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Edited Transcript of APH.V earnings conference call or presentation 15-Oct-19 1:00pm GMT

Q1 2020 Aphria Inc Earnings Call

LEAMINGTON Oct 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Aphria Inc earnings conference call or presentation Tuesday, October 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl A. Merton

Aphria Inc. - CFO

* Irwin D. Simon

Aphria Inc. - Interim CEO & Chairman

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Conference Call Participants

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* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* John Zamparo

CIBC Capital Markets, Research Division - Associate

* Justin Keywood

GMP Securities L.P., Research Division - Director of Equity Research

* Matt Bottomley

Canaccord Genuity Corp., Research Division - Analyst

* Owen Michael Bennett

Jefferies LLC, Research Division - Equity Analyst

* 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. Q1 Quarterly Investors Call. (Operator Instructions)

Katie Turner, you may begin your conference.

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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 Inc.'s financial results for the first quarter ended August 31, 2019. On today's call are Irwin Simon and Carl Merton. Jim Meiers will also be available for Q&A. By now, everyone should have access to the earnings release, financial statements, MD&A and investor presentation, which are available on the Investors section of Aphria's website at aphriainc.com. The financial statements have been filed with 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 in Aphria's earnings press release and financial filings issued today for a discussion on our risks and uncertainties associated with such forward-looking statements. And now I'd like to turn the call over to Irwin Simon.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [3]

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Thank you, Katy, and good morning, everyone. We appreciate you joining us today to discuss our first quarter financial results. Our team has accomplished a significant amount to start the year, both in Canada and internationally.

For the first quarter, our results were in line with our expectations, and we're on track to achieve our annual guidance. We believe our financial results truly sets us apart from our peers in the cannabis industry. Adult-use cannabis net revenue increased 8%, with a fourfold increase in consolidated adjusted EBITDA as compared to the fourth quarter. We ended the quarter with a strong balance sheet and a cash position including $464 million of cash and marketable securities. As they say, cash is king. Our cash position and balance sheet will continue to differentiate us in the cannabis industry. We remain focused on the highest return priorities for growth. Our first quarter results demonstrate our emphasis on sustainable, profitable growth. Since I joined Aphria, our focus has been on profitability, a strong cash position for growth and focusing on our assets that we believe will create the most value as we invest in them to grow, demonstrated by our performance, and these strategies are working. We have assembled a strong team with cannabis, consumer packaged goods, beverage and broader operational and supply chain experience that will fuel our growth this year and years to come, well into the future.

Most recently, Bernie Yeung joined us as Vice President of Sales. He is a dynamic executive with significant experience in the cannabis and the alcohol industry. He has already hit the ground running at Aphria with compelling insights and prospectus to help further our growth as we consistently enhance our competitive position in both the adult-use and the medical cannabis industry. In addition, [Denise Faltischek] has joined our team, bringing a tremendous depth of consumer packaged good experience, particularly in the natural organic industry. Over her career, she has led teams to complete over 50 acquisitions, while accelerating top line growth, profitability and generating value for her shareholders. She will work with me on our global strategic alliance, including future strategic partnerships in both the U.S. and international. She will also oversee our quality control and our assurance teams as well as the medical and international businesses. We're excited to have these 2 talented executives on board and look forward to their future contributions.

Our more than 1,200 team members worldwide are delivering on their key initiatives to fulfill our mission to be a premier global cannabis company, with our medical and adult-use cannabis brands. We continue to build upon our existing business fundamentals and capabilities, streamline processes through technology with our new ERP systems and greater automation in our facilities, all with an emphasis on consistent execution and to drive profitability and quality.

At Aphria, we strive to be better in all that we do, so we can further our industry-leading position. We have compelling brands for patients and consumers across broad demographics, and our team is always working to further brand development. We believe we can increasingly connect with consumers through our brands, positioning them to drive growth through innovation and return value to our shareholders.

As the cannabis industry continuously evolves globally, at Aphria, we are also evolving at rapid pace to ensure we stay ahead by leveraging our core capabilities. In Leamington, we enhanced our operations team to generate improved quality and higher yields at lower costs. We have a great video available on our website to illustrate the increased automation at our state-of-the-art facilities. At Aphria One, we are fully licensed and planted with nearly 600,000 plants. Our 100-acre Aphria Diamond premier greenhouse features 1.3 million square feet of production. The facility is fully constructed and ready to be operational. We have been working proactively with Health Canada to secure licensing for the facility. The team at Health Canada has gone above and beyond to work through Aphria Diamond's license process, particularly since the end of June. On Friday, we were advised by Health Canada that they're in the process of expediting the issuance of the license. We're excited about the tremendous growth opportunities we will have as a result of expanding our total annual domestic production capabilities in Canada to 255,000 kilograms.

We look forward to addressing industry-wide supply constraints with our expanded production capabilities. In addition, we remain confident we will obtain our EU GMP certification for bulk and finished product in the first half of this fiscal year, enabling us to export product to meet the growing demands of the European and South American markets. Today, Aphria has 5 high-quality brands, including Solei, RIFF, Good Supply, Broken Coast and our Aphria medical brand. Aphria's success will continue to be driven by our differentiation portfolio of brands and products, aimed at delightful distinct consumer segments. In fact, our adult-use brands continue to receive industry-wide recognition. Aphria brands continue to gain momentum in the Canadian marketplace. According to OCS data, we've reached a 12% market share. That is excellent. We were able to gain a significant amount of share during the quarter from our competitors, driven by brand awareness, nationwide distribution and the quality of our products. Now that Bernie has started, just think what else we're going to achieve.

Broken Coast, our industry-leading premium craft products continues to be among the only brand consumers consistently ask for by name in the industry. We believe over time our Broken Coast brand has the potential to be the #1 premium brand in Canada.

Solei continues to appeal to new consumers. It ranks #3 in the non-flower category and Solei's CBD oil, Solei Free, is consistently ranked as a top seller, according to the OCS. Good Supply entered the market later and despite a smaller SKU count has already shown great momentum for the enthusiastic heavy user looking for a great product at great, great value. We expect momentum to continue with these brands. We believe the quality of our brands remain unmatched in the industry.

We put patient and consumer needs at the forefront of our strategy. As regulations change, we will be proactive on our portfolio of brands and products. To this point, our entry into new product markets will be done in a strategic and thoughtful manner, where the best opportunities exist for differentiation. This includes vapes, as I previously mentioned, as well as edibles, teas, beverage and topicals. We believe the expected legalization of vapes and concentrates will create a significant opportunity in the Canadian market, providing more choice and new experiences, while opening the door to a range of new consumers and new products.

In Canada, we're excited to bring our premium cannabis extracts to disposables, 510s and the PAX Era device and platform.

I want to address some of the concerns surrounding vapes. The news coming from the U.S. is something we're continuously monitoring. Our #1 priority is always to protect the health and safety of our patients and consumers by ensuring we only sell high-quality cannabis products. It's our understanding that these illnesses are linked to products coming off the illicit markets, specifically cutting agents and other additives in the oils as well as faulty hardware versus the cannabis itself. This is why a continuous education and having a regulated market is so important. Patients and consumers need to be confident the products and the brands they are consuming comply with quality and safety regulations, and we will ensure that is happening. In addition to our quality assurance and our management process, we've taken appropriate precautions including only working with reputable suppliers, launch a platform mandate to provide education to Canadians about all forms of cannabis that are available now and in the future.

Health Canada has shown great leadership in establishing a regulated market that puts safety first, and we'll continue to work closely with regulators as regulations evolve. We will continue to collaborate with a growing roster of strategic innovation partners, such as PAX, Manna Molecular Science, Rapid Dose Therapeutics as we pursue new technologies and delivery systems that will change the way patients and consumers interact with cannabis in the future.

Internationally, we're very pleased with the process we have made since being granted the maximum number of lots within the German tender process. Aphria is the only licensed producer in Germany with permission to grow all 3 strains of medical cannabis approved by the German authority. In Colombia, we are in the final contract stages for a greenhouse facility that will have GMP cultivation and processing capabilities. This will soon enable us to play a leading role in the local market as well as the developed low-cost expert opportunities across the Latin America region. We are also committed to supporting and enabling the medical community through our exclusive partnership with Colombia Medical Federation, a highly respected organization with direct access to over 70,000 doctors and medical professionals. We plan to host our first event with speakers from the medical cannabis industry worldwide in November. With more than 650 million people in LATAM, we believe there's an incredible opportunity. In Buenos Aires, we're working with Hospital Garrahan in the region to collaborate on the clinical study focused on children with epilepsy. We are honored to work with them as we learn more together about how CBD-based products could become a large part of patients' health care regime.

In the U.S., we're focused on building strategic partnership and alliances for growth with an emphasis on the CBD market until medical cannabis is fully legalized. We believe Aphria can generate strong growth in the U.S. over time.

If we look to the future, we continue to believe Aphria will be a consumer packaged goods company, and with that comes plenty of options for us in the U.S. market, which we know greatly. Last but certainly not least, as we continue to deliver on our commitment to give back to both people and the planet, we launched Planet Positivity (sic) Plant Positivity. A new component of our corporate social responsibility strategy, Plant Positivity champions the incredible power that plants have in overall well-being and provide great access to green spaces for communities.

Aphria is increasingly well positioned with the right team, global infrastructure, strategic initiatives, production capabilities and capital to support our growth in fiscal 2020 and well into the future. We have great momentum in Latin America, including Colombia, Argentina, Paraguay and Jamaica as well as Germany and across our international markets as we continue to strengthen our global footprint. Together, the team at Aphria has entrepreneurial culture that is grounded into accountability. We're all working together towards our corporate objective of generating CAD 1 billion run rate by the end of calendar year 2020. And with that, margins will continue to improve to fuel profitability and cash flow. We believe the opportunities for long-term shareholder value creation are very strong, both in Canada, U.S. and internationally. I would like to thank our Board of Directors as some of them will not be seeking reelection at our next AGM. I'd also like to thank my leadership team and my direct reports for all their help getting us to where we are today and their continued dedication to moving this company forward.

With that, 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. As Irwin discussed, in the first quarter we continued to execute on our growth initiatives and prioritize profitability as we continue to position our business for long-term growth and success. We are pleased with our financial results, particularly our cannabis revenue growth, sequential positive adjusted EBITDA and our ability to maintain a strong balance sheet and cash position. As a result, we remain on track to achieve our fiscal 2020 guidance. This speaks to the strength of our team and the strategic initiatives we are working together to execute every day at Aphria. Focusing on our capacity, our Aphria One facility is fully licensed and planted. And as Irwin mentioned, we have been advised that Health Canada is in the process of expediting the issuance of Aphria Diamond's license, keeping us on track to achieve our annual production capacity.

Moving to our financial results. We are pleased with our first quarter results, particularly our continued increase in cannabis sales and our profitability improvement.

Net revenue in Q1 increased 849% over the prior year period to $126.1 million. Compared to Q4, cannabis revenue increased 30.8 -- sorry, increased to $30.8 million from $28.6 million. Distribution revenue was above our expectations for the quarter, but showed a slight decrease from $99.2 million to $95.3 million in the quarter. The slightly lower distribution revenue for Q1 from Q4 is associated with a conscious change we made in CC Pharma's business strategy to maximize profitability after recent changes in the German government's medical reimbursement model.

As a result, we are pleased to report CC Pharma has successfully navigated the change in that reimbursement model, increasing its gross margins and EBITDA in spite of the governmental changes. The entire CC Pharma team is working to further implement the change in strategy as well as preparing the business for the importation of EU GMP certified cannabis from Canada. Facility additions are well on their way, and they already have pharmacies reaching out for preorders. We look forward to supplying Germany's first domestically grown medical cannabis in late calendar 2020 from our new cultivation facility in Neumünster. The entire Aphria team in Germany is focused on positioning Aphria with the most comprehensive license in the country as a dominating force in the German cannabis market. In Canada, we experienced a small fire at our Broken Coast facility in British Columbia that impacted cannabis revenue during the quarter by approximately $1.5 million that will be made up in the balance of the year. Our team, led by Graeme Holfeld, did a tremendous job to act swiftly and quickly resume full operations in just a few short weeks. The amount of effort that went into reopening the facility was phenomenal. We continue to believe we have tremendous runway for growth with our Broken Coast brand of cannabis products.

The company sold 5,969 kilogram equivalents of cannabis in Q1, up 7% compared to 5,574 kilogram equivalents.

Adult-use cannabis accounted for 3,317 kilogram equivalents, and medical cannabis accounted for 1,354 kilogram equivalents. Adult use net revenue increased 8% from the fourth quarter of 2019 to $20 million, despite the fire at Broken Coast. The average selling price of adult-use cannabis, inclusive of excise tax increased to $6.02 per gram in Q1 compared to $5.73 per gram, due to a more profitable product mix. The average selling price of medical cannabis, inclusive of excise tax decreased to $7.56 per gram in Q1 compared to $7.66, primarily related to a higher percentage of total medical sales coming from Aphria.

During the quarter, our cash cost per gram increased from $1.35 last quarter to $1.43 as we continue to ramp production in our facilities. 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 Aphria Diamond expansion. We expect this temporary increase to continue until the Aphria Diamond expansion is fully planted.

Our all-in cost per gram increased from $235 a gram to $252 a gram, largely for the same reasons. Adjusted cannabis gross profit increased slightly to $15.3 million from $15.2 million. Adjusted cannabis gross margin was 49.8% in Q1 compared to 53%. The decrease was primarily due to lower sales of higher-margin items due to the Broken Coast fire and temporary higher cost per gram. Adjusted distribution gross profit decreased slightly to $12.2 million from $12.3 million in Q4. Adjusted distribution gross margin increased to 12.8% compared to 12.4% in Q4. SG&A costs in Q1 decreased approximately $20 million compared to the prior period. The decrease in SG&A was primarily due to the prior quarter, including $19.5 million in transaction costs, primarily associated with the issuance of the senior convertible debenture, a decrease of $3.9 million of general and administrative costs, all partially offset by an increase in share-based compensation and amortization.

Our first quarter was profitable for the second consecutive quarter, with net income of $16.4 million or $0.07 per share compared to net income of $15.8 million or $0.05 per share in Q4 and a net loss of $0.09 per share in Q1 last year. The consolidated adjusted EBITDA in the first quarter increased by $0.8 million to $1 million, based on adjusted EBITDA from cannabis operations of $1.3 million, adjusted EBITDA from distribution operations of $3.9 million, both partially offset by an adjusted EBITDA loss from businesses under development of $4.2 million. The increase in adjusted EBITDA is primarily attributable to cost containment strategies employed at our businesses under development and was our second consecutive quarter of positive adjusted EBITDA. Our team remains intently focused on future profit growth.

Moving to liquidity. We continue to have a solid cash position and strong balance sheet. As of August 31, 2019, the company had near cash of $464 million available for use and over $500 million of pro forma cash when including the receivable related to our settlement with GGB. This amount is more than sufficient to fund previously announced CapEx, working capital and strategic investments.

In the first quarter, the company used approximately $100 million of cash in the business. This amount was unusual and is not representative of future quarters. Cash outflows in the quarter included approximately $35 million for the final earnout related to our CC Pharma acquisition, an important part of our German strategy, $5 million of onetime payments on our long-term debt, $30 million of CapEx and a $15 million increase in working capital, supporting our increased production capacity. We anticipate a much lower CapEx in the second quarter, somewhere between $20 million and $25 million, depending upon the timing of delivery of equipment purchases. Further, we expect lower working capital requirements beginning in Q2. Going forward, we expect to generate solid cash flow. We believe this future cash flow, when combined with our existing cash position and strong balance sheet will support our growth initiatives in both Canada and internationally.

Turning to our outlook for fiscal 2020. We continue to expect to report net revenue of approximately $650 million to $700 million, with distribution revenue representing slightly more than half of the total net revenue. In addition, we expect to report adjusted EBITDA of approximately $88 million to $95 million. Applying our average selling price to our future production capacity, we continue to expect annualized revenue of $500 million in Canadian cannabis sales once all facilities are in full crop rotation; and two, annualized revenue of $1 billion in Canadian cannabis sales by the end of calendar year 2020, both of which strengthen our position as a leading global cannabis company.

In summary, at Apria, we have the greenhouse space, cultivation expertise, extraction capacity, automation technology, differentiated brands, product innovation and raw materials to position us for success. And as we gain scale, we will gain efficiencies in Canada. Those efficiencies will allow us to build out international distribution for our medical and adult-use cannabis. We are pleased with our financial results this quarter, and we continue to execute on our strategic priorities to be a stronger, more profitable company. Aphria has a long runway of growth ahead. We are confident in our ability to create long-term shareholder value.

That concludes our formal remarks. Irwin and I are now available for your questions. Operator, 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 the line of Owen Bennett with Jefferies.

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Owen Michael Bennett, Jefferies LLC, Research Division - Equity Analyst [2]

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Yes, just couple of questions from me. First of all, on the guidance. So capacity looks like coming online as expected with Health Canada expediting Diamond now. I was just wondering, what sort of industry growth do you need to see or are you planning on those assumptions to hit that $650 million, $700 million? And then maybe if you could give a bit of color in terms of how you see the mix between flower and new derivative products in that $650 million to $700 million? And then my follow-up is just any more color around the U.S., you briefly mentioned partnerships and alliances for growth, kind of is -- are we expected to hear something around the U.S. anytime soon?

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Carl A. Merton, Aphria Inc. - CFO [3]

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Okay. That's like the multipart question. So we'll -- let's deal with it in steps. In terms of the split between dried flower and the new derivative products, we've been on record multiple times. We think that dried flower remains a predominant share of the market going forward. But the vape category and the new derivative products start to take significant amount of market share fairly quickly. Our internal models are really based around 60% market share for dried cannabis, 20% to 30% for vapes, and the remainder being split between drinks, edibles and the other new product formats. In terms of growth within the industry itself and our ability to meet our guidance, we see a couple different things. One, we see our ability over the last few quarters to steal significant amounts of share in the space driven by the strength of our brands. We're consistently hearing from the individual store owners, more and more people coming and asking for our individual brands. And the sales capabilities we have today, are really be -- were really driven by the amount of supply we have and as supply frees up, we see being able to steal more space on the shelf and be able to steal more share. We do have some growth forecasted in our number for new store openings. We recently saw that Quebec has made an announcement. We see Ontario has got some new stores coming on. Obviously, the -- those new stores and their ultimate opening will impact that. But as of today, with the information we have, we believe those will help drive that number as well.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [4]

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And Owen, just on that, our brands have only been around less than a year. And the awareness that the team has built, and this is an industry that's tough to build brands because you're not allowed to advertise the brands. So it's getting the consumers to try and repeat sales. So I can back and say, just think if our brands are around for 5 years, consumers then start to know our brands, know the quality of our brands and why it's much better to be buying our brands at retail outlets than be buying products in the illicit market and that's the biggest opportunity. 25% of sales only comes today from recreational products that are sold in stores. The big opportunity for us is how we continuously take away sales from the illicit market. So and as Carl said, Canada expects to have over 3,000 stores within the next 3 to 5 years and with 1,000 here in Ontario. So just by additional store expansion, additional products and us with our brands out there, creating brand awareness and educating the consumer, the value of buying the brand in the store instead of the illicit market will drive our sales. Also there's a big focus here on medical. With Denise joining us and taking over our medical business, we think there's a lot of patients that we can add to our medical database there. So the opportunities there are tremendous.

In regards to our U.S., growth spending 25 years, building a consumer products company in the U.S. We are talking to multiple partners in regards to strategic opportunities and as that strategic opportunity is now with products that we would look at today that have the potential to be converted to CBD or THC or medical when ultimately it becomes legal. What I've seen is this year, there's a lot of partners that want to jump into it. And what I want to make sure is that partners want to join Aphria, or partner up with Aphria because they come back and they look at our facilities in Leamington, they look at what we're doing in regards to vapes, they looked at what we're doing in regards to drinks and edibles and all of that research has been done. So that's the kind of partners they want to do. So there's going to be a lot of opportunities for us. I think the wrong strategy was jumping in too soon because when you jumped in too soon, you don't know when legalization is going to happen. You don't know if it's just going to be medical, you don't know if it's rec. And they're still out there with the FDA and the USDA, trying to figure out in regards to CBD. So I want to make sure when we do it we got a plan, we know what products, we know what's legal and we know if it's all the U.S., certain states or if it's just medical. So absolutely, the opportunity is there, and we're working on it.

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Operator [5]

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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 [6]

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Congratulations on this quarter. Carl, thank you for giving the expectations on working capital and CapEx for Q2. If I can press you a little bit, can you give us a sense of how your cash burn might trend beyond that? So I guess at a high level we would expect cash burn to drop down in Q2 relative to Q1. At a high level, would you expect it to flatline for a couple quarters there? Or should we see continued drops thereafter?

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Carl A. Merton, Aphria Inc. - CFO [7]

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For the next few quarters I think the flat line plays out more. We still have investments to make in Germany and Colombia that are announced. And then once we go through those pieces that you'll start to see the CapEx component of that number come down. We don't anticipate any major changes on the financing side in terms of debt repayments, and we will have a little bit of a working capital increase as Diamond comes online, but the majority of the working capital increase for Aphria One has already been incurred.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [8]

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That's helpful. And then following on to Owen's question about guidance. I want to dig in on the other part of guidance, which is EBITDA, and really get a sense of how fit Aphria is going forward in coming quarters here. I know you guys are optimistic, some of us on the other end of the phone have become more pessimistic about the Canadian market up ahead. When you look at your EBITDA range of $88 million to $95 million for fiscal '20, can we talk to some of the stress tests that you might have put in place around this guidance, some of the broad themes or underlying assumptions within this range, so that some of us on the other end of the call can get comfortable of how you're modeling that range for fiscal '20, given all the moving parts that surround the industry right now?

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Carl A. Merton, Aphria Inc. - CFO [9]

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Yes. So I think the best way to answer that is a big chunk of those increases in EBITDA are being driven by the increased capacity coming online with Aphria Diamond and the cost expectations we have for growing product in that facility. If you look at all of our expansions and have visited our facility, you'll know that we -- the Aphria One facility is set up in 5 different parts. And as we've moved from part to part, we've refined and we've changed how we grow and we've changed how we set up. When we built Diamond we took the best that we had, and that's how we organized Diamond. And so you've got big -- sorry, you've got smaller expectations on costs and bigger amounts of gross margin flowing through that facility as a result. We are sitting at a cash cost of $1.35 in the quarter and -- sorry, $1.43 in the quarter, and we're expecting below $1 as we ramp into Diamond and get that fully operational. The scale that we get from our facilities drives out a number of costs at Aphria One. We're still in the process of ramping up that facility. Its capacity was at 55,000 -- sorry, its ramp was at 55,000 at the end of the quarter. We've built pieces into the model to -- through our EU GMP and our expectations on our ability to transfer product from Canada and start moving that internationally. And so as some of the demands in Canada, as some people are expressing some expected slowdown, we have the capability of moving that product from Canada to international opportunities at higher prices. That's built into those [movements].

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Operator [10]

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Your next question comes from Graeme Kreindler with Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [11]

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I don't mean to harp on the guidance point there, but just with respect to the stress test, one element, specifically from the retail side of things. I understand there's been a lot of success in stealing share at this point in time. But just wondering what the thoughts are with respect to opportunities for sell-through given the Ontario retail situation's been pushed back a bit? I know there's been some commentary that Quebec to increase that, but just wondering how any bumps along the way with respect to some of these key markets that retail could affect that outlook as well?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [12]

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So number one, I think is -- goes back to what I originally said. The opportunities for us in the retail market with additional stores opening up is tremendous. And I think in the Ontario market, if it was 25 stores the majority of the year, it was a lot sold online. I think there's lots of change coming to the Ontario market, is it going to be shipped direct to the stores, et cetera. But the key to all this is having good products with good brands and good pricing. And that's why we've built out under Bernie, the infrastructure and the sales team to get out there and make sure we got the right displays, where we're placed in the stores. We got the right products and working with the individual stores and the retailers to ensure that they know the Aphria brands, whether it's Solei, whether it's RIFF, whether it's Broken Coast. And I think at the end of the day, I mean this industry is just a year old. And the important part for us is that we have supply, and that's been the biggest challenge we've had all year is supply. And with Aphria Diamond ultimately coming on and having over 600,000 plants, we will be able to have supply.

Last but not least is being that producer of quality products is going to be important to us. And also that producer of quality products at a lower cost. And ultimately, Aphria with its brands, its products, its ability to ship, its infrastructure with sales organization, its infrastructure with its marketing group and building brand awareness, we feel good about achieving those numbers and winning over the consumer.

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Graeme Kreindler, Eight Capital, Research Division - Principal [13]

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Okay. Appreciate the color there. And just for my follow-up here. With respect to the ramp of that on the guidance for the fiscal year, with the average revenue growth, if my math is correct, looking like it needs to be something around 60% a quarter. Is it fair to say that much more of that growth is expected towards the latter half of the year, considering where that's going to fall in terms of the rollout with derivatives?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [14]

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Yes. And that is all with Diamond coming on board, rolling out on edibles and vapes, et cetera and continuously expanding the distribution and more and more stores opening up.

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Operator [15]

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Your next question comes from John Zamparo with CIBC.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [16]

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I wanted to stick with the guidance as well. I appreciate the color you gave, Carl, on future expectations of market composition, but can you say what percent of that $88 million to $95 million comes from derivative products specifically?

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Carl A. Merton, Aphria Inc. - CFO [17]

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We haven't publicly released that.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [18]

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Okay. Maybe if...

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [19]

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And I think it's important...

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John Zamparo, CIBC Capital Markets, Research Division - Associate [20]

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Sorry, go ahead.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [21]

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I think it's important that we're committing to our recreational products and growing our distribution and growing our brands and our products, but not to break it down, and we haven't broken it down by product line or category.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [22]

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Okay. Understood. So my follow-up is on the Aleafia contract. I know you said in your press release, this is immaterial. Just to clarify though, is none of the original EBITDA guidance including contributions from that contract? Or is it that you assume you'll find new buyers? And assuming it's the latter, what is it you assume on wholesale versus retail for that product?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [23]

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So number one, the Aleafia contract was a legacy agreement. It was built into our absolute guidance, and we expect to replace that with retail customers and other products to support those sales that we wouldn't have got from Aleafia and at better prices and better opportunities out there within both flower and oil prices.

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Operator [24]

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Your next question comes from Matthew Bottomley with Canaccord Genuity.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [25]

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Just want to circle back on sort of the vaping headlines we're seeing in the U.S. I think a lot of us have at least a high-level understanding as to what some of those issues are, and I know, Irwin, you spoke to them, but I imagine this is a bit of a PR issue for Health Canada and the federal government to have to navigate in this launch. So is there any color coming from them with respect to what they might be communicating to the public and if they might slow down the potential flow through to the retail stores of these products? Or are they completely agnostic to the whole issue as it stands right now?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [26]

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So we have not heard anything from Health Canada. And I think Health Canada has said they'll continue to evaluate. But again, what I've said is this here. I think what we want to ensure is the safety and quality of our products. And I think all indications so far, this is coming from vapes that are purchased through the illicit market, it's coming from products that are adulterated. It's coming from hardware that's never gone through quality testing. This comes back and just shows why it's so important for regulation. This is important -- why it's so important to have brands and quality products, because the consumer knows that they're getting a product that is safe, that the hardware has been tested and the product they're getting has been tested. So we don't like to see sickness, we don't like to see illness, and we don't like to see anything bad happening from vaping. But I think this comes back and just shows why consumers need to be buying products at approved retail outlets and buying it from approved suppliers that have gone through the quality here.

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Matt Bottomley, Canaccord Genuity Corp., Research Division - Analyst [27]

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Okay. And just a follow-up maybe for Carl. Just going back to the fiscal 2020 outlook again. I know there was a lot of commentary given this quarter and prior quarters on where you are in your overall build-out in order to achieve those numbers. But overall, if you were to assume the Canadian retail rollout goes horribly, just for the sake of argument, how much leverage do you have to put that distribution into international channels to better hit those numbers? So I guess a simple way of saying it is, if the Canadian market completely erupts on you, how sensitive is your $88 million to $95 million there?

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Carl A. Merton, Aphria Inc. - CFO [28]

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We have the ability to move product through international markets through -- once we have the EU GMP certification. We have significant demand through our operations in Italy, Germany, Colombia and Argentina and those are just our customers. We're also -- receive on a daily basis, e-mails from people wanting to buy product from us internationally that aren't our actual owned subsidiaries. We're very confident in our ability to divert product from Canada to overseas market in a downside scenario.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [29]

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But just on that, I think again, as we see the rest of the world in international being legalized in medical, the GMP certification opportunity for us is well within the hundreds and hundreds of millions of dollars and today, we're selling minimal product there. So that is a big opportunity. But just to come back, I am confident with the Canadian market, ultimately, and I see the opportunity in this Canadian market only being legalized for just less than a year. And as I said before, having these brands that are new to consumers. And there's a major market today that can be taken away from the illicit market of $4 billion. That is where the opportunity is, and that is where we've invested, and that's ultimately where Aphria will get to that $1 billion mark, we'll be able to generate tremendous amount of EBITDA and be able to generate a tremendous amount of cash.

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Operator [30]

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Your next question comes from Justin Keywood with GMP Securities.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [31]

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Just on the 12% market share mentioned, what was that up from the prior quarter? And how would that rank overall, like is it a first, second or third?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [32]

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So it's up 4 points from the prior quarter. And from a ranking standpoint, I'm not sure what you mean in a ranking standpoint.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [33]

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Like as far as the total market share, like, would that be a second, third? Or would that be, like, first, as far as leading market share?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [34]

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You mean as a company, as a brand, as a product? I'm not sure what you're asking me.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [35]

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So if it's 12% of the market, like who would hold the first market share? Like would that comprise of 15%?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [36]

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So as you've heard, we only have access to Ontario data. We don't have national data. But Ontario being the biggest market is a good indication for the rest of Canada.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [37]

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All right. And maybe just another question. What percentage of market share do you assume in your guidance?

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

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It's still growing from the 12% in Ontario.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [39]

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Right. So right now, we only have data on the Ontario market. And again as I said before, with that is -- number of stores that are open today with the number of stores that will open, we should only increase market share over the next 3 quarters for us or 2.5 quarters.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [40]

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Okay. And in your guidance, do you have a target number of stores that you anticipate to be open by then?

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [41]

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We do have a certain amount of stores. Do we have it down to a science by timing and date and stuff like that? No. I think there's couple ways we're looking at it. We're looking at our supply and supplying our current stores, new store openings and new product lines that will roll out during the year.

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Operator [42]

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There are no further questions at this time. I'll turn the call back over to management.

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Irwin D. Simon, Aphria Inc. - Interim CEO & Chairman [43]

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Thank you very much, everybody, for listening to our call today. As you heard, our last 2 quarters, there's a lot of things happening at Aphria, and with that we'll continue to do that. I'm excited in regards to our execution. I really got to come back and say thank you to our team members of 1,200 around the world that have been working endlessly to get us to where we are. I want to thank our Board of Directors for their support. As I've said, some of them will be leaving us at our -- this AGM and not re-running. Thank you very much to them.

Listen, this is a new industry. It's like I said, 1-year-old, Thursday. And there's been a lot of stops and starts and a lot of starts and stops. And with that, there's a lot of opportunity here. I come back as I've spent a lot of time on this and coming out of the consumer packaged goods industry for 25 years, I do see a lot of similarities. But I come back and see there's a market out there of $5 billion that is sold in both the illicit and the recreational. And our big focus and strategy has to be how we gain consumers' confidence and how we gain consumers' awareness of our brands that they're going to buy from retail stores and going to buy our brands and products and not be buying from the illicit market. Secondly is this here, as we expand our product portfolio and come out with new products and quality products, and products that are well priced, is something that we will continuously do and the marketing teams and the sales teams today are working together. One of the big things, in my old world, we had Nielsen numbers, we had IRI numbers, and we don't have that data at our fingertips today. And with that is data and content. And we are building around analytics. We are building around AI and building our products and important is the processes that we have in place.

A year from today, this will be a totally different industry than it is today. And that is the packaging that we'll bring into play in regards to sustainability, the products that we'll bring into play. But what I can reassure you is our focus is on quality, our focus is on safety, our focus is putting out great products out there. Our focus is on educating the consumer and ensuring these products are in the hands from a recreational standpoint to the right consumer. Our focus is to make sure we're putting out vapes or drinks, they are quality products. So with that, I'm excited about where Aphria is going. I'm excited, ultimately to get our license at Aphria Diamond that will give us adequate supply of 255,000 kilos. I'm excited about the opportunities with our medical business. And that's an area that we had not focused on over the past year, it was more on the rec side, but now that will be a big focus for us. And I really see the opportunity on a global basis as we bring our medical businesses together. And we see the opportunities, learning from patients all over the world. As I said, I was down in Buenos Aires few weeks ago and was working with one of the hospitals where we have been, and what we're seeing is young patients having 300-plus seizures a day in epilepsy and administering CBD to them, seeing their seizures go down to 0. So there's a lot happening both from the medical, from the rec, from the new product, from the grow standpoint, the processing.

The other big thing is, those who have been to Leamington, at certain times, what's happening there from an automation standpoint and just in our pre rolls, where we're doing 4 a minute, we now have automation in that facility where we're doing 5,000 an hour. So we'll continuously evolve on our processes, our automation. As we were going through scripts and presentations, last night we were talking about packaging. Last year this time, we were paying $3, $5 for certain amount of packaging that came out last year when products come out. We continuously come back today and are looking at new sustainable packaging that are -- we're purchasing for less than $1 today. So a lot has happened in a year. There's a lot of movement and tremendous amount of change in Aphria. And my objective is with this team that Aphria becomes the #1 leading global cannabis company around the world.

Thank you very much for your time. I hope everybody had a great Thanksgiving, and we'll speak to you again soon.

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Operator [44]

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This concludes today's conference call. You may now disconnect.