Tilray Brands, Inc. (TLRY) Q4 2020 Earnings Report, Transcript and Summary

Good morning, my name is Kirsten, and I’ll be your conference operator today. At this time, I’d 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’ll be a question-and-answer session for analysts and/or investor firms only. [Operator Instructions] Thank you. Ms. Katie Turner, you may begin your conference.

Great, thank you, Kirsten. Good morning, everyone. We appreciate you joining us to discuss Aphria, Inc. financial results for the fourth quarter and fiscal year ended May 31st, 2020. On today’s call are; Irwin Simon; and Carl Merton. By now everyone should have accessed 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 also 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 – the text of Aphria’s earnings release and the filings issued yesterday include a discussion of the risks and uncertainties associated with such forward-looking statements. All financial references are in Canadian dollars, unless management mentions, otherwise. Also, some of the financial metrics discussed on the call are non-IFRS measures. And we’d like to refer listeners to the company’s MD&A for an explanation as to how the company calculates those metrics. And now, I’d like to turn the call over to Irwin.

Thank you, Katie and good morning, everyone. I hope everybody had the opportunity to review our press release this morning. We appreciate you joining us today to discuss our strong fourth quarter financial results and a great end of year to fiscal 2020. I’m proud of the execution of our global team and particularly, in a very dynamic operating environment. Today, I’ll focus on this pivotal time we find ourselves in, before diving into the strength of our revenue growth, brand performance, profit increases, enhanced balance sheet and robust cash position. During the quarter, we continue to ensure the health and well-being of our more than 1,000 employees around the world, as we work together to protect and prevent against COVID-19 in the workplace and in our local communities and in our homes. On a daily basis, I’m reminded of how agile and resilient our team is at Aphria, as our valued patients and consumers, providing them with our medical adult-use cannabis products. I’m in Leamington this week, and I have to say, how proud I am to see how well our facilities and greenhouses are operating. Thank you to our great team at Aphria for all their hard work and dedication. At the same time, I’m challenging our organization to evaluate opportunities where we can be better, more supportive and more united. Not only can we – as we combat this global epidemic, but also championing the advancement of inclusion and diversity, both at Aphria and externally. As a purpose-driven company, we take great pride in leading with our core values, which are rooted in setting a standard for a change and an innovation in our industry and beyond. This starts with our talented and dedicated global team, from those in our production facilities, international operations, corporate offices, and of course, our Board of Directors. Everyone at Aphria contributed to our success and achievements in fiscal year 2020. And we are consistently taking a diversified approach to our innovation, corporate citizenship, strategic partnerships and our global expansion. Boy, what a difference a year makes. In an industry that’s only a few years old and has undergone significant change, Aphria has emerged as a clear leader, helping to both define and change the cannabis industry in Canada and abroad. While Carl will focus more on the details of the fourth quarter. I am incredibly pleased with our strong end to the year and how well we are positioned for continued growth and success. Relative to our largest competitors, Aphria maintained its number one net revenue position, widening the gap from our next closest competitor, in terms of adult-use gross revenue, Aphria move from number two to number one in Canada, with a 26.8% growth. And Aphria continues to maintain its number one ranking when compared to its closest competitor on an adjusted EBITDA basis. A few key highlights include; fiscal year 2020 consolidated net revenue increased to 129% and adjusted EBITDA improved by nearly CAD45 million compared to fiscal 2019, with Q4 representing the fifth, and I say it again, the fifth consecutive quarter of positive adjusted EBITDA. Importantly, fiscal year 2020 adult-use cannabis revenue increased a 184% year-over-year, driven by the strength of our brands that we believe are unmatched in the industry, which I’ll provide more detail shortly. We also experienced strong growth on the medical side in Germany with CC Pharma. Our distribution generated net revenue of CAD99 million plus in the quarter. We continue to leverage our market leadership as we develop our medical cannabis markets internationally. We have been partnering with clinics by delivering educational materials to support them and caring for their patients, as well as providing resources during COVID-19. In Germany, we have established our sales forces to develop our outreach strategy and online training platform to educate the physicians. And in Canada, we have restructured the medical team to ensure we have the right amount of dedication and focus on growing our medical business. We remain well positioned to fund the future growth in Canada and internationally with just under CAD500 million in cash and liquidity. And as I always like to say, cash is definitely a King here. We reduced our net debt position by approximately CAD73 million in the quarter. And finally, we made key decisions during the year to favorably monetize strategic investments. We’ve taken a CAD64 million non-cash impairment charge this quarter, which Carl will provide more information on a little later, while our commitment to grow our business internationally remains the same. We have pivoted our business models in international markets away from a large CapEx spend. If not for this shift in the strategy collectively, these businesses would have cost us upwards of CAD40 million in CapEx spend and a CAD2 million OpEx loss. In the short-term, we will supply our demand in LATAM with cannabis products sourced from Canada, and are exploring our mid to long-term options of whether a smaller production footprint would be appropriate or whether to outsource production to a third-party or simply ship product from Canada. When you look at all we’ve achieved in fiscal 2020 and where we started just over a year ago, we are very pleased with our ability to generate consistent results. A cornerstone of our long-term strategy is to be focused on the highest return priorities for our growth that enables us to be the only profitable publicly traded licensed producer in the industry. We believe we have the appropriate capital structure for our business and this provides us with strong financial flexibility in the future. At Aphria, we’re setting ourselves apart from the rest of the cannabis industry, generating some of the strongest sales growth, maintaining one of the strongest balance sheets and cash positions, compelling consumer brands and a well diversified global business. Our teams continue to work closely with our global supply chain partners to manage and minimize any potential business – disruptions as we continue to operate through this pandemic and best manage our operations to fulfill both customer and customer needs. Our team at Leamington executed well across all our facilities, including Aphria One and Aphria Diamond. As I discussed last quarter, we took decisive action to continuously develop strategies to effectively manage this – the challenge has created this COVID related operating environment, with our number one priority on our employees safety and keeping our facilities fully operational. Throughout the fiscal year and more recently, we further strengthened our leadership team in Leamington across core functions. For examples, in the areas of production, packaging, HR, quality and operations. The team is doing a great job of efficiently integrating Aphria Diamond to our processes. We are consistently working to generate greater yields and lower cost. We are pleased that in Q4, cash cost per gram remained below CAD1 for the second straight quarter and decreased 5% from Q3 to CAD0.88. We are pleased with the quick ramp up of quality product that is coming today from Aphria Diamond. We’re excited about the tremendous growth opportunities in Canada, as well as our strong medical adult-use brand sales, extraction capabilities and our ability to export EU GMP products and white label opportunities. From enhancing our global team, our brand building activities, new facilities and production capabilities to investing in R&D, Aphria is well positioned for future growth. Getting to our brands, we believe our brands differentiate us in the industry as we serve patients and consumers across broad demographics and geographies. Our six high quality brands including; Solei, RIFF, Good Supply, Broken Coast, Aphria, our medical brand, and most recently exclusively in the Province of Quebec the addition of P’tite Pof to our adult-use brand portfolio. P’tite Pof is a value brand inspired by Quebec culture and brand positioning, a straightforward, functional, bold, charming and iconic with additional blue red logo that has a modern twist. We also look forward to introducing two new exciting brands in fiscal year 2021 and beyond, so definitely stay tuned. Broken Coast remains a top, super premium brand nationally, delivering exceptional quality standards. Across our total business, we continue to gain national market share and grow brand sales in the primary markets of Ontario, Alberta, Quebec, British Columbia quarter-over-quarter. As a result, Aphria continues to drive category leadership and success growth as our revenue from adult-use cannabis grew by 184% from the first quarter to the fourth quarter, they are just great numbers. Total sales across primary markets grew significantly each quarter, most recently increasing 27% from the prior quarter. In Ontario, we added 300 basis points to our market share during Q4. For the month of May 2020, Aphria ranked as the number one LP for sales in all products and categories in the brick-and-mortar retail channels across all brands in Ontario. What a great accomplishment. This was achieved through strong sales from Aphria’s flower positioning and maintaining the number two position and pre-rolls, oral sprays, vapes, maintaining the number one position. In pre-rolls, RIFF, Good Supply are ranked in the top three pre-roll brands, the OCS. And our Good Supply Royal Highness is a top selling 3.5 gram flower at OCS. We are pleased that our oils of Solei is a leading brand across the country with our Solei Free CBD oil. It is important to note that we have seen very, very strong growth across our brands in vapes, Good Supply Pineapple Express 510 is the best selling vape at OCS, pretty impressive. You should try one. This market opportunity has been quickly ramping and contribute to our ability to grow adult-use revenue in excess of the category growth rates. And in Alberta Aphria has ranked the number one licensed producer across all product categories by dollar amount. Aphria’s success will continue to be driven by our differentiation portfolio of brands, products aimed at delighting distinct consumer segments. We are increasingly connected with patients and consumers through medical adult-use brand positioning and product innovation to drive our growth. Coming up, we’re about launching our liquid enhancers, topical concentrates in the near future, followed by Aphria edibles and beverages. We maintain a strong foundation in Canada, where we expect momentum to accelerate. As I mentioned in the last quarter, consumer behavior is changing. But this change continues to accelerate. Throughout our data insights and understanding of our consumer preferences, we believe we are well positioned to capitalize on these changes in the cannabis marketplace. This combined with our strong foundation also helps us to leverage key learnings, implement them on a market-specific basis in Germany, Latin America and the US as well as other international markets. Before I turn the call over to Carl, I want to thank the NASDAQ as our new exchange partner, where Aphria started trading in the US on June 8th. This move is a reflection of our ongoing commitment to find cost efficiency ways of operating, so we can continue to deliver long-term value to our shareholders. We’re also committed to Corporate Social Responsibility, and are excited to be working on this preparation of analysis for our stakeholders in an effort to evaluate opportunities for improvement in areas as we over index today. In summary, we are building brands that we believe resonate with consumers today and well into the future. Our mission is clear, to be the trusted partner for our patients and consumers, providing them with a cultivated experience and health and well-being through a high quality and differentiation and absolutely innovative products. As we execute on our vision of changing people’s lives for better, one person at a time by inspiring and empowering the worldwide community to live their very best life providing them with products that meet the needs of their mind, body and soul and invoke a sense of well-being. I would like to thank our entire team worldwide for their agility, focus, tenacity while navigating through a dynamic operating environment. Our operations and financial results are a direct result of their hard work and dedication. Once again, from the bottom of my heart, I thank you so much. With that, I now would like to turn the call over to Carl. Carl?

Thank you, Irwin and good morning. Before I discuss our results, I would like to echo Irwin’s sentiment and thank our entire team for all their hard work in fiscal 2020. Our operational and financial achievements are because of their efforts. And as a result, we furthered our leadership position, both in Canada and internationally, setting us apart from the competition and positioning us well for fiscal 2021 and beyond. As Irwin discussed, we continue to execute on our growth initiatives and prioritize profitability with long-term growth and success in mind, as we build brands that we believe resonate with consumers today, and will continue to in the future. We are pleased to present our fiscal 2020 and fourth quarter financial results, which lead the industry in almost every important financial metrics, particularly our adult-use cannabis revenue growth, sequential positive adjusted EBITDA, and our ability to maintain the strong balance sheet and cash position. As we emerge from the initial transition of managing the current health crisis, to creating our new future, the strength of Aphria team becomes even more evident. We’re doing everything we can to continue serving our patients and customers, and executing our strategic initiatives. The difficulties caused by the pandemic that our patients, customers and employees face each day requires strong leadership, and communities coming together to support one another. At Aphria, our team rose to the challenge and is executing every day. We continue to actively manage the operations and our supply chain in anticipation of the changing impacts of the pandemic. To this point, any impacts other than as discussed in our MD&A were minimal. From a liquidity perspective, we believe we possess sufficient funds for what we believe will be the expected duration of the pandemic. We have cash and undrawn line of credit facilities of just over CAD500 million and account receivable balances that are largely with Crown Corporations totaling approximately CAD55 million, that is due within the next 60 days. Our net – debt maturity is not until July of next year, and we do not anticipate any issues with our debt covenants. Additionally, we announced today that we established an at-the-market equity program under the prospectus we filed in August of last year, allowing us to issue common shares in an amount up to USD100 million, which will provide us additional optionality in the event of an acquisition requiring a cash payment and or more flexibility when scheduled debt repayments occur. Irwin provided an overview of the disciplined and well-planned actions we took across our business. And I also want to highlight a few additional industry data points that are important to keep in mind for Aphria. These include; recent Stats Canada reports highlight a growing market of adult-use purchases at the retail level, most recently indicating approximately CAD2.2 billion of annualized sales, with the market itself growing approximately 24% during the same period as our quarter end. It is important to note that Stats Canada reports at the retail level and provincial cannabis wholesalers buy at the wholesale level. So you usually see a difference in growth between the two. It is our belief that provincial cannabis wholesalers took advantage of the pandemic conditions in the quarter to better align their inventory levels with consumer demand. For some brands, this meant major reductions in orders. While for other brands, this represented slower growth and experienced that the consumer demand level. Accordingly, we believe that provincial cannabis wholesaler demand during the quarter was substantially less than the consumer demand portrayed in the Stats Canada report, making our approximately 27% growth in adult-use revenue in the quarter, more consistent with the market share growth we observed in our brands during the same quarter. Turning to our financial results, they demonstrate our ability to continue to gain market share. They demonstrate our continued focus on leveraging our cultivation expertise into lower costs per gram and our focus on remaining adjusted EBITDA positive. Net revenue in Q4 increased 18% over the prior year period, and 5% from the prior quarter, to CAD152.2 million. This net revenue is comprised of CAD99.1 million of distribution revenue and CAD53.1 million of cannabis revenue. Distribution revenue increased 12% to – CAD99.1 million in Q4 and gross cannabis revenue was CAD65.5 million, compared to CAD64.4 million last quarter. Net cannabis revenue benefited from the growth in adult-use revenue. But this was more than offset as we expected and communicated on our Q3 call from the decrease in wholesale revenue. Gross adult-use revenue increased 27% from the prior quarter to CAD56.7 million and medical revenue is relatively flat, consistent with patients’ reduced ability to get out to see doctors or refill their prescriptions. During the quarter, the company sold 12,557 kilogram equivalents of cannabis, including 10,831 kilogram equivalents of adult-use cannabis and 1,273 kilogram equivalents of medical cannabis. The average gross selling price of adult-use cannabis decreased to CAD5.23 per gram in Q4 compared to CAD5.47 per gram in Q3, primarily as a result of a shift in product mix, caused by the strength and demand of one of our two core brands, Good Supply, a brand which plays within the value market category, and price reductions in key markets to solidify market share. The average gross selling price of medical cannabis, exclusive of wholesale increased to CAD6.63 per gram in Q4, compared to CAD6.41 in Q3. Our cash costs to produce per gram remained below CAD1 for the second consecutive quarter, and decreased 5% to CAD0.88 in Q4. With the merging of Aphria Diamond’s cost structure into our income statement, we anticipate further reductions in this figure going forward. Our all-in cost per gram in Q4 remained flat at a CAD1.69 a gram. Adjusted cannabis gross profit increased to CAD28.1 million in Q4 compared to CAD23.7 million in Q3. Adjusted cannabis gross margin was 52.9% in Q4, compared to 42.7% in Q3. The increase was a combined result of the increase in higher margin adult-use sales, the wholesale transaction ratio, and our higher usage of the lower cost cannabis product produced by Aphria versus the sale of cannabis that was purchased through wholesale channels from other LPs in the prior quarter. I am pleased that since Q4, we sold all but approximately CAD4.4 million of purchased dried flower that we’ve maintained in our inventory level at the end of Q3 and we anticipate selling the remainder within the next month. Adjusted distribution gross profit increased slightly to CAD11.9 million in Q4 from CAD11.4 million in Q3. Adjusted distribution gross margin was 12.1% in Q4, compared to 12.9% in Q3 as a result of the impacts of COVID-19 on CC Pharma sales mix. SG&A costs increased to CAD116.6 million in Q4 compared to CAD50.9 million in the prior quarter. The increase is mainly related to CAD64 million of non-cash impairment charges that Irwin earlier referred to as a result of the changes that we made to fully impaired Jamaica and Lesotho and the pivot in our business model in Colombia away from a large CapEx spend. If not for these changes, these businesses would have cost CAD40 million in CapEx and CAD2 million in OpEx annually. As part of the non-cash impairment charges, we recorded approximately CAD5 million of impairment in Lesotho approximately CAD19 million of impairment in Jamaica and approximately CAD40 million of impairment in Colombia and Argentina, collectively. The Jamaican cannabis market is first and foremost, the tourist market that pandemic’s long-term impact on tourism in general and tourism to Jamaica in particular, forced us to reevaluate our relationship and cash flow expectations from this market, resulting in us taking a non-cash impairment of assets in our Jamaican operations. Similarly, we recorded the non-cash impairment on all the assets in the Lesotho operations since the country of Lesotho closed its borders, and our partners and senior management team have not been able to access the facility as they reside outside of Lesotho. The impairments in Colombia and Argentina were based on revised cash flow expectations going from the impacts of COVID-19, but only resulted in partial write-offs of intangible values. For the quarter, we reported a net loss of CAD98.8 million, or a loss of CAD0.39 per share as a result of the non-cash impairment, compared to net income of CAD5.7 million or CAD0.02 per share in Q3, and net income of CAD15.8 million or CAD0.05 per share in Q4 last year. Moving to full fiscal 2020 results. Adult-use net revenue increased 307% from CAD36.9 million in 2019 to CAD150.4 million in 2020. We reported net cannabis revenue of CAD204.7 million in 2020, an increase of 129% from CAD89.4 million in 2019. Net revenue in 2020 was CAD543.4 million, an increase of 129% from CAD237.1 million in 2019. In 2020, we reported positive adjusted EBITDA from cannabis operations of CAD20.1 million, compared to a loss of CAD17.5 million in 2019, an improvement of almost CAD40 million. 2020 was a transformational progress year for Aphria and we continue to execute on our plan to position ourselves for future growth in Canada and internationally. In an industry full of cash burns and heavy adjusted EBITDA losses, our focus remains on generating positive EBITDA. For the quarter, we are pleased to continue our trend and report a fifth consecutive quarter of positive adjusted EBITDA. Consolidated adjusted EBITDA in the quarter increased 49% to CAD8.6 million from CAD5.7 million. This includes adjusted EBITDA from cannabis operations of CAD9.3 million and adjusted EBITDA from distribution operations of CAD1.9 million, partially offset by an adjusted EBITDA loss from businesses under development of CAD2.7 million. Most notably, adjusted EBITDA from cannabis operations increased 55% in the quarter. Moving to liquidity, as Irwin said, we continue to possess an industry enviable balance sheet including strong cash position, robust capital structure and cap table with minimal potential dilution. As of May 31st, 2020, the company possessed cash of CAD497.2 million to fund planned Canadian and international growth that will also support any COVID-19 pandemic related financial impacts. While all material in process and new CapEx projects are currently on hold, our German expansion has continued. We expect to spend approximately CAD15 million to further finish our German expansion. Our Colombian expansion is now on hold temporarily and we reevaluated the growth plan of the Colombian market in the new environment with regulatory shutdowns and pending product registrations, and this slowed our expected development of the South American market. During the quarter, we were able to proactively manage our working capital investments to a lower value than originally anticipated. Only investing CAD12 million versus the previous guidance of CAD25 million to CAD50 million. As a result of revised growth expectation versus anticipated pre-COVID-19 growth, we do anticipate a minor build in inventory over the next quarter, which will be corrected the quarter thereafter. All leaving approximately CAD450 million, plus cash generated from operations available for future strategic initiatives. We believe this is sufficient to take advantage of any attractive distressed asset sales in Canada, US expansion or other income statement accretive opportunities and protect us from any adverse impacts of the pandemic. Cash inflows in the quarter primarily included CAD26 million from the liquidation of the promissory note from GA Opportunities, CAD2.3 million from CC Pharma’s additional term loan and CAD2.7 million provided by operating activities exclusive of changes in our working capital. Cash outflows in the quarter primarily included approximately CAD12.1 million for investments in working capital, CAD28 million in CapEx and CAD8.6 million associated with repayment of financial liabilities. Earlier Irwin highlighted the strength of our brands. It is a common misperception across the industry, that a deep discounted value product offering is necessary to be successful in the saleable flower category. What I think speaks of volumes about our brands is their success, including their number one positioning in several individual categories, and that we enjoy continued growth in our saleable flower business without the benefit of an economy priced 1 ounce packaged size. In our primary markets, based on Headset data for Ontario, the value category grew from 28% of sales in August 2019 to almost 50% in May of 2020. In Alberta, the category grew from 20% in June 2019 to 42% in May 2020. And in BC, the category grew from under 20% to over 40% from August 2019 to May 2020. I look forward to reporting our early success with both the 15 gram and 1 ounce packaged sizes next quarter end. Now that some of them are out in the market, with more to come by the end of our first quarter. We believe we can continue to find pockets of industry under supply and capitalize on them by identification, supply and brands and/or products and product line extensions that support those pockets of under supply. This quarter, we continue to gain national market share and grow brand sales in the primary markets we mentioned. And we are excited to be introducing two new brands teased in our MD&A in fiscal 2021 and beyond. Aphria continues to drive category leadership. And we believe that through our data insights and understanding of consumer preferences, we are well positioned to continue to take advantage of the opportunities of these undersupplied markets provide in the quarters and years to come. We continue to demonstrate incredible success in Canada and we believe that the companies that are able to execute in Canada are the ones who will experience the same success in the US as the legalization process unfolds there. Aphria continues to be unmatched on a variety of financial metrics, including our record of consecutive quarters of adjusted positive EBITDA, focus on profitability, operational efficiency and cannabis revenue. Our cash position will support our strong performance and underlying our ability to succeed through the times ahead, even given the uncertainty of the current environment. Aphria established the standard financial stability and strength for the industry over a year ago, seen our team continue to excel at the standard on a day-to-day basis summons our leadership position in the space. I am so proud to be a part of this great team. As great as today is, as part of this team, I know tomorrow, they will make it even better. Our financial results this quarter are the stepping stone for the future as we continue to execute on our strategic priorities heading into 2021. Namely, a stronger and more profitable company supporting our employees and the communities we operate in during these difficult times. We believe that Aphria’s competitive advantages, brand strength, balance sheet and the dedication of our employees continue to position the company at the top of the market and remain confident in our ability to create long-term shareholder value. That concludes our formal remarks. And Irwin and I are now available for your questions. Chris, back to you for the questions.

Thank you. [Operator Instructions] Owen Bennett with Jefferies. Your line is open.

Good morning, gents. Hope all well.

Good morning.

Good morning, Owen.

Hey, how are you doing? A couple of questions, please just first of all you’ve had a number of GMP approvals for you now. And you mentioned the continued spend on the German cultivation, could you just maybe talk about your expectations for the EU Germany specifically over the next 12 months when that German cultivation comes online? And then secondly, you spoke about possibly being in the market for attractive distressed assets. Just wondering what would you class out an attracted distressed asset, a bit more clarity around that? Thank you very much.

Okay, thanks Owen. I’ll handle the first part of the question and Irwin will take the second. The EU GMP certifications that we received in the last couple of quarters are a big opportunity for us. We see the ability to supplement the German market with export sales in Q2, as we’ve now secured all of the external permits necessary, we’re just waiting for the one from Health Canada to make our first shipment. We expect the first sale to happen just at the end of Q1, early Q2. We’re also looking at using our Canadian operations as we talked about earlier, to enter into the Colombian market with that product on an interim basis, based on all the changes that were happening in COVID. The cost structure that we’ve been seeing coming out of our Canadian cultivation and operations put them very close to the ability to – or the, sorry, the cost structure inside of the Colombian market. And so we see that as in a positive way to avoid what was supposed to be a short-term CapEx spend.

And Owen I’ll answer in regards to distressed assets. I think we look at it at a couple of ways. We would look at some 2.0 assets that ultimately, we could move all our 2.0 production into manufacturing for our own brands. We also look both Canada and the US consumer brands that are consumer brands today, but ultimately could be converted to cannabis brands in the future. And, you know, we’re also looking for assets that are organic growth and assets in regards to that will generate, you know, positive cash. We’re all sort of the same thing as we look at Europe where there’s asset opportunities in the medical field that can complement our current, you know, international platform.

Cool, great. Thank you very much gentlemen, very helpful.

Thank you, thank you.

The next question is from Andrew Carter with Stifel. Your line is open.

Hey, thanks. Thanks, good morning, guys. First off, I wanted to ask you mentioned the consumption trends and what we’ve been seeing is that your shipments here were kind of well below actually what we’ve seen from the brick-and-mortar provinces. So you mentioned the inventory – you mentioned the wholesalers taking advantage do an inventory, would you – should you expect to see kind of a catch up in the next couple of quarters of or had the provenance taken a permanent step down here?

Go ahead. I think a couple of things. Number one, I think some of the provinces were looking at their financial position, let inventories run down. So that’s number one. And number two is, as store openings were on hold, and you know, not as much inventory was needed. And number three, as stores were closed during that period of time and everything was online, there was no ordering. So I think again, there has been a big demand for products now. And you know, the different liquor control boards now are ordering to, you know, build their inventories back up.

Okay, got it. And the third question, I know that you guys are kind of refraining from giving guidance during the kind of uncertainty of COVID-19. But just kind of some apps that are out there of the story here. Should you expect free cash flow generation here in FY ’21? And just to go a step further, you’ve given some prior margin targets for the business. Will we see that in FY ’21 or as perhaps the thought ‘21 spend more aggressively behind Canada to further your position? Thanks.

So, on the spend side, yes, I would say the thought process is that there’s you know, as the value category continues to increase in demand, there’s opportunities there. We’ve enjoyed the success that we have with our brands, as I said, without the benefit of having that 15 gram or 1 ounce packaged size, that were just starting to get out to the market today. And we see huge opportunities with – with that part. I’m sorry, I forgot the first part of your question.

Yeah, kind of timeline for free cash flow generation. I know you’re not giving guidance, but kind of any – anything we should think about on that side, positive free cash flow obviously?

So getting to positive free cash flow is really a function of the CapEx spend. And now that we see the huge changes we’ve made there, you’ll see that CapEx spend decreased over the first couple of quarters and we should easily be into free cash flow by that –

And also was building inventory as part of Aphria Diamond and CapEx. So we should absolutely, you know, see positive free cash flow.

Thanks. I’ll pass it on guys.

Thank you.

The next question is from Pablo Zuanic with Cantor Fitzgerald. Your line is open.

Good morning, everyone.

Good morning, Pablo.

One question in terms of just if you can repeat the number on market share trends. So you grew in rev, 27%. But what’s your estimate of a b2b market during the quarter, because like you said the 20% retail is not the number that we should be looking at? And related to that, and maybe more importantly, just help us understand better the sustainability of your market share gains or even the market share position then you attain number one, right? And if I can elaborate on that, as you were first in vapes, and now people are catching up, then you know that’s less sustainable, right? Or in flower if other people have been catching up with value brands, just expand a little bit more on that. If it’s a sales team or the brands, maybe that’s more sustainable, just some color there would help. Thank you.

So the growth in the – at the wholesale level or the b2b market, I’m not sure that like b2b is really wholesale – is a wholesale to other LPs, if I separate that from sales to control boards and the provincial wholesalers, provincial markets. Those – that demand was really about half of what we saw in the Stats Canada report. And we think that more closely aligns with the growth we sustained in our brands, and the 27% increase in share.

And, Pablo in regards to our brands, I mean, you know, we’ll continue to spend behind our brands we’ll continue to innovate. Yes, we were number one in vapes, and you heard me talk about all the new vapes that’s coming out and vapes under different brands. So first of all, we you know, with, you know, Great North, we have a great sales team that is on, you know, on the street out there with visiting stores and working with the buckmasters. And again, our whole thing is to build out our brands and build out the quality and the regulatory that goes behind our brands. And as you saw our pricing you know in regards to our cost per gram has come down tremendously which should make our products affordable. The other big thing you know don’t mention here is not so much just taking share away from the other brands. It’s taking the share away from the illicit market and that’s the biggest opportunity out there. If you come back and look at the cannabis industry today, there’s twice as amount of cannabis sold through the illicit market than just going through stores today. So that’s what we have to go after, is taking consumers away from the illicit market and buy in branded products where they can, you know, trust the quality, trust the regulatory and buying at good price.

If I can ask a follow-up, I mean, obviously, the question that we, and I’m sure you get from investors, it’s, you know, concerns about the oversupply, right. And the idea is that that’s going to worsen now with the outer growth that we may see in the index drop in the fall. If you can just expand on that. You know, how bad is it? I mean, obviously, your price has reached sequentially didn’t decline that much right, but just more color on that, because it seems to be a concern out there still for investors.

I think oversupply is something that’s out there. But on the other hand, you’re hearing and reading about a lot of these, you know bigger LPs and other LPs taking, you know, charges and shutting down, you know, and mothballing a lot of their grow houses, okay. I think, you know, at Aphria Diamond and Aphria One, we’re a low cost producer and you see us down to CAD0.88 and there’s, you know, other opportunities there. So, again, you know, we have automation, we have a great facility. We’re located in a great part of Canada that service all of Canada. So with that, we have all the grow we need today. But it’s again going back to what I said, it’s building your brands and with that, taking supply away from the illicit market and a lot of these bigger LPs just way, way, way over built and some of them you know, will close their facilities and some of the other LPs will go away.

I think just to add to that, Pablo, the you know, the harvest from the outdoor market goes back to our comments about industry oversupply and undersupply. It really is further creating an oversupply situation inside of the trim and the extraction grade market. And if you can grow good saleable flower, people will buy it. And I think that’s clear, people are buying ours are good saleable flower without the need to create one of these economy or deep discount value brands today and that market will continue.

Can I just squeeze one last one, if I may and I’m sorry I normally would very short? But obviously the news from Bloomberg right about a potential merger with Aurora was very specific, right. And I guess what I’d like to hear from you is, you know, in terms of market share, I mean, I will assume there will be some antitrust issues. But is that more you know, what’s the rationale there? You need the scale to continue to gain share to compete overseas, just give some color there, because one thing is buying distressed assets and other thing is merging with an equal pretty much. Thanks.

Well, first of all, I’m not, there’s no reason to comment on it, because it’s something that’s not happening. So, you know, I’ll go back and say the only thing on a big picture, you know, and you know me from other industries, consolidation is something important. And I think, you know, being the most efficient biggest player in the Canadian market is important for opportunities in the US. So I’m not, you know, going to comment on our work, because there’s nothing there to comment on because there’s nothing you know, happening. But I come back and say, if there is an opportunity for consolidation, there is an opportunity to take cost from the SG&A and there is opportunities to grow the two of them together with their brands internationally, you know, and scale does matter, which gives you an opportunity one day when the US legalizes I think the biggest player in Canada has a big opportunity in the US.

Got it, thank you.

Thank you.

The next question is from Aaron Gray with Alliance Global Partners. Your line is open.

Hi, good morning and thanks for the questions. You know first of all for me is kind of continuing to watch in terms of the supply dynamics, you know, if I’m looking at the kilograms, you know, harvested during the past two quarters, you know, definitely come up pretty considerably, you know, with diamond coming online. So just how do we think about, you know, those marketplace dynamics for you guys, specifically, I think you mentioned some near-term, you know, inventory levels, you know, being increased. But how do you think about the need for brick-and-mortar, you know, additional brick-and-mortar overtime to support that growth with the additional harvest? Irwin, I also believe that you mentioned white label opportunities there. So started to think about the opportunities for that additional harvest and being able to sell that through. Thank you.

So, again, I’ll go back to the same story. I guess the people believe there is oversupply in the industry but I think it is just way too simplistic to say that there’s flat oversupply. There are lots of pockets of undersupply, we’ve built the strength of our brands and our number one positions as an LP in all product categories by sales, because we have been able to grow flower that people will buy. And as that process continues as a retail rollout expands in Ontario. You know, I think the most recent information they’ve released is that they’re going to try and get at least five stores approved per week. I’d like that to be a lot faster. But that’s a very healthy pace in comparison to where we sat before. As those new stores come on as BC continues there licensed new stores as demand continues to increase in Quebec. There are more and more opportunities to self-saleable flower. And the issue in the market isn’t – has nothing to do with saleable flower, it has to do with an abundance of extraction grade material, right and that people that have too much of that on their balance sheet are going to are going to suffer. And the people who are growing that much of it this year are going to have a hard time moving those products.

And just from a standpoint there, I come back and say there’s tremendous opportunities for us to grow white label to do wholesale. But you saw we’re no longer building a greenhouse now in Colombia, because we feel there’s an opportunity that we can ship directly from Canada into the Columbian market. It’s going to save us CAD40 million. And with all our GMP certifications and our licenses, the opportunity for Europe is going to be tremendous. And don’t be surprised if Germany becomes legalized over the next couple of years. So I come back and say yeah, there’s supply issues, but I’m going to tell you, it’s also you know, cannabis 2.0 big opportunities and again it’s coming back with the different strains and the different quality of product that’s ultimately going to set, you know, the different LPs apart and we’ll be a big part of that.

All right, great. Thanks. I appreciate that. And then if I could just, you know, ask one more, I certainly can appreciate the need to kind of keep things close to the vest in terms of your brand unveilings that you have upcoming, but just you know, curious to some of the commentary you had, in terms of behind competition we’re seeing in value. You clearly made it you know, certainly clear in terms of your opinion that it’s not just in terms of having low price, but also having, you know, good quality product, but just curious in terms of your quality, you know, data insights, what you’re seeing in terms of what those opportunities might be both within the legal market and then Irwin, you know, you consistently mentioned also the need to be competing with the black market. So just as where you kind of see those pockets just given also what you’ve noticed in terms of new product formats coming out. It seems like it’s going to be more on the concentrates and topical side with the edibles coming on later so wondering if that’s more a function of what you’re seeing in terms of opportunities or just something interesting on the supply chain side? Thanks.

Yeah. I think as I said earlier, saleable flower is you know has many categories unto itself right and you know, we have great strength in the brand equity that exists for Broken Coast inside of the premium plus portion of that market you know, Good Supply, one of our core brands along with RIFF have done very well again, they compete in very different markets. Riff is a little bit more for the higher end use someone who’s looking for something a little creatively, whereas Good Supply is more just about you know, that value offering with the lower price. You know, we’ve teased inside of the MDA new brands come in, one of which will be in, you know, in that lower category, and we’ll take advantage to use some of the material that we have that doesn’t meet our, you know, our current levels for those other higher level products. And we think that opens up a greater opportunity.

All right, great. Thanks.

Thanks, Aaron.

The next question is from Chris Damas from BCMI Research. Your line is open.

Good morning, gentlemen.

Good morning.

Good morning.

I wondered if you could, yeah, hi, Carl. Yeah, I wonder if you could comment on the outdoor grow. I totally agree with you about oversupply of extraction grade. But isn’t there a case that eventually we’ll have outdoor grow that sufficiently good quality to create, say, a blended pre-roll that would be competitive on costs? And now that we’re talking pennies in terms of cost and gross margin and that’s the cornerstone of Aphria’s strategy. What are you doing about outdoor, are you going to stick with obviously highest automated greenhouses in the country?

So, Chris I think the key is a lot of people talk about the low costs that they’re able to grow this outdoor product at, but then they haven’t been able to move. And you look at what I’m seeing written online as infamously croptober that’s going to happen this year. it’s going to be very difficult to move it and so it’s great to be able to stand up and say, I can grow outdoors for CAD0.10 I can grow outdoors for CAD0.20, but as soon as you’re actually capable of selling it. And if you can’t move it, because there are so much product of it, and it’s all going into one market extraction grade is CAD0.25 really the right, your right cost if you have to throw you know the half of it, three quarters of it out, your costs start – your cost creep back up, right. There just isn’t, I don’t view there being enough demand in extraction grade material to support the thesis of an outdoor grow. If you could have an outdoor grow, that’s your primary source of feeding your 2.0 products. I think that’s potentially a good business model for someone. But as soon as you create – start creating inventory levels in excess of demand, you’re going to have difficulties with that concept.

And I think consistency. And again, as you come back and look at what we’re growing today and the quality of the products we’re growing in the pricing, I’m not sure where outdoor grow is going to be a better option than what you can buy from Aphria that has the different strains and different qualities and the pricing that we’re able to offer today.

Great. Anyway, great quarter, guys. Keep it up.

Thank you so much, we really appreciate that.

The next question is from Tamy Chen with BMO Capital Markets. Your line is open.

Hi, thanks for the question. First just wanted to touch again on the developments that are happening on the US front in terms of regulatory reform where there’s been this new development that you know, the democratic platform wants to or supports federal legalization of medical cannabis, but deferring rec legalization to states. And I guess, Irwin this is probably specifically for you, but does that sort of change or impact the way you’re thinking about Aphria’s US strategy? I mean, something like that, if it is enacted, I mean, could you enter I mean what sort of business model would you envision and why I’m curious, why do you mention that scale in Canada would help for the US, I mean, given there would still be, I presume some sort of border restrictions, then you would have to build supply chains, relatively new Greenfield.

So good question number one, you know, I always look at, you know, the biggest in Canada that has gone through all the history and has gone through all the development R&D and has the facilities, when US opens up for record medical, I think they’re going to look at the companies that can bring, you know, a lot of the history and a lot of the data and financially, you know, be able to get going, I think as you come back and look at the different states in the US, they’re going to want to deal with companies that really have a good history and have been able to build out companies and have quality and have regulatory et cetera. So I think that there is an opportunity for those, you know, legalization, Aphria will be right in line to get additional licenses. And if there is not, is there going to be an opportunity for us to acquire licenses you know, with our history. So that’s number one. And you know, we’re going to be swimming around to see where there is those opportunities. Secondly is, we’re looking at opportunities in the US to acquire companies that either have distribution that have maybe a medical business or a consumer business, when it does become legalized where there’s a conversion here or they have a distribution business. And that helps us to get into the US market. And you know, with 27 years of history in the consumer world and the US market you know, myself and some of my team members, we know the US market quite well. So I want to take every bit of expertise that we have in the Canadian market and the international markets, both on rec and on medical and one day translate that into, you know, the opportunity in the US market.

Got it, thanks. And my follow-up question is specifically on the vape category. I noticed some of yours and some of your peers’ products have had some modest markdowns already. So I’m just wondering, curious to get your thoughts. Could this be another category where there might be pricing pressure down the road? I’m just thinking, especially as you’ve mentioned, part of the or maybe all the industry oversupply in your view concentrated on more supply in the extraction grade sort of input? Thank you.

So Tamy, I think if you look at those, a lot of those price decreases, they happen very early on. We all basically came out of the gate a little bit blind as to what pricing amounts were going to be and we very quickly recognized a lot of our vapes that we’d come out a little bit high. The rollout to affect those changes took a little bit longer than I think anyone was anticipating there’s just a lot of steps that have to go through to the control boards and then working its way down to retail. But we’ve also, you know, identified some key categories where we think we can we have offerings that consumers will enjoy greatly, and we’ve tried to make them a little bit more affordable, particularly during the COVID timeframe. And so I don’t think though, you should be interpreting that that’s going to lead to a necessarily a, you know, a race to the bottom.

And Tamy, again, like I keep harping on this illicit market. I think there is a lot of vapes out there that are in the illicit market, there’s an opportunity for us to take, you know, those sales away from those markets, where we have gone through tremendous quality and regulatory and we know we’re putting out a say quality product.

Okay, thank you. That’s helpful.

Thank you, Tamy.

The next question is from Vivien Azer with Cowen. Your line is open.

Hi, thank you so much.

Hi –

I was hoping – hi. I was hoping to follow-up on some of the commentary around the mismatch between shifts and deplete, you know, certainly in my coverage of alcohol, that’s a phenomenon that we’re, you know, well familiar with. But I do have a question. I’m trying to reconcile another comment that you made Irwin around some of the white space opportunities that you guys still think exists for you from an innovation standpoint. To the extent that some of your peers also feel the same way. Like what is the risk that there’s another wave like, inventory management, working capital management, because you know, with further proliferation, it’s going to end up putting those provinces back against the wall from a cash management standpoint again, so I’d love to hear how you’re reconciling those just normally? Thanks.

So again, you know, it’s like anything there’s strong competition out there. And that’s you know a key business opportunity for us. And I’ve met with, you know, multiple retailers, on how to work with them in regards to a white label for them. Now white label has to go through, you know, the liquor boards and everybody has an opportunity to do it. The other thing is what we don’t want and, you know, had a meeting with somebody yesterday talking about white label, and we’re not going to allow it to cannibalize our Good Supply and what are we going to do difference and different strains and different products? So, I think, you know, it’s no different in my old world where we had our brands that we did private label for someone and what private label stood for and what the brand stood for. And you know, today, if you walk into retailers, there’s a lot of private label out there. But as you know, being you know, an analyst in the liquor business, you know, we want to buy Tito’s, we’re not buying private label vodka out there. And that’s where brands do matter. And you deserve to be, you know, preaching about brand equity, brand equity, brand equity and that’s why Solei is winning the shares that it is and Good Supply is winning the share that it is, I think there’s going to be an opportunity out there, you know, for a white label brand, but at the end of the day, brands will win here. And brands will win if you got the right pricing, you know, the right strains and there’s a lot of other products, you know that we’re coming out with that are new products that are going to be able to build upon these brands. Now, again, you know, this is a difficult industry because you can’t go out there and traditionally advertise number one, like you can in most consumer products. And you know, it’s like I was saying yesterday, it’s not like and you know, in the liquor business, you can have multiple customers. Here you really got to sell through the liquor boards. It’s not like you know if I can get the right deal at Loblaws I can go to Wal-Mart you really got, you know only you know cannabis stores to sell through. So that’s what you really got to build upon your brands here. And you really got to educate your consumers on the quality of your brands, the pricing of your brands and uniqueness and that’s who’s going to win here. And there will be an opportunity for white label. And if we can be that low cost producers, we’re going to win that white label business.

That’s really helpful. If I could squeeze in a follow-up. Given your longstanding expertise in CPG. You know, different categories certainly have different dynamics. That you think about where you’d like to see kind of the EBIT margin profile for your cannabis business over time. Do you think that there’s an appropriate seven state for what percentage of total category revenues not necessarily your business, but just total category should be coming from white label?

Listen, if you come back and look, you know, in my old consumer days, you know 18% to 20% was, you know, on label or private label. Listen, if we got 80% is branded business today and 20% is white label, I’d be very happy with that.

Perfect, thanks for the color.

Thank you.

That will conclude the question-and-answer session. I’ll turn the call back over to management.

So thank you very much for joining our call today. I must tell you in a difficult, difficult time, whoever thought you know, we’d be sitting here in a year from today. We’d be social distancing. And you know, walking around wearing masks. Whoever thought that you know, most retail stores would have been closed and it’s great to see that, you know, Toronto was moving to phase three. You know what we saw during this period. You know, that consumers wanted to buy cannabis products. I must tell you during this time, our employees came to work, we had 80% of our employees that showed up every day. And with that, as we took care of our employees, you know, we really never had any really situation from COVID in our facilities, and that’s great to see. And now, you know, work with our employees. It was great to see how we operated around the world, you know, with teams with Zoom and we’ve been able to deliver, you know, as we look at next year, and you know, I know we’ve talked about guidance. I wish I could look into a crystal ball and say, will we all be living in this world that we’re living in today, you know, having four kids in school, not knowing who’s going back to school, who’s not going back to school and where you’re going. So there’s a lot of uncertainty out there. But what I will tell you is this here, that is certainly out there. Aphria today has seven great brands. Aphria today has a tremendous supply chain out there, where we can grow, you know, over 265,000 kilos a year and have the ability to do that. Aphria today can put out their tremendous. Aphria today has a strong, strong balance sheet, we don’t have to go out there and raise money. Aphria today has a tremendous management team. I’m very, very lucky that I get to work with the management team out there. I think if you come back and you know what Carl talk about, as from a Sox standpoint, you know, we have no significant deficiencies, no material weaknesses and what we’ve been able to do, and we all know where we came from in Aphria, and where it is today. So I come back and say, hey, this industry is just in its infancy stages, and it’s, you know, two years old from a legalization standpoint. There is so much opportunity out there from a medical standpoint. And let’s hope one day there’s a vape out there that that’s a vaccine towards COVID. And, you know, it solves a lot of problems. So, you know, I am really, really excited and pumped up on Aphria, I’m really, really excited and pumped up, you know, in regards to the cannabis industry, you know, I look at products like white claw, that is club soda and vodka and how big a business that is. There will be, you know, a white claw type of product one day that is either THC or CBD that will be sold similar to that. So the opportunity is tremendous and the opportunity, you know, is tremendous for Aphria. And that’s why as we get better and better in Canada, we will be there one way or another in the US and the rest of the world. So thank you very much for getting on the call. Be safe out there really. And, you know, enjoy the rest of your summer. Thank you very much.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Thank you.