Good morning. My name is Denise, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Aphria Inc. Q1 Quarterly Investors Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Katie Turner, you may begin your conference.

Thank you, Denise. Good morning, everyone. We appreciate you joining us to discuss Aphria Inc.’s financial results for the first quarter ended August 31, 2019. On today’s call are Irwin Simon; and Carl Merton. Jim Meiers will also be available for Q&A. By now, everyone should have access to the earnings release, financial statements, MD&A and investor presentation, which are available on the Investors section of Aphria’s website, at aphriainc.com. The financial statements have been filed with 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. And now, I’d like to turn the call over to Irwin Simon.

Thank you, Katie, and good morning, everyone. We appreciate you joining us today to discuss our first quarter financial results. Our team has accomplished a significant amount to start the year, both in Canada and internationally. For the first quarter, our results were in line with our expectations and we are on track to achieve our annual guidance. We believe our financial results truly set us apart from our peers in the cannabis industry. Adult-use cannabis net revenue increased 8%, with a four-fold increase in consolidated adjusted EBITDA as compared to the fourth quarter. We ended the quarter with a strong balance sheet and a cash position including $464 million of cash and marketable securities, as they say, cash is king. Our cash position and balance sheet will continue to differentiate us in the cannabis industry. We remain focused on the highest return priorities for growth. Our first quarter results demonstrate our emphasis on sustainable profitable growth. Since I joined Aphria, our focus has been on profitability, a strong cash position for growth and focusing on our assets that we believe will create the most value as we invest in them to grow, demonstrate by our performance and these strategies are working. We have assembled a strong team with cannabis, consumer packaged goods, beverage and broader operational and supply chains experience, that will fuel our growth this year and years to come well into the future. Most recently, Bernard Yeung joined us as Vice President Sales. He is a dynamic executive with significant experience in the cannabis and the alcohol industry. He is already hit the ground running at Aphria with compelling insights and perspectives that help further our growth as we consistently enhance our competitive position in both the adult-use and the medical cannabis industry. In addition, Denise Faltischek…

Thank you, Irwin, and good morning. Please note, all financial references are in Canadian dollars unless I mention otherwise. As Irwin discussed, in the first quarter, we continue to execute on our growth initiatives and prioritize profitability as we continue to position our business for long-term growth and success. We are pleased with our financial results, particularly our cannabis revenue growth, sequential positive adjusted EBITDA and our ability to maintain a strong balance sheet and cash position. As a result, we remain on track to achieve our fiscal 2020 guidance. This speaks to the strength of our team and the strategic initiatives we are working together to execute every day at Aphria. Focusing on our capacity, our Aphria One facility is fully licensed and planted, and as Irwin mentioned, we have been advised that Health Canada is in the process of expediting the issuance of Aphria Diamond’s license, keeping us on track to achieve our annual production capacity. Moving to our financial results, we are pleased with our first quarter results, particularly our continued increase in cannabis sales and our profitability improvement. Net revenue in Q1 increased 849% over the prior year period to $126.1 million. Compared to Q4, cannabis revenue increased $30.8, sorry, increased to $30.8 million from $28.6 million. Distribution revenue was above our expectations for the quarter, but showed a slight decrease from $99.2 million to $95.3 million in the quarter. The slightly lower distribution revenue for Q1 from Q4 is associated with a conscious change we made in CC Pharma business strategy to maximize profitability after recent changes in the German Government’s medical reimbursement model. As a result, we are pleased to report CC Pharma has successfully navigated the change in that reimbursement model increasing its gross margins and EBITDA in spite of the governmental changes.…

Thank you. [Operator Instructions] Your first question comes from the line of Owen Bennett with Jefferies. Your line is open.

Good morning, guys.

Good morning, Owen.

And -- yeah, just a couple of questions from me, first of all, on the guidance, so capacity and looks like and coming online as expected and with Health Canada expediting Diamond now. I was just wondering, what sort of industry growth do you need to see or are you planning on those assumptions to hit that $650 million, $700 million? And then, maybe if you could give a bit of color in terms of how you see the mix between flower and new derivative products in that $650 million to $700 million. And then my follow-up is just any more color around the U.S., you briefly mentioned partnerships and alliances for growth kind of is -- we expected to hear something around the U.S. any time soon? Thank you.

Okay. That’s all like the multi-part question. So let’s deal with good steps. In terms of the split between dried flower and the new derivative products we have been on record multiple times. We think that dried flower remains a predominant share of the market going forward. But that the vapes category and the new derivative products start to take significant amount of market share fairly quickly. Our internal models are really based around 60% market share for dried cannabis, 20% to 30% for vapes and the remainder being split between drinks, edibles and the other new product formats. In terms of growth within the industry itself in our ability to meet our guidance and we see a couple of different things. One, we see our ability over the last few quarters to see significant amounts of share in this space driven by the strength of our brands. We are consistently hearing from the individual store owners more and more people come in and asking for our individual brands and the sales capabilities we have today are really be -- were really driven by the amount of supply we have and when supply freeze up we see being able to steal more space on the shelf and be able to steal more share. We do have some growth forecasted in our number for new store openings. We recently saw that Quebec has made an announcement. We see Ontario has got some new stores coming on, obviously, the -- those new stores and their ultimate opening will impact that. But as of today the information we have we believe those will help drive that number as well.

And Owen, just on that, our brands have only been around less than a year and the awareness team is built, and this is an industry that’s tough to build brands, because you are not allowed to advertise the brands, so it’s getting the consumers to try and repeat sales. So I come back and say, just think of our brands are around for five years consumers then start to know our brands, know the quality of our brands and why it’s much better to be buying our brands at retail outlets then be buying products in the illicit market and that’s the biggest opportunity. The 25% of sales only comes today from recreational products that are sold in stores. The big opportunity for us is how we continuously take away sales from the illicit market. So, and as Carl said, Canada expects to have over 3,000 stores within the next three years to five years with a 1,000 year in Ontario. So just by additional store expansion, additional products and us with our brands out there creating brand awareness and educating the consumer, the value of buying the brand in the stores so the illicit market will drive our sales. Also there is a big focus here on medical with the niche joining us and taking over our medical business. We think there is a lot of patients that we can add to our medical database there. So the opportunity is there tremendously. In regards to our U.S. growth, spending 25 years, building a consumer products company in the U.S., we are talking to multiple partners in regards to strategic opportunities and is that strategic opportunities now with products that we would look at today that have the potential to be converted to CBD or THC or medical when…

Okay. Thanks guys. Very helpful. Appreciate it.

Thank you.

Your next question comes from Brett Hundley with Seaport Global. Your line is open.

Hey. Good morning, guys, and congratulations on this quarter. Carl, thank you for giving the expectations on working capital and CapEx for Q2. If I can press you a little bit, can you give us a sense of how your cash burn might trend beyond that, so I guess at a high level, we would expect cash burn to drop down in Q2 relative to Q1. At a high level, would you expect it to flat line for a couple of quarters there or should we see continued drops thereafter?

For the next few quarters, I think, the flat line plays out more. We still having investments to make in Germany and Colombia that are announced. And then once we go through those pieces that you will start to see the CapEx component of that number come down. We don’t anticipate any major changes on the financing side, in terms of debt repayments and we will have a little bit of a working capital increase as Diamond comes online, but the majority of the working capital increase for Aphria One has already been incurred.

Thank you. That’s helpful. And then following onto Owen’s question about guidance, I want to dig in on the other part of guidance, which is EBITDA and really get a sense of how fit Aphria is going forward in coming quarters here? I know you guys are optimistic some of us on the other end of the phone have become more pessimistic about the Canadian market up ahead. When you look at your EBITDA range of $88 million to $95 million for fiscal ‘20, can we talk to some of the stress tests that you might have put in place around this guidance, some of the broad themes or underlying assumptions within this range, so that some of us on the other end of the call can get comfortable of how you are modeling that range for fiscal ‘20, given all the moving parts that’s around the industry right now? Thank you.

Yeah. So, I think, the best way to answer that is a big chunk of those increases in EBITDA are being driven by the increased capacity coming online with Aphria Diamond and the cost expectations we have for growing product in that facility. If you look at all of our expansions and have visited our facility, you will know that we -- the Aphria One facility is set up in five different parts and as we move from part to part, we have refined and we have changed how we grow and we have changed how we set up. When we build Diamond, we took the best that we had and that’s how we organize Diamond. And so you have got big, sorry, you have got smaller expectations on costs and bigger amounts of gross margin flowing through that facility as a result. We are sitting at a cash cost of $1.35 in the quarter and, sorry, $1.43 in the quarter and we are expecting below $1 as we ramp into Diamond and get that fully operational. The scale that we get from our facilities drives out a number of costs at Aphria One. We are still in the process of ramping up that facility. Its capacity was at 55,000, sorry, it’s ramp was at 55,000 at the end of the quarter. We have built pieces into the model to -- through our EU-GMP and our expectations on our ability to transfer product from Canada and start moving that internationally. And so as some of the demands in Canada, as some people are expressing some expected slowdown, we have the capability of moving that product from Canada to international opportunities at higher prices. That’s built into those performances.

Thank you.

Your next question comes from Graeme Kreindler with VIII Capital. Your line is open.

Yeah. Hi. Good morning and thank you for taking my questions. I don’t mean to harp on the guidance point here, but just with respect to the stress test, one element, specifically from the retail side of things. I understand there’s been a lot of success in stealing share at this point in time. But I am just wondering, what the thoughts are with respect to opportunities for sell-through given the Ontario retail situation’s been pushed back a bit, I know there’s been some commentary at Quebec to increase that. But just wondering how many bumps along the way with respect to some of these key markets that retail could affect that outlook as well? Thank you.

So, hi, number one, I think, is goes back to what I originally said. The opportunities for us in the retail market with additional stores opening up is tremendous and I think in the Ontario market it goes 25 stores. The majority of the year was a lot and sold online. I think there is lots of change coming to the Ontario market. Is it going to be shipped direct to the stores, et cetera. But the key to all this is having good products with good brands and good pricing. And that’s why we have built out under Bernie the infrastructure in the sales team we get out there and make sure we got the right displays, where we are placing the stores, we got the right products and working with the individual stores and the retailers to ensure that they know the Aphria brands, whether it’s Solei, whether it’s RIFF, whether it’s Broken Coast. So I think at the end of the day, I mean, this industry is just a year old and the important part for us is that we have supply and that’s been the biggest challenge we have had all year with supply and with Aphria Diamond ultimately coming on and having over 600,000 plants, we will be able to have supply. Last but not least is being that producer of quality products is going to be important to us and also that producer of quality products at a lower cost. And ultimately, Aphria with its brands, its products, its ability to ship, its infrastructure with sales organization, its infrastructure with its marketing group and building brand awareness. We feel good about achieving those numbers and winning over the consumer.

Okay. Appreciate the color there and just for my follow-up here. With respect to the ramp of that on the guidance for the fiscal year, with the average revenue growth, if I ask correct, looking like it needs to be something around 60% a quarter. Is it fair to say that a much more of that growth is expected towards the latter half of the year considering where that’s going to fall…

Yes.

… in terms of…

Yes.

… the roll-out with the vapes?

And that is all with Diamond coming on Board, rolling note on edibles and vapes, et cetera, and continuously expanding the distribution and more and more stores opening up.

Okay. Thank you.

Thank you.

Your next question comes from John Zamparo with CIBC. Your line is open.

Thanks. Good morning. I wanted to stick with the guidance as well. I appreciate the color you gave Carl on future expectations of market composition. But can you say what percent of that $88 million to $95 million comes from derivative products specifically?

We haven’t publicly released that.

Okay. And I think…

I think, it’s important that we are committing to our recreational products and growing our distribution and growing our brands and our products. But not to break it down and we haven’t broken it down by product line or category.

Okay. Understood. Thanks. And my follow-ups on the Aleafia contract, I know you said in your press release this is a material. Just to clarify though, is none of the original EBITDA guidance including contributions from that contract or is it that you assume you will find new buyers and assuming it’s the latter, what is that you assume on wholesale versus retail for that product?

So, number one, the Aleafia contract was a legacy agreement. It was built into our absolutely guidance. And we expect to replace that with retail customers and other products to do support those sales that we wouldn’t have got from Aleafia and at better prices and better opportunities out there within both flower and oil prices.

Okay. Thank you.

You are welcome.

Your next question comes from Matthew Bottomley with Canaccord Genuity. Your line is open.

Good morning. Thanks for taking the questions. I just want to circle back on sort of the vaping headlines we are seeing in the U.S. I think a lot of us have at least a high level understanding as to what some of those issues are and I know when you spoke to them. But I imagine this is a bit of a PR issue for Health Canada and the federal government to have to navigate in this launch. So is there any color coming from them with respect to what they might be communicating to the public and if they might slow down the potential flow through to the retail stores of these products or they completely agnostic to the whole issue as it stands right now?

So we have not heard anything from Health Canada, and I think, Health Canada has said, they will continue to evaluate. But again, what I said is this year, I think, what we want to ensure is the safety and quality of our products. And I think all indications so far, this is coming from vapes that are purchased through the illicit market, it’s coming from products that are adulterated, it’s coming from hardware that’s never gone through quality testing. This comes back and just shows why it’s so important for regulation. This is important, why it’s so important to have brands and quality products, because the consumer knows that they are getting a product that is safe that the hardware has been tested and the product they are getting has been tested. So we don’t like to see sickness. We don’t like to see illness and we don’t like to see anything that happening from vapee. But I think this comes back and just shows why consumers need to be buying the products and approved retail outlets and buying it from approved suppliers that have gone through the quality here.

Okay. Thanks. And just a follow-up maybe for Carl, just going back to the fiscal 2020 outlook again, I know there is a lot of commentary given this quarter and prior quarters on where you are in your overall build out and over to achieve those numbers. But, overall, if you were to assume the Canadian retail rollout goes horribly just for the sake of argument, how much leverage do you have to put that distribution into international channels to better hit those numbers. So it gets a simple way of saying it is if the Canadian market completely erupts on you, how sensitive is your $88 million to $95 million there?

We have the ability to move product through international markets through once we have the EU-GMP certification. We have significant demand through our operations in Italy, Germany, Colombia and Argentina, and those are just our customers. We are also received on a daily basis emails from people wanting to buy product from us internationally that aren’t our actual own subsidiaries. We are very confident in our ability to deliver product from Canada to overseas market in a downside scenario.

But just on that, I think again, as we see the rest of the world and international being legalized in medical. The GMP certification opportunity for us is well within the hundreds and hundreds of millions of dollars, and today we are selling minimal product there. So that is a big opportunity. But just to come back, I am confident with the Canadian market ultimately and I see the opportunity in this Canadian market, only being legalized for just less than a year. And as I said before having these brands that are new to consumers and there is a major market today that can be taken away from the listed market of $4 billion. That is where the opportunity is and that is where we have invested, and that’s ultimately where Aphria will get to that $1 billion mark, we will be able to generate tremendous amount of EBITDA and be able to generate a tremendous amount of cash.

Okay. Thanks guys.

Thank you.

Your next question comes from Justin Keywood with GMP Securities. Your line is open.

Good morning and thanks for taking my call. Just on the 12% market share I mentioned, what was that up from the prior quarter and how would that rank overall, like, it is in first, second or third?

So it’s up four points from the prior quarter and I -- from a ranking standpoint, I am not sure what you mean in a ranking standpoint?

Like, as far as the total market share like would that be second, third or would that be, like, first, as far as leading market share?

You mean as a company, as a brand, as a product, I am not sure what you are asking me?

So if it’s 12% of the market, like, who would hold the first market share, like, would that comprise of 15%?

So as you heard we only have access to Ontario data, we don’t have national data.

Okay. Fine.

But Ontario being the biggest market is a good indication for the rest of Canada.

All right. Maybe just another question, what percentage of market share do you assume in your guidance?

It’s still growing from the 12% in Ontario.

Right. So right now we only have data on the Ontario market, and again, as I said before, with that is number of stores that are opened today with the number of stores that will open, we should only increase market share over the next three quarters for us or two-and-a-half quarters.

Okay. And in your guidance, do you have a target number of stores that you anticipate to be opened by them?

We do have a certain amount of stores, do we have it down to a signs by timing and date and stuff like that, no. I think there’s couple of ways we are looking at it. We are looking at our supply and supplying our current stores, new store openings and new product lines that will rollout during the year.

Okay. Thank you for taking my questions.

Thank you very much.

There are no further questions queued up at this time. I will turn the call back over to management.

Thank you very much everybody for listening to our call today. As you heard, our last two quarters, there’s a lot of things happening at Aphria and with that we will continue to do that. I am excited in regards to our execution. I really got to come back and say, thank you to our team members of 1,200 around the world that have been working endlessly to get us to where we are. I want to thank our Board of Directors for their support. As I said some of them will be leaving us at our -- this AGM and not to be running. Thank you very much to them. Listen, this is a new industry. It’s -- like I said, one-year old Thursday and there has been a lot of start -- stops and starts and a lot of starts and stops. And with that there is a lot of opportunity here. I came back as I have spend a lot of time on this in coming out of the consumer packaged goods industry for 25 years, I do see a lot of similarities. But I come back and see there is a market out there $5 billion that is sold in both the illicit and the recreational and our big focus and strategy has to be how we gain consumers’ confidence and how we gain consumers’ awareness of our brands that they are going to buy from retail stores and going to buy our brands and products and not be buying from the illicit market. Secondly is this year, as we expand our product portfolio, come out with new products and quality products and products that are well-priced is something that we will continuously do and the marketing teams and the sales teams today are working together.…

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