Third Quarter 2026 Results Conference Call - AURORA CANNABIS INC

Financial Performance:

• Net revenue reached $238 million for Q3 2026, a 2.5% year-over-year (YoY) decline driven by declines in liquor retail ($134.8M) and cannabis operations ($27.0M), partially offset by record revenue in cannabis retail ($85.6M).
• Gross profit declined 9.8% YoY to $57.9 million, with the overall gross margin contracting to 24.3% (down 2 percentage points) due to heavy losses in cannabis operations, despite record margins in both retail segments.
• Reported operating loss was $48.3 million, primarily due to a $52 million non-cash goodwill impairment in cannabis operations; however, adjusted operating income turned positive at $5.2 million, improving by $14.8 million YoY.
• Free cash flow hit a record $20 million, a 19.5% increase YoY, boosted by a $10.6 million one-time benefit from the initial unwinding of the captive insurance arrangement.
• Share repurchases totaled $10 million for the quarter (5.4 million shares at an average price of $1.31 CAD); since Q4 2024, the company has repurchased 34 million shares for $73.5 million, reducing shares outstanding by approximately 8%.

Guidance and Future Outlook:

• Management anticipates a second and final $8 million cash inflow from the captive insurance unwinding in Q4 2026, following the $10.6 million benefit realized in Q3.
• The company expects P&L benefits from cost-reduction initiatives and workforce reductions (30% cut at the Kelowna facility) to begin contributing in Q4 2026.
• Outlook includes a potential Substantial Issuer Bid (SIB) of up to $50 million to accelerate capital returns, subject to regulatory approval.
• Long-term capital allocation priorities remain disciplined, focusing on share repurchases, selective U.S. investments, and maintaining a debt-free balance sheet.
• Management anticipates a path to normalized operations in Ontario following a resolved regulatory matter with the Alcohol and Gaming Commission of Ontario, which may result in the deconsolidation of the franchise.

Business Segments and Product Lines:

• Cannabis Operations: Net revenue fell 27.7% YoY to $27.0 million due to the strategic exit from the unprofitable domestic dried flower category; gross margin was negative 6%. A strategic review is underway to evaluate asset divestitures or restructuring.
• Cannabis Retail: Delivered record quarterly net revenue of $85.6 million (up 0.7% YoY) with a record gross margin of 27.0%, driven by new store openings and product mix efficiencies despite a 3.8% same-store sales decline.
• Liquor Retail: Revenue declined 3.3% to $134.8 million due to soft demand and lower same-store sales (-6%); however, gross margin expanded to a record 27.0% due to pricing and procurement productivity, and private label sales outperformed national brands by 8.5 percentage points.

Market and Competitive Landscape:

• Cannabis retail performance was impacted by market contractions in Alberta and Ontario, though new store openings and value-backed conversions mitigated same-store sales declines.
• In cannabis operations, management notes that high-cost indoor production is not competitive against peer LPs utilizing large-scale hybrid greenhouses (e.g., 5 million sq. ft.), prompting the exit from the domestic flower market.
• The company maintains a dominant position in edibles and beverages within the cannabis portfolio.
• U.S. market strategy focuses on the "Parallel" joint venture (92% indirect equity ownership post-rights offering) and potential consolidation of medical cannabis operations in Florida, Texas, and Massachusetts.

Risks and Challenges:

• Continued underperformance in the cannabis operations segment remains a primary challenge, with negative gross margins and a need for structural restructuring.
• Persistent softness in market demand and declining same-store sales in the liquor retail segment pose near-term revenue headwinds.
• Regulatory risks include the timeline for Ontario franchise normalization and uncertainties regarding U.S. Schedule III cannabis legislation.
• Inventory adjustments associated with the dried flower exit and yield variances negatively impacted current financial results.

Management Commentary and Tone:

• Management expressed cautious confidence, highlighting "disciplined pricing," "cost control," and a "strategic pivot" as drivers for improved adjusted operating income and record free cash flow.
• Tone was proactive and decisive regarding the exit from the dried flower market and the initiation of a strategic review for the underperforming operations segment.
• Executives emphasized a shift toward "higher value products" and leveraging competitive advantages in edibles and beverages while acknowledging the significant work remaining in cannabis operations.
• The tone regarding U.S. expansion was optimistic, viewing the increased stake in Parallel and the new Florida facility as transformational milestones.

Analyst Questions and Answers:

• EUGMP Certification: Management confirmed the facility passed the audit and expects certification imminently; the value lies in eliminating processor fees ($0.20-$0.45/gram) and enabling better yields through facility upgrades (modern lights/HVAC).
• Dried Flower Exit Rationale: Management explained the exit is due to the high cost of indoor production relative to the domestic market price point; the company lacks the large-scale greenhouse infrastructure of competitors and will focus on distribution and profitable license relationships.
• Strategic Review of Operations: When asked about core competencies for winning in operations, management cited the need to improve commercial execution, distribution, and operational efficiency (labor, planning) while considering all options including divestitures.
• U.S. Capital Allocation: Confirmed the ability to deploy capital into the U.S. via the Sunstream joint venture; the next step is reconciling exposures and working with regulators/exchanges to consolidate the medical cannabis business.

Other Key Points:

• S&DL completed the Parallels restructuring, increasing indirect equity ownership from 67% to 92%.
• A potential deal structure for Ontario involves $30 million in third-party secured financing to repay debt, with proceeds remaining restricted as collateral, potentially transitioning the site to an administrative services-only model.
• If the Ontario franchise is deconsolidated, it would reduce reported net revenue by approximately $105 million but only reduce operating income by approximately $2 million.
• The company holds a debt-free balance sheet, providing flexibility for capital deployment and share repurchases.