Good morning. My name is Kensey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q3 Quarterly Investor Call. [Operator Instructions] Thank you. Ms. Katie Turner, you may begin your conference.

Thank you, Kensey. Good morning, everyone. We appreciate you joining us to discuss Aphria, Inc.'s financial results for the third quarter ended February 29, 2020. On today's call are Irwin Simon and Carl Merton. By now, everyone should have access to the earnings release, the 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 the text of Aphria's earnings release and the financial filings issued yesterday for a discussion of the risks and uncertainties associated with such forward-looking statements. I'd also like to note that we are conducting our call today from our respective remote locations as such there may be brief delays, cross-talk or other minor technical difficulties during this call and we thank you in advance for your patience and understanding. And now, I'd like to turn the call over to Irwin.

Thank you so much, Katie, and good morning, everyone. We appreciate you joining us today to discuss our strong third quarter financial results. Before I get into our robust sales growth, brand strength, profit improvements and strong balance sheets and cash flow, I'd like to comment on COVID-19 global health crisis and what we're experiencing across our operations in the industry. First and foremost, our thoughts, our prayers, go out to all those affected by this virus, and that includes plenty of people. As the situation has continued to rapidly evolve, our number one priority has been ensuring the health and safety of our employees and their families. Our leadership had a plan in place ahead of this, and I'm proud to say we took decisive action and executed well. We're fortunate that all our facilities have been deemed essential by their respective governments. This is a privilege and a responsibility we do not take lightly. It's our privilege to continue to be fully operational across our Canadian and International operations, as we serve our valued patients and consumers, providing with our medical adult use cannabis products. We remain committed to providing best-in-class products and services during this time and need and uncertainty as a result of COVID-19. And we will continue to work with local, provincial and federal regulators to help eliminate the illicit market. At the same time, we have a tremendous responsibility at Aphria to our employees, their families and the communities we operate in. We took decisive action and implement heightened safety measures in our facilities to protect us against and prevent the spread of COVID-19. These include but are not limited to staggering work schedules, redesigning work facilities to ensure appropriate social distancing, and significantly enhancing sanitation and regular cleaning procedures. We are immensely grateful…

Thank you, Irwin, and good morning. Please note, all financial references are in Canadian dollars, unless I mention otherwise. Also some of the financial metrics discussed on this call are non-IFRS measures and I refer listeners to the company's MD&A for an explanation as to how the company calculates those metrics. I want to start by highlighting three key items from our results. These quarterly results do not include any impairments, inventory write downs or provisions for future sales returns. As Irwin discussed, we continue to execute on our growth initiatives and prioritize profitability with long term growth and success in mind, especially now, that we are in the wake of a macroeconomic uncertainty as a result of the COVID-19 global pandemic. We are pleased with our financial results, particularly our cannabis revenue growth, sequential positive adjusted EBITDA, positive operating income and our ability to maintain a strong balance sheet and cash position. The strength of the Aphria team has become even more evident as the COVID-19 health crisis continues. We are doing everything we can to continue serving our customers and executing our strategic initiatives. Irwin provided an overview of the disciplined and well-planned actions we have taken across our business and I also want to highlight a few additional industry data points related to COVID-19 that are important to keep for Aphria as we move forward. These include, the Ontario, Alberta and British Columbia Control Boards were closed to deliveries and shipments for a week at the end of March for year-end inventory counts. The Ontario Control Board temporarily canceled two weeks of purchase orders from all licensed producers while it assesses its inventory balances and is generally expecting lower volumes due to COVID-19. The Alberta Control Board's replenishments are down 40% since COVID-19. In BC, retail stores…

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

And just a couple of questions please. First of all on the CapEx, and what CapEx has actually been [seen] [ph] just a bit more color on that, and linked to that are you still building Germany out and kind of sort of linked to that once more, anything on Europe [indiscernible] shipment in Q4 into Europe or is that kind of wait-and-see depending on what happens with COVID. Thank you.

Carl, you want to take that. Just in regards to CapEx, I think you know the big thing is this year, you know we always spent CapEx in enhancing and upgrading our facilities, and just we pull back on lot of those things, we are finished Aphria Diamond, there are some things in the processing area, we'll continuously do at Aphria One. In regards to Germany, it is just about finished and we will get that up and going. I was there a couple of months ago but you know we're going to always spend CapEx and you know is at 5% of sales each year et cetera. But we have just step back and sort of say wait now, our facilities are in pretty good shape, where can we more or less invest CapEx and taking out costs and become a much more efficient. So, our greenhouses are in good shape. There's some work that we need to do on processing which we will continuously do and we will get Germany finish which we're very, very close to do that today. Carl, anything you want to add?

I just reiterate Germany continues to move forward. Most of the work is done and there is a bit of a disproportionate between the works done and the cash we've paid at this point. There is some cash payments that are coming up shortly. We are very focused on being ready for the German market as soon as possible and are letting this delay impact that project but where we have opportunities to defer CapEx and starting of new projects we have - we've seized those pieces.

And I don't think it’s deferred CapEx, it’s just - I don’t think its deferred CapEx so much, it's just looking at the return on invested capital and where we need - where we need to spend CapEx to really get efficiencies out there. And there’s plenty of CapEx you can spend, but we will not spend CapEx unless it gets our hurdle of return on invested capital.

Our next question comes from the line of Chris Carey with Bank of America. Please go ahead. Your line is open.

So clearly some strength in different areas. I guess the one part you know that I'm just trying to reconcile right is this dynamic of where EBITDA is improving sequentially, but free cash burn has deteriorated sequentially. And you know just doing the math it's - you know it's about the widest gap we've seen between EBITDA and free cash burn on record. And I'm just trying to understand as you look forward on working capital commitments or maybe if you could offer some insight on why this is the case this quarter and when this positive EBITDA starts to flow through. And show up on the free cash flow statement or the cash flow statement as well? And then I have a follow-up.

So Chris, the free cash flow decrease in the quarter is really being driven by our investments in working capital. I think it's important to remember that we had Aphria One coming online with its first harvests and we expect to see an increase in working capital again next quarter. And is part of what I said during my portion of the discussion. As Aphria Diamond continues to ramp, there's five, six weeks of additional harvests that become on - that haven't reached a point where you can release them to the public, that number is going to build. It then goes into accounts receivable to control boards where you're waiting at least 60 days to collect on it. That's really what you're seeing this quarter. If you exclude the investment in working capital in the quarter our OpEx burn was less than CAD2.5 million.

And on top of that you're also seeing us as Carl talked before buying cannabis from other producers and building inventory which a lot you know some of that has not been sold through yet. So you're not seeing the cash net return here and that's a big number that is there. So you know the big thing and this again as we move into some of our biggest quarters. So if you look at it Aphria Diamond now is come on. So we've had to invest in regards to grow there. We've bought as Carl talked about close to [CAD18] [ph] million or so outside in cannabis so we're investing cash to ultimately to turn it into product with margins and that cash will come back in the next 30, 60, 90 days.

Okay, understood. And then just as my follow up and you did allude to it there, I guess you know just functionally right, so could - you did produce, I believe over 30,000 kilos in the quarter. So you're continuing to have nice harvest and so just functionally was it that, what you were producing was not necessarily the SKU that you needed for retail listings and that's why you went out in the market to purchase product. I’m just trying to understand the gap between what was produced and what was sold and the decision to purchase wholesale and effectively just so I can understand how we get the cannabis gross margins back to where - they were as you transition to more of the sales coming from your own product produced. Thanks so much.

So Chris I think it’s important to remember there is always that almost one quarter delay between when you harvest something and when you realistically have it out as a sale; last quarter our harvest were not 31,000 and so we identified that there were opportunities on the demand side to fill if we had more product, we didn’t have it because Aphria Diamond license was later then we had thought so we bought that cannabis, right just - but it was just we kind of replaced that whole that was going to happen in Q3 as we knew harvest were ramping for us that would be available to sell in Q4 but just weren't available in Q3. So it kind of goes back to that five, six week delay after you harvest something before that product is in a position to really go out the door by the time it gets dried, it gets irradiated, it goes through your packaging process and then clears all the QA and QC tests including microbiology, pesticides, potency all the different tests that we’re mandated to do by Health Canada.

Our next question comes from the line of Andrew Carter with Stifel. Please go ahead. Your line is open.

Yes, thanks just a couple questions. Number one on the CAD11 million in wholesale, could you quantify by chance how much that helped kind of profitability in the quarter and appreciate you kind of mentioning - kind of get it that you would have achieved the guidance after COVID-19, but which implied a pretty healthy scaling of the business in the fourth quarter. Would that be put off two quarters, I think, what's kind of the impediment there, is it getting really all 100% internal supply moving away from wholesale getting a good run rate on second gen products? Thanks.

So, Andrew, thanks for, thanks for asking the question. On the wholesale product, we are in about a 10% margin on that and that basically falls directly to the bottom-line on the EBITDA side. And I apologize but I missed the second-half of the question.

Yes. So I'll ask a just a little bit better. I would say in this, in kind of the fourth quarter implied a pretty healthy kind of EBITDA margin in the business apps that COVID-19 I get that. It included to - a couple of things included a stepwise increase in cannabis, a lot more internal production. If I had that right and then obviously second generation products will be much more meaningful. I mean is that, is that delayed two quarters, I mean, when do we really start to see the business, start to scaling or is that just with so much uncertainty around COVID-19, it's really even difficult to even say that at this point?

So, I think - I’ll say the deferral. It’s you know when you’re in different rooms but you know step back for a second, I think as you saw the increase in the third quarter and that will continue. When you have our - six brands gaining share and continue to gain share, that's going to be you know a big lift upon our sales. The other thing is one of the biggest problems is just having products to sell and now with a Aphria Diamond coming on, we will have the ability to sell a lot more products. We have sold close to a 100,000 vapes and we'll continue to sell a lot more of vape products. We don't have them yet but we will be rolling though, our edibles and that's going to be a big part of it. But I think the big thing is which is key, the consumer has really accepted our product, likes our product and they just having product they supply for them. Each quarter more and more stores come online, and I think the other big opportunity as we look at it is quick and quick as we sell more and more product through e-commerce. But the biggest opportunity for us is we came out with good product, good pricing, good selection, good supply. We're taking sales away from the illicit market and that's the key here is how we take sales away from illicit market because today within Canada 75% of cannabis still goes through the illicit market and that's ultimately there's 700 stores, 800 stores in Canada today, that’s going after that illicit market, going after the online market and additional retail stores opening.

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

I guess, first off, I just want to kind of ask about overall kind of sales price, you guys saw a nice sort of uptick during the quarter and there has been a lot of conversation in the market about more competition, especially in kind of deep value, you guys have done seemingly a real nice job of increasing your market share with your own brands. So can you talk about some of the market dynamics there? What you're seeing in terms of pricing pressure and how you feel like that should evolve over the next couple of quarters, especially as your 2.0 products continue to roll out? Thanks.

I'll take some of it then Carl will take the other part of it. Number one, our sales team working with Southern Glazer have done a great job with boots on the street, have done a great job of getting display and getting products. And I think the big part of it is just we've got more and more products that we've been able to get into the stores. The big thing also is the relationships and that we've built in displays. I come back and say where the quality of our product has continuously improved and increased with our flowers, with our vapes and when you gain share. So distribution is number one, innovation is number two and consumers becoming more and more aware of our products and know our products and accepting it. In regards to price, the big thing is you have to promote, you have to drop the prices when your product is not selling. And that's not been our case right now that we've not had to go out there and discount our products because our products are selling. Our biggest complaint is you can find our products if we're out of stock. Carl, you want to add anything?

I'll just add that we haven't seen the pricing pressure, as Irwin said. And I really think that's a function of how we've priced all of our brands and when you look in each segment that those brands are competing against, they are all priced competitively against the other brands in the space. We're not trying to sit out there and take the number one, number two selling price inside of a segment. All of them, we are kind of median or just slightly below it. And I think that's a big part of our success as well.

All right, great. Appreciate that. Internally, it seems evident in the market share gains. If I could just squeeze in one more, just as we look at the fourth quarter, I can certainly appreciate the decision to suspend guidance, but as you think about all the puts and takes, you do have some more stores that will come online, some continued market share gains, but obviously a lot of unknowns with COVID which has been impacting for about a month now. If everything were about to stay as it is now for the remainder of the quarter in terms of curbside pickup, delivery and what stores are closed, how would you see in terms of purchases from provinces? How do you expect kind of sales to trend sequentially? So, any color there would be helpful. Thanks.

So, we pulled the guidance, Aaron. There was a reason we did that and we suspended the guidance. There are - there is just so much uncertainty, individual control boards, when you talk to them, some are seeing things go up, some are seeing sales go down, some are just trying to be careful to make sure that they don't have excess amounts of inventory in this piece. And so I think you're seeing a move at the control boards to lower purchases on an individual purchase with a greater cadence of purchases just to be safe. They have learned from what happened in the 1.0 rollout that just buying product because it's available isn't an effective strategy for them. And that's what we're seeing. But it just - it does puts us in a position where we're just unable to comment on what that looks like other than providing the pieces we provided in the call, where we gave you the little pieces in each individual country of what we're currently experiencing. The real problem is nobody knows what we're going to experience tomorrow.

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

I wanted to follow-up on the wholesale question from earlier. At what point do you think you'll get to sourcing all of your products internally? Is it likely to be in fiscal Q4 or later in 2020? And then selling wholesale, can you talk about market conditions there and the sale that you had in the quarter? I mean, do you view this as somewhat sustainable or should we view it as kind of opportunistic and one-time?

So, I think, I said during my remarks, we don't anticipate duplicating that wholesale sale. It was kind of a one-time position. We had excess inventory and in one very specific part of our inventory and we wanted to make an adjustment there. And so we sold it to someone who is looking for it. As it relates to purchase flower, we have taken advantage of that market when it proactively benefited us. That was primarily in Q3 with - and we have a little bit left over that's going to be available for Q4. Our intention is not to be in that market. We have the capability to produce up to 255,000 kg's from our two facilities. Buying more on a long term basis doesn't make sense. It just - it made sense in this very limited short time opportunity.

Okay, that's helpful, thanks. And then my second question is on the derivative side. It sounds like you've had good results from your vape portfolio so far. I'm just wondering how do you think about keeping your share lead once additional competitors arrive and at what point do you expect to launch your edibles and topicals portfolio? I saw it was mentioned in the MD&A, just trying to get a sense of when we might see that. Thank you.

So I think some of the Q2 products that you're going to see come online at the end of the first half of the year. We have some other ones that we continue to move forward with, that will follow after that. We want to get this right. We did a critical analysis last year, we looked at our capabilities, we looked at what the market wanted and we saw a huge opportunity for us in vape and said we're going to get that one right. And we're going to just do one and then we're going to move to each additional area. And when we do it, we're going to do it right. And so we've taken a little bit slower focus than some people have to make sure that the products that we release are what consumers want and that they're done right. When it comes to vape and differentiation, we believe it's about the Terpene blend. And so we've been - we've done a lot of - we did a lot of testing on alternate flavors and things like that. That would be appealing to consumers and we continue to differentiate ourselves that way.

And I think it's important, listen, our brands stand for something and when we come out with a product, they got to meet the standards of our brands, from uniqueness, it's just not a median product, and that's what's going to be important, what we come out with. I think there's a lot of companies that have played beat-the-clock to get products out there. And with that, we're going to get the right product, something different, something unique and products that we're going to be able to get pricing and value for.

Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Please go ahead. Your line is open.

Good morning everyone and congratulations on the quarter, especially on the sales front.

Thank you, Pablo.

When you talked about the M&A side of things, can you clarify that a little bit in terms of looking at distressed assets in Canada? I mean, what specifically are you missing? And related to that, you only own 51% of Diamond, does it make sense to buy their 49% at some point, especially as you begin to use that facility? And then I have a follow-up. Thanks.

So number one, I think, listen, there's lots of investment that we need to assess that may make sense to be a part of Aphria and we'll look at that and where does that come from. And I think as we look at - there is opportunities within medical, there's opportunities within other processing. We have a tremendous amount of grow. We have over 265,000 kilos that we can grow today. But I think with any industry, consolidation is important and consolidation is going to happen and I think that's going to be something that's going to happen in the cannabis industry and that's going to be happening where there is a smart opportunity. And you know, Pablo, what we included together was 55 acquisitions. So that's something we will look at where - is there an opportunity to buy distressed assets or assets that are way undervalued. In regards to Aphria Diamond, we have a great partner in the Mastronardi's and I think partnership is not only owning a 100%, It's also owning and having partners that really can be helpful with your grow, really helpful in regards to how you run the facility. So there is no need for us to go out there and buy the other 49% because right now, we're able to get good grow, good products and good partners and why would we spend our money to do that.

Understood. And just a follow-up on 2.0, just to be clear, remind us of - in the February quarter, you have your full line-up there in terms of vapes or was it rolled out through the quarter? I'm just trying to - I understand most of the launches won't be until June, as you just said, but is there a difference in terms of how much product you will have out there in the May quarter versus the February quarter? Thanks.

Well, so far it was minimal, and really didn't start till January and some in February, but the quarter - the April - the March, April, May quarters are the big quarters that we're going to be rolling out product and that's where the majority of our vapes will be in the next six months. But this will be a good sized quarter for vapes.

Our next question comes from the line of Graeme Kreindler with Eight Capital. Please go ahead. Your line is open.

Just as a follow-up on the derivatives. I'd like to get, if you could provide some color on the production capacity right now for derivatives in 2.0 products kind of from the extraction angle down to downstream packaging and given the commentary on COVID-19 as well as the CapEx? I'm just wondering if that's going to impact any incremental licensing that might be required to ramp up production of vapes as well as given the market conditions, is that - will that inform any speed up or slow down of product launches as we see what happens at the brick and mortar angle here? Thank you.

So there may be some other licenses and opportunity out there as continuously we're looking at interesting technology out there and better vaping opportunities. We're also looking at potential partnerships out there as some of the other companies that do vape today realize cannabis is going to be something that's here to stay. So there is opportunities in partnerships, opportunities in innovation and we're seeing a lot of new technology out there and we look to improve product and improve performance and vaping will be a product that's going to be used in so many different occasions. And in regards to our other products, again, we've been a little slower than some of the other companies, but it's been because we want to make sure we perfected the right product and we got the right product and they should be rolling out in the second half of our fiscal year 2021.

And just to clarify, in addition, when talking about licensing, in particular with Health Canada, are there any areas that you're currently waiting for licensing that's going to help on the processing side of things and has the COVID-19 situation impacted any of the expected timing of when you might receive that licensing, if that's the case?

Nothing significant. We're always potentially looking for licensing in certain processing rooms and certain processing areas, but it's not like a license that we are waiting for Aphria Diamond or nothing that we're waiting for from an Aphria One or something like that. There could be some small licenses we're looking for in certain rooms within Aphria One or Aphria Diamond, but nothing that will hinder any of our growth in any of our major processing.

Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please go ahead. Your line is open.

I want to go back, Carl, to some of your commentary with respect to the lack of write-offs and impairments and that's something that obviously has been challenging in sector wide with a lot of downward surprises by many of your peers. So just curious on maybe the rationale or the philosophy about when you guys bring that biological asset into inventory, I don't know if you can get into the details of pricing assumptions, but maybe just the overall - the methodology of how you're confident that the way you're coasting that is ahead of the curve, given what many anticipate is going to be a commoditization as the sector evolves. I think that you commented on in the past that you're not as bearish on that, particularly with your product line up. But just to mitigate, maybe potential future risks of impairments, just given how much capacity is out there.

So one of the key pieces is that when we started as a company, we've always taken most likely - the most conservative view of fair value. And as a result, we haven't had to pay the price that other people have had to pay for that aggressiveness. We've been very clear and transparent in our disclosure, in our financial statements. Our cost structure has been lower than everyone else's. And so our actual - the real cost before you get into the artificial accounting costs of fair value, are generally lower than everyone else in the industry to begin with. And then when you pare that with being very careful on the value that we're writing the product up to, which again we provide full transparency on in the MD&A, it just put us in a better position. We proactively are looking at where market prices are for all of our products and if we - if there is a future need to adjust the fair value that we write the product up to, we'll deal with that, but at - to this point, those values have been easily recoverable. And I think it's just a function of not being aggressive early on.

Got it. That's very helpful. And then just a quick follow-up. And I think, Irwin, you had already commented on this a little bit previously. But when it comes to the Cannabis 2.0 rollout, just confirming that it seems like that big healthy growth you saw in adult-use was more in the dry flowers. So I'm imagining, there wasn't sort of any sort of step function increase this quarter on vapes and if anything we should anticipate a bit of that in your final fiscal quarter this year.

Exactly. I mean there is some vapes in the quarter. But the fourth quarter was the quarter we're in now, which ends the end of May, is where the big step-up is in vapes and then in our first quarter in 2021. And then in the back half of 2021, our second quarter, third quarter is when we go in to edibles and gummies and other products.

This concludes the Q&A session for today's call. I will now turn the call back over to management.

Thank you very much, Kinsey. Thank you everybody for today's call and spending time and listening to us. Listen, it's been just a year now that I've taken over as CEO and it has been a really, really interesting year. It's been an interesting industry and I've really enjoyed working with the people at Aphria. I've enjoyed working with our Board. I've enjoyed very much working with our consumers, our analysts and the financial world. It's an industry that has tremendous amount of legs in so many different areas, whether it's recreational, whether it's medical, whether there is other medical aspects of it, et cetera. And I think what you'll see today is Aphria playing a big part. Just think what we've been able to achieve within the year in regards to our brand building, in regards to our cash situation, our balance sheet, building out Aphria Diamond, completing Aphria One, building out Germany, building out LATAM and completing with that. So with that, just as you give us more and more time, just think what we will be within the cannabis world. There will be consolidation, there will be additional partnerships that come in and Aphria will be a big part of that. But I think the most important thing is we are in changing times. I've never seen this in my lifetime. I hope I never see something like this again in our lifetime. I think one thing we got to take into effect, the consumer will change, our purchasing habits will change, the way we socialize with people, what we do with our employees, how we sell products. Aphria today is in a good place. We have revenue, we have brands, we have cash and we're running every single day. We, every day, think about the safety of our employees, we think about what's going on in the world and how we give back and we will continuously give back in every way we can. So with that, I'd like to tell everybody, please be safe, use social distancing, stay home, relax, enjoy some great recreational cannabis, enjoy some medical and you'll be safe, happy and look forward to talking to you real soon. So thank you very much for today's call.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.