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Aphria Inc. (NYSE:APHA)
Q4 2019 Earnings Call
August 1, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Aphria Inc. Q4 quarterly investors call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session for analysts and/or investor firms only. If you would like to ask a question during this time, press * then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the # key. Thank you.

Miss Katie Turner, you may begin your conference.

Katie Turner -- Investor Relations

Thank you, Sharon. Good afternoon, everyone. We appreciate you joining us to discuss Aphria's financial results for the fourth quarter and fiscal year ended May 31st, 2019. On today's call are Irwin Simon, Aphria's Chairman and Interim CEO, and Carl Merton, Chief Financial Officer. 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.aphria.ca. These statements also have been filed with SEDAR and EDGAR.

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

I'd now like to turn the call over to Irwin Simon.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Thank you, Katie. Good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and fiscal year 2019 results. It has been a very productive quarter and six months with tremendous change that happened. The leadership team we have in place is solid. There is no management void at Aphria.

As Chairman and CEO, I am leading the company forward with our team every day. There is emphasis on interim by me or my team. It is about the initiatives and strategic growth plans that we have established in the last six months to move the company forward for sustainable growth today and over the long-term.

During our Q3 earnings call, I noted that in order to help us extend Aphria's vision to be the best performing cannabis company globally, providing investors with access to one of the most accretive cannabis opportunities around the world, that we began working with a leading consulting firm to work with our leadership team to prepare an internal 90-day plan prioritizing our long-term strategic objectives and build an execution roadmap.

The plan is to be used by our senior leadership team to assess the opportunities in the market, prioritize our initiatives, and ensure we are investing in strategies most likely to have immediate impact on our business and profitability that will prepare us for growth over the next several years.

In Q4, as you've seen, we've already started to implement many of those outcomes from the 90-day plan, which help us narrow our focus on the highest returns and the priorities for growth. The Aphria of today is not the Aphria of yesterday and won't be the Aphria of tomorrow. We strive to be better at all that we do so that we can further our industry-leading position. We are focused on the further development of our medical and adult use cannabis brands and how we can continuously connect with consumers to drive growth through innovation and return value to you, our shareholders.

I'm extremely proud of our more than 1,000 team members worldwide and their ability to embrace change as we rally behind our mission to be a premiere global cannabis company with our medical and adult use cannabis brands and unrelenting commitment, product quality, and, of course, innovation.

In what was a challenging time for us, our team came together as an organization. We identified immediate priorities to help generate substantial progress near-term. We built upon existing business fundamentals, capabilities, streamlined our processes, and strengthened our governance and focused on building our brand awareness, all with an emphasis on consistent execution.

Those efforts enabled us to achieve a positive outcome in the fourth quarter, which you're seeing today. Net revenue increased 75%. Adult use net revenue increased 158% as compared to the third quarter with positive profitability for both earnings and adjusted EBITDA. We accomplished a significant amount, made significant strides in financial operational opportunities.

Other key highlights included the completion of a 5.25% convertible senior note offering of net proceeds of over $335 million. The settlement with Green Growth Brands in regard to their takeover bid resulted in $50 million of cash already received and an additional $39 million to be received in November. Now that they've raised their funds necessary to make the payment, we look forward to receiving that in November.

We ended the year with a much stronger balance sheet and liquidity position, including $571 million of cash and liquid marketable securities to support our planned Canadian and international growth, leaving us with $610 million in cash pro forma with the receipt of the Green Growth Brands payments.

As the cannabis industry continuously evolves globally, at Aphria, we are also evolving at a rapid pace to ensure we stay ahead by leveraging our core capabilities. Importantly, we restructured the organization with a stronger focus on quality, employee safety, cost reduction, and accountability.

For example, we reorganized our growing process and operations in order to provide improved quality, higher yields, and a lower cost. This includes the installation of packaging automation that has increased our production. We have been able to leverage our volume, spend more money to reduce our packaging material, and while producing the highest premium products.

We planted more than 200,000 plants in the new expanded area of Aprhia 1. And as of this week, the facility is fully planted with over 500,000 plants. We have been harvesting out of the expanded automated area. At Aphria Diamond, our 100-acre second campus featuring 1.3 million square feet of premiere greenhouse production in s fully constructed and ready to be operational, pending Health Canada licensing approval, which we hope to get to. This will expand our total annual domestic production capacity in Canada to 255,000 kilos when all our facilities are fully licensed.

These facilities are truly the state of the art for the industry. We believe it will increasingly set us apart from our competition. We are eagerly anticipating Aphria Diamond's license and we remain in an ongoing dialogue with Health Canada. As many of you may know, Health Canada has a number of facilities to review and prioritize outdoor grow to allow for plantings this calendar year. We look forward to announcing Aphria Diamond's license receipt at a future date.

In addition, we are confident we will obtain our EU GMP certification for bulk and finished product in the first half of this fiscal year, enabling us to export product to meet the demands of the European and South American market. Today, Aphria has a presence in more than 10 countries across five continents with five high-quality brands, including Solei, RIFF, Good Supply, Broken Coast, and Aphria, our medical brand.

We are exploring opportunities to expand our capacity for our premium brand, Broken Coast, which is one of the most in demand consumer cannabis brands. We believe the quality of our brands remains unmatched in the industry, including products for both medical and adult use. These brands were developed to address distinct segments of the Canadian cannabis markets. We put consumers' needs at the forefront of our strategy. As regulations change, we will proactively evolve our portfolio of brands and products.

To this point, in Canada, we are excited to bring our premium cannabis extracts from Solei, RIFF, our flagship medical cannabis brands, Aphria, to the PAX Era device and platform. We believe the expected legalization of vapes and concentrates will mark a significant turning point in the Canadian market, providing more choices, new experiences, while opening the door to a range of new consumers.

We believe vapes and concentrates will represent close to 30% of the entire Canadian adult use market by 2021. Our strategic alliance with PAX sets the stage for our broad portfolio of vapes and concentrate products to come. The collaboration complements our growing roster of strategic innovational partners, including Manna Molecular Science and Rapid Dose Therapeutics. As we pursue new technology delivery systems, we will change the way patients and consumers interact with cannabis in the future.

Our extraction center of excellence, which Carl will speak to in more detail, was created to facilitate Aphria's leadership in the evolution of cannabis as an ingredient to help us create our own brand products with these cannabis ingredients. We believe our Canadian business will be a significant contributor to our results over the next several years with the potential for us to create one of the largest production footprints in the cannabis industry.

We look forward to addressing the industrywide supply constraints with our expanded production capacity, sophisticated proprietary automation technology that can help ensure Aphria remains at the forefront of the cannabis cultivation innovation. Internationally, we are very pleased to have been granted the maximum number of lots within the German tender process, a total of five, and Aphria is the only licensed producer in Germany with the permission to grow all three strains of medical cannabis approved by the German authority.

In addition, we introduced a CBD-based nutraceutical product line in the German market. We believe we have an opportunity for significant growth in Germany by selling these products to our subsidiary CC Pharma, which has access to more than 13,000 pharmacies through Germany.

We look forward to providing a full range of CBD products this calendar year. In Latin America, we generated approximately $4.1 million of sales since our Latam acquisition. In Colombia, we have taken steps to modify our plans to ensure we are in the best possible position to provide long-term shareholder value. With more than 650 million people in Latam, we believe there is an incredible opportunity there.

We are moving ahead with commitments to build a greenhouse. We're making significant progress building our GMP cultivation process facilities, which soon will enable us to play a leading role in that local market, as well as developing a low-cost export opportunity across the Latin America region. We are also committed to supporting and enabling the medical community throughout our exclusive partnership with the Colombia Medical Federation, a highly respected organization with direct access to over 70,000 doctors and medical professionals.

Just this week, our subsidiary, Marigold Projects Jamaica Limited received a retail Herb House license from Jamaica's cannabis license authority to open up its first store, Sensi Medical Cannabis Housing, overlooking the Peter Tosh Museum in New Kingston. It will feature a smoking lounge for on-site consumption as well as high-end accessories for sale.

The Sensi Medical Cannabis House will sell Marigold proprietary strains of cannabis and the Sensi Gold brand. We believe there is tremendous opportunity in Latam and the Caribbean from a domestic and an international perspective and look forward to bringing these products to market.

In the US, we are focused on building strategic partnerships and alliances for growth, which emphasize on the US CBD market until medical cannabis is fully legalized. We believe Aphria can generate strong growth in the US over time. Let me be clear -- we're always looking for opportunities in the US, but it needs to be that right opportunity, one that will create real and long-term value for our shareholders.

If we look to the future, Aphria will be the consumer packaged goods company with plenty of options in the US market. From a time perspective, we have enhanced the breadth and depth of leadership. I've said it before, the team here is incredible. We enhanced the executive team with appointments of several key positions in operations, IT, and human resources to help our team consistently execute on our initiatives and deliver results, we're preparing to rollout a new enterprise resource planning technology platform to enable better real time, which will give us data that will allow us to make real time decisions.

We're also adopting a pharmaceutical quality management program that will further enhance our existing strict quality management processes. The team at Aphria is energized and excited to drive growth and profitability for many, many years to come. We believe Aphria is increasingly well-positioned with the right team. Global infrastructure, strategic initiatives, production capacity, and the capital to support our growth in fiscal 2020 and well into the future.

Together, we have created the entrepreneurial culture grounded in accountability that we have today. We have aligned key leaders and their compensation for fiscal 2020 around our key priorities. We are all working together toward our corporate objective of generating $1 billion in annualized cannabis revenue by the end of calendar year 2020. With that, margins should substantially improve to fuel our profitability and cash flow.

Across our organization, we have taken decisive steps to help fuel our strategic initiatives in Canada and internationally and generate long-term shareholder value. We believe the opportunities for long-term value creation are very strong in both Canada and international. We believe we have great momentum in Latin America, including Colombia, Argentina, Uruguay, Jamaica, as well as Germany and across our international markets as we continue to strengthen our global footprint.

At Aphria, we will continue to drive sustainable long-term shareholder value by leveraging our strong brand positioning, superior distribution model, product innovation, industrial scale cultivation and automation, medical use leadership, and last but not least, a strategic global platform. We have said a lot. We have done a lot. We got a lot more to do.

Now, I'll turn it over to Carl to take you through the numbers. Thank you.

Carl Merton -- Chief Financial Officer

Thank you, Irwin and good afternoon. Please note, all financial references are in Canadian dollars unless I mention otherwise. As Irwin discussed, in the fourth quarter, we had a relentless focus on the growth initiatives that could generate meaningful near-term results and prioritize profitability as we continue to position our business for long-term growth and success. We believe the steps we have taken position us to generate long-term shareholder value with a strong team focused on consistent execution, full accountability, and best in class corporate governance.

Focusing on our capacity, once we fully licensed, our annualized capacity will be 255,000 kilograms and we remain on track to reach $500 million annualized in Canadian cannabis sales once we are in full crop rotation at all facilities and $1 billion on an annualized basis by the end of calendar year 2020.

This excludes our new extraction center of excellence, which is being constructed as an integral part of our Leamington production facilities, combining science and innovation to develop the future of the cannabis industry. The extraction center of excellence will be physically located on the same property as Aphria Diamond and requires Health Canada of Aphria Diamond before submitting their license amendment application.

As a result of the open license application, we have taken steps at our license facilities to supplement our extraction capability. These steps ensure that sufficient capacity exists to process all of our extraction needs regardless of when the license for the extraction center is received. Once received, the company will be in a position to increase the amount of biomass it processes for either internal or external needs.

At Aphria, we have the greenhouse space, the cultivation expertise, the automation technology, and the raw materials to position us for success. As we gain scale, we will gain efficiencies through our team's focus on product innovation, brand growth, and further building our international distribution for our medical and adult use cannabis.

Moving to our financial results, we are pleased with the momentum we have in key areas of our business as we move into fiscal 2020. Net revenue in Q4 increased 969% over the prior year period to $128.6 million. This represents the highest ever quarterly sales for Aphria. Compared to Q3, net revenue increased 75%. The company sold 5,574 kilogram equivalents of cannabis in Q4, up 111% compared to 2,637 kilograms equivalent sold in Q3.

Adult use cannabis accounted for 3,228 kilogram equivalents and medical cannabis accounted for 1,417 kilogram equivalents. Adult use net revenue increased an impressive 158% sequentially from the third quarter of 2019. The average selling price of adult use cannabis before excise tax increased to $5.78 per gram in Q4 compared to $5.14 per gram in Q3 due to a more evenly distributed brand mix.

The average selling price of medical cannabis before excise tax decreased to $7.66 per gram in Q4 compared to $8.03 in Q3, primarily related to a higher percentage of total medical sales coming from the Aphria brand. During the quarter, our cash cost per gram decreased from $1.48 last quarter to $1.35 as we focus on driving more profitable growth.

Included in this figure is $0.20 a gram related to this strategic decision to allocate flowering space to mothers to facilitate the ramp up of our Part 4, Part 5, and Aphria Diamond expansions. We expect this temporary increase to continue until the Aphria Diamond expansion is fully planted.

Our all-in cost per gram decreased from $2.86 a gram to $2.35 a gram. Adjusted cannabis gross profit increased to $15.2 million in Q4 from $7.6 million in Q3, more than doubling. Adjusted cannabis gross margin was 53% in Q4 compared to 49.5% in Q3. The increase was primarily due to the higher average selling price per gram. Adjusted distribution gross profit increased to $12.3 million in Q4 from $7.8 million in Q3. Adjusted distribution gross margin decreased to 12.4% in Q4 compared to 13.6% in Q3.

SG&A costs in Q4 decreased to $62.4 million compared to $106.6 million in the prior quarter. Excluding the impairment for the Latam acquisition last quarter, the increase in SG&A was primarily due to the inclusion of CC Pharma for the entire quarter, one-time transaction costs of $20.3 million associated with the completed convertible debenture financing as well as trailing residual costs from the special committee and hostile bid.

Our fourth quarter profitability with net income of $15.8 million or $0.05 per share compares to a net loss of $108.2 million or a loss of $0.43 per share in Q3. Our team quickly improved our profit performance to report positive earnings and EBITDA contribution for the quarter in a short period of time. We are particularly pleased with the $15+ million improvement in cannabis adjusted EBITDA for the quarter, all as a result of strong sales and gross margin improvements.

The consolidated adjusted EBITDA in the fourth quarter was also profitable at $0.2 million, based on adjusted EBITDA from cannabis operations of $1.9 million, adjusted EBITDA from distribution operations of $3.9 million, both partially offset by an adjusted EBITDA loss from businesses under development of $5.5 million. The increase in adjusted EBITDA is primarily attributable to the increase in net revenue and higher gross profit.

Moving to liquidity, we continue to have a solid cash position and a strong balance sheet to support our future growth and success. As of May 31st, 2019, the company had near cash of $571 million available for use. We believe this amount is sufficient to fund previously announced capex and strategic investments. In the fourth quarter, the company invested $1.8 million on maintenance capex and $42 million on grow capex. Importantly, we also reduced our investment in strategic initiatives as we focus on higher ROI investments.

Turning to our outlook for fiscal 2020, we expect to report net revenue of approximately $650 million to $700 million with distribution revenue representing slightly more than half of the total net revenue. In addition, we expect to report adjusted EBITDA of approximately $88 million to $95 million.

Applying our average selling price to our production capacity, we continue to expect annualized revenue of $500 million in Canadian cannabis sales once all our facilities are in full crop rotation. Two, annualized revenue of $1 billion in Canadian cannabis sales by the end of calendar year 2020, both of which strengthen our position as a leading global cannabis company.

In summary, we are pleased with a significant improvement of our financial results this quarter and the tremendous progress we have made to be a stronger, more profitable company. We believe we are in the early innings of realizing the growth we are capable of achieving at Aphria. Going forward, we are confident in our ability to create long-term shareholder value.

That concludes our formal remarks. Irwin and I are now available for your questions. Sharon, back to you.

Questions and Answers:

Operator

If you'd like to ask a question at this time, please press * then the number 1 on your telephone keypad. Your first question comes from John Zamparo with CIBC.

John Zamparo -- CIBC -- Analyst

Thanks. Good afternoon. On the F20 guide, you provided a split on the distribution business for revenue. Is it fair to assume that on EBITDA that the margin for that distribution business holds where it is now?

Irwin Simon -- Chairman and Interim Chief Executive Officer

Yes. Also, there is some opportunity for upside, as more and more of our medical cannabis is sold through the distribution business. As Carl said, right now, it is what it is. One of the reasons in acquiring that was to expand our distribution and increase the margins to all those medical pharmacies across Germany.

John Zamparo -- CIBC -- Analyst

Moving to a separate subject, some of your competitors have talked about lumpiness in terms of purchases with potential wholesale buyers. Is that something you've seen? Are there any regions of strength that are worth calling out for Aphria?

Carl Merton -- Chief Financial Officer

I think most companies go through somewhat of a lumpy ordering pattern during the month. You've got to remember this is a brand new industry. They're learning purchasing patterns. We're learning shipping patterns. I just think any lumpiness that exists is just a function of where we're at in the industry.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Again, it's not seasonality. There are not historical numbers. There are additional retail stores opening, additional online products. So, I think there's not a trend you can look at and say there's lumpiness out there. There could be lumpiness in July and it could be stellar in August. I think as we're learning a lot more about the industry in shipments and consumer behavior, it's hard to track what is lumpy and what is a trend and what our accelerated sales are.

John Zamparo -- CIBC -- Analyst

Understood. Maybe we could talk about the US strategy. I understand you don't want to signal too much to your competitors. Is there any more color you could provide there? is there a preference toward buying or building and is this something you expect could be material by the end of this fiscal year.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Listen, as I said in my script, I built a large consumer package good business in the US and I understand the US market. I think there are challenges in regard for legalization. There are challenges in regard to what you can sell in products, whether it's food, personal care products.

We do have lots of plans for the US and whether it's partnerships, acquisitions, strategic alliances, and what is profitable and where there is growth accretion here is something that we'll do. So, there are plans. There's nothing that I'm going to signal to you right now, but I think when we do go into the US, we will to do the right thing for our shareholders.

John Zamparo -- CIBC -- Analyst

Thanks. The last one for me -- on the German license win from May, I just want to get a sense of how those operations scale and what kind of revenue or EBITDA generation you can expect from those assets over the next year too.

Carl Merton -- Chief Financial Officer

The lot revenue will start fiscal '21 and will play out through that year. In the interim period, we believe we will have the EU GMP facilities up and we'll be driving additional revenue through Germany as a result of those.

Irwin Simon -- Chairman and Interim Chief Executive Officer

And that's all built into our 2020 forecast.

John Zamparo -- CIBC -- Analyst

Okay. Understood. That's it for me. Thank you.

Operator

Next question comes from Owen Bennett with Jefferies.

Owen Bennett -- Jefferies -- Analyst

Afternoon, guys. Just the one question from me -- so, you mentioned exploring opportunity to expand capacity of Broken Coast. I was just wondering how much additional capacity you would like to add there. I'm conscious as well and we've spoken in the past about the reason it can attract a premium is because sometimes it's in the scarcity value. So, there's a fine balance you're trying to reach there in terms of capacity and actually trying to even up scarcity value as well. Thank you.

Carl Merton -- Chief Financial Officer

Thanks, Owen. I think that's the right way to say it. You've got a careful balance you're trying to broker between a super premium product that has room and greater demand than exists in the overall market while also trying to balance the value it brings to the market because of scarcity. So, we continue to go through those internal discussions and we hope to have an advancement on shortly and exactly how big any expansion there would be.

Irwin Simon -- Chairman and Interim Chief Executive Officer

We do know the demand is there from the consumer. We do know we need more capacity and there are a lot of opportunities to go out there and build or do some other things to ensure that we have capacity to grow that brand. That is a business that has tremendous growth, tremendous margins and tremendous consumer awareness.

Operator

The next question comes from Tamy Chen with BMO Capital Markets.

Tamy Chen -- BMO Capital Markets -- Analyst

Thanks. Hi, everyone. Hi, Carl. The first question is I believe, Carl, in the last quarter, you had suggested that cannabis revenues for this fiscal Q4 would look a bit similar to fiscal Q3. So, I'm just wondering what were the main factors? I mean, obviously, the jump was in the rec market. So, I'm just wondering what really drove this sequential increase.

Carl Merton -- Chief Financial Officer

The changes in the sequential increase was really driven by the team in Leamington. They listen to investors when investors spoke very loudly in April and they made a conscious effort to continue to make improvements operationally.

Irwin Simon -- Chairman and Interim Chief Executive Officer

The big thing, Tamy is as we focused on our grow, we focused on our processes, the demand was there for the product. We were able to do -- what we were supposed to do is grow to a budget, grow to what the market needs are and be able to shift. That's where you see the numbers.

Tamy Chen -- BMO Capital Markets -- Analyst

That kind of ties into my second question is I just wanted to recap and review -- last quarter, there were some operational challenges. It sounded like it was a function of there were supply issues, perhaps because you were trying to build more mothers for phases for and five at Aphria 1, that that may have contributed to the ability to have been able to sell more in fiscal Q3. Is that a fair way to represent what those challenges had been in Q3 and are you now over that hurdle?

Irwin Simon -- Chairman and Interim Chief Executive Officer

Yes. That was our Q3 challenge and yes, we are over that. Listen -- we've made lots of changes in personnel. We've made lots of changes in our grow and we're seeing the results for it. I have said that Aphria 1 would be completely full of plants. You heard me talk about the number of plants that are in that facility and as of today, all the different houses are full. So, there was lots of change and lots of execution that's gone on and I'm very, very proud of what's happened in Aphria 1 and the growth of our plants.

Tamy Chen -- BMO Capital Markets -- Analyst

Got it. Okay. My last question, still on this point is that when I'm thinking about Aphria Diamond -- you touched on it a bit in terms of how it impacts your cost, but just the way I think about it, Aphria Diamond is licensed, it is a sizable facility. So, the supply challenges that you experienced last quarter, having to have enough mother plants, etc., would that then happen again when the Diamond facility gets licensed and you need to have the appropriate mother plants and all of that ready to start planting in Diamond?

Carl Merton -- Chief Financial Officer

Tammy, we've already made the steps to have additional mothers available for that additional capacity. There's still a ramp up. You can't go from planting zero of 1.3 million square feet to being fully planted in 1.3 million square feet. There will be a ramp up period, but we have prepared for that in advance.

Tamy Chen -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Your next question comes from Brett Hundley with Seaport Global.

Luke Perda -- Seaport Global -- Analyst

Hi, this is Luke Perda on for Brett Hundley. Looking first at the $1 billion revenue target by the end of calendar '20, what's required from the Canadian retail space as far as store rollout is concerned? As you model this forward, sales expectation, your assumptions in production and pricing may well be grounded, but what do you make of the potential for a national retail store network to come up short, particularly in high population areas like Ontario and Quebec.

Irwin Simon -- Chairman and Interim Chief Executive Officer

I think the big thing is the continuous opening of more and more stores, more and more retail outlets across the country. We're seeing that on a regular basis. I think as each of the provinces and the liquor control boards get comfortable, they're doing that. So, the other thing is as we get out there and invest in our brands and build our brands and we ese supply moving over from the illicit market into the rec market, that's where the opportunities are.

I think one of the big problems has been we talk about lack of supply, lack of supply, lack of supply. As we get out there and talk about, "We're able to supply," and once we have Aphria Diamond up and going, we'll be able to sell 255,000 kilos a year, we're going to have plenty of supply out there. The big thing is we build our brands to drive the consumer away from the illicit market to be out there buying at the stores and buying brands they're familiar with.

Operator

Next question comes from Noel Atkinson with Clarus Securities.

Noel Atkinson -- Clarus Securities -- Analyst

Hi, thanks for taking my call and congrats on a really solid quarter. First off, on the extraction side, can you talk about what you have for extraction capacity at Aphria 1 today, like in terms of kilos and whether you have any outsourced agreements in place to support that?

Carl Merton -- Chief Financial Officer

We have no outsourced agreements. We believe we have more than sufficient capacity internally to process all of our extraction needs for the immediate future. Currently, we have over 45,000 kgs of capacity and are building toward 125 in the short-term.

Noel Atkinson -- Clarus Securities -- Analyst

That's just at Aphria 1?

Carl Merton -- Chief Financial Officer

That's just at Aphria 1 and then the capabilities at the extraction center of excellence once licensed will grow it even further.

Noel Atkinson -- Clarus Securities -- Analyst

Just following on that, can you talk a little bit about what preparations beyond the PAX agreement, like what preparations you've been making for the edibles, the vapes, the topicals that are coming out? When do you expect to have first shipments of these products into the adult use market? Are you having supply negotiations already with any of the provincial agencies?

Irwin Simon -- Chairman and Interim Chief Executive Officer

So, number one is built into our plan that will be the back half of our plan is when we expect to have these products and ship them into the market plan. Absolutely, we are having supply and distribution discussions with different control boards. We are absolutely out there today working on R&D, working on product developing and working on partnerships on vapes, for sure, but drinks, edibles, etc. So, we are well into it. We'll be ready to be shipping products in the next evolution of products in the back half of 2020.

Noel Atkinson -- Clarus Securities -- Analyst

Okay. Great. Carl, I wonder if you can talk about the capex outlook for fiscal 2020.

Carl Merton -- Chief Financial Officer

So, there's some disclosure in the MD&A in the commitment note that is $45 million. Those are commitments. Then we're looking at another $35 million in Germany to complete the build in Germany. Those are the plans that we have announced.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Listen, we have capital. As we look and we've spent good capital on our facilities here in Leamington. As we look to expand Broken Coast, we look to expand Latin America and Germany, as we look for what's our return on invested capital and what is organic growth and what is EBITDA accretion, we're not looking to build big shiny boxes that are not going to get us good growth dilutive earnings and where is the size of these markets? As you heard me say before, Latin America is 650 million people. Germany is a big market for medical and can supply other parts of Europe.

So, we're going to spend capital where there's a right return on invested capital, where there's a good growth market where we think the medical market has the support from the docks there and we do have the balance sheet to go out there and do it.

Noel Atkinson -- Clarus Securities -- Analyst

And then finally, just on the cash cost side, what do you think your cash cost was in Q4 if you back out all that incremental overhead of part four and five and the $0.20 you mentioned. Were you approaching $1.00 a gram or below.

Carl Merton -- Chief Financial Officer

The number we reported already pulled out the $0.20 a gram. We reported $1.35.

Noel Atkinson -- Clarus Securities -- Analyst

That excludes the $0.20.

Carl Merton -- Chief Financial Officer

That excludes the $0.20, yes. We continue to trend down and we believe we'll be able to get it to the dollar.

Noel Atkinson -- Clarus Securities -- Analyst

Okay. So, you're still targeting $1.00 per gram.

Carl Merton -- Chief Financial Officer

Yes. The facility needs to be fully. The facility needs to run for a couple quarters for us to be able to achieve all the operational efficiencies.

Noel Atkinson -- Clarus Securities -- Analyst

Okay. That's it for me. Thanks very much.

Operator

Your next question comes from Jesse Pytlak with Cormark.

Jesse Pytlak -- Cormark Securities -- Analyst

Hey, guys. Just to start -- anything about the sequential growth on the cannabis side, particularly in the adult use channel? Can you quantify or otherwise speak to what sort of impact the opening of the Ontario retail storefront retail channel had on that groove?

Carl Merton -- Chief Financial Officer

Jesse, I think the provinces that have both data for online stores and for brick and mortar, it's very clear that brick and mortar is 95% of the sales revenue in those provinces. People for whatever reason do not want to buy cannabis online. So, the growth in Ontario was obviously stunted during the period of time when you could only buy products online. Now that they're starting to build out stores, we see tremendous growth opportunities in Ontario. They opened 25 stores and got another 50 more and they're going to keep announcing more stores.

Irwin Simon -- Chairman and Interim Chief Executive Officer

In this quarter, the 25 stores that opened, they opened pro rata and that's not what drove the growth in our rec cannabis this cannabis this quarter, the 25 stores that opened in Ontario.

Jesse Pytlak -- Cormark Securities -- Analyst

You're saying it wasn't opening the 25 stores that drove all the growth?

Carl Merton -- Chief Financial Officer

It was across all provinces.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Aphria products are sold today in every province in Canada and it was driven by growth in every province in Canada today.

Jesse Pytlak -- Cormark Securities -- Analyst

Okay. I get that. I was trying to get a sense of how impactful the Ontario store rollout was.

Carl Merton -- Chief Financial Officer

I don't have a number for you as a percentage, but it was absolutely a part of it, but it was not the major part of it at all.

Jesse Pytlak -- Cormark Securities -- Analyst

Okay. And then if memory serves correct, I think during the summer period last year, you guys experienced some labor staffing issues during the summer period. That left some operational challenges. Obviously, with Phase 4 and 5 online, labor is going to be not as big of a component, but I'm just wondering if you're having any type of seasonal impacts on the labor side this year.

Irwin Simon -- Chairman and Interim Chief Executive Officer

We are not having any seasonal labor issues at all this year.

Operator

Your next question comes from Matt Bottomley with Canaccord Genuity.

Matt Bottomley -- Canaccord Genuity -- Analyst

Hey, guys. Great quarter. Thanks for taking all these questions. Carl, just wanted to clarify the commentary on exiting 2020 with potential for $1 billion in Canadian cannabis sales -- is that a run rate you expect to achieve by Q4 or is that just the capacity you plan on having built out that could potentially service that much revenue?

Irwin Simon -- Chairman and Interim Chief Executive Officer

So, it's the capacity that's available on an annualized basis in December of 2020 times our current selling price.

Matt Bottomley -- Canaccord Genuity -- Analyst

And you're agnostic to where that's sold? Could some of that be exported or will it just be the Canadian market?

Irwin Simon -- Chairman and Interim Chief Executive Officer

We're working toward securing EU GMP so that we have export capabilities. We're agnostic to where it flows.

Matt Bottomley -- Canaccord Genuity -- Analyst

The next question goes to the 2020 guidance you put out there. Just a question on how CC Pharma will trend. I think you said here it's about half or slightly more than half of -- let's call the high end $700 million in revenue. That would be sort of $350 million that would be CC Pharma but that's lower than it's current run rate based on where we're at today. Given that you're planning on potentially launching CBD in Germany, I'm just wondering what that dynamic is that goes into your estimates there.

Carl Merton -- Chief Financial Officer

First off, we only recurred through the distribution portion of the business. The legacy business that was CC Pharma, cannabis sales that are involved through CC Pharma, we push through the cannabis portion of our business in those numbers. Secondarily, I think there are some people who have taken liberties with the euro exchange rate. When you look at a normalized euro exchange rate, it's not at the $400 million level of sales. It's lower.

Matt Bottomley -- Canaccord Genuity -- Analyst

Then on the implied margin at the high end of each range, it's about 13.5% EBITDA margin. Can you give any color on what expenses are below the gross margin line for the distribution business? I imagine this is part of a larger ramp that you'd anticipate in the subsequent fiscal years toward a higher overall EBTIDA margin.

Carl Merton -- Chief Financial Officer

There are SG&A costs at CC Pharma involved in the distribution business. There are not significant marketing costs associated with it and it doesn't contribute to the other items we disclose in our financials below SG&A.

Matt Bottomley -- Canaccord Genuity -- Analyst

Thanks. Last for me, I just noticed that wholesale revenues came back in this quarter. I think most of your fiscal 2019 was within this quarter. I haven't gone through the MD&A yet. Can you give us any color on where you expect wholesale to trend in 2020.

Carl Merton -- Chief Financial Officer

We have our existing supply agreements that we have announced and we'll take advantage of market opportunities when they're available. It's not a focus of our business, but it is a portion of it.

Irwin Simon -- Chairman and Interim Chief Executive Officer

It's a small part of business, as I said. We'll focus on building or brands and that's where the focus is.

Operator

We have a question from Graeme Kreindler with Eight Capital.

Graeme Kreindler -- Eight Capital -- Analyst

Good evening, guys. Thanks for taking my questions. Just to follow-up on the prior question about CC Pharma, I was just wondering -- is there any seasonality in terms of how that topline looks throughout the course of the year?

Carl Merton -- Chief Financial Officer

Seasonality, no, but it is going to be driven by the growth of Aphria Diamond and its licensing.

Irwin Simon -- Chairman and Interim Chief Executive Officer

CC Pharma, no -- CC Pharma, there is no seasonality in regard to the selling of drugs into the drug stores. Where sales will increase there is the selling of medical cannabis throughout CC Pharma was, we become GMP approved.

Graeme Kreindler -- Eight Capital -- Analyst

Okay. Understood. In terms of the fiscal 2020 outlook, is there any disclosure -- you discussed what the assumption is in terms of the domestic versus international sales volumes or dollars that's put into that number there?

Carl Merton -- Chief Financial Officer

We haven't given guidance on that.

Graeme Kreindler -- Eight Capital -- Analyst

Last one from me -- with respect to the billion-dollar run rate, I know it's been covered pretty well on the call, but I just wanted to clarify -- you mentioned the available capacity times the average selling price, is that taking a current average selling price or is there some sort of consideration in terms of how the average selling price is expected to trend. I guess one factor being the introduction of derivative products but also another factor being just more supply in general across the board in the market.

Carl Merton -- Chief Financial Officer

It's based on the current selling price. I think there's some confusion on what happens to blended selling rates in the future. Everyone recognizes that at some point there will be margin compression on dry flower, that margin compression will exists more in value and mainstream products and a lot less on super premium. But you've also got new product formats going in. Those new product formats come in, they have higher margins associated with them. As you get a new blend, we believe that average selling price stays consistent or goes up slightly. We don't see on a blended basis that that number will go down.

Operator

At this time, I will turn the call over to the presenters for closing remarks.

Irwin Simon -- Chairman and Interim Chief Executive Officer

Thank you very much, everybody. As I said in my opening remarks, Aphria today was not the Aphria of yesterday and the Aphria of today will not be the Aphria of tomorrow. I want to thank our over 1,000 employees around the world that have worked hard over the last six months with myself and the leadership team. We have tremendous brands. We have some tremendous grow facilities out there.

We have strategic facilities located around the world and I feel that what we've been able to do in the last six months, just stay tuned and fasten your seatbelts of what's going to happen in the next year. This industry is growing through tremendous growing pains, tremendous change, and it's going to be about the grow, the production, the people behind it, and the brands, and being fully capitalized and having that balance sheet. We have all of those at Aphria today.

I know there have been some tough times out there, challenging times. I want to thank all those investors that have stayed with us and supported us and look forward to some great growth and great opportunities. Enjoy the rest of your summer and thank you very much for your time today.

Operator

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

Duration: 55 minutes

Call participants:

Katie Turner -- Investor Relations

Irwin Simon -- Chairman and Interim Chief Executive Officer

Carl Merton -- Chief Financial Officer

John Zamparo -- CIBC -- Analyst

Owen Bennett -- Jefferies -- Analyst

Tamy Chen -- BMO Capital Markets -- Analyst

Luke Perda -- Seaport Global -- Analyst

Noel Atkinson -- Clarus Securities -- Analyst

Jesse Pytlak -- Cormark Securities -- Analyst

Matt Bottomley -- Canaccord Genuity -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

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