VIANARCHRIS
Well-Known Member
Transcript:
James West: Vic, thanks for joining us again.
Vic Neufeld: My pleasure. Thanks, James.
James West: Vic, there’s been a general lift in all of the publicly traded medical marijuana stocks in Canada, but Aphria seems to be doing particularly well. Can you give me some idea as to why that is?
Vic Neufeld: Yeah. I think, James, the general market and the investing community, is finally understanding what August 24 is all about under medical and the Allard response from Justice (Michael Phelen), but at the same time, we’re getting closer and closer to November and the task force recommendations, meaning, I think, a lot of investors want to get into this sector before the news breaks.
Specific to Aphria, I think the market is finally giving due credit and paying attention to the Aphria story. Our revenue growth is solid and very methodical and very sustainable, but on the flip side, our low-cost producer status just resonates. I think our last quarter that we issued, we had an all-in cash cost of $1.15 per dried bud gram in the vault, which unless there’s some LP that I’m not aware of, is the lowest cost producer in the country. Meaning, our margins are very, very healthy.
Now, what does that translate into in terms of August 24 as well as November? I can just suggest to you that when those pieces of legislation are brought into play, and they re-craft MMPR in terms of accessibility and what other forms of medical cannabis distribution channels they may bring into play, we at Aphria are best positioned to handle any, I’m not going to call it a price war, but there will be some pricing compression that’s going to be necessary. Because under both medical enhanced accessibility as well as recreational, you’re going to have another mouth to feed, another piece of the puzzle in the distribution channel; they’ll want their margin. And at the end of the day, a low cost producer is going to be able to tackle that issue.
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Vic Neufeld: I can only give you my ideas and thoughts and wishes, and to that extent, it’s my understanding that Health Canada, through Office of Medical Cannabis, together with Consumer Safety and Justice, have put together a series of initiatives to re-engineer MMPR so that it properly addresses all of the points that Justice Phelan has indicated in his ruling about five months ago, with another month to go, August 24. Specifically, and the Cannabis Canada Association and Health Canada are supportive of this, that we are very much in support of homegrown, medical use for patients that have a medical need, at their principal, primary residential address, and a certain number of plants that is necessary at any one point in time for an individual patient to grow at home.
And looking at the Colorado model, and many, many articles have been written on this, I think the number is anywhere from six through ten plants for an individual at home, grown on residential address. We’re all in favour of that. That absolutely should be part of it.
But on the heels of that, and again articles have been written, I think what perhaps the lawyers for Allard and the certain MMAR supporters are going to argue is, that’s all fine and dandy, but how about if we don’t want to grow our own? And therefore, we need to ensure that there’s a designated grower status. And to that extent, I’m very unclear as to where Health Canada and Justice are going to land on the designated grower status.
And thirdly, and I think Health Canada will take this opportunity in terms of addressing accessibility. I think a lot of MMAR supporters are going to argue that with the type of dispensaries located, whether Vancouver, Toronto or any other city in Canada, it really is ease of access. So it’s my view, not shared by all, but my view that Health Canada will take this opportunity and introduce perhaps some concept of pharmacy to be part of the medical cannabis distribution channel, subject to all of the other MMPR running rules in terms of cultivation and scripting, etcetera.
James West: Wow. So you see this sort of causing more of an acute inflection point for the MMPR publicly traded growers, whereby it’s going to become even harder to extract a profit based on the fact that now a big portion of your audience is going to be allowed to grow it at home or appoint somebody potentially?
Vic Neufeld: Growing at home, though, James, is really not a concern. It’s great in theory; practically, I’m not sure how that is going to be executed by individuals. I know of hundreds of individuals who are on medical cannabis, and they have no intentions nor desires to find a room on their residential property, get the genetics, whether it’s seed or cuttings, and really do every day the tender loving care necessary to grow a good harvest, and then the strain they need, the THC/CBD balance, it’s very, very time-consuming, and I’m not sure whether the cost factor, costs all-in including time value, will support a big portion of existing medical patients growing their own. I really don’t see that.
However, on the other side called accessibility and broadening the potential retail channel for medical cannabis, mainly pharmacy, I can see that being a very much of an issue for certain licensed producers who have cost structures that are significantly higher than Aphria’s, because if you include pharmacies, there is a margin requirement, a distribution fee, listing fees…the costs are quite significant, and if a licensed producer has a cost per gram that is $4.00, $4.50, $5.00 a gram, under MMPR running rules, it’ll be pretty hard-pressed for them to successfully compete against Aphria in that sort of landscape.
James West: OK. Let’s talk a bit about your last quarter that you announced on July 8. You obviously are in great shape; your cash cost to produce each gram was $1.67. What is it that you’re doing differently than the others that allows you to produce so cheaply?
Vic Neufeld: Yeah, I mean, James, we’ve communicated this many, many times, but again for your listeners, what really differentiates Aphria from the others is, we are truly a 100 per cent agriculture greenhouse play. We grow everything in a greenhouse. I know there are people out there that are bashing the story of Mother Nature, but it is absolutely true: we have less lights with lower intensity, less hours, and we don’t air condition. So when you compare us to every indoor grow, including those that refer to themselves as hybrid greenhouses, they have significantly higher electricity hydro costs in those four areas.
It’s been established, based on those public company licensed producers that we were able to forensically tear apart their income statement, we spend in one year on hydro what most LPs on average spend in a month. So that’s a 12:1 factor, and as we well know, at least in Ontario, it’s $0.17 a kilowatt hour when you include global adjustment, and it’s a very significant cost.
But the costs go further than that. Our seasoned labour force in Leamington, being a hotbed of greenhouses, 2,500 acres in total, we have excellent skilled workers that are very effective and efficient working in a greenhouse. We have certain fertilization plans and cost structures that truly are at the low end of what market conditions are. The list goes on: we have a capacity where fixed costs are spread over a significant amount of growing feet. So when you look at my cost structures, we absolutely have a competitive advantage in a greenhouse, in Leamington.
James West: Great, Vic. OK, let’s leave it there again. Great to catch up with you. We’ll catch up with you again soon in the future. Thank you so much for your time today.
Vic Neufeld: Yep, anytime, James. Thank you.
James West is an investor and the author of the Midas Letter, an investing research report focused on Canadian markets. The views expressed on this podcast — edited for clarity, brevity and compliance with securities laws — are his own and are presented for general informational purposes only. They should not be construed as advice to invest in any securities mentioned.
James West and/or associated funds do not own shares in any securities mentioned in this article. For the full Midas Letter disclosure policy, click here. Postmedia and Midas Letter have a revenue sharing arrangement.
Almost like he's bragging about gouging sick people.
