One of the lowest cost marijuana producers, Aphria Inc. (TSX:APH) is set to release its first quarter (Q1 2019) earnings for the three-month period ended August 31, on Friday, October 12. There are a number of items that investors would be looking out for in the company’s very last pure medical cannabis earnings results before recreational sales kick in next week.
Here are some of my expectations on Aphria’s earnings results due Friday.
Revenue growth
The company generated some decent revenue growth rates over the past quarters, mainly driven by patient numbers growth and, recently, the acquisition of Broken Coast Cannabis and increasing average price per gram.
The top line could still continue to grow sequentially, but one wonders if the company could see a decline in active patients like Aurora Cannabis did during the quarter to June.
That said, the full consolidation of Broken Coast results during a previous quarter could lead to slower sequential revenue growth as the comparison base is higher.
Medical cannabis revenue growth will remain very important, although it faces significant cannibalisation from the recreational use market. Medical sales could provide a smoother, low volatility revenue line that could contribute good margins, and international sales will add to this component too.
Production costs
Last quarter, Aphria reported a sequential decline in cash costs to produce a gram of cannabis, but the company saw “all-in” costs to produce (a broader production cost measure) increase marginally.
It’s desirable that cash costs be contained as the industry moves into a potentially flooded low margin adult-use market, where production cost profiles could mean the difference between profit making business and a loss leader.
Survival could very much depend on cost management.
Will the positive EBITDA profile be maintained?
Aphria set a new record by reporting its 11th consecutive quarter of positive operating earnings as measured by adjusted EBITDA. This is a feat no other Canadian cannabis firm has ever achieved and it gives the impression that the company could lead on profitability rankings.
However, that record is severely under threat as operating earnings continue to decline. The company has been incurring significant costs in preparation for recreational product sales, and management warned of increasing costs in the most recent annual report.
Most noteworthy, the last report’s positive adjusted EBITDA was for the Canada sales segment, while the same measure for Aphria International (formerly Nuuvera Corp) was negative and the loss was big enough to offset the Canada segment EBITDA on a consolidated basis.
I don’t expect this scenario to change this time.
Inventory growth
The company reported cannabis inventory of 5,640 kilograms and kilogram equivalents in its last earnings instalment.
Production is ramping up, and the company earlier suspended wholesale sales to beef up inventory before adult-use product shipments commenced. Aphria’s inventory in this report could very well give us an estimate of how much product the company is likely to have ready for sale across the provinces as recreational sales debut.
First, mover advantages in the new legalized market could provide critical market positioning in a new market and become a critical success factor.
The company said it received orders for 21,000 kilograms of adult-use cannabis from the provinces in its latest annual report, and expects to have an annualized productive capacity of over 255,000 kilograms by end of November 2018.
Fulfilling the orders within the first year of sales will likely not be a significant problem, but the company’s closing inventory for the quarter gives the market a better gauge of October 17, Day 1 readiness for Aphria.
Investor takeaway
The company could continue to report medical cannabis revenue growth, but I will be looking closely at its continued success in production and operating cost management for assurances on operating profitability in the new recreational use market.
Increased administration, marketing and distribution costs in preparation for the adult-use market could threaten Aphria’s bottom line, while strategic investments portfolio gains could dampen the impact, but I’m not expecting many surprises from the upcoming report.
