Good morning. My name is Mariana and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria, Inc. Q1 Quarterly Investors Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session for analysts and/or investor firms only. [Operator Instructions] Thank you. Ms. Tamara Macgregor, you may begin your conference.

Thank you, Mariana. Good morning, everyone and thank you for joining us to discuss Aphria Inc.’s financial results for the first quarter ended August 31, 2020. On today’s call are Irwin Simon and Carl Merton. By now everyone should have access to the earnings release, financial statements and MD&A, 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 the text of Aphria’s earnings release and the financial filings issued today for a discussion on the risks and uncertainties associated with such forward-looking statements. I would also like to remind you that all references to financial figures are in Canadian dollars unless otherwise stated. And now, I would like to turn the call over to Irwin.

Thank you very much, Tamara and good morning, everyone. We appreciate you joining us today to discuss our robust start to fiscal year 2021. In our first quarter, our global team continued to execute against our strategic plan and continue to perform at a high level to further Aphria’s industry leading market position, all with consistent emphasis on driving long-term sustainable growth by focusing on our highest return opportunities and most profitable priorities as we have told you so. As a purpose-driven company, we take great pride in leading with our core values and are committed to changing people’s lives for the better by investing in our products, our people, and of course, our planet. We began our transformational journey over a year ago. With a laser focus, we turned our attention to achieve the traditional business fundamentals in terms of maximizing growth in net sales, profitability, cost containment, managing cash flow and cash management. We have made substantial changes across our entire organization to position Aphria for sustainable long-term growth with a strategic focus on solidifying our strong, strong Canadian foundation by driving category leadership with strong carefully curated brands and the introduction of many new innovative products and increasing our market share in the Canadian market with a focus on operational excellence and being which we are that low cost, high-quality producer, increasing our profitability through continued cost managing and having that strong cash position for growth and expanding our geographic reach, where it makes sense and that is something that we have focused on. These initiatives helped propel Aphria forward and be the number one cannabis company today. In addition, we built a strong management team and continued to execute against these initiatives and they are focused on winning. And I am incredibly proud of our entire…

Thank you, Irwin. Good morning, everyone. Our cannabis business started off the fiscal year strong. Our brands continue to excel in market and late in the quarter, we introduced our large format sizes and our new brand, B!NGO, a large format offering utilizing lower potency cannabis. Our financial results continue to be the envy of the industry. We reported another quarter of record gross revenue for adult-use cannabis. Cash costs per gram remained below $1 as we leverage our cultivation experience and we generated our sixth consecutive quarter of positive adjusted EBITDA. These results helped us maintain our robust capital structure. We have a strong balance sheet, a strong cash position and a cap table with minimal potential dilution that continues to present Aphria with a multitude of opportunities to pursue future growth in Canada and internationally. Before I review our fiscal first quarter financials in more detail, I want to echo Irwin’s sentiment and extend my sincere thanks to our global team. Everyone continues to operate at a high level internationally, with an emphasis on initiatives that prioritize Aphria’s profitability, not only for today, but well into the future. We prioritized having a more diversified branded product offering portfolio to maintain and take share across product categories with our leading adult-use and medical brands. We continue to find pockets of industry under supply and capitalize on them using our data insights and understanding of consumer preferences. We believe our operational execution has helped further extend our leadership position in the cannabis industry. As Irwin mentioned earlier, balancing supply and demand remains one of our biggest priorities in Canada, particularly after the unprecedented ramp up of our Aphria Diamond facility in less than one quarter. In the middle of June, we temporarily reduced our cannabis output at Aphria One focusing…

Thank you. [Operator Instructions] Your first question comes from Andrew Carter with Stifel. Your line is open.

Hey, thank you. Good morning. I wanted to ask that you mentioned the consumption has been strong, you mentioned the Headset data, of course and this is two consecutive quarters where your shipments have meaningfully kind of trailed consumption. So I guess kind of an update on that. But I guess more importantly, you kind of – you have established the leading market share position, you have helped lead growth at the category level, which is really the thing that matters most than anything. So, I guess I want to ask, are you – is that helping you when you discuss with the provinces or are you getting that? Are they working with you more or has anything changed? Are you getting larger orders, more frequent shipments, all those things that we are trying to piece this together, whether the leadership position is kind of fully translated for you guys?

So, I will start that and then I will turn it over to Carl. The leadership position starts with the consumers that want our brands, okay and that’s what’s the most important here is buying our brands and the repeat purchase of our brands and it’s not just in one province, it’s in many provinces across Canada. And you see the growth among our brands and not only one brand it’s six of our brands. So, there is something there called a trend, there is something there called consumer behavior. So, that’s number one. Number two is, some of the data that we announce, there is a lag on that data. So, it’s not exactly as we say our growth in a certain month or a certain quarter, you don’t see it totally in all our shipments immediately. And I think that’s some of the problems that happened out there. Carl, you want to?

I would just echo that there is a lag. I think the presence of Headset data has been very helpful for LPs, for the control boards and for retailers to understand what product’s moving and how quickly, but there is steps in between in the process. And those pieces are still being worked on by the control board. I also think you have a few control boards that are going through some transitions, some of which are ordering less, but more frequently, some of which are in the process of moving facilities and changed order patterns as a result of moving those facilities. And we would expect going forward we are going to get to a point where that data and the LP sales are a little bit more consistent, but in these very early stages of Headset, you may not see that.

Sure, okay. So second question, just within that I wanted to ask because this is the first quarter you have launched the discount brand B!NGO I guess at the consumer level, probably too early to tell if it’s cannibalizing any of your other portfolio, but I will take any perspective if you have it? But secondly, going back to that shipments perspective, is that cannibalizing any of your other brands, i.e., our province is saying, hey, we are going to wait for B!NGO, we don’t want to take it, take as much Good Supply or Solei or anything like that? Thanks.

So, I think you are right, it’s too early, but it’s a different product line. It’s kind of like having a vanilla ice cream and coming out with a vanilla chocolate chip, that’s what it’s like here. So, it’s not this strain, this brand and this product and most of the consumers like when they are buying it don’t understand or realize it’s an Aphria brand. So, I think of anything what we are looking to do is take market share away from some of our competitor brands, not from ourselves. So, so far no and it’s a different strain, different product line and a different brand than anything we have today.

Thanks. I will pass it on guys.

Thank you.

Thanks, Andrew.

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

Hi, good morning and thanks for the questions. First question for me would be on the gross margin line, gross margins came down some, but remained pretty healthy at 50% for cannabis gross margins despite the launch of B!NGO. And so it looks like the all-in cost did come down. So, just wanted to get a better picture of how best to think about the puts and takes of value mix going forward as well as your kind of overall cost per gram to further offset that, especially as you look to increase the mix of vape and potentially international sales, which tend to have a higher ASP? Thanks.

It’s a lot of things in that one question, Aaron. Let’s try and unpack it a little bit. I think if you look at – as you look at the continued growth of vape, there are a number of things that make up each vape sales dollar. And so that results in vapes having a slightly lower gross margin than our other products. That product line is growing, but dried flower continues to grow as well. The costs coming out of our greenhouse have been decreasing. We will see a little bit of a minor headwind in the next couple of quarters as we adjust our output, but we don’t anticipate that taking our cash costs above the $1 though they are going to remain below at $1 amount. So, I think when you net all of the different pieces together, you have got some pluses, you have got some minuses, we anticipate margin staying in that 50% to 54% range going forward, which are healthy margins for a cannabis company as you said in your remarks.

No, absolutely. Thanks for that. That’s helpful color. Second question for me and I will pass it on is just on the distribution revenue. So, those came down decent amount sequentially and you offered some color on that, but gross margins there in our gross profit dollars were relatively consistent Q-over-Q. So you did mention that being a part of sales mix as well as cost and payment in terms of the gross margins offsetting the lower sales. So just how best to think about that going forward as are the lower sales going to continue, but have the higher gross margins, so you continue to have pretty consistent gross profit dollar or just some help in terms of what you are seeing going forward on that business line, I think will be helpful? Thanks.

So, it’s still early stages in our Q2, but as we said, we are starting to see improvement in the number of in-person visits that are happening, which is really the key driver for both medical cannabis revenue and for our distribution revenue. Those things are moving forward. We have taken cost containment measures and should result in those margins increasing slowly over time or maybe the better way to say it is staying consistent with what they were this quarter. But you will see margins continuously improve as through our distribution company, we sell more and more cannabis, which are higher margin products. And I think Carl made it very clear in regards to why our sales were down this quarter in CC Pharma because of Europeans not traveling, a lot less elective surgeries, which we expect to come back now. But the big thing is, we now have a distribution system that goes to over 37,000 – 13,000 drugstores that ultimately and now we have our EU GMP license and we can start shipping to Germany. There is a big, big opportunity there. And that’s why we acquired CC Pharma for that distribution to be able to sell medical cannabis into the drugstores with high margin products. And you will see the margins continuously grow as more and more went - as you heard us say, our first shipment went a couple of weeks ago and hopefully that continues more and more.

Thanks for that color and I will jump back into queue.

Thank you.

Thanks, Aaron.

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

Good morning.

Good morning, Pablo.

How are you? Look, I just – I want to touch on two things that are I guess unrelated to the quarter. But regarding the U.S. right, tell us why should we think that you have a right to compete their right to do well, how advanced are you there? If I compare that with other companies that have contingent deals to buy MSOs or may have already other platforms in place, just remind us whether it’s IP or what, why should we think Aphria is well-positioned to win in the U.S. market?

So, Pablo, as you know, I personally have a little bit of experience in the CPG and the industry in the U.S. I must tell you everyday we get calls from MSOs and we get calls from cannabis companies looking to do something with Aphria in the U.S., has legalized from a federal level, we can’t. So with our expertise in regards to our growth, building our brands and being far advanced with our product line, our R&D, I think on legalization that there will be plenty of opportunities for us to go into different states to acquire strategically align with different companies and with our balance sheet to do it. And what I can say, Pablo, there is plenty of things we are working on today and could be ready to go sooner than later, if there is changes that, the changes that happen, that will allow Aphria to enter the U.S. One thing I said this back last April, I am not going to focus on the U.S. I might buy a lottery ticket not knowing what’s going to happen there. And I am not sure of those cannabis companies that bought percentages of MSOs and held them and haven’t been able to effectively do anything with them get earnings from them, have not been the right thing for shareholders. But once we know what the state of the landscape looks like from legalization, there is so much that we will bring to the U.S. I think we will have our opportunities to be able to decide, which is the best one for us.

Thank you. And then one more look I mean I think we are all a bit concerned about the price deflation we are seeing in Canada. So Germany, right, 83 million people twice Canada or more becomes a big opportunity. But from what I see and I guess other people see that market is being very slow to develop, doctors not prescribing, volume is still very low. So yes, it’s nicer on the supply side, everyone is gearing up, but the demand is not is not playing out. Just a rehash for us, why should we think that things in Germany will accelerate over the next 1 or 2 years and I am asking about Germany, because yes, it is a bigger market potentially than Canada and yes, in Canada, we are seeing price inflation? Thanks.

So, you are right on what you say about Germany, but I think a couple things. It’s slow, but it’s coming. It’s not coming. So, it’s not like, it’s come to a halt. So that’s number one. And I feel good about where Germany ultimately will go. And unfortunately, COVID has not helped at all, but the demand is there. Now we got our licenses that will help and that’s going to be a key. The other thing is this year, I will say this year I think Germany will be the first country in the EU that will legalize recreational cannabis and there has been plenty of discussions there. And if and when that happens, again, we will be there. So I mean, we have and we are ready with our facilities, we are ready with product. And the big thing that we have there is our distribution to those 13,000 drugstores that we can distribute product to, little slower, little slower, but that’s why we won the tenders and but it’s not like there is no game that will start there.

Got it. And if I can ask just one last one.

Sure

I don’t want to rehash the questions about what’s happening retail versus pipeline and gross margins, but if I look at your MD&A, Carl, it says there that the large pack sizes on B!NGO accounted for close to $90 million in growth in drag quarter-on-quarter and your total sales grew $13 million, right. So, help me reconcile that because obviously large delta on the value side but the balance of the rest we have been done. And related to that, I guess we all have to focus on dollar gross profits, right, because yes, those margins may stay up, but they go from 260 to 150 per gram or something. But I am looking at the latest market data we can use going to use Hyfire or Headset I see at prices since your August quarter, would be on another 20% for your flower business. So, so just help me get comfortable with dollar gross profits and understand better what happened in the quarter because, like I said the MD&A says $19 million growth in value, versus a total growth of $15 million for record? Thanks.

So just Pablo, I think first off, as I answered one of my earlier questions, I think, we have to be a little bit careful with some of the data that is out there. It isn’t, Nielsen level quality at this point, the different sources that are out there have different groups of stores that are connected. And so, I think it is always very good directionally. But it can’t be taken too literally, when you look at the total growth for the quarter in terms of cannabis revenue. I am not sure I am understanding your point, because when I look at it our MD&A we are basically saying that the growth in the quarter was largely driven by B!NGO, right? It’s you are going on a gross basis from $65 million to $82 million. And $18 million of that is B!NGO. And I think that reconcile so I guess I am just a little confused where you are drawing your number from.

No. I will pass it on. But I think you confirm what I just said, right? There was the total delta, the B!NGO delta is larger than the total delta, right? So…

No, no, unchangeable. I am saying they are the same. But that’s okay.

Okay, now, alright. Got it. Thank you. I will follow-up later offline. Thank you.

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

Yes, thanks. Good morning. First question, I wanted to stick on B!NGO for a second, the price, the retail price of the product, I mean, it is on the lower end within that 28 gram format, compared to many of the other peers. So I am just curious, when you approach the pricing architecture for this brand, why go quite low on the scale compared to peers, given that, you have been gaining share, so far without a big value presence?

So, Tamy, I think we said multiple times during the call and in our disclosures in the MD&A. We are looking that the B!NGO brand differently than we look at our other brands, we look at B!NGO as a way to utilize lower potency cannabis that gets grown in our facility that wouldn’t qualify to be moved in other categories. And we are taking advantage of our low costs to move that product.

And it’s, the thing is Tamy, the reason we came out with it, we saw a need for it and we saw a need for which consumers were asking for. And, as Carl said, we had supply for, and we did not really see, the opportunity – we didn’t really see a competitor really hitting that area. And what we wanted is just make sure it’s not going to cannibalize our existing brands.

Okay, understood. And my second question is going back to the commentary you both had about managing your supply, with what you are able to sell and whatnot. So, you mentioned that you temporarily reduced production at Aphria One. I guess I just wanted to understand that a bit more, because I think you stopped disclosing kilograms produced. So are you able to give us a context of how much this sort of impacted your output? What this temporary mean? And just to confirm, there has been no supplier production output changes made at Diamond correct? And I will leave it there. Thank you.

So, I will now let Carl jump in here. First, I think, again, as we get more history in this business, and we look at our brands and there is more stores opening, and we focus on growth, we focus on margin, we focus on cash flow, we are going to grow what we are selling, and we want to make sure we sell what we grow. We have three great facilities. And if we have to pull back and only grow in certain parts of the facilities to make sure that we sell to demand. And ultimately, as demand grows, we will continue to grow a lot more we have the capacity to do it. So, that is the big thing from a financial standpoint, from a quality and the thing is when you are dealing with as many strains when you are dealing with six brands and when you are dealing with multiple, whether it’s pre-rolls, vapes, flowers, the last thing we want to do is be out of stock as we build our brand deck. We want consumers to be able to always buy our products. So, it’s now as we start to really dig in, it’s really managing our inventory, our supply, our purchasing power of packaging, we buy tremendous amount of packaging and want to make sure that again we are buying from a cost standpoint and we are buying from the supply standpoint and don’t have it on stocks. And that’s some of the things is we have too much of one thing, not enough of the other. So, there is a major plan in place here of how to figure out our supply chain and our demand forecasting for what consumers want. The other thing is what we got to continue to look at, Tamy, is today as there is 800 stores across Canada, if they go to 2,000, 3,000 stores, what’s going to happen there, we think for Aphria, that’s another $200 million, $300 million of sales, so having the demand to grow that out. Number two as you look at brands that we have built that have gone for $300 million to $400 million at retail, how to build those out, what happens in regards to vape versus pre-rolls, the pre-roll market is on fire right now. So how do we continue to see that. So it’s the April and making sure we have enough of that. So that’s the big thing here is now just bringing in a lot more process and intelligence into our whole growing, because the problem is once you start growing, there is something you got to do with it. Hope that answers your question.

That’s helpful. Thank you.

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

Good morning.

Hey, thanks. Thanks. Good morning. You mentioned becoming or expecting to become free cash flow positive in Q3, I just like to get a sense of your capital allocation priorities, when it comes to either debt reduction versus Greenfield investments or M&A and with M&A, I am referring to anything outside of U.S. cannabis, just would like to get a sense how you are think about that for calendar ‘21?

So, I will let Carl talk about CapEx for facilities and I think we are – that is winding down from the standpoint there. But yes, as I said, there is M&A stuff that we are looking at and there is very interesting M&A stuff. And if I gave you a number, you might know what I am looking at what I am trying to do, but we have the right balance sheet to go there, we have the ability from a leverage standpoint and with, free cash flow positive and basically from a cash flow standpoint today, I mean, if you take away some currency and other things, I mean, we are free cash flow positive on that. So, we will continue sale as our sales continue to grow. Listen, we are down below $1 on our cost and we will continuously come down. And as I have talked about, there is 5 points we are going to do, we are going to grow our share, we are going to take costs out of our facility as we continuously look at what we grow, what we sell. We continuously look at SKU rationalization in regards to all our brands. We still have some facilities that are not producing income and we will look to get those to income positive. And with Germany really coming on, we look to see Germany in a positive area very soon. In regards to CapEx, other than that, Carl, there is not a lot of CapEx.

Well, we finished all of our major CapEx projects in Canada. Future CapEx in Canada is really a function of opportunistically identifying some type of project that improves profitability. As it relates to Colombia, everything remains on hold. As it relates to Germany, we see about, under $10 million of CapEx that’s still to be to be spent. All of that will be spent this quarter. And I think as said earlier, $8 million to $13 million is our expected CapEx spend in the next quarter. Hopefully that answered your question?

Yes. That’s helpful. Thank you. And then secondly, I just want to dive a bit deeper on the average sale price. Can you quantify what the deflation was If you back out the impact of B!NGO, it sounds like the increase in gross cannabis revenue was sourced from B!NGO and if you think about the rest of your portfolio is having a volume increase presumably, but can you quantify what the price decrease would be on a like for life basis on your other brands? Thanks.

So, if we pull out large format offerings the average selling price would have increased $0.60 in the quarter.

Got it, okay. Thank you very much.

Thank you.

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

Yes. Hi, good morning. And thank you for taking my question here. Just I wanted to ask a follow-up here, with respect to managing the supply overall, I guess on two fronts, one, there was a wholesale sale of $4.7 million, as well as looking at the composition of inventory. On the cannabis side, in particular, it looks like on the kilogram basis, that’s about two-thirds of cannabis two, and then one-third trim. So just wondering, from the wholesale side of things, what that market looks like to expect it to be volatile, but there is still possibilities to help rebalance your own internal supply there? And with respect to the cannabis, particularly you have that split, I mentioned earlier, how much of that do you think is actually workable into the current brand architecture versus might be your mark for extraction later down the road or actually for wholesale? Thank you.

So, so Graeme, I think there is some confusion on the wholesale market, sometimes with people, I view it as really two separate markets. So there is a wholesale market for extraction grade product, which can include flower, that just doesn’t look nice, things like that, and trim. And though that market obviously is massively oversupplied right now, we made some adjustments in our costing in the current quarter, we removed fair value increments from our trend to reflect that and our trims are now carried on our books at $0.15. If you look at what is coming in the infamous croptober, there is a lot of extraction grade product that people have harvested. And quite honestly, I don’t think people are going to find homes for at this point. But that part portion of the wholesale market is very different from selling excess capacity of dried flower. And I think there are tremendous opportunities in that portion of the market. And it is a salable flower, there’s a number of LP’s that have taken production capacities down and are now finding it, maybe a need for a little bit more product or are finding that they are growing too much trim they and they cannot get the level of saleable flower they want and so they are interested in buying it there’s a number of LP’s that have switched to closer to asset light models. And those LP’s that have done that are out there looking for saleable flower. And so when you have the ability to take advantage of that need and move that product at a very reasonable price, as opposed to what the trim and the extraction grade, things are going to move out over the next 6, 9, 12 months. So I just think they are very, very different markets.

Appreciate the color. Thank you.

Okay, thanks, Graeme.

That’s all the time we have for questions today. I will now turn the call back over to Irwin Simon for closing remarks.

Thank you very much. And thank you, everybody, for getting on our call today. Again, I want to thank our team, all our great fellow employees, all are that are working in our facilities and keep it going through these tough times. I got to tell you I am really proud of what we have been able to do. Our Canadian cannabis sales are up 23%, our EBITDA $10 million. I mean, all of last year, we earned $17 million. So what a great start to the first quarter. If you look at our cash flow from a profitability standpoint and whether it’s currency or other tax, our cash flow is profitable, if you take away a lot of those things from one-time. We have number one share and continue to grow tremendously in multiple provinces out there, which shows consumers want our product. Again, continuously, we have got our costs down per gram, below $1. We are seeing great headway in Germany. Yes, it’s a little slower, but we will get there. And in regards to the U.S. don’t count those out, just because we don’t have a big strategic partner, we know the U.S. well, we know the opportunities and with a free-up performing the way it is, I will tell you, there is multiple companies, there is multiple opportunities for us. It’s just we want to make sure when we do it we want to pick the right one. It’s just not about money. With that, we are excited about the cannabis industry. We are only into this for about 2 years. Actually, it’s 2 years in October that cannabis ultimately legalized in Canada. We have perfected a lot. We have taken this company a long way. And I am proud of where Aphria is today on a global basis. There is a lot of unknowns out there in regards to what’s going on with COVID and the growth and what’s happening with COVID in many areas, I would say stock up on cannabis where you can, because you never know when retail stores are going to close etcetera. But there is a lot to come from Aphria. So with that, be safe, happy Thanksgiving to the Canadian, I just celebrated and to the Americans that will celebrate it in a few weeks and look forward to speaking to you in the New Year. With that, I thank you for joining us today.

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