Aphria Q1 F19 Aug 31, 2018 Rundown

I do want to add a comment before we get going….  Aphria always had an industry leading MDA in my opinion.  They stepped up their game considerably [as did ACB last Q].  They increased disclosure of Gain on Bios, FVI, QoQ impacts on cost per gram, and their detail on construction cost overruns and plant destruction were [to me] the type of disclosure the industry should strive towards.  They could always make me more happy by:

  • providing kg’s harvested, sold and held in inventory like CGC or
  • providing QoQ expense commentary as ACB added last Q
  • providing FG and WIP break downs on inventory [a pet peeve of mine with their reporting]

But all in all… they are disclosing a level of detail us finance nerds like. 

So, open up the Financials and the MDA and let’s roll up our sleeves and sling some numbers.

Sales:

Sales increased by 11%, which I wasn’t quite expecting given they were loading the vault for rec and Shoppers Drug Mart.

Selling price per gram went down from $9.16 to $7.48 (-18%) while retail price per gram went down from $9.25 to $8.99 (-3%), while KG sold went up 35%.  So even without the MDA disclosure we can tell sales mix changed, which it did.

  • BCC accounted for 348 kg sold in Q up 12% QoQ
  • Onboarding fell 4% to 164 kgs
  • Existing patients hit a record 936 kgs up 17% QoQ
  • And wholesale blew up to 312 kgs [not quite a return to pre “fill the vault” Q’s] from 33kgs last q
    • Clinical trials 110kgs
    • Sales to other LPs returned after a 1 Q hiatus to 202 kgs

The sales to other LP’s were product that they believed would not be sold to rec market.  I believe they called it a rebalancing of inventory [trim IIRC].  Q2F18 wholesale was 429KGs and Q3F18 was 445kgs wholesale. So, the sales level was not as big as those Q’s when they would have also been selling flower to other LP’s. [NOTE: I have to think there is STRONG demand for LP wholesale out there until production ramps across industry considerably.]

Cost of Goods Sold:

The “story” to me this Q is in the CoGS…  This is their Gross Margin the past 5 Q’s

31-Aug-17

30-Nov-17

28-Feb-18

31-May-18

31-Aug-18

      

78.0%

67.7%

77.1%

78.7%

63.6%

 

On a QoQ basis the all-in cost increased to $1.83/gram from $1.60 or 14%.

As you can see this is their lowest GM in 5Q’s. The primary driver was the write down of 13,642 plants worth $979k.  Without this it would have been 71%, which still would have been their lowest.  This is where I appreciate the disclosure.  Shit happened and they laid it out for everybody to see!! But still… destruction of plants for lack of qualified workers!!  I am sure there is more to the story [I would have liked more colour in Conference Call, but there was a time limit on the call and they had 4 analysts still in the queue when they ended].  They did indicate they doubled greenhouse staff in Q2F19 and that automation should relieve that problem. 

Other items impacting margin:

Favourably

  • Increase in BCC sales
  • Increase in oil sales but this was also a function of going from 6 grams per ml to 4.5 grams per ml equivalency

Unfavourably

  • Aforementioned plant destruction [kind of wished that Scientus Pharma wanted more full plants!!]
    • $979k
  • Reducing production capacity in favour of creating mother stock to fuel PIV and PV and Aph Diamond.  We saw CGC do this to fill BC Tweed.
    • Increased cost $0.20/gram
  • Temp controls and HVAC for PIII not being fully operational reduced yield
    • Increased costs $0.22/gram

So this is what good disclosure allows you to look at… total cost went up $0.23/gram and the unfavourable items listed above on a cost per gram basis were $0.42/gram.  Given these are short term in nature, it is less worrisome than an increase in cost per gram with no disclosure.

On the CC they indicated they don’t expect GM to return to previous levels until PIV, PV and Aph Diamond are fully operational.  I would take that as selling harvests and in full crop rotation.  So June 2019.

Production Costs per gram sold [my metric] increased to $2.50 from $1.71 or $0.79 QoQ and above are the reasons.

Fair Value increment per gram sold in the Q [this is the pulled ahead profit at harvest $ that was in Gain on Bios and layered above cost in inventory] was $2.37/gram versus $2.34/gram last Q.  A small increase.

FVI + Production costs aggregated to $8,646 vs Sales of $13,292… So, they continue to be an industry leader in being the LEAST aggressive at pulling profits forward.

Gain On Biologicals was $9,511 vs last Q $11,820…the decrease is likely largely due to the destruction of $979k in plants that didn’t make it into Inventory.

Operating Expenses:

Trend Analysis: Aphria

Peer Analysis: Last published Q

Selling expense increased to 36% from 34% last Q with adult rec ramp being the stated reason.  Versus Peers CGC and ACB lead the pack but there us a strong cluster of the remaining companies in the peer set hanging out in the same territory.

General and Admin expenses continue the large ramp. Increasing in the last 4q’s as follows:  23%, 27%, 62% and 67%.  This is the rec ramp that we have been seeing across the industry. But it also contains the SGA of the Nuuverra acquisition in Q4F18, which if you look at EBITDA, and given no sales from Nuuverra assets, would be $3.1 million of the $8.9 million or 34% of G&A’s

If you are hunting for inflection points this one might start showing a trend in Q2 of Rec.

Aphria also provides a breakdown of G&A expenses but YoY [cannot recall many others doing this].  I have started to record these in my spread and I will start commenting more on sub components in later Q’s.

SBC reduced as % of sales for the Q… but I prefer looking at this on a Trailing Twelve-Month Basis versus peers… so…

Again, CGC and ACB lead the pack with Aphria in third spot.  Remember that TRST wasn’t public until late C2018 and OGI was dealing with recall issues.

The MDA does indicate that SBC is higher YoY as the stock price is higher and

  • Current Q 15,884 DSUs ad 1,070,000 options vs
  • Last year Q 4680 DSU and 1,265,000 options

Again… some nice detail on the delta.

Operating expenses, which includes Amortization, R&D [interesting comment on R&D in MDA on page 19… Leads me to believe this is another area where industry does not have a standard], and I back out Transaction Costs and put them in Other Income and Expenses, aggregated $23,250 versus $13,292 in sales and $8.4 million on GM before IFRS voodoo.

Leaving a Net Operating Income b4 FRS voodoo of negative $15 million versus negative $12 million last Q.  General expense creep QoQ in all but SBC was the reason.

Other Income and Expenses:

Other Income and Expenses bolstered the negative Operating Profit by recording a positive $35 million.  In comparison the whole last Fiscal year was $43 million.  The Q was helped out by Hiku being acquired at a premium and then CGC also going up, Australia investment and LHS dispersal.

Net Income:

Net Income was $21 million based largely on the boost provided by Other Income and GoB.

Trend Analysis: Income Statement Drivers and Breakeven

PEER Analysis:

Adjusted EBITDA:

Well, the streak is officially over.  It was over last Q when they included Nuuverra G&A.  But this time, as per guidance, she ducked into the red of -$828k and all in it was -$4.0 million.  Nuu G&A only crept by $302k but is still -$3.1 million.  Until some gross margin is generated from those assets this will continue to sit out there.  But again, GOOD disclosure.  Other LP’s claiming they would be profitable now could show this type of disclosure to buoy their argument.

With the drop in EBITDA and the reduction in Gross Margin % the EBITDA breakeven would require $6.3 million in more sales, as compared with CGC gap of $54 million, ACB gap of $21 million.  Whereas TRST has a smaller gap to b/e EBITDA of $3.1 million and OGI is leading the pack at a gap of $610k.

Sales Gap to Breakeven Profit is another matter entirely. This data point requires operating profit [which EBITDA backs out SBC and Amortization] to be positive. Below is in Millions:

Millions of $’s

CGC

ACB

Aph

TRST

OGI

Tilray

Cronos

Sales Gap to B/E

$144

$72

$23

$17

$4.4

$34

$12

Existing Sales last Q

$26

$19

$13

$9

$3.7

$13

$3.3

Multiple to Existing Sales

5.54:1

3.78:1

1.76:1

2.11:1

1.19:1

2.61:1

3.63:1

So, as you can see… a number of companies have to double, triple, quadruple or quintuple existing sales to show a positive Net Operating Profit.

Balance Sheet

I am not going to spend too much time here. I’ll look at the deltas.

Cash and marketable securities are $318 million with a $209 million increase thanks to the $245 raise.

Inventory is up $13 million and include soft gels ($300k) and distillate ($2.8 million) and totals $33 million. I am disappointed they do not provide Finished Goods and Work in Progress figures. But they do provide the best Cost/FVI breakdown in the industry, and they improved it this Q by providing weekly FVI increments for Aph and BCC.

FVI as a percentage of inventory decreased to 61% from 64%. That is a trend I would like to see even more of.

Capital Assets are up $58 million of which $48 million was Construction in Progress and $7 million equipment. They disclosed a $3 million cost overrun on the $150 million PIV and PV projects.  That is 2%, and for the scope of the innovation they dropped in… that’s very good.

Long Term investments and Equity in Investee went up $37 million.  Increase in value in investment portfolio and $10 million gain on partial sale of LHS shares

Liabilities

Current Portion of Derivative Liab increased $7 million but LTD side was removed as it is due in next $12 months

Long Term Debt with WFCU was increased by $25 million during Q.

So from that $245 million raise and $25 million in new Long term Debt they used $58 million in capital assets, $12 million in inventory [but half of that is FVI], a $10 million convertible note advance to Fire and Flower, $5.5 million in NAC, $5.4 million in Rapid Dose Technologies, had an EBITDA shortfall of $4 million.

They do have a decent cash balance but they are playing against the “chip leader” in CGC and Acb post $200 million bank deal.  So, their stack could use a “buy in”.

Its Sunday and I have spent 4 hours doing this… so that’s all I got.

GoBlue

This Post Has One Comment

  1. Awesome analysis, in a few years, WHO do you see winning out right ??

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