VIDEO: Aphria Inc (TSE:APH) CEO Vic Neufeld on Global Cannabis Leadership

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Aphria Inc (TSE:APH | OTCMKTS:APHQF | FRA:10E) CEO Vic Neufeld discusses their deal to acquire Scythian Biosciences Corp’s (TSE:SCYB | OTCMKTS:SCCYF | FRA:9SB) Latin American and Caribbean assets. The Scythian agreement allows Aphria to use Colombia as their Latin American cultivation hub supplying in-country cannabis requirements while simultaneously exporting to Latin American countries with economic-zoned treaties. Mexico, Chile, Peru, and Brazil will all be targeted with the ultimate goal of exportation outside of South America. Jamaica will also be used in a similar multi-dimensional approach catering for local and international markets. The CEO further highlights Canadian brands coming to market and Aphria’s potential annual revenues after acquisitions.

Transcript:

Ben Smith: My guest here today is Mr. Vic Neufeld from Aphria. He needs no introduction, of course. Welcome Vic!

Vic Neufeld: Thanks for having me Ben, better you than James actually, so this is good.

Ben Smith: [Laughter] It’s good to hear. Now investors I’m sure are aware of the huge press release that came out this morning. Aphria of course was involved with Scythian Biosciences, a subsidiary where they purchased a holding in LATAM holdings from Scythian. Now how does that acquisition play out in the company’s grand scheme plans?

Vic Neufeld: Great question. I think to begin with, it further solidifies our global leadership. We have been very, very focused for a year and a half in certain European areas and we remain very focused and energized in other countries that we’re trying to penetrate but in terms of Latin America and why Scythian; it was an area we didn’t pay a lot of attention to. We were very focused on more mature markets. Markets that presented themselves at the time. Scythian on the other hand was like a mining company looking for an exploration company. Gold Corp, Barrick they reach out to exploration companies that have already found certain nuggets around the world and for us it was a huge de-risking of deployment of resources and capital.

We were brought into the Argentinean opportunity about a year ago and I spent two different in-market trips nurturing relationships with Department of Health and in this case, Department of Agriculture. In terms of Colombia, five day in-market with understanding the environmental, political, safety, the whole concept of why Colombia? Then I met the in-market teams. I tell you Ben, you can have the best strategies but if you don’t execute, you’re not destined for success.

One of the other objects of why we spend a lot of time in Argentinean but also Colombia recently is to understand the bench strength of leaders. Colombia for example, ColCanna and the tremendous passion of the individuals there and that kind of solidified the deal. So, Scythian to us was really searching market places where we didn’t have our own footprints. The transaction was first with a supply agreement and then I decided no, I wanted this to be fully controlled under the Aphria banner, Aphria international which is a division of Aphria.

Ben Smith: Okay great, now speaking of the Argentinean and Colombian opportunities, with Colombia specifically with ideal growing conditions and low labor input costs where you might get cannabis yields down to five or ten cents a gram, does Aphria view this as a potential global manufacturer and distribution hub for CBD oil worldwide. It’s hard to imagine any other nation competing on that sort of cost scale.

Vic Neufeld: Yeah, so Colombia actually has three fingers of its strategic plan. One is to grow for in country requirements. Two exporting to those Latin American countries that they have economic zoned treaties with including Mexico, Chile, Peru, Brazil and then ultimately but not factored into our pro forma an export outside of South America. Rather Canada, Europe, let’s not even go there because there’s too far a journey down the road. But, back to the Colombian opportunity what really excited us other than the tremendous leadership team that have been at this for over two years I might add in the beautiful coffee fields on the west side of the Andes. I say coffee fields because the climate control, the soils, the water management, electricity, safety all of those were big check marks.

So, we’ve persuaded this opportunity, now culminated with today’s announcement basically really wanting to move their business plan forward but in a bigger, more meaningful way. So, we have 35 acres. Our designs over three phases of the project are to build 3 different phases on 20.5 acres of land. That’s capable of over 50 000 kilos a year, probably more than is required for in-market. So, now export as I’ve already shared are those opportunities and oil extraction is absolutely a part of that. The low cost, five, ten cents a gram I think you’re pretty close to the ball park there, very cheap labor. The land was almost pocket change in terms of an acquisition. Most levelled land we’ve seen in all of the Colombian landscapes we’ve reviewed; it’s absolutely ideal.

To Argentina though, something that began over a year ago and the Department of Health; getting the only license issued by the Department of Health for the important of our high CBD oil “Rideau”. orders coming from the Ministry of Health but the offset of going to a certain university and hosp8ital for research purposes.

Very timely interview because just last week we received notification from the Argentinean regulators that they over the next 90 days want to explore and really come to a conclusion on a joint venture where we actually build our Aphria greenhouse technology and build in country.

So, Colombia will be an interim step on exporting to certain countries. But like many countries in Europe they all want eventually in country cultivation so if they can control, regulate the safety, ethically etc.

Ben Smith: Of course. Now moving onto the Jamaican assets of the deal. Now is the attraction in that jurisdiction the same as in South America where it could eventually become a manufacturing and distribution hub within the archipelago of the Caribbean or how do you view that? Is that more of a local market thing or you know a distribution within the Caribbean itself?

Vic Neufeld: So, Jamaica provides actually four different strategic options for us. One, grow domestic sell domestic for the recreational market, the Joe tourists. We know we’re not going to sell to residents of the country; they all grow it in their backyard. Secondly it’s a Jamaican medical and where that’s moving towards in terms of dispensaries. Thirdly reaching out to certain other Caribbean countries and their treaties where their various Ministries of Health are now talking about using Jamaica as a cultivation hub to service their medical needs. Fourth and finally not calibrated into our pro formas but looking at export.

I mean October 17th, here in Canada we know is happening. Can you imagine if Aphria brought one of its brands forward with a Colombia gold as an example. Very excited about that opportunity but it’s just one of four different strategic paths; all four of which we will be perusing.

Ben Smith: Of course and some of that, whether that opportunity materializes will depend on some of the advertisement and regulations by Health Canada. There’s some chicanery going on there as we’ve seen in the press in recent times. Would you like to comment perhaps comment on what’s going on and how you see that playing out? Rather you see restrictions being lifted or eased or perhaps they won’t be eased at all. What are your thoughts on that?

Vic Neufeld: So if you were James West, I’d correct you on your vocabulary. Chicanery is not a word I would of used for certain activities of specifically two other licensed producers. I would call it slipperiness and flying in the face of ethical behavior because everyone knows what Health Canada rules are. Billboards, concert endorsements, sponsorships, etcetera; they’ve taken this liberalized interpretation to their advantage. We’ve understood that warning letters have gone out, but again this is really not in concert with the underlying theme, the understanding, the integrity of what Health Canada was trying to bring to the table. The ACMPR which governs this today and the advertising rules presented, and more clarity going forward but these sort of activities some marketers would say, very far reaching and edgy, but those that really understand long-term business and brand awareness would call it trickery and slipperiness because this is total violation of and quite frankly in my opinion is giving the middle finger to Health Canada.

Ben Smith: So, I take this to mean that Aphria will abide by the rule of the law and not engage in what some other companies out there are doing in terms of putting their brand out there contrary to the rules.

Vic Neufeld: So we have a series of brand activation tactics and activities all lined up. I refer to it as the “dominos are ready to fall”. It’s a matter of when different organizations view the timeliness of this activation so we’re still waiting. It’s premature in our perspective but when we do, we will make sure it’s not in violation of the interpretation as an average individual would interpret the ACMPR rules.

We are out there and we’ll be activating for brand awareness. We have many brands we’re bringing to the Canadian consumer. We’ve got every province now registering our products. We’re doing more than our fair share. I’m very proud of my sales marketing team so I’m bringing these brands to the table. Our price points, our product variety, our promise of availability, but we will not flaunt in the face of Health Canada.

Ben Smith: Fair enough. Now just to be focusing back on the Scythian deal for a second. Now this deal puts Aphria, it volts you in clear position in the Latin American, Caribbean markets, now other LPs out there, some of the larger ones are kicking the tires and have participated in limited scopes but this sort of blows all that away in terms of leadership and scale and assets in your positions. Now, how do you plan on exploiting that position and maintaining that position when the flood of new entries is only going to grow?

Vic Neufeld: So, let me knock off these countries one by one; Jamaica; we’re only one of two level 3 licenses awarded by the government. We’ve already had one full harvest sitting in the vault. Our second major harvest is in process as we speak. So, product availability and product quality is already on our balance sheet. We’re moving forward on the proper licensing and site leaseholds on I guess they call them “ganja houses”, basically retail outlets and we’re very excited about what the price points these things can bring forward. Argentina as I’ve said, we’re absolutely committed to being part of the government program there. The relationships we’ve established, the Aphria story that has really taken us to the level we’re at there, I feel very confident on some huge successes in Argentina. Colombia I’ve already shared enough but I just want to reiterate that that whole business model in Colombia; low cost, climate, land etcetera, etcetera is really part of where and how we’re going to move Latin America.

I could tell you between LATAM, this acquisition and the end of 2019 on a conservative basis we’re probably going to generate 50 million revenue minimum and I’m going to say 60 percent EBITA, not margin; EBITA, unheard of in this industry.

Ben Smith: Wow, that’s pretty impressive. That’ll be accretive?

Vic Neufeld: Very accretive. That’s why certain investors that who are looking at today’s transaction may not quite understand. But you need to imbed yourself today at lower costs, lower entry costs and bring on board the right talent. You know, certain organizations talk about strategy, we execute strategy. The Aphria execution is really a culmination of many strengths but one for sure is making sure the leadership in country is beyond reproach, has integrity, are really solid in understanding the political framework, the regulatory framework, and know how to grow and that’s what Colombia brings, what Jamaica brings. In Jamaica we have a 19 cannabis cup winner as our master grower.

Again I speak to the Jamaican gold one day being on the shelves of retailers, not sure where in Ontario but I can tell you other provinces will have the retail. It’s tremendous opportunity and I’d be remiss if I didn’t say Brazil.

So Scythian again has the rolodex, the relationships and has the people that have moved the needle with certain Brazilian regulatory bodies and a major pharmaceutical player, I’m going to call them the “Apotex of Canada”; all part of their team. Part of this whole agreement is that we have our first right of refusal for a very cheap entry price of 24 million dollars for 50.1% should they be successful in their license. Now we were hoping before today’s announcement they would of crossed the finish line but when lawyers get involved there’s all sorts of complexities and delays and push-outs and that’s what has happened here.

I feel very confident once Brazil moves, again Aphria at a very I’m going to call it “cheap entry price” to an explosive market called Brazil. That’s the golden nugget, like Germany is to Europe, Brazil is to South America.

Ben Smith: Yeah, absolutely! They have about what? Half of South American’s total population? Something like that. So, would you foresee optionality kicking in? Perhaps at some point in the near future or it’s sort of hard to see how that’s going to play out as of yet? It depends on the license, correct?

Vic Neufeld: So this is a James West question, you know that. I would suggest to you that before the end of this year we will know with certainty rather or not the licensing process with the Ministers of Health, Justice in Brazil, our relationship partners that will remain non descriptive at this time, will have moved the needle forward enough and I’m fully hoping and expecting, wanting to transact this and send 24 million dollars of Aphria shares that way.

Colombia is really exciting. If Colombia is a home run, Brazil is a grand slam.

Ben Smith: Great. Well, Midas Letter will be following the story and I’m sure I’ll be writing a whole lot more about it. Thank you Mr. Vic Neufeld for joining us in studio today!

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