So far, only one Canadian marijuana producer has reported quarterly results that include sales in 2019. But when Aphria (NYSE:APHA) announced its results for the quarter ended Feb. 28, it wasn’t what investors had hoped for.
The company’s share price tanked Monday on its disappointing fiscal Q3 numbers. The bigger question now, though, is what these results might mean for other marijuana growers. Could Aphria’s poor performance be the canary in the coal mine signaling trouble ahead for other top Canadian marijuana stocks, including Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE: CGC), and Cronos Group (NASDAQ:CRON)?
Why Aphria underwhelmed
It’s important to understand just how badly Aphria performed in its third quarter. Revenue from the Canadian adult-use recreational cannabis market fell to $7.2 million Canadian, nearly 35% less than what the company made in the previous quarter. What’s especially discouraging is that the previous quarter only included about two weeks of adult-use sales, while Q3 included a full quarter of those sales.
Medical cannabis revenue slipped by 1.8% from the previous quarter to CA$10.6 million. Aphria’s only good news related to the top line was the inclusion of CA$57.6 million in distribution revenue from its acquisitions of CC Pharma and ABP.
Why did Aphria’s revenue decline? One key cause was the company’s transition in growing methods, which started in late fall and resulted in lower production. In addition, Aphria struggled to ship products because of added manual processing involved with the packaging requirements for adult-use cannabis.
Sometimes when one company reports problems in a quarter, other companies in the industry will experience similar issues. But that’s probably not the case here.
Aphria’s shift to different growing methods is an isolated issue that won’t apply to other cannabis producers. None of the other major players have mentioned any similar production changes.
All of Aphria’s peers must comply with the same packaging requirements for adult-use recreational marijuana products. Aurora Cannabis CEO Terry Booth mentioned in the company’s most recent earnings conference call that its packaging automation wasn’t fully set up in the quarter ended Dec. 3. Both Aurora and Canopy Growth mentioned that packaging costs were higher because of the Canadian government’s requirements. Cronos Group CEO Michael Gorenstein noted in March that packaging was one of the key challenges in expanding into additional Canadian provinces.
But none of these companies seemed to encounter the magnitude of problems with packaging that limited capacity for Aphria. It seems unlikely that Aurora, Canopy, or Cronos will report declining revenue in their next quarterly updates as a result of packaging issues.
One important word to remember
There’s one word Aphria mentioned several times in its quarterly update. That word was “temporary.” The issues that hurt Aphria in its latest quarter were all short-term in nature.
Aphria is implementing packaging automation over the next couple of quarters that should greatly improve its efficiency. The company received a license from Health Canada in March for its Aphria One facility expansion, space that allows the company to boost its annualized production run rate to 115,000 kilograms, up from 35,000 kilograms.
Interim CEO Irwin Simon said in Aphria’s Q3 conference call that demand remains strong and that the company could easily sell products if it had the capacity to produce them. That capacity will be on the way, although the first shipments from the Aphria One expansion won’t be until the company’s fiscal first quarter.
The bottom line for investors is that most of the problems that Aphria or any of the major Canadian marijuana producers will experience over the next few quarters are likely to be only temporary. Demand for cannabis continues to increase around the world. One disappointing quarter won’t change the promising long-term prospects.