The bru­tal re­al­ity of dy­nas­ties gone wrong

The Globe and Mail (Prairie Edition) - - FRONT PAGE - RE­PORT ON BUSI­NESS

Labour short­age, con­struc­tion de­lays have led to short­falls among mar­i­juana pro­duc­ers, Neufeld says

The chief ex­ec­u­tive of­fi­cer of Aphria Inc. says that it doesn’t have enough recre­ational cannabis to sat­isfy the ini­tial or­ders made by pro­vin­cial dis­trib­u­tors, adding that his com­pany has been ham­pered by a labour short­age and con­struc­tion de­lays.

Vic Neufeld, CEO of Leam­ing­ton, Ont.-based Aphria, added that most grow­ers don’t have enough prod­uct to sat­isfy their or­ders so “there will be sold-out signs” at on­line and in-store re­tail­ers across Canada soon af­ter recre­ational cannabis be­come le­gal next week on Oct. 17. But he hopes the in­dus­try will have re­solved the is­sues by Jan­uary.

“This sit­u­a­tion will need two or three months of un­rav­el­ling as a) more har­vest comes on and b) we get a bet­ter un­der­stand­ing of con­sumer up­take,” Mr. Neufeld said Fri­day on Aphria’s first-quar­ter earn­ings call. “It’s like try­ing to merge a five­lane high­way into a one-lane coun­try road. It’s tough to get ev­ery­thing through the bot­tle­neck on a timely ba­sis.”

Mr. Neufeld’s com­ments come a week af­ter four pro­vin­cial dis­trib­u­tors, in­clud­ing Bri­tish Columbia and Nova Sco­tia, warned that there will ini­tially be less in­ven­tory and va­ri­ety avail­able to con­sumers be­cause grow­ers have shipped less prod­uct than ex­pected.

In ad­di­tion to plot­ting its growth in Canada and its en­try into new mar­kets such as Ger­many and in South Amer­ica, Aphria is also in talks to part­ner with other con­sumer-goods firms.

This week, The Globe and Mail re­ported that U.S. to­bacco gi­ant Al­tria Group Inc. is in talks to ac­quire an eq­uity stake in Aphria, ac­cord­ing to mul­ti­ple sources. Both com­pa­nies have de­clined to com­ment.

It’s like try­ing to merge a five-lane high­way into a one-lane coun­try road. It’s tough to get ev­ery­thing through the bot­tle­neck on a timely ba­sis. VIC NEUFELD APHRIA CEO

Aphria started to ship recre­ational prod­uct to pro­vin­cial dis­trib­u­tors nearly three weeks ago. It has deals in place to sell to ev­ery prov­ince and in Yukon, se­cur­ing or­ders for more than 5,000 kilo­grams of cannabis un­der five dif­fer­ent brands.

“There will not be com­plete sat­is­fac­tion by any of the pro­vin­cial reg­u­la­tors out of the box,” Mr. Neufeld said. “It’s not a good place to be be­cause you’re short­ing ev­ery prov­ince and the ques­tion be­comes [whose or­ders] do you re­ally fill with cer­tain prod- ucts that have limited sup­ply?”

This sum­mer, Aphria said it had to dis­pose of 14,000 plants worth $979,000 be­cause it says it didn’t have enough work­ers to har­vest the crops. A short­age of green­house labour re­sulted in one week’s crop ro­ta­tion out­grow­ing its op­ti­mal har­vest pe­riod. The com­pany has since dou­bled its green­house staff and ex­pects its new au­to­mated sys­tems to be in use by the end of Novem­ber.

Aphria isn’t the only grower that has had to dis­card cannabis. Canopy Growth Corp. said in Septem­ber that it had to de­stroy “a num­ber of plants” at its Bri­tish Columbia fa­cil­ity af­ter li­cens­ing was de­layed by “in­fra­struc­ture and reg­u­la­tory ap­provals.”

New projects at Aphria – such as its green­house ex­pan­sion and new ex­trac­tion fa­cil­ity in Leam­ing­ton – have been de­layed by two months be­cause govern­ment ap­proval took longer than ex­pected. The $55-mil­lion ex­trac­tion fa­cil­ity, which will be able to process more than 200,000 kilo­grams a year of cannabis, is ex­pected to be open in May, 2019, sub­ject to Health Canada ap­proval.

In the three months ended Aug. 31, Aphria recorded rev­enue of $13-mil­lion from the sale of med­i­cal cannabis. Its “all-in” cost to pro­duce a gram of cannabis rose to $1.83 from $1.60 in the pre­vi­ous quar­ter.

Mr. Neufeld said Aphria’s ex­penses are higher as the com­pany scram­bles to pre­pare for le­gal­iza­tion and will sta­bi­lize in the com­ing quar­ters.

“There’s a lot of learn­ing curves go­ing on, a lot of bumps in the road,” he said. “But I would sug­gest to you in three months, if it’s not reme­died by Jan­uary, then this whole pro­gram is in big trou­ble.”

It’s not a good place to be be­cause you’re short­ing ev­ery prov­ince and the ques­tion be­comes [whose or­ders] do you re­ally fill with cer­tain prod­ucts that have limited sup­ply? VIC NEUFELD APHRIA CEO

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