Q2 2021 Aurora Cannabis Inc Earnings Call

[music].

Greetings and welcome to the Aurora, Canada second quarter '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 <unk>.

Telephone 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 and Investor Relations.

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

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

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

And 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 is futile future financial or business performance actual results could differ materially from those anticipated and these forward looking statements.

The risk factors that may affect the results are detailed and Aurora as annual information form and other periodic filings and 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 and we thank you and advance for your patients and understand.

Following the prepared remarks blamed the gallon 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 Mikael. Please go ahead in the Gulf.

Thank you and Eric 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 the discuss our progress to date and why we believe we're very well positioned to take advantage of the massive global cannabis opportunity ahead of us and short, we and 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 the CPG strategy that I know very well one that we're confident will give us maximum flexibility to drive growth cash flow and shareholder value in the coming quarters.

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

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 of Aurora is intent on continuing on this trend.

As you know our core business has four parts.

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

The significant optionality and the U S and four of our Canadian Rec business, where we've seen the market react positively to both of our generation, one and gen two products and our ability to enhance quality across both the efforts.

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

Adjusted gross margin was impacted slightly but relatively steady and 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 reduce production and initiated targeted product returns in order to open the channel the higher velocity products.

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

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

And a was $42 three meal and 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, adjusted EBITDA loss with the $58 million swing, the $12 1 million or excluding restructuring and revenue provisions and.

And the other big positive for the quarter was the improvement in our cash use by more than 74% versus Q2, 'twenty and 'twenty and our cash on hand on hand as of yesterday was $565 million the reduced cash burn plus our 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 and our strategic progress we're building momentum as we execute our plan and we firmly believe we are of the team the tools and the strategy in place to take advantage of the dynamic and exciting market.

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

Thanks, Neil and good afternoon, everyone.

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

We'd also note the comparative period for analysis today of Q2, 'twenty and 'twenty. We believe the best represent the measure of the company's transformation and improved performance and where appropriate and well also.

The sequential period comparisons.

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

We saw a strong performance and our medical business, especially international sale and we continue to transform our consumer business with the shift to higher quality higher margin products and you also made the decision to significantly reduce production volumes to align the demand we expect our sales to production rates from Q3 to be in the 90% range.

And we initiated targeted product returns and ordered and provincial sales channels to premium product.

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

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

Tumor cannabis business delivered $31 1 million and net revenue prior to these return provisions and or medical cannabis segment continued to accelerate and generating $39 million and sales.

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

Compared to 48% from the comparative quarter, excluding the $2 $7 million of the product return provisions of our overall Q2, adjusted gross margins 300 basis points lower than the prior period.

Importantly, I should point out that our decision to reduce production and supply the alignment with demand and to reposition it to produce our premium flower brands did impact gross margins in Q2, so underutilization of capacity resulted and close to and 8% reduction and overall gross margins. Some of this is expected to be.

First and the future because we have the full quarter reduce costs and sky.

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

<unk>, let's not lose sight of the importance of our medical business here in Canada and internationally.

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

This was primarily due to the strong performance and the international medical business, which was up 562% year over year, and 84% sequentially, but only with revenue growth significantly.

This segment also carries our highest margins the growth was driven in part on continued progress in Europe, which is now five times the size than it was a year ago and up 36% sequentially, but this quarter also saw our per shipment of medical cannabis to Cantel holdings and Israel.

And it's also important to note that we continue to have and ongoing advantage and the Canadian medical market share and this is underscored by $5 five per cent increase and revenue year over year.

And our medical segment adjusted gross margins were 56%.

Relatively consistent comparative quarters, However, Q2 margins were impacted by the capacity Underutilization and Scott and his production with smartly scaled back and.

And our overall medical gross margins would've been 66% of port capacity.

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

And a little to no price compression.

And with revenue is currently at $39 million and growing and 60% plus gross margins. It's clear that the medical business is a key differentiator for Aurora and should be an important driver of the future cash flow.

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

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

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

Consumer average selling price rose, 6% and the quarter due to increase and derivative sales and the continuing shift from flour and mix towards the premium brands.

Consumer margins were 27% compared to 38% and the prior quarter and this is because of the underutilized overhead costs of Sky and <unk>.

Increase in product return provisions.

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

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

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

And how 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 the business transformation the stepping back a bit.

We've engineered significant change year over year, and that's highlighted by this past quarter, the SG&A coming in at 63% of sales versus the 143% of sales and 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 and adjusted even for the launch in Q2 2021 of <unk>.

<unk> dollars 1 million and that's excluding revenue provisions and restructuring costs.

And that's a dramatic improvement from the $69 9 million adjusted EBITDA loss in the prior year comparative.

And what if a further $7 million and our Q2 the cost of sales and that was related to facility and production rationalization I'm pleased to see that on a run rate EBITDA continues to improve.

And now a few important points regarding our balance sheet cash flow and cash position.

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

And as you know with and agricultural product alignment does take time other December decision to adjust cash production was an incredibly important step towards our goal of shifting to a more variable and agile model.

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

And we used $26 million of cash to fund operations, excluding working capital investments.

Is the further $2 $1 million from contract and employee termination costs.

Theyre down materially from the prior quarter and cash used in operations is down over 75% from the prior year.

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

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

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

However, this was mainly due to shifts and the levels of accounts receivable and accounts payable, which we expect to settle out over time and critically the net change in inventory and biological assets used $10 million of cash during the quarter on <unk>.

Marked improvement from the $25 $1 million and Q1 and demonstrating our progress of the more closely aligning production levels of demand.

Finally as of today and the very strong cash position with $565 million in the bank and about $97 million of outstanding term debt and that is not due until the end of calendar 2022.

And so 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 for the fall.

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

And we're seeing of positively changing product mix, and our consumer business and of taking important steps and rationalizing and repositioning production.

And as G&A as well control and.

And cash flow items continue to improve.

<unk> by a strong balance sheet on.

I'm very pleased with our recent performance and I'm quite satisfied and we have the company well positioned today and on the firm financial trajectory and.

And I'd like to turn the call back over to Mikael.

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

They were thrilled to be back on offense pursuing profitable growth opportunities and 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 from most of the premium products over more variable production costs and significantly lower fixed costs. The upshot will be higher margins stronger cash flow and long term shareholder returns and having our financial house in order and my opinion will attract new business and lead the untold the opportunity before.

And 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 and the 60% range as I've mentioned, we are the number one medical cannabis company in Canada.

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

It's one of the many initiatives we have is moving our patient intake and the experience online where we can now offer a substantially more choices to our patients and veterans.

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

<unk> is uniquely positioned with the infrastructure regulatory experience and compliance systems in place to continue to lead and take share and the medical market. These investments represent a significant barrier to entry and 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.

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

And and industry, leading science and early January Aurora and our partner at the farm. We're successfully awarded three of nine lots, which included all available flower lives to the French medical cannabis standard program Aurora is one of the largest global footprint generating revenue and 13 countries today and we're excited about these opportunities and.

The global momentum they represent of the medical cannabis regimes.

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

And that really doesn't asset light sustainable growth platform, and Australia, and help physicians pharmacists and patients access to high quality range of Aurora cannabis medicines.

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

And our ability to operate in a highly regulated framework. This is unique to Aurora and provides us from transferable knowledge as we entered 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, and the U S as well as both houses of Congress.

Our Nielsen's top ranked use of CBD brand and really the remains and enviable strategic platform and we're excited to be announcing a new brand and extension called <unk> seven and athletic focused CBD brand in the coming weeks reliever provides us with critical distribution regulatory experience and the relationships and the key high growth U S market.

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

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

And with positive FDA action and the U S.

Stepping back and specifically on the U S T and C market I would say the following.

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

And we firmly believe that as a company with deep roots and science and experience and operating on their federally legal legal frameworks Aurora will have an opportunity to participate in that market and the meaningful way I will not commit the how we will gain exposure of the current U S. THC market, but I can say, we want simply wait for comprehensive legislation and though we're assessing ways to legal.

The advantage of our shareholders today, and addition to when comprehensive legislation is in place one thing I am confident in is that the competitive landscape and the U S will look very different the ph CSD scheduled and we believe social justice and economic reforms ultimately drive it for clarity whatever we do on the U S, whether that be and THC or of non.

And <unk> 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 four 350 stores across Canada, and we believe the store count and more than double and the near future.

And in an effort to capitalize on this opportunity and just last month, we entered into a strategic agreement with great North distributors candidates first and largest national sales broker to legalize adult use cannabis.

We are now of 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 and Canada's cannabis industry.

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

Secondly win share and 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 of away from fixed the variable.

Let's touch upon each of these topics individually.

Core and premium categories are more important for Aurora long term, even as we appreciate the importance of having a brand and 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 the market premium brands rebates pre rolls and premium flower offerings across multiple price tiers.

This will attract premium consumers and over time build loyalty based on the quality of the product and the experience of provides I've seen in many states and the U S. There of vibrant and premium offerings and all key category of succeeding with consumers.

To that point across every CPG category Theres always the consumer segment that will pay a premium price for premium products and we are blessed with a few of the best brand best brands and the cannabis industry Aurora, San RAF and Whistler.

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

Keeping this goal will require alignment with production and focusing our resources on growing high potency high Turkey and premium cultivars on a consistent basis, and reaching consumers who are willing to pay a premium for our premium products. We are well on our way of the building is key pieces of infrastructure.

Recall that we generate significantly more gross profit dollars on a premium Aurora and raptor and western flour per Gram and we do on the all the special and the difference between gross margin contribution per Gram can be four five times or greater and therefore, we don't need to be cultivated and the low potency flower for daily special as the.

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

Of course premium segments, but it's also be supportive of the classic CPG sales marketing trade marketing and consumer engagement methodologies to build awareness foster of affinity and generate outsized returns and will the invade and pre rolls and Theres also a lot of opportunity to bring classic CPG elements and packaging and alignment the traditional flowers.

And that lend itself to <unk>.

We've already experienced the significant improvement and the vape category as the most prominent proof point and our innovation strategy much like free roles concentrates and edibles specifically.

And we've seen our market share and vape golf and basically zero in September two of approximately 8% of the Ocs recently, which is great news. We have also launched a new product that we're really excited about our <unk> concentrate and the market reaction has been extremely strong and we would expect to start seeing similar games and other margin accretive categories as other new products rollout.

So I'm very pleased with our top line strategy and as I highlighted we're making progress on costs.

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

Since the closure of four of cultivation facilities across our network and I can confirm that several of those facilities and now shuttered. Most recently, we have terminated construction of the Aurora Sun facility and successfully reduced capacity utilization by 75% and our Aurora Sky facility. This will allow us to focus on premium quality flower at this facility.

We're already seeing data of the higher value higher margin derivative products is a winning strategy.

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

The press Star two if you would like to remove your question from the queue.

Each analyst will be allowed the opportunity for one question you may reenter the queue by pressing star one for participants using speaker equipment and may be necessary to pick up 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 thanks.

My question is on your on.

Mixed by segment.

And you kind of think about the business.

And it's over and call. It the next 12 or 18 months clearly you're very satisfied with the medical cannabis.

And considering the substantially higher margin and then.

And you're getting on that 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, thanks.

Yes, Thank you, David and I'm, not going to get to the exact specifics of its a little bit dynamic. Let me tell you you know sort of how I look at mix and this is going to sound very familiar to you first.

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

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

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

And with 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 of concentrated 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 70 to 30 of those gen. Two products plus of premium flower product to discount price I do think youre going to see of leveling out of the discount and flower business and Canada clearly the inventories will continue to be right sized and that clearly is a pathway forward where.

And also seeing from the provinces as they're starting to go through SKU rationalization and a focus on profitability per SKU on the it there'll be greater interest from them as well as the retailers on having a more premium focus and the 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.

And just made it clear that you've got and interest and maybe making the move ahead of us.

Significant reform.

Maybe what would it take for free.

What what's.

Whats the sufficient catalyst for that and or is something sort of like canopies acreage deal and what you have in mind or is there another pathway on your radar.

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

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

And we'll be advantaged and.

Struggle U S construct I clearly believe the FDA is going to play a role in cannabis and other federal agencies will play a role in Canada and U S and so those companies that have operated and not successfully whether that's manufacturing GMP ISO labeling sales and marketing practices.

And we'll all have significant legs up there that's not to say the msos don't have their own advantages by Canadian Lps that are science based and compliance space and have experience.

Benefit I think of little bit shortsighted to say that those companies that are and if successful around the world wouldn't also be successful and the.

And now in terms of catalyst.

The course of the legislation is promising.

<unk> comments, obviously from Senator Schumer, and others and we're seeing iterations of whether it's the safe banking Act or more of States Act I think first and foremost of version of the you know 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 of.

Of interest in many key parties, including ourselves and I think you're going to see something on that and then from that 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 balance sheet to be opportunistic and I think theres a lot of different ways that the company like Aurora and <unk>.

Monetize its experience its genetics, it's IP, it's brands and.

And 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 and once the U S.

Legalized cannabis and I think we're excited about that and we will take advantage of the when the time's right.

Our next question is from Pablo <unk> with Cantor Fitzgerald. Please proceed with your question.

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

The stickiness and that business because yes, you out of the leader, but other companies are also talking about gaining share and medical which is really attractive and given the margins and and Glen and second question related to that.

The double good exports 6 million to $12 million is that the new number and sustainable do you stay there or what are they of someone over this quarter and thank you.

And thanks, Pavel and great questions.

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

The strength and actually.

The growth corridor of people, but then the MRI.

Operator.

Okay.

We're seeing good growth in Canada and.

And as I mentioned year over year, we've seen that growth.

With a renewed focus on that segment, we've actually put new leadership and their and working very very hard on making the patient experience.

And as easy as possible and you can think Amazon and just make this.

Beautiful experience and.

And our focus on our high value of patient. So we actually see a tremendous opportunity and their top line and we're not signing up to the to the presumption of ASUR.

And the market just to be milk.

The it through to the and so no we expect growth out of that and we certainly have some internal targets the wood.

On the.

And 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 and Germany itself was up 21% quarter over quarter the.

Poland U K and number of number of countries in Europe.

And are showing good strong growth and so that might on a little of counter to what you're hearing from others, but even and the pace of Covid headwinds.

Our international medical business continues to accelerate and Thats.

And growing quarter over quarter now, we're adding new countries. So the.

Israel supply agreement may be a little bit lumpy.

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

Thank you.

[noise].

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

Hi, good evening and congrats on the quarter of.

I wanted to take this pretty high level here Mcgill with.

And with the recent acquisition of GW Pharmaceuticals, and other company that I cover.

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

And your your strong base within the deep science and plant genetics.

David Thanks for the Great question and I think it is validation if you look at what they paid for if you look at what they were getting and if you look at how they plug the emulate clearly the economics of the strong scientific base genetics IP biosynthesis all of the things that you can talk about a lot.

It was recognized as the significant value and that situations. So I think of it is validation of one of the most important aspects of the U S is gonna be how genetics, and IP and and that type of.

Those type of assets work and the U S is obviously the litigation right now against GW that I think what we like the 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 and there will be companies like them on the phone. So there will be a pharma and approach to cannabinoids and it's it's a deep bench of opportunities. There. So I thought it was very bullish and you know sort of representation of the value that we have there clearly experience and.

The compliance and science will win the day.

And the U S, we've seen that and Germany, and you'll see that and plants with the recent tenders you see it and these other markets and clearly the same companies appear to be winning time. After time after time and 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.

And of the brands and the rack and the consumer action.

And 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 we're not done yet.

Andrew couldn't area.

I apologize can you hear me now.

We can go ahead.

That's the way sorry about that wanted to and good afternoon I wanted to ask about the kind of the what's your expectations are from the consumer business because we have the COVID-19 lockdowns in in place right now I assume that is hitting the shipments for the provinces, obviously of seasonally lower quarter should that be flat just taken obviously a lot of gas and kind of gives us kind of thinking of how the.

Canadian kind of consumer business is trending next quarter.

And you got it.

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

And what's happening in Canada, right now, there's 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 and.

And the ability of the stores to be opened and consumers to access their products secondly.

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

We're going to be in this environment and thank them for a bit longer until you know, we see COVID-19 and 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 <unk> hundred 50, and 1400 and 70 stores.

And I think every expectation and that's going to double and the next six months and there's a lot of incentive for it to double and we also continue to see.

And our volume moved from the illicit market are the legacy markit into.

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

And this disruption that you're seeing right now probably.

And it gets you to the <unk>.

On the 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 an impact on the medical business, which is obviously really strong for us.

And so I think for those that participate the medical business Youre in occupancy of 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 and E.

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

Taking share or just addressable market growth and and then secondly are the arrangements similar to <unk> that youre working on right now that we could potentially see over the coming quarters.

Yes, 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.

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.

And like you've seen and medical markets and the U S and so we're very bullish on existing markets.

What you'll also see and some of these markets is the movement.

From medical the rack and that's the potential in Israel I think.

Israel is early days, but very exciting in terms of what we're seeing there with <unk>, we mentioned and the written remarks of the prepared remarks about getting three of the nine tenders and France.

And what's happening in France, and the U K those of really significant markets and there isn't the evolution. There. So we have no reason to believe the international can't continue to grow.

And while we will always be looking to take market share from our competitors.

One of the things, we do see and 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 EU GMP manufacturing in many cases, which is why we're so thrilled about our facility and the Netherlands, and I would describe as Nordic.

And so on.

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 and how much was the not daily special category and how much was the Aurora and Ralph Whistler and then.

And on the gross margin Glen and 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 courtyard and I apologize if I missed this I mean do you expect that that headwind is larger with the.

Full quarter impact and 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 Tammy and and.

And you go from kind of China and on daily special or is expecting that to go and.

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

<unk> of those costs will be gone through the full quarter on so we expect the per on a per unit basis.

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

And we should see improvement in Q3.

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

It is not so cost about what this will look like in Q3, but over time, we are on the right thing because of the.

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

And almost as importantly is repositioning to be able to produce our premium products and you can think of the difference and the economics.

And as Nick alluded to on my son and products from.

Non facility the 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 just the.

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

And again your thoughts on daily special and whatever.

And I wanted to yeah, I mean, the only special at the high Watermark and 13 2014 share back in March and April It really had that sort of price point to itself and and now it's roughly half of that we've made significant changes and daily special that's not to say we are focused on discount, but as I mentioned pretty significant changes the.

Of the potency and turf levels of that product.

You know I think we'll have to see where that falls on much more interested and in San RAF and to be honest Aurora and 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 and I'm already getting through Quebec, which is the lower days on hand, and some of the other provinces and women.

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

And to see some further work on Aurora and Whistler, So hard to say, what that's going to land and that none of the competitive thing, but as I mentioned earlier with the vans comment you know long term, we'd like to see 70% of our revenue come from premium products and Gen two and 30%.

And from the discount area of particularly low cost flower so.

And I think the best answer Tim and I can tell you is on.

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

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

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

Our next question is with Max Bottomley with.

Canaccord Genuity. Please proceed with your question.

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

The step back here and in and.

And sequential declines and you're 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 and the lower sales days of sales on an here is affecting all of the players across the board here in Canada. So just any color on how you think your branded products are actually selling and these dispensaries.

Particularly relative to last quarter, and then lastly, any commentary on your adjusted EBITDA for next quarter. I know you said last earnings season that potentially you'd get close to breakeven. This quarter. So is that possible as we look the fiscal Q3. Thank you.

Got it so on on the adjusted EBITDA, you know part of the the change and 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 think of the business nor is it the right thing for the consumer so what I can tell IMAX is it's our intent to make progress we've done that here pretty significantly and we intend to keep doing that and as Mike stated goal.

And you know to run of profitable business, but I think hard wiring or giving guidance to a particular date when you of a category that this dynamic and 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 and our partner where the tumor of high titer of matter on our other know the or others and what I would say is what you would expect the newer higher quality higher potency product and we see that much better take rates.

I mentioned, the 8% quick move that we saw on our vapor launch concentrates are doing really well I think it's a bit early days on some other sides of the flower what I will tell you, though is you're right. There definitely is the impact across all L. P. As 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, and how they're handling SKU rationalization and how they're handling the cadence of new products. It's definitely you know of change and I think as they adjust to it and I give a lot of respect for how they're going about it is.

And so the rest of us trying to navigate that as well it will be a bit bumpy, but and the long run and I think it's the right thing for the category, particularly.

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 on the other side of the Covid and the Morris towards open and the data gets better which is something we're really pleased with the data is getting better.

Syndicated data on them all.

And be able to give you a much better answer in terms of retail takeaway and some of the our 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.

And you noted that you expect to see continued improvement and the rate of free cash flow burn, but the topline and present doesn't look like and it'll be strong enough to revert the cash flow back to a positive state without.

The substantially larger inflection in revenue of our cost structure for the <unk>.

And as like how much offense can you play with strategic M&A, if you're still burning cash at such a high rate and unless the M&A is cash generative, which.

It's all of them is get the other visibility into improved operating fundamentals of there where you can do that without putting the company at risk.

Listen we continue to expect to make progress on and I think we're getting close to a point where things look a lot different and they have historically if you look at our.

What we need to be able to execute our plan and we don't need cash the do it and <unk>.

The last big significant and.

And we needed to make was the finishing of the Netherlands facility to be the GMP and.

And we do expect the rack business to turn around and the other three parts of our business are doing really well. So we're comfortable with it in terms of being able to make a play on.

I don't think it's out of the woods that there would be something.

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

Be more obvious but.

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

I'm not concerned at all of that we have what we need to execute our plan and I'm not concerned that we don't have what we needed the harder to make a move 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 and Miguel I apologize the Kemess understood. My question and I can deliver and Ah 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 on that I'm sure you didn't say of wrong I'm sure I misunderstood it.

I expect medical to be <unk>.

Steady and potentially slightly up as Glenn was quite articulate and we've not seen margin compression and that business in terms of the from.

And from a mix difference, we do expect to see growth and the rack business and then potentially is upside internationally and I agree I don't know how to put that all together other than Shang.

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

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

And.

And other key markets, such as Germany and Poland.

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

And Canada is hard for me to say.

And then but that's how I would sort of describe it and so I apologize that 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.

And 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 and $2 7 million on a six month basis, which I believes the little bit of a deceleration versus historically.

And 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 and this line.

Great.

And after you talked about really the the call. It is very simple its FDA regulation and now we've seen some very positive news as of late around the share and the potential placement of.

CBD and of dietary supplement framework would have to see what that looks like it was always my belief that the additive nature of believe it or Aurora companies on the science and deep genetics and a variety of other things clubs and in a place where we will lever would be advantaged with the FTAA and the same way that you saw vapor companies be advance.

And so the FDA is the connected up with large tobacco companies.

So there is that I mean really the right now is wonderful optionality and.

Reason I think you've seen a bit of of deceleration is COVID-19 is pretty dramatically affect.

And you know grocery stores supermarkets convenience stores and pharmacies around the foot traffic and.

And so it just is not as viable and now that being said, we continue to garner significant regulatory learnings and experiences. The fact that those products are in stores and 23000 stores and are in the top three wholesalers and the U S give it a pretty significant leg up at a time and which I believe we will have comprehensive.

The a regulation, particularly around the adjustables. So we're excited about the lever will be launching of new brand.

Called K G seven and that I mentioned on 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 an FDA protocol that allows for the sale of it and by complying company's relief and it's gonna be advantaged and I think that's gonna be of time and what should definitely.

And we'll be material to it and the other part is really the is of brick and mortar brands and I know and and age of.

E Com and Amazon and everything else, but the reality is none of it requires a lot of regulatory expertise to operate and brick and mortar stores and we think that's the big advantage for us and.

And on which of the Fda's I believe well past comprehensive science based legislation and so that's how I would describe the really the situation today. The only other point I would make is we are seeing international markets open up.

For CBD and that's exciting I think for a brand like reliever and EMEA.

And even see that throughout the Aurora system and a variety of different ways that complement the infrastructure. We have in those countries. So I think that's another piece of it more to follow on that in future quarters.

Our next question is with the John Chu with does day shutdown of 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 and whether or not Skype capable of producing premium flower. So all of this looks like from some of the debt.

Text I've read and that in the MD&A you still conducting task on sky the abilities, but can you give us a bit of and 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, I mean average John and me first though let me remind everybody we have other significant facilities beyond the Sky, Obviously sky is one of the the largest.

And it is an important piece and producing high quality flower and a low price. So we have tremendous experience, whether that's episodes like Whistler, a river of Reg or whether it's on our Nordic facility.

So it's not like we're new and they're producing now 20, plus potency product with high trip levels and of high quality. So there's a long history of Aurora being successful with Whistler, and the San RAF and and Aurora of products and as it pertains to Scott and we are making progress it is and it isn't.

Pivot and Theres no question about that we made the tough decision of taking it down to 25% production that allows us the ability to test a variety of different.

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

The sky the slate I would argue though that we have several of the deepest experience and some of the best scientists and so we're well on our way.

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

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

And you take it down I think we will be able to talk more specifically about it and the coming quarters, but this isn't reinventing the wheel this isn't establishing new protocols of developing new skills barrage of taking what we've been able to do it for years and other facilities and 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 and we're awfully excited about where the company is we're even more excited about where the company is going we appreciate your questions. We appreciate your interest and.

And while it's early days for me as the new CEO I can tell you the team the infrastructure and the entire strategic plan and as well on track and we look forward to bringing you even better results and the quarters to come and thank you I hope all of your families are safe and well all the best Bye.

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

Yeah.

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