Good morning. My name is Mary Alma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q1 Quarterly Investor's Call. [Operator Instructions] Carl Merton, you may begin your conference.

Good morning, everyone. Thank you for joining us to discuss our Q1 2019 financial results. With me on the call is Vic Neufeld, Chief Executive Officer of Aphria. I trust that you've all had the opportunity to read our press release on our financial results. Today's call is intended to give you more color about the results and to answer any questions that you may have in our allotted 45 minutes. As part of this call, I'm required to read the following cautionary statement. In talking about our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements concerning Aphria's objectives and strategies to achieve those objectives as well as statements with respect to management's beliefs, plans, estimates, intentions and similar statements concerning anticipated future results, circumstances and performances or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. The forward-looking statements in this discussion speak only as of today's date, and we undertake no obligation to update or revise any of these statements. Before we get started, I'd like to briefly address recent media speculation regarding a potential investment into Aphria. While it is our general policy to not respond to market rumors, we responded to a request from IIROC to make a public comment. As we stated in our press release on Wednesday, we engaged frequently in discussions with potential strategic partners and/or investors. At this time, we can confirm that there is no agreement, understanding or arrangement in place. Aphria will advise the investment community of any material changes, if and when they occur, as in line with disclosure obligations. We will not address this situation further today. Now I would like to turn the call over to Vic Neufeld, Chief Executive Officer of Aphria.

Thank you, Carl. And good morning, everyone, and thank you for joining us today. With less than 1 week to go until legalization on October 17, we are extremely excited to enter a new era of the cannabis industry. This is an historical milestone for Aphria and the industry that will open tremendous opportunities, and Aphria is at the forefront. Once again, Aphria delivered a solid set of results as we gear up for legalization. Key highlights in the first quarter of 2019 include significant increases in grams sold and strong top line growth. Net income rose by 40%, largely due to gains in Aphria's investment portfolio, including our investment in Liberty Health Sciences and the IFRS rules related to biological assets. Given the current federal legal framework in the United States, we've made the strategic decision to divest our remaining U.S. holdings in order to permit us to focus on other more immediate capital markets and strategic opportunities in Canada and in other legal markets around the world. However, as we have long said, we believe in a tremendous opportunity in the U.S. cannabis market and intend to be a significant player there at the appropriate time in the future. Aphria's core strategy remains on track. And we made significant progress with the Part IV and Part V expansions at Aphria One facility as well as the retrofit of Aphria Diamond, both located in Leamington, and we've ramped up our production capabilities significantly. Total annual Canadian production capacity is on schedule to reach 255,000 kilos annually, with the first sale from Part IV expected in Jan or February 2019, depending on Health Canada time lines for site visit and approval. Innovation fuels our competitive performance, which includes using the latest automation technologies. Automation is a key component of our…

Q1 2019 represented a key inflection point for Aphria. For the past 4 years, Aphria has operated as a medical-only cannabis company in Canada, but with the aspiration to participate in Canada's legal adult-use market when available. But that does not represent everything that Aphria has come to represent. For the past year, Aphria has had an equally intense focus on building itself as a global cannabis leader. So while during that period, our Canadian teams plan for the who, what and where, but without knowing the when associated with this market. Our international teams continue their march to build Aphria as a global brand. These international activities included advancing towards EU compliant GMP certification in Canada, preparing for the German tender due on November 5, including advancing the tender documents and the final design and approval of the cultivation and GMP certified processing facility in country. Announcing our entry into LatAm, with the purchase of LATAM Holdings providing operations in Colombia, Argentina, Jamaica, and an option/right of first refusal on Brazil, which closed subsequent to quarter-end. Advancing opportunities in Australia, including participating in the equity financing of Althea, one of Australia's newest public companies. Progressing on our CBD strategy in the European Union and receiving the first cannabis license in Malta. The building out of our international footprint is an investment in the future of Aphria. Just like the hard work done by our early employees in Canada, which established Aphria as a premier cannabis brand, the early work in international markets will continue to build the global brand equity in the Aphria name. During the quarter, our clinical drug trial partners continue to progress their efforts towards securing drug identification numbers, including Tetra Bio-Pharma with PPP001 moving to Phase III and beginning a head-to-head trial against fentanyl. We're…

[Operator Instructions] Your first question comes from the line of Noel Atkinson with Clarus Securities.

First, can you tell how you plan to move your first plants into Part IV, must be pretty soon?

We'll move Part -- sorry, Noel, our plan to move plants into Part IV is contingent on Health Canada approval.

Okay. But in theory, you'd be getting that hopefully very soon if you're going to have for saleable products in January.

Yes.

Noel, for clarification, our Part V, which has fast-tracked quicker than Part IV, the home of our new mothers, the request to Health Canada has already been submitted 2 weeks ago, so we are waiting on that. And I would suggest you within 2 weeks completion of all the securitization cameras, et cetera, et cetera, in Part IV will have been completed, and at that time, we'll make our submission to Health Canada. The unknown right now is the backlog of many, many, many activities within Health Canada. Many LPs are jockeying for position on getting a very short-staffed department for site visits. So we are -- we are hoping. It's a month in the waiting queue, but one never knows given the backlog.

Okay. And then just following on, on Health Canada. I see that there's soft gels now listed in your inventory, and there's also website's pages up for soft gel products. So are you folks close to having Health Canada approval for soft gels?

Yes, we are very close. We made submissions, back and forth correspondence. It should be imminent, Noel, but again -- and I don't want to keep referring to the backlog, but Health Canada is doing everything they possibly can with the tight resources of management and manpower. It's just -- it's the waiting game. And yes, we've got a pent up demand for soft gels, not just on the medical side but also the recreational side. So it's a big unknown, and I wish there was more clarity I could give, but there is none.

Okay. Was there any way that you could have salvaged those 14,000 plants by cutting off the bud and just putting them in a vault for future extraction or anything like that?

The decision to destroy them was conscious and was for production planting purposes. To have done those things would have been the same as just running them through harvest. It wouldn't have solved the production.

Okay. And then just finally before I go back in the queue here, so there's announcement out of the U.K. allowing specialist doctors to prescribe medical cannabis, as early as the start of November. Can you tell us if you have any activities in the U.K. right now?

So the U.K., as I think I made reference to in some past media interviews, is one of our top priority countries globally that we have not secured a license in yet. We have been in deep dialogue with a number of influencers and stakeholders in the U.K., have met with the House of Lords representatives, have really tried to move the needle on the medical platform. Albeit at the beginning, it's for epileptic seizure control, but the list of chronic conditions to unfold over time will happen. So yes, the U.K. is a very targeted country for the Aphria story to launch into, and we do have relationships and agreements that we're working toward to make sure that Aphria is one of the, and I believe, one of the first 3 entries using our high CBD oils for epileptic seizure control.

Your next question comes from Jesse Pytlak with Cormark.

Just to start, as you kind of look across the different Canadian provinces right now, kind of, what's your view on which province you can get probably best prepared for October 17? And how does that kind of span across the country?

Wow, that's -- Jesse, that's a loaded question. I would suggest you, there is 1 or 2 provinces that jumped into this journey in a very quick and meaningful manner, Quebec being one. They were the first out of the box with their complete management team, their strategy, their retail brick-and-mortar online distribution centers, so I would suggest you that Quebec is probably the best positioned in terms of the reachouts. And what I really can't talk about right now are the provinces where it is privatization and where are the private entrepreneurs in terms of their brick-and-mortars. It's a big unknown. But let me just get the elephant out on the table right now. There are shortages that we have conveyed for several months now. The landscape is such that trying to put so much product with so many brands, with supply chain issues, abounding everywhere with every LP, there will not be complete satisfaction by any of the provincial regulators out of the box. The pipeline still is not going to be there. But that's just the short term, and I've said many, many times, there is 3 windows when it comes to the supply side of the equation for adult use. And the shortage window for Aphria is probably the first 2 to 3 months. Thereafter, when we start gaining back our harvest productions with Part IV at Aphria One and Aphria Diamond thereafter. We will be in a very enviable position to fill any gaps, and there will be gaps, and there will be many gaps throughout the provinces in different SKU selections. So we have really crafted in the architecture behind 5 brands with various genetics and various product offerings to be there. The out-of-the-box journey, though, will be very, very difficult for all licensed producers.

Okay. And then just in your prepared comments, you also mentioned briefly your European CBD strategy. Can you maybe give us a little bit more color on what that entails?

Yes. And there's 2 strategies here. Depending on the country, there is a lot of movement in Europe, for example, with a CBD light. That CBD, that source from hemp, and what we are contemplating in certain countries, Portugal being one, Italy being one. Then there is the cannabis, CBD/THC cannabis strategy. So we're actually dual tracking depending on the country and what their Ministry of Health or Department of Health regs are. We are very much positioning ourselves in strategic countries to be not only replacing importation of medical cannabis in replacing that within country but also allowing us the opportunity to export out of certain countries, like Portugal into EU countries that will still continue to allow the importation for the next 2 to 3 years. So it's CBD light, but also it's CBD and THC from cannabis. And it depends on the type of regulatory framework country by country.

All right. And then just one final question, you mentioned the Germany tender deadline due November 5. Do you have any color on how quickly Germany is kind of considering allocating or awarding any of the production licenses?

How quickly, is that what you said, sorry?

Yes, like, how quickly do you think that process will kind of unfold?

So they've said that they are looking at the end of Q1. I take that -- maybe the accountant in me, I take it a little too literally and assume that means March 31.

Okay.

And I think the question, Carl, the tendering process is due and the applications are submitted in November, I believe, correct?

On November 5.

November 5. And Jesse, we are very well positioned and feel very confident that Aphria, with our application and as we all recall, this was really the beginning of why Nuuvera became such an important piece of our international strategy when we acquired them. The team in place, the vertical business model that they had sketched out and we're executing on, we feel very confident that we're going to be in that race.

And if I could just add to that, I think one of the important reasons for that if you look at the tender process itself, they didn't change the scoring system. So the scoring system remains identical to the previous tender.

Your next question comes from Matt Bottomley with Canaccord Genuity.

Just first, I want to go back just to the some of the labor challenges just in the quarter. So it seems like, post quarter, you doubled the labor portion resolved it. What's your view on how you're going to, I guess, look between increasing your automation versus even more labor, considering you going from, I think, 30,000 kilograms in Aphria One up to total 225,000 kilograms in the province? Still a large increase there. So are you going to be leveraging more on automation? Or is they're still challenges in potentially ramping up that labor force you can work?

No, the introduction of the automation into Part III and Part IV, we'll address that. We still have some -- we still have people we'll need to hire, but not at the level that we went through in the previous quarter.

Okay, great. And then maybe just going back to some of Jesse's comments there with respect to just the timing of this market and Vic's responses on the supply versus demand. So I got a couple of questions over the last week on that post article, whether some of Vic's comments were related to Aphria itself or the industry as a whole. In my view, it is an industry challenge over the next 2 or 3 months. So do you have any commentary on what you think this market will look like in these first 3 months, is a lot of it's going to be online sales? Do you have any readthrough from your provincial shipments? How much of a brick-and-mortar is getting supplied over the last couple of weeks versus just these online platforms we're seeing in many provinces? And are you expecting to see sold-out signs on some of these websites once the market kicks off next week?

Well, I think I can address the latter one easy. Yes, there'll be sold-out signs. It again reflects everyone's desire to be good partners to every province, but it still comes with supply chain issues and labor. Lot of us have equipment that needs Health Canada approval, and we've been frantically and patiently waiting. There is a lot of moving parts. These are not necessarily excuses but they are the reasons why a lot of LPs will not be able to fulfill the MO use that the provincial regulators are looking for. Now that allows, however, these craft growers, these smaller LPs who were not allowed to enter the journey because they could not satisfy the provincial needs. That allows them an opportunity to come to the table, and that's a good thing for the Canadian consumer, and I can see that happening. I think BC has already made that reachout to those LPs with smaller brands but can service their particular needs. Back to your other question, though, it's split between online and Ontario's only online and brick-and-mortar, we do not have complete visibility in terms of, let's take Manitoba, the 4 existing license holders and their rollouts of brick-and-mortar. I don't think any one of those license holders has a fully developed and ready to open the doors on October 17. The individual retail entities in Alberta up to 37 doors, again, I don't think there was enough time available to secure, build and staff train all of the brick-and-mortars in Alberta. So there's a lot of learning curves going on, a lot of bumps in the road, but I would suggest you, in 3 months, if it's not remedied by January, then this whole program is in big trouble. But I truly believe that Aphria is going to do our part by January 2019 and so will other provincial privatized retailers also finally get to where they want to be.

That's helpful. Just last question on my end, moving to the international side of thing. Maybe just an general overview or quick commentary on what we should be looking for in 2019 in the LatAm market, that's something that I think is becoming a lot more exciting? Obviously, a lot of countries there are trying to roll out their programs and secure supply. You guys have taken a pretty big dive there into that market. Just curious on what we investors should be looking for in the next 12 months in that region, in general?

So let's do the countries individually as part of our LATAM transaction. I'll start with the easiest and then go to the biggest at the end. In terms of Brazil, where we have our option, that market is still evolving. It's still not 100% clear whether the government is going to allow imports or not and whether the people we have chosen to partner with will be able to secure one of those licenses. So I would not expect anything in F'19 from Brazil. Jamaica. Jamaica, we have existing cultivation licenses. We have inventory on hand. We have herb houses that are completed and that will be completed in the next few months. So I think you're going to see a modest level of revenue coming from Jamaica. It's not -- certainly not the biggest part of that LATAM transaction but it will likely be the first to have repeatable sales. In Argentina, we have announced the hospital clinical drug trial with Hospital Garrahan at 6,000 bottles of our Rideau CBD oil. We have applied for export and import certificates related to that, and we hope to be able to announce successful delivery of that product in the short term. That transaction will bleed through Fiscal '19 for those 6,000 bottles. On the Columbian side, Columbia was obviously the crown jewel in that acquisition. The facility continues its greenhouse build. We are looking to export product from Canada into the Colombian market on a short-term basis to help fill supply, but you will see in fiscal or -- I'm sorry, in calendar '19, you will see revenues from Columbia.

Your next question comes from Martin Landry with GMP Securities.

Just wanted to clarify something. Have you started to ship to provinces yet?

Oh, yes. Our shipping is probably 2 weeks under our belt already in terms of those provinces who were early with POs, again, Quebec being my primary example. But yes, we have been split-shipping for at least 2 -- probably in the closer to 3 weeks by now.

Okay. And can you talk to the quantities you have shipped so far?

No, not until everything -- all the dust is settled. We're still trying to understand the allocations. As I said in my opening remarks, Martin, we are shipping everything we're growing and -- in saleable inventory. It's a very difficult task for my supply chain team today, and that's for the last 2 weeks of trying to understand provincial needs, the strain selections, the SKU selections, the forms of product intake and applying various provincial excise tax stamps. It's playing Solomon, and it's not a good place to be because you are shorting every province. The question becomes who do you really fill with certain products that are of limited supply. And when I say limited I'll just repeat again, this situation will need 2 or 3 months of unraveling as, a, more harvest comes on; b, we get a better understanding of consumer offtake, like, for example, is it a 0.3 gram pre-rolled? Or is it a 0.5? Is it a 1-gram bottle or a 5-gram bottle? What sort of sprays are there, Indica and Sativa. All this consumer profiling will have a much better grasp of how to reshape our supply chain once we have some data points from POS, and that's problematic for -- to every LP.

Okay. And just so I understand better, the bottleneck, right now, is it your excise stamps? Or is it the amount of product you have available?

It's a host, Martin. The excise stamps have been problematic. It's slowly but quickly more recently been alleviated, but now you need the labor now to come in and start applying it to every provincial genetic strain to the 5 brands, to the individual SKUs. It's trying to merge a 5-lane highway into a 1-lane country road. It's tough to get everything through the bottleneck on a timely basis. And so for us, it's going to take probably at least 1 month or so of the internal supply chain and then a couple more months of getting harvest back up to where it's supposed to be in terms of meeting or exceeding the expectations of our provincial regulators.

Okay. And on the labor front, are you seeing pressure on wages? Are you -- do you have to increase wages you're paying to your workers to retain them?

No, not the base rate, Martin. What we have done though, again in especially in Ontario, you've got so many hours after which an employee can reject extra hours. Have we paid incentive pay to come in on weekends? Absolutely. We have had 50 volunteers last Saturday, for example, working extra. It's a premium, yes. But again, no one really wants to continue to work 50, 55 hours a week. So we have financially incentivized them to come in on Saturday as well as on a Sunday morning for a 4-hour shift. It's very heartwarming to hear and see the response from our reach out to our employees, both in processing, harvesting in greenhouse, but at the same time, it does come with a little added expense. And that's why, I'm really not looking at our next quarter Q2 as indicative of the cost structures going forward because it's being jammed. And with jammed operations, you've got certain inefficiencies that are costly. And so it's again, it's an event, it's not a continuum.

Okay. And just last question. Do you -- are you still entertaining a U.S. listing? And if so, is there a timing you can share with us?

Yes. Martin, we don't hide behind the fact that as a company, we continue to search for ways to grow up and mature in our space that includes regulatory exchanges that are outside of Canada. So the answer is yes. We are entertaining some thoughts on an uplisting, and I'll leave it at that. We only press release when there is facts. We do not talk about if this and then that. We're not about rumors. So when there's something factual, you'll read and see a press release accordingly.

We have reached the end of the allotted time for the call. I will now turn the call back over to the presenters.

Thank you, everyone, for participating today. We'll now conclude the call, and let everyone get back to trading. Thank you, again, for joining us, and we look forward to updating you on our progress and new developments in Aphria's business in January. Goodbye.

Thank you, everyone.

This concludes today's conference call. You may now disconnect.