Good morning. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria, Inc. Q3 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. Mr. Carl Merton, you may begin the conference.

Thank you, Mariama. Good morning, everyone, and thank you for joining us to discuss Aphria Inc.'s financial results for the third quarter ended February 28, 2021. Joining me on today's call are Irwin Simon and other members of our management team. 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 been filed with SEDAR and EDGAR. Before we begin, please remember that, during this call, we may make forward-looking statements. These statements are based on our 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, Carl, and good morning, everyone. We appreciate you joining us to discuss our third quarter fiscal year 2021 results. Today, I will discuss our Q3 operational and financial highlights as well to reiterate the anticipated strategic benefits of our proposed business combination with Tilray. We are very excited to further advance Aphria's long-term vision to be a leading global cannabis, lifestyle and consumer packaged goods company. Across our global operations, the Aphria team proactively implement significant cost savings initiatives in the quarter to preserve profitability and maintain growth against the changing consumer demands due to the ongoing effects of COVID-19 in Canada and Europe. In Canada, our largest market, the provincial lockdowns extended through most of the quarter and the provincial boards lowered their inventory levels in view of the limitation imposed on the operation of cannabis stores, which were closed and only had pickup and delivery through e-commerce. Germany also continued to be impacted by COVID-19-related restrictions, which resulted in lower levels of inventory at our CC Pharma distribution business due to insufficient supply of medical products from other European Union countries, as well as pharmacies experienced lower turnover and being closed. While we factored in some impact to our business from the pandemic, and in Q3 the duration and the magnitude of the lockdown was greater than we initially anticipated. Our responsiveness and our ability to make adjustments to our business allowed us to successfully deliver our eighth consecutive quarter of positive adjusted EBITDA. I want to thank our global team for their hard work and dedication to keeping the health and safety of our employees a top priority, while also delivering these results. For Q3, we achieved adjusted EBITDA of CAD 12.7 million, in line with Q2, despite net revenue of CAD 153.6…

Thank you, Irwin. 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 to the non-GAAP financial measures identified during our call. All amounts are expressed in Canadian dollars unless otherwise noted, and except for per gram, kilogram, kilogram equivalents and per share amounts. As Irwin mentioned, this quarter featured unique circumstances that had a direct impact on our ability to grow our business and on our financial results. During the 89-day period of the quarter, portions of the biggest province in Canada, Ontario, were in a lockdown virtually every day. Two of the other big provinces in Canada, Alberta and British Columbia, experienced significant lockdown periods. Germany experienced lockdowns for most of the quarter, and the Southwest United States, while not in lockdown, saw significantly less on-premise business than it has in other periods since the pandemic began. These lockdowns directly impacted total revenue that our businesses were capable of earning. Despite these lockdowns, we believe our team did an incredible job during the quarter focused on our highest return priorities. In the quarter, once we realized the duration and magnitude of the lockdowns were going to be greater than we initially anticipated, particularly in Canada, we responded quickly and implemented meaningful changes to our operations to align with demand and reduced costs in this dynamic operating environment. These changes resulted in significant cost savings. These savings went a long way to help us generate our eighth consecutive quarter of positive adjusted EBITDA. We are very pleased with this result and expect a portion of these savings to continue in future quarters. While a majority of them will ramp back up as demand increases, provinces are fully open for business.…

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

Good morning, gents. Hope all are well.

Good morning, Owen.

Good morning.

Just the one question from me. I wanted to focus on the decline in average selling price in adult use. So, could you give some more specifics on your portfolio mix shift to value over Q1, Q2 and now Q3? And then, linked to this, can you maybe talk about what you're doing to support your more premium offerings? Are there opportunities to drive upside there, particularly maybe around Broken Coast? Obviously, that's a very strong brand and that's probably a key advantage for you having that brand? Thank you.

Owen, so two things. I'll answer the first part and I'll let Carl. I want to be clear, because what I'm seeing when it sounds – when we're talking about lockdowns, originally, when Canada closed, cannabis stores were deemed essential service. So, the stores were open. During the next evolution, the Canadian government and the Ontario government closed stores. So, you couldn't go to a store. You either had curbside pickup or e-commerce. And each retailer saw about 25% decline and some up to 30%. So, the stores were closed. And that's the difference. And I know we've been getting questions in regards to well, weren't we locked down before? So that's number one. Number two, in regards to Broken Coast, as you heard me talk about and I've had many conversations, there's been really no price adjustment on Broken Coast. It continues to be our premium brand. And Owen, I have talked to a lot of the control boards. Nobody wants to see price compression. I think some of the price compression was moving inventory, trying to get consumers to come to the stores or order online, and that's the way that ultimately – what was happening from a market standpoint. I think once we get back to normal, we will see innovation out there in regards to different potencies of products. I think you'll see innovation in regards to different vape, different pre-rolls and demand. So, I come back and say price compression is because of what's happening out there to try and get consumers to come and shop. But on the other hand, I see great things happening with Broken Coast. We have every bit of intention of how to maintain that premium product. Carl, you want to just go ahead and talk about…

Yes. So just to add to that, I'll start with Broken Coast. Owen, I think there's some very interesting things that have been going on there in the last quarter in terms of potency increases and the new products. Irwin talked in his script about Pipe Dream. That strain has been doing very well. And Broken Coast really started a concerted effort probably six, seven months ago to make improvements on their potency. And we've been seeing that over the last three, four months. And consumers should be seeing that over the last two months as those products are hitting shelves. And so, we think that - those are great improvements to really drive that brand equity. In terms of your question about shift in mix, I would say, again, further to Irwin's comment, the price decrease in the quarter on a per gram basis in adult use is more about price compression than it is about a shift in mix. We saw a little bit of a shift away from pre-rolled and vapes, driven more because of the unique circumstances of the lockdown. But we didn't see a direct shift into more value in our portfolio.

Okay. That’s very helpful. Thank you, guys. Appreciate it.

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

Thanks. Good morning.

Good morning, Andrew.

Good morning. Hey. Regarding the beverage alcohol business, on-premise growth, 35%, pretty significant. I think given that initial strength, are you expecting kind of a sustained recovery going forward? You've got additional distribution, maybe declining off-premise. And I guess even with the seasonally low quarter with kind of the business mix headwind, profitability was kind of right in line with the business case. So, going forward, how are you thinking about this business portfolio? Does it offset more tepid profit expectations from Canada? Or do you step up marketing investment to really build brands and capabilities? Thanks.

Good question, Andrew. I think number one, what we're seeing and what we've said, before you see what's happened with H.A.Z.Y. and the demand for H.A.Z.Y., we also introduced a vodka seltzer called Oasis, and it's actually become one of the number one vodka seltzers out there. We'll be introducing some of the RIFF products under the RIFF Broken Coast. So, again, we're looking to expand our beverage business. We're now going to be sold in over 30 states and we'll continue to expand that. So – and with on-premise opening up the way it is, I see lots of potential. We're also working on lots of CBD type of products and other products within our beverage business. So, there is a lot of upside on the profitability of our beverage business. We're also working with SweetWater in regards to the Canadian markets with THC and CBD products and getting distribution in that market.

Got it. Thanks. I will pass it on.

Thank you.

Thanks, Andrew.

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

Thanks. Good morning. Thanks for the question. I wanted to go back, Irwin and Carl, you had some comments about other pending business combinations in consumer and CBD products. I was just wondering, to the extent that you can, if you could elaborate a bit more on what you mean by that. I presume this is thinking more in the U.S.?

Hi, Tamy, good morning. Number one, it is the U.S. and also it's international, where it makes sense there. No different than we did with our CC Pharma and no different than we did with SweetWater in the U.S. that ultimately can parlay into legalization, parlay into THC products once we can. So, that's the plan there. Listen, we think we can build - continuously build out a high market share in the Canadian market with legalization already there in rec. I think there's going to be lots of changes in regards the way we market our product. I think there's still opportunities to drive some of our medical. I think continuously more and more markets will open up in Europe in regards to medical and potentially rec. And for us to get the scale and size we want in the U.S., we will look to do more consumer products that will parlay into cannabis type products or THC products when once legalization does happen.

Got it. Thank you.

And part of that will be utilizing our Aphria brands like RIFF, like Solei, like Good Supply, like we're doing with those in regards to the beverage business with SweetWater.

Understood. Thank you.

Thank you.

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

Someone asked about Canada and the market share. And I know we're kind of impacted right now because some of the COVID restrictions. But as we look forward simply at Ontario, how do you think about returning to market share gains within the province, especially the context of more stores opening, maybe steps you're taking to ensure you have the right kind of shelf space within those new stores and working with the provincial buyers and on a go forward basis kind of return to those market share gains and also through the lens of the pending Tilray acquisition closing. Thanks.

Listen, I think, again, Aaron, there's one day, this pandemic is going to be over, okay? And I think what we're seeing demand for cannabis, as more and more states in the US open up legalization, but we're legal in Canada today and my objective, as I said before, with the combination of Tilray, to get to 30% market share out there. Recently, I've had calls with the different control boards. And again, it's a major source of income for them. They see the demand and there's a major focus with them in regards to growing their products. In Ontario alone, they expect to have, by September, close to 1,400 stores. And they've been a little slow in opening up stores because of the pandemic. Stores now are closed for the next four weeks and you only can order by curbside. They also are looking at, basically, new innovation products, how we deliver products online. So, there's a major, major effort from each of the control boards how to grow this business to a $6 billion retail business. And with a 30% share of retail of $6 billion, that's a good size business to grow in the Canadian market. And I'll continuously say this here, I think the medical market, when patients can get back to their doctors, we'll see growth in the medical market. But at the same time, I think patients will have the ability to buy a lot of different medical products at retail. The other big opportunity for us right now, we don't have a major presence in drinks and edibles. And that's going to be a major opportunity for us to get into drinks and edibles and expand our business in that marketplace. So I think the opportunity is out there in the Canadian market. And with us having the ability to grow higher potency strains at Aphria Diamond and Aphria One, we easily can compete in the higher potency marketplace out there if that's what consumers are demanding.

Your next question comes from Pablo Zuanic with Cantor Fitzgerald.

Maybe a question for those shareholders that are still on the fence regarding the vote. And I don't know if you want to comment, maybe the percentage of people that are on the fence is very small. But a two-part question. First, discuss international markets. We've seen relief by EMA, we've seen other transactions, a number of companies talking about making, even Canadian ones, mid-size, talking about making inroads in Europe. So, taking a medium/longer-term view, just a reminder of how Tilray and Aphria together are stronger in Europe. And the second question, which is part of the same topic, is on the subject of the need for scale in the Canadian market, right? The way I look at the numbers, they are small and midsize companies that seem to be doing well, quite well actually, developing niches, growing certain formats. You saw 7ACRES become number one in premium. So, there's a question mark about the need for scale in the domestic market with some mid-sized, smaller guys seem to be doing quite well. Thank you.

So number one, as I've said before, Pablo, I recommend if you haven't got out to vote your shares, now please do so. So far, we've had great turnouts in regards to that. And close to 90% of Aphria shareholders that I've got out there have voted in favor of the deal. And I think that's what's important, is investors are seeing the value of this deal both on the Aphria side and the Tilray side. I think it's just making sure investors get out there and vote as we're living in a world today of somewhat shareholders not going out to vote, and I can't stress enough how important it is to get out there and vote. I come back and say this here, Pablo, we started a trend when we announced this deal in December and you saw the deals and the consolidations that have happened after that. And I think with that, as I've said before, having a 30% share and being that low cost producer, now, again, being a small player, yes, they're doing quite well, but what's quite well on a scale and size. This is our eighth quarter of EBITDA profitability. We have 265,000 kilograms of ability to grow at low cost. And with that, I think, again, if you're going to scale this up, you've got to have grow, you've got to have products, you've got to have the ability to market the products. And that's something that Aphria has. You've got to be able to put boots on the street to sell into the bud masters. Once the world gets back to normal, a lot will change out there. And a lot will change how we sell our products at brick and mortar, how it's sold online, how you innovate. And ultimately,…

Your next question comes from John Zamparo with CIBC.

I wanted to ask about free cash flow and in two parts, both on SG&A and CapEx. The cost savings initiatives that you're referring to, when did you implement these in the quarter? And should we consider these temporary as sales growth is limited? Or do you view them as more sustainable? And then, the CapEx number in the quarter, is that also likely a sustainable number moving forward?

John, in terms of the CapEx, we do believe that's a sustainable number going forward. It likely has some room to come down a little bit in various periods. In terms of the incremental SG&A, as we talked about in the conference call and in the MD&A, a big chunk of that number is tied to share-based compensation, which was driven by the increase in our share price in the quarter, a big chunk of that increase was driven by introducing SweetWater's SG&A into our income statement for 89 days as opposed to 5 days in the previous quarter. A big part of that number is just the amortization required on some of the intangibles that we purchased as part of the transaction.

Maybe I could just follow up on that. I'm referring specifically to the cost cutting efforts, though. And it looks like it was mostly through the Aphria SG&A line, in particular, on either headcount or salaries. I'm just looking…

John, it's not one time. It's not that we cut them and then we're going back to normal. These are costs that have been dealt with and taken out of our business and we'll continue on.

And you can see them in the G&A line, John, when you normalize out the bringing in of SweetWater. There's a paragraph on in the MD&A.

Your next question comes from Matt Bottomley with Canaccord Genuity.

Just wanted to go back to your philosophy on market share and some of the endeavors you're doing subsequently to closing Tilray to get up to about 30%. Just curious on how you think that's going to evolve in the Canadian space, given we've seen some of your peers, particularly one that's probably the next closest to you on market share by specific brands or by specific other LPs, sort of tuck-in acquisitions to get incremental market share, is that something you think the combined entity will be looking to do as well? You mentioned beverages might be one sort of segment you're looking to get into? Or do you think there's not really a lot of terminal value yet for a lot of these brands, given the fact that, from my perspective, when I walk into a lot of these dispensaries, if you're sort of brand agnostic, it's still a pretty rough environment there to actually glean which LP has bought and what the product offerings are. There's a lot of, I think, progression still there. So, just curious on you think if M&A is part of the strategy in order to build up that market share or do you think you can build from the ground up pro forma the [indiscernible] acquisition based on what you guys already have in the pipe?

I think you said it. When you walk into stores, do brands mean anything. I think what's going to be important is not so much brands. Between Tilray and Aphria, we'll have over 12 brands out there. I think what's going to be important is quality in regards to the product itself, the potency of the product, somewhat on pricing of the product, educating consumers on the regulatory and the quality of the products. And I think that's what's ultimately going to be important. The other big thing here is having boots on the street, when as they get into stores, to make sure they have a great representation of our products. And with that, I think we have enough out there and don't have to go out there and acquire any other brands. I think we've got to continuously have a good pipeline of innovation. I think we've got to continuously expand drinks. I think we've got to continuously expand edibles. But I think the big thing here is also is convincing Health Canada and Canadian government some of the ways we've got to market the right way to consumers, and from an education standpoint, why certain brands and products matter.

Your next question comes from Neal Gilmer with Haywood Securities.

I'm not sure he's there, operator.

Your next question comes from Michael Lavery with Piper Sandler.

Just curious if you could give an update on the current quarter and maybe what you're seeing that from the consumer. You mentioned there's the four more weeks to go in Canada with store closures. Are you seeing consumers get used to that and do more of the online ordering and pickup even if that hadn't been their typical behavior? Do you think that, when stores reopen, there's going to be pent-up demand or it'll just go back to a kind of a normal level as opposed to sort of making up for lost time? Just some of kind of what you're seeing in terms of how they're reacting now and what you expect might come towards when stores reopen?

Michael, excellent question. And it's something that we talk to a lot of people, collect a lot of data there and do a lot of analytics on this here. So, with that, the good news is, hopefully, more people – even though you're on – and I hate the word lockdown, but, again, Toronto or Ontario is closed down from a province standpoint. With nice weather, people want to get out, people want to get out and enjoy some recreational cannabis. Consumers will go stand in line and pick up at store, at curbside or will order online. So, I think the good news is, as we head into a warmer weather, it will help business. Again, now, consumers are used to going to curbside and ordering online where this was all something new that just happened in December, January because before stores were open. And then third, especially Ontario, but the rest of Canada, more and more stores are continuously open, so it will be available. I think we've as a company have learned a lot through this year in regards to how to market our brands, what consumers want in potency, the different types of products. And I think the control boards have learned a lot too and we're working with them on forecasting because we can't afford out of stocks. We can't afford to have the wrong products in there. So, I see us getting back to normal come this summer. And, yes, the question is what's a better time to get back to normal coming into the summer. And there will be tremendous piped up demand.

There are no further questions at this time. I will now turn the call back to Mr. Simon for closing remarks.

Thank you very much, everybody. And thank you for getting on this call. I know it's difficult times out there, difficult quarter considering, again, the close down of stores. And as I step back and we talk to the control boards and we hear what their sales are down, we hear what they've done with their inventories, it is actually no excuse. But if the stores are closed, the stores are closed. I really commend the action we've taken. And it's not a one-time action in regards to looking at our organization, in regards to taking out our costs, in regards to increasing potency, in regards to improving our grow, in regards to working with our employees around the world. With that, I feel where else is there a business out there that worldwide can be $100 billion business, where else out there is a business that you step back and look at what the demand will be in cannabis both in recreational medical, in beverages, in edibles, et cetera. And what Aphria has today, it has tremendous brands, it has a tremendous grow facility, has tremendous innovation, has tremendous regulatory and has a strong balance sheet. And with the combination of Tilray, it will even strengthen it more. So, again, I cannot recommend enough to get out there and please vote both Aphria shareholders and Tilray for this deal that we can get this closed and move forward. And again, I come back and sort of say consolidation will be something that will happen in this industry and continuously happen. And when legalization, SAFE Bank, medical cannabis legalization happens, Aphria/Tilray will be ready for it and will be well positioned in regards to its products, its brands, its innovation to be able to make a difference. So with that, please stay safe. And thank you very much for listening today.

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