Aurora Cannabis Inc. (ACB) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Aurora Cannabis Inc Third Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ananth Krishnan, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Denise, and we appreciate you all for joining us this afternoon. With me today are CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our financial results for the third quarter of fiscal 2022. The release, and accompanying financial statements, management discussion and analysis are available on our IR website and via SEDAR and EDGAR data bases. In addition, you can find a supplemental information deck on our IR website. Listeners are also reminded that certain matters discussed in 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 Information Form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session for and 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, Ananth. 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. In fact, I'm very pleased to tell you that, our plan is working and we are in better position 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 with margins that exceed 60%. These are highly desirable characteristics in today's volatile economic environment. And in addition to being the number one Canadian LP 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 are pleased to have identified additional opportunities. Recall from last quarter, we said, we'd achieved 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 have 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 won't impact plan 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 Aurora 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 for further strategic and value accretive opportunities, and about $190 million U.S. remaining under our ATM program. Fourth, Occo, our science and innovation business has one of the largest catalogs of high-quality genetics and IP in biosynthesis available for licensing. Occo represents a capital-light, long-term, revenue growth opportunity that we believe makes Aurora 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 shipment to 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 regulatory complexities, such as timing of government approvals and import permits. We are currently selling medical cannabis products in seven EU countries, Germany, Malta, Poland, Czech Republic, UK, Denmark and France. And are either the market leader or in the top three in all of those countries. We estimate today, there are around 150,000 patients in the EU, but if it were to reach similar adoption levels as Canada i.e. 1% of the population, the patient pool could expand to 3.5 million patients. In Poland, revenues grew threefold 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 the success to continue, as we launch new cultivars in Q3, accompanied by a marketing push. In the UK, our revenues increased 60% compared to Q3 last year. Growth was driven by a rapid increase in patient numbers as 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 import partners. In Germany, we had two of the top three best selling products and 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. While growth in patient numbers is moderated due to slow prescriber adoption, Germany remains the largest market in the EU, and 83 million citizens and we're bullish, given the new coalition's 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. In the Netherlands, we partner with 1 of 10 license holders to sell legally produced cannabis in approximately 10% of the country's coffee shops. The Netherlands is roughly half the size of Canada, which recall is a $5 billion retail market. And like France, we expect sales here 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 MedRelief Australia, we offer medical patients in the EU GMP certified range of products, including dry flower and recently released vapes. Let me reiterate that we believe that the cannabis 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 sizable market share given our regulatory expertise, compliance protocols, testing and science. These attributes put us in a pole position for success. Turning now to the Canadian medical market, we not only have a 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 physician service we offer along with the launch of a number of premium products and innovation. Our [insured] (ph) 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. And the truth is that a lot of that same infrastructure and knowhow of 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've said before, these dynamics are unsustainable, but we have the scale and resources to navigate through this 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 include our first infused pre-rolls, and hash offerings, brand new cultivars from our breeding program, and a bevy of new vape edibles 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 want to conclude with our recent accretive acquisition of Thrive. Thrive is most widely known for its award winning flagship recreational brand Greybeard Cannabis Company, which was recognized as the number one brand recommended by Canadian bud tenders in 2021. This transaction will place the talented management teams in Thrive in charge of our Canadian rec business, which we expect will drive improvements in our cultivation practices and premium products offerings. This team has 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 Glen.

Thank you, Miguel. Good afternoon, everyone. I'll 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 principle on our 2024 convertible debt at a total cost of $11.8 million, including accrued interest. And in early May we repurchased another $128 million in principle on our convertible debt at a total cost of $122.9 million including accrued interest. As of today, we have $229 million of principal remaining on our convertible debt. We believe that debt reduction even though maturity is still almost three years out, is a prudent and defensive capital allocation decision. This debt reduction will save annual cash interest costs 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 perspective, with US$887.6 million still available on direct, including US$187.6 million remaining under our ATM programs. As we have stated before, we don't need this capital for operating purposes, consider it as available for 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 Miguel described, we expect cash flow to continue to improve. We are also progressing closer to our EBITDA 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, as I'll explain shortly, as gross margins remain strong and healthy, and SG&A expenses continued to decline further as part of our business transformation plan. Q3 net cannabis revenue was $50.4 million compared to $60.6 million last quarter. The change was mainly due to variable cadence from quarter to quarter of shipments in Israel, and partially due to lower consumer cannabis net revenue because of competitive pressures across the portfolio, coupled with retail store closures during the quarter in key provinces that impacted our premium offerings. So let me address each of our core businesses 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. To build on what Miguel 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 is $14.6 million, and reflected 55% growth versus the prior year, and the decrease of 26% sequentially. Now I will remember that Q2 revenue included approximately $8.5 million in 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, UK 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 quarterly. Medical represented about 78% of our Q3 revenue and almost 90% of our total Q3 gross profit. This segment distinguishes us from our competitors, and the stability of the gross profit generated in the 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. Consumer cannabis represented about 21% of our Q3 revenues 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 revenue fell, our consumer gross margin improves 600 basis points to 29%, as we continue to shift towards the higher margin product portfolio. In March for the first time in our history, San Rafael sales were greater than data special revenue. 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 $280,000. SG&A which includes R&D came in at $42.3 million in Q3. And this included $2.7 million in restructuring costs and prior period accruals. Excluding these costs, adjusted SG&A was 39.5 million, our lowest level in almost four years, which was prior adult use legalization. While our SG&A is already well controlled, we are certainly not done with the efficiency and expect to make significant additional progress as part of our updated targeted range for cost savings. So, pulling all of this together, yes, we generated an adjusted EBITDA loss in Q3 2022 of $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 the end of calendar 2022 and expect 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 as the inventory is drawn down following production related savings. And of course, all of it positively impacts our cash flow the changes are executed. Today's announcement of the closure of our Aurora Sky facility in Edmonton is part of our business transformation plan. This decision is in keeping with our strategy in the Canadian adult rec market to focus on higher margin premium categories and to move away from purposefully producing for the low to no margin categories. We are working toward a leaner more agile operating model and is expected to provide strong upward EBITDA leverage as future revenues increase. Resulting from the strategic business transformation changes, we recorded a number of one-time non-cash accounting charges in Q3. Goodwill in the Canadian market segment was written down completely charges $741.7 million. And we recorded specific asset impairments of $176.1 million, and an inventory provision charges $63.6 million. So summing up, there are three key takeaways from 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 for 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 or bottom-line and cash flow and reflect a leaner operating model that positions as well for future growth. So, thanks for your interest in Aurora. I'll now turn the call back to Miguel.

Thanks, Glen. 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 environment of war in Europe, high inflation and possible recession. It has defensible characteristics, high margins, and in our view, no one does it better, both domestically and internationally. Third, we expect the 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 is rationalizing our footprint and driving cost efficiencies. Fourth, our science and innovation program adds another capitalized opportunity 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, seeking targets that not only fits strategically, but are also rationally priced. The 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. We're energized for the rest of the year. And now, I'll turn it over the operator to open the lines for questions.

Thank you, sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question we have is from Michael Lavery from Piper Sandler. Please go ahead.

So, it's no surprise to see Aurora Sky finally get closed all the way. I think it has capacity several times what you're selling at the moment, but it's a big facility. It was sort of a showpiece of 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 flowed 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 fiscal '23 versus starting to see them in the fourth quarter this year?

Sure. So let me kick off on sort of a top line point, and then I'll let Glen go into some of the modeling points. You know, Michael, I think as you're well aware, and many people are aware that these massive facilities that were built, particularly in Canada, really were built 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, 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 you'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 in proactively right sizing the Company for what it needs. So most recently, as we've announced, Aurora 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, and it 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, sort of overall footprint. Secondly, when you have such a complicated network, with facilities all over Canada, it creates a lot of excess cost in the overall sort of simplicity of that system. And so there's added benefits, not just because of the carrying costs of Aurora Sky, but also to the simplification, or the closure of other facilities that we've announced as well, which will have a significant impact overall. And so, you know, I think those are all sort of important points. I mean, Glen, 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 the savings are going to hit our balance sheet, and I think you'll see quite quickly. But Glen, 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 in April on the manufacturing lines that have been moved back east are just up and running now. Sorry, external noise here. So, the timing on those, you should start seeing a lot of that, the positive impact on cash flows starting to come through in the next quarter. Now, that additional tranche of savings that we have announced is combination of both shuttering of some facilities that Miguel talked about in SG&A cost reductions about 50-50 on that additional tranche of savings. The SG&A cost reductions are expected to be executed over the next couple of quarters. So, we'll see them hitting immediately. And the Sky reduction, I mean, our current plan is to have Sky shut down by the end of summer. So, I think the next couple of quarters will be telling in terms of cash flow savings. Obviously, the production side, as it hits our cost of good takes a quarter or two to flow through following that. So, we expect to see the margin improvement coming through towards the last quarter of the calendar year, maybe even a little bit in the September quarter as well. So, we haven't really seen it Mike impact other than the SG&A savings. We haven't really seen the stuff impact our financials yet but it's coming.

I mean, Michael, one other point I would make is, you know, for example, closing Sky will save us $7 million a quarter in cash savings. So, it's significant.

Thank you. The next question we have is from Andrew Carter from Stifel. Please go ahead.

Good afternoon. So, I just want to ask you have upgraded the target by $90 million and your adjusted EBITDA loss was $12 million in the quarter. So multiply that by four $48 million loss, you got $90 million of cost savings. Are you saying that we should be getting to a $40 million EBITDA run rate, that's not even including Thrive and, or the tail end of the [Indiscernible]. I just want to make sure I'm squaring and thinking of this correctly. Thank you.

Glen, do you want to walk through the staging and then I'll talk about how to think about the timing?

Not, not really timing guys. I was just -- I was actually saying, is that just an out of bounds, absolute number to think about that 90 plus or 48 million annualized loss, 45 over the next two years. Thanks.

I'm having a little trouble following your question there. Our SG&A, we expect to take it down on a quarterly basis to low 30, and we expect our margins to continue to be where they are 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 that it's at now down below 30 is going to take us most of the way on the cost reduction that we need to get to positive EBITDA. But, even without depending on revenue growth.

I mean, I guess Andrew, I would, 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 rec business is up to and you, I think presume a bit of steadiness to the other two pieces of business and you drop the SG&A savings. that Glen just mentioned you're there. 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 EBITDA target.

[Operator Instructions] The next question we have is from Vivien Azer from Cowen. Please go ahead.

This is actually Victor Ma on for Vivien Azer. Thank you for taking the questions. So given the recent comments by Germany's health and finance ministers on accelerating adult use legalization, can you frame the adult use opportunity there and offer your thoughts and the timing? Can you also offer some color and how you look to leverage your current competitive position in medical market to approach the opportunity there? Thank you.

Sure, I'd be happy to. So, I think that the first thing with all of these countries whether it's Germany, or whether it's Netherlands, or you pick any of these EU countries. It's a similar regulatory framework in terms of the regulators, and they start with production, and they get into manufacturing protocols, and all EU GMP and the different pieces of it. So, those companies that have had success, and we're clearly one of them. In Germany, we'll have the inside line on racks. The folks that are making that decision are the folks that were involved in medical. And I think we were a bit pleased with the speed in which that announcement was made. So, it's really hard to pick timing in this. But it doesn't change your strategic sort of approach, because everything that you're doing for medical will apply to what we hope is a quick rapid turnaround. And so you talked a little bit about modeling. Right now, the percentage of the adult population in Germany that's using cannabis is one-tenth that at point 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. But I think 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, this little nuance about Germany that I'll share as to why it's so hard, their 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 say, well, Miguel, that gives you plenty of sort of buffer at 2.5. Balance 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 they said we're one of them, we'll have the inside line. When that goes rack and we think it'll be subjective. We also would point out that there are a lot of eyes on Germany as 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, sir. The next question we have is from John Zamparo from CIBC World Markets.

I wanted to ask about M&A especially following the drive acquisition. It seems as though companies in the space are generally more capital constrained and in the past and they're seeing valuations compress more. Does that give you more appetite to be active on acquisitions and keeping in mind you're going to look for human capital and brands that have connected, but is there any appetite to maybe accelerate the M&A strategy at this point?

Yes, I mean, 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, a really 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're mentioning is around Canada and this sort of question about, what type of companies do you go after? And with this, you know, credit markets, what do you get there. I really seen the dynamic nature of the business and renting market share, and buying companies just for their market share really is not, I think, a positive approach. And to the point you're 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, you know, different than others, you know, it was my intent to find a great high functioning team, and then put them in charge of our rec business. And so, the CEO of that company, Jeff, Uber, who's a wonderful talent with his team, they're now going to run our Canadian rec business. And not only, I think they'll do that at a high level but also they bring a significant amount of innovation in genetics, that we can plug both into our rec business, international medical business and our domestic name business. So, as Glen mentioned, we've got a lot of flexibility on the balance sheet. And I think as things get tighter, access to capital is a key strategic advantage for any company, but particularly the cannabis company. And as things get, more affordable and make more sense, we would be there, particularly, you know, possibly around medical assets. And we really, without being too boastful, consider ourselves being one of the best if not the best, international medical cannabis company out there. And so you know, those type of things are unique interest to us.

Thank you, sir. The next question we have is from Andrew Blonde from Jefferies.

Hi, good evening, Andrew Blonde on line for Owen Bennett. Thanks for taking our questions. So just 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 there's been any shipments since the end of the quarter today? Thank you.

Yes, I'll happy to. I have spent a lot of time in Israel. And I've really had the honor of having worked in Israel a lot in my career. And so, I was most recently there. A couple 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, a very smart and thoughtful gentleman, Yuval Landschaft, who runs, what's called the IMCA, the regulator of cannabis in Israel. And you're starting to see, a lot of interest and obviously many of our competitors, shipping Canadian flower in Israel, and I've done that successfully, but you're also seeing a significant growth of local growers in Israel that are becoming successful growing their own cannabis. And I don't need to name the name of my competitors, but I was there and I've seen many of those grows and been respectful that. So what you're seeing is in a country of 9 million people with about 130,000 patients that there is probably more supply than demand currently of good to great quality cannabis. And so, while it is always a challenge to navigate the very sort of high bar of the IMCA to get products into Israel, the results also now the internal pressure of having local grows, putting out high quality flour, particularly into that market. And so, we have said to everybody that, when we have a shipment to Israel, we will announce it. And so, in that statement, we have not had won 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, was shipping the larger shipment anyone's ever shipped into Poland or into Czech Republic or the significant growth you have that we have in Australia, you were able to balance out that. And I understand, from an analyst standpoint, it's hard not seeing that regular cadence into a market as important as Israel. But we think that when you have such breadths internationally overall it's going to smooth out. And we have been pretty good at guiding towards how we think our international medical business is going to do. And that's, without some of the new markets that are coming online. So, that's sort of it on Israel and I have great respect for what's going on there. And I think Israel beyond a place to sell 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 obviously there is a long history in Israel of biotech. So we are bullish, we're active in Israel. We at this point, don't have a shipment to tell you about.

Thank you, sir. The next question we have is from Frederico Gomes from ATB.

Good afternoon, Miguel and Glen. 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? I mean, what's the capacity there in terms of cultivation? How much of that capacity are you currently utilizing and then as well what are your plans for Sky? Are you looking for a buyer for this app? Does can even have a market for selling facility that size given the conditions that we are seeing right now? And also some of your other facilities as well that you plan to close. Thank you.

Sure. So I'll go as a top line overview and I'll let Glen correct me if I go in terms of the exact numbers on production clients by facility. So, our primary facilities our River and Ridge, they are historical facilities. They produce extremely high-quality cannabis. And as we focus on premium products, both domestically, internationally, rec and medical, they are proven facilities both with historical cultivars and new cultivars. We also retain the Whistler facility in BC that we all know produces some of the highest quality organic craft cannabis that is always done very well. And then staying in the Canadian market, we also are thrilled what we get with the Thrive acquisition, both are a tremendous indoor grow and a focused on concentrates as well as a significantly important outdoor grow that has a wonderful, cost of goods impact, particularly on fresh grows and for extracts and concentrates. Internationally, we have a 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 we look at all that in terms of disposition, it's my expectation that Edmonton market, particularly around that airport authority, that sky, we'll have a great buyer and we'll 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 CROs and others on interest on the MD&A. Glen, you want to talk a bit about maybe production quantities or [indiscernible]?

So, I mean, we have to Scotland before the capacity of like River, Ridge, Whistler, et cetera. And then they run in the neighborhood, sort of, like, I guess, stated capacity at River about 30,000 kilograms a year, Ridge about 5,000 kilograms a year, and Whistler 2000 kilograms a year. But it's more importantly, and I know its total biomass, what we've been focused on in cultivation, and then more and more expertise is obviously the yields and pass rates at spec. So for producing a 25% flower, how you want all your batches to be hitting 25% flower circle and falling in value. So, some of the -- one of the reasons that we're really focusing in River and Ridge is the exceptional pass rates are just hitting high levels of THC on a consistent basis, sometimes 100% of the batches in a particular period will be hitting there. So that's all really important for producing high quality flower. So it's great to state 30,000 kilograms, our focus has been getting, as much as possible at 30,000, to meet the high quality specifications. What we're thrilled about with the Thrive team is this is like, one of the best brands in Canada. And that's really obvious when you look at the Company and their performance, but what's under the covers is just exceptional expertise in the cultivation side. In the cultivar selection, you're growing techniques, very scientific method that's backed up by decades of legacy growing experience. You get some folks that kind of came over as part of that team that are getting real, sometimes, twice, what we've been getting a high quality stuff. So, we're excited to see even more coming out of our River and Ridge, we think we've got plenty of capacity there. As far as it goes in Europe, I think you're asking about whether we could use capacity there. In fact, we're starting to be concerned about capacity constraints and a couple of years. And it's not a problem. We've got expansion capability there. And we certainly can continue to export from Canada, but I put it in the other. 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. The next question we have is from Matt Bottomley from Canaccord Genuity. Please go ahead.

I just wanted to go back to one of the questions. I think Andrew was asking just about the change in the increase in the 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, it hasn't changed, but you're adding at the midpoint about 90 million of savings. So I understand that, from a standpoint of what you previously telegraph, maybe that sort of breakeven by sort of the midpoint of adjusted EBITDA, 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 '23, when that will be achieved, and then the actual cash part of it will be lagging or are we expecting some sort of step function increase into the adjusted EBITDA at that point in time given the significant increase in these initiatives?

Yes, I'll start to unpack that a little bit. So when we see annualized run rate, we're making a number a series of decisions, some of them happening today, some of them happening in June, and then et cetera, through the summer, and they execute a the shutdown facility obviously takes a number of months. So what we were targeting is that by the time we have to Q2, that all the decisions are done, the Saudis are shuttered that are set to be shuttered. And everything's been executed so that we're running at a rate that is EBITDA positive and that the savings have been captured by them. So looking forward, I think it's the right way to look at this on a run rate basis, annualized savings. How it differs from before? As we resize 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 this EBITDA 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 step, and we take that before. A lot of this shows up in cash savings, or why we're telling you the big numbers, is that's all cash savings. Obviously, when you cut it out of operational savings, Miguel mentioned Sky, you know, it's 7 million a quarter. So there's almost $30 million annually of cash saving face shattering that facility. So, that's, I think, if you want to think about this sort of the run rate here. We've got a couple quarters here of continuing hard work, to execute all these savings, but we've got an exceptionally crisp plan and we're executing on it. So cost of goods, obviously, the margins will start to improve, you would expect over time. There's definitely headwind in the market, you know that inflation, et cetera, et cetera. But we think we're going to at least cover that if not more through these cross rationalizations and the SG&A cuts to get us to positive EBITDA in a quarter that looks like Q3.

Yes, I guess the other couple 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 Kraft and PNG, or a new Head of HR, who comes from Hilton, AmEx. So, they're -- this is a different management team that's running through this. The second part is, we're going to continue to give updates the best we see it. And I understand while some people may say, well, Miguel, geez, I understand these enhance savings, why wouldn't you increase your raise your guidance overall. And I'm a bit sensitive to the history of the Company saying, it's going to do something, particularly around profitability and savings and not getting there. Then Glen's right and talking about the structural differences of this based upon the current revenue. So, you know, that's why I want to see a little bit of the execution. I want to see a little bit of the timing. It's a bit of a, you know, a wonky time period with inflation and some other aspects going on. If we get closer with greater clarity, of course, we'll be transparent and then 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.

Thank you, sir. So our final question comes from Doug Miehm from RBC Capital Markets.

Thank you. I just wanted to go back to this so that I'm sure I understand Aurora Sky. So, it's operating at 25% capacity today. I'm just curious then, what is it making and what are the revenues roughly coming out of that site? And is it losing $10 million to $20 million a year or even more by the sounds of it?

So, Doug, let me go, I mean, put up with this a little history bit. Sky was originally created as many people on this call know better than I, 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 product was more than acceptable for the Canadian market and some other markets. As the consumer evolved very quickly, bud quality density, moisture, all of those things, and then potency and terps and all these other sort of core character attributes did not lend itself to automation. And we are 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 of cultivars that do well. And so, when you couple the rapid sort of expansion of what a consumer wanted, particularly in the rec business and with the need for new cultivars scale of that size became a bit of an impediment. And so, we pivoted sky and made massive improvements and absolute kudos to the folks that worked 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 cost, whether it's maintenance, whether it's all of those things that were created under a past sort of scenario, Sky became really untenable. And so, we took it down to 25%, and yes, it was losing a significant amount of money as we had to allocate the overall costs of that facility against the product that was created there, which was almost entirely flour. And as flour prices, particularly in the rec 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 rec 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 to. And I think, we have been pretty proactive in reducing our footprint, whether that was Sky, whether that was previously with Sun, and 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 cannabis we need. And lastly is, as you see an expansion into other items, concentrate, infuse pre-rolls, vapes, ingestibles in the Canadian market, massive facilities, just producing flour, 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 Miguel Martin for closing remarks. Please go ahead, sir.

Well, I want to thank everybody for taking the time to continue to listen to Aurora 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, they've never been stronger. And so, we're excited about the quarters and we appreciate all of your coverage and interest in Aurora. 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.