Good afternoon. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q4 Quarterly Investors Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session for analyst and/or investor firms only. [Operator Instructions] Thank you. Ms. Katie Turner you may begin your conference.

Thank you, Sharon. Good afternoon, everyone. We appreciate you joining us to discuss Aphria's financial results for the fourth quarter and fiscal year ended May 31, 2019. On today's call are Irwin Simon, Aphria's Chairman and Interim CEO and Carl Merton, Chief Financial Officer. By now everyone should have access to the earnings release, financial statements and MD&A, which are available on the investor's section of Aphria's website at www.aphria.ca. These statements have also been filed on SEDAR and EDGAR. Before we begin, please remember that during the course of this call, management may make forward-looking statements. These statements are based on management's current expectations and beliefs and involve various known and unknown risks and uncertainties, which may prove to be incorrect and actual results could differ materially from those described in these forward-looking statements. Please refer to the text in Aphria's earnings press release and financial filings issued today for a discussion of the risks and uncertainties associated with such forward-looking statements. I'd now like to turn the call over to Irwin Simon.

Thank you, Katie. Good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and fiscal year 2019 results. It has been a very productive quarter and six months with tremendous change that happened. The leadership team we have in place is solid. There is no management void at Aphria. As Chairman and CEO, I am leading the company forward with our team every day. There is no emphasis on interim by me or my team. It is about the initiatives and strategic growth plans that we have established in the last six months to move the company forward for sustainable growth today and over the long-term. During our Q3 earnings call, I noted that in order to help us extend Aphria's vision to be the best performing cannabis company globally, providing investors with access to one of the most accretive cannabis opportunities around the world that we began working with a leading consulting firm to work with our leadership team to prepare an internal 90-day plan, prioritizing our long-term strategic objectives and build an execution roadmap. The plan is to be used by our senior leadership team to assess the opportunities in the market, prioritize our initiatives and ensure we are investing in strategies most likely to have immediate impact on our business and profitability that will prepare us for growth over the next several years. In Q4, as you've seen, we've already started to implement many of those outcomes from the 90-day plan, which help us narrow our focus on the highest returns and the priorities for growth. The Aphria of today is not the Aphria of yesterday and wouldn't be the Aphria of tomorrow. We strive to be better at all that we do, so that we can further our industry-leading position. We are…

Thank you, Irwin, and good afternoon. Please note all financial references are in Canadian dollars unless I mention otherwise. As Irwin discussed, in the fourth quarter we had a relentless focus on the growth initiatives that could generate meaningful near-term results and prioritize profitability as we continue to position our business for long-term growth and success. We believe the steps we have taken position us to generate long-term shareholder value with a strong team focused on consistent execution, full accountability and best-in-class corporate governance. Focusing on our capacity, once fully licensed, our annualized capacity will be 255,000 kilograms and we remain on track to reach CAD 0.5 billion annualized in Canadian cannabis sales once we are in full crop rotation at all facilities and CAD one billion on an annualized basis by the end of Calendar Year 2020. This excludes our new Extraction Centre of Excellence, which is being constructed as an integral part of our Leamington production facilities combining science and innovation to develop the future of the cannabis industry. The Extraction Centre of Excellence will be physically located on the same property as Aphria Diamond and requires Health Canada approval of Aphria Diamond before submitting a license amendment application. As a result of the open license application, we have taken steps at our licensed facilities to supplement our extraction capability. These steps ensure that sufficient capacity exists to process all of our extraction needs regardless of when the license for the Extraction Centre is received. Once received, the company will be in a position to increase the amount of biomass it processes for either internal or external needs. At Aphria, we have the greenhouse space, the cultivation expertise, the automation technology and the raw materials to position us for success. And as we gain scale, we will gain…

[Operator Instructions] Your first question comes from John Zamparo with CIBC.

Thanks. Good afternoon. On the F-20 guide you provided a split on the distribution business for revenue. Is it fair to assume that on EBITDA that the margin for that distribution business holds where it is now?

Yes.

And also, if there is some opportunity for upside as more and more of our medical cannabis is sold through the distribution business. But as Carl said right now, it is what it is. But one of the reasons in acquiring that was to expand our distribution and increase the margins to all those medical pharmacies across Germany.

Okay. Thanks. Moving to a separate subject, some of your competitors have talked about lumpiness in terms of purchases with provincial wholesale buyers. Is that something you've seen? And are there any regions of strength that are worth calling out for Aphria?

I think most companies go through somewhat of a lumpy ordering pattern during the month, and you've got to remember this is a brand new industry. They're learning purchasing patterns. We're learning shipment patterns. I just think that any lumpiness that exists is just a function of where we're at in the industry.

Again, it's not seasonality. There's not historical numbers. There is additional retail stores opening additional online products. So I think there's not a trend yet you can look at and say there's lumpiness out there. There could be lumpiness in July, and it could be stellar in August. So I think as we're just learning a lot more about the industry and shipments and consumer behavior, it's hard to track what is lumpy and what is a trend and what accelerated sales are.

Understood. Maybe we could talk about the U.S. strategy. I understand you don't want to signal too much to your competitors, but is there any more color you can provide there? And is there a preference towards buying or building? And is this something you expect could be material by the end of this fiscal year?

Listen as I said in my script, I built a large consumer packaged goods business in the U.S. and I understand the U.S. market. I think there is challenges in regards to legalization. There is a challenge in regards what you can sell in products whether it's food, personal care products. We do have lots of plans for the U.S. and whether it's partnerships, acquisitions strategic alliances. And what is profitable and where there is growth accretion here is something that we'll do. So there's plans. There's nothing that I'm going to signal to you right now. But I think when we do go into the U.S. we will be ready to do the right thing for Aphria and its shareholders.

Okay. Thanks. And last one for me. On the German license win from May, I just want to get a sense of how those operations scale and what kind of revenue or EBITDA generation you can expect from those assets over the next year or two.

So the lot win in the next year really will start, sorry. The lot revenue will start in fiscal 2021 and will play out through that year. In the interim period, we believe we'll have the EU GMP facilities up and we'll be driving additional revenue through Germany as a result of those.

And that's all built into our 2020 forecast.

Okay. Understood. That's it for me. Thank you.

Thank you.

The next question comes from Owen Bennett with Jefferies.

Good afternoon guys. And just the one question for me. So you mentioned exploring opportunity to expand capacity of Broken Coast. I was just wondering kind of how much additional capacity you would like to add there, because I'm conscious as well you've spoken in the past about the reason it can attract a premium is because sometimes in terms of scarcity value. So kind of is it a fine balance you're trying to reach there in terms of capacity and actually kind of keeping up scarcity value as well? Thank you.

Thanks, Owen. I think that's the right way to say it. You've got a careful balance that you're trying to broker between a super premium product that has room and greater demand than exists in the overall market, while also trying to balance the value that it brings to the market because of scarcity. And so we continue to go through those internal discussions and we hope to have an announcement shortly on exactly how big any expansion there would be.

But we do know the demand is there from the consumer. We do know we need more capacity and there's lots of opportunities to go out there and build or do some other things to ensure that we have capacity to grow that brand, because that is a business that has just tremendous growth, tremendous margins and tremendous consumer awareness.

Okay. cool. Thank you very much. Appreciate it.

Thanks. Thank you.

The next question comes from Tamy Chen with BMO Capital Markets.

Thanks. Hi, Irwin. Hi, Carl.

Hi.

First question is I wanted…

Hey, Tamy we're having trouble hearing you.

Sorry. Can you hear me now?

I can hear you now.

Okay. Hi, guys. First question is I believe Carl on the last quarter you had suggested that cannabis revenues for this Fiscal Q4 would look a bit similar to Fiscal Q3. And so I'm just wondering what were the main factors. I mean, obviously, the jump was in the rec market. So I'm just wondering what really drove this sequential increase.

The changes in the sequential increase was really driven by the team in Leamington. They listened to investors when investors spoke very loudly in April and they made a conscious effort to continue to make improvements operationally.

The big thing Tamy is we focused on our grow we focused on our processes. The demand was there for the product. And we were able to do what we were supposed to do is grow to a budget, grow to what the market needs are and be able to ship. And that's where you see it in the numbers.

And that kind of ties into my second question is that I just wanted to recap and review. Last quarter there were some operational challenges. It sounded like it was a function of there were supply issues perhaps that because you were trying to devote and build more mothers for Phases IV and V at Aphria One that that may have contributed to the ability to have been able to sell more in fiscal Q3. Is that a fair way to represent what those challenges had been in Q3? And are you now over that hurdle?

Yes that was our Q3 challenge and yes we are over that. Listen, we've made lots of changes in personnel. We've made lots of changes in our grow. And we're seeing the results for it. And I have said that Aphria One would be completely full of plants and you heard me talk about the number of plants that are in that facility as of today and all the different houses are full. So there was lots of change and lots of execution that's gone on and I'm very, very proud of what's happened in Aphria One and the growth of our plants.

Got it. Okay. And my last question still on this point is that, when I'm thinking about Aphria Diamond and you touched on it a bit in terms of how it impacts your cost, but just the way I think about when Aphria Diamond is licensed, it is a sizable facility. And so the supply challenges that you experienced last quarter having to have enough mother plants etcetera, would that then happen again when the Diamond facility gets licensed and you need to have the appropriate mother plants and all of that ready to start planting in Diamond?

Tamy we've already made the steps to have additional mothers available for that additional capacity. There's still a ramp-up. You can't go from planting 0 of 1.3 million square feet to being fully planted in 1.3 million square feet. There will be a ramp-up period, but we have prepared for that in advance.

Okay. Thank you.

Your next question comes from Brett Hundley with Seaport Global.

This is Luke Perda on for Brett Hundley. Looking first through the CAD 1 billion revenue target by the end of Calendar 2020, what's required from the Canadian retail space as far as store rollout is concerned? As you model this forward sales expectation your assumptions on production and pricing may well be grounded, but what do you make of the potential for national retail store network to come up short particularly in high-population areas like Ontario and Quebec?

So I think the big thing this year is the continuously opening of more and more stores more and more retail outlets across the country. And we're seeing that on a regular basis. And I think as each of the provinces and the liquor control boards get comfortable with their supply, they're going to be able to -- they're doing that. So the other thing is as we get out there and invest in our brands and build our brands and we see supply moving over from the illicit market into the rec market that's where the opportunities are. And I think one of the big problems has been we've talked about lack of supply, lack of supply, lack of supply. And as we get out there and talk about we're able to supply and once we have Aphria Diamond up and going we'll be able to sell 255,000 kilos a year we're going to have plenty of supply out there. And the big thing is we built our brands to drive the consumer away from the illicit market to be out there buying at the stores and buying brands that they're familiar with.

Got it. That’s it for me, thanks.

Thank you.

The next question comes from Noel Atkinson with Clarus Securities.

Hi, thanks for taking my call and congrats on a really solid quarter. First off on the extraction side, can you talk about what you have for extraction capacity at Aphria One today like in terms of kilos and whether you have any outsourced agreements in place to support that?

We have no outsourced agreements. We believe we have more than sufficient capacity internally to process all of our extraction needs for the immediate future. Currently we have over 45000 kg of capacity and are building towards 125,000 in the short term.

And that's just at Aphria One.

That's just at Aphria One. And then the capability that the Extraction Centre of Excellence once licensed will grow it even further.

Okay. And then just following on that can you talk a little bit about what preparations beyond the PAX agreement -- what preparations you've been making for the edibles the vapes the topicals as they're coming out? And when do you expect to have first shipments of these products into the adult-use market? Lot of questions. And are you having supply negotiations already with any of the provincial agencies?

So number one is, it's built into our plan it will be in the back half of our plan is when we expect to have these products and ship them into the marketplace. Absolutely we are having supply and distribution discussions with different control boards. And we are absolutely out there today working on R&D, working on product developing and working on partnerships on vapes for sure, but drinks edibles et cetera. So we are well into it and we'll be ready to be shipping products when the next evolution of products in the back half of 2020.

Okay. Great. And Carl I wondered if you could talk about the CapEx outlook for Fiscal 2020?

So there's a – there’s some disclosure in the MD&A in the commitment note that is CAD 45 million. And those are commitments. And then we're looking at about another CAD 35 million in Germany to complete the build in Germany. And those are the plans that we have announced.

And listen we have capital. As we look -- and we've spent good capital on our facilities here in Leamington. And as we look to expand Broken Coast, we look to expand Latin America and Germany. As we look for what's our return on invested capital. And what is organic growth and what is EBITDA accretion. And we're not looking to build big shiny boxes, that are not going to get us good growth, dilutive earnings and where is the size of these markets. As you heard me say before, Latin America is 650 million people. Germany is a big market for medical and can supply other parts of Europe. So, we're going to spend capital, where there's the right return on invested capital, where there's a good growth market, where we think the medical market has the support from the docs there. And we do have the balance sheet to be able to go out there and do it.

Okay, great. And then finally, just on the cash cost side, what do you think your cash cost was in Q4, if you back out all sort of that incremental overhead of Part IV and V and, the CAD 0.20, you mentioned, like, were you approaching CAD 1, a gram or below?

We reported -- the number we reported already pulls out the CAD 0.20 a gram.

Okay.

We reported CAD 1.35.

And that's after -- that excludes the CAD 0.20 of the …

That excludes the CAD 0.20, yes.

Okay. Are you still targeting…

It continues to trend down. And we believe we'll be able to get it to the CAD 1.

Okay. So you're still targeting CAD 1 one per gram.

Yes.

Yes. The facility needs to be full. The facility needs to run for a couple of quarters, for us to be able to achieve all of the operational efficiencies.

Okay, that's it for me. Thanks very much.

Your next question comes from Jesse Pytlak with Cormark.

Hey, guys. Just to start in thinking about the sequential growth on the cannabis side particularly on the adult-use channel. Can you quantify or otherwise maybe speak to just what sort of impact the opening of the Ontario storefront retail channel had on that growth?

Well, Jesse, I think the provinces that have both data for online stores and for brick-and-mortar. It's very clear that brick-and-mortar is 95% of the sales revenue in those provinces. People for whatever reason do not want to buy cannabis online. And so the growth in Ontario was obviously stunted during the period of time when you could only buy products online. Now that they're starting to build out stores, we see tremendous growth opportunities in Ontario. They opened 25 stores. They've got another 50 more. They're going to keep announcing more stores.

But the 20, in this quarter, I mean, the 25 stores that opened. They've opened pro rata and that's not what drove the growth in our rec cannabis this quarter, also 25 stores that opened in Ontario.

So, you're saying it, it wasn't the opening of the 25 stores that drove all the growth?

It was across all products.

It was across -- Aphria products are sold today, in every province in Canada. And it was driven by growth in every province in Canada today.

Okay. I guess I was just trying to get a sense of how impactful the Ontario store rollout was to the total growth.

I don't have a number for you as a percentage. But it was absolutely a part of it. But it was not the major part of it at all.

Okay. And then, if memory serves correct. I think during the summer period last year, you guys experienced some labor staffing issues during the summer period. That led to some operational challenges. Obviously with Phase IV and V online and the level of automation there labor is going to be not as big of a component, but just wondering if you're having any type of seasonal impacts on the labor side this year.

We are not having any seasonal labor issues at all this year.

Okay. That’s all for me. Thank you.

Your next question comes from Matt Bottomley with Canaccord Genuity.

Hey guys. Great quarter, thanks for taking all these questions. Carl, just wanted to clarify the commentary on exiting 2020 with a potential for CAD 1 billion in Canadian cannabis sales. Is that a run rate you expect to achieve by Q4? Or is that just the capacity you plan on having built out, that could potentially service that much revenue?

So it's the capacity, that's available, on an annualized basis, in December of 2020 times our current selling price.

And you're agnostic to where that's sold? Could some of that eventually be exported? Or would it just be the Canadian market?

Yeah. No, it could -- we're working towards securing EU, GMP, so that we have export capabilities. We're agnostic to where it flows.

Okay. The next question just goes to the 2020 guidance you put out there. Just a question on how CC Pharma will trend. I think you said here, it's about half or slightly more than half of your let's call the high end CAD 700 million in revenue. That would be sort of CAD 350 million that would be CC Pharma but that's lower than its current run rate based on where we're at today. And given that you're planning on potentially launching CBD in Germany, I'm just wondering what that dynamic is that goes into your estimates there.

So, first off we only record through the distribution portion of the business the exact -- sorry the legacy business that was CC Pharma. All cannabis sales that are involved through CC Pharma we push through our cannabis portion of our business in those numbers. Secondarily, I think there's some people who have taken some liberties with the euro exchange rate. And when you kind of look at a normalized euro exchange rate it's not at the $400 million level of sales, it's lower.

Okay. And then on the implied margin. So, again at the high end of each range it's about 13.5% EBITDA margin. Can you give any color on what expenses are below the gross margin line for the distribution business? And I imagine this is part of a larger ramp that you'd anticipate in the subsequent fiscal years towards the higher overall EBITDA margin?

Yes, so I mean there are SG&A costs at CC Pharma and involved in the distribution business. There are not significant marketing costs associated with it. And it doesn't contribute to the other items we disclose in our financials below SG&A.

Thanks. And last for me I just noticed that wholesale revenues came back in this quarter. I think most of your fiscal 2019 was in this quarter. And I haven't gone through the MD&A yet, but can you give us any color on where you expect wholesale to trend in 2020?

We have our existing supply agreements that we have announced and we'll take advantage of market opportunities when they're available. It's not a focus of our business but it is a portion of it.

And it's a small part of our business. And as I said we'll focus on building our brands and that's where the focus is.

All right. Thanks guys.

Thank you.

We have a question from Graeme Kreindler with VIII Capital.

Hi, good evening guys and thanks for taking my questions. Just to follow-up on the prior question about CC Pharma, I was just wondering is there any seasonality in terms of how that top line looks throughout the course of the year?

Seasonality no. But it is going to be driven by the growth of Aphria Diamond and its licensing.

No. No. I think CC Pharma there is no seasonality in regards to the selling of drugs into the drugstores. Where sales will increase there is the selling of medical cannabis throughout CC Pharma as we become GMP-approved.

Okay, understood. And then in terms of the fiscal 2020 outlook is there any disclosure can you discuss what the assumption is in terms of the domestic versus international sales volumes or dollars that's put into that number there?

We haven't given guidance on that.

Okay. All right. And then lastly last one for me. With respect to the $1 billion run rate I know that it's been covered pretty well so far in the call, but I just wanted to clarify. You mentioned that's the available capacity times the average selling price. But is that taking your current average selling price? Or is there some sort of consideration in terms of how the average selling price is expected to trend? I guess one factor being the introduction of derivative products but also another factor being just more supply in general across the board in the market.

It's based on the current selling price. I think there's some confusion on what happens to blended selling rates in the future, right? And everyone recognizes that at some point there will be margin compression on dried flower that margin compression will exist more in value and mainstream products and a lot less on super premium. But you've also got new product formats coming in. And as those new product formats come in they have higher margins associated with them. And so as you get a new blend we believe that that average selling price stays consistent or goes up slightly. We don't see on a blended basis that that number will go down.

Okay, understood. Thank you very much,

At this time, I will turn the call over to the presenters for closing remarks.

Thank you very much everybody. As you can see -- as I said in my opening remarks, the Aphria of today was not the Aphria of yesterday and the Aphria of today will not be the Aphria of tomorrow. I want to thank our over 1,000 employees around the world that have worked hard over the last six months with myself and the leadership team. We have tremendous brands. We have some tremendous grow facilities out there. We have strategic facilities that are located around the world. And I feel that what we've been able to do in the last six months just stay tuned and fasten your seat belt of what's going to happen in the next year. This industry is going through tremendous growing pains, tremendous change and it's going to be about the grow the production the people behind it and the brands and being fully capitalized and having that balance sheet. And we have all of those at Aphria today. I know there's been some tough times out there challenging times and I want to thank all those investors that have stayed with us and supported us. And look forward to some great growth and great opportunities. Enjoy the rest of your summer and thank you very much for your time today.

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