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 million, down 4% from Q2.

This demonstrates the strength and resiliency of our team as well the importance of having a diversified business, from medical to adult use cannabis in Canada, along with our distribution of our medical products internationally, to a robust beverage alcohol business in the U.S.

We've created a solid foundation for future top line growth as the dynamic environment we are operating in improves and it will improve. We also have several incremental growth opportunities as we look to parlay our branded consumer products into additional complementary product offerings in Canada, the U.S. and internationally.

The key strategic focus of our team is consistently on the highest return priorities, such as strengthening our core cannabis business in Canada and completing strategic M&A to generate sustainable growth for today and well into the future.

We improved our free cash flow by $12.4 million during the third quarter, predominantly as a result of reduced capital expenditures and maintaining the cash provided by operating activities.

We continue to manage our working capital, and believe as our top line increases as the market dynamics improve, we'll reach our goal of being cash flow positive.

We believe the strength of our balance sheet and access to capital will continue to be our key competitive strength and a differentiator in the cannabis industry, helping us to support our long-term financial flexibility. Our transformational journey began well over a year ago.

When we started is very different than where we are today and will be in a year from now. Our global team will continue to evolve our business to stay at the forefront of the industry. We remain focused on maximizing our growth in net sales, profitability, and most importantly, our cost containment.

Our market leading adult use cannabis brands remain strong and our international cannabis sales footprint has expanded to include new regions for distribution.

During the quarter, Aphria maintained its number one position as the top licensed producer in terms of sales to provincial boards across all our brands in both Ontario and Alberta per Headset reporting data, and that's with a lot of retailers closed. Headset data covers a large portion or approximately 63% of the total retail market in Canada.

Focusing on Headset data a little more - in a little more detail, from a market share perspective, Aphria is the number one licensed producer in Canada, with an overall national market share of 12.1%. We are the number one licensed producer in Saskatchewan, number five in British Columbia.

Our vape cartridge maintains the number one market share with an 18.8% market share. Our brands held the number two dried flower with a 12% market share, number two pre-rolled share with a 12% market share and number two oil share with a 13% market share in Canada. What great accomplishments.

We're also seeing great improvement in Quebec, rising to the number two licensed producer in terms of sales to the provincial board based on the internal analysis. We foster a robust culture of innovation, brand development, cultivation at Aphria and being that low-cost producer.

During that quarter, Broken Coast extended its premium cannabis offerings with the introduction of newly developed strain, Pipe Dream. We introduced our Solei brand topical, the highest potency topical available in the Canadian market. Both new products have received positive initial feedback from retail partners and consumers.

We are continuously evaluating options to connect with consumers through our compelling brand propositions and delivering compelling innovation, so Aphria can meet the needs of the ever evolving consumer preferences in the marketplace. Internationally, we're expanding our presence.

Today, we are in Germany, Italy, Israel, with growing opportunities in Malta, Poland, as well in Asia and Latin America. We're leveraging our strength with our medical platform and our multifaceted international operation.

This includes our domestic cultivation, our medical cannabis product registrations and licenses and a large distribution infrastructure to increase access to high-quality medical cannabis for patients and consumers.

There are more than 600 million people across the EU, representing a tremendous opportunity for long-term growth, both medical and recreational when legalization happens. We expect to continue to see growth in our distribution medical cannabis and CBD offerings across the region.

Importantly, we're also recognizing ourselves to quickly benefit from changes in EU legalization and other countries that are allowing medical cannabis. As many you know, for 30 years, myself and a lot of my team members have led a CPG company, along with other key members.

Under our leadership, we lead the CPG company in Europe to over $3.5 billion business on a global basis. We believe we have a proven track record to build consumer brands within Aphria that will help with – that we understand government relations, local preferences to grow our international business and our local businesses.

In addition, we believe our key learnings from operating in Canada will help us with the EU and the US market once legalization happens. At Aphria, we foster a strong ability to innovate across cannabis forms, with brands that resonate from a premium offer.

We expect the success to be a key differentiator in our assets for future international and Canadian growth. We're excited about the long-term potential to grow internationally and our core Canadian business.

As a company that's a purpose-driven company, we take great pride in leading with our core values, are committed to changing people's lives for better by investing in our products, our brands, and our people, and of course, the most important, our planet.

Focusing on Q3, represented our first full quarter contribution from SweetWater, and what a great brand. They contribute CAD 14.8 million in net revenue and CAD 5 million in adjusted EBITDA for the quarter, and that's still with most of the bars closed.

Post Q3, the month of March, we're pleased to report SweetWater experienced a large rebound, with on-premise sales up approximately 35% compared to the prior year when the US first went into a national lockdown.

SweetWater recently launched H.A.Z.Y., an IPA, a year-round brew, and is already the number one new craft brew item in the southeast, number six nationwide according to IRI data. H.A.Z.Y. IPA growth is being fueled by millennials, an important demographic in our business.

The traction and growth in the new offering is just a few months into – which we speak to and which we speak in regards to the strength of SweetWater's innovation and brand development. We've been working closely with the team at SweetWater. It's already been very productive.

And initial opportunities are coming to life as we collaborate to leverage [ph] Aphria's cannabis brands in the US through new beverage offerings. This will provide valuable brand awareness, brand building opportunities with consumers ahead of potential federal cannabis legalization.

SweetWater provides a robust, profitable platform for future growth and development and what a big opportunity in the beverage business. We're leveraging their innovation, manufacturing, marketing and distribution infrastructure in the southeast and expansion opportunities all across the US.

During the quarter, we also launched SweetWater Beverages, including the 420 strain, statewide in Colorado, the first US state to legalize adult use cannabis. This is a great place for us to potentially start offering Aphria cannabis branded beverages in the future to start to build out our brand awareness and cannabis lifestyle consumers.

Our team at Aphria understands the importance of brand equity and selling good quality, safe products. In the US, more and more states are legalizing both medical and adult use cannabis, with recent developments being in New York and New Jersey.

In the last four months, five states have legalized adult use marijuana, meaning now 30% of the country allows its adult residents to possess and use cannabis. As of April 7, 15 states and Washington DC have legalized adult use and 36 states have legalized medical cannabis through voter ballot initiatives or state bills.

At least two more states are poised to be added to that list following the passage of cannabis legalization this year. The national trend is indicative on the shift of Americans' perspective on cannabis.

As we continue to advance our long-term vision and growth objectives, the addition of SweetWater is a cornerstone with our US strategy and strong complement to our existing Aphria business, and we believe it will continue to be compelling financially for us.

To further advance our vision and strategic growth objectives, we believe the addition of SweetWater and other pending business combinations in the US in both consumer products and CBD products that can parlay into future THC and cannabis products will help us widen the gap between us and our peers, position us well ahead of the competition.

I urge Aphria's shareholders and Tilray stockholders to vote for the business combination. On a combined basis, as I mentioned many times before, there are many benefits of both of these companies coming together. I can't stress enough, please get out there and vote if you've not done so.

From a global operations perspective, we remain committed to Latin America and seek to develop our business in Asia, where we've already sold in our first CBD products. We have a tremendous runway for growth and proven global teams with a track record of success. In the US, we plan to leverage our strong sales and distribution network.

This includes leveraging SweetWater's existing relationships with the addition of Tilray CBD wellness brand, Manitoba Harvest, a pioneer in their industry. We look to build upon our existing distribution partnership in the US and international.

Keep in mind, SweetWater and Manitoba Harvest provides us with thousands of distribution points for our products across natural, mass, club and grocery channels and SweetWater is also available in restaurants and bars which will allow us one day to sell in the cannabis cafes.

We believe this will give us a tremendous head start to access these retail and food outlets with our craft beer as well as our CBD hemp product offerings and we can do this on a national scale in the US as well for our cannabis offerings when federal legalization happens.

In summary, we are pleased with her ability to contain our costs globally, and report positive EBITDA for Q3 in a difficult – and I mean difficult – operating environment, but that will pass too. I am proud of all our employees and their contribution to further Aphria's vision, especially during COVID-19. I'd like to thank every one of them.

I'd also like to thank our board for their contribution. We plan to continue to build on our strong foundation in Canada and internationally to capitalize on growth opportunities, utilizing our best-in-class cultivation and manufacturing across a greater distribution footprint.

This will enable us to connect with an increasing number of consumers who want cannabis and patients with our industry leading brands and products. With that, I'll now turn the call over to Carl, who will take you through our financial results for Q3.

Carl?.

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. Our ability to achieve CAD 12.7 million of adjusted EBITDA this quarter demonstrates the agility of our team and operations despite our net revenue of CAD 153.6 million, being down 4.3% from the prior quarter.

A few weeks after the quarter ended, we were optimistic that the prospect of lockdowns was ending and anticipated demand might be returning to pre lockdown levels shortly. This coincided with on-premise business at SweetWater increasing by 35% from March and the prior year, a very positive sign.

But as Canada continues to struggle with COVID-19 infection rates, Ontario recently returned to a full lockdown for at least four weeks. Alberta and British Columbia continued to experience all-time highs in infection rates and could return to lockdown. And just last week, Germany implemented a 14-day hard lockdown.

A return to lockdowns presents a very short-term headwinds on revenue growth. But as we displayed this quarter, even in the face of lockdowns, our management team is hyper focused managing our business through such headwinds and on maintaining profitability. This quarter represented our first full quarter of SweetWater results.

These results include not only the revenue and adjusted EBITDA from SweetWater's operations, but also include and explain the increased SG&A costs incurred in the quarter, particularly the first quarter of amortization on definite life intangibles acquired as part of the transaction.

The CAD 12.7 million of adjusted EBITDA in the quarter included adjusted EBITDA from our cannabis business of CAD 7.9 million, adjusted EBITDA of CAD 5 million from SweetWater and adjusted EBITDA of CAD 1.3 million from our distribution business, all offset by negative adjusted EBITDA of CAD 1.5 million from our businesses under development.

As Irwin discussed, despite the demand pressures, we worked hard to maintain our brand strength in the quarter across both our adult use and medical markets.

Our industry leading cultivation team continues to do a great job, helping us to keep our cash costs below $1 per gram, coming in at $0.90 this quarter, despite lower wintertime yields and not operating all growing chambers during the quarter.

Like others in the industry, we are interested in Health Canada's response to the recent labeling issues uncovered in the adult use cannabis market and expect to respond quickly once they provide their views on standard labeling. We maintained a strong balance sheet and overall capital structure to support our long-term growth.

This financial flexibility positions us well as we look ahead. We expect to continue to strategically evaluate M&A opportunities as we look to be a leader in the medical and adult use cannabis industry globally and build our US infrastructure in advance of federal legalization.

As we mentioned during our Q2 call, early in Q3, we closed a $120 million financing with BMO, providing a $20 million revolving credit facility, which has not been drawn on, and a term debt facility of $100 million. At closing, we drew fully on the term debt facility.

From a free cash flow perspective, our CAD 12.4 million improvement was not enough to achieve our previously stated goal of being free cash flow positive in Q3, largely because of the revenue impact associated with the COVID-19 lockdowns.

Across our global team, we continue to emphasize initiatives that prioritize Aphria's profitability, not only for today, but well into the future.

In Q3, CC Pharma's distribution revenue was down slightly from the prior quarter based on lower levels of inventory due to insufficient supply of medical products from other European countries, as well as pharmacies experiencing lower turnover due to COVID-19 restrictions.

In addition, the portions of our business reliant on in-person visits, whether they be to doctors' offices, hospitals, pharmacies, cannabis clinics, bars, restaurants, or cannabis retail stores, continue to experience challenges depending upon the local conditions and restrictions and regulations related to the global pandemic, which may continue to have an adverse impact on our revenue in the future, depending on the rate of vaccinations and reopening schedules.

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption associated with COVID-19.

Moving on to a more detailed breakdown of our financial results for Q3, net revenue increased 6.4% from the prior year, but decreased 4.3% from the prior quarter to CAD 153.6 million.

This was primarily due to a decrease in net cannabis and distribution revenue, partially offset by an increase in net beverage alcohol revenue from the acquisition of SweetWater. Net cannabis revenue decreased 23.8% from the prior quarter to CAD 51.7 million.

As noted in today's press release, we experienced a reduction in demand during the quarter as a result of the ongoing effects of the pandemic, including provincial lockdowns and provincial boards taking measures to lower inventory levels, which had previously included forecasted cannabis market growth.

These provincial measures resulted in decreased orders from the provincial boards, and product returns of approximately CAD 5 million. Our team did a good job of working to mitigate a portion of the product return by finding alternate distribution channels for some of the products on short notice.

But we still experienced a reduction in net cannabis revenue of CAD 4.1 million. Absent the product returns, net cannabis revenue would have been CAD 55.8 million. The average retail selling price of medical use before excise tax decreased to $6.69 per gram in the quarter compared to $6.96 in the prior quarter.

The decline is a result of specific pricing programs offered to assist patients who have been negatively impacted by the pandemic along with other promotional programs.

The average selling price of adult use cannabis before excise tax decreased to $3.82 per gram in the quarter compared to $4.29 per gram in the prior quarter, primarily related to consumer trends to large format products and price compression in the market.

Price compression, combined with standard labeling, were a dominant discussion point in the industry during the last quarter. In order to play during this period of price compression, LPs that didn't strip production costs will experience large cash burns in the quarter.

Adjusted cannabis gross profit for the third quarter was CAD 20.3 million, with an adjusted cannabis gross margin of 39.2% compared to 45.9% in Q2. The decrease in adjusted cannabis gross profit and adjusted cannabis gross margin was primarily due to lower wintertime yields and the impact of the product returns, as previously mentioned.

The remaining difference is due to price compression in the quarter. Q3 adjusted distribution gross profit was CAD 11.4 million, with an adjusted distribution gross margin of 13.1%. The decrease in adjusted distribution gross profit specifically was a result of a decrease in distribution revenue at CC Pharma in Germany.

Our adjusted gross margin on beverage alcohol decreased from 60.5% in Q2 to 47.9% in Q3. The prior-quarter gross margin included only five days of sales, with a sales mix that more heavily skewed towards on-premise consumption, which carries a higher margin. Operating expenses in the quarter increased to CAD 100 million from CAD 82.7 million in Q2.

The increase from Q2 was primarily driven by the impact of the growth of our share price in Q3 and the addition of a full quarter of operating expenses from SweetWater, including the amortization charges on defined life intangible assets, the remaining increases from transaction costs associated with the acquisition of SweetWater, the proposed Tilray arrangement, other potential acquisitions, and one-time litigation costs.

As Irwin discussed and I highlighted at the beginning of my remarks, the provincial lockdowns were more impactful, particularly in Canada, than we initially expected.

In our response, our team took immediate action to implement several cost saving initiatives, including temporary four-day workweeks at our Canadian cannabis facilities, better managed headcount, and reduced planned operating expenditures. These initiatives were instrumental in preserving our positive adjusted EBITDA from cannabis operations.

As we consistently state, our focus remains on profitability, as shown through metrics such as adjusted EBITDA and free cash flow.

As I mentioned, from a liquidity perspective, our working capital improvement efforts, including maintaining at the same levels for the last two quarters, our investment in inventory and our reduction in capital expenditures resulted in an improvement in free cash flow of CAD 12.4 million in the quarter, recording a free cash flow loss of only CAD 3.9 million.

Similar to Q2, we continued to work to lower our quarterly working capital requirements, succeeding in the current order by reporting positive operating cash flow or cash provided by operations of CAD 1.2 million.

And we continue to work to be free cash flow positive, all subject to the intensity of COVID-19 restrictions in the markets where we operate. We believe this free cash flow, when combined with our existing cash position and strong balance sheet, will support our growth initiatives in both Canada and internationally.

In summary, we are pleased with the agility of our global team. They reacted quickly with decisive actions to maintain our adjusted EBITDA, responding to changing industry dynamics.

As we move ahead, we believe our strong cash position will continue to help us navigate through this COVID-19 global pandemic as we succeed in reaching more consumers and patients with our high quality, leading brands and products.

Aphria is better positioned than ever before in Canada, the US, Europe and Latin America for continued growth and development, all as Irwin already highlighted in detail. We are ready for future potential cannabis legalization in the US and Europe with a proven global team to execute on our strategic growth initiatives.

In closing, we are excited about our upcoming special meeting of shareholders to vote to approve the proposed Aphria/Tilray business combination. As a shareholder, I voted for the resolution to approve the arrangement.

We urge Aphria shareholders and Tilray stockholders, as of the record date, equally vote for the resolution to approve the arrangement. As we move forward, we expect to become an even stronger, more diversified and profitable company.

We maintain tremendous confidence in our ability to create long term sustainable shareholder value for many years to come. This concludes our prepared remarks. Irwin and I are now available for analyst questions. Back to you, Mariama..

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, the importance too, is what we're seeing is, consumers want higher potency products, want differentiation, and that's something that Aphria will be able to do.

With a strong balance sheet, we'll be able to invest in those brands. And I think there's got to be some changes in the Canadian market and the way you advertise to consumers. And I think that's important.

In regards to Europe, with our current facility in Germany, with our CC Pharma, and with the addition of the great facility that Tilray has in Portugal, we're well ahead of the marketplace. And to start from scratch there today is a two, three, four-year build out at a very, very costly CapEx to go ahead and do that.

So, with the combination of Aphria/Tilray, I am still even more convinced as I spent more and more time on this over the last three months why this makes sense, why this prepares us for the US. I think, ultimately, there will be legalization in the US.

But I think there's going to be opportunities for Canadian LPs to do a lot in the US once that happens. So, I go back to your first question. Hopefully, everybody gets out there and votes that's a shareholder today.

And hopefully, we'll come back and show you all the benefits, which I've said multiple times, the combination of Aphria and Tilray together. .

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..