Q3 2022 Aurora Cannabis Inc Earnings Call
Greetings and welcome to the Aurora Cannabis, Inc. Third quarter 2022 results conference call.
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I would now like to turn the conference over to your host knock Krishnan, Vice President of corporate development and Investor Relations. Please go ahead Sir.
Thank you Denise and we appreciate you all joining us this afternoon.
With me today are CEO , Miguel Martin and CFO Glenn.
After the market close.
<unk> issued a news release announcing our financial results for the third quarter of fiscal 2022.
The release and accompanying financial statements and management discussion and analysis are available on our IR web site and via SEDAR and Edgar databases. In addition, you can find the supplemental information deck on our IR website.
Listeners are reminded that certain matters discussed on today's conference call could constitute forward looking statements that are subject to risks and uncertainties related to our future financial or business performance actual results could differ materially from those anticipated in these forward looking statements. The risk factors that may affect actual results are detailed in our annual.
Formation form and other periodic filings and registration statements. These documents may be accessed via SEDAR and Edgar.
Following prepared remarks by Magellan, Glenn we will conduct a question conduct a question and answer session for analysts. However, we ask you to limit yourselves to one question and then return to the queue with that I will turn over the call to Miguel. Please go ahead.
Thank you in an environment defined by political upheaval record setting inflation and market volatility. We are intent on controlling what we can control and delivering on our target of reaching a profitable adjusted EBITDA run rate.
By the first half of fiscal 2023.
I'm very pleased to tell you that our plan is working and we're even better positioned to hit this goal than we were a quarter ago.
The foundation of our confidence is our global medical cannabis business, which is both defensible and stable margins that exceed 60%. These.
These are highly desirable characteristics in today's volatile economic environment and in addition to being the number one Canadian L. P. In terms of medical cannabis revenue over the last 12 months. The business continues to grow in other parts of the world, especially in Europe , and Australia this quarter.
The second reason for our confidence is cost savings and we're pleased to have identified additional opportunities.
Recall from last quarter, we said, we'd achieve the higher end of our targeted $60 million to $80 million savings annually by the first half of fiscal 2023.
Today, we are announcing that we've identified an additional $70 million to $90 million of savings within that same timeframe for a total of $150 million to $170 million of savings annually.
Importantly, our total cost savings wont impact planned growth investments, but we expect them to materially reduce our cash needs.
Our third reason is the balance sheet, which remains among the strongest in the industry and puts a war in a position of strength, particularly in challenging times.
We currently have approximately $283 million in cash inclusive of our early repurchase of $141 million in convertible debt.
Further strategic and value accretive opportunities and about $190 million U S remaining under our ATM program.
Fourth cocoa, our science and innovation business and it's one of the largest catalogs of high quality genetics, and IP and biosynthesis available for licensing.
<unk> represents a capital light long term revenue growth opportunity that we believe makes them, where our unique and can drive success by enabling our licensing partners to deliver a continuous stream of innovation to the market.
Let's take a deeper dive on our medical business.
During Q3 International medical revenue was up 55% compared to last year, but down from Q2 because of our large shipments of Israel last quarter, which we did not expect to recur. This quarter as you know predictability of revenue, especially in developing markets can be affected by a regulatory complexities such as timing of government approvals.
And import permits.
We are currently selling medical cannabis products in certain EU countries, Germany, Malta, Poland, Czech Republic, U K, Denmark, and France and are either the market leader for them. The top three in all of those countries. We.
We estimate today there are around 150000 patients in the EU.
But if it were to reach similar adoption levels as Canada, <unk>, 1% of the population the patient pool could expand the $3 5 million patients.
In Poland revenues grew three fold year over year as we followed up last quarter's record breaking shipment with another strong quarter. We have established a leadership position in the Polish flower market with an estimated 70% share and expect this success to continue as we launch new cultivars in Q3, accompanied by a marketing push.
Yeah.
In the UK, our revenues increased 60% compared to Q3 last year.
Both was driven by a rapid increase in patient numbers is more evidence has come out and more physicians prescribe cannabis.
While there is no reimbursement currently which is a barrier to growth we've not seen any pricing erosion we are.
Also preparing to launch extracts in Q4 and have already completed the first delivery to our important partners.
In Germany, we had two of the top three best selling products in dry flower for all of calendar 2021, and currently estimate we are number two in market share.
Our market share has grown steadily in the extract markets, thanks to new product innovation.
Growth in patient numbers has moderated due to slow prescriber adoption, Germany remains the largest market in the EU.
The 83 million citizens and we are bullish given the new coalitions plans to legalize adult rec cannabis and improve medical patient accessibility.
In France, we have completed three shipments to date for the pilot program, where we are the exclusive supplier of dry flower.
Early estimates have us generating revenue as early as March 2023.
And then the other ones, we partner with one or 10 license holders to sell legally produce cannabis and approximately 10% of the country's coffee shops.
<unk> is roughly half the size of Canada, which recall is a $5 billion retail market like France, we expect sales year to begin in calendar 2023.
Finally in Australia, our revenues rose, 300% year over year, driven by record numbers of patients.
Through our exclusive supply agreement with Med relief, Australia, we offer medical patients in the EU GMP certified certified range of products, including dry flower and recently released space.
Let me reiterate that we believe that the canvas growth story over the next several years will center on international medical and recreational.
While the EU is currently a medical only market several governments have announced plans for recreational schemes, most notably Germany.
The EU cannabis market is expected to be $6 billion by 2025, and we expect to grab a sizeable market share given our regulatory expertise compliance protocols testing in science.
These attributes to put us in the pole position for success.
Turning now to the Canadian medical market, we not only how the competitive advantage, but our direct to consumer approach drives our industry, leading margins overall revenue was mostly flat in Q3 compared to Q2, although our market share expanded 200 basis points to 26%.
We attribute these share gains to the best in class patient clinician and positioning service we offer.
Along with the launch of a number of premium products and innovation.
Our insured patients made up 79% of our domestic medical sales up from 73% in Q2. This is a key to stability and we believe bodes well for the future.
The infrastructure to acquire retain and move the patient through the process requires significant resources and experience.
The truth is that a lot of that same infrastructure and knowhow with patients in the Canadian market is directly applicable to our success in other key markets, such as UK, Germany and France.
Regarding Canadian adult Rec, our Q3 revenue reflects persistent macro challenges, including excess inventory and pressure on older Skus.
As we have said before these dynamics are unsustainable, but we have the scale and resources to navigate through is industry consolidation.
In the meantime, our focus remains on maximizing profitability by leveraging low cost production and further rationalizing facilities that no longer makes sense and we have also entered higher margin categories.
From April to July we plan to launch 40, new products, which we expect to benefit both rec and medical channels. These.
These include our first infuse pre rolls and hash offerings brand new cultivars from our breeding program and a bevy of new vape edible and concentrate flavors.
Our full year 2022 innovation calendar includes a significant number of new products and we have established a regular cadence of new product innovations.
Finally, I wanted to conclude with our recent accretive acquisition of thrive.
<unk> is most widely known for its award winning flagship recreational brands Graybeard cannabis company.
Which was recognized as the number one brand recommended by Canadian Bud tenders in 2021.
This transaction will place the talented management team, who thrive in charge of our Canadian Rec business, which we expect will drive improvements in our cultivation practices and premium product offerings. This team have been able to build a profitable premium business with limited resources that will immediately contribute EBITDA to our bottom line.
And with that I would now like to turn the call over to Glenn.
Thank you Mikael good afternoon, everyone I will start off with a few key highlights.
We take pride in having one of the strongest balance sheets among Canadian Lps at quarter end, we had $480 million of cash and no term debt.
During Q3, we repurchased $13 $4 million in principal on our 2024 convertible debt and a total cost of $11 $8 million, including accrued interest.
And in early May we repurchased another $128 million in principal on our convertible debt.
Total cost of $122 $9 million, including accrued interest.
Look today, we have $229 million U S dollars of principal remaining on our convertible debt.
We believe that debt reduction, even though maturity, it's still almost three years, though is a prudent and defensive capital allocation decision.
Debt reduction will save annual cash interest cost of $8 $5 million.
Also in early May we closed the thrive acquisition for which we paid mostly cash about $26 million cash up to $38 million price.
We continue to have access to a shelf prospectus with $887 6 million U S still available under it including a $187 $6 million remaining under our ATM program.
As we have stated before we don't need the capital for operating purposes.
Consider it as available through strategic M&A and other value creation opportunities.
Our cash flow continues to improve with $39 $3 million used in operations and working capital in Q3 compared to $66 $2 million in the same period of last year.
And based on the additional targeted cost reductions in calendar 2022 that Magellan described we expect cash flow to continue to improve.
We are also progressing closer towards a positive milestone as we reduced our loss by $8 6 million versus last year, however, compared to last quarter. Our adjusted EBITDA loss increased by $3 2 million. This is purely due to revenue differences and as I'll explain shortly as gross margins.
<unk> strong and healthy and SG&A expenses continued to decline further as part of our business transformation plan.
Q3, net cannabis revenue was $54 million.
Compared to $60 $6 million last quarter the.
The change was mainly due to variable cadence from quarter to quarter of shipments Gainesville, and partially due to lower consumer cannabis net revenue because of competitive pressures across the portfolio, coupled with retail store closures during the quarter and key provinces that impacted our premium offerings.
So let me address each of our current business is in a bit more detail.
Canadian Medical revenue was $24 8 million in Q3 down slightly from Q2 as we have said previously our Canadian medical patients fall into two groups those with cost reimbursement and those without it.
Build on what <unk> said earlier, we have purposefully repositioned our business to focus on the insured patient population, which should allow us to further improve our bottom line.
Our international Medical revenue was $14 6 million and reflects a 55% growth versus the prior year, a decrease of 26% sequentially.
However, remember that Q2 revenue included approximately $8 5 million and net sales to Israel.
Excluding the impact of the Q2 Israeli sales net international medical revenue increased sequentially by 29% and was driven by growth in important markets, including Germany, Poland U K and Australia.
So taken together, our leading medical businesses in Canada, and Europe performed well as usual.
Generating $39 $4 million in sales and gross margin of 64% up slightly from the prior quarter.
Medical represented about 78% of our Q3 revenue.
Almost 90% of our total Q3 gross profit.
This segment distinguishes us from our competitors and the stability of the gross profit generated in these businesses is a critical component for us in reaching a positive EBITDA run rate by the end of the first half of fiscal 2023.
Our Q3 consumer revenue was $10 3 million, which reflected a 28% decline compared to the last quarter.
Tumor candidates represented about 21% of our Q3 revenue and about 11% of our gross profit.
As I mentioned before the revenue decline is primarily attributed to price pressures across our portfolio and was exacerbated by Covid related store closures in January that impacted our premium brands.
It is important to note that even as our consumer cannabis net revenues fell our consumer gross margin improved 600 basis points to 29% as we continued to shift towards the higher margin product portfolio.
In March for the first time in our history, San RAF sales were greater than data special erosion.
This shift is important for our path to positive EBITDA and combined with the acquisition of thrive we expect to see this move to premium margins accelerate.
As an example of the importance of this shift in Q3, despite revenue being off $4 million quarter over quarter gross profit was only down $280000.
SG&A, which includes R&D came in at $42 $3 million in Q3.
And this included $2 7 million in restructuring costs in prior period accruals.
Excluding these costs adjusted us.
Adjusted SG&A was $39 $5 million, our lowest level in almost four years, which was pre adult use legalization.
All of our SG&A is already well control we are certainly not done with the efficiencies we expect to make significant additional progress as part of our updated targeted range for cost savings.
So pulling all of this together we generated an adjusted EBITDA loss in Q3, 2020 to $12 3 million.
$3 $2 million change in adjusted EBITDA loss as compared to last quarter was primarily driven by the lower level of sales in the Israel and was partially offset with a $2 $3 million decrease in adjusted SG&A expense.
Now I'll give you a bit more color regarding our revised cost savings target of $150 million to $170 million on an annualized basis.
We plan to have executed all of the necessary changes before at the end of calendar 2022.
These savings to be evenly split between cost of goods sold and SG&A.
They should be reflected in our P&L either as they occur over the next three quarters for SG&A savings or inventory drawn down following production related savings and of course all of it positively impacts our cash flow with the changes are executed.
Today's announcement of the closure of our Aurora Sky facility in Edmonton as part of our business transformation plan.
This decision is in keeping with our strategy in the Canadian Rec market to focus on higher margin premium category and to move away from purposefully producing for the low to no margin categories.
We are working toward a leaner more agile operating model is expected to provide strong upward deleverage as future revenues increase.
Resulting from these strategic business transformation changes, we recorded a number of one time noncash accounting charges in Q3.
Goodwill in the Canadian market segment was written down completely in charge of $741 $7 million and we recorded specific asset impairments of $176 1 million and an inventory provision charge of $63 6 million.
So summing up there are three key takeaways for my financial review of Q3, 2022 first our balance sheet remains strong supported by a healthy cash balance reduced convertible debt levels and improving working capital on cash flow.
Second our medical businesses in Canada, and internationally provide us with a competitive advantage and are critical to us generating sustainable profitability.
And it's worth noting.
We generate more gross profit from our medical cannabis businesses than any of our Canadian LP competitors do from their entire cannabis businesses.
And finally, we've worked hard to increase the target range for cost savings.
These are expected to have material positive impact on our bottom line and cash flow and reflect a leaner operating model that positions us well for future growth.
Thanks for your interest in Aurora, I'll now turn the call back to Neil.
Thanks, Glenn before Q&A, let me share some final takeaways.
We expect to achieve a positive adjusted EBITDA run rate by the end of the first half of fiscal 2023.
Second our medical cannabis business continues to be a smart business to invest behind particularly in an environment of war in Europe high inflation and possible recession.
It has a defensible characteristics higher margins and then our view no one does it better both domestically and internationally.
Third we expect a rec market in Canada to correct and when that process is complete we will have added opportunity for market share and pricing our focus in the meantime, as rationalizing our footprint and driving cost efficiencies.
Our science and innovation program adds another capital light opportunities to our portfolio and our strong balance sheet positions us for continued organic growth and strategic M&A.
On that note, we have already demonstrated considerable patience and discipline in evaluating acquisitions.
<unk> targets that not only fits strategically but are also rationally priced.
Accretive M&A is a vital part of our plan going forward and we believe we're in a great position to create shareholder value over time.
So in closing we're delivering on our stated goals, most notably our business transformation plan, which is squarely on track.
We appreciate your time and interest today were energized for the rest of the year and now I'll turn it over to the operator to open the lines for questions.
Thank you.
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The first question we have.
Michael lapping from Piper Sandler. Please go ahead.
Thank you good evening.
Do you think Michael.
So.
It's no surprise to see it.
Aurora Sky finally get closed all the way I think it has capacity several times, what youre selling at the moment, but.
It's a big facility it was sort of a showpiece the portfolio for a while how much of the incremental sales are driven by that is that really the majority is it all of it is it just one of several pieces and a little bit related to that to understand how the savings flow through could you maybe touch on.
The sequential deterioration in EBITDA margins from last quarter to this one I know, it's always a little bit lumpy, but.
What was some of the drivers there and how much of that is.
How should we think about the savings really hitting the <unk>.
<unk> 23 versus starting to see them in the <unk>.
Fourth quarter this year.
Sure. So let me kick off line instead of a top line point and then I'll, let Glen go into some of the modeling points.
I think as you're well aware and many people are aware that these massive facilities that were built particularly.
Particularly in Canada.
Really were dealt with this idea that you could grow cannabis, particularly flower.
In Canada and ship it all around the world.
Including the U S and parts of Eastern Europe . So that was obviously has not come to be secondly E mail.
Consumers very quickly evolved into being very discerning, we're seeing that not only in Canada, but we're also seeing it in the U S and we're starting to see as well in Western Europe . These massive facilities that employed a significant amount of automation just were not.
Built for purpose for this environment and one of the things I think I would mention here is Aurora has been very aggressive and proactively right sizing the company for what it needs. So most recently as we've announced.
Sky was down about 25% capacity the carrying cost on fixed and what that means across your system was just untenable and we did everything we could to try to find locations to be able to sell that type of flower cannabis just didn't work. So I think that should be an indication I think to everybody that we will continue to make the tough decisions.
That we need to make in order to have the proper.
Overall footprint secondly, when you have such a complicated network and facilities all over Canada and creates a lot of excess cost in the overall sort of simplicity of that system and so there is added benefits not just because of the carrying costs of Aurora Sky, but also to the simplification of the closure of other facilities.
We've announced as well, which I will have a significant impact overall.
Overall, and so I think those are all sort of important points I mean, Glenn do you want to.
Grab the second part of Michael's question in terms of the flow through just the one thing I will mention Michael is that we're really proud of how quick and how fast these savings are going to hit.
Our balance sheet and its I think youll see them quite quickly, but Glenn if you could talk about the modeling and the timing.
Sure Mike So the initial tranche of savings that we announced last year that we're pretty much getting towards the end of executing were mainly driven by operational centralization and so for instance, Polaris was just finally shuttered.
April on the manufacturing lines that had been moved back east.
Are just up and running now.
External noise here.
So the timing on those you should start seeing a lot of that positive impact on cash flows starting to come through in the next quarter now that the additional tranche of savings that we've announced is a combination of both shuttering of some facilities that <unk> talked about <unk>.
And SG&A cost reduction, it's about 50 50 on that additional tranche of savings yes.
G&A cost reductions are expected to be executed over the next couple of quarters. So we will see them immediately and the Sky reduction. We were current plan is to have sky shut down by the end of the summer. So I think the next couple of quarters that would be telling in terms of cash flow savings.
Yes Lee.
The production side as it hits our cost of goods.
The quarter or two to flow through following that so we expect to see the margin improvement coming through towards.
In the last quarter of the calendar year maybe.
Maybe you can elaborate on that.
September quarter.
Quarter as well so thats.
We haven't really seen it might impact us.
Other than the SG&A savings, we haven't really seen the stuck impact our financials, yet, but it's coming.
I mean, Michael one other point I'd make is for example, closing sky will save us $7 million a quarter in cash savings. So it's significant.
Okay, great. Thanks, so much.
Very welcome.
Thank you. The next question is from Andrew Carter from Stifel. Please go ahead.
Yes. Thanks, good afternoon. So I just wanted to ask you've upgraded the target by $90 million and you just your adjusted EBITDA loss was <unk> 12 in the quarter.
Multiply that by $448 million loss.
That $90 million of cost savings.
Are you, saying that we should be getting to a $40 million EBITDA run rate thats, not even including thrive in or the tail on the savings I just wanted to make sure I'm squaring and think of this correctly. Thank you.
Go ahead, you want to walk through the staging and then I'll talk about how you think about the timing.
Sure.
No.
Guys.
I was just I was actually saying is that just an out of bounds absolute number to think about that 90, plus a $48 million annualized loss 45 over the next two years.
I'm, having a little trouble following your question there.
SG&A, we expect to take it down.
On a quarterly basis below 30.
And we expect our margins to continue to be where they're at or improve over time through the centralization just more efficiencies coming out of the operation. So in between the two as you can see taking our SG&A down from roughly the 40% now down below 30 is going to take US most of the way on the cost reduction.
We need to hit to be but even without depending on revenue growth.
Yes, I mean, I guess, Andrew without without the only piece I'd add is if you took Q3 and you made the presumption, particularly as it pertains to gross profit and adjusted EBITDA of what the rack business is up to <unk>.
You.
I think presume a bit of steadiness to the other two pieces of business and you drop the <unk>.
Drop the SG&A savings that Glen just mentioned, you're there I don't I don't think I don't think it flips to a plus 40 and I would not want to profess that but that's sort of the back of the envelope math on why I think people should have some confidence in the adjusted EBIT target.
Okay. Thank you.
Thank you.
Okay.
Ladies and gentlemen, just a reminder, if you would like to ask a question. Please press star one now.
Next question <unk> <unk> from Cowen.
Please go ahead.
Hi, Good afternoon. This is actually Victor on for Vivien Asia, and thank you for taking the questions.
Sure.
Good how are you how are you.
Yeah.
So given the recent comments by Germany's health and financing finance ministers on accelerating adult use legalization can you frame the adult use opportunity there and offer your thoughts on the timing can you also offer some color on how you look to leverage your current competitive position in the medical market to approached opportunity there. Thank you.
Sure I'd be happy to do so I think the first thing with all of these countries, whether it's Germany or whether its Netherlands or you can pick any of these EU countries.
Similar regulatory framework in terms of the regulators and they start with production then they get into manufacturing protocols in all of the EU GMP and the different pieces of it. So those companies that have had success and we are clearly one of them.
In Germany, we will have the inside line on rack.
The folks that are making that decision or the folks that were involved in medical and <unk>.
I think we were a bit pleased with the speed and once that announcement was made so it's really hard to pick timing in that but it doesn't change your strategic sort of approach because everything that youre doing for medical will apply to what we hope is a quick ramp.
<unk> turnaround.
And so you talked a little bit about modeling right now the percentage of the adult population in Germany. That's used in Canada is one data.
At <unk>, 1%.
What we see in Canada, and so I think if you multiply that times. The population I think you can see the possible upside.
The thing we're most pleased about is we've had very productive conversation with the regulators and a very conservative compliant approach, particularly on the production side for Germany has bode well for US one just little nuance about Germany.
There as to why it's so hard theyre deviation provision on potency is only 10% most places in the world will allow a 20% deviation to label.
While you might have a 25 potency product and you can say when the Gal that gives you plenty of sort of buffer at $2 five balanced products are becoming quite popular in many cases, they'll have a 10% THC number which only gives you a 1% variation which is a very difficult challenge for Germany. So we think the leaders in.
Germany and as I said, we're one of them will have the sideline when that goes rack and we think it'll be substantive. We also would point out that there are a lot of eyes on Germany is the largest economy currently looking at it and we think if they do go it's going to have a halo effect on the other markets around that look at them from a regulatory.
Standpoint.
Thank you. The next question we have is from Jonathan pilot from CIBC World markets.
Thanks, Good afternoon, I wanted to ask about M&A, especially following the <unk> acquisition. It seems as though companies in the space are generally more capital constrained than in the past, we're seeing valuations compress more does that give you more appetite to be active on acquisitions.
Keeping in mind Youre going to look for human capital and brands that are connected but is there any appetite to maybe accelerate the M&A strategy at this point.
Yes, John it's a great question. So there's really been sort of two areas of M&A activity. One is the U S and I think we've been on record about our play in the U S which is.
Clear one that everything that we're doing around the world is going to have access points to the U S with an FDA regulation and with a thoughtful sort of approach. So I think we've been smart about not chasing in the U S. On those really high valuations around that second piece is what you are mentioning.
As around Canada, and this sort of question about do what type of companies do you go after and with this.
Credit markets.
Do you get there I really seeing the dynamic nature of the business and renting market share in buying companies just for their market share really is not I think a positive approach and to the point Youre, making human capital does make a significant difference and so.
We are interested in finding teams that are really thoughtful that are margin accretive and that are focused on sustainably, making money thrive was one of those teams and I think different than others.
I intend to find a great high functioning team and then put them in charge of our rack business and so the CEO of that company Jetblue, where he was a wonderful talent with his team. They are now going to run our Canadian rack business and not only I think they will do that at a high level, but also they bring a significant amount of innovation in genetics.
That we can plug bolt into our rack business, our international medical business and our domestic Canadian business. So Glenn mentioned, we've got a lot more flexibility on the balance sheet.
I think as things get tighter access to capital is a key strategic advantage for any company, but particularly candidates company and as things get.
More affordable and make more sense, we would be there.
<unk>, possibly around medical assets and we really.
Without being too <unk> consider ourselves to be among the best if not the best International Medical cannabis company out there and so those type of things are a unique interest to us.
Thank you Sir the next question inherent issue Andrew Klein Conjecturing.
Hi, Good evening, Andrew bottom line for Owen Bennett, Thanks for taking our questions.
Andrew.
<unk>.
Just.
Around around Israel definitely appreciate timing of shipments can be lumpy, but the market still looks like it's going well just wanted to see if you could give a little more detail around how you see shipments trending for the rest of the year, if theres been any shipments since the end of the quarter to date. Thank you.
Yes, it'd be obviously I have spent a lot of time in Israel and I really have the honor of having worked in Israel a lot in my career and so I was most recently there.
A couple of months ago, the situation with Israel is an interesting one first and foremost I think you have one of the most progressive and thoughtful regulators globally.
Very smart and thoughtful gentleman named <unk> shaft, two runs whats called the <unk> and they are the regulator candidates in Israel and Youre starting to see a lot of interest and obviously many of our competitors are shipping.
Adrian flower into Israel, and I have done that successfully but youre also seeing a significant growth of <unk>.
Local growers in Israel that are becoming successful.
Growing their own candidates.
And I don't need to name the name of my competitors, but I was there and I have seen many of those grows and respectful of that so what youre seeing is in a country of 9 million people with about 130000 patients that there is probably more supply than.
And then demand currently a good to great quality candidates and so while it is always a challenge to navigate the very sort of high bar.
The IMC area to get products into Israel.
Also now the internal pressure of having local grows putting out high quality flower and particularly into that market and so we've said to everybody that when we have a shipment to Israel, we will announce it and so in that statement, we have not had one yet this quarter, but what I will say is that the.
International market beyond Israel does go hot and cold as these regs are there when you have a diversified business like we do and you can offset.
Shipments that didn't happen to Israel with <unk>.
Shipping the largest shipment anyone's ever shipped into Poland, and the Czech Republic, where there's significant growth that we have in Australia, you are able to balance out.
That and I understand from an analyst standpoint, it's hard not seeing that regular cadence.
Newer market is important as Israel, but we think that when you have such brats internationally overall, it's going to smooth out and we've been pretty good at.
A guiding towards how we think our international medical business was going to do and Thats without some of the new markets that are coming online. So.
That sort of Iran, Israel and I have great respect for what's going on there and I think Israel beyond in place to sell Canadian.
Canadian cannabis will be a leader.
In genetics in seed propagation and starting at some point in export and so I'm hopeful for that and and obviously, there's a long history in Israel with biotech. So we're we're bullish we're active in Israel. We just at this point I don't have a shipment to tell you about.
Thank you <unk>.
Christian inherently cringing cocco manager.
Yes.
Yes, good afternoon, guys. Thanks for taking my questions.
Just with the asset rationalization that you're doing right now closing sky could you remind us about the facilities that you have last right now.
What's the capacity there in terms of cultivation and how much of that capacity are you currently.
Utilizing gander as well what are your plans for Sky and are you looking for a buyer for it does that the scanner. They even have a market for selling facility that size given the conditions that we're seeing right now and also some of your other facilities as well that you.
That you plan to close thank you.
Sure.
I will go as the topline will review and I'll, let Glenn drive correct me if I go straight in terms of the exact numbers on production clients by facility. So our primary facilities.
Our river in Reg.
Our historical facilities, they produce extremely high quality cannabis.
And as we focus on premium products, both domestically internationally rack and medical they are proving facilities, both with historical called the bars, a new coffee bars. We also retain the Whistler facility in BC that we all know produces some of the highest quality organic.
<unk> candidates that has always done very well.
And then staying in the Canadian market. We also are thrilled with what we got with the thrive acquisition, both tremendous indoor grow and our focus on concentrates as well as a significantly important outdoor grow that has a wonderful cost of goods impact, particularly on fresh frozen for extra.
<unk> concentrates internationally.
Our facility in Germany that we talked about we also have our Nordic facility.
As well as our partnership in the Netherlands, and we feel confident that both in our internal network as well as the partnerships that we have with others that we have more than what we need in terms of current demand with a proper sort of fixed cost.
In terms of.
Overall sort of when you look at all of that in terms of disposition.
It's my expectation that.
Edmonton market, particularly around the airport authority that sky.
We'll have a great buyer and we will obviously work with our business partners. Both at the municipal level like we have with the Polaris facility.
And the same thing would happen valley is in a tremendous location from agriculture, and there'll be no issues in terms of finding a great buyer there and we'll have to see what happens from <unk> and others on interest on the India, Glenn you want to talk a little bit.
Production quantities R. R.
The restaurant.
Yes, so I mean, we.
We have disclosed before the capacity of like River Ridge, Whistler, etcetera, and they run in the neighborhood sort of like I guess stated capacity at river about 30000 kilograms a year right.
It's about 5000 kilogram here in West, Virginia, 2000 kilograms per year range, but more importantly, that's total.
Total biomass, where we've been focused on in cultivation and getting more and more expertise is obviously the yields and pass rates that spec sofas, producing a 25% flower.
And how you want all your bachelors can be hitting 25% flower certain falls in value. So some of the one of the reasons that we're really focusing in and river and rich.
The exceptional pass rates, so just thinking high level, the THC on a consistent basis, sometimes a 100% of the batches.
In a particular period will be hitting them. So that's all really important to producing high quality flower. So it's great to stay 30000 kilograms.
Our focus has been.
Much as possible of 30000 to meet the high quality specifications.
Thrilled about with the <unk> team as this is like the one of the best brands in Canada, that's really obvious when you look at them.
In our performance, but what's under the covers is just exceptional expertise in cultivation side.
And the code of our selection in your on your growing Tech piece, a very scientific method backstopped by decades.
The legacy growing experience.
Yes.
Some folks that came over as part of that team.
Getting yield sometimes twice, what we've been getting us to the high quality stuff. So we're excited to see even more coming out of our original range. We think we've got plenty of capacity there as far as that goes in Europe , I think youre asking about whether we could use capacity. There in fact, we're starting to be concerned about capacity constraints and a couple of <unk>.
Theres not a problem we've had expansion capability there and we certainly can continue to export from Canada, but I'd put it.
And the other don't don't fall asleep on the European opportunity there, we need everything we can get out of our European facilities, and we're still going to need to supply from Canada over the next couple of years. So there are no problems with the international facilities at all.
Thank you Sir.
Next question is from Matthew Boston Canaccord Genuity. Please go ahead.
Thanks for taking the questions I just wanted to go back to one of the questions. I think Andrew was asking just about the change in the the increase in anticipated savings apologies.
Towards the end there my line was cutting out, but I think I caught most of it.
The guidance on reaching a run rate of positive EBITDA hasnt changed, but youre, adding at the midpoint about $90 million of savings So I.
I understand that.
From.
And the standpoint of what you previously telegraphed, maybe thats sort of breakeven by sort of the midpoint of adjusted EBIT, but adding those $90 million of savings and when you say annualized is that the last month or the last week of that particular point in time, let's call. It midway through fiscal 'twenty, three whether that will be achieved and then the actual cash part of it will be lagging or are we expecting.
<unk>, some sort of step function increase into the adjusted EBIT at that point in time, given the significant increase in these initiatives.
So anyway.
I'll start to unpack that a little bit. So so the win when we can annualized run rate, we're making a number of series of decisions some of them happening today some of them happening in June and then et cetera through the summer.
But to execute stay at the shutdown facility, obviously takes a number of months. So so what we were targeting is that by the time, we exit Q2.
All of the decisions are done.
The facilities are shuttered that are set to be shuttered.
And everything has been executed so that we're running at a rate that is EBIT positive in that these savings have been captured by then so looking forward I think it's the right way to look at that from a run rate basis annualized savings how it differs from before we've resized this to get to positive EBITDA even at current revenue. So if we took our.
Q3 revenues of $50 million just to be dead certain we can hit that target. We said what do we need to do to the business to make sure that even at a rate like this which we don't expect to persist, but even at a rate like this what would it take to be positive. So it's a bigger steps we've taken before a lot of this shows up in cash.
Things are why we're telling you. The big number is is that all cash savings obviously, when you cut it out of operational savings Magellan mentioned sky.
At $7 million a quarter, so theres almost $30 million annually of cash savings shuttering a facility. So.
If you want to think about sort of the run rate here, we've got a couple of quarters here continuing in cars work take the.
To execute all these savings, but we've got an exceptionally crisp plan.
<unk>.
And we're executing on it.
So cost of goods, obviously, the margins will start to improve we would expect over time is definitely headwinds in the market.
Donna inflation et cetera, et cetera, but we think we're going to at least cover that if not more through these cost rationalizations in the SG&A cuts.
Get us to positive EBITDA in the quarter that left in Q3.
Yes, I guess the other couple of points I would make is one is.
Why you hate to do these things. This is a team that has a bit of experience now doing it. It's also a team with some new leaders in place that come from a background, whether that's our new head of operations, who comes from grafts and P&G or a new head of HR, who comes from Hudson Amex.
This is a different management team that's running through this the second part is.
We're going to continue to give updates to the best we see it and I understand while some people may say, well mcgough, because I understand these enhanced savings why wouldn't you increase or raise your guidance overall.
And I'm a bit sensitive to the history of the company, saying it is going to do something particularly around profitability and savings are not getting their glenn's right in talking about the structural differences of this based upon the current revenue. So that's why I want to see a little bit of the execution I want to say a little bit of timing it is a bit of.
A walkie time period with inflation and some other aspects going on if we get closer with greater clarity of course, we'll be transparent and I think people know that but we want to be a bit conservative here in terms of how we provide guidance on this.
Because I am sensitive to how people have looked at historical statements on the company.
Okay.
Yeah.
Thank you Sir.
Final question cushion Duncan Morgan RBC capital markets.
Yes. Thank you I just wanted to go back to this I'm sure I understand.
Sky. So it's operating at 25% capacity today I'm just curious what is it in making and what are the revenues roughly coming out of that site visit losing.
$10 million to $20 million.
There are even more by the sounds of it.
So Doug So let me go.
Put up with this little little history history bit Sky was originally created as many people on this call know better than either to be the one of the largest global automated almost completely automated facilities to grow what I would call mid tier flower and the reason that was okay.
Because at that time, a 16 or 18 potency products was more than acceptable for the Canadian market and for other some other markets.
As the consumer evolve very quickly, but quality density moisture all of those things and then potency in terms in all of these other sort of core character attributes does not lend itself to automation and we're not the only one that sort of talked about that so sky had to be retrofitted very rapidly.
And as you might imagine a facility of that nature has a different sort of profile genetically have cultivars that do well and so when you couple the rapid sort of expansion of what a consumer wanted them, particularly in the rack business.
And with the need for new call device scale of that size became a bit of an impediment and so we pivoted sky and made massive.
<unk>, an absolute kudos to the folks that work there.
In order to find a home for that product, particularly internationally, where you would have higher margins that would sustain the overall fixed cost of that facility and as you might imagine whether it's utility costs, whether it's Nate wins, whether it's all of those things that were created under a pass.
Scenario Sky became really untenable. So we took it down to 25% and yes. It was losing.
A significant amount of money as we do allocate the overall cost of that facility against the product that was created there which was almost entirely flower.
And as flower prices, particularly in the rack market cratered for everybody. It became this ongoing piece and then when Israel, particularly became a little bit more I would say less consistent.
It really became untenable and when overall, we took our rack business down to what we think is sustainable.
In terms of focus on premium it just didn't make sense and so that's really how we got to where we got you and I think we've been pretty proactive in reducing our footprint whether that was sky smooth.
And whether that was previously with Sun Valley and others and we continue to do what I think most would say is the right thing for the business to have the right cost structure overall for the amount of candidates, we need and lastly.
Is as you see an expansion into other items concentrate infuse pre rolls.
<unk> and <unk> in the Canadian market massive facilities, just producing flower just don't make sense to the tune of.
Millions and millions of dollars of losses, if you keep them open.
Thank you Sir.
Ladies and gentlemen, we have reached the end of our question and answer session and I would like to turn the call back to Macau Martin for closing remarks. Please go ahead Sir.
Well, Dan I want to thank everybody for taking the time to continue to listen the ROI story, we've never been more confident about the targets we have in front of us.
Hopefully people understand we continue to make the tough calls based on what we think is right for the shareholders. If you look at the balance sheet. If you look at our core cannabis business, which is international medical we have never been stronger and so we're excited about the quarters out and we appreciate all of your coverage and interest in <unk>. Thank you very much.
Thank you Sir.
Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.