Key Operating Highlights
- 92% increase in kilogram equivalents1 sold, reflecting partial period sales from the opening of the Canadian adult-use market, as well as continued sales of medical cannabis to existing and new patients
- Adjusted gross margins of 47% of net revenue, compared to 64% in prior quarter, as expected, due to lower effective selling prices in adult-use market, as well as temporarily lowered yields and higher production costs related to facilities expansion and implementation of automation
- Part IV and V expansions of Aphria One awaiting Health Canada approval; application for cultivation licence at Aphria Diamond submitted and also awaiting Health Canada pre-cultivation inspection
- Announced and closed subsequent to quarter-end of the acquisition of CC Pharma, a leading distributor to pharmacies in Germany
- Closed acquisition of key operations and licenses in strategic Latin America and Caribbean jurisdictions; subsequently established additional strategic alliances in the region to expand the Company’s medical cannabis operations and distribution
- Listed on the NYSE, providing shareholders greater liquidity
- Appointed new independent Chair of Board of Directors, Irwin D. Simon, subsequent to quarter-end
- Ended quarter with strong balance sheet and liquidity, including $152.1 million of cash and $32.7 million of liquid marketable securities, to fund announced Canadian and International growth and facilities expansion
Aphria Chief Executive Officer Vic Neufeld, and Co-founder Cole Cacciavillani, are both nearing the end of their five-year journey with the Company and will transition out of their executive roles over the coming months but remain on the Board. Working closely with Irwin D. Simon, Aphria’s recently appointed independent Chair, and President Jakob Ripshtein, Mr. Neufeld and Mr. Cacciavillani intend to complete a smooth and responsible transition to a globally-minded executive leadership team for the long-term benefit of the Company’s patients, shareholders, customers, and employees.
Aphria Chair Irwin D. Simon commented, “Vic and Cole are consummate entrepreneurs. Thanks to their vision, energy and passion, Aphria has become a global player in an industry that didn’t even exist five years ago. On behalf of the entire Aphria team, I want to express my gratitude to both. I look forward to working with them to further build Aphria’s leadership team and continue driving long-term value for our patients, customers and employees into the future.”
“When the Canadian medical cannabis market opened up five years ago, Cole was growing millions of potted flowers in Leamington, and he understood that cannabis was a natural product extension for the founding team’s decades of experience as greenhouse growers in Leamington,” said Mr. Neufeld. “Now with legalization and globalization, including a huge market opportunity with positive developments in the U.S., Aphria’s next generation of leadership may take the reins. Building and leading a Company like Aphria, which exploded from an idea in late 2013 to our many successes to-date, has been an incredible journey, despite the toll it has taken on health, family and personal priorities.”
“Vic and I have worked tirelessly for decades, building great businesses, but now in our sixties, it is time for both of us to step back from the demands of leading a world-class organization. Endless meetings, travel, deadlines, talent search – the list of executive responsibilities will only continue to grow,” said Mr. Cacciavillani.
“Succession is the plan. Cole and I have informed the Board, and they have agreed, that we will begin the transition process immediately, and at the appropriate time, we will both step down from executive positions at Aphria. We continue to have the greatest pride in what Aphria has achieved, and its future has never looked brighter. From continued technology advancements, to continued support of scientific developments, to amazing adult use brands, to globalization strategies, and most of all, the hundreds of dedicated passionate team members that have joined Aphria, we are well positioned to be a dominant player,” concluded Mr. Neufeld.
The Board has requested that, following the transition, Mr. Neufeld and Mr. Cacciavillani continue to apply their knowledge and expertise as special advisors to both the Chair and the President, ensuring a smooth transition of institutional experience and strategic advice until a new CEO is appointed.
Second Quarter Commentary
“In our second quarter, Aphria continued strengthening its position as a premier supplier of medical- and adult-use cannabis to the Canadian market, building long-term competitive advantage and developing key global opportunities,” said Mr. Neufeld.
“This is the first quarter to partially include adult-use sales, helping to drive 63% quarter-over-quarter net revenue growth, as did continued strength in sales to the medical-use market. As expected, gross margins declined, reflecting lower effective selling prices in the adult-use market, as well as temporarily lower yields and higher production costs in the quarter as we moved aggressively to build out production facilities and implement new automation processes.
“A top priority for Aphria is expanding production and automation to secure our long-term cost and scale advantages. The Part IV and V expansions of Aphria One are now complete and awaiting Health Canada approval, while an application for a cultivation licence at Aphria Diamond has been submitted and is awaiting pre-cultivation inspection. Based on this, we now expect to generate first sales from these new facilities later in the calendar year, pending Health Canada approvals, with our annualized harvest reaching 255,000 kilograms, compared to 35,000 kilograms currently, by the end of calendar 2019.
“In the second quarter we also positioned the Company for long-term growth in key global markets with strategic alliances, targeted investments and disciplined acquisitions. We’re excited to have just closed the previously announced acquisition of CC Pharma, based in Germany, which distributes pharmaceuticals and medical cannabis to over 13,000 pharmacies. This transaction positions Aphria to be a leading player in the European medical cannabis market. We’re equally optimistic about our recently announced alliances and acquisitions of highly strategic licenses and operations in Latin America and the Caribbean’s most attractive emerging cannabis markets, including Colombia, Argentina, Paraguay and Jamaica.
“A strong foundation is critical to sustaining Aphria’s leadership in the global cannabis market and delivering long-term profitable growth. To that end, we finished the quarter with a strong balance sheet and sufficient capital to fund our previously announced plans internationally,’ said Mr. Neufeld.
Key Financial Highlights
Net revenue for the three months ended November 30, 2018 was $21.7 million, compared to $13.3 million in the prior quarter and $8.5 million in the same period last year. Higher revenue in the quarter was driven by a 92% increase in kilogram equivalents of cannabis sold and an additional $1.6 million of non-cannabis international sales. Initial sales in the newly legalized Canadian adult-use market accounted for over 1,900 kilogram equivalents sold. Medical cannabis sales declined marginally from 1,466.2 kilogram equivalents sold in the previous period to 1,443.6 kilogram equivalents sold in the second quarter. Cannabis oil sales, as a percentage of volume, decreased to 19% of overall sales from 39% in the prior quarter, reflecting the higher percent of dry bud sold in the adult-use market.
Partly offsetting the positive revenue impact of higher kilogram equivalents sold, average selling price, inclusive of excise tax, declined to $6.54 per gram in the quarter, compared to $7.12 in the prior quarter. As anticipated, this reflected sales to the adult-use market, which had a lower average selling price of $6.32, inclusive of excise tax, compared to $7.51 in the medical-use market, also inclusive of excise tax.
Adjusted gross profit for the second quarter was $10.2 million, with an adjusted gross margin of 47%, compared to $8.5 million with an adjusted gross margin of 64% in the prior quarter. Adjusted gross margins declined as expected in the quarter, reflecting lower average selling prices in the adult-use market. In addition, production costs as a percentage of sales temporarily increased and yields decreased as production space was allocated for mother and vegetative plants for the Part IV and Part V expansion of Aphria One.
Selling, general and administrative costs (“SG&A”) in the quarter rose to $27.5 million, from $24.1 million in the prior quarter and $7.3 million in the prior year, primarily due to higher headcount and employee-related costs, following the acquisitions of Nuuvera Inc. and LATAM Holdings, and as a result of investing $2.6 million in brand development prior to the implementation of The Cannabis Act. As a percent of net revenue, SG&A declined to 127% from 181% in the prior quarter, reflecting improved operating leverage on the Company’s growing revenue base.
Net income for the second quarter of 2019 was $54.8 million or $0.22 per share, compared to $21.2 million or $0.09 per share in the previous period, and $6.5 million or $0.05 per share for the same period last year. The increase in net income relates to gains on our long-term investment portfolio, primarily our divestitures of positions in Hiku Brands and Liberty Health Sciences.
Adjusted EBITDA loss from Canadian cannabis operations (previously referred to as ACMPR operations)1 for the second quarter was $6.1 million compared to a loss of $0.8 million in the prior quarter. Adjusted EBITDA loss from Aphria International for the second quarter was $3.5 million compared to adjusted EBTIDA loss from Aphria International of $3.1 million in the prior quarter. The increased adjusted EBITDA loss in the second quarter is primarily attributable to temporary increases in production costs, decreases in yields as previously noted, as well as increases in general and administrative expenses undertaken to support the Company’s planned capacity expansions.
Conference Call on January 11, 2019
The Company invites you to join Vic Neufeld, Chief Executive Officer and Carl Merton, Chief Financial Officer, on its analyst conference call this morning at 9:00 am EST to discuss its financial results for the quarter-ended ended November 30, 2018. An audio replay of this call will be available by 11:45 am ET from January 11, 2019 through February 11, 2019.
Conference Call Details:
Date: Friday, January 11, 2019
Time: 9:00 am EST
Dial In: 1-888-231-8191 (Toll-free), +1 (647) 427-7450 (International)
Conference ID: 5591407
Replay Passcode: 5591407
We Have A Good Thing Growing.
1 – In this press release, reference is made to adjusted gross profit, adjusted gross margin, adjusted EBITDA from Canadian cannabis operations, adjusted EBTIDA loss from Canadian cannabis operations, kilogram (or kilogram equivalents) sold, cash costs to produce dried cannabis per gram, “all-in” costs to produce dried cannabis per gram and investments in capital and intangible assets – wholly-owned subsidiaries, which are not measures of financial performance under International Financial Reporting Standards. Definitions for all terms above can be found in the Company’s November 30, 2018 Management’s Discussion and Analysis, filed on SEDAR and EDGAR.