controlled at $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 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 despite absorbing additional overheads from the reduced cost at 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 second and third largest international medical markets, respectively. I should note that while we did not recognize sales in 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 $21.3 million before return provisions.

This is down from Q3 2020 as we work through the plan to reposition our consumer business and whether the COVID headwinds that Miguel described. Consumer margins were 21%, compared to 28% in the prior year's comparative quarter. And this was mainly because of the company-initiated increase in product return provisions and also because of the under-absorbed overhead cost at Sky. Adjusting for just the return provisions, the 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 and processing techniques and the successful introduction of new immune cultivars coming from our breeding program in genetics bank, we can now produce a high-THC, high-terpene flower at Sky without materially increasing the cost to produce that flower. So leaning hard into our expertise in science and cultivation to focus on premium power production, we expect to see the strengthening of our consumer margins over the next 12 to 18 months as we successfully pivot our consumer business to a greater proportion of the 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 flower 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&A, which includes R&D. We continue to operate at our targeted low $40 million range, coming in at $41.9 million in Q3. This excludes approximately $3.2 million of employee and contract termination costs related to our business transformation.

Although we continue to deliver on the run rate that we've previously targeted, as Miguel noted, we see a path to further improvement over the coming quarters. So pulling all of this together, we generated an adjusted EBITDA loss in Q3 2021 at $16.7 million, and that's excluding revenue provisions for restructuring. This represents a continued improvement from the $44.6 million adjusted EBITDA loss in the prior-year comparative but is a slightly larger loss than in 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 in 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 that we are confident that we can get Aurora to a positive EBITDA run rate without having to rely on revenue growth and margin expansion. That growth, when it comes, 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 a net $12.2 million for capital expenditures in Q3, down from $83.9 million in the prior-year comparative. So we're on track to reduce capex spending to approximately $41 million for this fiscal year. And that's before taking into account a further offset to come from an expected $9.4 million government grant to be received related to our cogeneration project completed at River. Networking capital used is $25 million 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 million in the bank and less than $90 million 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 close and will not impact our TSX listing, nor the 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 our new ATM supplement for a U.S. 300-million-dollar 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 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 under way.

We've also taken important steps in rationalizing production, SG&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.

Miguel Martin -- Chief Executive Officer

Thanks, Glen. As I referenced earlier, Aurora's 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, international medical business; three, a U.S. CBD business; and four, finally, our Canadian adult-recreational-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, we still believe that we have significant growth still ahead. First, I'd like to highlight that the top five 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 and that's a lot of potential for us to grow into. Second, there are further opportunities to leverage technology in our patient intake and user experience, lower wait times, improve service levels and increase product choices.

We have made the requisite investments in infrastructure and 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 national medical segment generates revenue across 12 countries and has been a consistent winner. We have a leading position in Germany in dried flower but are also bullish on the large and growing oil market there. Additionally, we have made inroads in Israel through a strategic supply agreement with Cantek.

We are also involved in the French medical cannabis tenure program with our partner at BfArM where we won three of the nine tenders representing all of the dried flower tenders awarded to supply the French medical pilot program. As you know, Senator Chuck Schumer says on the Senate floor that 4/20 is the unofficial American marijuana holiday. And 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 recreation use is 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 an 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. Reliva is the top-ranked CBD brand from Nielsen, and 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 will launch on shelves this quarter. In the near term, we think this new distribution would 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 Reliva 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 CAD 2 billion or CAD 10 billion a year over time, we believe that Reliva will be advantaged 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 if the non THC parts of our portfolio and are ultimately as big as the THC parts of our portfolio, particularly with positive FDA action in the U.S. Moving on to the Canadian consumer market. Our three-step approach to winning is as follows. First, we've made significant investments in improving the quality of our products.

This includes the addition of hand trimming, hand drawing techniques, and innovative packaging. Importantly, we have also improved the minimum potency specs of our two largest brands. Today, our Daily Special dried flower has a minimum of 20% potency, up from 16%, and we've increased both potency and terpenes on some of our best-selling San Rafael straight tubes. 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 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 EU GMP shipments to our key European medical business, and the closing of inefficient cultivation and manufacturing facilities.

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 the 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. They will be working closely with the team at Great North Distributors, a new contract sales force, who is the No.

1 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 cannabinoid molecules, including minor cannabinoids will be huge as the regulations globally evolve.

In fact, our Reliva 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 Anandia. Through licensing deals, Aurora and 22nd Century Group together share the global intellectual property rights to key aspects of cannabinoid biosynthesis. The two 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&A and delivered 60-plus million in quarterly SG&A savings.

We said we would align our production to current demand. We delivered that in Q3 with a 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?

Questions & Answers:


Operator

Thank you. [Operator instructions]. Our first question comes from the line of Vivien Azer with Cowen.

Vivien Azer -- Cowen and Company -- Analyst

Hi, how are you?

Miguel Martin -- Chief Executive Officer

Good afternoon, Vivien.

Vivien Azer -- Cowen and Company -- Analyst

Good afternoon. So my question has to do with the competitive dynamic in the adult-use 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, you know, there's a difference between revenue declines and changes in the market share. And so I'm curious to understand, Miguel, is your perspective on the competitive landscape. Because it looks like in the high buyer data, which obviously doesn't include Quebec, you know, there was sequential degradation in your market share.

And when I look at kind of the top operators in aggregate, you know, 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 the first mover versus the way you have to compete against smaller second movers who are displacing market share? Long-winded question but thank you.

Miguel Martin -- Chief Executive Officer

Great. Well, it's a great question. Let me just address the sort of macro issues that everybody faces because I think it's, you know, COVID is the sort of the top-line answer. But I think everyone else has to understand this, you had the provinces, which act as wholesalers making massive cuts to their days on hand as they reacted.

So that's sort of a one-time impact, we're talking about seven and eight-figure pieces. We 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, you know, curbside delivery and store are not opening, that's only a portion of the revenue story. And I would say, you know, that is a bit of timing in a lot of good ways.

Now, moving to your question about market dynamics, let me take it in two directions. So first and foremost, it is a very dilutive market compared to what I'm used to and maybe what you're used to where you have the top five 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 the key category dried flower, pre-roll vape, you know, 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 two and gen three products in Canada.

So if you look over the last 12 months, flower might be up 30% to 40%. If you look at everything else it might be up to three times that. And I think everyone understands that there was a delay in the Canadian market with those gen two and gen three products. So when you think about concentrates and vapor and pre-rolls, those are going to have higher margins regardless of that.

Lastly, you know, I think a lot of these competitive dynamics are a bit temporary variances as you've seen a glut of what I would describe as, you know, low-cost flowers 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 taking a little bit longer than people would have wanted because of, you know, just the situation wherein with COVID. And then I guess lastly, I don't mean to be disrespectful with 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, you know, as Glen 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 we saw at 3.2. It takes a while to get that out of retail and you get that in the system. But I think the changes that we've made across the board on potency and with new items are encouraging.

I think GND and retail coverage is really a no -- not talked about a lot. Just as one data point for you -- from our data we see that the No. 1 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 60% of the stores.

That's an abysmally low number in any sort of traditional CPG. We think someone like GND that can make three times the number of calls for us, has great data systems as national coverage will be really strong on the blocking tackling. So while we're not -- I'm not happy with the timing of it, you know, we're doubling to see improvements but that really goes to the strength of the other parts of our business, which are way steadier and had way last compression and provide a lot of opportunities.

Operator

Your next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Please proceed with your question.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

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 have been hurt with the boards, with the retailers? And what about the brands? You know, have the brands suffered 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.

Miguel Martin -- Chief Executive Officer

Pablo, when you mean the boards, you mean the provincial boards?

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Yep, yep, yeah. So this is like three parties to a story, right? Your relationship with the board, your relationship with the retailers, the stores, and then, you know, the relationship with the consumer and consumer brands. Because what I -- I'm surprised is that we feel 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.

Miguel Martin -- Chief Executive Officer

OK, you are very welcome. So let me see if I can take those in three 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 three 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, a large manufacturer, you have the same opportunity. Now what is evolving, which I think will benefit a company like Aurora, particularly with my background, is you're now seeing very sort of sophisticated CPG. And in many cases, the decision-makers are coming from, you know, the beverage side.

So scoring manufacturers on fill rates, in-stock conditions, shipping provisions. You know, 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, 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, you know, 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, you know, a series of connected events.

Now there is a ban on inducements, which you well know that restricts a manufacturer from, say, a traditional CPG alignment program. But again, they're looking for profitability. And when I mentioned before that the No. 1 SKU in the country is only 60% in stock, there's a ton of upside to blocking and tackling, 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. You know, 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 hash and rosins and resins. And that, I think, will benefit a company like Aurora that's made significant investments there.

So you know, 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 five LPs in the category do 60%, 70%, you're seeing in stocks in the 80s and 90s, you're seeing national execution, and you're seeing a more consistent brand experience, even though there'll always be a place for a regional brand. I just don't think it's at the level it's at today.

Operator

Your next question comes from the line of David Kideckel with ATB Capital Markets. Please proceed with your question.

Frederico Gomes

Hi, guys. This is actually Frederico chiming in for Dave. Thanks for taking my question. So we've seen M&A activity has really taken off here in Canada.

I am just wondering how do you guys see that environment? What's your game plan there, are you looking at anything M&A-wise in Canada, or maybe do you have other plans then? So that's not in the U.S., I mean, specifically for Canada.

Miguel Martin -- Chief Executive Officer

So Frederico, it's an interesting question. Obviously, there have been some notable acquisitions of late. I think what I -- the way I would describe it is this, without giving 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 a market share, I think right now, is not a great play in Canada. Now that being said, if we saw something that was accretive, a technology, a management team, or something that was in a category that we didn't need, then maybe it would be of interest. I think, as many of you know, Aurora is -- was on an absolute tear in terms of acquisition in the early days. And so whether it's in India as a lab or coasting call marks in terms of IP and technology or manufacturing, we got plenty of infrastructures and have 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 a market share, unless there was a systemic or a sustainable reason in order to add that to the portfolio. Clearly, if we needed to do it through the 525 million, with the 300 million ATM, we'd be in a position to do it if we saw it. So that's how I would describe it, Frederico.

Operator

Your next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery -- Piper Sandler -- Analyst

Thank you. Good afternoon.

Miguel Martin -- Chief Executive Officer

Good afternoon, Michael.

Michael Lavery -- Piper Sandler -- Analyst

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 you 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 you know, 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?

Miguel Martin -- Chief Executive Officer

I would tell you, Michael, we feel confident that we're going to be able to deliver that 60 million to 80 million in straight up in efficiencies. I mean, if you sort of unpack that, we've got the Nordic facility that we talked about in the past. You know, it is now producing EU GMP 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, it means we have redundancies and efficiencies. So I would say, 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 that 18-month period.

And with that, as you know, we don't need to grow our way into EBITDA neutral or have to have see anything happen on the margin. So I'd take it as is. Did that answer your question, Michael?

Operator

Your next question comes from the line of Heather Balsky with Bank of America. Please proceed with your question.

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

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 press release about your cost savings getting you, I guess, moving the 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 negotiation in the U.S.?

Miguel Martin -- Chief Executive Officer

Glen, you want to take that one up?

Glen Ibbott -- Chief Financial Officer

Yep. Thanks, Heather. So listen, yeah, 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 million to $20 million a quarter, and you think of our EBITDA at minus 16 or 17 this quarter. That gets a long way toward your positive cash flow from operations. Working capital, there is a bit of an anomaly this quarter, with the $24 million receivable that we collected just in April.

So let's just say we collected that during the course of March, we would have seen the single-digit investment in 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, will 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 our capex, piece of this.

You know, we talked about how much we've reduced that, I mean as we -- I know you are relatively new to our store but you've done your homework. You know what we were spending on capex a year ago. You know where we're at now, and we think we've got one or two of our projects complete. So even going forward there, we spent 40 million bucks over -- we're on track to spend 40 million bucks this fiscal year.

And I don't see us -- that's the top end for next year of that. So you know, the pieces are in place, and really, what we want to do is execute on these cost reductions in operations and the SG&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 outlined.

And we believe that we've put the pieces in place to get consumers 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 to 18 months on the back of continued rationalization of costs and then picking up additional cash flows as we see growth.

Thanks.

Operator

Your next question comes from the line of Matt McGinley with Needham and Company. Please proceed with your question.

Matt McGinley -- Needham & Company -- Analyst

Thank you. My question is on what changes about the financial performance in the fourth quarter versus the third. Growth in the consumer business seems pretty contingent upon COVID disruptions normalizing, but you'd only have about one and half months 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 fourth quarter.

So should we expect improvements in the fourth quarter? Or should we think of this more as like 2022 before we would expect to see improvements?

Miguel Martin -- Chief Executive Officer

Glen, do you want to take that?

Glen Ibbott -- Chief Financial Officer

Yep.

Miguel Martin -- Chief Executive Officer

No, I guess, here's what I'd say on that. You know, we're -- on the rec 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 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 are other pieces on the cost side. So I'm sorry, I can't give you 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 other pieces there, you know, I think that sort of is what it is. It's hard, you know, when I talk about the provinces making a change of eight 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 put -- sort of leave it there. Glen, anything you want to add to that?

Glen Ibbott -- Chief Financial Officer

No, that's fine. We don't -- we recognize, as you just described, the consumer market there. We're doing what we can but there are things that are kind of dynamic to the market right now. And we've seen, over the last day in our quarter, that the provinces are adjusting on the fly as well.

So we'll focus on the plan we've laid out, which is over the next number of quarters, and continue to just look for improvement each quarter.

Operator

Your next question comes from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.

Tamy Chen -- BMO Capital Markets -- Analyst

Hi, thanks for the question. Miguel, I wanted to ask a bit more on 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 and 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 whitespace. So can you talk a bit about the production consistency? Because I'm also just thinking about your ability right to tackle that whitespace and also the implications on inventory, possible impairment going forward. I know you did the big inventory writedown this quarter, but I really want to understand the level of consistency you can hit in terms of the higher potency and all the thresholds that are required for a premium flower? Thanks.

Miguel Martin -- Chief Executive Officer

Sure. It's a great question, Tamy. So you know, let me go back a little bit. First and foremost, a year ago, the market was one in which you could have sold 16%, 16.5% potency with a low two-level terp, bud quality, moisture, 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 Special, 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 products, maybe 20 potency products, anything above that is really hard to buy-in.

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 will be making it, the flower market and pricing would be great, but it's a hard thing to do. So we have to pivot Sky.

Now, I'll talk to you 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 D.C., and they've been very consistent. And so Tamy, 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, you know, 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 totality of what you're going to get out of Sky.

And to Glen'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 deliver 22, 23 potency products that is enough retail value. And importantly, at a cost structure, that is rightsized for the environment that we're in. So I think, you know, 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, you know, aspects of the redundancy, that's not the only one, but it is one of them.

Operator

Your next question comes from the line of John Zamparo with CIBC. Please proceed with your question.

John Zamparo -- CIBC -- Analyst

Thanks. Good evening. Miguel, I wanted to follow up on a comment you made -- you referenced competitors' SKU and what percent of retail is that. I'm not sure if this is a number you have handy or are 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 a couple of quarters? Thank you.

Miguel Martin -- Chief Executive Officer

So, John, I come from a world of incredible analytics. Our 242,000 stores, I get wholesale -- I mean 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 their 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 the roughly 1,540 or 1,600 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 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. The third would be in-stock conditions, which in Canada will come in two ways. One, 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, you know, that's why those weekly calls matter. And then, nice to have would be the 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. So you know, 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 is 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.

Operator

Your next question comes from the line of John Chu with Desjardins Capital Markets. Please proceed with your question.

John Chu -- Desjardins Capital Markets -- Analyst

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 two 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 the 10th of that Canadian rec market, 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 two markets in general. Thanks.

Miguel Martin -- Chief Executive Officer

Yeah. I mean, John, it's the -- you know, 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 and 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 the U.K., it's a really high bar to get into and there's a deep moat 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, you know, medical typically is the pathway forward on rec, and it is the same regulators, and if you have tremendous efficiencies in manufacturing, packaging, regulatory compliance, legal, all of those things. And so there are 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. 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 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 that have made big bets that stand to gain 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, and it is an important part of the rec story, whether it's today's synergies or tomorrow's new markets.

Glen Ibbott -- Chief Financial Officer

Miguel, I'd like to add just a couple of things --

Miguel Martin -- Chief Executive Officer

Sure.

Glen Ibbott -- Chief Financial Officer

A follow on about the medical thing. Just you're talking about market sizing. So let's -- Canada, I would say, maybe 1% of the Canadian population are medical cannabis consumers. In Germany, it's one-tenth of that.

It's one-tenth of 1% of the German population are currently medical cannabis patients. And so as our leadership in Germany would tell you there's 90% of the patients out there don't realize they're medical patients yet. And so it's our job is to go help them understand the benefits of medical cannabis because -- so you talked about growth opportunity, just simply getting the same sort of penetration we've got in Canada, you know, we have ten-fold opportunity there. But more importantly, and when we focus myopically on revenue, we miss an important point, 60% margins, and I'll just kind of reiterate that, I don't see anybody in our industry delivering 60% margin.

So to me, 60% margin is worth twice the consumer dollars that somebody operating at 20% to 30% in the consumer market. So we shouldn't lose sight of that, you know, it's a massive part of our business. I think the growth opportunities are excellent. I think the ability to support a cash-generating business is excellent.

And for all the reasons that Miguel said, it leads you into future opportunities. So I don't want to sort of leave it as a poor cousin to the rest of the business. It's an incredibly important part of the business. Thanks.

Operator

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.

Miguel Martin -- Chief Executive Officer

Well, on behalf of all of us, we want to say thank you for all of your interest in Aurora. We look forward to delivering this plan. And I hope everyone is safe and well with you and your families. All the best.

Thank you.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Ananth Krishnan -- Vice President, Corporate Development and Investor Relations

Miguel Martin -- Chief Executive Officer

Glen Ibbott -- Chief Financial Officer

Vivien Azer -- Cowen and Company -- Analyst

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Frederico Gomes

Michael Lavery -- Piper Sandler -- Analyst

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Matt McGinley -- Needham & Company -- Analyst

Tamy Chen -- BMO Capital Markets -- Analyst

John Zamparo -- CIBC -- Analyst

John Chu -- Desjardins Capital Markets -- Analyst

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