APHRIA INC (APHA) Q3 2019 Earnings Call Transcript

David like me a fellow Canadian, he his Real Madrid's Global Head of Partnerships, David has over 25 years of marketing and international experience, which we believe will help Aphria as we navigate our strategic growth priorities in new and existing markets. Going forward, we will continuously evaluate our team and Board of Directors to add best-in-class talent to our organization.

At Aphria, we remain committed to strong corporate governance and promoting a culture of integrity and ethical behavior throughout the organization. I'd like to thank the Special Committee's diligence and independence in undertaking its review of our LATAM assets. The work of the Special Committee has affirmed for me and the Board that the LATAM transaction was executed at an acceptable value and is consistent with the Company's international growth strategy.

The team at Aphria is energized and excited. We are embarking on a renewed path forward. With the help of a leading consulting firm, we are intensively working on a 90-day strategic plan to prioritize our long-term strategic objectives. We will define a set of strategic platforms and translate our objectives into an execution roadmap. We believe the opportunities for long-term value creations are very strong in both Canada and internationally.

I will now review our progress in key geographic regions, before turning the call over to Carl to review our financials. Today Aphria has presence in more than 10 countries across five continents with five high quality brands, including our Solei brand dedicated to novice and first time users; RIFF, our brand dedicated to community and culture; Good Supply, our brand offering cannabis enthusiasts a great value; Broken Coast, our super premium British Columbia-grown craft brand with quality that we believe remained unmatched in this industry, including products from both medical and adult-use and of course Aphria, our medical consumer brand. These brands were developed to address distinct segments of the Canadian cannabis market.

We put consumers' needs at the forefront of our strategy. As regulations change, we will proactively evolve our portfolio brands and our products. From a production standpoint, we are really excited to have recently reached a major corporate milestone with Aphria One receiving Health Canada expansion approvals for Part IV and Part V. This brings the current annualized production capacity for the total Company to 115,000 kilograms. We look forward to addressing industrywide supply constraints with our expanded production capacity and sophisticated proprietary automation technology that can help ensure Aphria remains at the forefront of the cannabis cultivation and innovation worlds.

I would just add Aphria Diamond last week and the facility is truly a state-of-the-art for the industry and we believe we will increasingly set us apart from the competition. The license application continues to progress at Health Canada where staff are working diligently to bring more cultivation on line. We believe our Canadian business will be a significant contributor to our results over the next several years with the potential for us to create one of the largest production footprints in the cannabis industry.

In Europe and Lesotho, we continue construction on the EU-GMP oil processing facilities. We recently launched CannRelief, a CBD-Based nutraceutical and cosmetic product line, for the German market. These products are being produced in the EU and distributed by our subsidiary CC Pharma which has access to more than 13,000 pharmacies throughout Germany. This provides a natural extension to Aphria's growing business opportunities in the German medical cannabis market. We look forward to providing a full range of CannRelief CBD products this year. Importantly, Aphria has just recently been awarded a provisional approval in Germany for a medical cannabis cultivation license. We believe this is a validation of our strategic approach to supporting the German medical cannabis market with high-quality domestic state-of-the-art indoor production to secure vital supply for the patients.

Since, Germany Cannabis as a Medicine Act was enacted in March of 2017, the country is growing medical cannabis needs currently estimated at 40,000 patients has been exclusively supplied by imports. We look forward to seeking to supply German patients with domestically grown high-quality medical cannabis. In Latin America, we generated approximately CAD2.7 million in sales since our LATAM acquisition. We also continue the build-out of herb houses in Jamaica and are waiting final approval of our conditional licenses. Aphria continues to execute on its medical and adult-use cannabis growth initiatives internationally.

We believe we have great momentum in Latin America, Germany and across international markets as we continue to strengthen our global footprint. At Aphria, we will continue to drive sustainable long-term shareholder value by leveraging our strong brand positioning, superior distribution model, product innovation, industrial-scale cultivation and automation, medical-use leadership and last but not least, our strategic global platform.

I would now like to turn the call over to Carl.

Carl A. Merton -- Chief Financial Officer

Thank you Irwin, and good morning. Please note all financial references are in Canadian dollars, unless I mention otherwise. Before, I get into the financial results, I would like to remind everyone, it is still early in terms of legalization in Canada, and as with every industry in its early stages, we are continuously, learning and improving including refining our methods for cultivation, production, packaging and distribution.

Aphria has a history with multi-generational expertise in commercial agricultural -- agriculture and we believe the challenges we faced in the quarter, particularly supply shortages were based on proactive decisions we made and they are temporary in nature with our expectation, that our fourth quarter cannabis sales will be similar to the third quarter, as we continue to position our business for a long-term growth and success. With the changes to our growing method now stabilized, we are positioned to implement our new cannabis leading industrial scale automation and necessity to remain at the leading edge of cost to supply. We believe the steps we have taken will help fuel the growth of our strategic initiatives in Canada and internationally and generate long-term shareholder value.

As Irwin mentioned, our annualized production capacity today between Aphria One including Part IV and V and Broken Coast is 115,000 kilograms. Applying our current average selling price in adult-use this level of production results in CAD0.5 billion in sales annually, once we are in full crop rotation. Once fully licensed, Aphria Diamond is expected to increase this annualized capacity to 255,000 kilograms. Using the same logic, this level of production could result in more than CAD1 billion in Canadian cannabis sales, once we're in full crop rotation. But that isn't enough. In addition, we are continuing to expand our processing capabilities with our new extraction center of excellence, which is still under construction. As we gain production scale and invest in automation, we expect to realize greater efficiencies and further support our growth opportunities in Canada and initially. At Aphria, we have the greenhouse space, the cultivation expertise, the automation technology and the raw materials to position us for success.

Moving to our financial results. Net revenue in Q3 increased 617% over the prior year period to CAD73.6 million compared to Q2 net revenue increased 240% driven by CAD57.6 million of distribution revenue from CC Pharma and ABP in Argentina. The Company sold 2,637 kilogram equivalents of cannabis in Q3, down 23% compared to 3,409 kilogram equivalents sold in Q2. Adult-use cannabis accounted for 1,329 kilogram equivalents and medical cannabis accounted for 1,274 kilogram equivalents. The decrease in cannabis revenue and kilograms sold compared to Q2 was primarily related to lower inventory levels entering the quarter; supply shortages as we transitioned growing methods and allocated more space to mother plants in order to prepare for the Aphria One and Aphria Diamond expansions, as well as temporary packaging and distribution challenges.

We made the strategic decision to transition our growing method in order to remain competitive. We are focused on maintaining industry-leading cost of supply. In order to achieve this, the cost savings associated with scale and industrial automation will be an important component.