Q2 2021 Aurora Cannabis Inc Earnings Call

[music].

Greetings and welcome to the Aurora cannabis second quarter of 'twenty 'twenty. One results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.

Non keypad as a reminder of this conference is being recorded I would now like to turn the conference over to your host and add the Christian Vice President corporate development in Investor Relations.

Thanks, Maria and good afternoon, everyone and thank you for joining us in the Aurora cannabis second quarter of fiscal 2021 conference call for the three months ended December 31 2020.

This call is being recorded today Thursday February 11, 2021 with me, our Aurora CEO Miguel Martin and CFO Glenn.

After the close of market today Aurora issued a news release announcing our financial results for the fiscal second quarter. This news release in the accompanying financial statements in management discussion and analysis are available on our web site or on our SEDAR and Edgar profiles.

As a reminder, that certain matters discussed in today's conference call or answers that maybe given to questions asked could constitute forward looking statements that are subject to the risks and uncertainties relating to Aurora mutual future financial or business performance actual results could differ materially from those anticipated in these forward looking statements.

The risk factors that may affect the results are detailed in the Aurora annual information form in other periodic filings in registration statements. These documents may be accessed via the SEDAR and Edgar database basis.

Since we are conducting today's call from our respective remote locations. There may be brief delays cross talk or other minor technical issues. During the call. We thank you in advance for your patients in understand.

Following the prepared remarks by Magellan, Glenn we will conduct the question and answer session to ensure we get as many questions as possible, we ask the analysts to limit themselves to one question.

With that I'd like to turn the call over to Miguel. Please go ahead Miguel.

Thank you in the air and good afternoon, let me begin with some high level comments about the quarter I will then turn the call over to Glenn for his financial review after which I'll come back to discuss our progress to date in why we believe we're very well positioned to take advantage of the massive global cannabis opportunity ahead of us in short we're in excellent second quarter.

And we're pleased to be tracking to the strategic plan laid out in September when I became CEO. We are now executing a proven regulated CPG strategy that I know very well one that we're confident will give us maximum flexibility to drive growth cash flow in shareholder value in the coming quarters.

Our fiscal second quarter represents the pivot for Aurora from a full year of tough, but shareholder friendly decisions that will ultimately lay the foundation for the future. We essentially reorganized the business reset strategy in mobilized our entire team where they are now organized behind our strategic plan. We're squarely on offense early progress is already reflected in our.

The financial statements and market share data, but beyond the financial statements. We've made significant strides pursuing margin accretive initiatives rest assured that in the coming quarters Aurora is in terms of continuing this trend.

As you know our core business has four parts.

The first high margin Canadian medical we are a number of one by revenue second International Medical where we continue to see strong growth. In fact, we just recently announced the strategic relationship that should accelerate the business three or U S. CBD business really the which is the number one Nielsen rang CBD brand in continues to be of platform provides us with.

Significant optionality in the us in for our Canadian Rec business, where we've seen the market. We are positively to both of our generation one N. Gen two products and our ability to enhance quality across both efforts.

We're pleased that for the second quarter of our total cannabis net revenue excluding provisions was $70 3 million in increase of 11% versus the year ago period.

Adjusted gross margin was impacted slightly but relatively steady in the low forties. It's important to note the margins would've been 52% had we not applied the full fixed costs of the Aurora Sky facility. During a time when we significantly reduced production and initiated targeted product returns in order to open the channel the higher velocity products.

Fortunately this was mostly offset by steady margins in our medical markets in Canada, Europe and U S. CBD.

Combining the margin in these businesses are generally 60 per cent of higher on a run rate basis. That's the.

G&A was $42 three meal in million, excluding a onetime charge associated with our strategic plan. This represents a dramatic decrease of 55% from last year's second quarter.

Finally, as it relates to Q2, we materially improved our year over year of adjusted EBITDA loss was the $58 million swing in the $12 1 million or excluding restructuring in revenue provisions in.

The other big positive for the quarter was the improvement in our cashews by more than 74% versus Q2 2020 in our cash in hand on hand as of yesterday was $565 million the reduced cash burn plus a newfound balance sheet strength and flexibility allows us to act quickly should the opportunity to grow and take market share of rises.

So the bottom line is we feel great about the quarter in our strategic progress we're building momentum as we execute our plan and we firmly believe we are of the team the tools in the strategy in place to take advantage of the dynamic and exciting market.

Now I'll turn it over to go out in the walk through the financial details.

Thanks, Neil and good afternoon, everyone.

Please note that the figures I'll be going over today are all in Canadian dollars and can be found in the press release, we issued the stock in.

I would also note that the comparative period for analysis today in Q2 2020, we believe the best represent the measure of the company's transformation in improved performance from appropriate I'm also not in the sequential period comparisons.

Our second quarter fiscal 2021, the three month period ended December 31st 2020.

We saw a strong performance in our medical business, especially international sale and we.

To transform our consumer business with the shift of higher quality higher margin products.

<unk> made the decision to significantly reduce production volumes to align the demand we expect our sales to production ratio in Q3 to be in the 90% range and we initiated targeted product returns in order to open the provincial sales channels to premium product.

These actions impacted reported revenues in gross margins for Q2, but they provide a sturdy foundation to support higher margins in accelerating cash flow in the coming quarters.

In Q2 2021, our net revenue all of it from cannabis businesses with $73 million, excluding product return provisions of $2 $7 million per <unk>.

In tumor cannabis business delivered $31 $1 million in net revenue prior to these return provisions in our medical cannabis segment continued to accelerate generating $39 million in sales.

Adjusted gross margin before fair value adjustments on cannabis net revenue remained strong at 42%.

Moving to 48% in the comparative quarter, excluding the $2 $7 million of the product return provisions.

The overall Q2, adjusted gross margins 300 basis points lower than the prior period.

Importantly, I should point out that our decision to reduce production of sky per lineup with demand and to reposition it to produce our premium flower brands did impact gross margins in Q2 of Underutilization of capacity, resulting in close to an 8% reduction in overall gross margins. Some of this is expected to be.

First in the future as we have a full quarter of reduce costs in sky.

Now I'll provide some additional insights into reported revenue of margins.

Firstly, let's not lose sight of the importance of our medical business here in Canada in internationally.

The medical revenue was up 42, 3% year over year in 16, 4% sequentially.

This was primarily due to the strong performance in the international medical business, which was up 562% year over year in 84% sequentially, but only with revenue growth significant in this segment also carries our highest margins. The growth was driven in part of continued progress in Europe, which is now five times in size, but it was a year.

Oh in up 36% sequentially, but this quarter also saw per shipment of medical cannabis to Canada holdings in Israel.

It's also important to note that we continue to have in ongoing advantage in the Canadian medical market share in this is underscored by five 5% increase in revenue year over year.

In our medical segment adjusted gross margins were 56%.

Relatively consistent comparative quarters. However, Q2 margins were impacted by the capacity Underutilization in Scott as production was smartly scaled back in.

In our overall medical gross margins would've been 66% of full capacity.

I'd like to draw your attention to the fact that we've been selling in Canadian and European medical market for over four years.

<unk> seen a little to no price compression.

With revenues currently at $39 million in growing in 60% plus gross margins, it's clear that our medical business is a key differentiator for Aurora and should be in important driver of the future cash flow.

Looking now at our consumer business Aurora in Q2 revenue was $31 1 million down 7% from Q2 2020, not conclude the return provisions however, with with provisions included in our reported revenue was up 24, 7% over the comparative period.

We are very pleased that of consumer derivatives net revenue of 11 $5 million, an increase of 18, 4% sequentially.

This was driven by our focus on higher margin products, such as weight edibles and concentrates.

Our consumer average selling price rose, 6% in the quarter due to increase in derivative sales and the continuing shift in flower in mixed towards the premium brands.

Consumer margins were 27% compared to 38% in the prior quarter. In this is because of the underutilized overhead costs of sky in the increase in product return provisions.

Adjusting for just the return provisions consumer gross margin would have been 34, 2%.

Also related to our production in demand alignment, we halted construction of our facility in Alberta.

Route forward for this facility is not yet clear during the quarter, we recorded a noncash impairment of approximately $228 million for the shutdown.

Now to SG&A, which includes R&D.

We are pleased with of $42 million run rate in Q2. This excludes approximately $2 million of termination costs related to our business transformation, so stepping back a bit.

We've engineered significant change year over year in Thats highlighted by this past quarter, the SG&A coming in at 63% of sales versus the 143% of sales in the prior year comparative.

We continue to believe this level of SG&A spend is quite sustainable and capable of supporting a much higher revenue line.

So pulling all of this together we generated an adjusted EBITDA loss in Q2 2021 of $12 $1 million in that's excluding royalty provisions in restructuring costs.

The dramatic improvement from the $69 $9 million adjusted EBITDA loss in the prior year comparative.

A further $7 million in Q2, the cost of sales that was related to facility in production rationalization I'm pleased to see that our run rate EBITDA continues to improve.

Now a few important points regarding our balance sheet cash flows in the cash position.

Inventory in biological assets increased $16 million from the previous quarter and not the significant improvement as we made progress rationalizing production levels to the current demand.

With in agricultural product alignment does take time, but our December decision to adjust cash production was in incredibly important step towards our goal of shifting to a more variable in agile model.

Another area of dramatic improvement in this past quarter as cash in our use of cash.

We used $26 million of cash to fund operations, excluding working capital investments is to further $2 $1 million from contracting of employee termination costs.

Both are down materially from the prior quarter in cash used in operations was down over 75% from the prior year.

We also paid a net $8 $8 million per capital expenditures in Q2 down from $15 million in the prior quarter and down from $128 million in the prior year comparative.

The continuing to expect cash used for capex to be below $40 million for this fiscal year.

Increased net working capital used $34 million in the quarter.

This was mainly due to shifts in the levels of accounts receivable in accounts payable, which we expect to settle out over time.

Critically the net change in inventory in biological assets used $10 million in cash during the quarter a marked improvement from the $25 $1 million in Q1, the demonstrating our progress of the more closely aligning production levels of demand.

Finally as of today.

Our strong cash position in $565 million in the bank in about $97 million of outstanding term debt is not due until the end of calendar 2022.

We also expect to receive some additional non dilutive cash inflows from previously announced facility sales and Covid related government grants over the next several months.

So what I think people really need takeaway from our Q2 results were the following.

We continued to deliver excellent results in our high margin medical business, both in Canada in international.

We're seeing of positively changing product mix in our consumer business and have taken important steps in rationalizing in repositioning production.

G&A as well control.

And cash flow items continue to improve the supported by a strong balance sheet.

I'm very pleased with our recent performance in I'm quite satisfied that we have the company well positioned today and non affirm financial trajectory.

I'd now like to put in the call back over to Miguel.

Thank you Glenn as you know calendar 2020 was a difficult year, we made some tough decisions in faced several challenges not the least of which was right sizing our cost structure strengthening our balance sheet in dealing with the pandemic yet by the fall we formulated the introduced the new strategy, because I know I speak for our entire team when I say we're through.

The back on offense.

<unk> profitable growth opportunities in creating economic model the strikes the balance between where the industry is today and where it's going.

The goal of the plan of simple drive revenue for most of the premium products over more variable production costs and significantly lower fixed cost the upshot will be higher margins stronger cash flow in long term shareholder returns in having our financial house in order of in my opinion will attract new business and lead the untold the opportunity before.

If we go to questions, let me take a deeper dive into our businesses and subsequent strategy, starting with medical our domestic and international medical businesses delivered a 42% revenue increase over the last year's second quarter and generates consistently high margins in the 60% range as I've mentioned, we are the number one medical cannabis company in Canada.

The revenue today, Yeah, we still have lots of opportunity to grow in the years to come.

Just one of the many initiatives we have is moving our patient intake in experience online, where we can now offer substantially more choices to our patients in veterans.

Overtime in the medical channel May see some migration of the consumer channel, but we see pockets of demand in the Canadian medical landscape the represent meaningful growth opportunities for Aurora.

<unk> is uniquely positioned with the infrastructure regulatory experience in compliant systems in place to continue to lead in take share in the medical market. These investments represent a significant barrier to entry in key patient groups represent a very sticky patient group for our products.

These attributes of our medical business support our expectation that the Canadian medical channel can continue to generate 60% gross margins for the foreseeable future.

Our international Medical segment has been a consistent performer and reported in the 84% revenue increase quarter over quarter. We are already one of the leading providers of flower in Germany, and we continue to see opportunities in the oil market in November we entered into the strategic supplier agreement with can check in Israel, providing us with the great opportunity to expand our medical cannabis.

<unk> and industry, leading science in early January Aurora in our partner at the farm. We're successfully awarded three of nine lots, which included all available flower lives to the French Medical Canada Standard program Aurora is one of the largest global footprint generating revenue in 13 countries today.

We're excited about these opportunities and the global momentum they represent from medical cannabis regimes.

Additionally, in January we announced the long term strategic agreement with Med relief, Australia. The exclusive distribute the Aurora can embed in med relief in the brands in that country.

The relief is an asset light sustainable growth platform in Australia, the help physicians pharmacists and patients access to high quality range of Aurora cannabis medicines.

We're also seeing other countries began to approach of medical cannabis more favorably in compassionately and we expect our experience in Germany, Israel in Australia, the position has to be of frontline or new markets that won't be by accident. However, they will result in the Aurora is commitment of science compliance testing EU GMP compliant cultivation.

In our ability to operate in a highly regulated framework. This is unique to Aurora and provides us from transferable knowledge as we enter new medical markets globally.

Now, let's turn to our U S. CBD segment, which has been receiving a lot of attention you of the Democratic control of the presidency in the U S as well as both houses of Congress or.

Of our Nielsen's top rankings of CBD brand in Romeva remains in enviable strategic platform and we're excited to be announcing a new brand extension called <unk> seven and athletic focused CBD brand in the coming weeks, we'll leave it provides us with the critical distribution regulatory experience and the relationships in the key high growth U S markets.

Really the focus of some brick and mortar stores in as the primary CBD supplier for some of the largest retailers and wholesalers nationally in our products are in over 23000 stores.

Given that the variable cost model, where we have it doesn't require any capex, but as I said, it's a foothold in the largest cannabinoid market in the world, which bodes well for our growth global positioning we will continue to leverage our science and innovation in it wouldn't surprise me if the non THC parts of our portfolio are as big as the THC parts of our portfolio.

With positive FDA action in the U S.

Stepping back and specifically in the U S P&C market I would say the following the.

The U S is clearly one of the largest markets today with legislative reform that would allow companies like Aurora the operate P&C businesses in the U S. I would expect it could be much bigger.

We firmly believe that as a company with deep roots in science and experience in operating on their federally legal legal frameworks Aurora will have an opportunity to participate in that market in the meaningful way.

I will not commit to how we will gain exposure of the current U S. THC market, but I can say, we won't simply wait for comprehensive legislation in though we are assessing ways to legally advantage of our shareholders. Today. In addition to win comprehensive legislation is in place one thing I am confident in is that the competitive landscape in the U S will look very different in <unk>.

Scheduled and we believe social justice and economic reforms ultimately drive it for clarity whatever we do in the U S whether that be in THC or of non P&C businesses. It will be carefully and thoughtfully done and make strategic sense for our shareholders.

Moving to the Canadian consumer market, we see it as having significant white space given the market, which is currently seeing of rollout of new stores. Currently there are 1550 stores across Canada, we believe the store count to more than double in the near future.

And in average capitalize on this opportunity in just last month, we entered into a strategic agreement with great North distributors, Canada first and largest national sales broker the legalized adult use cannabis.

We are now the exclusive representative for our Canadian cannabis retail brands, great North reaches across every province in Canada, including established relationships with provincially owned and operated retailers and private retailers in Canada cannabis industry.

Beyond this agreement our strategic plan includes first focus in driving sales of premium brands in flour, particularly with our high quality high premium brands, such as Wetzler San RAF in Aurora Secondly.

Secondly win share in key margin accretive growth formats vapor pre rolls edibles and concentrates.

Third as we mentioned we have already taken meaningful steps to align our production and manufacturing costs away from fixed to variable, let's touch upon each of these topics individually.

Core in premium categories of more important for Aurora long term, even as we appreciate the importance of having a brand in the value segment.

This is because of the consumer is dynamic trying different brands and in doing so shifting market share.

We therefore have a great opening of the market premium brands rebates pre rolls in premium flower offerings across multiple price tiers.

This will attract premium consumers in over time build loyalty based on the quality of the product in the experience of provides as seen in many states in the U S. There of vibrant premium offerings in all key categories, succeeding with consumers.

To that point across every CPG category, there's always the consumer segment that will pay a premium price for premium products. We are blessed with a few of the best brands in best brands in the cannabis industry Aurora San RAF in Whistler.

We are building ecosystems around each of them in various formats, the foster greater visibility and provide greater choices to the consumers when they could work up the value chain.

Moving this goal will require alignment with production focusing our resources on growing high potency high chirping premium cultivars. So in a consistent basis and reaching consumers who are willing to pay a premium for our premium products. We are well in a way to build in those key pieces of infrastructure.

Recall that we generate significantly more gross profit dollars in our premium Aurora St wrapped in Western flower program than we do on the all the special in the difference between gross margin contribution per Gram can be four of five times or greater therefore, we don't need to be to cultivate in the low potency flower for daily special as the <unk>.

First mover in these decisions were better off sourcing that product in the wholesale market more efficiently.

Of course premium segments, but it's also be supportive of classic CPG sales marketing trade marketing and consumer engagement methodologies to build awareness foster affinity in generate outsized returns and we'll then vapes in pre rolls. There was also a lot of opportunity to bring classic CPG elements in packaging in alignment with traditional flowers.

Does not lend itself to <unk>.

We've already experienced the significant improvement in the vape category as the most prominent proof point in the renovation strategy much like free roles concentrates and edibles, specifically, we've seen in our market share in vape Gulf from basically zero in September two of approximately 8% of the Ocs recently, which is great news. We have also launched the new product that really in.

Cited about R. O G <unk> concentrate in the market reaction has been extremely strong and we would expect to start seeing similar gains in the other margin accretive categories as other new products rollout. So I'm very pleased with our top line strategy in as I highlighted we're making progress on costs.

To give you a bit more detail of the tailwind in the fiscal 2020.

We announced the closure of four cultivation facilities across our network and I can confirm that several of those facilities in now shuttered.

Most recently, we have terminated construction at Aurora Sun facility and successfully reduced capacity utilization by 75% at our Aurora Sky facility. This will allow us to focus on premium quality flower outfits facility, we're already seeing data that of higher value higher margin derivative products is a winning strategy.

So in closing I think the main takeaway today is in Aurora has never been better positioned strategically operationally and financially we have over $565 million in cash available. The number one medical business in Canada in industry, leading gross margins in our medical cannabis segment in some of the strongest brands in the cannabis industry.

And I say that at a time when the cannabis industry is presenting us with the generational opportunity we intend on seizing the moment and I look forward to keeping you all updated in the coming quarters I'll now turn it over the operator for questions operator.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question. Kim you May Press Star two if you would like to remove your question from the queue each.

Each analysts will be allowed the opportunity for one question you may re enter the queue by pressing star one for participants using speaker equipment in may be necessary. The pickup your handset before pressing the star keys, one moment, please while we poll for questions.

Yeah.

Our first question is from Vivien <unk> with Cowen. Please proceed with your question.

Hi, good evening.

My question is on your net.

By segment.

As you kind of think about the business over a call in the next 12 or 18 months clearly you're very satisfied with what the medical cannabis.

In considering the substantially higher margin.

And then you're getting on that do you guys have any internal targets you can share in terms of the revenue mix.

Hope to see you kind of by the end of fiscal 'twenty two for instance.

Yes, Thank you David.

Get the the exact specifics of its a little bit dynamic. Let me tell you you know sort of how I look at mix. In this is kind of sound very familiar to you.

The first and foremost when we think about premium the discount Max disc out to me is the.

Something you have the deal with but you really want to look at price gaps in the interplay between the two I'd like to see on.

In the perfect World from a revenue standpoint about a 70 30 mix.

The discount now some aspects as you mentioned of those Gen. Two products may carry of discount moniker such as daily special, but clearly of vapor product the concentrate product of pre roll product carries a higher margin. So I guess the way I would sort of cut that up would be the true 70, 30 premiums of discount or <unk>.

70 to 30 of those Gen two products plus of premium flower product.

The discounted price I do think youre going to see of leveling out of the discount in flower business in Canada, clearly the inventories will continue to be right size in there clearly is the pathway forward. We're also seeing from the provinces as they're starting to go through SKU rationalization and a focus on profitability per SKU on the there'll be greater interest from.

Them as well as the retailers aren't having a more premium focused in a more accretive sort of margin approach as it pertains. The gen two versus just low cost flower.

Yeah.

Operator.

Our next question is with the Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you good evening.

Just would love to get a little more thoughts on the U S. You've touched on it some of you.

Made it clear that you've got in interest in maybe making the move ahead of us.

Significant reform.

Maybe what would it take for free.

What what's the sufficient catalyst for that.

<unk> is something sort of like canopies acreage deal what you have in mind or is there another pathway on your radar.

Absolutely. It is of Great question, I mean, Michael obviously, we're staying very close to the shifting of legislation in policy landscape, that's taking place in the U S.

I think to sort of reframe the question in bed in and I'll talk about the triggers I think it's important to understand what type of company. We think it's going to be successful in the U S. We continue to believe that the company like Aurora or of companies like us that of a history of operating in a compliant highly regulated federal environment, like Canada, or Germany will be.

Advantaged.

In the federal U S construct I clearly believe the FDA is going to play a role in cannabis in other federal agencies will play a role in Canada. The U S and so those companies that have operated in that successfully whether that's manufacturing GMP ISO labeling sales in marketing practices.

Well I'll have you know of significant legs up there that's not in say the msos don't have their own advantages by Canadian Lps that are science based in compliance based in that experience.

We will benefit I think of little bit shortsighted to say that those companies that are in a successful around the world wouldn't also be successful in.

In the U S now in terms of catalyst.

The course of the legislation is promising we've heard comments, obviously from Senator Schumer and others. We're seeing iterations of what is the safe banking act or more of state Jack I think first and foremost of version of the the.

The safe banking act that would allow a.

A bit more clarity around financials, I think has to make sense Interstate commerce clearly I think it was the benefit is of interest in many key parties, including ourselves in I think you're going to see something on that and then from that of what type of investment makes sense I think it's hard to say, but what I can say as you know we put the cash on the back.

<unk> to be opportunistic in I think there's a lot of different ways that a company like Aurora can monetize its experience in genetics. It's IP, it's brands in whether that's through M&A or whether that's through partnership we'd have to see.

But clearly there's going to be a significant advantage that companies like Aurora will have at the time in which the U S.

Legalize cannabis in I think we're excited about that and we will take advantage of the one of the times right.

Our next question is from Pablo.

Of your neck with Cantor Fitzgerald. Please proceed with your question.

Look I mean, just a question for Glen obviously this quarter. The medical was 75% gross profit. So in terms of domestic medical business. The market. The market is not growing so it's broadly when I get more competitive youre, saying youre, maintaining your gross margins there but talk about.

The stickiness in that business, because yes, you heard of the leader, but other calls of base. It also talking about gaining share of the medical which is really attractive given the margins in Glen. The second question related to that you doubled your exports of 6 million to 12 million is that a new number in sustainable do you stay there or what are their someone obviously this quarter. Thank you.

Thanks, Pavel great questions.

What we're seeing in Canada in medical has continued.

The strength in actually.

Growth in the order people, but the net.

Alright.

Moving.

Okay, and what we're seeing in growth in Canada in as I mentioned year over year, we've seen that growth.

With a renewed focus on that segment instead of actually put new leadership in there in working very very hard on making the patient experience is.

And in easiest possible thing you can think Amazon just make this a beautiful experience in.

In our focus on our high value of patient, so I actually see tremendous opportunity in our poplar in and we're not signing up to the to the presumption of ASUR.

The market just to be milk.

The it through to the end so don't we expect growth out of that and we certainly have some internal targets.

Yeah.

The part of that plan over the next couple of years internationally, Yes, we benefited this quarter from the sale into Israel that was about a little over $3 million, we had significant growth across the rest of the country there'll be settlement in Germany itself was up 21% quarter over quarter the.

Poland U K the number number of countries in Europe.

Are showing good strong growth in so that might kind of little counter to what you're hearing from others, but even in the face of Covid headwinds.

Our international medical business continues to accelerate in that.

In growing quarter over quarter, non we're adding new countries. So the.

Israel supply agreement may be a little bit lumpy.

The quarter over quarter, but just modeling it in long term is gonna be in important market for us.

Thank you.

[noise].

Our next question is with David Quebec Cow eight with the ATB capital markets. Please proceed with your question.

Hi, good evening, congrats on the quarter of.

I wanted to take this pretty high level here Mcgill.

With the recent acquisition of GW Pharmaceuticals in other company that I cover.

I'm wondering what you think the ramifications are for the industry as a whole, but also of Aurora, specifically just given.

Your your strong base within the deep science in plant genetics.

David Thanks for the Great question I think it is validation if you look at what they paid for it if you look at what they were getting in if you look at how they plugged into it.

Clearly the economics of the strong scientific base genetics IP biosynthesis all of the things that you talk about a lot.

Was recognized as the significant value in that situation. So I think it is validation of one of the most important aspects of the U S is gonna be how genetics in IP in that type of.

Those type of assets work in the U S is obviously litigation right now against GW that I think what we like to set the stage for where that sets, but theres no reason to believe that this category of won't operate.

Some of the other categories in there will be companies like them on the phone. So there will be a pharma in approach to cannabinoids in it it's a deep bench of opportunities. There. So I thought it was very bullish sort.

Of representation of the value that we have there clearly you know experience in.

In compliance in science will win the day.

In the U S. We've seen that in Germany, we see that in plants with the recent tenders you see it in these other markets in clearly the same companies appear to be winning time. After time after time in the Aurora is one of them and so that's one of the reasons why we're really bullish on the category, particularly as it pertains to the U S. Because we have that experience, but you're right the science piece outside.

Of the brands in the rack in the consumer action.

Really in until part of the story and I think of really exciting piece of it.

Our next question is with Andrew Carter from Stifel. Please proceed with your question.

Okay.

Andrew.

Andrew couldn't area.

I apologize can you hear me now.

We can go ahead.

Absolutely sorry about that I wanted to ask the ethane I wanted to ask about the kind of the what's your expectations are from the consumer business, because we had the COVID-19 lockdowns in in place right now I assume that's hitting the shipments for the provinces, obviously, a seasonally low quarter should that be flat of you've taken obviously a lot of gas in kind of stopped giving us kind of thinking of how the.

Canadian kind of consumer business is trending next quarter.

You got it.

It's in it's a bit of a convoluted answer so if you think about.

What's happening in Canada right now there is a couple of things to make it difficult to sort of predict exactly whats happening first and foremost you mentioned COVID-19, that's having an impact, particularly in Ontario in.

In the ability of the stores to be opened in consumers to access their products Secondly, youre.

Youre, having the provinces in the very sort of aggressive way start to bring in you know things like SKU rationalization in a variety of other aspects to it third is you know there are a lot of sort of Lps that are sitting out of low cost flower. So I think that's a long winded way to say you know we're going to be in this environment.

<unk> I think in for a bit longer until you know we see COVID-19 in the stores open up I don't think youre going to see back of that normal growth, but I do expect we'll get back the last quarter's growth.

And we're optimistic about that right now there's roughly 1400 50 of 1400 70 stores.

I think every expectation that's going to double in the next six months in there's a lot of incentive for at the double we also continue to see volume move from the illicit market are the legacy markit into you.

You know this type of market and so I think it's hard to predict Andrew but I think the.

This disruption that you're seeing right now probably.

It gets you to the <unk>.

No no in beginning of the summer and then I think things will take off pretty aggressively.

On the flip side of that is we haven't really seen in impact in the medical business, which is obviously really strong for us and so I think for those that participate in the medical business Youre not going to see the same type of disruption, which benefits folks like Aurora.

Our next question is with the John <unk> with CIBC. Please proceed with your question.

Thanks, Good evening I wanted to follow up on the earlier question on the international medical business over the next couple of years.

Presuming no legalization of any major countries do you think the primary driver of this growth is going to be.

Taking share or just the addressable market growth in and then secondly are the arrangements similar to Kansas Act that Youre working on right now that we could potentially see over the coming quarters.

Yeah, John Thank you.

I think if you think about international sales, we see growth opportunities even in existing markets and then as the you know of.

Of the products become more accustomed to the patients of the systems become more developed the economics become more developed I think youre going to see of growth.

Like you've seen in medical markets in the U S. In so we're very bullish on existing markets.

What you'll also see in some of these markets is the movement, obviously from medical the rack in that's a potential in in Israel I think.

Israel is early days, but very exciting in terms of what we're seeing there with <unk>.

We mentioned in the written remarks of the prepared remarks about getting three of the nine tenders in France between what's happening in France in the U K those are really significant markets in there. There's an evolution. There. So we have no reason to believe the international can't continue to grow.

And while we'll always be looking to take market share from our competitors one of the things we do see in those international markets. As you know, there's a pretty high barrier to entry. It's expensive requires a certain skill set requires a significant amount of experience requires in new GMP manufacturing in many cases, which is why we're so thrilled.

About our facility in the Netherlands that we describe as the Nordic.

And so.

I'm very optimistic and bullish on the international markets, whether we got a massive movement in terms of countries opening up or not.

Yeah.

Okay.

Our next question is the Tami Chen with BMO capital markets. Please proceed with your question.

Hi, Thanks for the question I was wondering if you're able to help us understand or possibly even quantify of your consumer revenue mix. This quarter. How much was in that daily special category in how much was the Aurora San RAF Whistler and then.

On the gross margin Glen I apologize I may have missed this but I just wanted to better understand when you talk about the under utilization or the.

Less absorption of fixed costs as we think two of the fiscal Q3 quarter of I apologize if I missed this I mean do you expect that that headwind is largely because of the.

Full quarter impact in if you could just kind of clarify again, what you meant by that the headwind might reverse course. Thank you.

So let me start with the gross margin came in in.

You go from kind of chime in on daily special where he's expecting that to go.

What does the referring to with Sky as we actually took the costs out right at the end of the quarter. In you saw that we announced publicly in mid December the reduction in head count in some of the costs that are very very with production levels. So we didn't actually get much of the cost reduction in the quarter. Although we took production down but we will see in Q3.

The use of those costs will be gone for the full quarter. So we expect the per on a per unit basis.

To recover a little bit in terms of our efficiency, they're not wholly there is some fixed cost some of them are operating in the 25% capacity, obviously those fixed costs make each in a per unit measure in a little bit more extensive.

We should see improvement in Q3.

I have to tell you Tammy Mike when we think about margins and EBITDA in in just the business. So we're really taking purposeful in long term decisions to create value from a little.

It is not sort of cost about what this will look like in Q3, but over time, we know it's the right thing because of our.

The big part of what we're doing in Sky, Yes, aligning our production with our demand.

Almost as importantly is repositioning starting to be able to produce our premium products. In you can think of the difference in the economics.

I think I alluded to in my son in products from.

Non of facility that generated three four or more times the gross profit dollars. So.

That's the big part of it so we expect margins to improve through two things.

In a quarter of the Costa recovery, but more importantly, shifting to a higher average selling price coming out of the facility.

Your thoughts on daily special.

I wanted to yeah, I mean, the only special out of high watermark in 13 14 share back in March in April It really had that sort of price point to itself in and now it's roughly half of that we've made significant changes in daily special that's not to say we are focused on discount, but as I mentioned in a pretty significant changes.

The potency in turf levels of that product.

I think we'll have to see where that falls in much more interested in in San RAF in to be honest Aurora in wetzler. It's early days on that turnaround plan, it's got really sort of three parts to it the first will be the higher quality product we've seen it in already getting through of Quebec, which has lower days on hand in some of the other provinces in women.

Pleased with that we will start to see it in the other quarters, you'll you'll pick up on it in in high fire in headset data in body of data that I know you look at and then stop.

To see some further work on Aurora and Whistler, So hard to say, what asking of land not knowing the competitive day, but as I mentioned earlier with the vans comment in a long term, we'd like to see 70% of our revenue come from premium products in the Gen. Two in 30%.

From the discount area of particularly low cost flower so like in.

I think the best answer came in I can tell you is our.

The first launch with the vapor product we were pleased with that the.

The next was concentrated in it takes a little bit longer on the flower.

This quarter in the next quarter I think you'll start to see that at all be able to give you a better answer in terms of mix in blend.

Our next question is with Max Bottomley with.

Canaccord Genuity. Please proceed with your question.

Thank you good evening, everyone just wanted to dig a little deeper on the adult use penetration here when we look at maybe consumer mind share took.

Took a step back here in in sequential declines in your in in the consumer side, but can you give any color as to how you think your sales to end users out of the dispensaries, because I think the inventory balances in the lower day.

The days of sales on in here.

All of the players across the board here in Canada. So just any color on how you think your branded products are actually selling in the dispensaries, particularly relative to last quarter and then lastly, any commentary on your adjusted EBITDA for next quarter. I know you said last earning season that potentially you'd get close to breakeven this quarter. So is that possible.

If we look the fiscal Q3, thank you.

Got it so on the adjusted EBITDA.

Part of the the change in the financing allowed us to not have to hard wire EBITDA targets by quarter I understand people are interested in it.

But there are things that you want to be able to do the actually run your business. As an example, the significant investment we made to put of higher quality product and of the system take back lower quality product accelerated through the provinces has an impact EBITDA.

If we were just singularly focused on that we wouldn't do it which is not the right thing for the business noise of the right thing for the consumer so what I can say IMAX, it's our intent to make progress we've done that here pretty significantly and we intend to keep doing that it is my stated goal.

The run of profitable business, but I, I think hard wiring or giving guidance to a particular date when you of a category that this dynamic of moving as quickly I think you do yourself of the service in terms of takeaway day, there were a bit.

We get some from some of the key accounts that we in our partner where the tumor of high titer of matter or other know the or others in what I would say is what you would expect the newer higher quality higher potency product, we see that much better take rates.

I mentioned in the 8% quick move that we saw in our vapor launch concentrates are doing really well I think it's a bit early days on some other sides of the flower of what I will tell you, though is you're right. There definitely is the impact across all of LP is what's happening it's not just COVID-19, though it's also I think the evolution of how the provinces are.

Handling days on hand, how they're handling SKU rationalization of how they're handling the cadence of new products is definitely a change in I think as they adjust to it and I give them a lot of respect for how they're going about it is.

The rest of us trying to navigate that as well it will be a bit bumpy, but in the long run I think it's the right thing for the category, particularly as you're adding so many stores. So I think we're in a bit of of weird time here there are impacts across the system as we get out in the other side of the Covid in the more stores open in the data gets better which is something we're really pleased with the data in.

It's getting better.

Syndicated data.

I'll begin to be able to give you a much better answer in terms of retail takeaway in some of your other core metrics that you used to hearing from.

Our next question is with Matt Mcginley from Needham. Please proceed with your question.

Thank you.

Do you expect to see continued improvement in the rate of free cash flow burn, but the the topline in PRASM doesn't look like it will be strong enough to revert the cash flow back to a positive state without.

The substantially larger inflection in revenue of our cross structure. So the question is like how much offense can you play with strategic M&A, if you're still burning cash in such a high rate and unless the M&A is cash generative, which.

It's all of them is do you feel the.

The visibility into improved the operating fundamentals of there where you could do that without putting the company at risk.

Listen we continue to expect in make progress on in I think you know, we're getting close to a point where things look a lot of different than they have historically, if you look at our what we need to be able to execute our plan, we don't need cash to do it.

<unk> significant.

We needed to make was the finishing of the Netherlands facility to be E. G. M P.

And we do expect the rack business to turn around the other three parts of our business are doing really well. So we're comfortable with it in terms of being able to make in play I don't think it's out of the woods that there would be something that.

They would have upside to it that would allow us to you know.

The more obvious but.

We're not concerned about it we've had the best cash position. We've ever had this is the best state the balance sheets been in in for a long period of time, and we're going to continue to find efficiencies in and work our way forward. So.

I'm not concerned at all of that we have what we need to execute our plan in I'm not concerned that we don't have what we need in order to make a move of if we needed to.

Our next question is with Vivien <unk> with Cowen. Please proceed with your question.

Thanks for taking the follow up I, just wanted to clarify Michelle I apologize the Kemess understood. My question I can deliver it well my question was around the targeted mix shifts between the medical and consumer given the very high margins on your medical cannabis.

You got that I'm sure you didn't say of wrong I'm sure I misunderstood it.

I expect medical to be steady in potentially slightly up as Glenn was quite articulate we have not seen margin compression in that business in terms of of.

From a mix difference, we do expect to see growth in the rack business in there potentially is upside internationally medically I don't know how to put that all together other than anything.

We don't believe that the Canadian medical business is going to decline in we do think we can not only grow it but gained share you've seen some pretty.

Significant union announcements around the medical cannabis benefits that give them the opportunity I also think that there's opportunities in moving some folks from the legacy market into it internationally in medically the medical business has the potential to be stronger we're seeing in its early days in Israel, we are seeing.

<unk>.

In other key markets, such as Germany in Poland.

And we do expect to grow the the rack business, how that all plays out with Covid in store counts.

In Canada, it's hard for me to say.

But that's how I would sort of describe in so I apologize if it doesn't give you the precision that you may want.

Yeah.

Our next question is from Adam Buckman with Scotiabank. Please proceed with your question.

Good evening, Thanks for taking my question.

I just wanted to touch on the really really of the business of possible now it looks like of contributed roughly $1 million of the topline in the quarter in $2 7 million on a six month basis, which I believes a little bit of a deceleration versus historical is.

Can you maybe walk us through what the bottleneck is on the CBD side and then what catalysts, we should be looking for in terms of acceleration in this line.

Great.

We're happy to talk about really the the call. It is very simple its FDA regulation you know we've seen some very positive news as of late around the share in the potential placement of <unk>.

CBD in the dietary supplement framework would have to see what that looks like it was always in my belief that the additive nature of the leave it of Aurora accompany the science in deep genetics in a variety of other things puts it in a place where we will lever would be advantaged with the FDA in the same way that you saw vapor companies be advantage.

So of the FDA as they connected up with large tobacco companies.

So there is that I mean really the right now is wonderful optionality in the reason I think you've seen a bit of of deceleration is COVID-19 is pretty dramatically in fact.

Grocery stores supermarkets convenience stores and pharmacies around the foot traffic and so it just is not as viable now that being said, we continue to garner significant regulatory learnings and experiences. The fact that those products are in the stores in 23000 stores in or in the top three wholesalers in the U S.

Give it a pretty significant leg up at a time in which I believe we will have comprehensive FDA regulation, particularly around ingestible. So we're excited about the lever will be launching of new brand.

Called K G. Seven that I mentioned in our prepared remarks, and I clearly expect whether you want to say that the U S. CBD business as $2 billion of 5 billion of $10 billion that under in F. D. A protocol that allows for the sale of it by complying company's relief is gonna be advantaged in I think that's gonna be a time in which it definitely will be.

Material to it and the other part is reliever is of brick and mortar brands in I know in an age of E.

E Com and Amazon in everything else, but the reality is now in its requires a lot of regulatory expertise to operate in brick and mortar stores in we think that's the big advantage for us in.

In which of the Fda's I believe well past comprehensive science base of legislation in so that's how I would describe the really the situation today. The only other point I would make is we're seeing international markets open up.

For CBD.

And that's exciting I think for a brand like reliever in EMEA.

Even see that throughout the Aurora system in a variety of different ways. The complement the infrastructure. We have in those countries. So I think that's another piece of it more to fall in that in future quarters.

Our next question is with the John Chu with does day you shutdown in capital markets. Please proceed with your question.

Hi, good evening.

I guess my main question here is with the pivot to a premium focus.

The key question from in White Hot Skype capable of producing premium flower. So all of this lets take from some of the the.

Text I've read in the in the MD&A you still conducting tests on sky the abilities, but can you give us a bit of in insight as to how these tests are progressing because obviously.

Being able to produce that premium flower sky is core to the premium strategy.

Yeah the average.

John I mean first though let me remind everybody we have other significant facilities beyond the sky, Obviously sky is one of the the largest.

It is an important piece in producing high quality flower in a low price. So we have tremendous experience whether they accept the songs like Whistler of river of Reg or whether it's in our Nordic facility.

So, it's not like where new of they're producing now in <unk>.

20, plus potency product with high trip levels in the high quality. So there's a long history of Aurora being successful with Whistler in the San RAF in in Aurora of products and as it pertains. The scale, we are making progress it is in.

It is of pivot and Theres no question about that we made the tough decision of taking it down.

The 25% of production that allows us the ability to test a variety of different.

You know of mechanisms in systems in cultivars in the genetics.

At the Sky the story I would argue though that we have several of the deepest experience in some of the best scientists in so we're well on our way.

So you see that we also are complementing that process through external by which allows us additional flexibility, but I think the what.

Best thing I can describe is we're early on to that process are we just made the decision in December the.

Take it down I think we'll be able to talk more specifically about it in the coming quarters, but this isn't reinventing the wheel this isn't establishing new protocols of developing new skills for us it's taking what we've been able to do it for years in other facilities in applying it to the Sky facility. So that's how I would describe it.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Miguel Martin Chief Executive Officer.

Well. Thank you everyone. We really appreciate it we're awfully excited about where the company is we're even more excited about where the company is going.

Appreciate your questions. We appreciate your interest in.

While it's early days from me as the new CEO I can tell you of the team the infrastructure in the entire strategic plan is well on track and we look forward to bring in new even better results in the quarters to come. Thank you I hope all of your families are safe and well all of the best buy.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

Yeah.

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