Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Q2 Quarterly Investors Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Katie Turner, you may begin your conference.

Thanks, Suzanne. Good morning, everyone. We appreciate you joining us to discuss Aphria Inc.’s financial results for the second quarter ended November 30, 2019. On today’s call are Irwin Simon and Carl Merton. 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 www.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 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 note that in the text of 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 would like to turn the call over to Irwin Simon.

Thank you, Katie. Good morning, everyone. We appreciate you joining us today to discuss our second quarter financial results. Our team has accomplished a lot on all fronts. Boy, what a difference a year makes from enhancing our global team to our brand building activities, new facilities, grow production capabilities to invest in a new systems technology as well as evolving our corporate governance. I enjoy working closely with our team and it’s great to remove the interim title. Together, we all appreciate the hard work and dedication that has propelled us forward and will continue our future success is on horizon. Well, let’s focus on Q2. A few key quarterly highlights include adult-use cannabis net revenue increased 46% and we nearly doubled our consolidated adjusted EBITDA as compared to the first quarter. Net cannabis revenue increased 9% and we nearly tripled cannabis operations adjusted EBITDA from the prior quarter. We ended the quarter with one of the strongest cash positions in the industry, a strong balance sheet, $498 million of cash and cash equivalent to fuel our future growth in Canada, Germany and South America. As I like to say, cash is king and we are proving them. We believe that as the cannabis industry continues to evolve globally, our balance sheet and financial flexibility will continue to further and differentiate us. We remain focused on the highest return priorities for growth. Our second quarter results demonstrate our emphasis on sustainable and profitable growth. At Aphria, our entire team of more than 1,200 employees is intensely focused on growing our brand’s profitability, our strong cash position for growth and focusing on our core assets that we believe will create the most value as we invest in them to grow. This also includes the potential modernization of non-core assets, which…

Thank you, Irwin and good morning. Please note all financial references are in Canadian dollars unless I mentioned otherwise. Given recent industry events, I want to highlight four key items from our results. These quarterly results include no impairments on subsidiaries, no inventory write-downs, no provisions for future sales returns and no sales returns on either adult-use or medical cannabis. As Irwin discussed, in the second 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 the strong balance sheet and cash position. While recognizing the need to hasten the evolution of CC Pharma’s business model, most importantly as it relates to sales levels. This demonstrates the strength of our team and the strategic initiatives we are working on together to execute everyday at Aphria. Our commitment to give back to both people and the planet continues. Aphria launched its cannabis education program, Aphria Educates, in the quarter. Mandated to educate Canadian adults on responsible use of all cannabis products, legally available now and in the future, Aphria Educates kicked off with a 2-city panel tour in Toronto and Vancouver. Throughout the year, Aphria will continue to provide both education and understanding where it makes sense to Canadians helping them to better understand the ever-evolving cannabis landscape. Our sustainability benchmarking is underway and we are on track towards our commitment to report on our CSR and sustainability initiatives and practices after the end of this fiscal year. And finally, Plant Positivity, our social impact platform that champions plants and the incredible power they have in overall well-being as well as looking to improve access to…

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

Good morning guys.

Good morning.

Yes, just a couple of questions please. First of all, so you gave a number of factors leading to the sales downgrade and could you maybe just put some actual numbers on these versus initial expectations and actually, which of these were most impactful? And then secondly, could you just give a bit more comment around the shift in sales mix impacting the average price in rec in the quarter? Thanks very much.

Thanks, Owen. So just in terms of the guidance, we laid out an order in the discussion and so I think the biggest item was the impact of the change in the store counts or the lack of change in store counts in Ontario. Those 40 additional stores that were supposed to be opened sometime in the late fall and now don’t look like they are going to get up until March maybe late April. That certainly had the biggest impact. The Province of Alberta’s temporary ban was next in order of priority and then the last piece related more to the purchase cannabis in the quarter due to the delay in Aphria Diamond’s license previously. With respect to sales mix in the quarter, we saw a greater increase in the brand mix itself and so we see higher prices per gram in Solei and RIFF and slightly lower prices in Good Supply and there was a little bit more volume on Good Supply in the quarter.

Okay, cool. Thanks very much.

Thank you.

And your next question comes from the line of Aaron Gray of Alliance Global Partners. Your line is open. Please go ahead.

Thanks for the question and Irwin congrats on the official title.

Thank you.

So just wanted to dive a little bit more into the average price per gram, so I can appreciate in terms of how it kind of declined sequentially given the increased volume for Good Supply? How do we expect that kind of going forward as you are going to have more mix from vape coming online and then with beverages and edibles in the very near future? And then also you made a comment on Aphria Diamond, where I believe you referenced the wholesale market from sales coming from them in the fourth quarter, so should we expect kind of a lower price per gram thereto to kind of have an impact, so just high level how to think about that line item kind of going forward over the next couple of quarters? Thank you.

So I will take the question on the Aphria Diamond and the wholesale piece first just because I think there might have been just a misunderstanding in terms of that comment. Aphria Diamond’s sole customer is Aphria. And so all of the products coming from Aphria Diamond moves on a wholesale basis to Aphria and then Aphria takes that product, does all of the packaging, branding product from a conversion and then sells it into the market. So, no, we are not expecting a change in sales mix, price mix, average selling price just as a result of Aphria Diamond coming online. Any changes that happen within that would really be driven by a decision to lower prices which is not at position we have taken. We continue to remain and see very strong sell-through of our brands and it’s really more just about that, the mix of which brand is selling more in the quarter, which brand has more orders, when do shipments go out and in the current quarter we ended up shipping more Good Supply than we did the other two brands or actually the other three brands, sorry I am forgetting Broken Coast, right.

Okay, alright. Thanks. And just one more quickly then, just in terms of what drove the increase sequentially in sales and marketing, I believe the increase associated with variable cost tied to sales, so should we expect that to be the new clip kind of going forward, has that come back down, just any color on that would be helpful? Thanks.

It should be the new norm as we rollout new products we continuously invest in our brands and continuously get new distribution out there. And as more and more retail stores open in Ontario and more and more new products whether it’s our vapes, edibles and that we will continue to spend dollars to grow those brands and products. And it’s working which is key because that’s why our share increased in Ontario and if you combine all our brands together you see what our share is increasing. The other thing is we continue to invest with our partners, Great North or Southern Glazer’s has boots on the ground to get our distribution and to get our displays within the stores. So we will continue to invest at those levels.

Great, thanks. That makes sense with the market share momentum. I will jump back into queue.

Thank you.

And our next question comes from the line of Graeme Kreindler of VIII Capital. Your line is open.

Yes, hi, good morning and thanks for taking my questions here. My first question was with respect to CC Pharma and the distribution revenue, two quarters ago, the question came up about seasonality in that revenue and it was discussed that there isn’t seasonality in that revenue? Now I see that’s one of the factors in there i addition to the change in the reimbursement structure in Germany. So I was just wondering what’s changed from the previous discussion there and how big are those impacts in seasonality, what points of the year might we see some of those impacts as it goes on? Thanks.

Thanks, Graeme. So, we see some elements of seasonality really in this quarter tied around the pre-orders leading up to the December period. In past years that seasonality wasn’t as pronounced as it was this year, but by far the bigger of the two items at CC Pharma is the continued evolution of that business as it scales properly for the change in the reimbursement model. We believe that the impact on revenues has hit its trough so to speak at this point. And at future quarters we will see growth in that number as the business finishes that evolution.

Okay, that’s very helpful. Sorry, go ahead.

I think it’s important to understand too. I mean, there is a lot connected with CC Pharma in regards to the government there and some of the regulations, so that’s – it’s not so much seasonality, it’s just how the government mandates some of this distribution. So it’s not so much seasonality.

Got it, okay. And then just as a follow-up, with respect to the comments made in the prepared remarks on the call saying that Diamond will have its first shipment out in February. As that relates to revenue growth and the cadence of that revenue growth and tying into the guidance here, is it fair to assume that the fiscal Q4 will have quite a step up from the fiscal Q3, just trying to assess the magnitude of how large that first shipment could actually be?

Yes, that’s fair.

Okay, I will get back into queue. Thank you.

Thanks, Graeme.

And your next question comes from the line of Brett Hundley of Seaport Capital. Your line is open.

Hey, good morning guys. Thank you. Carl, something caught my ear on potential monetization of non-core assets, I think it was in Irwin’s commentary, but can we just revisit that and maybe have you put some type of quantitative factors around that comment or at the very least, is that comment related to new management potentially looking to reverse some M&A decisions made by prior management? Can you just color that a little bit for us?

So I think first off like non-core investments, you need to concentrate on long-term investments, convertible notes receivable, promissory notes sections of our financial statements. So promissory notes was kind of Note 14, long-term investments is Note 13 and the convertible notes receivable is Note 11. I wouldn’t say it is a change as it relates to M&A. That’s – those two things are very, very different, okay.

Alright. Thanks for clarifying that. And then Irwin, if I can just ask you something on your U.S. focus and your potential evolution there or market entrants there, so consumer CBD in the U.S. just seems increasingly uncertain with recent commentary from both the FDA and the USDA. There was even a recent article in the journal kind of painting a picture that mainstream CPG companies are potentially stepping back from their CBD development, whether that’s true or not? As you guys evaluate your place in the U.S. market, you have talked about some complementary areas that you are looking at and I can appreciate that, but given the backdrop here, is your position something that may have to increasingly wait in the U.S. or are your opportunities still front, center and available? Thank you.

Thank you. So good question and I think listen Aphria from the beginning always had a position. We are not going to jump into the U.S. with a lot of unknown out there. And last year when the Acreage-Canopy deal happened, I came back and said it was buying a lottery ticket. So we are not going to go out there and jump into an unknown situation, but having a 25-year experience in the consumer packaged goods business and something in the consumer area that would complement Aphria and complement CBD or TAC when it did become legalized is something that we are looking at. That would have strong sales, strong growth and strong EBITDA contribution that would fit within well with Aphria and there is nothing wrong with diversifying from cannabis, but to diversify into consumer packaged goods products. What I said in my remarks, I want Aphria to be a global consumer packaged goods business that has connection with the cannabis industry.

Thank you.

And our next question comes from the line of John Zamparo of CIBC. Your line is open.

Thank you. Good morning. I wanted to ask about the Alberta vaping ban or temporary ban, you mentioned you expected to last through April, what conversations have you had with the Province and what’s the Province looking for in order to move forward?

At this point, I think they continue to collect information. They have been a little bit tightlipped on the full details of it, but they just want – they want to take the right steps for their consumers. And we just based on those conversations we feel that, that’s an April decision, not something that’s going to happen in the next 2, 3 weeks.

Okay, that’s helpful. On the 2.0 products and pricing, I don’t expect you can share specific numbers, but just directionally, do you expect these to be beneficial to price per gram or gram equivalent in gross margin given your numbers are already ahead of some competitors on those metrics and will we notice it more in Q3 or is it more likely be felt in Q4?

I think you will start to see it in Q3.

Okay. And directionally versus your existing products, can you make any…

Oh, sorry, directionally versus our existing product, yes, it will represent upticks.

Okay, that’s useful. Thanks. And if I could sneak in one more about inventory, I guess a two-parter question, you have got a meaningful amount of inventory, I think it was about 10,000 kilos of dried flower on hand, so just walk us through why does you feel the need to buy from third-parties? And then the second part of that, given the stagnant number of stores in Ontario, does that make you rethink the product strategy at Diamond once it is online and do you feel you have too much inventory on hand or is there a risk you will have too much inventory on hand for the medium term?

So if you look at our inventory, I think one of the things you will see is there is a bit of a concentration on oils. And we are actively working on managing all of the inventory balances, but that one in particular some of our balances on salable flower were lower and that was where the customer demand was in the quarter. It’s a little bit specific to strains and potencies and things like that. And so we supplemented our production capabilities where there was demand that we just didn’t have the right specific inventory.

Okay, that’s all for me. Thank you.

Thanks, John.

And our next question comes from Matt Bottomley of Canaccord. Your line is open.

Yes, good morning. Thanks for taking the questions. Just two questions, one on the domestic cannabis sales and then just some more clarification on the international distribution. Just first, I am wondering if you can provide any commentary on what your expectations are in the next 6 months or so given the significant increase in dried cannabis flower inventory balances at wholesalers. So I think you had a pretty solid pricing relative to some of your peers at about $5.20 in change this quarter. What magnitude could we potentially expect of price erosion, particularly on the dried flower, I understand that the cannabis 2.0 will likely more than offset this, but I am just trying to get my arms around how significant commoditization might be in the next couple of quarters here industry-wide?

So I think that any level of price compression is really going to be tied to brands themselves and people who haven’t invested properly in their brands and who haven’t developed their brands and don’t have sell-through are going to experience far more price compression than the people who have thoroughly invested and thoroughly researched and developed good strong brands. We continue to see very strong sell-through of all of our brands, very positive reviews online related to the brands. I don’t foresee the same concerns with price compressions that I think a number of our competitors do.

Okay, great. And then just staying on the…

Sorry, ask your question.

Yes. And just sort of staying on just the cannabis or the domestic sales, can you give any sort of goal posting or how you feel the initial launch has gone of the 2.0 products? I understand we are in very, very nascent stages, but just I know that retail is muted and you gave some of the factors in your press release and prepared remarks as to why guidance has come down, but just a general first sort of 3 or 4 weeks of cannabis 2.0 from a logistical standpoint how that’s been going?

Well, I think you see the big difference for cannabis 2.0 versus 1.0 is the different ordering patterns that the control boards have gone through. In cannabis 1.0, it was more about I will take whatever anyone has got. In cannabis 2.0, it’s been a more muted initial purchases by the control boards. They are trying things out. They are trying brands. They are trying to manage inventory levels, inventory levels inside of the control boards, inventory levels at stores and so the idea is lower purchases, higher frequency just changing the cadence of orders and there has been some – I have read some articles where some places accordingly out of stock and are doing more frequent reorders. It’s just being handled differently this quarter, this time.

Great, thanks. And just last question for me on the international side. Just want to make sure I understand the sort of ramp in that segment considering your revised guidance, so at about 50% of your revised guidance, that puts your international revenues at about $290 million. So you have already done about $180 million in the first 6 months. So that delta of about $100 million how is that going to come into the results over the next two quarters? Is it going to be a gradual decline, because I imagine we are going to see more substantial decreases in that segment given your new guidance?

No, I would suggest that you are going to see revenues that more or less mirror what they did this quarter in our international distribution business for each of the remaining…

It will continue to be the same.

Okay, fair enough.

It’s slightly more than half.

Yes, got it. Okay, thank you.

[Operator Instructions] Our next question comes from the line of Pablo Zuanic of Cantor Fitzgerald. Your line is open.

Thank you. Good morning, Irwin and Carl. Look I just want to follow-up on the guidance question, I mean obviously based on the share price this morning, the market doesn’t like the guidance, but I have to say personally I like it. What I want is clarity here. Based on the numbers you have given, we are looking in cannabis sales for the second half of $160 million to $210 million versus $55 million in the first half? I mean those are rough numbers, right? That’s a meaningful step up in growth of 150% to 220% growth. Yes, you have confidence on those numbers, but can you just maybe give more granularity like what do you think happens with the base business, what happens with 2.0 and just so we don’t have more confidence on that big ramp up in sales that you are giving here, any color will help whether medical flat, 2.0, what percentage of that, how Diamond helps and then just the base underlying business? And then the second question is related to the – go on, yes, I will stop there. Thank you.

So Pablo, hi, how are you and nice to hear from you. I will go with my piece first and then I will let Carl chime in here, but why are we confident and what happened out there, there is a lot of things that were not in our control as Carl took you through, but I think with cannabis 2.0 and rollout of the vape product line, we will hopefully rollout some edibles in the latter part of the fourth quarter and continuously additional stores opening up in Ontario and the rest of the country, our GMP certification which we have received over the last couple of days which we will be able to ship to the EU. And just the big thing is having supply here and with Aphria Diamond coming on and we will be able to start shipping product in mid-February that we now have supply. So there is a real good plan in place. It’s a real good integrated plan from a growth standpoint, from a process standpoint, from our marketing standpoint as we build their brands and last but not least is a whole rollout with our sales team and with Great North who helps us do this. And as you saw in our last quarter, in Ontario with 25 stores and more stores opening up, we grew our share to over 13%. So that’s why we feel good. And as this industry is in its infancy stages, there is lots to change, but I got to tell you we really got a good measured account of how we will achieve this guidance in the back half.

The only thing I would really add to that, Pablo, was that our sales growth to-date has been more limited by our internal supply than buy demand from individual consumers within our brands. As I said earlier, our brands continue to demonstrate very, very strong sell-through and significant levels of demand. And so we remain confident with that additional demand or ability to pickup additional share with the expected retail rollouts in Alberta and BC and some of the other provinces as it relates to this year and then going past this year, Ontario, it all puts us in a position where we are extremely confident in that guidance.

That’s good. Thank you. And can I just ask you follow-up. So more from a market perspective, if you can talk about underlying trends, I mean, the September and October stats and data show flat sales sequentially month on month after double-digit growth from the prior months? What happened in November, December, do you have a sense of that? There is chatter in the market that there is explosive growth in the very, very low end of the market and I wonder whether that’s incremental just bringing people from the BC market, so that’s not a problem or whether it’s really cannibalizing the other products. Just give more color in terms of what you see happening in the underlying market from a 1.0 perspective? Thanks.

Well, from a market standpoint and from a timing standpoint, as I said we continuously see great demand out there. And I think there is a lot of anticipation and build up in regards to cannabis 2.0 and rolling other vapes and we are one of the first ones to get out with them. And I come back and say is this year, not much has changed from share that we talked about November. So it’s robust. Listen, I think what happens is there is price out there and price always does matter, but one of the biggest things that we are seeing Pablo, is this year the consumer wants brands and quality. And that is the big thing. And ultimately, where is the consumer coming from, it’s them coming from the illicit market and coming into buying products that they know they have gone through quality regulation and that’s what we feel very, very good about. And there is lots of plans in place at Aphria, how we continuously move consumers over from the illicit market into the regulated market.

Thank you.

And there are no further questions in the queue at this time. I turn the call back to the presenters.

Thank you very much everybody. Again, a lot is happening at Aphria as you can see. We are in an industry that’s changing daily. And I was part of a natural organic food industry for 25 years and saw lots of change there. Very similar. I am down at ICR meeting, lot of investors today and it’s exciting to talk about Aphria. And as I sit back and look at Aphria from a rep standpoint, from a medical standpoint as we sit back and look at our GMP certifications that we can sell into the EU as we sit and look at many multiple products and multiple things that we can do. What I will tell you cannabis is something that’s going to be around a long, long time in many, many, many multiple facets. Aphria today having both Aphria One and Aphria Diamond having that supply, having that quality and having that regulation and yes, we are talking about rep only being legalized in Canada today, but there is a lot we are learning from that, that will help us rollout products around the world. As I said, we have a very interesting and we are looking at multiple opportunities for the U.S., just not around CBD, around other products that will complement cannabis and that’s something that we will be focused on. So we have our brands, we have our people, we have our strategy. We have a strong balance sheet that will allow us to do this. And last but not least, we look to go back and how do we return back to shareholders. So with that, everybody have a great day and thank you very much for your time.

And this concludes today’s conference call. You may now disconnect.