Aphria Inc.'s (APHA) fiscal second quarter results are sure to create some chatter. The announced exit of key executives will probably get more attention than the financials themselves. Personally, I think it's a good thing that CEO Vic Neufeld and co-founder Cole Cacciavillani are leaving the company. The drama surrounding their acquisition tendencies has been hampering things no matter how you swing it. The fact that they're leaving gives me a feeling they might genuinely have been a bit biased in their purchases. Either way, I'm glad to see the controversy leave.
I do own some Aphria stock. It was trading far too high for some time, but we've finally returned to reality. I own it for a simple reason. They have been well ahead of the game in terms of production and revenue creation compared to many competitors. That's all I see when I look at the stock. Pending Health Canada approvals, the company expects to be harvesting 255,000 kilograms of cannabis from its production by the end of 2019. If they can do that, they'll be one of the biggest producers in the industry. Coupled with a strong balance sheet that other names don't have, I still like this stock despite the drama.
On a revenue basis, Aphria did great. Net revenue increased 154% to $21.67 billion. As has been relatively expected for the Canadian producers, recreational sales did not create anything exciting for Aphria in terms of profits. The supply is simply not there yet; and the costs being incurred in ramping up the business are definitely showing. Year over year, gross profits (including fair valuations) actually decreased 3.5% to $5.98 million. Operating expenses increased over $20 million to $27.54 million. This brings operating income, or rather losses in this case, to $21.55 million.
So how did the company report diluted earnings per share of $0.22? That's a 450% increase year over year. The gains stemmed from non-operating items, primarily investments. Aphria reported $46.89 million in gains from equity investments. It also reported $30.5 million in gains on long-term investments. These, rather than operations, are where the quarter's money came from. Nevertheless, net income of more than $54.7 million is still nothing to slouch at.
My biggest complaint by far is the stock dilution. Directly related to many critics complaints of expensive acquisitions, Aphria's share count is up roughly 70% year over year. While I approve of stock based financing versus taking on debt, it's still a drag on eps potential.
Overall, I think the market is going to be more relaxed with the exit of these high level executives. The stock has taken a lot of heat after accusations by shorts that acquisitions were being made at inflated prices for insiders. Of course, Neufeld is remaining on the board, so his influence will still be there in a way. Considering the production scale that has been created over the last few years, I don't necessarily think that's a bad thing. But it's definitely good that he distance himself from executive decisions.
Based on the stock reaction today, I think the markets agree with me. Shares were down premarket after the earnings announcement, but have since rallied and are up nearly 4% to $6.82 as of 2 p.m. ET. Obviously short-term swings mean nothing, but it speaks to investor sentiment. There are some promising international moves. I like the CC Pharma acquisition in Germany. By having an ownership in the distribution of pharmaceuticals in Germany, they have an avenue for the ease of sales of their goods to the medical market. Outside of that, I'd really like to see international focus take a backseat to the market at their fingertips -- Canada. Focus on your home market. Get that revenue rolling. Get the story focused on that. That's where Aphria can succeed in creating a better image. I've seen enough stock dilution for purchases. It's time for some old fashioned organic growth.
When will things get interesting?
Based on production capacity coming into full use by the end 2019, there's some time to kill before this one will have any real momentum that should drive the share pricing. Any swings in the meantime are speculative maneuvers. I certainly am looking at buying a little more if we can get another dip to $5. I doubt I'll get that price, but one can hope. Like many Canadian LP's, I think Aphria's story will be in the second half of the year. We need supply to meet demand. Then we'll know where things stand in terms of earnings.