Aphria Inc. (APHA) Q2 2021 Earnings Call Transcript

Aphria Inc. (NYSE: APHA) Q2 2021 earnings call dated Jan. 14, 2021

Corporate Participants:

Tamara Macgregor — Chief Corporate Affairs Officer

Irwin D. Simon — Chief Executive Officer

Carl Merton — Chief Financial Officer

Analysts:

Owen Bennett — Jefferies — Analyst

Vivien Azer — Cowen — Analyst

W. Andrew Carter — Stifel Financial Group — Analyst

Aaron Gray — 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 Denise, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Aphria Inc. Q2 Quarterly Investors Call. [Operator Instructions]

Ms. Tamara Macgregor, you may begin the conference.

Tamara Macgregor — Chief Corporate Affairs Officer

Thank you, Denise. Good morning, everyone, and thank you for joining us to discuss Aphria Inc.’s financial results for the second quarter ended November 30, 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 Investors 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 those — in these forward-looking statements. Please note the text in our earnings press release and the financial filings issued today for a discussion on 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 would like to turn the call over to Irwin.

Irwin D. Simon — Chief Executive Officer

Thank you very much, Tamara. Good morning, everyone. We appreciate you joining us today to discuss our second quarter of fiscal year 2021 results. Across geographies, our global teams continue to execute well and advance our leadership position as we build upon our long-term vision to be a leading global cannabis lifestyle consumer packaged goods company. The strength of our operational financial results demonstrates the diversification of our businesses.

We took important strategic steps to focus on our highest priorities, including which we believe will be high returns, such as strengthening our core cannabis foundation in Canada and Europe and completing our strategic M&A, which help us generate sustainable growth for today and well into the future. In the second quarter, we reported net revenue of CAD160.5 million, an increase of 33% from prior year quarter. This was helped — fueled by best adjusted EBITDA quarter, representing our seventh consecutive quarterly increase in positive adjusted EBITDA.

We had a record adjusted EBITDA from our cannabis business, also up for the seventh consecutive quarter. And on an adjusted basis, we reported net income of CAD3.2 million or earnings of CAD0.01 per share. Our market-leading adult-use cannabis brands remained strong and our international medical cannabis sales are off to a solid start.

During the quarter, Aphria maintained its number one position as the top licensed producer in terms of sales to provincial boards across all of our brands, in both Ontario and Alberta per Headset reporting data. Headset data, while not always encompassing of retail sales in Canada, covers a large portion or approximately 63% of the total retail market. Based on Headset’s retail data for the first half of fiscal 2021, Aphria is the number one licensed producer with a market share of 13%.

For another point of reference, according to OCS data for the rolling three months of October, November and December 2020, Aphria again is the number one LP for all category sales with a 16.2% market share. Aphria is also the number one LP in vape category with a 21% market share. And our brands, just to name a few RIFF, Good Supply Solei were number one in dried flower with a 16.8% market share, number two in pre-roll with a 21.3% market share and number two in oils with a 16.5% market share in Canada, all according to OCS for the same rolling three month period.

Internationally, we completed our first EU-GMP shipments of dried cannabis and cannabis oil to Germany. We also received an import permit in Malta for our first EU-GMP shipment of cannabis oil sales for the Maltese market. In Israel, we completed our first shipment of medical cannabis to Canndoc, and we executed a supply agreement with ODI Pharma, expanding Aphria’s international presence into Poland.

We are leveraging our strength with our medical platform and our multifaceted international operations. This includes our domestic cultivation, import permits and a large distribution infrastructure to increase access to high quality medical cannabis for patients and consumers. We’re excited about the long-term potential to grow internationally and in our core Canadian market where our foundation continues to be very strong.

As a company that’s purpose-driven, we take great pride in leading our core values and are committed to changing people’s lives for the better by investing in our products, our brands and our people, and of course, saving the planet. We utilize our industry-leading cultivation and production facilities along with our R&D and innovations teams to create compelling and relevant product offerings for all of our consumers.

At the same time, we did an excellent job managing our costs with Q2 marking our fifth consecutive quarter of cash cost per gram below CAD1, and there is room to even reduce this more. The strength of our balance sheet and capital structure enables us to support our growth organically and inorganically increasing establishing Aphria as a clear leader. While we’re pleased with our growth and success to-date, we know there is still a tremendous potential for sustainable long-term growth.

Our transformational journey began well over a year ago. And where we started is very different than where we are today, and probably, where we will be next year this time. And as we look ahead to the next six to 12 months and beyond, we will continue to evolve and our business will stay in the forefront of the industry. We focused on maximizing our growth in net sales, profitability, and more important, cost containment. We ended Q2 with a pro forma cash of CAD320 million. And an important one, improved our free cash flow by CAD70 million in the quarter as we move closer to our target of generating positive free cash flow.

I want to thank our global teams for their hard work and dedication to deliver these results during these times. The health and safety of our employees remains a top priority for us. In the midst of the ongoing dynamic operating environment, we completed the strategic accretive acquisition of SweetWater, one of the largest independent craft brewers in the United States based on volume, and most recently, entered into a definitive agreement to combine with Tilray in order to create the largest global cannabis business based on revenue.

We’re on track to close Tilray at the end of April or early May of 2021 following the receipt of regulatory approvals and shareholder approval for both companies, and I’m really excited about getting this done. At Aphria, we’re building on our existing strong foundation in Canada and internationally by increasing the scale of our global operations through these two strategic transactions.

Focusing on SweetWater, Freddy Bensch, Founder and CEO of SweetWater and his team, have truly hit the ground running, working side-by-side with our team on drinks. Our acquisition of SweetWater provides a robust profitable platform for future growth and development as we leverage their innovation, manufacturing and marketing distribution infrastructure in the Southeast with expansion opportunities across all the U.S. for craft beer, and upon federal legalization, cannabis products and drinks, which is well over a CAD200 billion market.

We now have added key partnerships with leading U.S. distributors, retailers and on-premise customers, strengthening our ability to develop new distribution in the U.S. for Aphria products and branded beer products and branded drink products. In addition to acquiring a strong brand and an accretive business, this acquisition positions Aphria with a scalable infrastructure within the U.S. and enables us to access the U.S. market quickly in the event and when federal legalization happens.

We’re excited to build brand awareness for adult-use cannabis brands in the U.S. ahead of potential federal cannabis legalization. Our integrated creative teams are already done, a tremendous job developing new cannabis lifestyle craft beer and other beverages for products using the Aphria cannabis brands. We can’t wait for them to hit the market in fiscal year 2021. This also includes SweetWater’s most recent product innovation in the rapid growing hard seltzer category and a great new product called H.A.Z.Y, which is being fueled by millennials, an important demographic in our business.

As many of you know, for 30 years, I led a CPG company in the U.S. I know what it takes to build winning brands. Brand equity is key. Consumers resonate with brands. Our team at Aphria understands the importance of brand equity and selling good quality safe products. In the U.S., we believe the recent election will likely provide a stronger near-term potential for change in federal cannabis regulations. And at Aphria, we are ready and well positioned for it.

We expect change to happen faster and decisions to be made sooner under the new Democratic leadership. More and more states are legalizing both medical and recreational cannabis. One in every three U.S. citizen has access to legal cannabis today. 68% of Americans are in favor of legalized based on a recent Gallup poll. And the anticipated passage of the SAFE Banking Act [Phonetic] should provide access to additional institutional investors and marked strategic partners. As we continue to advance our long-term vision and growth objectives, the addition of SweetWater is a cornerstone within our U.S. strategy and a strong complement to our existing Aphria business, and we believe it will be compelling financially for us.

To further advance our vision and strategic growth objectives, we believe the addition of SweetWater and its pending [Phonetic] business and the combination with Tilray will widen the gap between us and our peers, position us well ahead of the competition. We believe SweetWater and Tilray will provide compelling, strategic and financial benefits and significant value for Aphria and Tilray shareholders, particularly, as we increase our financial strength and flexibility for sustainable profitable growth on a global basis.

On a combined basis, we will be the largest global cannabis and consumer packaged goods company in the industry based on revenue. Aphria and Tilray will be the leading adult-use cannabis Canadian licensed producer based on revenue for the last 12 months, reported by each company by combining their respective brand and distribution networks and world-class facilities. We’ll have some of the strongest and most compelling leading brands with an ongoing focus on innovation, new products, new distribution. For example, for the period of August to October 2020, the combined company would have a market share approaching 20%, the largest share held by any single licensed producer in Canada and 700 basis points higher than the next closest competitor.

While we’re pleased to be in this position together, we are striving to be at least 30% market share over a better — over time. In Europe, we will have five strong brands to help us establish on unrivaled European platform, including two production facilities. Tilray has the leading medical cannabis operations in Europe that will benefit our existing medical sales and distribution. On a combined basis, Aphria and Tilray will be one of the strongest medical cannabis companies with our assortment of dried flower, medical cannabis, medical cannabis oil, CBD cosmetics and wellness products, a true market leader and innovator.

We will also have a robust and flexible supply chain given Tilray’s EU-GMP facility in Portugal. And we expect to be the first to have in-country cultivation in Germany based on the recent completion of our new facility. At the same time, we look forward to extending CC Pharma’s medical cannabis offering with access to over 13,000 pharmacies throughout Germany. We believe these compelling operational strength position us better than ever before for leading the medical cannabis market and to better position us when cannabis potentially becomes a legal form of recreational standpoint in Europe, and we believe this will happen sooner than later.

From a global operations perspective, we remain committed to Latin America, and today, are the only Canadian LP with a physical presence in Latin America. We have a tremendous runway for growth, a proven global team with a track record of success. In the U.S., we can leverage a strong sales and distribution network. This includes, leveraging SweetWater’s existing relationships along with the addition of Tilray’s CBD and wellness brand, Manitoba Harvest, a pioneer in their industry. SweetWater and Manitoba Harvest together represent over CAD120 million sales in the U.S. market.

We look to build upon our existing distribution partnerships in the U.S. and internationally. Keep in mind, SweetWater and Manitoba Harvest provide us with thousands and thousands of distribution points for our products across the natural, mass club and grocery sales channels as well as via e-commerce. And SweetWater is available in restaurant and bars and other on-premise food service outlets. We believe this will give us tremendous head-start to access these retail and food outlets with our craft beer beverage, CBD and hemp product offerings. And we can do this on a national scale in the U.S. as well for our cannabis branded products offering when federal legalization occurs.

We also look to build upon strategic partnerships. The business combination builds on both Tilray and Aphria’s other strategic partnerships with consumer industry leaders, including the global pharmaceutical, alcohol, CPG, functional foods and beverage categories. We’re excited about the opportunity for approximately CAD100 million in pre-tax cost synergies between both companies that should happen within the first 24 months following the completion of the transaction. This will also be a positive platform for future business accretion as we integrate our two business together. With a strong financial profile, low-cost production, market share leading brands, distribution network and unique partnerships the combined company of Aphria and Tilray will be increasingly well positioned to deliver sustainable attractive return for both our shareholders.

In summary, we are very pleased with our results for the first half of fiscal year 2021 in a difficult operating environment. At Aphria, we continue to build on our strong foundation in Canada and internationally to capitalize on growth opportunities utilizing our best-in-class cultivation and manufacturing across greater distribution footprint, enabling us to connect with an increasing amount of consumers and patients with our industry-leading brands and products.

We remain excited about the tremendous growth in Canada, in the U.S. and the rest of the world and the future milestones, including the completion of our business combination with Tilray. From the bottom of my heart, I’d like to thank our entire team that has worked tirelessly to run the business to do these deals and to stay safe, and our board of directors for their continuous efforts and always being there and being successful and helping us with our transformational journey. I know I said a lot and there is a lot to do. But as a team, we are really excited about what the end result will be.

With that, I will now turn the call over to Carl, who will take you through our financial results for fiscal Q2. Carl?

Carl Merton — Chief Financial Officer

Thank you, Irwin. Good morning, everyone. Today, I will reference our adjusted financial results, unless noted otherwise. Please refer to our press release issued today for a reconciliation of our reported financial results under IFRS to the non-GAAP financial measures identified during our call.

Q2 marked our highest adjusted EBITDA quarter ever with adjusted EBITDA of CAD12.6 million and adjusted EBITDA from our cannabis business of CAD12.9 million. This represents our seventh consecutive quarter of increasing positive adjusted EBITDA. We maintained our brand strength in the quarter across both our adult-use and medical markets. And for the seventh consecutive quarter, we reported record gross revenue for adult-use cannabis.

Our industry-leading cultivation team continues to do a great job, helping us to keep our cash cost below CAD1, coming in at CAD0.79 this quarter. The strength of our balance sheet and capital structure enables us to not only complete the strategic, accretive acquisition of SweetWater Brewing Company, but also end the quarter with pro forma cash of CAD320 million. As Irwin discussed, SweetWater further diversifies our product offering, broadens our consumer reach and enhances loyalty with consumers.

In conjunction with our acquisition of SweetWater, we closed $120 million financing with BIMO, providing $20 million in a revolving credit facility and $100 million of term debt within a few days after the end of our second quarter. At closing, we drew fully on the term debt facility. The credit facility is secured by the assets of SweetWater and a corporate guarantee from Aphria. The term loan bears interest at the Eurobond rate plus metric pricing based on SweetWater’s leverage. And our efforts to improve our free cash flow position were successful in the quarter as we improved our position by more than CAD70 million and moved closer to our target of generating positive free cash flow.

With these results, Aphria continues to maintain its leadership position within the cannabis industry. We are pursuing significant opportunities for future growth and further diversifying our business in Canada and internationally. Our ability to generate consistent financial results is a direct result of our global teams’ emphasis on initiatives that prioritize Aphria’s profitability, not only for today, but well into the future.

As Irwin mentioned, we shipped our first EU-GMP certified product to Germany and Malta during the quarter. And we completed our first shipment of medical cannabis to Canndoc for distribution in Israel. In the second quarter, we are pleased to see a return to normalized sales levels at CC Pharma, after experiencing an impact from COVID-19 in their business in the prior quarter. Our teams remain resilient and agile to best manage our cannabis operations and our supply chain as the marketplace evolves.

At the end of the quarter, our supply chain experienced little impact as a result of COVID-19. Keep in mind, even though we experienced minimal supply chain impact from COVID-19, the portions of our business reliant on in-person visits, whether they be to doctor offices, hospitals, pharmacies, cannabis clinics, bars, restaurants or cannabis retail stores, continue to experience challenges depending upon the local restrictions and regulations related to the global pandemic, which may have an adverse impact on our revenue in the future.

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption associated with COVID-19. In addition, we were closely watching and proactively preparing for Brexit. CC Pharma worked closely with alternative suppliers to minimize any Brexit impacts and purchased additional inventory after quarter end from the United Kingdom in advance of Brexit.

Moving to our financial results for Q2 in more detail. Net revenue increased 33% from the prior year or 10% from the prior quarter to CAD160.5 million. Net cannabis revenue increased 7% from the prior quarter to CAD67.9 million or an increase of 99% from the prior year quarter, all while medical cannabis revenue was essentially flat in the quarter, despite a 5.7% decrease in the average gross retail selling price to medical patients. This decline in average gross retail selling price is a result of specific price programs offered to assist patients in need who have been negatively impacted by COVID-19 and other promotional programs.

The increase in revenue from adult-use cannabis products was primarily due to a 3.4% increase in the average gross selling price to the adult-use market to CAD4.29 based on sales mix. As Irwin mentioned, we are particularly pleased with our CAD5.3 million of international cannabis revenue as we started selling cannabis in Europe and met our first year volumes to Canndoc. Given that we sold our first year volume to Canndoc in the quarter, we anticipate fluctuation in our international cannabis revenue over the remainder of the year. And Sweetwater contributed nearly CAD1 million in revenue at a very attractive 61% adjusted gross margin based on us owning the business for only five days in the quarter.

Finally, during the quarter, we missed an opportunity, particularly in Alberta, when we experienced a significant increase in demand for pre-rolls over an extremely short period of time that we were unable to supply. To address the increase in demand experience at the end of — at the beginning of the quarter, we worked to triple our daily supply capabilities by the end of the quarter, positioning us to better meet demand going forward.

Adjusted cannabis gross profit decreased to CAD31.2 million into Q2 compared to CAD31.5 million in Q1. Adjusted cannabis gross margin was 45.9% in Q2 compared to 49.7% in Q1. Decrease in adjusted cannabis gross profit and gross margin was primarily due to actions taken to reduce production levels at our Aphria One facility to better match supply and demand, including inventory that was liquidated below cost.

We liquidated some older inventory below cost, resulting in a gross loss of approximately CAD1.5 million on the sale. And we incurred unabsorbed overhead of approximately CAD1 million as a result of our reduced operating capacity. Our cash cost to produce per gram remained below CAD1 for the fifth consecutive quarter, down 9% to CAD0.79. Our all-in cost per gram decreased 8% to CAD1.30 in Q2.

Adjusted distribution gross profit for the second quarter was CAD12 million compared to CAD11.8 million in the prior quarter. The increase in adjusted distribution gross profit was a result of an increase in distribution revenue at CC Pharma in Germany. During the quarter, our adjusted gross margin on distribution decreased from 14.4% to 13.1%. The decrease in the gross margin was a function of product sales mix at CC Pharma.

Operating expenses in the quarter increased to CAD82.7 million from CAD54.5 million in the prior quarter. The increase from the prior quarter was primarily due to CAD22.6 million of transaction costs associated with our M&A activities in the quarter and increased share-based compensation, largely driven by the increase in Aphria share price. On an adjusted basis, excluding the impacts of non-cash losses on financial instruments driven by the increase in our share price, share-based compensation, driven by the increase in our share price and transaction costs, we reported net income for Q2 of CAD3.2 million or CAD0.01 per share.

As we consistently stated, our focus remains on generating positive EBITDA. We are pleased that Q2 represents a record adjusted EBITDA for us and our seventh consecutive quarter of increasing and positive adjusted EBITDA. Consolidated adjusted EBITDA for the quarter increased CAD2.6 million to CAD12.6 million. This includes adjusted EBITDA from cannabis operations of CAD12.9 million, adjusted EBITDA from distribution operations of CAD2.6 million and adjusted EBITDA from our beverage alcohol business of CAD0.3 million. These positive results were partially offset by an adjusted EBITDA loss from businesses under development of CAD3.2 million. Most notably, adjusted EBITDA from cannabis operations increased 24% in the quarter, achieved by driving revenue increases and our consistent focus on managing our cost structure.

From a liquidity perspective, at the end of the quarter, the company had pro forma cash of CAD320 million to continue to fund planned international growth. We are extremely pleased to report that on a free cash flow basis, our concentrated efforts resulted in an improvement in free cash flow of over CAD70 million in the quarter, recording a free cash flow loss of CAD16.3 million compared to a loss of CAD86.6 million in the prior quarter. This was accomplished, while completing the capex spending on our Germany cultivation facility.

Similar to Q2, we continue to work to lower our quarterly working capital requirements, succeeding in the current quarter by reporting positive operating cash flow or cash provided by operations of over CAD3 million. And we continue to work to be free cash flow positive in Q3, all subject to the intensity of COVID-19 restrictions in the markets where we operate. We believe this free cash flow, when combined with our existing cash position and strong balance sheet, will support our growth initiatives in both Canada and internationally.

In summary, we believe Aphria continues to set itself apart from others in the cannabis industry based on a variety of financial metrics, including our record of consecutive quarters of positive adjusted EBITDA, our growing cannabis revenues, our diversified revenue stream with the addition of SweetWater, our ability to leverage our Canadian cannabis brands in the U.S. through SweetWater’s brand portfolio, our focus on our highest return priorities and profitability as well as our industry-leading cultivation and production efforts. We believe our strong cash position will continue to help us navigate through this COVID-19 global pandemic as we succeed in reaching more consumers and patients with our high quality leading brands and products.

As Irwin highlighted in detail, Aphria is better positioned than ever before in Canada, the U.S., Europe and Latin America for continued growth and development. We are ready for potential future cannabis legalization in the U.S. and Europe with a proven global team to execute on our strategic growth initiatives.

Since closing the acquisition of SweetWater, we are working collaboratively to execute on key revenue synergies and strategic initiatives, particularly for fiscal year 2022. With the addition of SweetWater, we are creating a complementary branded cannabis lifestyle product platform. Prior to our acquisition of SweetWater, they grew revenues, generated solid net income and adjusted EBITDA as well as good cash flow, in spite of headwinds from COVID-19. We look forward to leveraging combined scalable operating model to drive strong long-term financial performance and are confident this acquisition will support our long-term growth in revenue, enhance our profitability, enhance our margin structure and generate free cash flow, while enhancing value for our shareholders.

Since Irwin reviewed the key reasons why we continue to believe Tilray is a compelling and attractive business combination for Aphria’s shareholders, I wanted to spend a few moments addressing some financial items and on a couple of housekeeping items. First, in addition to maintaining their NASDAQ listing, we understand that Tilray is working on registration under the TSX so that the combined entity will be dual-listed post-closing. It is a goal of the combined entity to maintain its place on the S&P-TSX Composite Index.

The combined company will report results under U.S. GAAP accounting rules, which means our finance team at Aphria will be working diligently to convert our existing Canadian reporting to U.S. GAAP. We also anticipate that combined company will maintain Aphria’s current fiscal year end in May. Importantly, we are working on a joint circular, which subject to SEC review, we anticipate filing the mailing to shareholders in mid-March. Please reference our Aphria and Tilray business combination FAQ for any further questions related to the transaction, available on our website.

As part of margins [Phonetic], our transaction team, which included finance and operational representation, spent a considerable amount of time identifying and quantifying potential synergies from the transaction. As part of our announcement of the transaction, we announced that over CAD100 million of pre-tax synergies have been identified and were capable of achievement within 24 months of the transaction. Upon achievement, we expect that these synergies will benefit the combined company going forward and deliver incremental value to its shareholders, which we believe if you were to apply a 10 to 15 times multiple to this incremental EBITDA, it would imply CAD1 billion to CAD1.5 billion of incremental value accretion to shareholders of the combined company.

From a sales perspective, at the time of announcement, the combined company would be the largest cannabis company in the world. The additional scale and financial strength this provides will be an important part of our entry into the U.S., makes us more appealing to potential CPG partners and allows us to better leverage Aphria’s existing production footprint in Canada.

Looking ahead to the second half of fiscal 2021 for Aphria, we expect to become an even stronger, more diversified and profitable company. We will continuously work with local and global communities where we operate. We have tremendous confidence in our ability to create long-term sustainable shareholder value for many years to come.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Owen Bennett with Jefferies. Your line is open.

Owen Bennett — Jefferies — Analyst

Good morning, gents.

Irwin D. Simon — Chief Executive Officer

Good morning.

Carl Merton — Chief Financial Officer

Good morning, Owen.

Owen Bennett — Jefferies — Analyst

Just one question from me. So Canada looks like it continues to perform actually, so I just actually wanted to focus on the international business. And so international sales taking off in the quarter and this segment will obviously become much more of a focus with the addition of Tilray. So just hoping you could maybe talk through the international competitive and pricing dynamics a bit more, and particularly with regards to Germany because it does appear like competition in Europe is really ramping up at the moment. So just wanted to get some thoughts around that, please? Thank you.

Irwin D. Simon — Chief Executive Officer

So Owen, I’ll take that. Pricing in Germany today has remained on a balanced level. We’re not seeing pricing be competitive out there. I think from a standpoint of Aphria, with our facility there, with the tenders we have won and being able to ship product at a low cost from our Leamington facility, we can be very competitive. The other thing is, we are very well positioned because of CC Pharma. And then ultimately, with Portugal coming on, which will allow us to ship anywhere in Europe, I mean, we can be as competitive as anybody else. So I’m quite excited about the European market from a medical standpoint, from potentially a recreational legalization, our other products, that CBD products. But so far, we have not seen the competitive pricing there that we’ve seen somewhat in Canada.

Owen Bennett — Jefferies — Analyst

Okay. Thank you. Very helpful.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from Vivien Azer with Cowen. Your line is open.

Vivien Azer — Cowen — Analyst

Hi, good morning.

Irwin D. Simon — Chief Executive Officer

Good morning.

Vivien Azer — Cowen — Analyst

Good morning. I was hoping to touch on your inventory levels given the sales at below cost that weighed on your gross margin picked up only just modestly sequentially in the quarter, but remained elevated relative to historical levels. So any color around that would be helpful? Thank you.

Irwin D. Simon — Chief Executive Officer

So basically, listen, I think again, as we go into the back half is the two biggest quarters of Aphria, our inventory levels went up to hit those sales. The demand for pre-rolls, which we’re selling 7 million, 8 million a quarter. So a lot of it is built up for demand, built up for new product distribution, built up for new stores opening and built up for some of our products. But on the other hand, there is a big effort within the company right now as we look at our inventories and how we get our inventories down. And one of the bigger things here is it’s here. More and more stores are opening up, the market is growing and how we balance our inventories.

Also as some of the liquor control boards go through secure rationalization is going to force us to do that. And as we look at integrating Tilray and some of their grow into our facilities will help our inventory position also. So it’s something I will tell you that we are focused and we are all over because what happens when you manage your inventory there is a lot of cash that drives to the bottom line there.

Carl, I don’t know if you want to add anything to that.

Carl Merton — Chief Financial Officer

Just — the only thing I would add is, if you look at the inventory levels over the last three quarters, you can see that sequentially, we’ve been bringing those balances — growth in the inventory down and are working to — in the current quarter to flip that equation.

Vivien Azer — Cowen — Analyst

Perfect. Thank you so much.

Operator

Your next question comes from Andrew Carter with Stifel. Your line is open.

W. Andrew Carter — Stifel Financial Group — Analyst

Hey, thanks. Good morning. I know you’re not giving any thermal targets, but I kind of want to think about — ask about how you’re thinking about revenues for kind of the second half. The distribution business snapped back up nicely, but you kind of cautioned with COVID. So is this the right level or is it two quarters ago? How are you thinking about the SweetWater business relative to that 2019 CAD66.6 million revenue number? I know you cited the bar business.

And then also, how should we be thinking — sorry, the wholesale agreement as well. Is there an opportunity to do anymore with Tilray? And I guess the final question is, this was kind of the first quarter where we’ve seen some market share — you’ve ceded some market share. So over the back half, do you see yourself getting back into a position of gaining market share with the current portfolio or perhaps you need kind of the full capabilities with the Tilray acquisition to do that? Thanks.

Irwin D. Simon — Chief Executive Officer

Well, I’ll take a few and then I’ll let Carl. There’s a lot of questions there. Hopefully I can remember them all. But the big thing here is in regards to, listen, we know it’s Ontario right now. Ontario has closed down its curbside delivery. In regards to SweetWater, a lot of on-premise is closed down. On the other hand, as consumers and people stay home, they’re going to consume more and more beer that they buy at retail or consume more and more cannabis because they’re at home and will pick it up at curbside.

So I see us dealing with that. But I think the big thing is that we have the uniqueness and products and how we build out our brand and continue to take share. You heard me talk about inventories before and balancing out our inventories. And I think where the liquor control boards are getting a lot smarter to by looking at their inventories and what sells and what doesn’t. And a big part, as Carl talked about, where we did lose some share is because we just didn’t have the right products there and the right inventories. So listen, it’s two years and we’re getting a lot better from having the visibility, having data, having the products. But one of the big things that you got to remember here, consumers want our products. If they’re not in the store, they are not going to buy them.

In regards to the next half, listen, it’s our biggest two quarters out there, and we’ve planned for it. And how do we maneuver around COVID is a whole other thing. We’re not giving guidance, but it’s our biggest two quarters as we look at the back half. And we see tremendous demand, we see more and more stores opening up, we see more and more provinces wanting product, but it’s going to go through some SKU rationalizations out there.

The other thing is in regards to our product that we’re going to ship to Europe in EU-GMP certified. You’ve heard me talk about Israel. You heard me talk about Poland. You heard me talk about the demand. The opportunity for us — one of the things when Brendan built out Tilray, he was an asset-light Canadian operation. So there is a lot of opportunity to bring a lot of Tilray grow into the Aphria facilities. And that was a big part of our cost savings. And we’re already all over that and executing on that.

Carl, I don’t know, do you want to add anything or I don’t know if I missed — Andrew, if I missed any of your questions.

Carl Merton — Chief Financial Officer

Just to go a little bit further on the share that was ceded, as Irwin talked about, that was really a function of pre-roll capacity internally. And now that our capacity is back up and we look at the December information and the limited January information that we have available to us, we believe that all that share is back.

W. Andrew Carter — Stifel Financial Group — Analyst

Well, that’s great. Thank you, guys. I’ll pass it on.

Irwin D. Simon — Chief Executive Officer

Thanks, Andrew.

Operator

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

Aaron Gray — Alliance Global Partners — Analyst

Hi. Good morning, and thanks for the question. So I want to jump back to kind of international opportunities because it’s going to be more of a focus once the merger closes. So specifically on Germany, you guys kind of talked about the pricing landscape, but want to talk about the overall market growth there, because we’ve seen the data from the insurance kind of slowdown in the market the past two quarters. So want to get your sense in terms of any initiatives you might have in terms of educating doctors on getting more patients to kind of help lift the overall market, because you’re going to have CC Pharma and the pharmacy distribution there, but how about like increasing the overall demand from the consumers and how you’re thinking about that German market and how it evolves as you have your own cultivation come online in the country and you have Tilray’s Portugal facility? Thanks.

Irwin D. Simon — Chief Executive Officer

So good question. And what’s happening right now, we can’t — we’ve been there to see doctors, but we have a whole online program of how to get to doctors, how to educate the doctors. And there’s other things that we’re looking with — working with in the universities and potentially working with some of the medical schools and some of the research there and investing in that. And as I say, that’s going to be a big important part of Tilray and Aphria coming together in Europe is building out our medical platform, and Tilray has a very, very strong platform in Europe already, which are number one in the oils.

And I got to tell you, the other big thing that we have a major league of in regards to distribution to 13,000 drug stores through CC Pharma. And so we have a plan, even though we’re — got our hands tied right now because of COVID, we can’t get to the medical. There is a plan right now in place as we get to them online. Hopefully that answers?

Operator

And your next question comes from Pablo Zuanic with Cantor Fitzgerald. Your line is open.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Thank you. Good morning. Irwin, I guess my question is more about the U.S. David Klein in an interview with BNN Bloomberg recently he said that he expects to be selling in the U.S. in seven to eight months time, of course on giving his outlook about how things will change from a regulatory perspective. Given that the company like Canopy Growth has those contingent stakes in acreage and TerrAscend, how much of a disadvantage is that for you not having those contingent stakes?

And related — and of course, I know you have SweetWater and Manitoba Harvest. And related to that, a two-part question. In the call, you referenced a few times being more attractive to CBG companies and strategic partners. Again, how much of a disadvantage compared to a Cronos or Canopy Growth is it for you not having the backing of [Indecipherable] or the Constellation Brands? Thanks.

Irwin D. Simon — Chief Executive Officer

So Pablo, I don’t think I’m at a disadvantage at all. And David Klein got a strategy that he is going to execute on. And today, we’re selling products in the U.S. under SweetWater and we’re selling — we’ll be selling products under Manitoba Harvest. We will be selling other CBD products. Listen, I do not think we are at all disadvantage because with Aphria, with its brands, with its balance sheet, with its R&D, with its regulatory that we have out there, with our global footprint, today you heard me say, we go to thousands of grocery stores, thousand of convenience stores. So there is going to be plenty of partners out there for us to partner up with. And you know what, there is other consumer packaged goods companies now that are going to want to be in this industry. So you know what, we can step back and pick the right partner for the right area of the business.

So I don’t think we’re one bit disadvantage of anything. I think we get to pick what partner if we want to partner with on the consumer side. I think in regards to whether we acquire if legalization happens, whether we merge, we will get to pick the right person or the right company. And the most important thing, Pablo, when that happens, it’s going to be at a time when we know what the landscape looks like on legalization. Not out there buying a lottery ticket and trying to guess what could happen.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Right. Can I squeeze one more, if I may? If you don’t mind? At the local level, I understand the logic of Tilray, the merger with Tilray. But at the local level in Canada, how much of an advantage is it being larger? And I ask the question in the context that brewers and farms and greater guns seems to be the companies doing best in terms of sales and market share trends, right? So those are much smaller companies. So I’m just wondering how the size, at least in a Canadian context only help? Thanks. That’s it.

Irwin D. Simon — Chief Executive Officer

Listen, size does not always matter, it’s what’s in the company, okay? And Tilray brings to us some great assets in their medical business. They bring some great brands to us. They bring some great management and people. They are asset-light. They bring a lot of grow that will fit within to our facility. And the combination, back to what I said before, the combination — today, we have over 20% market share.

So with that, if we get the 30% market share, there’s a lot of catching up. And by the way, as prices come down, Pablo, and to compete with us who are going to be that low-cost producer is going to be more and more difficult. And last but not least, when you have scale and size and have free cash, you’ve got to invest in your brands. And that’s something that we’ll be able to do where the little guys or the little LPs will not have the ability to do it.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Thanks.

Operator

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

Tamy Chen — BMO Capital Markets — Analyst

Thanks. Good morning. Just one question. Irwin, can you talk a bit more or explain a bit more about what underscores your optimism on more legalization in Europe, including your view that recreational legalization in some countries, say Germany, could come sooner than later? What are you specifically seeing there that’s driving your expectation or optimism there? Thank you.

Irwin D. Simon — Chief Executive Officer

Good morning, Tamy. So again, your expectations are only as good as what your intel is telling you from these countries. And whether it’s the green party and certain elections, my intel is coming back from my team there that on the timing when it could happen and it could happen this year. The second thing is, listen, like the U.S., like Canada, every country needs tax dollars. And with that, I think legalization and understanding the benefits of cannabis and I think what Germany had the opportunity to look at is what it was able to do from a legalization on a medical standpoint.

So that’s where I’m getting my intel and that’s what I’m hearing back from lobbyists and our political relationships over there and the different change in parties that will happen and just what the population wants. So that’s why I think Europe and Europe is usually a lot more progressive than the United States. So that’s why I see legalization happening in Europe sooner than later.

Operator

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

John Zamparo — CIBC Capital Markets — Analyst

Thanks. Good morning. I wanted to follow-up on the…

Irwin D. Simon — Chief Executive Officer

Good morning, John.

John Zamparo — CIBC Capital Markets — Analyst

Good morning. I wanted to follow-up on the U.S. side of things as well, and just would like to get your thoughts on whether or if your strategy changed at all since the results of last week’s run off elections? Does it give you a sense of greater urgency to go gain a presence in the U.S. beyond what you already have now or does it make you take pause to say you might get some clarity or certainty from a regulatory’s perspective? And in that sense, you’d want to preserve capital as you’d be able to go after plant touching businesses or launch your own cannabis brands in the U.S. maybe earlier than you would have thought, even a couple of weeks ago? Just any thoughts there would be helpful. Thanks.

Irwin D. Simon — Chief Executive Officer

John, great question. Listen, I think — I don’t think within the first 100 days the Biden Administration is going to legalize cannabis. And I think there is multiple ways and multiple things going to happen within the SAFE Banking Act, just legalizing medical, decriminalizing, etc. Going out and buying a piece of a company today is something that we can easily do. But I like the idea of buying assets like we did with SweetWater or Manitoba Harvest that can easily translate into legalized cannabis THC products when the market allows.

The other thing is it’s here. And people think sometimes I’m crazy when I’ve said it, but just like there is great Canadian beer made in Canada that’s shipped into the U.S., In regards to build out the infrastructure to supply the U.S. and having the regulations and the quality and the safety, and Canada in this October will have three years, will there be an opportunity to ship Canadian cannabis into the U.S.? We don’t know that, okay?

So again, I hate to get out in front and guess and to win there and make big bets for our shareholders and make big bets with an unknown is not something I would let Aphria and Tilray to do. But I think the big thing is, it’s here. With our footprint today in Canada, with our footprint in Europe, with our footprint in the U.S., having the balance sheet that we have, having the R&D behind us, having three years of good regulation, when the legalization happens to what form, we will be ready to partner to buy to greenfield. And I think that’s what’s important that we’re kind of circling the wagons instead of getting on the wagon now.

John Zamparo — CIBC Capital Markets — Analyst

Okay. That’s great color. Thank you.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

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

Graeme Kreindler — VIII Capital — Analyst

Hi. Good morning, and thank you for taking my question. I wanted to ask a quick follow-up question regarding the outstanding merger agreement with Aphria and Tilray. I was just wondering, given the recent share price appreciation over the past months for both stocks, particularly looking at Tilray significantly outperforming its peer group here. I’m wondering if that has any impact between now and expecting closing date? If you could provide some color there that would be helpful? Thank you very much.

Irwin D. Simon — Chief Executive Officer

Not at all. I mean there is a fixed share price and a fixed agreement. I think our both stocks have moved. And I think again what shareholders are thinking, they like Tilray because it will be together with Aphria and they like Aphria, but it has no effect on the deal. And as I said before, the deal is moving to close the end of April, early May. The teams are hard at work at putting all the pieces together, the infrastructure, the synergies, the opportunities for both companies. And I have to say, I like the deal even more now, the more and more I’ve got into it as it bring these two companies together. It is really going to be exciting for Aphria and Tilray shareholders.

Graeme Kreindler — VIII Capital — Analyst

Understood. Thank you very much, Irwin.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

I would now like to turn the call back over to Irwin Simon for closing remarks.

Irwin D. Simon — Chief Executive Officer

Thank you very much. Denise. And everybody, thank you very much for getting on this call today. 2020 in regards to Aphria has been a good year. Lots of changes. What a difference a couple of years makes. In 2021, we got a lot to do, and being number one does not always mean you stay at number one. And you got to continuously earn it, you got to continuously work at it and you got to continuously evolve and change. I have a saying, when you’re green, you’re growing. When you’re ripe, you rot. And we never can actually let ourselves, ripe because we’ve got to grow. I would say, this year, if you look at Aphria and Tilray together, next year this time we’ll both be very, very different companies and so will the industry.

Again, I can’t thank all the employees at Aphria that have worked real hard and worked to get both these M&A transactions done, at the same time running the business, and it’s been difficult. Borders are closed getting up to Canada and — but I got to tell you, a lot has happened within Aphria, and I really want to thank the team. I want to also think Brendan Kennedy and the Tilray team. What a great pleasure to work with them. And Brendan will join our board and there’s a lot of his team members that will join the Aphria-Tilray team, and we’re really excited about the partnership. And I got to tell you, I’m really pleased how the two teams have worked well together in putting this together because they know it’s the best thing for the companies, they know it’s the best thing for the shareholders and they know it’s the best way to go out there and win.

The next five months are going to be tough out there with COVID. And I think from a standpoint, we have to be smart and safe. And with that, every day, we look at our facilities, we look at our offices, how we keep them open, but more important, how we keep our business growing during these times. The stores are closed, restaurants are closed, how we push at retail, etc. I want to thank everybody for your support. Thank you very much for believing in the Aphria and now believing in Aphria, Tilray and SweetWater as we come together. So Happy New Year. Be safe out there. And I look forward to talking to you in the next four months. Bye, bye.

Operator

[Operator Closing Remarks]