Categories Earnings Call Transcripts, Health Care

Aphria Inc (APHA) Q3 2021 Earnings Call Transcript

APHA Earnings Call - Final Transcript

Aphria Inc  (NASDAQ: APHA) Q3 2021 earnings call dated Apr. 12, 2021

Corporate Participants:

Carl Merton — Chief Financial Officer

Irwin D. Simon — Chief Executive Officer

Analysts:

Owen Bennett — Jefferies — Analyst

W. Andrew Carter — Stifel Financial Group — Analyst

Tamy Chen — BMO Capital Markets — Analyst

Aaron Grey — Alliance Global Partners — Analyst

Pablo Zuanic — Cantor Fitzgerald — Analyst

John Zamparo — CIBC Capital Markets — Analyst

Matt Bottomley — Canaccord Genuity — Analyst

Michael Lavery — Piper Sandler — Analyst

Presentation:

Operator

Good morning. My name is Maryama and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q3 quarterly investors call. [Operator Instructions] Thank you.

Mr. Carl Merton, you may begin the conference.

Carl Merton — Chief Financial Officer

Thank you, Maryama. Good morning, everyone, and thank you for joining us to discuss Aphria Inc.’s financial results for the third quarter ended February 28th, 2021. Joining me on today’s call are Irwin Simon, and other members of our management team.

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 this call, we may make forward-looking statements. These statements are based on our current expectations and belief 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 in our earnings press release and the financial filings issued today for a discussions 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’d like to turn the call over to Irwin.

Irwin D. Simon — Chief Executive Officer

Thank you very much, Carl, and good morning, everyone. We appreciate you joining us to discuss our third quarter fiscal year 2021 results. Today, I will discuss our Q3 operational and financial highlights as well to reiterate the anticipated strategic benefits of our proposed business combination with Tilray.

We are very excited to further advance Aphria’s long-term vision to be a leading global cannabis, lifestyle and consumer packaged goods company. Across our global operations, the Aphria team proactively implement significant cost savings initiative in the quarter to preserve profitability and maintain growth against the changing consumer demands due to the ongoing effects of COVID 19 in Canada and Europe.

In Canada, our largest market, the provincial lockdowns extended through most of the quarter and the provincial boards lowered their inventory levels in view of the limitation imposed on the operation of cannabis stores, which were closed and only had pickup and delivery through e-commerce.

Germany also continued to be impacted by COVID-19 related restrictions, which resulted in lower levels of inventory at our CC Pharma Distribution business due to insufficient supply of medical products from other European Union countries as well as pharmacies experienced lower turnover and being closed. While we factored in some impact to our business from the pandemic and in Q3, the duration and the magnitude of the lockdown was greater than we initially anticipated.

Our responsiveness and our ability to make adjustments to our business allowed us to successfully deliver our 8th consecutive quarter of positive adjusted EBITDA. I want to thank our global team for their hard work and dedication to keeping the health and safety of our employees a top priority, while also delivering these results.

For Q3, we achieved adjusted EBITDA of CAD12.7 million, in line with Q2 despite net revenue of CAD153.6 million, down 4% from Q2. This demonstrates the strength and resiliency of our team as well the importance of having a diversified business from medical to adult use cannabis in Canada, along with our distribution of our medical products internationally to a robust beverage alcohol business in the U.S.

We’ve created a solid foundation for future top line growth as the dynamic environment we are operating in improves and it will improve. We also have several incremental growth opportunities as we look to parlay our branded consumer products into additional complementary product offerings in Canada, the U.S., and internationally. The key strategic focus of our team is consistently on the highest return priorities such as strengthening our core cannabis business in Canada and completing strategic M&A to generate sustainable growth for today and well into the future.

We improved our free cash flow by CAD12.4 million during the third quarter, predominantly as a result of reduced capital expenditures and maintaining the cash provided by operating activities. We continue to manage our working capital and believe our top line increases as the market dynamics improve we’ll reach our goal of being cash flow positive.

We believe the strength of our balance sheet and access to capital will continue to be our key competitive strength and a differentiator in the cannabis industry, helping us to support our long-term financial flexibility. Our transformational journey began well over a year ago when we started as very different than where we are today and where we’ll be in a year from now.

Our global team will continue to evolve our business to stay at the forefront of the industry. We remain focused on maximizing our growth in net sales, profitability, and most importantly, our cost containment. Our market leading adult use cannabis brands remain strong and our international cannabis sales footprint has expanded to include new regions for distribution. During the quarter, Aphria maintained its Number one position as the top license producer in terms of sales to provincial boards across all our brands, in both Ontario and Alberta per Headset reporting data and that’s with a lot of retailers closed.

Headset data covers a large portion or approximately 63% of the total retail market in Canada. Focusing on Headset data a little more — in a little more detail, from a market share perspective, Aphria is the Number one licensed producer in Canada with an overall national market share of 12.1%. We are the Number one licensed producer in Saskatchewan, Number five in British Columbia.

Our vape cartridge maintained the Number one market share with an 18.8% market share. Our brands held the Number two dried flower with a 12% market share. Number two pre-roll share with a 12% market share, and Number two oil share with a 13% market share in Canada. What great accomplishments.

We’re also seeing great improvement in Quebec, rising to the Number two licensed producer in terms of sales to the provincial board, based on the internal analysis. We foster a robust culture of innovation, brand development, cultivation at Aphria and being that low-cost producer. During the quarter, Broken Coast extended its premium cannabis offerings with the introduction of newly developed strain Pipe Dream. We introduced a Solei brand topical, the high potency topical available in the Canadian market. Both new products have received positive initial feedback from retail partners and consumers.

We are continuously evaluating options to connect with consumers through our compelling brand propositions and delivering compelling innovation so Aphria can meet the needs of the ever evolving consumer preferences in the marketplace. Internationally, we’re expanding our presence. Today, we are in Germany, Italy, Israel, with growing opportunities in Malta, Poland as well in Asia and Latin America.

We are leveraging our strength with our medical platform and our multi-facet international operation. This includes our domestic cultivation, our medical cannabis product registrations and licenses and a large distribution infrastructure to increase access to high quality medical cannabis for patients and consumers.

There are more than 600 million people across EU representing a tremendous opportunity for long-term growth both in medical and recreational, when legalization happens. We expect to continue to see growth in our distribution of medical cannabis and CBD offerings across the region. Importantly, we’re also recognizing ourself to quickly benefit from changes in EU legalization in other countries that are allowing medical cannabis.

As many of you know, for 30 years, myself and a lot of my team members have led a CPG company along with other key members. Under our leadership, we led the CBG Company to over a CAD3.5 billion business on a global basis. We believe we have a proven track record to build consumer brands within Aphria that will help to uncover that we understand government relations, local preferences to grow our international business and our local businesses.

In addition, we believe our key learnings from operating in Canada will help us with the EU and the U.S. market, once legalization happens. At Aphria, we foster a strong ability to innovate across cannabis forms with brands that resonate from a premium offer. We expect this success to be a key differentiator and are assets for future international and Canadian growth.

We’re excited about the long-term potential to grow internationally and in our core Canadian business. As a company that’s a purpose-driven company, we take great pride in leading with our core values, are committed to changing people’s lives for better by investing in our products, our brands and our people and of course the most important, our planet.

Focusing on Q3, represented our first full quarter contribution from SweetWater, and what a great brand. They contributed CAD14.8 million in net revenue and CAD5 million in adjusted EBITDA for the quarter and that’s still with most of the bars closed. Post Q3, the month of March, we’re pleased to report SweetWater experienced a large rebound with on-premise sales up approximately 35% compared to the prior year when the U.S. first went into a national lockdown.

SweetWater recently launched H.A.Z.Y. an IPA, a year round brew and is already the Number one new craft brew item in the Southeast, Number Six nationwide, according to IRI data. H.A.Z.Y. IPA’s growth is being fueled by millennials, an important demographic in our business. The traction and growth in the new offering in just a few months in — which we speak to, and which we speak in regards to the strength of SweetWater’s innovation and brand development.

We’ve been working closely with the team at SweetWater. It’s already been very productive and initial opportunities are coming to life as we collaborate to leverage [Phonetic] Aphria’s cannabis brands in the U.S. through new beverage offerings. This will provide valuable brand awareness, brand building opportunities with consumers ahead of potential federal cannabis legalization.

SweetWater provides a robust, profitable platform for future growth and development and what a big opportunity in the beverage business. We’re leveraging their innovation, manufacturing, marketing and distribution infrastructure in the Southeast with an expansion opportunities all across the U.S. During the quarter, we also launched SweetWater beverages, including the 420 Strain state-wide in Colorado. The first U.S. state to legalize adult use cannabis. This is a great place for us to potentially start offering Aphria cannabis branded beverages in the future, to start to build out our brand awareness and cannabis lifestyle with consumers.

Our team at Aphria understands the importance of brand equity and selling good quality, safe products. In the U.S., more and more states are legalizing both medical and adult use cannabis with recent developments being in New York and New Jersey. In the last four months, five states have legalized adult use marijuana, meaning now 30% of the country allows its adult residents to possess and use cannabis.

As of April 7th, 15 states in Washington DC have legalized adult use and 36 states have legalized medical cannabis through voter ballot initiatives or state bills. At least two more states are poised to be added to that list following the passage of cannabis legalization this year. The national trend is indicative on a shift of American’s perspective on cannabis. As we continue to advance our long-term vision and growth objectives, the addition of SweetWater is a cornerstone with our U.S. strategy and strong complement to our existing Aphria business and we believe it will continue to be compelling financially for us.

To further advance our vision and strategic growth objectives, we believe the addition of SweetWater and other pending business combinations in the U.S. in both consumer products and CBD products that can parlay into future THC and cannabis products will help us widen the gap between us and our peers, positioning us well ahead of the competition. I urge Aphria shareholders and Tilray stockholders to vote for the business combination. On a combined basis, I mentioned many times before, there are many benefits of both of these companies coming together. I can’t stress enough, please get out there and vote if you’ve not done so.

From a global operations perspective, we remain committed to Latin America and seek to develop our business in Asia where we’ve already sold in our first CBD products. We have a tremendous run rate for growth and proven global teams with a track record of success. In the U.S., we plan to leverage our strong sales and distribution network. This includes leveraging SweetWater’s existing relationships with the addition of Tilray’s CBD wellness brand, Manitoba Harvest, a pioneer in their industry. We look to build upon our existing distribution partnership in the U.S. and international.

Keep in mind, SweetWater and Manitoba Harvest provides us with thousands of distribution points for our products across natural, mass, club and grocery channels and SweetWater is also available in restaurants and bars which will sell — allow us one day to sell into cannabis cafes. We believe this will give us a tremendous head start to access these retail and food outlets with our craft beer as well as our CBD hemp product offerings and we can do this on a national scale in the U.S. as well for our cannabis offerings when federal legalization happens.

In summary, we are pleased with our ability to contain our costs globally and report positive EBITDA for Q3 in a difficult, and I mean difficult, operating environment, but that will past too. I am proud of all our employees and their contribution to further Aphria’s vision, especially during COVID-19. I’d like to thank every one of them. I’d also like to thank our Board for their contribution.

We plan to continue to build on our strong foundation in Canada and internationally to capitalize on growth opportunities, utilizing our best-in-class cultivation and manufacturing across a greater distribution footprint. This will enable us to connect with an increasing number of consumers who want cannabis, and patients with our industry-leading brands and products.

With that, I’ll now turn the call over to Carl, who will take you through our financial results for Q3, Carl?

Carl Merton — Chief Financial Officer

Thank you. Irwin. 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. All amounts are expressed in Canadian dollars, unless otherwise noted, and except for per gram, kilogram, kilogram equivalents, and per share amounts.

As Irwin mentioned, this quarter featured unique circumstances that had a direct impact on our ability to grow our business and on our financial results. During the 89-day period of the quarter, portions of the biggest province in Canada, Ontario, were in a lockdown virtually every day. Two of the other big provinces in Canada, Alberta and British Columbia, experienced significant lockdown periods.

Germany experienced lockdowns for most of the quarter and the Southwest United States, while not in lockdown, saw a significantly less on-premise business than it has in other periods since the pandemic began. These lockdowns directly impacted total revenue that our businesses were capable of earnings. Despite these lockdowns, we believe our team did an incredible job during the quarter focusing on our highest return priorities.

In the quarter, once we realized the duration and magnitude of — the duration and magnitude of the lockdowns were going to be greater than we initially anticipated, particularly in Canada, we responded quickly and implemented meaningful changes to our operations to align with demand and reduce costs in this dynamic operating environment.

These changes resulted in significant cost savings. These savings went a long way to help us generate our 8th consecutive quarter of positive adjusted EBITDA. We are very pleased with this result and expect a portion of these savings to continue on in future quarters. While a majority of them will ramp back up as demand increases, provinces are fully opened for business. Our ability to achieve CAD12.7 million of adjusted EBITDA this quarter demonstrates the agility of our team and our operations despite our net revenue of CAD153.6 million being down 4.3% from the prior quarter.

A few weeks after the quarter ended, we were optimistic that the prospect of lockdowns was ending and anticipated demand might be returning to pre-lockdown level shortly. This coincided with on-premise business at SweetWater increasing by 35% from March in the prior year, a very positive sign. But as Canada continues to struggle with COVID-19 infection rates, Ontario recently returned to a full lockdown for at least four weeks; Alberta and British Columbia continued to experience all-time highs in infection rates and could return to lockdown; and just last week, Germany implemented a 14 day hard lockdown.

A return to lockdowns presents a very short-term headwind on revenue growth. But as we displayed this quarter, even in the face of lockdowns, our management team is hyper-focused managing our business through such headwinds and on maintaining profitability. This quarter represented our first full quarter of SweetWater results. These results include not only the revenue and adjusted EBITDA from SweetWater’s operations, but also include and explain the increased SG&A costs incurred in the quarter, particularly the first quarter of amortization on definite life intangibles acquired as part of the transaction.

The CAD12.7 million of adjusted EBITDA in the quarter included adjusted EBITDA from our cannabis business of CAD7.9 million, adjusted EBITDA of CAD5 million from SweetWater, and adjusted EBITDA of CAD1.3 million from our distribution business, all offset by negative adjusted EBITDA of CAD1.5 million from our businesses under development.

As Irwin discussed, despite the demand pressures, we worked hard to maintain our brand strength in the quarter across both our adult use and medical markets. Our industry-leading cultivation team continues to do a great job, helping us to keep our cash costs below $1 per gram coming in at $0.90 this quarter, despite lower win time yields and not operating all brewing chambers during the quarter.

Like others in the industry, we are interested in Health Canada’s response to the recent labeling issues uncovered in the adult use cannabis market and expect to respond quickly, once they provide their views on standard labeling. We maintained a strong balance sheet and overall capital structure to support our long-term growth. This financial flexibility positions us well as we look ahead. We expect to continue to strategically evaluate M&A opportunities as we look to be a leader in the medical and adult use cannabis industry globally and build our U.S. infrastructure in advance of federal legalization.

As we mentioned during our Q2 call, early in Q3, we closed a $120 million financing with BMO, providing a $20 million revolving credit facility, which has not been drawn on and a term debt facility of $100 million. At closing, we drew fully on the term debt facility.

From a key — free cash flow perspective, our CAD12.4 million improvement was not enough to achieve our previously stated goal of being free cash flow positive in Q3, largely because of the revenue impact associated with the COVID-19 lockdowns. Across our global team, we continue to emphasize initiatives that prioritize Aphria’s profitability not only for today, but well into the future.

In Q3, CC Pharma’s distribution revenue was down slightly from the prior quarter based on lower levels of inventory due to insufficient supply of medical products from other European countries as well as pharmacies experiencing lower turnover due to COVID-19 restrictions. In addition, the portions of our business reliant on in-person visits, whether they’d be to doctor’s offices, hospitals, pharmacies, cannabis clinics, bars, restaurants or cannabis retail stores, continue to experience challenges depending upon the local conditions and restrictions and regulations related to the global pandemic which may continue to have an adverse impact on our revenue in the future depending on the rate of vaccinations and reopening schedules. Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption associated with COVID-19.

Moving on to a more detailed breakdown of our financial results for Q3; net revenue increased 6.4% from the prior year, but decreased 4.3% from the prior quarter to CAD153.6 million. This was primarily due to a decrease in net cannabis and distribution revenue, partially offset by an increase in net beverage alcohol revenue from the acquisition of SweetWater. Net cannabis revenue decreased 23.8% from the prior quarter to CAD51.7 million.

As noted in today’s press release, we experienced a reduction in demand during the quarter as a result of the ongoing effects of the pandemic, including provincial lockdowns and provincial boards taking measures to lower inventory levels which had previously included forecasted cannabis market growth.

These provincial measures resulted in decreased orders from the provincial boards and product returns of approximately CAD5 million. Our team did a good job of working to mitigate a portion of the product return by finding alternative distribution channels for some of the products on short notice, but we still experienced a reduction in net cannabis revenue of CAD4.1 million.

Absent the product returns, net cannabis revenue would have been CAD55.8 million. The average retail selling price of medical cannabis, before excise tax, decreased to $6.69 per gram in the quarter, compared to $6.96 in the prior quarter. The decline is a result of specific pricing programs offered to assist patients who have been negatively impacted by the pandemic along with other promotional programs. The average selling price of adult use cannabis before excise tax decreased to $3.82 per gram in the quarter compared to $4.29 per gram in the prior quarter, primarily related to consumer trends to large format products and price compression in the market.

Price compression, combined with standard labeling were a dominant discussion point in the industry during the last quarter. In order to play during this period of price compression, LPs that didn’t strip production costs will experience large cash burns in the quarter. Adjusted cannabis gross profit for the third quarter was CAD20.3 million with an adjusted cannabis gross margin of 39.2% compared to 45.9% in Q2. The decrease in adjusted cannabis gross profit and adjusted cannabis gross margin was primarily due to lower winter time yields and the impacts of the product returns, as previously mentioned. The remaining difference is due to price compression in the quarter.

Q3 adjusted distribution gross profit was CAD11.4 million with an adjusted distribution gross margin of 13.1%. The decrease in adjusted distribution gross profit specifically was a result of a decrease in distribution revenue at CC Pharma in Germany. Our adjusted gross margin on beverage alcohol decreased from 60.5% in Q2 to 47.9% in Q3. The prior quarter gross margin included only five days of sales with a sales mix that more heavily skewed towards on-premise consumption, which carries a higher margin.

Operating expenses in the quarter increased to CAD100 million from CAD82.7 million in Q2. The increase from Q2 was primarily driven by the impacts of the growth of our share price in Q3 and the addition of a full quarter of operating expenses from SweetWater, including the amortization charges on defined life intangible assets. The remaining increase is from transaction costs associated with the acquisition of SweetWater, the proposed Tilray arrangement, other potential acquisitions and one-time litigation costs.

As Irwin discussed and I highlighted at the beginning of my remarks, the provincial lockdowns were more impactful, particularly in Canada, than we initially expected. And in response, our team took immediate action to implement several cost-saving initiatives including temporary four-day work weeks at our Canadian cannabis facilities, better managed head count, and reduced plant operating expenditures. These initiatives were instrumental in preserving our positive adjusted EBITDA from cannabis operations.

As we consistently state, our focus remains on profitability as shown through metrics such as adjusted EBITDA and free cash flow. As I mentioned, from a liquidity perspective, our working capital improvement efforts, including maintaining at the same levels for the last two quarters, our investment in inventory and a reduction in capital expenditures, resulted in an improvement in free cash flow of CAD12.4 million in the quarter, recording a few a free cash flow loss of only CAD3.9 million.

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 CAD1.2 million and we continue to work to be free cash flow positive, all subject to the intensity of COVID-19 restrictions in the markets where we operate. We believe 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 are pleased with the agility of our global team. They reacted quickly with decisive actions to maintain our adjusted EBITDA, responding to changing industry dynamics. As we move ahead, we believe our strong cash position will continue to help us navigate through this COVID 19 global pandemic as we succeed in reaching more consumers and patients with our high quality leading brands and products.

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

In closing, we are excited about our upcoming special meeting of shareholders to vote to approve the proposed Aphria Tilray business combination. As a shareholder, I voted for the resolution to approve the arrangement. We urge Aphria shareholders and Tilray stockholders as of the record date, equally, vote for the resolution to approve the arrangement.

As we move forward, we expect to become an even stronger, more diversified, and profitable company. We maintain tremendous confidence in our ability to create long-term sustainable shareholder value for many years to come.

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

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. Hope all are well.

Irwin D. Simon — Chief Executive Officer

Good morning, Owen.

Owen Bennett — Jefferies — Analyst

Just the one question from me. I wanted to focus on the decline in average selling price in adult use. So, could you give some more specifics on your portfolio mix shift to value over Q1, Q2 and now Q3? And then linked to this, can you maybe talk about what you’re doing to support your more premium offerings. Are there opportunities to drive upside there, particularly maybe around Broken Coast? Obviously that’s a very strong brand and that’s probably a key advantage for you having that brand? Thank you.

Irwin D. Simon — Chief Executive Officer

So Owen, so two things. I’ll answer the first part and I’ll let Carl. I want to be clear, because what I’m seeing when it sounds — when we’re talking about lockdowns, you know and originally when Canada closed, cannabis stores were deemed essential service, so the stores were open. During the next evolution, the Canadian government and the Ontario government closed stores.

So you couldn’t go to a store, you either had curbside pickup or e-commerce and each retailer saw about 25% decline and some up to 30%. So the stores were closed. And that’s the difference, and I know we’ve been getting some questions in regards to why weren’t we locked down before. So that’s number one.

Number two, in regards to Broken Coast, as you heard me talk about and I’ve had many conversations, there has been really no price adjustment on Broken Coast. It continues to be our premium brand and you know Owen I have talked to a lot of the control boards, nobody wants to see price compression. I think some of the price compression was moving inventory, trying to get consumers to come to the stores or order online and that’s the way that ultimately what was happening from a market standpoint. I think once we get back to normal, we will see innovation out there in regards to different potencies of products. I think you’ll see innovation in regards to different vape, different pre-roll’s end-demand.

So, I’d come back and say price compression is because of what’s happening out there to try and get consumers to come and shop. But on the other hand, I see great things happening with Broken Coast. We have every bit of intention of how to maintain that premium product.

Carl, you want to just go ahead and talk about…

Carl Merton — Chief Financial Officer

Yeah. So just to add to that. I’ll start with Broken Coast, Owen. I think there is some — there are some very interesting things that have been going on there in the last quarter in terms of potency increases and the new products. Irwin talked in his script about Pipe Dream that strain has been doing very well. And Broken Coast really started a concerted effort probably six, seven months ago to make improvements on their potency and we’ve been seeing that over the last three, four months and consumer should be seeing that over the last two months, as those products are hitting shelves.

And so we think that’s — those are great improvements to really drive that brand equity. In terms of your question about shift in mix, I would say again further to Irwin’s comment, the price decrease in the quarter on a per gram basis in adult use is more about price compression than it is about a shift in mix. We saw a little bit of a shift away from pre-rolls and vapes, driven more because of the unique circumstances of the lockdown. But we didn’t see — we didn’t see a direct shift into more value in our portfolio.

Owen Bennett — Jefferies — Analyst

Okay. That’s very helpful, thank you guys. Appreciate it.

Operator

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

W. Andrew Carter — Stifel Financial Group — Analyst

Thanks, good morning. I want to dive into the beverage — good morning, hey. Regarding the beverage alcohol business, on premise growth 35%, pretty significant. I think given that initial strength, are you expecting a kind of a sustained recovery going forward. You’ve got additional distribution may be declining off-premise. And I guess even with the seasonally low quarter with kind of the business mix headwind profitability was kind of right in line with the business case.

So going forward, how are you thinking about this business’ portfolio role? Does it offset more a tepid profit expectations from Canada or do you step up marketing investment to really build brands and capabilities? Thanks.

Irwin D. Simon — Chief Executive Officer

Good question, Andrew. I think number one, what we’re seeing and what we’ve said before you see what’s happened with H.A.Z.Y and the demand for H.A.Z.Y. We also introduced a vodka seltzer called Oasis and it’s actually become one of the number one vodka seltzers out there. We will be introducing some of the RIFF products under the RIFF Broken Coast.

So, again, we’re looking to expand our beverage business. We’re now going to be sold in over 30 states and we’ll continue to expand that. So — and with on-premise opening up the way it is, I see lots of potential. We’re also working on lots of CBD type of products and other products within our beverage business. So, there is a lot of upside on the profitability of our beverage business. We’re also working with SweetWater in regards to the Canadian market with THC and CBD products and getting distribution in that market.

W. Andrew Carter — Stifel Financial Group — Analyst

Got it, thanks. I will pass it on.

Irwin D. Simon — Chief Executive Officer

Thank you.

Carl Merton — Chief Financial Officer

Thanks Andrew.

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. Thanks for the question. I wanted to go back, Irwin and Carl, you had some comments about other pending business combinations in consumer and CBD products. I was just wondering, to the extent that you can, if you could elaborate a bit more on what you mean by that? I presume this is thinking more in the U.S.

Irwin D. Simon — Chief Executive Officer

Hi Tamy, good morning. Number one, it is the U.S. and also it’s international where it makes sense there, no different than we did with our CC Pharma and no different than we did with SweetWater in the U.S. that ultimately can parlay into legalization — parlay into THC products once we can.

So that’s the plan there. Listen, we think we can build — continuously build out a high market share in the Canadian market with legalization already there on rec. I think there’s going to be lots of changes in regards to the way we market our product.

I think there’s still opportunities to drive some of our medical, I think continuously more and more markets will open up in Europe in regards to medical and potentially rec. And for us to get the scale and size we want in the U.S., we will look to do more consumer products that will parlay into cannabis type products or THC products, once legalization dose happen.

Tamy Chen — BMO Capital Markets — Analyst

Got it. Thank you.

Irwin D. Simon — Chief Executive Officer

And part of that will be utilizing our Aphria brands, like RIFF, like Solei, like Good Supply, like we’re doing with those in regards to the beverage business with SweetWater.

Tamy Chen — BMO Capital Markets — Analyst

Understood, thank you.

Irwin D. Simon — Chief Executive Officer

Thank you.

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 question. So, I want to ask about Canada and the market share. So I know we’re kind of impacted right now because some of the COVID restrictions but kind of as we look forward specifically at Ontario, how do you think about kind of returning to kind of market share gains or kind — within the province, especially in the context of more stores opening, maybe steps you’re taking to ensure you have the right kind of shelf space within those new stores and working with the provincial buyers on a go-forward basis to kind of return to those market share gains and also through the lens of the pending Tilray acquisition closing? Thanks.

Irwin D. Simon — Chief Executive Officer

Thank you. Listen, I think again and, there is one day this pandemic is going to be over, okay. And I think what we’re seeing, you know demand for cannabis as more and more states in the U.S. open up legalization. But we’re legal in Canada today and my objective, as I’ve said before, with the combination of Tilray to get to a 30% market share out there.

Recently, I’ve had calls with the different control boards and again it’s a major source of income for them. They see the demand and there is a major focus with them in regards to growing their products in Ontario alone, they expect to have by September, close to 1,400 stores and they’ve been a little slow in opening up stores because of the pandemic. Stores now are closed for the next four weeks and you only can order by curbside.

They also are looking at basically new innovation products, how we online — how we deliver products online. So there is a major, major effort from each of the control boards how to grow this business to a CAD6 billion retail business and with a 30% share of retail of CAD6 billion, that’s a good sized business to grow in the Canadian market.

And I’ll continuously say this, you know, I think the medical market, when patients can get back to their doctors, we’ll see growth in the medical market. But at the same time I think patients will have the ability to buy a lot of different medical products in that retail. The other big opportunity for us right now, we don’t have a major presence in drinks and edibles and that’s going to be a major opportunity for us to get into drinks and edibles and expand our business in that marketplace.

So I think the opportunity is out there in the Canadian market and with us having the ability to grow higher potency strains at Aphria Diamond and Aphria One. I mean, we easily can compete in the higher potency marketplace out there, if that’s what consumers are demanding.

Aaron Grey — Alliance Global Partners — Analyst

All right, great. Thanks. I’ll pass it along.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

Your next question comes from Pablo Zuanic with Cantor Fitzgerald. 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

You know maybe a question for those shareholders that are still on the fence regarding the vote and I don’t know if you want to comment, maybe the percentage of people that are on the fence is very small. But a two-part question. First, you know discuss international markets, you know [Indecipherable] we’ve seen other transactions, the number of companies talking about making, even Canadian ones mid-sized, talking about making inroads in Europe. So taking a medium, longer-term view, just a reminder of how Tilray and Aphria together are stronger in Europe.

And the second question, which is part of the same topic is on the subject of the need for scale in the Canadian market, right. The way I look at the numbers, there is a lot of small and mid-sized companies that seem to be doing well, quite well actually, developing niches, growing certain formats. You saw 7ACRES, right, become number one in premium. So there is a question mark about the need for scale in the domestic market with some mid-sized smaller guys seem to be doing quite well. Thank you.

Irwin D. Simon — Chief Executive Officer

So, number one, as I’ve said before, Pablo, I recommend if you haven’t got out to vote your shares, please do so. So far we’ve had great turn-outs in regards to that and close to 98% of the Aphria Shareholders that have got out there have voted in favor of the deal. And I think that’s what’s important is, investors are seeing the value of this deal, both on the Aphria side and the Tilray side, I think it’s just making sure investors get out there and vote as we’re living in a world today of somewhat shareholders not going out to vote, and I can’t stress enough how important it is to get out there and vote.

I come back and say this here, Pablo, we started a trend when we announced this deal in December and you saw the deals and the consolidations that have happened after that and I think with that, as I’ve said before, having a 30% share and being that low-cost producer, again, being a small player, yes, they’re doing quite well. But what’s quite well on a scale and size. I mean, this is our 8th quarter of EBITDA profitability. We have 265,000 kilograms of ability to grow at low cost.

And with that, I think, again, if you’re going to scale this up, you got to have growth, you got to have products, you got to have the ability to market the products and that’s something that Aphria has. You got to be able to put boots on the street to sell into the bud masters.

Once the world gets back to normal, a lot will change out there and a lot will change how we sell our products at brick-and-mortar, how it’s sold online, how you innovate and ultimately the importance too is what we’re seeing is, consumers want higher potency products, want differentiation and that’s something that Aphria will be able to do.

With a strong balance sheet we’ll be able to invest in those brands and I think there’s got to be some changes in the Canadian market in the way you advertise to consumers, and I think that’s important.

In regards to Europe, with our current facility in Germany with our CC Pharma and with the addition of the great facility that Tilray has in Portugal, we’re well ahead of the marketplace and to start from scratch there today is a two, three, four year build out at a very, very costly capex to go ahead and do that.

So, with the combination of Aphria and Tilray, I’m still even more convinced as I spent more and more time on this over the last three months, why this makes sense? Why this prepares us for the U.S.? I think there’s — ultimately there will be legalization in the U.S., but I think there is going to be opportunities for Canadian LPs to do a lot in the U.S. once that happens.

So I go back to your first question. Hopefully everybody gets out there and vote as the shareholder today and hopefully we’ll come back and show you all the benefits which I’ve said multiple times the combination of Aphria and Tilray together.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Thank you.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

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

John Zamparo — CIBC Capital Markets — Analyst

Thank you. Good morning.

Carl Merton — Chief Financial Officer

Good morning, John.

Irwin D. Simon — Chief Executive Officer

Good morning, John.

John Zamparo — CIBC Capital Markets — Analyst

I wanted to ask about free cash flow and in two parts, both on SG&A and capex. The cost savings initiatives that you’re referring to, when did your implement these in the quarter and should we consider these temporary as sales growth is limited or do you view them as more sustainable? And then the capex number in the quarter, is that also likely a sustainable number moving forward? Thanks.

Carl Merton — Chief Financial Officer

So, John, in terms of the capex, we do believe that’s a sustainable number going forward. It likely had some room to come down a little bit in various periods. In terms of the incremental SG&A, as we talked about in the conference call and in the MD&A, a big chunk of that number is tied to share-based compensation, which is being — which was driven by the increase in our share price in the quarter.

A big chunk of that increase was driven by introducing SweetWater’s SG&A into our income statement for 89 days as opposed to five days in the previous quarter. And including a big part of that number is just the amortization required on some of the intangibles that we purchased as part of the transaction.

John Zamparo — CIBC Capital Markets — Analyst

Okay. Maybe I could just follow up on that. I’m referring specifically to the cost cutting efforts. So — and it looks like it was mostly through the Aphria SG&A line in particular on either headcount or salaries, I’m just looking [Speech Overlap].

Irwin D. Simon — Chief Executive Officer

Sorry John they — it’s not one time. It’s not that we cut them and then we’re going back to normal. These are costs that have been dealt with and taken out of our business and will continue on.

Carl Merton — Chief Financial Officer

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

John Zamparo — CIBC Capital Markets — Analyst

Okay, understood. That’s very helpful. Thank you.

Irwin D. Simon — Chief Executive Officer

Okay, there is a paragraph on it in the MD&A.

Operator

Your next question comes from Matt Bottomley with Canaccord Genuity. Your line is open.

Matt Bottomley — Canaccord Genuity — Analyst

Good morning, Irwin and Carl. Hope all is well. Just wanted to go back to — through your philosophy on market share and some of the endeavours you’re doing subsequently, because in Tilray, to get up to those 30%, just curious on how you think that’s going to evolve in the Canadian space given we’ve seen some of your peers, particularly one that’s probably the next closest to you on market share, buy specific brands or buy specific other LPEs sort of tuck-in acquisitions to get incremental market share. Is that something you think the combined entity will be looking to do as well?

You mentioned beverage might be one sort of space [Phonetic] you’re looking to get into or do you think there is not really a lot of terminal value yet for a lot of these brands, given the fact that, from my perspective, when I walk into a lot of these dispensaries, if you’re sort to brand agnostic, it’s still pretty rough environment there to actually gleam you know who — which is LP is what and what the product offerings are? It’s pretty — there’s a lot of I think [Phonetic] progression still there. So just curious on you think if M&A is part of the strategy in order to build up that market share or do you think you can build from the ground up pro forma with the Tilray acquisition based on what you guys already have in pipe?

Irwin D. Simon — Chief Executive Officer

Good question. And I think you said it when you walk into stores, do brands mean anything? I think what’s going to be important is, it’s not so much brands. Between Tilray and Aphria, we’ll have over 12 brands out there. I think what’s going to be important is quality in regards to the product itself. The potency of the product somewhat on pricing of the product, educating consumers on the regulatory and the quality of the products. And I think that’s what’s ultimately going to be important.

The other big thing is, is here — is having boots on the street once they get into stores to make sure they have a great representation of our products. And with that, I think we have enough out there and don’t have to go out there and acquire any other brands.

I think we got to continuously have a good pipeline of innovation. I think we got to continuously expand drinks. I think we got to continuously expand edibles. But I think the big thing here is also is convincing Health Canada and Canadian government some of the ways we got to market the right way to consumers and from an education standpoint and why certain brands and products matter.

Matt Bottomley — Canaccord Genuity — Analyst

Okay, thank you.

Irwin D. Simon — Chief Executive Officer

Thank you.

Operator

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

Irwin D. Simon — Chief Executive Officer

Hello?

Operator

Neil?

Irwin D. Simon — Chief Executive Officer

I’m not sure he is there, operator?

Carl Merton — Chief Financial Officer

Yeah, I think we just — should just go to the next call.

Operator

Okay. Your next question comes from Michael Lavery with Piper Sandler. Your line is open.

Michael Lavery — Piper Sandler — Analyst

Good morning. Thank you. Just curious if you could give an update on the current quarter and maybe what you’re seeing from the consumer. You mentioned there is four more weeks to go in Canada with store closures. Are you seeing consumers get used to that and do more of the online ordering and pick up even if that hadn’t been their typical behavior?

Do you think that when stores reopen, there’s going to be pent-up demand or it will just go back to kind of a normal level as opposed to sort of making up for lost time. Just some of — kind of what you’re seeing in terms of how they’re reacting now and what you expect might come towards — when the stores reopen?

Irwin D. Simon — Chief Executive Officer

Michael, excellent question and it’s something that we talk to a lot of people, collect a lot of data out there and do a lot of analytics on this year. So with that, the good news is, hopefully more people even though you’re on, and I hate the word lockdown, but again Toronto or Ontario is closed down from a province standpoint. With nice weather, people want to get out. People want to get out and enjoy some recreational cannabis. People — consumers will go stand in line and pickup at store, at curbside or will order online.

So, I think the good news is, as we head into a warmer weather, it will help business. Again, now, consumers are used to going to curbside and ordering online where this was all something new that just happened in December, January because before stores were opened.

And then third, you know, especially Ontario, but the rest of Canada, more and more stores are continuously opened, so it will be available, I think we’ve, as a company have learned a lot through this year, in regards to how to market our brands, what consumers and want potency, the different types of products.

And I think the control boards have learned a lot too, and we’re working with them on forecasting because we can’t afford at the stocks — we can’t afford to have the wrong products in there. So, I see us getting back to normal come this summer and yes, the question is what a better time to get back to normal coming into the summer and there will be tremendous piped up demand.

Michael Lavery — Piper Sandler — Analyst

Okay, great color. Thanks so much.

Irwin D. Simon — Chief Executive Officer

Thank you. Thank you.

Operator

There are no further questions at this time, I will now turn the call back to Mr. Simon for closing remarks.

Irwin D. Simon — Chief Executive Officer

Thank you very much, everybody, and thank you for getting on this call. I know it’s difficult times out there, difficult quarter considering, again, the close down of stores. And as I step back and we talk to the control boards and we hear what their sales are down, we hear what they’ve done with their inventories. It is actually no excuse. But if the stores are closed the stores are closed.

I really commend the action we’ve taken and it’s not a one-time action in regards to looking at our organization, in regards to taking out our costs, in regards to increasing potency, in regards to improving our growth, in regards to working with our employees around the world. With that, I feel where else is there a business out there that worldwide can be a CAD100 billion business? Where else out there is there a business that you step back and look at what the demand will be in cannabis both in recreational medical, in beverages, in edibles etc.?

And what Aphria has today; it has tremendous brands, it has a tremendous grow facility, has tremendous innovation, has tremendous regulatory, and has a strong balance sheet. And with the combination of Tilray, it will even strengthen it more. So, again, I cannot recommend enough that get out there and please vote both Aphria shareholders and Tilray shareholders for this year deal that we can get this closed and move forward.

And again, I come back and sort of say consolidation will be something that will happen in this industry and continuously happen and when legalization safe bank [Phonetic], medical cannabis legalization happens, Aphria-Tilray will be ready for it and will be well positioned in regards to its products, its brands, its innovation to be able to make a difference. So with that, please stay safe and thank you very much for listening today.

Operator

[Operator Closing Remarks]

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