Q3 2021 Aphria Inc Earnings Call
Okay.
Good morning, My name is Mariana and I will be your conference operator today at this time I would like to welcome everyone to the of free of Inc. Q3 quarterly Investor's call. All lines have been placed on mute to prevent any background noise.
For the speakers remarks, there will be a question and answer session for analysts and investor firms only.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Would like to withdraw your question. Please press the pound key thank you Mr. Carl Merton you may begin the conference.
Thank you Mariano good morning, everyone and thank you for joining us to discuss our free of Inc. 's financial results for the third quarter ended February 28 2021.
Joining me on today's call are Irwin Simon the other Matt.
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 of free as website at Www Dot of free of Inc. Dot com and.
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 discussions on risks and uncertainties associated with such forward looking statements.
Right also 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 of fiscal year 'twenty 'twenty. One 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 til rate.
We are very excited to further advance of free as of long term vision to be a leading global cannabis lifestyle and consumer packaged goods company.
Across our global operations C of free of team proactively implement significant cost savings initiatives in the quarter to preserve profitability and maintain growth against the changing consumer of man demands due to the ongoing effects of COVID-19 in Canada and Europe.
In Canada, our largest market the provincial lockdowns extend it through most of the quarter and the provincial boards lowered their inventory levels in view of the limitation of imposed on the operations of cannabis stores, which were which were closed and the only had pickup and delivery through ecommerce Germany.
<unk> 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 pharmacy experience lower turnover and being close.
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 response of lives 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 our top priority while also.
For delivering these results.
For Q3, we achieved adjusted EBITDA of 12 7 million in line with Q2, despite net revenue of $153 6 million down 4% from Q2 the.
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 and 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.
I think 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 maintain the cash provided by operating activities. We continue to manage our working capital and believe our top line increases as the market die.
<unk> improved will 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 the 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 where we'll be in the 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 remained strong and our international cannabis sales footprint has expanded to include new regions for distribution.
During the quarter of free of maintain its number one position as the top license producer in terms of sales to provincial boards across all our brands in both Ontario, and Alberta per headset reported data and that's with a lot of retailers closed head.
Set 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 are free of is the number one licensed producer in Canada with an overall national market share of 12, 1%.
We are the number one license producer in Saskatchewan number five in British Columbia, Our vape cartridge maintained the number one market share with an 18, 8% market share our brands held the number two dry flower with of 12% market share number two pre roll of share where the 12% market share.
And number two oil share with a 30% market share in Canada.
Great accomplishments, we're also seeing great improvement in Q back rising to the number two licensed producer in terms of sales to the provincial board based on the internal analysis.
We foster of robust culture of innovation brand development cultivation at of free up and being that low cost producer.
During the quarter broken coast expanded extended its premium cannabis offerings with the introduce the introduction of newly developed strain pipe Dream.
We introduced a solely 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 of free it 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 Multifacet International operations. This includes our domestic cultivation, our medical cannabis products 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 in medical and recreational when legalization happens we expect to continue to see growth in our distribution of medical cannabis and CBD offerings across the region.
Importantly, we're also recognizing herself to quickly benefit from changes in EU legalization and other other countries that are allowing medical cannabis.
As many of 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 led the CPG company for you to over $3 $5 billion business on the global basis. We believe we have a proven track record to build consumer brands within of free.
That will help with government 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 U S market once the legalization happens at a free we foster of strong ability to innovate across cannabis forms with brands that resonate from of premium offer we expect a success to be a key differentiator.
<unk> and our assets for future International and Canadian growth.
We're excited about the long term potential to grow internationally and are in our core Canadian business as a company that has 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 contributed $14 8 million in net revenue and $5 million and adjusted EBITDA for the quarter and that's still with most of the borrowers closed.
Post Q3, the month of March were pleased to report Sweetwater experience of large rebound with on premise sales up approximately 35% compared to the prior year when the U S. First went into a national Lockdown.
Sweetwater recently launched hazy and IPA of year round brew and is already the number one new craft brew item in the South East number six nationwide. According to IRI data as the IPA growth is being fueled by millennials and important demographic in our business the.
The traction of growth of in the new offering is just a few months interest, which we speak to and which we speak and we get in regards of the strength of Sweetwater innovation and brand development.
We've been working closely with the team of Sweetwater, it's already been very productive and initial opportunities are coming to life as we collaborate the average of free as cannabis brands in the U S 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 inner.
<unk> manufacturing marketing and distribution infrastructure in the southeast we didn't spend and expansion opportunities all across the U S.
Yeah.
During the quarter, we also launched Sweetwater beverages, including the for 'twenty strain.
<unk> why Inc. In Colorado, the first U S state the legalized adult use cannabis. This is a great place for us to potentially start offering a free of cannabis branded beverages in the future to start to build out our brand awareness and cannabis lifestyle consumers.
Our team out of free of understands the importance of brand equity and selling good quality safe products in the U S more and more states are legalizing, both medical and adult use cannabis with recent developers being in New York and New Jersey.
In the last four months five states of league of the legalized adult use marijuana, meaning out 30% of the country allows its adult residents to possess and use cannabis.
As of April 7th 15 States in Washington D. C 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 of the shift of Americans perspective on cannabis as.
As we continue to advance our long term vision and growth objectives. The addition of Sweetwater is the cornerstone with our U S strategy and strong complement to our existing of free of 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 U S. In both consumer products and CBD products that can parlay into the future THC and cannabis products will help us widen the gap between us and our peers position.
Well ahead of the competition.
I urge of free of shareholders until Ray 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 U S. We plan to leverage our strong sales and distribution network. This includes leveraging sweetwater has existing relationships with the addition of til Ray CBD wellness brand, Manitoba harvest a pioneer in their industry, we look to build upon our existing distribution partnership in the U S and international.
Okay.
Keep in mind Sweetwater in 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 into 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 the national scale in the U S as well for our cannabis offerings when federal legalization happens.
In summary.
We are pleased with our ability to contain our cost globally and report positive EBITDA for Q3 in a difficult and I mean difficult operating environment, but that will pass II.
I am proud of all our employees and their contribution to further of free his vision of especially during COVID-19, I'd like to thank every one of the 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.
<unk>, 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 <unk> for the non-GAAP financial measures identified during their call all.
All amounts are expressed in Canadian dollars, unless otherwise noted and except for per Gram kilogram kilogram equivalents and per share amounts.
As Arun 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, when the 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 that it has in other periods since the pandemic began.
These lockdowns directly impacted the 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 realize the duration and magnitude of the.
The duration and magnitude of the Lockdowns, we're 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 reduce costs in this dynamic operating environment.
These changes resulted in significant cost savings the savings went a long way to help us generate our eighth consecutive quarter of the.
Positive adjusted EBITDA.
We are very pleased with this result, and expect a portion of these savings to continue into the future quarters.
While the majority of them will ramp back up as demand increases provinces are fully open for business.
Our ability to achieve $12 $7 million of adjusted EBITDA. This quarter demonstrates the agility of our team and operations.
Spite, our net revenue of $153 6 million being down for 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 in the prior year of very positive sign.
Canada continues to struggle with COVID-19 infection rates, Ontario recently returned to a full lockdown for at least for weeks.
Alberta, and British Columbia continues 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 headwind on revenue growth, but as we displayed this quarter even in the face of Lockdowns. Our management team is hyper focused managing their 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 as 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 $12 7 million of adjusted EBITDA in the quarter included adjusted EBITDA from our cannabis business of $7 9 million.
Adjusted EBITDA of $5 million from Sweetwater, and adjusted adjusted EBITDA of $1 3 million from our distribution business.
All offset by a negative adjusted EBITDA of $1 5 million from our businesses under development.
Yeah.
As the Orin 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 cost below $1 per gram coming in at <unk> 90, this quarter, despite lower wind time yields and not operating all of our own chambers during the quarter.
Like others in the industry, we are interested in the health, Canada as a 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 U S infrastructure in advance of federal legalization.
As we mentioned during our Q2 call early in Q3, we closed a 120 million U S dollar financing with BMO.
Providing the 20 million U S dollar revolving credit facility, which has not been drawn on and the term debt facility of $100 million.
At closing, we drew fully on the term debt facility.
From a key free cash flow perspective, our $12 $4 million improvement was not enough to achieve our previously stated goal of being free cash flow positive in Q3 <unk>.
Largely because of the revenue impact associated with the COVID-19 Lockdowns.
Across our global team, we continue to emphasize initiatives that prioritize of free of profitability not only for today, but well into the future.
In Q3 Cc pharma 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 pharmacy is experiencing lower turnover due to COVID-19 restrictions.
In addition, the portions of our business the reliance on in person visits whether they'd be the doctor's offices hospitals pharmacies candidates clinics bars restaurants for cannabis retail stores continued to experience challenges, depending upon the local conditions and restrictions and regulations.
<unk> 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 the day to day basis to prevent and minimize any sort of disruption associated with COVID-19.
Moving onto a more detailed breakdown of our financial results for Q3 net.
Net revenue increased six 4% from the prior year, but decreased four 3% from the prior quarter to $153 6 million.
This was primarily due to a decrease of net cannabis and distribution revenue, partially offset by an increase of net beverage alcohol revenue from the acquisition of Sweetwater.
Net cannabis revenue decreased 23, 8% from the prior quarter to $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 $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 experience a reduction in net cannabis revenue of $4 1 million.
Absent the product returns net cannabis revenue would have been $55 8 million.
The average retail selling price of medical case 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 for.
Primarily related to consumer trends to large format products and price compression in the market.
Price compression combined with standard labeling for 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 $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 winter time yields and the impacts of the product returns I previously mentioned.
The remaining difference is due to price compression in the quarter.
Q3, adjusted distribution gross profit was $11 $4 million with an adjusted distribution gross margin of 13, 1%.
The decrease in adjusted distribution gross profit specifically was the result of a decrease in distribution revenue at Cc pharma in Germany.
Our adjusted gross margin on beverage alcohol decreased from 65% in Q2 to 47, 9% in Q3.
The prior quarter gross margin included only five days of sales with the sales mix that more heavily skewed towards on premise consumption, which carries a higher margin.
Operating expenses in the quarter increased to $100 million from $82 7 million in Q2.
The increase from Q2 was primarily driven by the impacts of the growth of our share price in Q3.
And the addition of a full quarter of operating expenses from Sweetwater incur.
Including the amortization charges on defined life intangible assets.
The remaining increases from transaction costs associated with the acquisition of Sweetwater the proposed to array of 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 and our response.
The response of our team took immediate action to implement several cost saving initiatives, including temporary for day Workweeks at our Canadian cannabis facilities, better managed head count and reduced planned operating expenditures. These initiatives were instrumental in preserving our positive adjusted EBITDA for.
The cannabis operations.
As we consistently state.
Our focus remains on profitability as showing through metrics, such as adjusted EBITDA and free cash flow.
As I mentioned from a liquidity perspective, our working capital improvement efforts, including maintaining of 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 $12 4 million in the quarter recording of a free cash flow loss of only $3 9 million.
Similar to Q2, we continued to work to lower our quarterly working capital requirements, succeeding in the current quarter by reporting positive operating cash flow for cash provided by operations of $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're 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.
Our free is better positioned than ever before in Canada. The U S 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 U S 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 the free its array of business combination.
As the shareholder I voted for the resolution to approve the arrangement.
We urge of free of shareholders until Ray 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 maintained 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 Marianna.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
With John Your question press, the pound or Husky, please standby, while we compile the Q&A roster.
Carl that of shortening.
Your first question comes from Owen Bennett with Jefferies.
Your line is open.
Loan against of rollout.
Good morning morning.
And just the one question from me I want to focus.
Focus on the decline in average selling price in the east.
And could you give some more specifics on your portfolio mix shift to value of the key one key to know key free and then linked to the can you maybe talk about what youre doing to support your more premium offerings and the opportunities to drive upside debt, particularly maybe around both in kind of established that eastern bound and ask.
For the key advantage for you have enough of them.
Thank you.
Oh, and so two things I'll answer the first part and I'll, let Carl I wanted to be clear because I'm, what I'm seeing when it sounds when we're talking about lockdowns.
No.
Originally when Canada close.
Canada stores were deemed essential service of the stores were open.
During the next.
Evolution, the Canadian government and the Ontario government closed stores. So you Couldnt go to a store you either had curbside pickup or e-commerce.
And each retailer's Saba of 25% decline.
And sum up to 30%. So the stores were closed and Thats the difference and I know we've been getting some questions in regards to what Werent, we locked down before so that's number one.
The number two in regards to broken coast as you heard me talk about and I've had many conversations.
Been really no price adjustment on broken coast continues to be our premium brand and.
Oh, and 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 the inventory trying.
Trying to get consumers to come to the to the stores of order online and Thats the way.
Ultimately what was happening from a market standpoint.
Once we get back to normal we will see.
Innovation out there in regards to different potencies of products.
Youll see innovation in regards to different bait different pre rolls and demand.
So I come back and say price compression.
It is because of what's happening out there to try and get consumers too.
And shop, but on the other hand.
Great things happening with broken coast, and we have every bit of intention of how to maintain that premium product. Carl you want to just go ahead and talk about.
So just just to add to that I'll start with broken coast.
Owen I think theres some theres 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 of about pipe Dream.
Street has been doing very well and.
Broken coast really started a concerted effort, probably six seven months ago to make improvements on their potency in and we've been seeing that over the last three four months in consumer should be seen that over the last two months.
Those products are.
Our hitting shelves. So we think thats those are great improvements to really drive that brand equity in terms of your question about shift in mix I would say again further.
<unk> comment the price decrease in the quarter on a per Gram basis in adult use is more about price compression than it is about the shift in mix.
We saw a little bit of a shift.
Away from pre rolled and <unk>.
<unk> driven more because of the.
The unique circumstances of the lockdown.
But we didn't see we didn't see of direct shift into <unk> into.
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, I wanted to.
And of the beverage out good morning, Hey.
Regarding the beverage alcohol business on premise growth, 35% pretty significant I think given that initial strength or are you expecting a 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.
The case, so going forward how are you thinking about this business its portfolio role does it offset more of tepid profit expectations from Canada, or do you step up marketing investment to really build brands and capabilities.
Good question, Andrew I think number one what we're seeing and what we've said before you see what's happened with hazing and the demand for hazy.
Also introduced.
The bulk of Seltzer called Oasis and.
It's actually become one of the number one.
Perhaps the seltzer is out there we will be introducing some of the risk products under the RIF broken coast. So again, we're looking to expand our beverage business. We're now going to be sold in over 30 States and will 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 for.
Beverage business. We're also working with Sweetwater in regards to of the Canadian market with THC, and CBD products and getting distribution in that market.
Okay.
Got it thanks, I will pass it on.
Thank you thanks, Andrew.
Your next question comes from Tami, Chen with BMO capital markets. Your line is open.
Thanks, Good morning, Thanks for the question.
Wanted to go back.
You had some comments about other pending business combinations and consumer and CBD products I was just wondering to the extent that you can.
A bit more of what you.
And by that I presume this is.
Thank you more in the U S.
Hi, Tammy good morning.
The number one it is the U S and also its international.
Where it makes sense, they're no different than we did.
With the Cc farm for CBD Cc pharma.
And no different than we did with Sweetwater in the U S debt ultimately can parlay into legalization legal parlay into th.
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 the legalization already there and I think theres going to be lots of changes in regardless of the way we market our products.
I think there's still opportunities to drive some of our medical.
Continuously more and more markets will open up in Europe in regards to medical and potentially wreck and for us to get the scale and size of we want in the U S.
We will look to do more consumer products that will parlay into.
Cannabis type products for THC products, unless the legalization does happen.
Got it thank you.
And part of that will be utilizing.
Our free of brands like replace so la 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 Grey with Alliance Global Partners. Your line is open.
Hi, good morning, and thanks for the question.
So I wanted to ask about Canada, and the market share. So I know, we're kind of impacted right now because some of the COVID-19.
Restrictions, but kind of as we look forward specifically at Ontario, How do you think about kind of returning to kind of market share gains are kind of within the province, especially in 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 on a go forward basis to kind of return of those market share gains.
And also through the lens of the pending acquisition of closing thanks.
Thank you listen I think again Theres 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 U S open up the legalization, but where legal in Canada today, and my objective as I've said before.
With the combination of til rate to get to a 30% market share out there.
Recently I've had calls.
With the different control boards and again, it's a major source of income from them. They see the demand and there is a major focus with them in regards to.
Growing their products in Ontario alone they expect to have by September close to 1400 stores.
And they've been a little slow in opening up stores because of the pandemic.
The stores now are closed for the next four weeks and the only can order by curbside.
We also are looking.
Add basically new innovation products, how we online how we deliver products online.
So there is a major major effort from each of the control boards had of grow this business two of $6 billion retail business and with a 30% share of retail of $6 billion. That's a good sized business to grow in the Canadian market and I'll continuously say the share I think the medical market.
When patients can get back to the doctors will see growth.
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 president and 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 opportunities out there in the Canadian market and with us having the <unk>.
<unk> to grow higher potency strains at of free of Diamond and of free of one I mean, we easily can compete in the higher potency marketplace out there if that's what consumers are demanding.
Alright, great. Thanks, I'll pass along.
Thank you.
Your next question comes from Pablo <unk> with Cantor Fitzgerald. Your line is open.
Good morning.
Good morning, Robbie maybe a.
Question for those shareholders of astute on defense regarding of the vote and I don't know if you want to comment maybe the percentage of people that on the defense is very small.
But the two part question first.
Discussing international markets.
The leaf by EMA, we've seen other transactions and the number of companies talking about making even Canadian ones mid size.
Thinking about making inroads in Europe, so thinking of medium longer term view, just the reminder of how to be enough for you to hear that are stronger in Europe.
And the second question would you book the same topic.
He is on the subject of the need for scale in the Canadian market right. The way I look at the numbers the Sidoti.
The small and mid sized companies that seem to be doing well quite well actually developing niches growing something for much of useful sort of in acres right become number one in premium.
So there's a question mark about the need for skilled in the into domestic market with some mid size from one of the guys seem to be doing quite well. Thank you.
So number one as I've said before Pablo.
Pablo I recommend if you haven't got out of the vote your shares.
Not please do so.
So far we've had great turnouts in regards to that.
Post the 90% of the of free of shareholders that have got out there.
Voted in favor of the deal and I think Thats whats important as investors are seeing the value of this deal both on the free of site in the <unk> side I think it just making sure investors get out there and vote as we're living in the world today.
Somewhat shareholders not going out to vote.
Can't stress enough how important it is to get out there in the 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 I mean, the since our eighth quarter of EBITDA profitability, we have 265000.
Thousands kilograms of ability to grow at low cost and with that I think again, if youre going to scale. This up you got to have growth you got to have products you got to have the ability to market the products and thats something that of free of has got to be able to put.
Boots on the street to sell it 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 of free or will be able to do with the strong balance sheet, we will be able to invest in those brands and I think theres got to be some changes in the Canadian market and the way you advertise to consumers and I think thats important in regards to Europe.
With our current facility in Germany, with our Cc pharma and with the addition of the great facility that till Ray has in Portugal.
We're well ahead of.
Of the marketplace and to start from scratch. There today is of 234 year Buildout at a very very costly capex to go ahead of do that so with the combination of of free until Ray.
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 U S.
There is ultimately there will be legalization in the U S, but I think theres going to be opportunities for Canadian Lp's to do a lot in the U S and once that happens. So I go back to your first question hope.
Hopefully everybody gets out there in both sets of shareholders today, and hopefully we will come back and show you all of the benefits, which I have said multiple times the combination of a free until ready together. Thank.
Thank you.
Thank you.
And your next question comes from John Zeng parallel with the CIBC. Your line is open.
Thank you good morning.
Good morning, John Good morning, John.
I wanted to ask about free cash flow.
And in two parts, both on SG&A and Capex the cost savings initiatives that you are 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 corner in the quarter is that also a likelihood of sustainable.
Moving forward. Thanks.
So John in terms of <unk>.
The Capex, we do believe that the state of sustainable number going forward.
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.
In the conference call and in the MD&A, a big chunk of that number is tied to share based compensation, which is which has been great.
Driven by the increase in our share price in the quarter, a big chunk of that increase was driven by introducing suite waters SG&A into our income statement for.
89 days as opposed to five days in the previous quarter.
And including them.
A big part of that number is just the amortization required.
On some of the intangibles that we that we purchased as part of the transaction.
Okay, maybe I could just follow up on that I am referring specifically to the the cost cutting efforts, though and it looks like it was mostly through through the of free SG&A line in particular.
The headcount or salaries I'm, just looking at yes, sorry.
Sorry, John.
John.
It's not one time, it's not that we cut them and then we're going back to normal. The these are costs that had been.
Dealt with and taken out of the <unk> 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 the.
The bringing in of Sweetwater.
Okay understood that's very helpful. Thank you.
Okay. There is a paragraph on it in the MD&A.
Your next question comes from Matt Bottomley with Canaccord Genuity. Your line is open.
Hey, good morning, Marine cargo book.
Just wanted to go back to.
Three of your philosophy on market share in some of that.
Endeavour Youre doing the subsequently the closing until ready to get up to about 30%.
<unk> on how you think that's going to the.
Paul from the Canadian given we've seen some of your peers, particularly one that's probably the view on market share.
Bi specific brands of Bispecific other Lps sort of tuck in acquisitions to get incremental market share or is that something you think you know the.
Combined entity will be looking to do with well you mentioned that might be one for you.
Got it.
Or do you think theres not really a lot of terminal value of yet for a lot of these brands given the fact that from my perspective, when I walk into the lot of these dispensaries that youre sort of brand agnostic, it's still pretty raw.
The environment there.
The.
With the healthiest blood and what the product offerings are pretty low there's a lot of Ah.
I think progression there. So just curious how you think 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.
Oklahoma was ignore acquisition based on what you guys have already happened.
Good question.
And I think you said that when you walk into stores.
For the brands mean anything I think what's going to be important is not so much brands between.
The array of free and will have over 12 brands out there I think what's going to be important is the quality in regards to.
For 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. So I think that's what's ultimately going to be important the other big thing is this here.
Yes.
Having boots on the street once 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.
And don't have to growth there and acquire any other brands I think we got to continuously have a good pipeline of innovation I think we got to continuously expand drinks I think we got to continuously.
Expands edibles, but I think the big thing here is also is convincing health, Canada. The Canadian government some of the ways, we got to market the right way to consumers.
And from an education standpoint, and why certain brands and products matter.
Okay. Thank you.
Thank you.
Okay.
Your next question comes from Neal Gilmer with Haywood Securities. Your line is open.
Hello.
Neil.
I'm not sure of is there operator.
And the greatest should you go to the next call.
Yeah.
Okay. Your next question comes from Michael Lavery with Piper Sandler Your line is open.
Good morning, Thank you.
Just curious if you could give an update on the current quarter and maybe what youre seeing from the consumer you mentioned, there's still for more weeks to go in Canada with the store closures are you seeing consumers get used to that and do more of the the online ordering and pick up even if that hadn't been there.
The typical behavior do you think that when stores reopen there's going to be pent up demand or it will just go back to kind of a normal level as opposed to sort of making up for lost time with just some of kind of what youre seeing in terms of how you know.
Theyre reacting now and what you expect might come towards that when stores reopen.
Michael excellent question and.
It's something that.
We talk to a lot of people collect a lot of data out there and do a lot of analytics on this year.
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's closed down from a province standpoint.
With nice whether people want to get out people want to get out and.
Enjoy some recreational cannabis people.
The 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 <unk>.
The 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 we're opening.
And then third.
<unk>.
Especially Ontario.
But the rest of the Canada more and more stores are continuously open so it will be available.
We as a company have learnt a lot through this year.
In regards to how to market our brands, what consumers want and potency the different types of products and I think the control boards have learnt a lot too and we're working with them on forecasting because we can't afford it of the stocks, we can't afford to have the wrong products in there. So you know.
I see us getting back to normal come the summer and yes. The question is what's a better time to get back to normal coming into the summer and there will be will be tremendous piped up demand.
Okay, great color. Thanks, so much.
Thank you. Thank you.
Yeah.
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 the difficult times out there.
Difficult quarter considering.
Again, the close down of stores.
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.
Of 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 taken out of our cost in regards to increasing potency in regards to improving our growth in regards to working with our employees around the world.
With that I feel.
Is there of business out there that worldwide can be of $100 billion business, where else out there is there a business that.
You step back and look at what the demand will be in cannabis both in recreational medical.
And beverages, edibles et cetera, and what of free of has today. It has tremendous brands. It is of tremendous grow facility has tremendous innovation has tremendous regulatory.
And has a strong balance sheet and with the combination of til rate it will even strengthen the more so again I cannot.
Recommend enough that get out there and please vote both for your shareholders until ratio of holders for this year deal that.
Of that we can get this closed and move forward and again I come back from sort of say.
Consolidation will be something of that will happen in this industry and continuously happen.
Cannabis legalization happens.
Our free of Til Ray will be ready for it and we will be well positioned in regards to its products its brands 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.
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