Aphria Reports a Second Consecutive Profitable Quarter, While Some Investors Share Concern Over Canadian Market

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This week marks the one year anniversary of the launch of adult use cannabis sales in Canada, and, as Aphria executives on Tuesday shared with investors their first quarter 2020 earnings, they expressed continued confidence in the Canadian cannabis market moving forward; investors, though, weren’t quite as confident. 

Aphria reported a net revenue of C$126.1 million ($96 million USD), up 849% from the same quarter last year and a 2% decrease from last quarter. The company’s revenue from adult-use cannabis sales in Canada stood at C$20 million at the end of the first quarter, which ended August 31, an 8% increase quarter-over-quarter.

News of the profitable quarter comes as investors reflect upon what many consider an underwhelming first year of adult use cannabis sales in Canada. (One investor on the earnings call noted, “some of us on the other side of the phone have become more pessimistic about the Canadian market up ahead.”) The earnings call also came one week after a five-year wholesale cannabis supply agreement, signed last September, between Aphria and Canadian company Aleafia Health Inc. was terminated. In a news release last week, Aleafia cited “Aphria’s failure to meet its supply obligations under the Supply Agreement” as grounds to kill the deal.

“We expect to replace [the terminated agreement] with retail customers and other products to support those sales that we would have gotten from Aleafia,” Aphria’s interim CEO Irwin Simon said during the call in response to a question about Aleafia, adding,  “There are better prices and better opportunities out there within both flower and oil prices.”

Other themes during the earnings call included Aphria’s continued focus on the Canadian market among its other global operations; how the vaping illnesses in the United States may affect Canada as regulations for edibles, and concentrates go live later this week; Aphria’s high cash burn during Q1 (which CFO Carl Merton said is expected to flatline throughout the next few quarters); and the company’s upcoming cultivation site “Aphria Diamond” which would “provide an additional 1,300,000 sq. ft. of licensed greenhouse growing area” once approved, bringing Aphria’s cultivation space total to 2.4 million square feet and allowing an expected “annual production of 255,000 kgs of cannabis” according to their earnings report.

On the vaping illnesses in the United States potentially affecting Canada’s vaping regulations, which are expected to put products on the market as early as December, Simon said that the company has “not heard anything from Health Canada” and emphasized that the illnesses, as far as he understands them, are thought to be caused by products from the illicit market. “This just comes back to show why regulation is so important,” he said.

But investors’ concerns over the future of the Canadian market continued throughout the earnings call. In response to a question about how equipped Aphria would be to output their “distribution into an international channel” to hit their target numbers if “the Canadian retail rollout [for new cannabis products] goes horribly just for the sake of argument,” Merton said that the company has “significant demand” in overseas markets, such as in Italy, Germany, Colombia and Argentina, where Aphria has operations, and that they are “very confident in [their] ability to divert products from Canada to overseas markets in a downside scenario.”

Jumping in, Simon noted that though the overseas market is a big opportunity, he is “confident with the Canadian market, ultimately.”

“There is a major market today [in Canada] that can be taken away from the illicit market,” Simon said. “That is where the opportunity is, and that is where we’ve invested, and that’s ultimately where Aphria will get to that billion dollar mark and be able to generate… a tremendous amount of cash.”

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