The chief executive of licensed marijuana producer Aphria Inc. is calling on his competitors to disclose and reduce their production costs well in advance of the coming legal recreational market.
Vic Neufeld said other CEOs of licensed producers need to clearly articulate how they plan to rein in millions of dollars of operating expenditures per quarter to a level that will be more sustainable when prices drop in the soon-to-be-legal recreational market.
Aphria is the lowest-cost producer in Canada. As such, it welcomes the opportunity to break out a metric called cost per gram, which companies are not required to report and many do not.
If other marijuana companies were compelled to report the metric, it would highlight how favourably Aphria’s costs stack up.
But Neufeld said reporting costs would encourage producers to drive expenses down and make his competitor’s operations more viable in the long term — something he believes is necessary for the industry to meet projected demand.
“I’m just concerned because I need some of my fellow licensed producers to step up, because we need the supply chain,” he said Wednesday after the company posted better-than-expected fourth-quarter results.
The federal government has set a target of next Canada Day to launch the legal recreational market, leaving Health Canada scrambling to approve more licensed producers amid supply concerns for the expected millions of legal marijuana users.
The looming target date also has existing producers moving quickly to ramp up production to take advantage of the recreational market, expected to be worth $6 billion by 2021.
“The government has a very clear objective and that is moving underground consumers above ground and that means there’s another mouth to feed called the retailer,” Neufeld said.
Profit margins
Distribution costs, advertising and sales taxes will further erode profit margins and cause price compression, he said, possibly squeezing companies whose production costs are too high out of the market, he added.
Production costs have so far not been a major concern in the tightly controlled medical market where demand far outstrips supply.
Licensed producers are fetching between $7 and $15 a gram in the current medical market, but that is expected to fall in the consumer market. If the product is not affordable, the fear is, users will stick to the black market where costs are lower.
Capital spending is necessary to increase the supply, but Neufeld said his competitors have to find ways to bring their cost per gram down.“Sooner or later, investors are going to say, ‘Wow, these guys can never make a profit,’” he said.
Neufeld speaks from a position of relative authority on the matter. Aphria, which grows product in greenhouses rather than in warehouses, is the lowest-cost producer in Canada and the first to report positive cash flows.
Aphria reported cash costs of $1.11 per gram in its most recent quarter, down from $1.73 in the prior quarter.
Reporting standards
However, reporting standards vary greatly in the nascent marijuana industry. Aphria said its cash costs are just 79 cents per gram according to its “competitor’s definition,” which doesn’t include indirect labour or quality control costs.
By contrast, Canopy Growth Corp., Aphria’s biggest competitor, reported costs of $2.90 per gram in its most recent quarter, while MedReleaf Corp., a big producer that recently went public, reported cash costs of $1.53 per gram. Most other companies don’t disclose such a metric.
Aphria sold 738,000 kilograms equivalent of product in the quarter at an average price of $7.75 per gram, with an adjusted gross margin of 85 per cent. Revenue increased to $5.7 million from $5.1 million in the previous quarter.
However, the company swung to a loss of $2.6 million during the quarter, largely due to a number of expansions and strategic investments. Still, the results beat average analyst estimates and Aphria’s share price rose 14 per cent to close at $5.94 per share on Wednesday.
“We view these results very positively,” said Haywood Securities analyst Neal Gilmer. “We believe it demonstrates the leverage Aphria has in low-cost production that can drive meaningful earnings versus some of the other LPs in the sector.”
credit:420intel.com
