REELING IN CANNABIS COSTS
Aphria nearly doubles revenues
Dramatic cuts in production costs helped Leamington-based cannabis grower Aphria Inc. nearly double its revenue in the final quarter of its 2017 fiscal year.
The firm reported earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $2.8 million. That’s an increase of 181 per cent over its third-quarter earnings and marks the seventh consecutive quarter of positive growth.
“Leamington used to be known as the Tomato Capital of Canada. We’re going to turn it into the Cannabis Capital of Canada,” said Aphria CEO Vic Neufeld. “We knocked it out of the park the last quarter, exceeding (Bay Street’s) expectations.
“The most important thing we did is drive down our production costs. Nobody in the industry can touch our costs.”
The company’s EBITDA for 2017 increased to $6.1 million, a 962 per cent increase over 2016’s total ($572,888).
Aphria, which uses greenhouses and natural light instead of indoor artificial light to produce its crop, benefited from more sunlight hours and improved growing techniques to slash its “all-in cost” of production per gram from $2.23 to $1.67.
Neufeld said the average for allin production cost per gram for the rest of the industry is $3 to $4.
With the legalization of cannabis on July 1, 2018, Neufeld said the industry must keep paring production costs.
“The objective of the government is to get marijuana sales off the street corner and away from organized crime,” Neufeld said. “But if you can buy a gram for $8 to $10 on the corner and it’s $12 at the LCBO, the consumer is going to go for the cheaper price point from Joe on the corner. There’s going to be price compression when recreational use is legalized.”
Aphria is selling its medical marijuana products for an average cost of $7.75 per gram.
He said it’ll be hard to predict the effect of legalization until the federal and provincial governments provide more clarity for producers.
“We’re not waiting around; we already have a research and development centre working on things in anticipation of that market,” Neufeld said. “There’ll be a lot of infused oils and products related to food use.
“We’re flexible and we’re prepared to take whatever road is presented to us.”
With the focus of 2017 mainly on reducing production costs, improving quality and getting the company’s expansion plans in place, Neufeld said the company is well positioned for rapid growth.
“I’d be disappointed if we didn’t double all of our metrics across the board in the coming year,” Neufeld said.
“The real opportunity for growth comes when we finish Phases III and IV of our expansion.”
The company added 53,000 square feet of space this spring with the second phase of expansion. The first crop of cannabis from the Phase II expansion began being harvested last week.
Currently, Aphria has 100,000 square feet of greenhouse space at its Leamington site. However, after Phase IV is completed by late next summer or early fall, the company will have one million square feet of greenhouse space.
A 350,000 square foot processing and storage centre and a $20-million cogeneration power plant will also be built as part of the expansion. The power plant is expected to save the company nine or 10 cents a kilowatt hour.
The company employs 150 people, but that will swell to 400 employees once the expansion is fully operational.
“No one has plans like this on the table,” Neufeld said. “Once Phase IV is completed, we’ll be able to produce over 100,000 kg annually.
“Our production costs will go down even further with that volume. We’ll be able to lower our price $1 or $2 a bottle to handle the price compression when it comes.”
Neufeld said Aphria has also invested $25 million in Floridabased Liberty Health Science, which launches at the beginning of August. The company is also eyeing expansion into the German and Australian markets.