Aphria Inc Q4/19 Earnings Preview: Subdued Expectations

Aphria Inc. (TSX:APHA), one of the Canadian marijuana stocks, will report Q4/19 financial results after markets close on Thursday, August 1, 2019

SmallCapPower | July 31, 2019: Aphria Inc. (TSX:APHA) (NYSE:APHA), one of the Canadian cannabis stocks, is expected to report Q4/19 and annual financial results on Thursday, August 1, 2019, after markets close. Analysts are expecting revenue for the quarter of $99.3M (including distribution revenues) and a net loss of $24.9M.

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Revenues expected to remain flat. During last quarter’s earnings call, management guided that Q4/19 results would be similar to Q3/19. In its third quarter, cannabis revenue came in at $15.4M (2,637 kg), a decrease of 22.6%, compared to $19.9M (3,409 kg) of revenue generated in Q2/19. The decrease was due primarily to a transition of growing methods and more space being allocated to mother plants, in order to prepare Aphria ONE and Aphria Double Diamond for production. Additionally, Aphria generated $57.6M in distribution revenue from its German subsidiary CC Pharma. Through CC Pharma, Aphria has distribution to 13,000 pharmacies in Germany. Cannabis revenues are expected to remain flat because of the 14-to-16-week lead time required to bring Aphria ONE into full operation, which includes first flowering and Health Canada quality checks. First revenues of cannabis from Aphria ONE are expected to be included in financial results in Q1/20. In addition, the Double Diamond facility has faced some operational challenges, as the facility has still not received its cultivation license from Health Canada. We would expect a similar lead time of 14-16 weeks for this facility to become fully operational as well. Cash costs per gram increased in the third quarter to $1.48 from $1.34 in the second quarter – due to the decision to allocate flower space to mother plants as well. Analyst are estimating that Aphria should generate $99.3M in revenue (including distribution revenues) in the fourth quarter.

Figure 1: Aphria Double Diamond

Source: www.aphriainc.com

Gross margins expected to improve in subsequent quarters, however Aphria is still a few quarters from positive EBITDA. Gross margins decreased from 47% in Q2, to 18% in Q3, reflecting an increase in distribution revenues, which carry lower margins. Gross margins are expected to increase significantly once cannabis revenues from Aphria ONE ramp up in Q1/20. Analysts are not expecting Aphria to generate positive EBITDA until Q3 or Q4 of 2020. Another risk putting a damper on profitability could be additional write-downs of assets acquired through the Nuuvera/LATAM acquisitions. Recall that during the third quarter, the LATAM acquisitions have already been written down to the tune of $50M. The European Nuuvera assets were purchased for $500M, of which $400M is goodwill. If it turns out that Aphria overpaid for these assets, the $400M could be at risk of impairment. On the last earnings call, Chairman of the Board Irwin Simon mentioned that there were currently no assets under review for impairment. However, Simon also mentioned as this quarter is year-end, Aphria will be subject to a year-end audit, when assets are tested annually for impairment. The impairment test could require Aphria to further write-down the assets for the auditors to sign off on their financials.

Figure 2: Aphria ONE

Source: www.aphriainc.com

Key takeaways. Revenue and gross margins are expected to remain flat for this quarter, although both are expected to increase once the Company’s 255,000 kg of annual production capacity come online. However, Aphria is waiting on approval of its Double Diamond cultivation facility and it is not clear when Health Canada is expected to grant the site its cultivation license. Investors should expect management to provide guidance for Q1/20, as well as an update on the Extraction Center of Excellence (ECoC), and Aphria ONE. Construction of the ECoC was anticipated to be finished by the end of June 2019. Additionally, investors will be looking out to see if Aphria provides any update on a new CEO.

Shares of Aphria ended Tuesday’s trading session 2.7% higher at C$7.21. Aphria’s stock trades at a market cap of C$1.8 billion.

  • Market Cap: $1.8 Billion
  • YTD Return: -8%
  • 90-Day Average Trading Volume: 2,057,000
  • Q4/19 Consensus Revenue Estimate: $96.3 Million (6 estimates)
  • Q4/19 Consensus Net Loss Estimate: $24.9 Million (3 estimates)
  • Earnings Date: Thursday, August 1, 2019, after markets close

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