[ad_1]
<p class = "canvas-canvas-text-canvas Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This is not lost for companies from Marijuana: Take steps to reduce marijuana production costs, but some companies are better off than others, and arguably Aphria is better off. to focus on greenhouses rather than more expensive indoor facilities, Aphria's gross margin has always been superior to that of its major competitors: & nbsp;Cover growth (NYSE: CGC) and Aurora Cannabis (NASDAQOTH: ACBFF). & nbsp; "data-reactid =" 12 "> Marijuana growers are not spared Everyone is taking steps to limit marijuana production costs, but some companies are doing better than others , and it can be argued that Aphria is better off – deciding to focus on greenhouses rather than on more expensive indoor installations – Aphria's gross margin has always been superior to that of its main competitors: Cover growth (NYSE: CGC) and Aurora Cannabis (NASDAQOTH: ACBFF).
The inspirational Aphria's enviable margin record however was marked by a black mark last quarter. Aphria's latest quarterly financial data shows that its gross margin dropped significantly over the period, prompting investors to question whether its margin advantage would disappear. Does Aphria's latest results suggest that its margins are in trouble or is anything else happening?
A man looking at a wall covered with drawings of money bags and question marks.
SOURCE OF IMAGE: GETTY IMAGES.
A big emerging market
The Canadian market for medical marijuana has been a great success since changes paved the way for producers and licensees in 2014. Since then, the medical market has progressively developed, which means that This is reflected in significant revenue growth for industry participants, including Aphria.
Canada's medical marijuana market is worth hundreds of millions of dollars a year, but cannabis companies have a much greater opportunity to serve the adult consumer market or the marijuana market for the better. recreation. Licensed producers will start selling cannabis cannabis and cannabis oils to adults for recreational use on October 17, following a favorable decision by the Government of Canada earlier this year.
Estimates vary depending on the breadth of the Canadian leisure market next year, but most industry observers predict that a large portion of marijuana sales in Canada will rise from the black market to retail stores in 2019. For example, Deloitte estimates that two-thirds of sales in the market will move into the legal market, resulting in legal marijuana sales of up to 4.3%. billions of Canadian dollars next year. If that were the case, it would be a boon to Aphria and its competitors.
Prepare for the potential
Canada has licensed 120 marijuana growers. However, the market share of marijuana is concentrated among the biggest players and it is unlikely that this will change when the market for adult consumption is operational. In fact, market shares could become even more concentrated next year, as only the largest cannabis companies are willing to cope with soaring demand.
Aphria is not as big as Aurora Cannabis, which has funded an annual production of 570,000 kilograms, or Canopy Growth, whose production capacity is expected to reach 500,000 kilograms north of next year. , but is still becoming the third largest producer in Canada, with approximately 255,000 kilograms of capacity per year.
Aphria production currently being 35,000 kilograms, the expansion works of Aphria One, its largest greenhouse, are essential to achieve the company's capacity goal. Aphria One is currently expanding in parts to increase annual production to 110,000 kilograms per year. As part of this expansion, it is installing new automation equipment that can limit the use of labor, which is the biggest expense of growing in a greenhouse.
Once completed, the automation will handle a lot of tedious tasks at Aphria One, including:
- Transplanting cuttings into the last pots for flowering
- Assessment of plant health and quality
- Watering and nutrient supply
- Transportation of facilities for treatment
- Cutting and size of plants
- Disposal of cutting, deburring and trimming waste
- And distribute the buttons in the dryer to dry them.
The aim of the project is to limit the work to the initial phase of cultivation, size and size during the growth phase. If successful, Aphria should be able to produce far more marijuana than today at a lower cost, which will allow it to maximize its profits through the sales boom due to the demand for recreation.
Marijuana growing in a greenhouse.
SOURCE OF IMAGE: GETTY IMAGES.
Growth pains have an impact
Aphria's latest quarterly financial results were rich in positive points. Its revenues have more than doubled in the last year to $ 13.3 million; the percentage of sales of cannabis oils, which have pricing power and offer better margins than dried flowers, increased from 29% to 39%; and its net profit jumped to 21.2 million Canadian dollars, compared with 15 million Canadian dollars the year before.
However, these numbers are accompanied by asterisks.
Yes, revenue increased 10% from the previous quarter, but this is largely due to wholesale sales to limited partnerships. This would have been more encouraging if this growth had been driven by retailers' demand because of the increased number of patients served.
The increase in sales of cannabis oil as a percentage of sales is good, but it was "mainly driven by a change of internal formula for our pension adjustment". Management did not explain in its press release how it changed its equivalence formula in grams, so investors will need more information to make a real comparison between apples.
In addition, the performance of Aphria's net income is less exciting if we consider it to have been strongly influenced by gains on investments in other marijuana-producing companies. In addition, earnings per share has actually dropped over the past year because the company has issued more shares. Per share, earnings decreased to $ 0.09 from $ 0.11 last year.
The company's cash cost to produce one kilogram of dried flowers went from $ 0.95 to $ 1.30. As we move back from our investment portfolio and exclude increases in fair value of organic assets due to increased production, Aphria's gross margin dipped to 63.6% in the quarter, from 78 7% in the previous quarter.
Is this cannabis business losing its competitive advantage?
Dependence on wholesale revenues rather than organic growth of consumers may simply reflect a flattening of medical marijuana demand in anticipation of the opening of the leisure market this month. As a result, investors may not want to worry too much about this.
It's impossible to know what will happen to the stock prices of marijuana during a given quarter. Investors should therefore probably not pay much attention to the impact of price changes on Aphria's net results.
It is undeniable that the erosion of margins is something to watch for, but investors may not want to put too much emphasis on the downturn in the last quarter, as it is apparently due to a shortage of labor that forced it to "dispose" of a crop of a rotation when it "exceeded its optimal harvest period". Given that the company plans to double its workforce at Aphria One as part of its expansion plans since the end of the quarter, this decline could be a one-off event, and not a sign of lasting deterioration in margins. . If we recoiled on the negative drag caused by operational hiccups, Aphria's gross margin would have been 7.4% higher, or 71% higher.
This remains below Aphria's gross margin of 75.6% in the last financial year and 78.7% in the previous quarter. But it exceeds Canopy Growth's gross margin by 43% last quarter, and Aurora Cannabis, which had a gross margin of 74% in the last quarter, was 52% last year.
As Aphria's balance sheet shows that it has always delivered better margins than those of these companies, it might be worthwhile to give management the benefit of the doubt as to the possibility of retaining its low-cost advantage. .
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " More from The Motley Fool "data-reactid =" 91 "> More from The Motley Fool
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Todd Campbell has no position in any of the actions mentioned. His clients can hold positions in the mentioned companies. The Motley Fool has no position in the mentioned actions. The Motley Fool has a disclosure policy."data-reactid =" 97 ">Todd Campbell has no position in any of the actions mentioned. His clients can hold positions in the mentioned companies. The Motley Fool has no position in the mentioned actions. Motley Fool has a disclosure policy.
