Q3 2019 Aphria Inc Earnings Call

Apr 15, 2019 PM UTC 查看原文
APH.V - Aphria Inc
Q3 2019 Aphria Inc Earnings Call
Apr 15, 2019 / 01:00PM GMT 

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Corporate Participants
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   *  Carl A. Merton
      Aphria Inc. - CFO
   *  Irwin D. Simon
      Aphria Inc. - Interim CEO & Independent Chairman

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Conference Call Participants
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   *  Brett Michael Hundley
      Seaport Global Securities LLC, Research Division - Research Analyst 
   *  George Ulybyshev
      Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation
   *  Graeme Kreindler
      Eight Capital, Research Division - Research Analyst
   *  John Zamparo
      CIBC Capital Markets, Research Division - Associate
   *  Neal Gilmer
      Haywood Securities Inc., Research Division - Research Analyst of Special Situations
   *  Katie M. Turner
      ICR, LLC - MD

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Presentation
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Operator   [1]
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 Good morning, my name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Aphria Inc. Q3 Quarterly Investor's Call. (Operator Instructions) Thank you. I'd now like to turn the call over to Katie Turner for opening remarks.

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 Katie M. Turner,  ICR, LLC - MD   [2]
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 Thank you, Denise. Good morning, everyone. We appreciate you joining us to discuss Aphria's financial results for the fiscal 2019 third quarter and 9 months ended February 28, 2019.

 On today's call, we have Irwin Simon, Aphria's Chairman and Interim CEO; and Carl Merton, Chief Financial Officer. By now, everyone should have access to the earnings release, financial statements and MD&A, which are available on the Investors Section of Aphria's website at www.aphria.ca. These statements have also been filed on SEDAR and EDGAR.

 Before we begin, please remember that during the course of this call, management may make forward-looking statements. These statements are based on management's current expectations and beliefs and involve various 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 refer to the text [that appear] in the earnings press release and financial filings issued today for a discussion of the risks and uncertainties associated with such forward-looking statements. I'd now like to turn the call over to Irwin Simon.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [3]
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 Thank you, Katie. I'm excited to be speaking with you on my first earnings call as Aphria's Interim CEO. Since joining Aphria as Chairman in December, it has been a pleasure getting to know and work with everyone. To address our challenges, we have made significant changes. This was necessary to propel the company forward. I am very proud of more than 1,000 team members worldwide and their tremendous efforts to rally behind our mission to be the premier global cannabis company through unrelenting commitment to our people, the planet, product quality and our innovation. Thank you to all our employees, for coming together quickly to solve problems, embrace new ways of thinking, which was important for us. Together, you've helped create the culture we have today as we all strive towards our corporate objective of generating $1 billion in annualized revenue by the end of calendar year 2020. And with that, margin should substantially improve to fuel profitability and cash flows.

 It is exciting to have the opportunity to lead Aphria at this important stage of the company's rapid growth. And at a time of strong growth and development in the estimated $150 billion global medical and adult-use cannabis industry. I believe there are many similarities between the growth experience in the organic and natural product industry and the growth we believe that is achievable for Aphria in the cannabis world.

 Across our organization, we have taken decisive steps to help fuel our strategic initiatives in Canada and internationally and generate long-term shareholder value. We are very pleased to announce an update regarding the unsolicited offer from Green Growth Brands. Aphria has entered into a series of transactions that will accelerate expiration dates of their unsolicited offer and provide Aphria with an additional $89 million of liquidity without dilution to any of our shareholders.

 From a corporate governance perspective, we are pleased to have announced the appointment of 2 new independent directors: Walter Robb and David Hopkinson, effective today. I've known Walter for many years and had the opportunity to get to know David since joining Aphria. We're fortunate to have such accomplished and tenured leaders join our board. Walter brings tremendous public company experience, having been co-CEO and a Director of Whole Foods for over 30 years. Walter has taken Whole Foods with his team from 12 stores to 475 stores. Walter has significant knowledge of the specialty retail and CPD industry, and this expertise in pioneered disruptive growth industries will be invaluable to Aphria as we embark on our next stage of growth. David, like me, a fellow Canadian, he is Real Madrid's Global Head of Partnerships. David has over 25 years of marketing and international experience, which we believe will help Aphria as we navigate our strategic growth priorities in new and existing markets.

 Going forward, we will continuously evaluate our team and Board of Directors to add best-in-class talent to our organization.

 At Aphria, we remain committed to strong corporate governance and promoting a culture of integrity and ethical behavior throughout the organization. I'd like to thank the Special Committee's diligence and independence in undertaking its review of our LATAM assets. The work of the Special Committee has affirmed for me and the Board that the LATAM transaction was executed at an acceptable value and is consistent with the company's international growth strategy.

 The team at Aphria is energized and excited. We are embarking on a renewed path forward. With the help of a leading consulting firm, we are intently working on a 90-day strategic plan to prioritize our long-term strategic objectives. We will define a set of strategic platforms and translate our objectives into an execution road map. We believe the opportunities for long-term value creations are very strong in both Canada and internationally.

 I will now review our progress in key geographic regions before turning the call over to Carl to review our financials. Today, Aphria has presence in more than 10 countries across 5 continents, with 5 high-quality brands, including our Solei brand, dedicated to novice and first-time users; RIFF, our brand dedicated to community and culture; Good Supply, our brand offering Canada's enthusiasts a great value; Broken Coast, our super-premium British Columbia-grown craft brand, with quality that we believe remains unmatched in this industry, including products for both medical and adult use; and of course, Aphria, our medical consumer brand. These brands were developed to address distinct segments of the Canadian cannabis market.

 We put consumers' need at the forefront of our strategy. As regulations change, we will proactively evolve our portfolio brands and our products. From a production standpoint, we are really excited to have recently reached a major corporate milestone with Aphria One, receiving Health Canada expansion approvals for Part IV and Part V. This brings the current annualized production capacity for the total company to 115,000 kilograms. We look forward to addressing the industry-wide supply constraints with our expanded production capacity and sophisticated proprietary automation technology that can help ensure Aphria remains at the forefront of the cannabis cultivation and innovation worlds.

 I was just at Aphria Diamond last week, and the facility is truly a state-of-the-art for the industry, and we believe we will increasingly set us apart from the competition. The license application continues to progress at Health Canada, where staff are working diligently to bring more cultivation online. We believe our Canadian business will be a significant contributor to our results over the next several years, with the potential for us to create one of the largest production footprints in the cannabis industry.

 In Europe and Lesotho, we continue construction on the EU GMP oil processing facilities. We recently launched CannRelief, a CBD-based nutraceutical and cosmetic product line for the German market. These products are being produced in the EU and distributed by our subsidiary CC Pharma, which has access to more than 13,000 pharmacies throughout Germany. This provides a natural extension to Aphria's growing business opportunities in the German medical cannabis market. We look forward to providing a full range of CannRelief's CBD products this year.

 Importantly, Aphria has just recently been awarded a provisional approval in Germany for a medical cannabis cultivation license. We believe this is a validation of our strategic approach to supporting the German medical cannabis market, with high-quality, domestic state-of-the-art indoor production to secure vital supply for the patients.

 Since Germany's Cannabis as a Medicine Act was enacted in March of 2017, the country's growing medical cannabis needs, currently estimated at 40,000 patients, has been exclusively supplied by imports. We look forward to seeking to supply German patients with domestically grown, high-quality medical cannabis.

 In Latin America, we generated approximately $2.7 million in sales since our LATAM acquisition. We also continue the build out of herb houses in Jamaica and are awaiting final approval of our conditional licenses.

 Aphria continues to execute on its medical and adult-use cannabis growth initiatives internationally. We believe we have great momentum in Latin America, Germany and across international markets as we continue to strengthen our global footprint. At Aphria, we will continue to drive sustainable long-term shareholder value by leveraging our strong brand positioning, superior distribution model, product innovation, industrial-scale cultivation and automation, medical-use leadership and last but not least, our strategic global platform.

 I would now like to turn the call over to Carl.

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 Carl A. Merton,  Aphria Inc. - CFO   [4]
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 Thank you, Irwin, and good morning. Please note, all financial references are in Canadian dollars unless I mention otherwise.

 Before I get into the financial results, I would like to remind everyone it is still early in terms of legalization in Canada, and as with every industry in its early stages, we are continuously learning and improving, including refining our methods for cultivation, production, packaging and distribution. Aphria has a history with multigenerational expertise in commercial agricultural -- agriculture, and we believe the challenges we faced in the quarter, strictly supply shortages, were based on proactive decisions we made, and they are temporary in nature, with our expectations that our fourth quarter cannabis sales will be similar to the third quarter as we continue to position our business for long-term growth and success. With the changes to our growing method now stabilized, we are positioned to implement our new cannabis-leading, industrial-scale automation, a necessity to remain at the leading-edge of cost of supply. We believe the steps we have taken will help fuel the growth of our strategic initiatives in Canada and internationally and generate long-term shareholder value. As Irwin mentioned, our annualized production capacity today between Aphria One, including Part IV and V and Broken Coast, is 115,000 kilograms. Applying our current average selling price in adult use, this level of production results in $0.5 billion in sales annually once we are in full crop rotation. Once fully licensed, Aphria Diamond is expected to increase this annualized capacity to 255,000 kilograms. Using the same logic, this level of production could result in more than $1 billion in Canadian cannabis sales, once we are in full crop rotation. But that isn't enough. In addition, we are continuing to expand our processing capabilities with our new Extraction Centre of Excellence, which is still under construction.

 As we gain production scale and invest in automation, we expect to realize greater efficiencies and further support our growth opportunities in Canada and initially. At Aphria, we have the greenhouse space, the cultivation expertise, the automation technology and the raw materials to position us for success.

 Moving to our financial results. Net revenue in Q3 increased 617% over the prior year period to $73.6 million. Compared to Q2, net revenue increased 240%, driven by $57.6 million of distribution revenue from CC Pharma and ABP in Argentina. The company sold 2,637 kilogram equivalents of cannabis in Q3, down 23% compared to 3,409 kilogram equivalents sold in Q2. Adult-use cannabis accounted for 1,329 kilogram equivalents, and medical cannabis accounted for 1,274 kilogram equivalents. The decrease in cannabis revenue and kilograms sold compared to Q2 was primarily related to: lower inventory levels entering the quarter; supply shortages as we transitioned growing methods and allocated more space to mother plants in order to prepare for the Aphria One and Aphria Diamond expansions; as well as temporary packaging and distribution challenges. We made the strategic decision to transition our growing method in order to remain competitive.

 We are focused on maintaining industry-leading cost of supply. In order to achieve this, the cost savings associated with scale and industrial automation will be an important component. The average selling price of adult-use cannabis before excise tax decreased to $5.14 per gram in Q3 compared to $6.32 per gram in Q2 due to a shift to smaller package sizes to maximize our SKU assortment and maximize shelf space for our brands. The average selling price of medical cannabis before excise tax increased to $8.03 per gram in Q3 compared to $7.51 in Q2, primarily related to higher oil sales.

 During the quarter, our cash cost per gram increased from $1.34 last quarter to $1.48. Included in this figure is $0.20 a gram related to the strategic decision to allocate flowering space to mothers to facilitate the ramp-up of our Part IV, Part V and Aphria Diamond expansions. Our all-in cost per gram increased from $2.60 a gram to $3.76 a gram. This temporary increase was driven primarily by an increase in packaging costs, from $0.97 a gram to $1.98 a gram in the quarter. Our increased packaging costs per gram were a result of the demand from the adult-use market and in order to comply with the packaging requirements under the Cannabis Act.

 Since the launch of adult-use cannabis, we have reevaluated all of the total packaging used in our products, the materials used themselves and the source of the materials. We need the multiple levels of cost improvement. We are also working on packaging automation over the next 2 quarters and expect labor costs to decrease as that comes online.

 Near term, we expect consistent packaging costs as we work through our existing inventory of materials but expect to gain efficiencies from this automation and other cost savings initiatives in the midterm.

 Adjusted gross profit increased to $13.4 million in Q3 from $10.1 million in Q2. Adjusted gross margin was 18.2% in Q3 compared to 46.9% in Q2, reflecting an increase in revenues from our distribution business, which operates with lower gross margins than our cannabis business, typically in the 10% to 15% range. The margin decline was also due to the previously mentioned increased packaging costs as we build scale and automation and wait for Part IV and Part V to begin producing a plant. SG&A costs in Q3 increased to $106 million, up from $27.5 million in the prior quarter. The increase was primarily due to a $50 million impairment for the LATAM acquisition and increase in noncash share-based compensation and the inclusion of a full quarter of LATAM and 2 months of CC Pharma.

 As disclosed in our earnings release today, the basis for this impairment arises from our reassessment of the discount rate and the financial forecasts for those entities as a result of new financial information received from the financial advisors to the Special Committee, who reviewed the LATAM transaction. Please note, despite the recording of the impairment of $50 million, our investment in the LATAM assets remains $30 million more than the originally agreed purchase point of approximately $195 million, a purchase price that was both supported and confirmed as consistent with other transactions in the cannabis industry during our Special Committee review of LATAM.

 Net loss in the third quarter was $108.2 million or $0.43 per share compared to net income of $54.8 million or 22% -- $0.22 per share in Q2. Excluding the noncash impairment charges, adjusted net loss was $50.2 million or $0.20 per share in the third quarter. The adjusted EBITDA loss for the period was $14.4 million based on an adjusted EBITDA loss from Canadian cannabis operations of $13.8 million and adjusted EBITDA loss from Aphria International of $0.6 million.

 In the previous quarter, the company reported adjusted EBITDA loss of $9.5 million based on an adjusted EBITDA loss from Canadian cannabis operations of $6.1 million and an adjusted EBITDA loss from Aphria International of $3.4 million.

 The increase in the adjusted EBITDA loss was primarily attributable to an increase in general and administrative costs to support our planned capacity expansions, higher overhead costs related to supply shortages as well as a temporary increase in packaging and distribution costs for the adult-use market.

 The decrease in adjusted EBITDA loss for Aphria International is primarily attributable to the inclusion of CC Pharma's operating results in the quarter of $3 million of positive adjusted EBITDA. We expect our fourth quarter results to be similar to those experienced in the third quarter.

 Moving to liquidity. As of February 28, 2019, the company had near cash of $134.7 million available for use. This amount, combined with the proceeds from the liquidation of the GA Opportunities Corp. notes and option agreement announced today, is sufficient to fund previously announced CapEx in strategic initiatives.

 During the quarter, the company invested $3.4 million on maintenance Capex and $25.6 million on growth Capex related to Aphria One's Part IV, Part V and Aphria Diamond expansions as well as the Extraction Centre of Excellence.

 In summary, we made significant progress on our strategic initiatives in the third quarter and are confident in our ability to create long-term shareholder value. Though we do not provide guidance to the market on a pro forma basis, when applying our average selling price to our production capacity, our corporate objectives are for: one, annualized revenue of $500 million by the end of the calendar year; and two, annualized revenue of $1 billion by the end of calendar year 2020, which could help strengthen our position as a leading, global cannabis company. That concludes our formal remarks. Irwin and I are now available for your questions. Denise, back to you.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Your first question comes from Neal Gilmer from Haywood Securities.

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 Neal Gilmer,  Haywood Securities Inc., Research Division - Research Analyst of Special Situations   [2]
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 A couple of questions. Maybe I'll start off with, maybe on the cannabis sort of 2.0 outlook and so forth. Could you provide an update on the construction for your Extraction Centre of Excellence? And sort of, what sort of are the things you've started putting in place to be prepared for the other product formulations that are expected to come to market later this year?

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 Carl A. Merton,  Aphria Inc. - CFO   [3]
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 So in our MD&A this morning, we announced that the construction will be finalized about 2 weeks later than we had originally anticipated. That's going to push final completion into the month of June. In terms of additional product formats, the facility has blowout rooms built in it, specifically designed so that we can introduce butane and ethanol extractions into the process. We believe very strongly that the cannabis market is going through a secular change. People, over the next few years, will not only think of buying cannabis as a product itself, but it's going to evolve to a situation where people are buying another product with cannabis as one of the ingredients in it. The Extraction Centre of Excellence sets us up perfectly for the time period when that occurs.

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 Neal Gilmer,  Haywood Securities Inc., Research Division - Research Analyst of Special Situations   [4]
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 Okay. Then maybe on the Part IV expansion. So when are you expecting first sales of harvest sort of that facility? Is that sort of going to be in the fiscal Q1 time frame? I know in your prepared remarks, you stated expecting sort of Q4 to be similar to Q3. Is that sort of then when you expect an increase in inventory and obviously, then sales?

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 Carl A. Merton,  Aphria Inc. - CFO   [5]
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 Yes. So there's a -- we received our license on March 1. There's an 8-week period while the first plants go through the flowering stage. And then a 4- to 6-week period while they clear QA, QC, going through drying, curing, all of those operations. We expect to see the first bud that's harvested from the new facility to really be available for sale about second or third week of June. So it will -- so all of that capacity increase will come in Q1.

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 Neal Gilmer,  Haywood Securities Inc., Research Division - Research Analyst of Special Situations   [6]
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 Okay. And then maybe my last question will be your comments again with respect to the packaging and distribution sort of bottlenecks. Do you feel that most of that has been addressed on your side at this point? Maybe any color you're having with any of the provinces? And then going into -- basically my point being -- here being, as you bring that product online in the third week of June, do you feel that you're well set up to basically satisfy the provincial demand?

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [7]
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 So number one, yes, we feel that we're in a good position to really get in front of it, and the demand is strong. I would say if we had product today, we could easily sell it. So we are able to supply what we can right now. As Carl said, by the end of June, we should -- Aphria IV and V, we should have plants in there, and we should absolutely, getting into September, have ample product to supply the provinces. And in regards to cost reduction, in automation, there is a significant plan in place of how to improve all those.

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 Carl A. Merton,  Aphria Inc. - CFO   [8]
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 Yes. We've already pulled significant costs out as we've changed the packaging, both the amount of packaging in the product but also the package containers themselves. It was a fun and challenging process being ready for legalization on October 17, and we made decisions that allowed us to expedite product to market, and now we're taking the steps that are necessary to rationalize the costs associated with it.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [9]
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 And you can just imagine us scaling from where we were in sales and how we're scaling up now. And with the difference in regards to the people that we have running Aphria III, IV, V today, Aphria Diamond and the processes we're going through to take a lot of the cost out of that business, and we feel really good about that.

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Operator   [10]
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 Your next question comes from Brett Hundley with Seaport Global.

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 Brett Michael Hundley,  Seaport Global Securities LLC, Research Division - Research Analyst    [11]
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 Just staying on that last theme for a minute. So if you consider your ongoing productive assets, right, excluding expansion, it sounds like the biggest bottleneck then is around kind of the testing, packaging side as compared to distribution. Am I hearing that right that basically, once you get through some of the bottlenecks related to packaging, you feel like you can more easily distribute that product into provinces?

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [12]
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 Absolutely right. I think the big thing is, if you look at it here, there's the grow, which today, we have a license to grow in IV and V and then, as you look at the front end in regards to packaging and production and automation there and of course, supply. And with that, we feel very, very good about -- that's why we feel good about our 2020 plans. And we got supply, we got automation, we got our packaging, we got our costing in place. The orders are there, and it's just pulling it all together now.

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 Brett Michael Hundley,  Seaport Global Securities LLC, Research Division - Research Analyst    [13]
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 Okay. And I just want to make sure that I'm clear on the packaging theme. So are you guys actually going to be taking some of future packaging requirements in-house? Are you negotiating better rates? Can you just talk a little bit about how that bottleneck eases for you going forward? I'm a little unclear on that still.

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 Carl A. Merton,  Aphria Inc. - CFO   [14]
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 So let's just give you a couple of examples. So when -- in the early days of legalization, if you looked at our packaging, there would be an interior package, there would be an exterior package associated. We're moving to simplify that process. Then you look at the individual packages themselves. Again, the process for approval from Health Canada came a lot closer to legalization date than I think a lot of people realized, particularly as it related to label approvals and things like that. And so the amount of time that was available to go out and to buy and source packaging effectively was limited. We made a decision to make sure we had as much product on the shelf that we could on legalization date. And so we didn't necessarily buy the best-sourced packaging. We're doing that now. We shifted to that probably in November or December. We still have some of that original inventory that we have to work through, and that'll see that cost come down over time. But more importantly is the introduction of automation to the process. In those early days of legalizations, we had employee parties with a number of people sort of helping out, trying to get those packages out the door. We start moving to automation and industrial-scale level just strips that labor out.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [15]
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 And this being a new industry today, looking for the adequate packaging that Health Canada would allow that would basically support what the product stood for and from a cost standpoint. Originally, it was just trying to get into business. Now, it's executed upon our strategy. And there is so much automation that we're looking to bring into our facilities, where the equipment was not there before so we had to go out and create and work with engineers of how to manufacture this equipment. Just think, there's nobody out there that has 2.4 million, or will have 2.4 million square feet of greenhouse that will grow cannabis in the way we're going to grow it. So first, taking that and then putting the automation behind it. And just in regards to our rolling facility, it was done by hand, where they were doing 4 a minute. That's going to an automation now where it will be thousands within minutes or 2. So it's just -- it's amazing what we've taken from a manual to an automation in packaging and products and supply and growth, and it's pretty exciting what ultimately the end result will be.

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 Brett Michael Hundley,  Seaport Global Securities LLC, Research Division - Research Analyst    [16]
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 That's really helpful. So essentially, going forward, your packaging assets are going to be much more closely aligned with the expansion that you're bringing on relative to previous.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [17]
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 And we're going to have to be, to be able to -- if you come back and think about it, what we plan on growing and our growth strategy, you're -- from a packaging and to keep up with that supply and that's where the automation has come into place, and that's where we've brought in outside help and third parties to help us with that, from a sourcing -- packaging and a sourcing of equipment to keep up with our growth strategy.

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 Brett Michael Hundley,  Seaport Global Securities LLC, Research Division - Research Analyst    [18]
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 Got you. Okay. That's really helpful. Just last one for me, and I'll get out. Irwin, your comment in your script about a 90-day strategic plan, is that a plan where you guys are -- when we hear strategic plans on our side of phone, we think evaluating all potential options to include strategic partners. Is it something like that? Or is this just a strategic plan where Aphria is looking, on a standalone basis, how it wants to craft its forward go-to-market strategy? Just some clarity there would be helpful.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [19]
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 Great. So again, the 90-day plan is on grow our products, how we produce it, how we sell it, how we market our IV or V brands in our international strategy. And listen, if there is other opportunities out there with strategic partners, we'll continuously look at that. But how we get to our $1 billion mark by the end of 2020 in the cannabis world in Canada, how we grow our international and first and foremost, what's the first 90-day plan here. So there is a 90-day plan that we will make sure we have in place, and that will be built around our people, our brands, our strategy, our execution and last but not least, our balance sheet and then, how we build upon that. And I got to tell you, the most exciting I am is I've been with Aphria now 3, 3.5 months, is the personnel that we've had there. So this is not me, this is what the existing people that at Aphria were doing before. And now it's pulling it all together to put it into a 90-day plan and then a plan going forth -- forward.

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Operator   [20]
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 Your next question comes from the line of Noel Atkinson with Clarus Securities.

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 George Ulybyshev,  Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation   [21]
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 This is George dialing for Noel. Two questions here. On Part IV expansion, we understand the labor market is pretty tight and limited right now. How is it going with hiring staff for Part IV?

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 Carl A. Merton,  Aphria Inc. - CFO   [22]
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 We're in great shape. We were a little more proactive this expansion than we were last expansion. But more importantly, there is so much more automation coming into the facility that as we ramp up, the number of new bodies that is necessary is substantially reduced.

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 George Ulybyshev,  Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation   [23]
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 Okay. Got it. And can you give us a sense of the CapEx required to complete projects in Canada and Germany at the moment?

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 Carl A. Merton,  Aphria Inc. - CFO   [24]
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 So in Germany, the build for that facility is EUR 25 million. And we've spent EUR 8 million of it so far. And in Canada, it's in the MD&A. I think it's -- there's another EUR 14 million in total.

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 George Ulybyshev,  Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation   [25]
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 EUR 14 million. Got it. And finally, last question is, what's the status of the EU GMP certification for you guys right now?

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 Carl A. Merton,  Aphria Inc. - CFO   [26]
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 So we continue to move forward with securing the EU certification. We're pursuing portions of that at both Avanti and at Aphria One so that we're ideally positioned to move product from both Canada to Europe, Canada across the world. We continue to move forward in Lesotho with that as well and in Malta.

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Operator   [27]
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 Your next question comes from Graeme Kreindler with Eight Capital.

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 Graeme Kreindler,  Eight Capital, Research Division - Research Analyst   [28]
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 I had a question regarding the sales price in the adult-use market. Talking about the new assortment and shelf-space decisions, just wanted to get a bit more context in terms of what the company is targeting and what changes were made specifically that affected the pricing there.

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 Carl A. Merton,  Aphria Inc. - CFO   [29]
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 Yes, so going into the quarter, we recognized that the change in our growing method had reduced our supply levels. And so in order to maintain shelf space and in order to maintain a number of products on the shelf space that we had, we decided to package in smaller sizes. And so our packaging began to concentrate on more of the 1 gram and the 3.5 gram sizes, single prerolls as opposed to the bulk packs. Once the improved harvest start to roll through the facility and we're able to offer those to the control boards, we'll move back into those larger-size formats.

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 Graeme Kreindler,  Eight Capital, Research Division - Research Analyst   [30]
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 Okay. Understood. Then the other question I had is with respect to the news this morning and the -- for the GGB bid and the company getting, I think it's $89 million in capital there. Can you just walk through the mechanics of how that came to pass? How you guys end up getting the cash there?

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 Carl A. Merton,  Aphria Inc. - CFO   [31]
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 It was a long process. We negotiated extensively with Green Growth to try to find a way to exit a bid that appeared on its face to not be supportable at any level, given where the changing share prices went. We had -- they had some investments in us, we had optionality through GA Opportunities Corp. to access some of their shares and we both recognized that in order to find final resolution on the bid, we both needed to exit those positions. And so that was -- that became a major focus of the negotiations.

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 Graeme Kreindler,  Eight Capital, Research Division - Research Analyst   [32]
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 Okay. And then the last question here. Just looking at the notice of variation filing that crossed this morning, looks like you guys have good faith negotiations right now to come up with some sort of commercial arrangement. So just on the back of that, just curious as to what the company's thoughts are on the U.S. CBD market. A number of your peers have announced some initiatives there. Just what the thoughts are on the market? And could the commercial arrangement with GGB be a part of that in the near future?

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [33]
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 So number one, it could be. I think we need to let the bid expire and move away from GGB. But I think the U.S. market is a big opportunity for us, and knowing the U.S. market from my prior experience, there is lots of opportunities. And I think looking for the right opportunity, whether it's with strategic partners, where is there other opportunities, it's something that's a focus of Aphria today. Again, Canada is a big focus for us as it's a big, big market. It's legal there. And we have great facilities. International, we have some great international markets that we can really grow our business. There is some -- from the size standpoint and medical cannabis in those markets. And then there is the U.S. And the U.S. market is changing dramatically, and I want to make sure we get it right, if it's hemp, if it's CBD, if it's the right partnership. And as part of our strategic plan, we're reviewing what our options are in the U.S. market.

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Operator   [34]
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 (Operator Instructions) Your next question comes from John Zamparo with CIBC.

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 John Zamparo,  CIBC Capital Markets, Research Division - Associate   [35]
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 I just wanted to follow up on the previous question as it relates to go-to-market strategy. When you say you're maximizing your SKU assortment, does this mean you're looking to build breadth over depth? Or was that just part of the temporary change for the quarter as it relates to your growing restrictions?

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 Carl A. Merton,  Aphria Inc. - CFO   [36]
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 It was temporary in -- for the quarter.

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 John Zamparo,  CIBC Capital Markets, Research Division - Associate   [37]
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 Okay. Understood. And overall, what can you tell us about the lessons you're learning as it relates to consumer preferences so far? And what would you say is your top priority for derivative products later this year?

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 Carl A. Merton,  Aphria Inc. - CFO   [38]
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 So I think...

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [39]
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 Listen, I think what we're learning is as we've introduce our brands today, consumers are looking for brands that they can trust, brands that they can rely on, brands that have quality behind it. And whether it's Solei or Broken Coast, they already have created a lot of brand equity. Our consumers are looking for a variety of different products, want to try new and innovative products. And as vape and edibles come into the market, we see big opportunities and as we've done our focus groups and research, consumers will be excited about those products. So brands are important. Quality of products are important. And last but not least, price is going to be important, too, and that's something we're seeing. Listen, the biggest thing out there today is everybody wants supply, supply, supply. And that's what they want to make sure that they're in stock, they got supply, and we can build upon our brands.

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 John Zamparo,  CIBC Capital Markets, Research Division - Associate   [40]
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 Okay. That's helpful. Maybe if we can move to SG&A. Is this quarter a good metric to interpret for a reasonable run rate backing out stock comp and the impairment obviously?

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 Carl A. Merton,  Aphria Inc. - CFO   [41]
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 So this quarter and next quarter will look fairly similar, but you're going to see substantial changes going forward.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [42]
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 And with our sales increasing and automation, that's going to absolutely change what our SG&A numbers look like. And as Carl said, this quarter and next quarter, there are similarities. But as we move forth into our second quarter of next year, we expect that to change dramatically.

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 John Zamparo,  CIBC Capital Markets, Research Division - Associate   [43]
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 Okay. And just a couple of quick ones. You mentioned in the press release that the OSC had requested review of the LATAM acquisition. I know that was part of the mandate of the Special Committee. I just want to confirm, are there any other assets that are currently under review either as a request from the OSC or the Special Committee?

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [44]
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 No.

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 Carl A. Merton,  Aphria Inc. - CFO   [45]
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 No. We do our annual impairment test in Q4 though.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [46]
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 But there's none right now, no. There's none under review.

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 John Zamparo,  CIBC Capital Markets, Research Division - Associate   [47]
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 Okay. Understood. And lastly, do you have an idea at the moment of when you might have a permanent CEO in place?

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [48]
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 Not yet, and I think with myself and the team, we're moving in the right direction, and at the time that we'll start a search that will be the time we'll come back and announce about it.

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Operator   [49]
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 There are no further questions queued up at this time. I'll turn the call back over to management for closing remarks.

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 Irwin D. Simon,  Aphria Inc. - Interim CEO & Independent Chairman   [50]
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 So thank you everybody for listening to today's call. I got to tell you, being my first call, a lot of exciting news, and most important is the excitement about the future that will come in regards to our people, our brands, our supply and our strategy, and there's the 90-day strategy, which we'll execute upon. But there is our strategy as we move forward. There's not too many industries that are evolving and changing as quick as this one. If you come back and look at the size, $150 billion in size. So there's a lot of low-hanging fruit and sales and opportunities for Aphria. We've built out the infrastructure to grow products, to package products. We've built out the infrastructure from a sales group to sell products, and we've built out the infrastructure from a marketing and innovation to be able to develop products and market our products. And with that, our international opportunities are tremendous with the infrastructure that we've built out. We'll pull all that together, and we will create one of the greatest cannabis companies that is in the world today. So thank you very much for your time and look forward to speaking to you on our next earning calls or any follow-up question. Have a good day.

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Operator   [51]
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 This concludes today's conference call. Thank you for your participation, you may now disconnect.




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