Aphria Inc. (APHA) Q1 2021 Earnings Call Transcript

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Aphria Inc. (NASDAQ:APHA)
Q1 2021 Earnings Call
Oct 15, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Mariama, and I will be your conference operator today. At this time I would like to welcome everyone to the Aphria Inc. Q1 quarterly investors call.

[Operator instructions] Thank you. Ms. Tamara Macgregor, you may begin the conference.

Tamara MacgregorChief Corporate Affairs Officer

Thank you, Mariama. Good morning everyone, and thank you for joining us to discuss Aphria Inc’s financial results for the first quarter ended August 31, 2020. On today’s call are Irwin Simon and Carl Merton. By now, everyone should have access to the earnings release, the financial statements, and MD&A which are available on the Investor section of Aphria’s website at www.aphriainc.com.

The financial statements have been filed with SEDAR and EDGAR. Before we begin, please remember that during the course of this call, management may make forward-looking statements. These statements are based on management’s current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect, and actual results could differ materially from those described in these forward-looking statements. Please note that the text of Aphria’s earnings press release and the financial filings issued today for a discussion on the risks and uncertainties associated with such forward-looking statements.

I’d also like to remind you that all references to financial figures are in Canadian dollars unless otherwise stated. And now, I’d like to turn the call over to Irwin.

Irwin SimonChairman of the Board and Chief Executive Officer

Thank you very much, Tamara, and good morning, everyone. We appreciate you joining us today to discuss our robust start to the fiscal year 2021. In our first quarter, our Global team continued to execute against our strategic plan and continued to perform at a high level to further Aphria’s industry-leading market position. All with a consistent emphasis on driving long-term sustainable growth by focusing on our highest return opportunities, and most profitable priorities as we’ve told you so.

As a purpose-driven company, we take great pride in leading with our core values and are committed to changing people’s lives for the better, by investing in our products, our people, and of course, our planet. We began our transformational journey over a year ago. With a laser focus, we turn our attention to achieving traditional business fundamentals in the terms of maximizing growth in net sales, profitability, cost containment, managing cash flow, and cash management. We’ve made substantial changes across our entire organization to position Aphria for sustainable long-term growth with a strategic focus on solidifying our strong, strong Canadian Foundation, by driving category leadership with strong cash carefully curated brands, and the introduction of many new innovative products.

And increasing our market share in the Canadian market with a focus on operational excellence and, B which we are that low-cost hot quality producer. Increasing our profitability through our continued cost managing, and having that strong cash position for growth, and expanding our geographic reach where it makes sense, and that is something that we focused on. These initiatives help propel a free forward and be the number one cannabis company today. In addition, we’ve built a strong management team and continued to execute against these initiatives and they are focused on winning.

I am incredibly proud of our entire team and the culture of accountability and entrepreneurship we have created. The dedication, collaboration, and ability to be both nimble, agile in what remains a dynamic operating environment has helped us generate the strong financial results that you’re seeing today. I’ve spent nearly 30-years running the CPG company in the U.S. I know what it takes to build winning brands and brand equity is key.

And I understand the importance of brand equity and selling good quality products. In the U.S., the up and coming U.S. elections could provide for a change in federal regulations which Aphria will be ready for. Our first fiscal quarter results reinforce Aphria’s inevitable leadership positions, particularly in Canada.

We believe we’re executing at a level above our competitors. Our results this quarter reflect record adult-use cannabis revenue, an increase of 248%, compared to Q1 last year, and an increase of over 23% from Q4 fiscal ’20. While enabling us to also maintain a cash cost program below $1.00. This represents the fourth consecutive quarter of lowering of Aphria’s cash costs to produce dry cannabis while continuing to utilize our cultivation expertise to increase our product quality.

Thanks to our team in Leamington, we continue to execute well across all our facilities including Aphria one, Aphria Diamond, and Broken coast. We are outperforming many of those in the marketplace with solid market share gains in Canada with new brands, product innovation, which will continue to evolve as we anticipate changing consumer and patient preferences and demands. Additionally, the balance of supply and demand in Canada’s business remains a top priority. As Carl explained in more detail, we proactively took steps shortly after year-end to lower our cannabis supply.

Further, we continue to actively manage both sides of supply and demand and working to work until lower our inventory balances. For the first quarter, adjusted EBITDA from our Cannabis business increased by 11% to $10.4 million. And on a consolidated basis, we reported our sixth consecutive quarter of positive adjusted EBITDA. As I consistently say and I always say, cash is king.

We ended the first quarter with $400 million of cash to fuel future plant growth in Canada and internationally. At Aphria, we’ve created one of the strongest balance sheets, with ample financial flexibility to also pursue potential future M&A. If and when we believe there’s an opportunity to further enhance our shareholder value. I am consistently challenging our team to evaluate opportunities where we can win and continue doing so in the future, while we maintain a safe environment for our team to work for the ongoing global health crisis.

Relative to our largest competitor, Aphria maintains its number one revenue position among Canadian LPs. In terms of adult-use gross revenue, Aphria maintains our number one position in Canada with 23% growth, widening the GAP from our next closest competitor. And Aphria continued to maintain that number one ranking when compared to his closest competitors on an adjusted EBITDA basis. We believe that our differentiation portfolio brands which are all designed to resonate with consumers in all categories is a key component of what sets us apart from our competitors.

This provides us with the ability to establish a leading position in the adult-use market in Canada. As this industry evolves, we continue to evaluate the cannabis market, our adult-use brand portfolio in order to ensure that it continues to meet multiple consumer segments. We are also leveraging our vast selection of strains to offer each consumer segment, a differentiation experience. While focusing on the value proposition for each of these segments as it relates to price, potency, and product assortment.

Our team has done a tremendous job of entry into new product categories that drive most consumer demand. Last quarter, I was excited to share with you the launch of a P’tite Pof, a valued brand, inspired by Québec culture. Most recently, our team introduced B!NGO to the Canadian market and economy brand. utilizing lower potency cannabis.

We’ve experienced strong, strong initial selling for both P’tite Pof and B!NGO. These two brands complement our existing high-quality brand portfolio, including Good Supply, Solei, RIFF, and Broken Coast. And remember, these brands are only a couple of years old. Broken Coast remains a top super-premium brand, not only delivering exceptional quality standards.

Across our total business, we continue to gain national market share and grow brand sales in the primary markets of Ontario, Alberta, Québec, British Columbia, and that is quarter over quarter we’re talking about. For the month of August 2020, Aphria ranked as the No. 1 LP for sales in the brick and mortar retail channel across all brands in Ontario and Alberta. In Ontario for the quarter, Aphria maintains at least a 17% market share per OSC monthly reporting.

Aphria experience 60% more sales than the next highest LP in Ontario. And that is according to headset data, which covers a large portion of the Canadian retail market. Although, not encompassing all the retail sales for the month of August. Head says the most recent publication also highlights the Aphria brand for the quarter, and quarter including 48.4% growth in the quarter, 55% better than the industry average in Canada.

The No.1 LP in Canada with a market share of 14%, more than 20% higher than the next closest LP. As you can see, we’re achieving a lot with our brands, and our brands are growing nicely. In the month of August, Aphria evades cartridges to maintain the highest market share, scoring a 12.6 share, 30% higher than the next closest LP. Our brands held the number one pre-rolled share, and our brands held a No.2 dried flower oil share in Canada.

To see what the numbers are saying, consumers are buying our products. Again, looking at the quarter in Alberta, we understand for the month of September, Aphria held at 23% market share across all categories. And our vapes and dried flowers obtain 32% share, and 21% market share respectively. Again, great achievements.

Importantly, the market report suggests spending in the legal market outpace the illicit market for the first time. And boy, this is a big win. As I’ve said before, conversion of the illicit to legal market represents one of the largest opportunities for Aphria and the industry as a whole. We continue to believe this will be achieved through strong brands, price, quality, innovative new formats, and of course access to many retail stores that will continue to open across Canada.

Consumers are now able to purchase quality cannabis in similar formats at a similar price through the legal market. So why wouldn’t they. And when it comes to access, consumers will have more options with retailers stores expected to triple across the country. We continue to believe Aphria is well-positioned to benefit from the future growth of retail.

To summarize from enhancing our global team, our brand-building activities, leveraging our cultivation expertise and production capabilities, managing our cost to reinvesting in R&D, Aphria is well-positioned for future growth. We remain excited about the tremendous growth in Canada, potentially the U.S., and the rest of the world. Focusing on our international opportunities, we currently maintain operations in Germany, Italy, Malta, Colombia, and Argentina. As well as strategic relationships in Israel, Denmark, and Poland.

In establishing our international, we focus on areas where we identified the biggest opportunities for growth with a low cost of capital that can drive near-term profitability. In Germany, we recently completed our first certified EU GMP shipment of dried flower from Aphria One facility toward the German subsidiary, CC Pharma. This is a significant milestone for Aphria. One that strengthens our position as a leading cannabis company in Germany and in the European Union.

We are leveraging our strong medical platform, our multifaceted international operation, which combines, domestic cultivation, import permits, large distribution infrastructure to increase access to high-quality medical cannabis for the patients worldwide. We remain excited about future milestones, including the completion of our cultivation facility in New minister Germany, which we expect will be completed this coming quarter. We maintain our strong foundation in Canada and have great momentum. We believe going forward, we built a strong foundation with our strong leadership team, strong brands, industry-leading cultivation expertise combined with our emphasis on cost containment, and the highest return on our priorities.

As well as our key consumer data insights, all will fuel our growth in Canada and internationally. Our teams continue to lean in and take an aggressive and balanced approach to our future growth and profitability. I would like to thank our entire team worldwide. Our board of directors.

Our operation and financial results. Our direct results of their ongoing commitment to Aphria, our brands, our products. We are very pleased with the start of this fiscal year and look forward to a great year to come. With that, I will now turn the call over to Carl, we’ll take you through our financial results for fiscal Q1.

Carl.

Carl MertonChief Financial Officer

Thank you, Irwin. Good morning, everyone. Our Cannabis business started off the fiscal year strong. Our brands continue to excel in markets.

And late in the quarter, we introduced our large format sizes, and our new brand B!NGO, a large format offering utilizing lower potency cannabis. Our financial results continue to be the envy of the industry. We reported another quarter of record gross revenue for adult-use cannabis. Cash costs per gram remain below $1.00, as we leverage our cultivation experience and we generated our sixth consecutive quarter of positive adjusted EBITDA.

These results helped us maintain our robust capital structure. We have a strong balance sheet, a strong cash position, and a cap table with minimal potential dilution that continues to position Aphria with a multitude of opportunities to pursue future growth in Canada and internationally. Before I review our fiscal first-quarter financials in more detail, I want to echo Irwin’s sentiment and extend my sincere thanks to our global team. Everyone continues to operate at a high level internationally, with an emphasis on initiatives that prioritize Aphria profitability, not only for today but well into the future.

We prioritized having a more diversified brand and product offering portfolio to maintain and take share across product categories with our leading adult-use and medical brands. We continue to find pockets of the industry undersupply and capitalize on them using our data insights and understanding of consumer preferences. We believe our operational execution has helped further extend our leadership position in the cannabis industry. As Irwin mentioned earlier, balancing supply and demand remains one of our biggest priorities in Canada.

Particularly after the unprecedented ramp-up of our Aphria Diamond facility in less than one quarter. In the middle of June, we temporarily reduced our cannabis output at Aphria One, focusing the reduction on our operating facility with the higher of our two cost structures. As a result of cannabis’s 12 weeks grow cycle, this reduction in capacity did not impact harvests until the month of September, and therefore, had no impact on Q1. Managing cannabis supply is not just about fewer plants.

We are focused on processes and procedures designed to minimize the number of sugar leaves trimming on plants, increase the amount of saleable flower off of each plant, and minimize the amount of extraction grade flower growing. The adjustment to operating cannabis output already affected our current focus. While always being capable of further adjustments on the supply side is on identifying additional sources of demand, including the introduction of new cannabis 2.0 products, meeting short-term demand increases for pre-rolls, continued development of our industry-leading vape portfolio, the introduction of B!NGO, and economy brand utilizing lower potency cannabis. And meeting the demand in international markets for either JACP or EU GMP certified products, including Israel, Germany, Italy, Australia, and Colombia.

As Irwin mentioned, we press release that we have shipped EU GMP certified product to Germany in the last two weeks, and we anticipate sales by CC Pharma, the triggering event for us to recall the sales in our consolidated results to occur in the next two weeks. Further, pending receipt of permits from Health Canada, we anticipate a late quarter shipment to Israel. Throughout the global health crisis, we are staying in bold and agile to best manage our cannabis operations, and our supply chain as a marketplace evolves to the end of the quarter. Our supply chain experiences little impact as a result of COVID-19, while the impact on our supply chain has been minimal, the portions of our business reliant on in-person visits whether they be to doctor offices, hospitals, pharmacies, or cannabis clinics continue to be negatively impacted.

The volume of these visits was noticeably down during the quarter. Post-quarter-end, we are beginning to see improvement. But given the continuing global health crisis, these activities will continue to impact both distribution revenue and medical cannabis revenue going forward. Focusing on our financial results for this quarter in more detail.

Net cannabis revenue increased 18% from the prior quarter to $62.5 million. Gross adult-use revenue increased 23% from the prior quarter to $69.6 million. While medical cannabis revenue was lower in the quarter as new patient registration slowed. Our industry-leading portfolio of vape products continues to drive demand.

Revenue from vape products was 13% of gross cannabis revenue in the quarter and increased 17% from the prior quarter. During the quarter, the company sold 20,882 kg equivalents of cannabis, including 16,780 kg equivalents of adult-use cannabis, and 1,072 kg equivalents of medical cannabis. Net revenue in Q1 increased 16% over the prior-year period and decreased 4% from the prior quarter to $145.7 million. Distribution revenue decreased by 17% to %82.2 million in Q1.

The decline in distribution revenue is largely a function of the impacts of the COVID-19 health crisis, including reductions in the number of elective procedures, and in-person visits to physicians and pharmacies. The average gross selling price of adult-use cannabis increased to $4.15 per gram in Q1, compared to $5.23 per gram in Q4. Primarily as a result of the initial pipeline fill of new large-format offerings, including the introduction of B!NGO. The average gross selling price of medical cannabis increased to $7.38 per gram in Q1, compared to $6.63 in Q4.

Adjusted cannabis gross profit increased to $31.5 million in Q1, compared to $28.1 million in Q4. Adjusted cannabis gross margin was 49.7% Q1, compared to 52.9% in Q4. The increase in adjusted cannabis gross profit dollars and decrease in gross margin was primarily due to the release of and pipeline fill of large format products, and B!NGO utilizing lower potency cannabis, which provided an increase in sales. But at a lower margin than Aphria’s other branded products.

Absent this pipeline fill, adjusted cannabis gross margin whatever remained approximately 53%. Our cash cost to produce per gram remain below $1.00 for the third consecutive quarter and decreased 1% to $0.87 n Q1. Despite temporarily reducing our operating capacity, we expect our cash cost to remain below $1.00. Our all-in cost per gram decreased by 17% to $1.41 in Q1.

Adjusted distribution gross profit decreased slightly to $11.8 million in Q1 from $11.9 million in Q4. Adjusted distribution gross margin was 14.4% in Q1, compared to 12.1% in Q4 based on CC Pharma sales mix, and cost containment in the quarter. Highlighting CC Pharma’s ability to concentrate on higher-margin opportunities even during a period of lower volumes. SG&A cost decrease to $54.4 million in Q1, compared to $116.6 million in the prior quarter, and increased from $41.4 million in the prior-year quarter.

The increase from the prior year primarily due to higher operating costs, as we’ve grown our global operations and increased selling costs associated with our higher sales. For the quarter, we reported a net loss of $5.1 million or a loss of $0.02 per share. As we have consistently stated, our focus remains on generating positive EBITDA. To start fiscal ’21, we are pleased to continue this trend and report our sixth consecutive quarter of positive adjusted EBITDA.

Consolidated adjusted EBITDA in the quarter increased 16.3% to $10 million from $8.6 million in the prior quarter. This includes adjusted EBITDA from cannabis operations of $10.4 million and adjusted EBITDA from distribution operations of $2.4 million. But partially offset by an adjusted EBITDA loss from businesses under development of $2.8 million. Most notably, adjusted EBITDA from cannabis operations increased 11% in the quarter.

This has been achieved by driving revenue increases and our constant focus on our cost structure. From a liquidity perspective, as of August 31, 2020, the company possessed cash of $400 million to continue to fund Planned Canadian and international growth. As previously announced, we established an at the market equity program under the prospectus we filed in August. During the quarter and up through today’s date, we have not drawn on the ATM facility.

The ATM will allow us to issue common shares in amount up to 100 million U.S. dollars, which will provide additional optionality in the event of an acquisition requiring a cash payment, or more flexibility when scheduled debt repayments occur. In the first quarter, the company’s cash position decreased by $97 million. The majority of this decrease related to onetime items that are not anticipated to continue in the future, most particularly $19 million related to decreases in the U.S.

Canadian foreign exchange rate, $15 million related to the cash payment as part of a legal settlement with a former customer essentially returning a cash deposit made by the customer, and the delayed receipt of HST refunds held by CRA as a result of COVID-19 processing delays of which we subsequently received all $20 million claimed. The remaining cash utilized in business included $8 million in increases in accounts receivable in our cannabis business late in the quarter as a result of the large format, and B!NGO’s pipeline fell $17 million in capex. The majority of which related to the completion of our German cultivation facility. $5 million in inventory increases in our distribution business, revenues lagged against our plan in the quarter for which purchases have been adjusted in the current quarter, and $15 million in cash costs going into inventory for the cannabis business down from $30 million in the quarter.

But consistent with our comments in our Q4 earnings call, we anticipate a much lower capex in the second quarter somewhere between $8 million and $13 million as we complete our German expansion. Further, we expect lower working capital requirements going forward. We continue to believe we will be free cash flow positive in Q3. We believe this free cash flow when combined with our existing cash position, and strong balance sheet will support our growth initiatives in both Canada and internationally.

In summary, we believe Aphria continues to be unmatched on a variety of financial metrics, including our record of consecutive quarters of positive adjusted EBITDA, our focus on profitability, our operational efficiency, and our overall cannabis revenue. Our strong cash position helps support our ability to succeed through the times ahead, given the uncertainty of the current environment. For fiscal 2021, we will continue to execute our strategic priorities, including becoming a stronger more profitable company. We will continuously work closely with the local and global communities where we operate and those we serve.

We believe that Aphria’s diverse branded product offerings, robust balance sheet, and dedicated team of global employees are key competitive advantages that give us confidence in our ability to create long-term sustainable shareholder value for many years to come. This concludes our prepared remarks. Irwin and I are now available for analyst questions. Back to you Mariama.

Questions & Answers:

Operator

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

Andrew CarterStifel Financial Corp. — Analyst

Thank you. Good morning. I wanted to ask that you mentioned the consumption has been strong. You mentioned headset data of course, and this is two consecutive quarters where your shipments have meaningfully contrail consumption.

So I guess, an update on that. But I guess more importantly you kind of a step. You’ve established the bleeding market share in this position. You’ve helped lead growth at the category level which is really the thing that matters most in anything.

So I guess I want to ask are you — Is that helping you when you discuss with the provinces. Are you getting that. Are they working with you more, or has anything changed. Are you getting larger orders, more frequent shipments? All those things that we’re trying to piece this together whether the leadership position is fully translating for you guys.

Irwin SimonChairman of the Board and Chief Executive Officer

So, I’ll start it, and I’ll turn it over to Carl. The leadership position starts with the consumers that want our brands. Ok. And that’s what’s the most important here is buying our brands and the repeat purchase of our brands.

And it’s not just in one province, it’s in many provinces across Canada. And you see the growth among our brands. And not only one brand, but It’s also six of our brands. So, there is something there called a trend.

There is something there called consumer behavior. So that’s number one. Number two is, some of the data that we announce there’s a lag on that data. So it’s not exactly as we say, our growth in a certain month or certain quarter you don’t see it totally in all our shipments immediately.

And I think that’s some of the problems that happened out there. Carl, you want to.

Carl MertonChief Financial Officer

I would just echo that there is a lag. I think the presence of headset data has been very helpful for LPs, for the control boards, and for retailers to understand what products moving and how quickly. But there are steps in between in the process, and those pieces are still being worked on by the thereby the control boards. I also think you have a few control boards that are going through some transitions.

Some of which are ordering less, but more frequently. Some of which are in the process of moving facilities and changed order patterns as a result of moving those facilities. And we would expect going forward. We’re going to get to a point where that data and the LP sales are a little bit more consistent.

But in these very early stages of the headset, you may not see that.

Andrew CarterStifel Financial Corp. — Analyst

Ok. So the same question just within that. I want to ask because this is the first quarter you launched the discount brand B!NGO. I guess at the consumer level probably too early to tell us if it’s cannibalizing any of your other portfolios.

But I’ll take any perspective you have it. But secondly, going back to that shipment’s perspective, is that cannibalizing any of your other brands i.e. our province is saying, “Hey, we’re going to wait for B!NGO”. We don’t want to take it, take as much good supply or selling, or anything like that.

Thanks.

Irwin SimonChairman of the Board and Chief Executive Officer

So, I think you’re right. It’s too early. But it’s a different product line. It’s like having if a vanilla ice cream and coming out with a vanilla chocolate chip.

That’s what it’s like here. So, it’s not. There’s this strain about this brand and this product. And most of the consumers that go in there and are buying it.

I don’t understand or realize this is the Aphria brand. So if I think of anything we’re looking to take market share away from some of our competitor brands not from ourselves. So, so far, No. And it’s a different strain from the product line and a different brand than anything we have today.

Andrew CarterStifel Financial Corp. — Analyst

Thanks. I’ll pass it on.

Irwin SimonChairman of the Board and Chief Executive Officer

Thank you.

Carl MertonChief Financial Officer

Thanks, Andrew.

Operator

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

Aaron GreyAlliance Global Partners — Analyst

Hi, good morning. And thanks for the questions. The first question from you would be on the gross margin line. Close margins came down some, but remain pretty healthy at 50% for cannabis gross margins despite the launch of B!NGO.

As it looks like the all-in costs did come down. So, just wanted to get a better picture of how best think about the puts and takes a valued mix going forward as well as your kind of low overall cost per grant to further offset that, especially as you look to increase the mix of vape and potentially international sales which tend to have a higher SPF. Thanks.

Irwin SimonChairman of the Board and Chief Executive Officer

A lot of things on that one question, Aaron. Let’s try and unpack it a little bit. I think if you look at — as you look at the continued growth of vape, there are a number of things that make up each vape sales dollar. And so that results in vapes having a slightly lower gross margin than our other products.

That product line is growing. But dried flower continues to grow as well. The cost coming out of our greenhouse has been decreasing. We will see a little bit of a minor headwind in the next couple of quarters as we adjust our output.

But we don’t anticipate that taking our cash costs above a dollar. So, they’re going to remain below at $1.00 amount. So I think when you net all of the different pieces together, you’ve got some pluses you’ve got some minutes. We anticipate margins staying in that 50% to 54% range going forward.

Which are healthy margins for a cannabis company. As you said in your mark remarks.

Aaron GreyAlliance Global Partners — Analyst

No, absolutely. Thanks for that. That’s helpful color. The second question for me and not to pass it on.

Just on the distribution revenue. So, those came down a decent amount sequentially, and you offer some color on that. But gross margins there in our gross profit dollars were relatively consistent Q over Q. So, you didn’t mention that being a part of the sales mix as well as cost and payment in terms of the gross margins offsetting the lower sales.

So, how best to think about that going forward. Are the lower sales going to continue but have the higher gross margins so you continue to have pretty consistent gross profit dollars, or just some help in terms of what you’re seeing going forward on that business plan. I think would be helpful. Thanks.

Carl MertonChief Financial Officer

So, it’s still early stages in our Q2. But as we said, we’re starting to see improvement in the number of in-person visits that are happening which is really the key driver for both medical cannabis revenue, and for our distribution revenue. Those things are moving forward. We’ve take cost-containment measures should result in there.

Those margins increasing slowly over time, or maybe the better way to say it is staying consistent with what they were, this quarter.

Irwin SimonChairman of the Board and Chief Executive Officer

But you will see margins continuously improve, as through our distribution company. We sell more and more cannabis which are higher-margin products. I think Carl made it very clear in regards to why our sales were down this quarter in CC Pharma because of Europeans not traveling a lot less elective surgeries which we expect to come back now. But the big thing is, we now have a distribution system that goes to over 13,000 drugstores that ultimately and now we have our EU GMP license and we can start shipping to Germany.

There’s a big, big opportunity there and that’s why we acquired CC Pharma for that distribution to be able to sell medical cannabis into the drug stores with high margin products. And you’ll see the margins continue to grow as more and more. As you heard us say, our first shipment went a couple of weeks ago, and hopefully that continues more and more.

Aaron GreyAlliance Global Partners — Analyst

Thanks. And I’ll jump back in the queue.

Irwin SimonChairman of the Board and Chief Executive Officer

Thank you.

Carl MertonChief Financial Officer

Thanks, Aaron.

Operator

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

Pablo ZuanicCantor Fitzgerald — Analyst

Good morning.

Irwin SimonChairman of the Board and Chief Executive Officer

Good morning, Pablo.

Pablo ZuanicCantor Fitzgerald — Analyst

How are you. Look, I just want to touch on two things that are — I guess unrelated to the quarter but regarding the U.S. right, tell us why should we think that you have a right to compete there or a right to the well. How to advance out you there.

If I compare that with other companies have contingent deals as to why MSO or how would any other platforms in place. Just remind us whether it’s IP or what. Why should we think Aphria is well-positioned in the U.S. market.

Irwin SimonChairman of the Board and Chief Executive Officer

So, Pablo as you know, I personally have a little bit of experience in the CPG in the industry in the U.S. I must tell you, every day we get calls from MSOs and we get calls from cannabis companies looking to do something with Aphria in the U.S. as legalized from the federal level, we can’t. So with our expertise in regards to our row building our brands, and being far advance with our product line.

Our R&D, I think on legalization that there’ll be plenty of opportunities for us to go into different states to acquire strategically. Align with different companies, and with our balance sheet to do it. And what I can say, Pablo, there’s plenty of things we’re working on today. And could be ready to go sooner than later.

If there are changes that the changes that happen that will allow Aphria to enter the US. One thing I said this back last April, I’m not going to focus on the US. I still buy a lottery ticket not knowing what’s going to happen there. And I’m not sure those cannabis companies that bought percentages of MSOs and held them and haven’t been able to effectively do anything with them.

Get earnings from them have not been the right thing for shareholders. But once we know what the state of the landscape looks like from legalization, there’s so much that we’ll bring to the U.S., I think we’ll have our opportunities to be able to decide which is the best one for us.

Pablo ZuanicCantor Fitzgerald — Analyst

Thank you. And one more thing, I think we’re all a bit concerned about the price inflation we’re seeing in Canada. So in Germany, right, 800 million people twice Canada or more becomes a big opportunity. But from what I see and I guess how did people see, the markets being very slow to develop.

Doctors are not prescribing volumes to the very low. So yes, it’s nice on the supply side. Everyone is gearing up, but the demand is not playing out. Just tough to free cash for us.

Why should we think that things in Germany will accelerate over the next one or two years. And I’m asking about Germany because yes, it should be a good market. But potentially in Canada. And yes, in Canada, we are seeing price inflation.

Thanks.

Irwin SimonChairman of the Board and Chief Executive Officer

Hope you’re right about what you say about Germany. But I think a couple of things. It’s slow, but it’s common. It’s not, not coming.

So it’s not like it’s come to a halt. So that’s number one. And I feel good about where Germany ultimately will go. And unfortunately, covid has not helped at all.

But the demand is there. Now we got our licenses that will help. And that’s, that’s going to be a key. The other thing is this here I will say this here.

I think Germany will be the first country in the EU that will legalize recreational cannabis, and there’s been plenty of discussions there. And if and when that happens again, we will be there. Oh, I mean, we have and we’re ready with our facilities. We’re ready with product, and the big thing that we have there is our distribution to those 13,000 drug stores that we can distribute product to.

Little slower, a little slower, but that’s why we won the tenders. And but it’s not like there’s no game going to start there.

Pablo ZuanicCantor Fitzgerald — Analyst

Got it. Just want to ask just one last one. I don’t want to rehash the questions about what’s happening retail versus pipeline, and gross margins. But if I look at your MD&A Carl, it says there that the large back sizes and B!NGO accounted for close to $90 million in growth in the quarter in the quarter.

And your total sales grew $13 million. Right. So help me reconcile that because obviously, large delta on the value side. But apparently, unless we have been done.

And related to that, I guess we all have to focus on dollar gross profits. Right. Because yes, gross margins next to ya but you know they go from 260 to 150 per gram or something. But I’m looking at the latest market data, and we can just fire or said, I see on prices things you are always quarter with the iron and out of 20% for your Flower business.

So, just help me get comfortable with dollar gross profits. And I understand better what happened in the quarter because like I said, the MD&A says $19 million growth in value versus a total growth of $13 million for [inaudible] Thanks.

Carl MertonChief Financial Officer

So just follow. I think first off. As I please answer to one of my earlier questions I think we have to be a little bit careful with some of the data that is out there. it isn’t Nielsen level quality.

At this point, the different sources that are out there have different groups of stores that are connected. And so, I think it’s always very good directionally, but it can’t be taken too literally. When you look at the total growth for the quarter in terms of cannabis revenue. I’m not sure I’m understanding your point.

Because when I look at it and I look at our MD&A, we’re basically saying that the growth in the quarter was largely driven by B!NGO. Right. It’s — you’re going on a gross basis from $65 million to $82 million. And $18 million of that is B!NGO.

And I think that reconcile. So I guess, I’m just a little confused where you’re drawing your number from.

Pablo ZuanicCantor Fitzgerald — Analyst

No. I’ll pass it on, but as you go from what I just said right there was just total data, the B!NGO data is larger than the total data. Right. So, that’s not changed.

Carl MertonChief Financial Officer

I’m saying they’re the same but that’s OK.

Pablo ZuanicCantor Fitzgerald — Analyst

Ok. All right. Got it. Thanks.

I’ll follow it later offline. Thank you.

Operator

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

Tamy ChenBMO Capital Markets — Analyst

Thanks. Good morning. The first question, I wanted to stick on B!NGO for a second. The price, the retail price of the product.

I mean it’s on the lower end within that 28-gram format, compared to many of the other peers. So, I’m just curious when you approach the pricing architecture for this brand, why go quite low on the scale compared to peers given that you have been gaining share so far without a big value presence.

Carl MertonChief Financial Officer

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

Irwin SimonChairman of the Board and Chief Executive Officer

And the thing is Tamy, the reason we came out with it we saw a need for it. We saw a need for which consumers are asking for. And you know as Carl said, we had supplied for it, and we didn’t really see the opportunity. We didn’t really see a competitor really hitting that area.

And what we wanted is to make sure it’s not going to cannibalize our existing brands.

Tamy ChenBMO Capital Markets — Analyst

Ok. I understand. And my second question is going back to the commentary you both had about managing your supply with what you’re able to sell and whatnot. So you mentioned that you temporarily reduced production at Aphria One, I guess I just want to understand that a bit more because I think you stop disclosing kgs produce.

So are you able to give us a context of how much that impacted your output. What does temporary mean. And just to confirm, there’s been no supplier production output changes made at Diamond. Correct.

I’ll leave it there. Thank you.

Irwin SimonChairman of the Board and Chief Executive Officer

So, I’ll let Carl jump in here first. I think again, as we get more history in this business, and we look at our brands and as more stores opening, and we focus on growth, we focus on margin, we focus on cash flow, we’re going to grow what we’re selling and we want to make sure we sell what we grow. We have three great facilities. And if we have to pull back and only grow in certain parts of the facilities to make sure that we sell to demand.

And ultimately, as demand grows, we’ll continue to grow a lot more. We have the capacity to do it. So that is the big thing from a financial standpoint. From a quality and the thing is when you’re dealing with as many strains, when you’re dealing with six brands, and you’re dealing with multiple whether it’s pre-rolled vape flowers.

The last thing we want to do is be out of stock as we build our brand. We want consumers to be able to always buy our products. So, it’s now as we start to really dig in. It’s really managing our inventory, our supply, our purchasing power of packaging.

We buy a tremendous amount of packaging and want to make sure that again, we’re buying from a cost standpoint and we’re buying from the supply standpoint and don’t have other stops. And that’s some of the things is we have too much of one thing not enough for the other. So, there’s a major plan in place here of how to figure out our supply chain, and our demand forecasting for what consumers want. The other thing is what we’ve got to do is look at Tamy is, today is there are 800 stores across Canada.

If they go to 3,000 stores what’s going to happen there. We think for Aphria that’s another $200 million, $300 million for sales. So having the demand to grow that out. Number 2.

As you look at brands that we have built that have gone through $300 million or $400 million at retail, how to fill those out. What happens in regards to vape versus pre-rolls. The pre-roll market is on fire right now. So how do we continue to do that.

So as of April, and make it sure we have enough of that. So that’s the big thing here is how it’s just bringing in. A lot more process, and intelligence into our home growing because the problem is once you start growing there’s somebody’s got to do with it. I hope that answers your question.

Tamy ChenBMO Capital Markets — Analyst

That’s helpful. Thank you.

Operator

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

Irwin SimonChairman of the Board and Chief Executive Officer

Good morning.

John ZamparoCIBC — Analyst

Hey, thanks. Thanks. Good morning. You mentioned becoming or expecting to become free cash flow positive in Q3.

I’d just like to get a sense of your capital allocation priorities when it comes to either debt reduction versus greenfield investments or M&A. And with M&A referring to anything outside of U.S. Canada. I would like to get a sense of how you’re thinking about that for a calendar 21.

Irwin SimonChairman of the Board and Chief Executive Officer

So, I’ll let Carl talk about capex for facilities. And I think we’re — that is winding down from a standpoint there. But, yes. As I said, there is M&A stuff that we are looking at, and there’s very interesting M&A stuff.

And if I gave you a number you might know what I’m looking at and what I’m trying to do. But we have the right balance sheet to go out there. We have the ability from a leverage standpoint and with free cash flow positive. And basically from a cash flow standpoint today, I mean if you take away some currency and in other things. I mean, we’re free to cash flow positive now.

So we will continue sale as our sales continue to grow. Listen, we’re down below a dollar on our cost, and we will continuously come down. And as I’ve talked about, there are five points we’re going to do. We’re going to grow our share. We’re going to take costs out of our facility as we continuously look at what we grow, what we sell.

We continue to look at SKU rationalization in regard to all our brands. We still have some facilities that are not producing income and we’ll look to get those to income positive. And with Germany really coming on. We look to see Germany in a positive area very very soon. With regards to capex, other than that Carl, there’s not a lot of capex.

Carl MertonChief Financial Officer

So we finished all of our major capex projects in Canada. Future capex in Canada is really a function of opportunistically identifying some type of project that improves profitability. As it relates to Columbia, everything remains on hold. As it relates to Germany, we see about under $10 million of capex that’s still to be to be spent. All of that will be spent this quarter.

And I think it’s an earlier $8 million to $13 million which is our expected capex spend in the next quarter.

John ZamparoCIBC — Analyst

Yes. That’s helpful. Thank you. And then secondly, I just wanted to dive a bit deeper into the average sale price.

Can you quantify what the deflation was if you back out the impact on B!NGO. It sounds like the increase in gross cannabis revenue was the source from B!NGO, and if you think about the rest your portfolio is having a volume increase presumably. Can you quantify what the price decrease would be on a like for like basis on your other brands. Thanks.

Carl MertonChief Financial Officer

So, if we pull out large-format offerings on the average selling price would have increased $0. 60in the quarter.

John ZamparoCIBC — Analyst

Got it. Ok. Thank you, very much.

Irwin SimonChairman of the Board and Chief Executive Officer

Thank you.

Operator

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

Graeme KreindlerEight Capital — Analyst

Yes. Hi, good morning. And thank you for taking my questions here. Just wanted to ask a follow-up here with respect to managing the supply overall.

I guess on two fronts. One, there was a wholesale sell a $4.7 million as well as looking the composition of inventories on the cannabis side in particular. It looks like on the kg basis that’s about two-thirds of cannabis too. And then one-third trend.

So just wondering from the wholesale side of things what that market looks like. It’s expected to be volatile but is there still a possibility to help rebalance your own internal supply there. And with respect to the cannabis particularly you have that split I mentioned earlier, how much of that you do you think is actually workable into the current brand architecture versus my previous remark for extraction later down the road are actually for wholesale. Thank you.

Irwin SimonChairman of the Board and Chief Executive Officer

So, Graeme, I think there’s some confusion on the wholesale market. Sometimes with people, I view it as really two separate markets. So there’s a wholesale market for extraction grade product which can include flower that just doesn’t look nice, things like that. And Trim.

And that market obviously, is massively oversupplied right now. We made some adjustments in our costing in the current quarter. We removed fair value increment from our trim to reflect that, and our trims all now carried on our books at $0.15. If you look at what’s coming in the infamous Croptober there is a lot of extraction grade product that people have harvested.

And quite honestly, I don’t think people are gonna find homes for at this point. But that part portion of the wholesale market is very different from selling excess capacity of dried flower. And I think there are tremendous opportunities in that portion of the market until saleable flower. There’s a number of pieces that have taken production capacities dow, and are now finding may be a need for a little bit more product, or finding that they’re growing too much trim.

And they can’t get that level of saleable flower they want. And so they’re interested in buying it. There’s a number of LPs that have switched to closer to asset-light models and you know those LPs that have done that are out there looking for a saleable flower. And so when you have it, you have the ability to take advantage of that need and move that product at a very reasonable price as opposed to what the trim and the extraction grain things are going to move out over the next 6 months, 9 months, 12 months.

So I think they’re very different markets.

Graeme KreindlerEight Capital — Analyst

Appreciate the color. Thank you.

Carl MertonChief Financial Officer

Ok. Thanks, Graeme.

Operator

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

Irwin SimonChairman of the Board and Chief Executive Officer

Thank you very much, and thank you everybody for getting on our call today. Again, I want to thank our team. All our great fellow employees. All of you know that are working in our facilities and keep it going through these tough times.

I got to tell you I am really proud of what we’ve been able to do. Our Canadian cannabis sales are up 23%. Our EBITDA, $10 million. I mean all of last year, we earned $17 million.

So, what a great start to the first quarter. If you look at our cash flow from a profitability standpoint and whether it’s a currency or other tax, our cash flow is profitable. If you take away a lot of those things from one time. We have No.

1 share and continue to grow tremendously in multiple provinces out there which shows consumers want our product. Again, continuously, we’ve got our costs down per gram below a dollar. We are seeing great headway in Germany. Yes, it’s a little slower, but we will get there.

And in regards to the U.S. don’t count us out just because we don’t have a big strategic partner. We know the U.S. well.

We know the opportunities and with a free performing the way it is, I will tell you there are multiple companies. There are multiple partner opportunities for us. It’s just we want to make sure when we do it, we want to pick the right one. It’s just not about money.

With that, we’re excited about the cannabis industry. We’re only into this for about two years. Actually, it’s two beers in October that cannabis ultimately legalized in Canada. We’ve perfected a lot.

We’ve taken this company a long way, and I am proud of where Aphria is today. On a global basis, there’s a lot of unknowns out there in regards to what’s going on with covid, but in the growth and what’s happening in covid, but in many areas, I would say stock up on cannabis where you can because you’ve never know retail stores are going to close, etc. But there’s a lot to come from Aphria. So, I would say be safe.

Happy Thanksgiving to the Canadians. I just celebrate it. And to the Americans that will celebrate it in a few weeks, I look forward to speaking to you in the New Year. With that, I thank you for joining us today.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Tamara MacgregorChief Corporate Affairs Officer

Irwin SimonChairman of the Board and Chief Executive Officer

Carl MertonChief Financial Officer

Andrew CarterStifel Financial Corp. — Analyst

Aaron GreyAlliance Global Partners — Analyst

Pablo ZuanicCantor Fitzgerald — Analyst

Tamy ChenBMO Capital Markets — Analyst

John ZamparoCIBC — Analyst

Graeme KreindlerEight Capital — Analyst

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