VIDEO: Aphria Inc’s (TSE:APH) South American Play

Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) CEO Vic Neufeld discusses Aphria’s strong quarter and its global reach. Neufeld explains the importance of emerging medical cannabis markets in Germany and the impact of the US Senate’s approval of the 2018 Farm Bill to legalize hemp.  The pair discuss the significance of the South American market emphasizing Aphria’s control of all three THC medical licenses in Argentina and what the company’s plans are for Brazil. Neufeld outlines Aphria’s 2019 Canadian production targets which include producing 20,000 kilos per month between Aphria One, Aphria Diamond, and Broken Coast, by late spring.

Transcript:

James West:   Hey there, welcome back to Midas Letter Live. My guest in this segment is somebody who’s been here a couple of times before: you might recognize Vic Neufeld, CEO of Aphria. Vic, thanks for joining me again today.

Vic Neufeld:  And thanks for having me again. Thank you.

James West:   Hey, Vic, you came out with a, by all accounts, a fantastic quarter. Why don’t you give me the bright lights?

Vic Neufeld:  Well, in our definition, it was a healthy quarter. Lot of metrics were met and exceeded; again, lowest cost producer status, I think, has been punctuated yet again. Cash costs actually went down a penny. It’s really attributable to who we are, growing in a greenhouse, and our growers, but it’s more than that: it’s our revenues that continue to be properly balanced with our medical platform, but at the same time, making sure that we’re loading up sort of in the vault for the recreational launch. So yeah, and we made a lot of investments, both the marketing of the rec brand and investments therein, but also internationally. We’re putting a lot of effort, which takes money, in the many countries we’re in.

James West:   Yeah. So you’ve got, your current global portfolio includes the United States, Australia, Germany, Malta, Lesotho, Italy, Colombia, Argentina, United Kingdom and Uruguay. I think the US is mistakenly here, because you’re not actually in the US as Aphria, correct?

Vic Neufeld:  Correct.

James West:   Yeah. So that’s, but you’re really everywhere. Which of these jurisdictions excites you most about the future?

Vic Neufeld:  Hmm, about the future?

James West:   Yeah.

Vic Neufeld:  Wow. I’ve never had that question before. I like em all.

James West:   [laughter] I’ve never asked it before.

Vic Neufeld:  There’s some viewers are probably going to say, “Say Jamaica! Say Jamaica!” I think there’s a couple that are of even importance to us: Germany, now that they’ve announced the re-launch of their tendering process, and our German team that we’ve inherited from the Nuuvera acquisition, together with my team here at Aphria, are marching forward to re-engineer and fine tune and really make sure that we hit it out of the park.

Germany, the country, the population, the amount of chronic ailments that have been approved, and again, socialized medicine there…it’s a very, very important market.

James West:   How many patients in Germany right now totally, in the whole system?

Vic Neufeld:  Oh, I think maybe 5,000?

James West:   Still low.

Vic Neufeld:  Oh, very, low.

James West:   Okay, so all the upside is yet in the future.

Vic Neufeld:  Absolutely.

James West:   Interesting.

Vic Neufeld:  The other country, though, and I kind of want to – not correct you, because I hate correcting a moderator. But the US, we still have the ownership of Liberty in escrow, which is subject to different vendor programs going forward as they get released. But the US market is of great excitement. That’s why we continue, we as Aphria, continue to support Liberty in certain aspects where we can, in full compliancy of the TSX undertakings we gave them. The CBD hemp farm Bill being moved with bipartisan support into the White House by the Fall of this year is what we think is just the beginning of what’s going to be happening, and once that goes from Schedule 1 to Schedule 2, CBD, that is, from hemp, it’s the beginning of the transition. Could take two, three, four years to finally get to where Canada is; I’m not even looking that far. Just give me medical across the Federal boundaries – it’s huge. It’s huge. And it just punctuates the reason why we even began the journey with the state of Florida.

James West:   Very cool. What about Brazil and Colombia and all of Latin America? I mean, what is it, 540 million people in that area. If you do the percentages, that implies easy low-hanging fruit 5.4 million cannabis users on the medical side. So I mean, that’s got to be cause for excitement.

Vic Neufeld:  So we have – we began our journey of understanding Latin with Argentina, and it was over a year ago that I personally made my first of two trips there, and very important to understand where is the Ministry of Health? Where is their head at? Where’s the population going in terms of, in this case for Argentina, epileptic seizure control, and what evolves? What chronic ailments, pain management, etcetera, going forward? And establishing the credentials, establishing relationships, understanding and presenting the Aphria story to them, the quality, the GMPs, etcetera.

So we got really, really excited with Argentina. From my Jamieson days, I know it takes one to two years of preceding activities and minor investments before the government is ready to act; well, they’re acting now, so their order to us is already with Health Canada, this infamous wait 45 days. Therein lies the beginning of some really, really good, EBITDA-positive, significant, turning into material business opportunity: Argentina.

Colombia: Colombia today, CBD is now like an OTC product, and if you wanted to do a THC, there’s a special license, which Colcanna, Scythian, but by, after the closing, will be Aphria, just got that final license. So we have all three licenses now in Colombia that allows THC through doctor scripting. It’s 50 million people. One could talk about the poverty levels, the GDPs, minor inflation, the growth of 2, 2.5 percent; I mean, it’s not that it’s a country that is going down the tubes, and it’s not a China with 12 percent growth. But in between, it’s a country that really is central to the Department of Health regulations, because as Colombia goes, so will other countries, namely Brazil.

And Brazil is really the home run. They have moved, well, maybe 90 degrees in just the last month. The last month, they have moved and now talked about the importation of CBD oils in being our redux oil that’s being sold into Argentina, out of the box into Colombia and hopefully Brazil, and we make an application there.

So this whole acquisition we made for – and, just to be clear – Aphria value paid 160 million for three countries, Argentina, Colombia, Jamaica – and a rofer for Brazil. To put that in perspective. To put that in perspective, three countries plus the rofer, there was one company that went public two months ago with a 300 million market cap for one country called Colombia; another LP last month made an acquisition for $150 million USD for one country called Colombia. I bought, for $160 million, three countries plus a rofer on what really is the gem of South America, called Brazil. So I rest my case when there’s any investors that think I’ve overpaid in doing something that is not in proper care-keeping of Aphria assets; I beg to differ.

James West:   Right. Okay, interesting. Now, coming back to Canada, you included the information that you’re on track to be producing 255,000 kilograms by January 2019. That’s astounding; that’s a tremendous amount of kilograms. Let me ask you: what do you think your average price per kilogram is going to be? This is post-recreational onset in Canada, but what’s the average price per kilogram that you’re going to sort of target and say, I think that’s what we’re going to get?

Vic Neufeld:  You want me to give forward guidance here, James!

James West:   Darn, you caught me!

Vic Neufeld:  No, but I’ll give you high level, but I just want to add the clarity to your viewers: It is our firm belief and expectation, sometime end of September to mid of October, we will have completed the construction of Part 4, of Part 5 at Aphria One, and the retrofit of Aphria Diamond. We have given ourselves two months for Health Canada to come in onsite and inspection. If we err in some timing, it’s Health Canada; we give them two months. We say two months because part of that we are then going to start loading up on cuttings and veg plants, so that when we get the approval, we can now drop plants in that are in flowering, which is now only eight weeks further.

Therefore, on all that timing, it’s expected, if these dominoes fall the way I just described, that by end of January 2019, we will start the saleable harvest products out of the expansion areas. But it’s a ramp-up.

James West:   Okay.

Vic Neufeld:  So, to hit the number that you quantified will be May or June of 2019.

James West:   Oh, okay.

Vic Neufeld:  So every month we’re going to be adding, I’m just going to pick another – 4,000 kilos a month, another 4,000, etcetera. By May or June, we will be producing, available for sale, 20,000 kilos a month between Aphria One, Aphria Diamond, and Broken Coast. And that’s a lot.

James West:   Wow. So we can pick a number and just do the math ourselves, is what you’re saying?

Vic Neufeld:  No, I am going to go a little more –

James West:   A little further out on the gangplank?

Vic Neufeld:  Because we also pride ourselves in what we’ve been, wow, a year and a half of engineering design, brainstorming…our automation in Part 4 is beyond belief. Every investor group, every pension fund, every analyst that we have brought to see in amazement, and their jaws drop when they see, how can these robots do what they’re doing? How did you come up with this? Well, it was taking from this industry, that industry and that industry; this country and that country; and the team putting it all together. And it’s just not my co-founders; it’s many others in the Leamington area that really feel like they’re part of the Aphria team, although they’re contractors to us.

They just want to work with us. So that is really driving out a lot of costs: labour costs. Labour, I’m going to suggest to you, for any other greenhouse growers out there that are trying to double, triple their size, labour is going to be a concern as companies go forward in trying to throw in 15 or 20 people per acre of greenhouse. It’s not an easy skill set to find, and to retain, and to train, properly train with GMP training, WHMIS training, etcetera. So we were trying to eliminate some of the costs associated with labour, some of the headaches: automation. See, robots, they don’t go on vacation, they don’t get sick, they don’t take time off, they don’t have babysitting.

James West:   They do try to take over the world once in a while, though.

Vic Neufeld:  HAL?

James West:   HAL, or Terminator, take your pick.

Vic Neufeld:  No, my point is this: the quarter we just finished, we had $0.95 cash cost, $1.60 all-in; the $1.60, there was a lot of unabsorbed overhead. When you transition, as we are, from Part 2 to Part 3 completions, now Part 4 and Part 5, you’ve got a lot of – not redundancy, you have to hire far in advance of actual cultivation and harvesting. So that was the little blip increase in costs of goods sold. But the $0.95, let me go back to that one: that, if we could have a circle day, which I know you will circle, that June of 2019, you and I are here: I’m going to say that my cash cost is $0.80 or lower on the cash cost, because of automation. We are driving out so much labour, and having robotics just being part of who we are.

James West:   Okay, well, I’ll look forward to June 2019, but I hope I see you again before then, Vic! Let’s cut it there; we’ll come back to you again shortly. And thanks for joining me again.

Vic Neufeld:  Great. Thank you.

More Great Cannabis Content

• VIDEO: Aphria Inc (TSE:APH) CEO on Molson Coors Canada Cannabis Deal
• VIDEO: Alternative Health Fund Manager’s Current Favourite: Aphria (TSE:APH)
• Aphria Inc Hoping For A Post Earnings Reaction About-Face

Original article: VIDEO: Aphria Inc’s (TSE:APH) South American Play

©2018 Midas Letter. All Rights Reserved.