Aphria Inc. (APHA) Q1 2021 Earnings Call Transcript

Aphria Inc.  (NYSE: APHA) Q1 2021 earnings call dated Oct. 15, 2020

Corporate Participants:

Tamara Macgregor — Chief Corporate Affairs Officer

Irwin D. Simon — Chief Executive Officer

Carl Merton — Chief Financial Officer

Analysts:

W. Andrew Carter — Stifel Financial Group — Analyst

Aaron Grey — Alliance Global Partners — Analyst

Pablo Zuanic — Cantor Fitzgerald — Analyst

Tamy Chen — BMO Capital Markets — Analyst

John Zamparo — CIBC Capital Markets — Analyst

Graeme Kreindler — VIII Capital — Analyst

Presentation:

Operator

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q1 Quarterly Investors Call. [Operator Instructions] Thank you. Ms. Tamara Macgregor, you may begin the conference.

Tamara Macgregor — Chief Corporate Affairs Officer

Thank you, Mariama. Good morning, everyone, and thank you for joining us to discuss Aphria Inc.’s financial results for the first quarter ended August 31, 2020. On today’s call are Irwin Simon and Carl Merton. By now, everyone should have access to the earnings release, financial statements, and MD&A which are available on the investor section of Aphria’s website at www.aphriainc.com. The financial statements have been filed with SEDAR and EDGAR. Before we begin, please remember that during the course of this call, management may make forward-looking statements. These statements are based on management’s current expectations and beliefs and involve known and unknown risks and uncertainties which may prove to be incorrect and actual results could differ materially from those described in these forward-looking statements. Please note the text of Aphria’s earnings press release and the financial filings issued today for a discussion on the risks and uncertainties associated with such forward-looking statements. I’d also like to remind you that all references to financial figures are in Canadian dollars unless otherwise stated.

And now, I’d like to turn the call over to Irwin.

Irwin D. Simon — Chief Executive Officer

Thank you very much, Tamara and good morning, everyone. We appreciate you joining us today to discuss our robust start to fiscal year 2021. In our first quarter, our global team continued to execute against our strategic plan and continued to perform at a high level to further Aphria’s industry-leading market position, all with consistent emphasis on driving long-term sustainable growth by focusing on our highest return opportunities and most profitable priorities as we’ve told you so. As a purpose-driven company, we take great pride in leading with our core values and are committed to changing people’s lives for the better by investing in our products, our people, and of course, our planet. We began our transformational journey over a year ago.

With a laser focus, we turned our attention to achieving traditional business fundamentals in the terms of maximizing growth and net sales, profitability, cost containment, managing cash flow, and cash management. We’ve made substantial changes across our entire organization to position Aphria for sustainable long-term growth with a strategic focus on solidifying our strong, strong Canadian foundation by driving category leadership with strong carefully curated brands and the introduction of many new innovative products, and increasing our market share in the Canadian market with a focus on operational excellence and being which we are that low cost, high quality producer, increasing our profitability through a continuous cost managing and having that strong cash position for growth and expanding our geographic reach where it makes sense and that is something that we have focused on.

These initiatives help propel Aphria forward and be the number one cannabis company today. In addition, we’ve built a strong management team and continued to execute against these initiatives and they are focused on winning. And I am incredibly proud of our entire team and the culture of accountability and entrepreneurship we have created. The dedication, collaboration, and ability to be both nimble, agile in what remains a dynamic operating environment has helped us generate the strong financial results that you’re seeing today. I’ve spent nearly 30 years running a CPG company in the U.S. I know what it takes to build winning brands and brand equity is key and I understand the importance of brand equity and selling good quality products. In the U.S., the up-and-coming U.S. elections could provide for a change in federal regulations, which Aphria will be ready for. Our first fiscal quarter results reinforce Aphria’s inevitable leadership position particularly in Canada. We believe we’re executing at a level above our competitors.

Our results this quarter reflect record adult-use cannabis revenue, an increase of 248% compared to Q1 last year, and an increase of over 23% from Q4 fiscal ’20, while enabling us to also maintain a cash cost per gram below CAD1. This represents the fourth consecutive quarter of lowering Aphria’s cash cost to produce dry cannabis while continuing to utilize or cultivation expertise to increase our product quality. Thanks to our team in Leamington, we continue to execute well across all our facilities including Aphria One, Aphria Diamond, and Broken Coast. We are outperforming many of those in the marketplace with solid market share gains in Canada with new brands, product innovation, which will continue to evolve as we anticipate changing consumer and patient preference and demands.

Additionally, the balance of supply and demand in our cannabis business remains a top priority. As Carl will explain in more detail, we proactively took steps shortly after year-end to lower our cannabis supply. Further, we continue to actively manage both sides of supply and demand and working to — work to lower our investment in inventory balances. For the first quarter adjusted EBITDA from our cannabis business increased 11% to CAD10.4 million. And on a consolidated basis, we reported our sixth consecutive quarter of positive adjusted EBITDA. As I’ve consistently say and I always say, cash is king. We ended the first quarter with CAD400 million of cash to fuel future plant growth in Canada and internationally.

At Aphria we’ve created one of the strongest balance sheets with ample financial flexibility to also pursue potential future M&A if and when we believe there’s an opportunity to further enhance our shareholder value. I am consistently challenging our team to evaluate opportunities where we can win and continue doing so in the future, while we maintain a safe environment for our team to work for the ongoing global health crisis. Relative to our largest competitor, Aphria maintained its number one revenue position among Canadian LPs. In term of adult-use gross revenue, Aphria maintained our number one position in Canada with 23% growth, widening the gap from our next closest competitor. And Aphria continued to maintain its number one ranking when compared to its closest competitors on an adjusted EBITDA basis.

We believe that our differentiation portfolio brands, which are all designed to resonate with consumers in all categories is a key component of what sets us apart from our competitors. This provides us with the ability to establish a leading position in the adult-use market in Canada. As this industry evolves, we continue to evaluate the cannabis market, our adult-use brand portfolio, in order to ensure that it continues to meet multiple consumer segments. We are also leveraging our vast selection of strains to offer each consumer segment a differentiation experience while focusing on the value proposition for each of these segments as it relates to price, potency, and product assortment. Our team has done a tremendous job of entering new product categories that drive most consumer demand.

Last quarter, I was excited to share with you the launch of P’tite Pof, a value brand inspired by Quebecois culture. Most recently, our team introduced B!NGO to the Canadian market, an economy brand utilizing lower potency cannabis. We’ve experienced strong, strong initial sell-in for both P’tite Pof and B!NGO. These two brands complement our existing high quality brand portfolio including Good Supply, Solei, RIFF, and Broken Coast. And remember, these brands are only a couple of years old. Broken Coast remains a top super premium brand nationally delivering exceptionally quality standards. Across our total business, we continue to gain national market share and grow brand sales in the primary markets of Ontario, Alberta, Quebec, British Columbia, and that is quarter-over-quarter we’re talking about. For the month of August 2020, Aphria ranked as the number one LP for sales in the brick-and-mortar retail channel across all brands in Ontario and Alberta.

In Ontario for the quarter of Aphria maintained at least a 17% market share per OSC monthly reporting. Aphria experienced 60% more sales than the next highest LP in Ontario. And that is according to Headset data, which covers a large portion of the Canadian retail market, although not encompassing all the retail sales for the month of August. Headset’s most recent publication also highlights Aphria brand for the current quarter including 48.4% growth in the quarter, 55% better than the industry average in Canada. The number one LP in Canada with market share of 14%, more than 20% higher than the next closest LP. As you can see, we’re achieving a lot with our brands and our brands are growing nicely. In the month of August, Aphria vapes cartridges maintained the highest market share scoring a 12.6 share, 30% higher than the next closest LP.

Our brands held the number one pre-rolled share and our brands held the number two dried flower oil share in Canada. So, see what the numbers are saying, consumers are buying our products. Again, looking at the quarter, in Alberta, we understand for the month of September Aphria held 23% market share across all categories and our vapes and dried flowers obtained 32% share and 21% market share, respectively, again, great achievements. Importantly, market report suggests spending in the legal market outpaced the illicit market for the first time. And boy, this is a big win. As I’ve said before, conversion of the illicit to legal market represents one of the largest opportunities for Aphria and the industry as a whole. We continue to believe this will be achieved through strong brands, price, quality, innovative new formats, and of course access to many retail stores that will continue to open across Canada.

Consumers are now able to purchase quality cannabis in similar formats at a similar price through the legal market. So why wouldn’t they. And when it comes to access, consumers will have more options with retails and stores expected to triple across the country. We continue to believe Aphria is well-positioned to benefit from the future growth of retail. To summarize, from enhancing our global team, our brand building activities, leveraging our cultivation expertise and production capabilities, managing our cost to reinvesting in R&D, Aphria is well-positioned for future growth. We remain excited about the tremendous growth in Canada, potentially in the U.S. and the rest of the world. Focusing on our international opportunities, we currently maintain operations in Germany, Italy, Malta, Colombia, and Argentina, as well as strategic relationships in Israel, Denmark, and Poland.

In establishing our international footprint, we focus on areas where we’ve identified the biggest opportunities for growth with low cost of capital that can drive near-term profitability. In Germany, we recently completed our first certified EU-GMP shipment of dry flower from our Aphria One facility to our German subsidiary CC Pharma. This is a significant milestone for Aphria, one that strengthens our position as a leading cannabis company in Germany and in the European Union. We are leveraging our strong medical platform, our multifaceted international operation, which combines domestic cultivation, import permits, large distribution infrastructure to increase access to high quality medical cannabis for the patients worldwide.

We remain excited about future milestones including the completion of our cultivation facility in Neumunster, Germany, which we expect will be completed this coming quarter. We maintain our strong foundation in Canada and have great momentum. We believe going forward we built a strong foundation with our strong leadership team, strong brands, industry-leading cultivation expertise combined with our emphasis on cost containment and the highest return on our priorities, as well as our key consumer data insights all will fuel our growth in Canada and internationally. Our teams continue to lean in and take an aggressive and balanced approach to our future growth and profitability. I would like to thank our entire team worldwide, our Board of Directors. Our operation and financial results are a direct result of their ongoing commitment to Aphria, our brands, our products. We are very pleased with the start of this fiscal year and look forward to a great year to come.

With that, I will now turn the call over to Carl, who will take you through our financial results for fiscal Q1. Carl?

Carl Merton — Chief Financial Officer

Thank you, Irwin. Good morning, everyone. Our cannabis business started off the fiscal year strong. Our brands continue to excel in markets. And late in the quarter, we introduced our large format sizes and our new brand, B!NGO, a large format offering utilizing lower potency cannabis. Our financial results continue to be the envy of the industry. We reported another quarter of record gross revenue for adult-use cannabis. Cash cost per gram remained below CAD1, as we leverage our cultivation experience and we generated our sixth consecutive quarter of positive adjusted EBITDA. These results helped us maintain our robust capital structure. We have a strong balance sheet, a strong cash position, and a cap table with minimal potential dilution that continues to present Aphria with a multitude of opportunities to pursue future growth in Canada and internationally.

Before I review our fiscal first quarter financials in more detail, I want to echo Irwin’s sentiment and extend my sincere thanks to our global team. Everyone continues to operate at a high level internationally with an emphasis on initiatives that prioritize Aphria’s profitability, not only for today, but well into the future. We prioritized having a more diversified brand and product offering portfolio to maintain and take share across product categories with our leading adult-use and medical brands. We continue to find pockets of industry undersupply and capitalize on them using our data insights and understanding of consumer preferences. We believe our operational execution has helped further extend our leadership position in the cannabis industry.

As Irwin mentioned earlier, balancing supply and demand remains one of our biggest priorities in Canada, particularly after the unprecedented ramp up of our Aphria Diamond facility in less than one quarter. In the middle of June, we temporarily reduced our cannabis output at Aphria One, focusing the reduction on our operating facility with the higher [Phonetic] of our two cost structures. As a result of cannabis’ 12-week grow cycle, this reduction in capacity did not impact harvests until the month of September, and therefore had no impact on Q1. Managing Canada’s supply is not just about less plants. We are focused on processes and procedures designed to minimize the amount of sugar leaf trim on plants, increase the amount of saleable flower off of each plant, and minimize the amount of extraction grade flower growing.

The adjustment to operating cannabis output already affected our current focus while always being capable of further adjustments on the supply side is on identifying additional sources of demand, including introduction of new Cannabis 2.0 products, meeting short term demand increases for pre-rolls, continued development of our industry-leading vape portfolio, introduction of B!NGO, an economy brand utilizing lower potency cannabis, and meeting the demand in international markets for either GACP or EU-GMP certified product including Israel, Germany, Italy, Australia, and Colombia. As Irwin mentioned, we’ve press released that we have shipped EU-GMP certified product to Germany in the last two weeks, and we anticipate sales by CC Pharma, the triggering event for us to record the sales in our consolidated results to occur in the next two weeks. Further, pending receipt of permits from Health Canada, we anticipate a late quarter shipment to Israel.

Throughout the global health crisis, we are staying nimble and agile to best manage our cannabis operations and our supply chain as the marketplace evolves. To the end of the quarter, our supply chain experienced little impact as a result of COVID-19. While the impact on our supply chain has been minimal, the portions of our business reliant on in-person visits whether they’d be to doctor offices, hospitals, pharmacies, or cannabis clinics continue to be negatively impacted. The volume of these visits were noticeably down during the quarter. Post quarter end, we are beginning to see improvement, but given the continuing global health crisis, these activities will continue to impact both distribution revenue and medical cannabis revenue going forward.

Focusing on our financial results for this quarter in more detail, net cannabis revenue increased 18% from the prior quarter to CAD62.5 million. Gross adult-use revenue increased 23% from the prior quarter to CAD69.6 million while medical cannabis revenue was lower in the quarter as new patient registration slowed. Our industry-leading portfolio of vape products continue to drive demand. Revenue from vape products was 13% of gross cannabis revenue in the quarter, an increase of 17% from the prior quarter. During the quarter, the company sold 20,882 kilogram equivalents of cannabis, including 16,780 kilogram equivalents of adult-use cannabis and 1,072 kilogram equivalents of medical cannabis. Net revenue in Q1 increased 16% over the prior year period and decreased 4% from the prior quarter to CAD145.7 million. Distribution revenue decreased 17% to CAD82.2 million in Q1.

The decline in distribution revenue is largely a function of the impacts of the COVID-19 health crisis, including reductions in the number of elective procedures and in-person visits to physicians and pharmacies. The average gross selling price of adult-use cannabis decreased to CAD4.15 per gram in Q1 compared to CAD5.23 per gram in Q4 primarily as a result of the initial pipeline fill of new large format offerings including the introduction of B!NGO. The average gross selling price of medical cannabis increased to CAD7.38 per gram in Q1 compared to CAD6.63 in Q4. Adjusted cannabis gross profit increased to CAD31.5 million in Q1 compared to CAD28.1 million in Q4. Adjusted cannabis gross margin was 49.7% in Q1 compared to 52.9% in Q4.

The increase in adjusted cannabis gross profit dollars and decrease in gross margin was primarily due to the release of and pipeline fill of large format products and B!NGO utilizing lower potency cannabis, which provided an increase in sales but at a lower margin than Aphria’s other branded products. Absent this pipeline fill, adjusted cannabis gross margin would have remained approximately 53%. Our cash cost to produce per gram remained below CAD1 for the third consecutive quarter and decreased 1% to CAD0.87 in Q1. Despite temporarily reducing our operating capacity, we expect our cash costs to remain below CAD1. Our all-in costs per gram decreased 17% to CAD1.41 in Q1. Adjusted distribution gross profit decreased slightly to CAD11.8 million in Q1 from CAD11.9 million in Q4. Adjusted distribution gross margin was 14.4% in Q1 compared to 12.1% in Q4 based on CC Pharma’s sales mix and cost containment in the quarter, highlighting CC Pharma’s ability to concentrate on higher margin opportunities even during a period of lower volumes.

SG&A costs decreased to CAD54.4 million in Q1 compared to CAD116.6 million in the prior quarter and increased from CAD41.4 million in the prior year quarter. The increase from the prior year is primarily due to higher operating costs as we’ve grown our global operations and increased selling costs associated with our higher sales. For the quarter, we reported a net loss of CAD5.1 million or a loss of CAD0.02 per share. As we have consistently stated, our focus remains on generating positive EBITDA. To start fiscal ’21, we are pleased to continue this trend and report our sixth consecutive quarter of positive adjusted EBITDA. Consolidated adjusted EBITDA in the quarter increased 16.3% to CAD10 million from CAD8.6 million in the prior quarter. This includes adjusted EBITDA from cannabis operations of CAD10.4 million and adjusted EBITDA from distribution operations of CAD2.4 million, but partially offset by an adjusted EBITDA loss from businesses under development of CAD2.8 million.

Most notably, adjusted EBITDA from cannabis operations increased 11% in the quarter. This has been achieved by driving revenue increases and our constant focus on our cost structure. From a liquidity perspective, as of August 31, 2020, the company possessed cash of CAD400 million to continue to fund planned Canadian and international growth. As previously announced, we established an at-the-market equity program under the prospectus we filed in August. During the quarter and up through today’s date, we have not drawn on the ATM facility. The ATM will allow us to issue common shares in the amount up to $100 million, which will provide additional optionality in the event of an acquisition, requiring a cash payment or more flexibility when scheduled debt repayments occur.

In the first quarter the company’s cash position decreased by CAD97 million. The majority of this decrease related to onetime items that are not anticipated to continue in the future. Most particularly, CAD19 million related to decreases in the U.S., Canadian foreign exchange rate, CAD15 million related to the cash payment as part of a legal settlement with a former customer essentially returning a cash deposit made by the customer. And the delayed receipt of HST refunds held by CRA as a result of COVID-19 processing delays of which we subsequently received all CAD20 million claimed. The remaining cash utilized in the business included CAD8 million in increases in accounts receivable in our cannabis business late in the quarter as a result of the large format and B!NGO’s pipeline fill.

CAD17 million in capex, the majority of which related to completion of our German cultivation facility, CAD5 million in inventory increases in our distribution business, revenues lagged against our plan in the quarter for which purchases have been adjusted in the current quarter and CAD15 million in cash cost going into inventory for the cannabis business, down from CAD30 million in the quarter, but consistent with our comments in our Q4 earnings call. We anticipate a much lower capex in the second quarter, somewhere between CAD8 million and CAD13 million, as we complete our German expansion. Further, we expect lower working capital requirements going forward. We continue to believe we will be free cash flow positive in Q3. We believe this free cash flow when combined with our existing cash position and strong balance sheet will support our growth initiatives in both Canada and internationally.

In summary, we believe Aphria continues to be unmatched on a variety of financial metrics including our record of consecutive quarters of positive adjusted EBITDA, our focus on profitability, our operational efficiency and our overall cannabis revenue. Our strong cash position helps support our ability to succeed through the times ahead given the uncertainty of the current environment. For fiscal 2021, we will continue to execute on our strategic priorities including becoming a stronger, more profitable company. We will continuously work closely with the local and global communities where we operate and those we serve. We believe that Aphria’s diverse branded product offerings, robust balance sheet and dedicated team of global employees are key competitive advantages that give us confidence in our ability to create long-term sustainable shareholder value for many years to come.

This concludes our prepared remarks. Irwin and I are now available for analyst questions. Back to you, Mariama.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the Andrew Carter with Stifel. Your line is open.

W. Andrew Carter — Stifel Financial Group — Analyst

Hey. Thank you. Good morning. I wanted to ask that — you’ve mentioned the consumption has been strong. You mentioned the Headset data of course. And this is two consecutive quarters where your shipments have meaningfully kind of trailed consumption. So, I guess, kind of an update on that. But I guess more importantly, you kind of — you’ve established the leading market share base position. You’ve helped lead growth at the category level, which is really the thing that matters most than anything. So, I guess I want to ask, are you — is that helping you when you discuss with the provinces? Are you getting that — are they working with you more or has anything changed? Are you getting larger orders, more frequent shipments, all those things that we’re trying to piece this together whether the leadership position is kind of fully translating for you guys?

Irwin D. Simon — Chief Executive Officer

So I’ll start and then I’ll turn it over to Carl. Well, the leadership position starts with the consumers that want our brands, okay. And that’s what’s the most important here is buying our brands and — the repeat purchase of our brands. And it’s not just in one province, it’s in many provinces across Canada. And you see the growth among our brands and not only one brand, it’s six of our brands. So there is something they’re called a trend. There is something they’re called consumer behavior. So that’s number one. Number two is, some of the data that we announce, there’s a lag on that data. So it’s not exactly — as we say — our growth in a certain month or a certain quarter, you don’t see it totally in all our shipments immediately. And I think that’s — some of the problems that happened out there. Carl, do you want to?

Carl Merton — Chief Financial Officer

I would just echo that there is a lag. I think the presence of Headset data has been very helpful for LPs, for the control boards, and for retailers to understand what products moving and how quickly. But there are steps in between in the process. And those pieces are still being worked on by the control boards. I also think you have a few control boards that are that are going through some transitions, some of which are ordering less but more frequently, some of which are in the process of moving facilities and changed order patterns as a result of moving those facilities. And we would expect, going forward, we’re going to get to a point where that data and the LP sales are a little bit more consistent. But in these very early stages of Headset, you may not see that.

W. Andrew Carter — Stifel Financial Group — Analyst

Sure. Okay. So same question just within that, I wanted to ask because this is the first quarter you launched the discount brand B!NGO. I guess at the consumer level, probably too early to tell if it’s cannibalizing any of your other portfolio but I’ll take into perspective you have it. But secondly, going back to that shipments perspective is that cannibalizing any of your other brands, i.e., are provinces saying, hey, we’re going to wait for B!NGO. We don’t want to take it take as much Good Supply or Solei or anything like that. Thanks.

Irwin D. Simon — Chief Executive Officer

So I think, you’re right, it’s too early but it’s a different product line. It’s kind of like having a vanilla ice cream and coming out with a vanilla chocolate chip. That’s what it’s like here. So it’s not — this strain, this brand, and this product and most of the consumers like when they’re buying it don’t understand or realize it’s an Aphria brand. So if I think, if anything, what we’re looking to do is take market share away from some of our competitor brands, not from ourselves. So, so far, no, and it’s a different strain, different product line and a different brand than anything we have today.

W. Andrew Carter — Stifel Financial Group — Analyst

Thanks. I’ll pass it on, guys.

Irwin D. Simon — Chief Executive Officer

Thank you.

Carl Merton — Chief Financial Officer

Thanks, Andrew.

Operator

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

Aaron Grey — Alliance Global Partners — Analyst

Hi. Good morning and thanks for the questions. First question from me will be on the gross margin line. Gross margins came down some, but remained pretty healthy at a 50% for cannabis gross margins despite the launch of B!NGO. As it looks like the all in cost did come down, so just wanted to get a better picture of how best to think about the puts and takes, value mix going forward, as well as your, kind of, overall cost per grant to further offset that especially as you look to increase the mix of vape and potentially international sales, which tend to have a higher ASP? Thanks.

Irwin D. Simon — Chief Executive Officer

There’s a lot of things in that one question, Aaron. Let’s try and unpack it a little bit. I think if you look at — as you look at the continued growth of vape, there are a number of things that make up each vape sales dollar. And so, that results in vapes having a slightly lower gross margin than our other products. That product line is growing, but dried flower continues to grow as well. The cost coming out of our greenhouse have been decreasing. We will see a little bit of a minor headwind in the next couple of quarters, as we adjust our output. But we don’t anticipate that taking our cash cost above CAD1. Though, they’re going to remain at below CAD1 amount. So, I think when you net all of the different pieces together, you’ve got some pluses, you’ve got some minuses. We anticipate margins staying in that 50% to 54% range going forward.

Carl Merton — Chief Financial Officer

Which are healthy margins for a cannabis company, as you said in your remarks.

Aaron Grey — Alliance Global Partners — Analyst

No, absolutely. Thanks, that’s helpful color. Second question for me and then I’ll pass it on, is just on the distribution revenue. So, those came down decent amounts sequentially and you offer some color on that. But gross margin is there and again gross profit dollars were relatively consistent q-over-q. So, you did mention that being a part of sales mix as well as cost containment in terms of the gross margins offsetting the lower sales. So, just how best to think about that going forward? Are the lower sales going to continue but have the higher gross margins, so you continue to have pretty consistent gross profit dollars or just some help in terms of what you’re seeing going forward on that business line I think will be helpful? Thanks.

Carl Merton — Chief Financial Officer

So, it’s still early stages in our Q2, but as we said we’re starting to see improvement in the number of in-person visits that are happening, which is really the key driver for our — for both medical cannabis revenue and for our distribution revenue. Those things are moving forward. We’ve taken cost containment measures. It should result in those margins increasing slowly over time or maybe the better way to say it is staying consistent with what they were this quarter.

Irwin D. Simon — Chief Executive Officer

But you will see margins continuously improve as through our distribution company, we sell more and more cannabis, which are higher margin products. And I think Carl made it very clear in regards to why our sales were down this quarter in CC Pharma because of Europeans not travelling, a lot less elective surgeries which we expect to come back now. But the big thing is we now have a distribution system that goes to over 37,000 — 13,000 drugstores that ultimately, and now we have our EU-GMP license and we can start shipping to Germany. There’s a big, big opportunity there and that’s why we acquired CC Pharma for that distribution to be able to sell medical cannabis into the drugstores with high margin products. And you’ll see the margins continuously grow as more and more win. As you heard us say, our first shipment went a couple of weeks ago, and hopefully that continues more and more.

Aaron Grey — Alliance Global Partners — Analyst

Thanks for that color, and I’ll jump back in the queue.

Irwin D. Simon — Chief Executive Officer

Thank you.

Carl Merton — Chief Financial Officer

Thanks, Aaron.

Operator

Your next question comes from Pablo Zuanic with Cantor Fritzgerald. Your line is open.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Good morning.

Irwin D. Simon — Chief Executive Officer

Good morning, Pablo.

Pablo Zuanic — Cantor Fitzgerald — Analyst

How are you? Look, I just — I want to touch on two things that are I guess unrelated to the quarter. But regarding the U.S., right, tell us why should we think that you have a right to compete there or a right to do well? How advanced are you there? If I compare that with other companies that have contingent deals to buy MSOs or may have already other platforms in place, just remind us whether it’s ideal or why should we think Aphria is well-positioned to win in the U.S. markets?

Irwin D. Simon — Chief Executive Officer

So, Pablo, as you know, I personally have a little bit of experience in the CPG and the industry in the U.S. I must tell you, every day we get calls from MSOs and we get calls from cannabis companies looking to do something with Aphria in the U.S. as legalized from a federal level, we can’t. So with our expertise in regards to our growth, building our brands, and being far advanced with our product line, our R&D, I think on a legalization that there’ll be plenty of opportunities for us to go into opportunities for us to go into different states, to acquire strategically and align with different companies and with our balance sheet to do it.

And what I can say Pablo, there’s plenty of things we’re working on today and could be ready to go, sooner than later if there’s changes that — the changes that happen that will allow Aphria to enter the U.S. One thing, I said this back last April, I’m not going to focus on the U.S. I might as well buy a lottery ticket not knowing what’s going to happen there. And I’m not sure those cannabis companies that bought percentages of MSOs and held them and haven’t been able to effectively do anything with them, get earnings from them have not been the right thing for shareholders. But once we know what the state — the landscape looks like from legalization, there is so much that we will bring to the U.S. I think we’ll have our opportunities to be able to decide which is the best one for us.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Thank you. And then one more — look, I mean, I think we’re all a bit concerned about the price deflation we’re seeing in Canada. So Germany, right, 83 million people, twice of Canada or more becomes a big opportunity. But from what I see and I guess other people see, that market is being very slow to develop. Doctors not prescribing, volume still very low. So, yes, it’s nicer on the supply side. Everyone is gearing up. But the demand is not is not playing out. Just to rehash for us, why should we think that things in Germany could accelerate over the next one or two years? And I’m asking about Germany because, yes, it is a bigger market, potentially on Canada, and yes in Canada, we are seeing price deflation. Thanks.

Irwin D. Simon — Chief Executive Officer

So, you’re right in what you say about Germany. But I think a couple of things. It’s slow, but it’s coming. It’s not, not coming. So, it’s not like it’s come to a halt. So, that’s number one. And I feel good about where Germany ultimately will go. And unfortunately, COVID has not helped at all, but the demand is there. Now, we got our licenses that will help and that’s going to be a key. The other thing is this year. I will say this year I think Germany will be the first country in the EU that will legalize recreational cannabis. And there’s been plenty of discussions there. And if and when that happens, again, we will be there. So, I mean, we have and we’re ready with our facilities. We’re ready with product. And the big thing that we have there is our distribution to those 13,000 drugstores that we can distribute product to. Little slower. Little slower but that’s why we won the tenders and — but it’s not like there’s no game to start there.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Got it. Thanks. Can I ask just one last one?

Irwin D. Simon — Chief Executive Officer

Sure.

Pablo Zuanic — Cantor Fitzgerald — Analyst

I don’t want to rehash the questions about what’s happening in retail versus pipeline and gross margins. But if I look at your MD&A, Carl, it says there that the large pack sizes and B!NGO accounted for close to CAD90 million in growth in direct quarter-on-quarter. And your total sales grew CAD13 million, right? So, help me reconcile that because obviously large delta on the value side but apparently would have been done. And related to that, I guess we all have to focus on dollar gross profits, right, because, yes, gross margins may stay up, but they go from CAD260 to CAD150 per gram or something. But I’m looking at the latest market data and we can use Hi-Fi or Headset. I see here prices since your August quarter would be down another 20% for your flower business. So just help me get comfortable with gross profits and understand better what happened in the quarter because like I said, the MD&A says CAD19 million growth in value versus the total growth of CAD13 million for the record? Thanks.

Irwin D. Simon — Chief Executive Officer

So, Pablo, I think first off, as I answered one of my earlier questions, I think we have to be a little bit careful with some of the data that is out there. It isn’t Nielsen-level quality at this point. The different sources that are out there have different groups of source that are connected. And so I think it’s always very good directionally but it can’t be taken too literally. When you look at the total growth for the quarter in terms of cannabis revenue, I’m not sure I’m understanding your point because when I look at it and I look at our MD&A, we’re basically saying that the growth in the quarter was largely driven by B!NGO, right? You’re going on a gross basis from CAD65 million to CAD82 million, and CAD18 million of that is B!NGO. And I think that reconciles so I guess I’m just a little confused where you’re drawing your number from.

Pablo Zuanic — Cantor Fitzgerald — Analyst

No, no. I’ll pass it on but since you confirmed what I just said, right, there was — the total delta, the B!NGO delta is larger than the total delta, right? So.

Irwin D. Simon — Chief Executive Officer

No. I’m saying they’re the same, but that’s okay.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Okay. All right. Got it. Thank you. I’ll follow up later offline. Thank you.

Operator

Your next question comes from Tamy Chen with BMO Capital Markets. Your line is open.

Tamy Chen — BMO Capital Markets — Analyst

Yeah. Thanks. Good morning. First question. I wanted to stick on B!NGO for a second. The price, the retail price of the product, I mean it’s on the lower end within that 28-gram format compared to many of the other peers. So, I’m just curious when you approach the pricing architecture for this brand, why go quite low on the scale compared to peers given that you have been gaining share so far without a big value presence?

Carl Merton — Chief Financial Officer

So, Tamy, I think we said multiple times during the call in our disclosures if you — in the MD&A, we’re looking at the B!NGO brand differently than we look at our other brands. We look at B!NGO as a way to utilize lower potency cannabis that gets grown in our facility that wouldn’t qualify to be moved in other categories. And we’re taking advantage of our low costs to move that product.

Irwin D. Simon — Chief Executive Officer

And it’s — the thing is, Tamy, the reason we came out with it, we saw a need for it, and we saw a need for it, which consumers were asking for and as Carl said, we had supply for it. And we didn’t really see the opportunity — we didn’t really see a competitor really hitting that area. And what we wanted them — what we wanted is to make sure it’s not going to cannibalize our existing brands.

Tamy Chen — BMO Capital Markets — Analyst

Okay, understood. And my second question is going back to the commentary you both had about managing your supply with what you’re able to sell and whatnot. So, you mentioned that you temporarily reduced production at Aphria One. I guess I just wanted to understand that a bit more because I think you stopped disclosing kilograms produced. So, are you able to give us a context of how much this sort of impacted your output? What does temporary mean? And just to confirm, there’s been no supply or production output changes made at Diamond, correct? And I’ll leave it there. Thank you.

Irwin D. Simon — Chief Executive Officer

So, I let Carl jump in here first. I think, again, as we get more history in this business and we look at our brands and there’s more stores opening, and we focus on growth, we focus on margin, we focus on cash flow, we’re going to grow what we’re selling and we want to make sure we sell what we grow. We have three great facilities, and if we have to pull back and only grow in certain parts of the facilities to make sure that we sell to demand. And ultimately, as demand grows, we’ll continue to grow a lot more and we have the capacity to do it. So, that is the big thing from a financial standpoint, from a quality.

And the thing is when you’re dealing with these many strains, when you’re dealing with six brands and when you’re dealing with multiple where there’s pre-rolls, vapes, flowers, the last thing we want to do is be out of stock as we build our brand equity. We want consumers to be able to always buy our products. So, it’s now as we start to really dig in, it’s really managing our inventory, our supply, our purchasing power of packaging. We buy tremendous amount of packaging and want to make sure that, again, we’re buying from a cost standpoint and we’re buying from the supply standpoint and don’t have other stocks. And that’s some of the thing is we have too much of one thing, not enough of the other. So, there’s a major plan in place here of how to figure out our supply chain and our demand forecasting for what consumers want.

The other thing is, what we’ve got to continuously look at Tamy, is — today as there’s 800 stores across Canada. If they go to 2,000, 3,000 stores what’s going to happen there? We think for Aphria that’s another CAD200 million, CAD300 million of sale so having the demand to grow that out. Number two, as you look at brands that we have built that have gone through CAD300 million, CAD400 million at retail, how to build those out. What happens in regards to vape versus pre-rolls. The pre-roll market is on fire right now. So how do we continue to do that? So as the vape roll, and making sure we have enough of that. So that’s the big thing here is now just bringing in a lot more process and intelligence into our whole growing, because the problem is once you start growing, there’s something you got to do with it. I hope that answers your question?

Tamy Chen — BMO Capital Markets — Analyst

That’s helpful. Thank you.

Operator

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

Irwin D. Simon — Chief Executive Officer

Good morning.

John Zamparo — CIBC Capital Markets — Analyst

Hey, thanks. Thanks. Good morning. You mentioned becoming or expecting to become free cash flow positive in Q3. Just like to get a sense of your capital allocation priorities when it comes to either debt reduction versus greenfield investments or M&A? And with M&A I’m referring to anything outside of U.S. cannabis, just would like to get a sense of how you’re thinking about that for calendar ’21?

Irwin D. Simon — Chief Executive Officer

So I’ll let Carl talk about capex for facilities and I think we’re — that is winding down from a standpoint there. But, yeah, I — as I said, there is M&A stuff that we are looking at and there’s very interesting M&A stuff. And if I gave you a number, you might know what I’m looking at, or what I’m trying to do. But we have the right balance sheet to grow there. We have the ability from a leverage standpoint and with free cash flow positive and basically from a cash flow standpoint today. I mean, if you take away some currency and other things, I mean, we’re free cash flow positive now. So, we will continue sale — as our sales continue to grow.

Listen, we’re down below CAD1 on our cost and we will continuously come down. And as I’ve talked about there’s five points we’re going to do. We’re going to grow our share. We’re going to take costs out of our facility as we continuously look at what we grow, what we sell. We continuously to look at [Indecipherable] rationalization in regards to all our brands. We still have some facilities that are not producing income, and we’ll look to get those to income positive. And with Germany really coming on, we looked to see Germany in a positive area very soon. In regards to capex, other than that, Carl, there’s not a lot of capex.

Carl Merton — Chief Financial Officer

So, we finished all of our major capex projects in Canada. Future capex in Canada is really a function of opportunistically identifying some type of project that improves profitability. As it relates to Colombia, everything remains on hold. As it relates to Germany, we see about — under CAD10 million of capex that’s still to be to be spent. All of that will be spent this quarter. And I think I said earlier, CAD8 million to CAD13 million is our expected capex spend in the next quarter.

John Zamparo — CIBC Capital Markets — Analyst

Okay.

Irwin D. Simon — Chief Executive Officer

Hopefully that answers your question.

John Zamparo — CIBC Capital Markets — Analyst

Yeah. That’s helpful. Thank you. And then secondly, just wanted to dive a bit deeper on the average sell price. Can you quantify what the deflation was if you back out the impact of B!NGO? It sounds like the increase in gross cannabis revenue was sourced from B!NGO. And if you think about the rest of your portfolio, it’s having a volume increase presumably. But can you quantify what the price decrease would be on a like-for-like basis on your other brands? Thanks.

Irwin D. Simon — Chief Executive Officer

So, if we pull out a large format offerings, the average selling price would’ve increased CAD0.60 in the quarter.

John Zamparo — CIBC Capital Markets — Analyst

Got it. Okay. Thank you very much.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

Your next question comes from Graeme Kreindler with VIII Capital. Your line is open.

Graeme Kreindler — VIII Capital — Analyst

Yeah. Hi. Good morning and thank you for taking my question here. Just wanted to ask a follow-up here, with respect to managing the supply overall. I guess on two fronts, one, there was a wholesale sale of CAD4.7 million, as well as looking the composition of inventory on the cannabis side in particular. It looks like on a kilogram basis, that’s about two-thirds of cannabis tooth and then one-third trim. So, just wondering, from the wholesale side of things, what that market looks like? Is it expected to be volatile? But are there still possibilities to help rebalance your own internal supply there? And with respect to the cannabis particularly over that split I mentioned earlier, how much of that do you think is actually workable into the current brand architecture versus might be your mark for extraction later down the road or actually for wholesale. Thank you.

Irwin D. Simon — Chief Executive Officer

So, Graeme, I think there’s some confusion on the wholesale market sometimes with people. I view it as really two separate markets. So, there’s a wholesale market for extraction grade product which can include flower that just doesn’t look nice, things like that and trim. And that market obviously is massively oversupplied right now. We made some adjustments in our costing. In the current quarter, we removed fair value increment from our trim to reflect that and our trim is all now carried on our books at CAD0.15. If you look at what’s coming in the infamous croptober, there is a lot of extraction grade product that people have harvested and quite honestly I don’t think people are going to find homes for at this point.

But that portion of the wholesale market is very different from selling excess capacity of dried flower and I think there are tremendous opportunities in that portion of the market on sustainable flower. There’s a number of LPs that have taken production capacities down and now finding maybe a need for a little bit more product or are finding that they’re growing too much trim and they can’t get the level of saleable flower they want. And so, they’re interested in buying it. There’s a number of LPs that have switched to closer to asset-light models and those LPs that have done that are out there looking for saleable flower. And so when you have it, you have the ability to take advantage of that need and move that product at a very reasonable price as opposed to what the trim and the extraction grade things are going to move out over the next six, nine, 12 months. So, I do think they’re very, very different markets.

Graeme Kreindler — VIII Capital — Analyst

Okay. Appreciate the color. Thank you.

Irwin D. Simon — Chief Executive Officer

Okay. Thanks, Graeme.

Operator

That’s all the time we have for questions today. I will now turn the call back over to Irwin Simon for closing remarks.

Irwin D. Simon — Chief Executive Officer

Thank you very much and thank you, everybody, for getting on our call today. Again, I want to thank our team, all our great fellow employees, all our — that are working in our facilities and keep it going through these tough times. I got to tell you, I am really proud of what we’ve been able to do. Our Canadian cannabis sales are up 23%, our EBITDA CAD10 million. I mean all of last year, we earned CAD17 million. So, what a great start to the first quarter. If you look at our cash flow from a profitability standpoint and whether its currency or other tax our cash flow is profitable if you take away a lot of those things from one time. We have number one share and continue to grow tremendously in multiple provinces out there, which shows consumers want our products.

Again continuously, we’ve got our costs down per gram below a CAD1. We are seeing great headway in Germany. Yes, it’s a little slower, but we will get there. And in regards to the U.S., don’t count us out just because we don’t have a big strategic partner. We know the U.S. well. We know the opportunities. And with Aphria performing the way it is, I will tell you there’s multiple companies, there is multiple partner opportunities for us. It’s just we want to make sure when we do it we want to pick the right one. It’s just not about money. With that, we’re excited about the cannabis industry. We’re only into this for about two years. Actually it’s two years in October that cannabis ultimately legalized in Canada.

We’ve perfected a lot. We’ve taken this company a long way. And I am proud of where Aphria is today on a global basis. There’s a lot of unknowns out there in regards to what’s going on with COVID and the growth and what’s happening in COVID in many areas. I would say stock up on cannabis where you can because you never know when retail stores are going to close, etc, but there’s a lot to come from Aphria. So with that, be safe. Happy Thanksgiving to the Canadians that just celebrated and to the Americans that will celebrate it in a few weeks and look forward to speaking to you in the New Year. With that, I thank you for joining us today.

Operator

[Operator Closing Remarks]