Q3 2021 Aphria Inc Earnings Call

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 Erwin.

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 till right. We are very excited to further Advance bought a Prius long-term Vision to be a leading Global cannabis lifestyle and consumer packaged goods company across our Global operation. See aphria Team. I actively Implement significant cost-savings initiative in the quarter to preserve profitability and maintain growth against the changing consumer demands demands off 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 birth.

Lord their inventory levels in view of the limitation imposed on the operation of Cannabis stores which were 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 RCC Pharma distribution business due to insufficient a supply of medical products from other European Union countries, as well as pharmacies experience lower turnover and being closed while we factored in some impact our business from the pandemic and in Q3 the duration and the magnitude of the lockdown was greater than we initially anticipated are responsive 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

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 June. We achieve adjusted ebitda up twelve point seven million in line with you too despite net revenue of 153.6 million down 4% off from Q2. This demonstrates the strength and resiliency of our team as well the importance of having a diversified business from medical to adult used can walk in Canada along with our distribution of our Medical Products internationally to a robust beverage alcohol business in the US. We've created a solid foundation for your top-line growth as a dynamic environment. We are operating in improves and it will improve we also have several incremental growth opportunities as we look to Parlay our birth.

Consumer products into additional complimentary product offerings in Canada the US and internationally the key strategic focus of our team is consistent with 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 approved our free cash flow by twelve point four million dollars during the third quarter predominately as a result of reduced Capital expenditures and maintaining the cash provided by operating activities. We continue to manage our working capital and believe our top-line increases as the market dynamics 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 a differentiator in the Cannabis industry helping us to support our long-term Financial flexibility are transformational Journey began well over a year ago when we started is very different than we are we are today and where we'll 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 and net sales profit. Yep.

And most importantly our Cost Containment our market-leading adult used 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 head set data covers a large portion or approximately 63% of the total retail Market in Canada focusing on data a little more in a little more detail from a market share perspective a free month 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.

live in British Columbia

Vape cartridge maintain the number one market share with an 18.8% market share Our Brands held the number to drive flower with a 12% market share number to pre-rolls share with a 12% market share and number two oil share with a 30% market share in Canada. What Great accomplishments we're also seeing great Improvement came back rising to the number to 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 off expanded extended its premium cannabis offerings with the introduction of newly-developed strain pipe dream. We introduced a sole 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 who are 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 Multnomah Poland as well in Asia and Latin America, we're leveraging our strength with our medical platform and our multi-faceted International operation. 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 more than six hundred million people across you representing a tremendous opportunity for long-term growth both in medical and recreational when legalization happy birthday.

We expect to continue to see growth in our distribution medical cannabis and CBD offerings across the region importantly. We're also recognizing herself to quickly benefit from changes in you legalization and other other countries that are allowing medical cannabis as many, you know for thirty years myself and a lot of my team members have led a cpg company along with other key members under our leadership. We let the CBG coming to you to over 3 and 1/2 billion dollar business on a global basis. We believe we have a proven track record to build consumer Brands within aphria that will help with government that we understand government relations local preference just to grow our international business and our local businesses. In addition We Believe are key learnings from operating in Canada will help us with the EU and the US market wants to legalize a dog.

happens at aphria

We Foster a strong ability to innovate across cannabis forms with brands that resonate from a premium offer. We expect a success to be a key differentiator thousand assets for future International and Canadian growth. We're excited about the long-term potential to grow internationally in our in our core Canadian business as a company. That's a purpose-driven a 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 are 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 14.8 million in net revenue off and five million dollars in adjusted ebitda for the quarter and that's still with most of the bars closed.

Post Q3 the month of March were pleased to report Sweetwater experience a large Rebound with on-premise sales up approximately 35% compared to life prior year when they went into a national lockdown Sweetwater recently launched hazy an IPA a year-round brew and is already the number one new craft brew pub in the Southeast number six Nationwide according to data hazy IPA growth is being fueled by Millennials and important demographic in our business. The traction growth in the new offering is just a few months in which we speak to and which we speak and we in regards to the strength of Sweet Waters 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 the average a free is cannabis brands in the US through Thursday.

Beverage offerings this will provide valuable brand awareness brand-building opportunities with consumers ahead of potential Federal cannabis legalization. Sweetwater has 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, but in an expansion opportunities all across the u.s.

During the quarter. We also launched Sweetwater beverages including the 420 strain Statewide and in Colorado the first US state to legalize adult life cannabis. This is a great place for us to potentially start offering a free cannabis branded beverages in the future to start to build out our brand awareness and cannabis lifestyle consumers.

Our team at a free understands the importance of brand equity in selling good quality Safe products in the US more and more states are legalizing both medical and adult used cannabis with rep developers being in New York and New Jersey in the last four months five states have legal legalized adult used marijuana, meaning out 30% of the country allows its adult residents to possess and use cannabis as of April 7th fifteen States in Washington DC have legalized adult use and 36 states have legalized 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 with the national trend is indicative on a shift of American 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 existing aphria business. And we believed 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 combination in the u.s. In both consumer products and CBD products that can parlay into future THC in cannabis products will help us widen. The gap between us our peers position us well ahead of the competition.

I urge aphria shareholders until Ray stockholders to vote for the business combination on a combined basis. I mentioned many times before their many benefits of both of these companies came 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 took the us we plan to leverage our strong sales and distribution Network. This includes leveraging Sweet Waters existing relationships with the addition of tilray CBD Wellness. Bran, Manitoba a Pioneer in their industry. We look to build upon our existing distribution partnership in the 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 off 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 Headstart gain 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 fed legalization happens in summary. We are pleased with our ability to contain our cost globally and Report positive ebitda for life in a difficult and I mean difficult operating environment, but that will pass to I am proud of all our employees and their contribution to further free is Vision especially during wage.

Fourth nineteen. I'd like to thank everyone 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 patience with Our industry-leading Brands and products with that. I'll now turn the call over to Carl will take you through our financial results for Q3 Carl.

Thank you, Aaron.

Today, I will reference our adjusted Financial results unless noted. Otherwise, please refer to our press release issued today for a Reconciliation of a reported Financial results under I took us to the non-gaap financial measures identified during our call. All amounts are expressed in Canadian dollars unless otherwise noted and except for program kilogram kilograms excellence and per share amounts as a room 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 Hyundai. Of the quarter portions of the biggest province in Canada Ontario were no lockdown virtually every day two of the other big box is in Canada, Alberta and British Columbia experienced significant lock down periods, Germany experienced lockdowns for most of the quarter and the south-west United States while not not lock down. So significantly Less on-premise business that it has in other periods since the pandemic began these lockdowns directly impacted the total revenue that our business is not capable of learning.

Despite these lockdowns. We believe our team did an incredible job during the quarter focus on our highest return priorities.

In the quarter once we realize the duration and magnitude of the the duration of magnitude or 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 these savings went along way to help us generate our eighth consecutive quarter of positive adjusted ebitda Thursday. We are very pleased with this result and expect a portion of these savings to continue in the future quarters while a majority of them will ramp back up as demand increases provinces are fully open a business our ability to achieve twelve point seven million dollars of adjusted ebitda this quarter demonstrates the agility of our team and operations despite our net revenue of 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 be locked down level shortly.

This coincided with on-premise business at Sweetwater increasing by 35% from March and the prior-year a very positive sign but his Canada continues to struggle with COVID-19 rates Ontario recently returned to a full lockdown for at least four weeks, Alberta and British Columbia continue to experience all time highs and infection rates and could return to break down and just last week Germany implemented a 14-day hard lockdown. I returned to lock Downs presents a very short-term headman on Revenue growth. But as we display 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 Sweet Waters operations, but also include and explain the increase SJ cost incurred in the quarter particularly, the first quarter of amortization on definite life intangibles acquired as part of the transaction.

12.7 million of adjusted ebitda in the quarter included adjusted ebitda from our cannabis business of 7.9 million adjusted ebitda of five million from Sweetwater and it's just adjusted ebitda of 1.3 million from our distribution business all offset by negative adjusted ebitda of 1.5 million from our business is underdeveloped.

Has it ever been discussed despite the demand pressures. We worked hard to maintain our brand strength in the quarter across both are adult use and medical markets our industry the the team continues to do a great job helping us to keep our cash cost below $1 per gram coming in at $0.90 this quarter despite lower wind time yields and not reporting all growing Chambers during the quarter like others in the industry. We are in interested in health Canada's response to the recent labeling issues uncovered in the adult viewers 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.

It's 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 used candidates industry wage globally and build our infrastructure in advance of federal legalization.

As we mentioned during our queue to call Early in Q3, we closed a 120 million dollar financing with BMO providing the $20 revolving credit facility wage has not been drawn on and it turned that facility of 100 million US dollars at closing. We we'd ruefully on the term debt facility.

From a free cash flow perspective are twelve point four million dollar Improvement was not enough to achieve our previously stated goal of being free cash flow positive in Q3 largely because of the revenue impacts associated with the COVID-19 lockdowns.

Across our Global team we continue to emphasize initiatives that prioritize a free as profitability not only for today, but well into the future.

In Q3 CC Farms 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 two doctor's offices hospitals pharmacies cannabis clinics bars restaurants off of his 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 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 a quarter to 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 Sweetwater net cannabis Revenue decreased 23.8% from the prior quarter to fifty one point seven million dollars as noted in today's press Thursday. We experience 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 five million dollars.

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 that cannabis Revenue off of 4.1 million dollars absent the product returns net cannabis. Revenue would have been fifty five point eight million dollars the average retail selling price of medical school before excise tax decrease 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 decrease to $3.82 per gram in the quarter compared to $4.29 per gram in the prior quarter of primarily related to Consumer Trends to large-format products and price compression in the market.

Price compression combined with standard labeling. We're a dominant discussion point in the industry during the last quarter in order to play during this period of price compression Alfie's that didn't strip production wage will experience large cash Byrnes 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 month.

The decrease in adjusted cannabis gross profit and adjusted cannabis gross margin was primarily due to lower wintertime yields and the impacts of the product returns as previously mentioned. The remaining balance is due to price compression in the quarter.

Two or three adjusted distribution gross profit was eleven point four million dollars 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 Farm in Germany are adjusted gross margin on beverage alcohol decreased from 60.55% 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 a hundred million dollars from 82.7 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 including the investigation charges on Defined Life intangible assets.

The remaining increase is from transaction costs associated with the acquisition of Sweetwater the proposed Arrangement other potential Acquisitions and one-time litigation costs long as there is there one 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 life. It is a response are turn. Our team took immediate action to implement several cost-saving initiatives including temporary four-day work weeks 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 operation.

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 are working capital Improvement efforts, including maintaining that the same levels for the last two quarters are investment in inventory and get a reduction in capital expenditures resulted in an improvement in free cash flow of twelve point four million in the quarter recording a few of free cash flow loss of only three point nine million dollars a month.

similar to Q2 we continue to work to lower our quarterly working capital requirements succeeding in the current quarter by reporting positive operating cash flow or cash provided by the operations of 1.2 million dollars 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 that.

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 off leading Brands and products.

Aphria is better positioned than ever before in Canada Europe and Latin America for continued growth and development all as Urban already highlighted in DTG. 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 tolerate business combination as a shareholder. I've voted for the resolution to approve the arrangement. We urge aphria 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 maintain tremendous confidence in our ability to create long-term sustainable value for many years to come.

This concludes our prepared remarks or when and I are now available for analysts questions.

back to you, Mariana

Thank you, as a reminder to ask a question. He will need to press star one on your telephone to withdraw your question, press the pound or haschke. Please stand by while we compiled the name.

Truss got a short.

Your first question comes from Owen Bennett with Jefferies your line is open.

Morning gents. Hope all well morning knowing.

And just the one question from there. I wanted to focus on the decline in average selling price and I bought use so and could you give some more specifics on your portfolio mix shift to Value off the key one key to and now key free and then link to this if you maybe talk about what you're doing to support your more premium offerings other opportunities to drive upside their particular life around broken Coast. Obviously, that's it up to very strong Brandon. It'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 cuz I'm what I'm seeing when it sounds when were talking about lock Downs, you know in originally when Canada close from Cannabis stores were deemed essential service. So the stores were open.

During the next Evolution the Canadian government and the interior government close.

Storz 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 30% So the stores were closed and that's the difference and I know we've been getting some questions in regards to what 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 coax. It continues to be our premium brand and and you know month or would I have talked to a lot of the control board's? Nobody wants to see price compression. I think some of the price compression was moving inventory trying to get consumers to come to talk to the stores or order online. And that's the way you know that ultimately what was happening from a marketing standpoint. I think once we get back to normal, we will see dead.

Innovation out there in regards to you know different potencies of products. I think you'll see Innovation and in in regards to different Vape different pre-rolls and divorced. So I I come back and say price compression, you know is because of what's happening out there to try and get consumers to come in shop but on the other hand, I see great things happening with broken coast and we have every bit of intention of how to maintain that premium product for all you want to just go ahead and talk about so I'm just just to add to that. I'll start with broken Coast. Oh and I think there's some there's some very interesting things that have been going on there in the last quarter in terms of potency wage increases and the new products Irwin talked in his script about pipe dreams that that strain has been doing very well and you know broken Coast really started a concerted effort wage.

Probably six seven months ago to make improvements on their potency and and we've been seeing that over the last three or four months in consumers should be seen that over the last two months as those projects are hitting shelves. And so we think that's those are great improvements to to Really drive that brand equity in terms of your question about shift in mix. I would say, you know again further down so her wings, and they the price decrease in the quarter on a program racist and 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 and Vapes driven more because of, you know, the unique circumstances of the lock down, but we didn't see a we did a direct shift into into more value in 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. Nice. Good morning. Good morning regarding our 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 got additional distribution may be declining off-premise and off I guess even with the season Lelo 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 attempt at profit expectations from Canada or do you step up marketing investment to really build Brands and capabilities? Thanks good question. And I think number one what was seeing and what we've said before you see what's happening with hazing and the demand for Hazy. We also introduced.

About cassettes are called Oasis.

And uh, it's actually become one of the number one vodka Seltzer's out there will be introducing some of the Riff products under the rift broken Coast. So again, we're looking to expand, you know, our beverage business. We're now going to be sold in over thirty States and will continue to expand that so, you know and with on-premise opening up the way it is dead. I see lots of potential we're also working on lots of CBD type of products and other products within our our beverage business. So there is a lot of upside on the profitability of our, you know beverage business. We're also working with Sweetwater in regards to the Canadian Market with THC and CBD products and getting distribution in that market.

Got it. Thanks. I will pass it on. Thank you.

Your next question comes from Tammy Chen with BMO Capital markets your line is open.

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

Hi Tammy, good morning. Number one. It is also its International where it makes sense. They're no different than we did, you know off with their CC Farm CT Pharma and no different than we did with Sweetwater in the that ultimately can parlay into legalization legal, you know, parlay into THC products once we can so that's that's the plan there. Listen. We think we can build, you know, continuously build out, you know off hi market share in the Canadian Market with legalization already there and Rec. I think there's going to be lots of changes in regards to the way we Market our product. I think there's still opportunities to drive some of our marriage I think 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. We want in the US wage.

Look to do more consumer products that will parlay into you know, cannabis type products or THC products and was legalization does happen.

Got it. Thank you and and part of that will be utilizing, you know, our Fria Brands like rip, like so late good Supply like we're doing with those in regards to the beverage biswas, Sweetwater.

Understood. Thank you.

Thank you.

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

Good morning. And thanks for the question. Someone asked about Canada and the market share. So, you know, we're kind of impacted right now, you know, cuz some of the Cove it you know restrictions but as long as we look forward to Simply at Ontario, you know, how do you think about you know, kind of returning to kind of market share gains or kind of within the problem is especially the context of more stores opening maybe 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 kind of return to those market share gains and also through the lens of a pending sale reacquisition closing Banks.

Thank you. Listen, I think again and there's one day this pandemic is going to be over. Okay, and I think what we're seeing, you know demand for cannabis as more and more States 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 a thirty, you know percentage market share out there, you know recently I've had calls come with a different control boards. And again, it's a major source of income from them. They see the demands and there's a major focus with them in regards to you know, growing their products in Ontario alone. They expect to have by September close to 1,400 storz. And you know, they've been a little slow and opening up stores cuz of the pandemic just you know stores now are closed for the next four weeks and you only can order by curbside. They also are looking

And basically, you know new innovation products how we how we deliver products online. So there's a major major effort from each of the control bulb had a grow this business to a six billion dollar retail business and you know with a 30% share of retail of six billion dollars. That's a good size business to grow in the Canadian market and and I'll continuously say this year I think the medical Market, you know would when you know patients can get back to their doctors will see growth in in the medical Market, but at the same time I think patience with the ability to buy a lot of different Medical Products, you know in at retail the other big opportunity for us right now, we don't have a major present in drinks in Edibles and that's going to be a major opportunity for us to get you know, in two drinks and Edibles and expand our business, you know in that Marketplace. So I think you know the opportunities out there in the Canadian market and with us having the yep.

The to grow higher potency strains that aphria diamond aphria one. I mean we easily can compete in the higher potency Marketplace out there if that's what consumers are demanding.

My great. Thanks. I'll pass along. Thank you.

Next question comes from Pablo Sonic with Cantor Fitzgerald your line is open. Good morning. Good morning. Maybe maybe you know question for those shareholders Thursday on the fence regarding the boat. And I don't know if you want to comment maybe the percentage of people that aren't defensive very small, but the two-part question first, you know, discuss International markets, you know in real life by email like we've seen other transactions a number of companies talking about making it even Canadian ones midsize talking about making inroads in Europe. So taking a medium longer-term view just reminds me of how children aphria together are stronger in Europe and 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 that the numbers the sort of small mid-sized companies that seem to be doing. Well quite well actually developing Nietzsche's growing certain formats you so Seven Acres right become number one in premium dead.

So, you know, there's a question mark about the need for scale in the in the domestic Market when some mid-sized motor guys seem to be doing very well. Thank you.

So number one as I've said before Pablo, you know, I recommend if you haven't got out the vote your shares not please do so, you know so far we've had great turnouts in regards to that and you know supposed to 90% of the free of shareholders that I've got out there, you know 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 freest site and the tilray site. I think it just making sure investors get out there and vote as we're living in a world today. You have somewhat shareholders not get out to vote and I can't stress enough how important it is to get out there and vote. I I come back and say this here Pablo we started a trend when we announced his deal in December and you saw the deals and the consolidations that have happened, you know after that and I think with that, you know, as I said before having a

30% share and being that low cost producer now again being a small player. Yes, you know, they're doing quite well, but what's quite well on a scale and size. I mean, this is a 08 quarter of eBay profitability. We have 265,000, you know thousand kilograms of ability to grow at low cost. And with that I think again, if you're going to scale this up, you got to have grow you got to have products you got to have the ability to market the products and that's something that aphria has you've got to be able to put you know, it's 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. I ask how you innovate and ultimately the importance to is what we're seeing is consumers want higher potency products wants differentiation. And that's something that a free old be able to do a job.

the strong balance sheet, you know, 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, you know with our current facility in Germany with RCC Pharma. And with the addition of the great facility that tilray has in Portugal, you know, we're well ahead of the marketplace and to start from scratch there today is a 234 year, you know build out at a very very costly, you know capex to go ahead and do that. So with the combination of a free until Ray I'm still even wage, you know 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 I think you know, there's ultimately there will be a legalization in the US but I think there's going to be opportunities for Canadian LPS to do a lot in the US and what's that happened? So I go back to your first question. Hopefully everybody gets out there and votes. That's a shame.

Over today and hopefully, you know, we'll come back and show you all the benefits which I've said, you know multiple times a combination of a free until ray together. Thank you.

Thank you.

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

Thank you. Good morning.

Morning, John. I wanted to ask about free cash flow and and into Parts both on sg&a and the cost savings initiatives that 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 or do you view them as more sustainable? And then uh, the capex number in the corner is in the corner is that also offer my career sustainable number phone number moving forward? Thanks.

So John in terms of the the capex, we we do believe that's sustainable number going forward, you know likely has some room to come down a little bit in various periods, you know in terms of the incremental sg&a as we talked about in the in the in the conference call in the MDA a big chunk of that number is tied to share-based compensation which is which is being which was driven by the increasing our share price in the quarter a big chunk of that increase was was driven by introducing Sweetwater's sg&a into our income statement for you know, eighty nine days as opposed to five days in the previous quarter, you know and took a you know, 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'm referring specifically to the the cost-cutting efforts though. And it looks like it was mostly through through the free sg&a line in particular on Thursday encounter her salary. Just looking to either sorry John John. They it's not one time. It's not that we to cut them and then we're going back to normal. The these are costs that have been, you know dealt with and taken out of the taken out of our business and will continue on.

And you can see them in the G&A line John when you normalize out the the the the bringing in of Sweetwater.

Okay, understood. That's very helpful. Thank you. There's a paragraph running in the mdna.

Your next question comes from Matt bottomley with canaccord genuity. Your line is open. Good morning. I just wanted to go back to through your philosophy on market share and and some of the you know, whatever you're doing subsequently to close until Ray to get up to about 30% just curious on on how you think that's going to evolve in the Canadian space given we've seen some of your peers particular one. That's probably the next closest you want market share by a specific brand or by specific other LTE sort of tuck-in Acquisitions to get incremental market share. Is that something you think, you know, the combined entity will be looking to do as well. You mentioned beverages might need one part of the bed to get into or do you think there's not really a lot of terminal valued yet for a lot of these Brands given the fact that you know 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, they're actually green, you know food which healthiest bought and what the product offerings are. It's pretty it was a lot of uh, I think progression still there. So just curious on you think if m&a part of the strategy in order to build up that market share or do you think you can feel from the ground up, you know pro forma with the door acquisition based on what you guys already have in the fight good question. And I I think you said it when you walk into stores, you know, the brands mean anything I think what's going to be important is it's not so much Brands between, you know, tilray and a free it will have over 12 Brands out there. I think what's going to be important is quality in regards to, you know, the product itself the potency of the product somewhat on pricing of the product of 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 is this here.

Is you know having boots on the street when they get into stores to make sure they have a great representation of our products and with that, you know, I think we have enough out there and don't have to go out there and acquire any other brands. I think we got to continuously have a good pipeline of innovation. I think we got to continuously, you know expand drinks. I think we go back to sleep, you know expand edibles, but I think the big thing here is also is convincing Health Canada and the Canadian government some of the ways we got to market the right way to Consumers and from an education standpoint and you know, why certain brands and products matter

Okay, thank you. Thank you.

Your next question comes from Neal Gilmer with Haywood Securities your line is open.

Hello, Neil.

I'm not sure. He's there operator. Yeah, I think we just you just go to the next. Okay, your next question comes from Michael Lavery with your line is open Thursday morning. Thank you. Just curious if you could give an update on the current quarter and maybe what you're seeing from the consumer you mentioned there's still four more weeks to go off in Canada with store closures. Are you seeing consumers get used to that and and do more of the the online ordering and pick up even if that hadn't been their their typical Behavior. Do you think that when stores re-open? There's going to be pent-up demand or 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 them kind of what you're seeing in terms of how you know how they're reacting now and and what you expect might come towards, you know that when stores reopen

Michael excellent question and you know, it's something that you know, we talked 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 lock down. But again, you know you Toronto or Ontario Mills close down from a profit standpoint with nice whether people want to get out people want to get out and you know, enjoy some recreational Cannabis people, you know consumers will go back online and pick up at store, you know at curbside or we'll order online. So I think the good news is as we head into, you know, a warmer weather it would help business again now consumers are used to going to curb side and ordering online where this was all something new that just happened, you know in December.

For January because before stores were opening and then third, you know, you know, especially Ontario, but the rest of Canada more and more stores are continuously open so long will be available. I think we've as a company have learnt a lot through this here in regards to how to Market Our Brands what consumers want potency the different types of products and I think the control board's have learned a lot too and we're working with them on forecasting cuz we can't afford at a stocks. We can't afford to have the wrong products in their home. So, you know, I see us getting back to normal, you know, come this summer. And yes, the question is what a better time to get back to normal coming into the summer and there will be either be you know, tremendous piped up demand.

Great color thankful. Thanks so much.

Thank you. Thank you.

There are no further questions at this time. I will now turn the call back to mister Simon for closing remarks. Thank you very much everybody. And thank you, you know for getting on a call. I know it difficult times up there difficult quarter considering, you know, again close down the stores and they you know, as I step back and we talked to the control board's and we hear what their sales are down. We hear what they've done with their inventories, you know, it is actually no excuse but it you know, if the stores are closed doors 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 you know, taking out our month 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 U age

Where else is there a business out there that worldwide can be a hundred billion dollar business where else out there is our business that you step back and look at what the demand will be an abyss both in recreational medical, you know in in beverages in Edibles Etc. And what aphria has today? It has tremendous Brands. It has a tremendous job facility has tremendous innovation has tremendous Regulatory and has a strong balance sheet and with the combination of tilray, it will even strengthen it month. So again, I cannot, you know recommend enough to get out there and please vote both free or shareholders until Ray shareholders for this year deal that we can get this close and move forward. And again, I come back and sort of say, you know consolidation will be something that will happen in this industry and continuously happen and when legalizations say Thursday,

Medical cannabis legalization happens aphria. Tilray will be ready for it, and we'll be well positioned in regards to its products its Brands office in evasion 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.