Good morning. My name is Denise and I will be your conference operator today. At this time, I’d like to welcome everyone to the Aphria, Inc. Q2 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, Denise. Good morning everyone and thank you for joining us to discuss Aphria Inc.’s financial results for the second quarter ended November 30, 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 Web site 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 in our earnings press release and the financial filings issued today for a discussion on 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’d 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 second quarter fiscal year 2021 results. Across geographies, our global teams continue to execute well and advance our leadership position as we build upon our long-term vision to be a leading global cannabis lifestyle, consumer packaged goods company. The strength of our operational financial results demonstrates the diversification of our businesses. We took important strategic steps to focus on our highest priorities, including which we believe will be high returns such as strengthening our core cannabis foundation in Canada and Europe, and completing a strategic M&A which helps us generate sustainable growth for today and well into the future. In the second quarter, we reported net revenue of 160.5 million, an increase of 33% from prior-year quarter. This was helped fueled by best adjusted EBITDA quarter representing our seventh consecutive quarterly increase in positive adjusted EBITDA. We had a record adjusted EBITDA from our cannabis business, also up for the seventh consecutive quarter. And on an adjusted basis, we reported net income of $3.2 million or earnings of a $0.01 per share. Our market-leading, adult-use cannabis brands remain strong and our international medical cannabis sales are off to a solid start. During the quarter, Aphria maintained its number one position as the top licensed producer in terms of sales to provincial boards across all of our brands in both Ontario and Alberta per Headset reporting data. Headset data, while not always encompassing of retail sales in Canada covers a large portion or approximately 63% of the total retail market. Based on Headset’s retail data for the first half of fiscal 2021, Aphria is the number one licensed producer with a market share of 13%. For another point of reference, according to OCS…

Thank you, Irwin. Good morning, everyone. Today, I will reference our adjusted financial results unless noted otherwise. Please refer to our press release issued today for a reconciliation of our reported financial results under IFRS for the non-GAAP financial measures identified during our call. Q2 marked our highest adjusted EBITDA quarter ever with adjusted EBITDA of 12.6 million and adjusted EBITDA from our cannabis business of 12.9 million. This represents our seventh consecutive quarter of increasing positive adjusted EBITDA. We maintained our brand strength in the quarter across both our adult use and medical markets. And for the seventh consecutive quarter, we reported record gross revenue for adult use cannabis. Our industry leading cultivation team continues to do a great job helping us to keep our cash cost below $1 coming in at $0.79 this quarter. The strength of our balance sheet and capital structure enables us to not only complete the strategic accretive acquisition of SweetWater Brewing Company, but also end the quarter with pro forma cash of 320 million. As Irwin discussed, SweetWater further diversifies our product offering, broadens our consumer reach, and enhances loyalty with consumers. In conjunction with our acquisition of SweetWater, we closed a $120 million U.S. financing with BMO, providing US$20 million in a revolving credit facility and US$100 million of term debt within a few days after the end of our second quarter. At closing, we drew fully on the term debt facility. The credit facility is secured by the assets of SweetWater and a corporate guarantee from Aphria. The term loan bears interest at the EUROBIR rate plus major pricing based on SweetWater’s leverage. And our efforts to improve our free cash flow position were successful in the quarter as we improved our position by more than $70 million and moved closer…

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

Good morning.

Good morning.

Good morning, Owen.

Just one question for me. So Canada looks like it continues to perform excellent. So, I just actually wanted to focus on the international business. And so international sales taking off in the quarter and this segment will obviously become much more of a focus with the addition of Tilray. So just hoping you could maybe talk through the international competitive and pricing dynamics a bit more particularly with regard to Germany. So, it does appear like competition in yours is really ramping up at the moment, so just wanted to get some thoughts around that please. Thank you.

So, Owen, I'll take that. Pricing in Germany today has remained on a balanced level. We're not seeing pricing be competitive out there. I think from a standpoint of Aphria with our facility there with tender, we do have one, and being able to ship product at a low cost from our Leamington facility, we can be very competitive. The other thing is we are very well positioned because of CC Pharma. And then ultimately with Portugal coming on, which will allow us to ship anywhere in Europe, I mean we can be as competitive as anybody else and then some. So, I'm quite excited about the European market from a medical standpoint, from potentially a recreational legalization, other products at CBD products, but so far we have not seen the competitive pricing there that we've seen somewhat in Canada.

Okay. Thank you. It’s very helpful.

Thank you.

Again, just as a reminder, please limit yourself to one question and then rejoin the queue for any additional questions. Your next question comes from Vivien Azer with Cowen. Your line is open.

Hi. Good morning.

Good morning.

I was hoping to touch on your inventory levels given the sales at below cost that weighed on your gross margin, picked up only just modestly sequentially in the quarter, but that remains elevated relative to historical levels. So, any color around that would be helpful. Thank you.

So, basically listen, I think again as we go into the back half, the two biggest quarters of Aphria, our inventory levels went up to hit those sales. The demand for pre-rolls, which we're selling 7 million, 8 million a quarter, so a lot of it is built up for demand, built up for new product distribution, built up for new stores opening and built up for some of our products. But on the other hand, there is a big effort within the company right now as we look at our inventories and how we get our inventories down. And one of the bigger things here is this here. More and more stores are opening up. The market is growing and how we balance our inventories. Also as some of the liquor control boards go through SKU rationalization is going to force us to do that. And as we look at integrating Tilray and some of their growth into our facilities will help our inventory position also. So, it's something I will tell you that we are focused and we are all over because what happens, you manage your inventory, there's a lot of cash that drives to the bottom line there. Carl, I don’t know if you want to add anything to that?

The only thing I would add is if you look at the inventory levels over the last three quarters, you can see that sequentially we've been bringing those balances -- growth in the inventory down and are working in the current quarter to flip that equation.

Perfect. Thank you so much.

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

Hi. Thanks. Good morning. I know you're not giving any formal targets, but I kind of want to think about -- ask about how you're thinking about revenues for kind of the second half. The distribution business snapped back up nicely, but you kind of cautioned with COVID. So is this the right level or is it two quarters ago? How are you thinking about the SweetWater business relative to that 2019 $66.6 million revenue number? I know you started the bar business. And then also, how should we be thinking -- sorry, the wholesale agreement as well? Is there an opportunity to do anymore with Tilray? And I guess the final question is, this is kind of the first quarter where we've seen some market share -- you've ceded some market share. So over the back half, do you see yourself getting back into a position of gaining market share with current portfolio or perhaps you need kind of the full capabilities with the Tilray acquisition to do that? Thanks.

Well, I'll take a few and then I'll let Carl. There's a lot of questions there, and hopefully I can remember them all. But the big thing here is in regards to – listen, we know what’s Ontario rate now. Ontario is closed down and its curbside delivery. In regard to SweetWater, a lot of on-premises closed down. On the other hand, as consumers and people stay home, they're going to consume more and more beer that they buy at retail or consume more and more cannabis because they're at home and will pick it up at curbside. So, I see us dealing with that. But I think the big thing is that we have the uniqueness in products and how we build our brand and continue to take share. You heard me talk about inventories before and balancing out our inventories. And I think where the liquor control boards are getting a lot smarter too by looking at their inventories and what sells and what doesn't, and a big part as Carl talked about it where we did lose some share is because we just didn't have the right products there and the right inventories. So, listen, it's two years, and we're getting a lot better from having visibility, having data, having the products, but one of the big things that you got to remember here, consumers want our products and if they're not in the store, they're not going to buy them. In regards to the next path, listen, it's our biggest two quarters out there and we've planned for it, and how do we maneuver around COVID is a whole other thing. We're not giving guidance, but it's our biggest two quarters as we look at the back half and we see tremendous demand, we see more and more stores opening up, we see more and more provinces wanting products, but it's going to go through some SKU rationalizations out there. The other thing is in regards to our products that we're going to ship to Europe in EU GMP certified, you heard me talk about Israel, you heard me talk about Poland, you heard me talk about the demand. The opportunity for us -- one of the things when Brendan built out Tilray, he was in asset-light Canadian operation. So, there is a lot of opportunities to bring a lot of Tilray to grow into the Aphria facilities, and that was a big part of our cost savings. And we're already all over that and executing on that. Carl, I don't know if you want to add anything or I don't know if I missed -- Andrew, have I missed any of your questions?

Just to go a little bit further on the share that was ceded, as Irwin talked about, that was really a function of pre-roll capacity internally. And now that our capacity is back up and we look at the December information and the limited January information that we have available to us, we believe all that share is back.

That’s great. Thank you, guys. I’ll pass it on.

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. So I want to jump back to kind of the international opportunities because it's going to be more of a focus once the merger closes. So, specifically on Germany, you guys kind of talked about the pricing landscape, but want to talk about the overall market growth there because we've seen the data from the insurance kind of slowdown in the market the past two quarters. So want to get your sense in terms of any initiatives you might have in terms of educating doctors, getting more patients there to kind of help lift the overall market because you're going to have Cc Pharma and the pharmacy distribution there, but how about like increasing the overall demand from the consumers and how you’re thinking about that German market, how it evolves as you have your own cultivation come online in the country and you have to raise Portugal facility? Thanks.

So, good questions. What's happening right now, we can't get in there to see doctors. But we have a whole online program of how to get to doctors, how to educate doctors. And there's other things that we're working with in the universities in potentially working with some of the medical schools and some of the research there and investing in that. And as I say, that's going to be a big important part of Tilray and Aphria coming together in Europe is building out our medical platform and Tilray has a very, very strong platform in Europe already, which are number one in the oils. And I got to tell you, the other big thing there we have a major leg up in regards to distribution to 13,000 drugstores through Cc Pharma. So we have a plan even though we got our hands tied right now because of COVID, you can't get to the medical. There's a plan right now in place as we get to them online.

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

Thank you. Good morning. Irwin, I guess my question is more about the U.S. David Klein in an interview with BNN Bloomberg recently, he said that he expects to be selling in the U.S. in seven to eight months time, of course, on given his outlook about how things will change from a regulatory perspective. Given that a company like Canopy Growth has its contingent steaks in Acreage and [indiscernible], how much of a disadvantage is that for you not having those contingent steaks? And related -- and of course I know you have SweetWater and Manitoba Harvest. And related to that, a two part question. In the call you reference a few times being more attractive to CBG companies or strategic partners. Again, how much of a disadvantage compared to Cronos or Canopy Growth is it for you not having the backing of an algae [ph] or Constellation brands? Thanks.

So, Pablo, I don't think I'm at a disadvantage at all. And David Klein got a strategy that he's going to execute on. And today, we're selling products in the U.S. under SweetWater and we're selling – we will be selling products under Manitoba Harvest. We will be selling other CBD products. Listen, I do not think we are at all disadvantaged because with Aphria, with its brands, with its balance sheet, with its R&D, with its regulatory that we have out there, with our global footprint, today you heard me say we go to thousands of grocery stores, thousands of convenience stores. So there's going to be plenty of partners out there for us to partner up with. And you know what, there's other consumer packaged goods companies now that are going to want to be in this industry. So you know what, we can step back and pick the right partner for the right area of the business. So I don't think we're one bit disadvantaged. If anything, I think we get to pick what partner -- if we want to partner with on the consumer side, I think in regards to whether we acquire, if legalization happens, whether we merge, we will get to pick the right person or the right company. And the most important thing, Pablo, when that happens, it's going to be at a time when we know what the landscape looks like on legalization, not out there buying a lottery ticket and trying to guess what could happen.

Right. Can I squeeze one more if I may, if you don't mind? But at the local level -- I understand the logic of Tilray, the merger with Tilray. But at the local level in Canada, how much of an advantage is it being larger? And I ask the question in the context of [indiscernible] seem to be doing – the company's doing best in terms of sales and market share trends, right? So those are much smaller companies. So I'm just wondering how the size at least in the Canadian context only help? Thanks. That's it.

Listen, size does not always matter. It's what's in the company, okay? And Tilray brings to us some great assets in their medical business, they bring some great brands to us, they bring some great management and people. They’re asset light. They bring a lot of grow that will fit within to our facility. And the combination -- back to what I said before, the combination today we have over 20% market share. So with that, if we get to 30% market share, there's a lot of catching up. And by the way, as prices come down, Pablo, and to compete with us who are going to be that low cost producer is going to be more and more difficult. And last but not least, when you have scale and size and have free cash, you got to invest in your brands. And that's something that we'll be able to do where the little guys or the little LPs will not have the ability to do it.

Thank you.

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

Thanks. Good morning. So one question. Irwin, can you talk a bit more or explain a bit more about what underscores your optimism on more legalization in Europe, including your view that recreational legalization in some countries, say, Germany could come sooner than later? What are you specifically seeing there that's driving your expectation or optimism there? Thank you.

Good morning, Tamy. So, again, your expectations are only as good as what your intel is telling you from these countries. And whether it's the Green Party and certain elections, my intel is coming back from my team there that on a timing when it could happen and could happen this year. The second thing is, listen, like the U.S., like Canada, every country needs tax dollars. And with that, I think legalization and understanding the benefits of cannabis and I think what Germany had the opportunity to look at is what it was able to do from a legalization on a medical standpoint. So that's where I'm getting my intel and that's what I'm hearing back from lobbyists center or political relationships over there, and the different change in parties that will happen and just what the population wants. So that's why I think Europe, and Europe is usually a lot more progressive than the United States, so that's why I see legalization happening in Europe sooner than later.

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

Thanks. Good morning. I wanted to follow on the --

Good morning, John.

Good morning. I wanted to follow up on the U.S. side of things as well. And just would like to get your thoughts on whether or if your strategy changes at all since the results of last week's runoff elections, does it? Does it give you a sense of greater urgency to go gain a presence in the U.S. beyond what you already have now or does it make you take pause to say you might get some clarity or certainty from a regulatory perspective? And in that sense, you'd want to preserve capital as you'd be able to go after plant touching businesses or launch your own cannabis brands in the U.S. maybe earlier than you would have thought even a couple weeks ago. Just any thoughts there would be helpful.

So, John, great question. Listen, I don't think within the first 100 days the Biden administration is going to legalize cannabis, and I think there's multiple ways and multiple things going to happen within the SAFE Bank Act, just legalizing medical, decriminalizing, et cetera. Going out and buying a piece of a company today is something that we can easily do. But I like the idea of buying assets like we did with SweetWater or Manitoba Harvest that can easily translate into legalized cannabis THC products when the market allows. The other thing is just here and people think sometimes I'm crazy when I've said it, but just like there's great Canadian beer made in Canada that shipped into the U.S., in regards to build out the infrastructure to supply the U.S. and having the regulations and the quality and the safety and Canada in this October, we'll have three years, will there be an opportunity to ship Canadian cannabis into the U.S.? We don't know that, okay. So, again, I hate to get out in front and guess. And to go in there and make big bets for our shareholders and make big bets with an unknown is not something I would let Aphria and Tilray to do. But I think the big thing is, is this year, with our footprint today in Canada, with our footprint in Europe, with our footprint in the U.S., having the balance sheet that we have, having the R&D behind us, having three years of good regulation, when the legalization happens to what form, we'll be ready to partner, to buy, to greenfield and I think that's what's important that we're kind of circling the wagons instead of getting on the wagon now.

Okay, that’s great color. Thank you.

Thank you.

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

Hi. Good morning and thank you for taking my question. I wanted to ask a quick follow-up question regarding the outstanding merger agreement with Aphria and Tilray. I was just wondering, given the recent share price appreciation over the past months for both stocks, but particularly looking at Tilray significantly outperforming its peer group here, I'm wondering if that has any impact between now and expecting closing date, if you could provide some color there, that would be helpful? Thank you very much.

Not at all. There's a fixed share price and a fixed agreement. I think our both stocks have moved and I think, again, what shareholders are thinking, they like Tilray, because it will be together with Aphria and they like Aphria. But it has no effect on the deal. And as I said before, the deal is moving to close the end of April, early May. The teams are hard at work at putting all the pieces together, the infrastructure, the synergies, the opportunities for both companies. And I have to say, I like the deal even more now, the more and more I've got into it, as I bring these two companies together. It is really going to be exciting for Aphria and Tilray’s shareholders.

Understood. Thank you very much, Irwin.

Thank you.

I would now like to turn the call back over to Irwin Simon for closing remarks.

Thank you very much, Denise, and everybody thank you very much for getting on this call today. 2020 in regards to Aphria has been a good year, lots of changes, what a difference a couple years makes. In 2021, we got a lot to do and being number one does not always mean you stay at number one, and you got to continuously earn it, you got to continuously work at it and you got to continuously evolve and change. I have a saying when you're green, you're growing; when you're ripe, you rot and we never can actually let ourselves ripe because we got to grow. I would say this year if you look at Aphria and Tilray together, next year this time we'll both be very, very different companies and so will the industry. Again, I can't thank all the employees at Aphria that have worked real hard and worked to get both these M&A transactions done at the same time running the business. And it's been difficult. Borders are closed getting up to Canada, but I got to tell you, a lot has happened within Aphria and I really want to thank the team. I want to also thank Brendan Kennedy and the Tilray team, what a great pleasure to work with them. And Brendan will join our Board and there's a lot of his team members that will join the Aphria-Tilray team. And we're really excited about the partnership. And I got to tell you, I'm really pleased how the two teams have worked well together in putting this together, because they know it's the best thing for the companies, they know it's the best thing for their shareholders and they know what's the best way to go out there and win. The next five months are going to be tough out there with COVID. And I think from a standpoint, we have to be smart and safe. And with that every day, we look at our facilities, we look at our offices, how we keep them open, but more important, how we keep our business growing during these times. The stores are closed, restaurants are closed, how we push in retail, et cetera. I want to thank everybody for your support. Thank you very much for believing in Aphria and now believing in Aphria, Tilray and SweetWater as we come together. So Happy New Year. Be safe out there. And I look forward to talking to you in the next four months. Bye-bye.

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