VIDEO: Aphria Inc (TSE:APH) CEO on Molson Coors Canada Cannabis Deal
Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) CEO Vic Neufeld provides his opinion on the recent Molson Coors Canada, the Canadian business unit of Molson Coors Brewing Company (NYSE:TAP) (TSE:TPX), joint venture deal with Hydropothecary Corp (TSE:HEXO) (OTCMKTS:HYYDF) (FRA:74H). The CEO believes “the concept was not as transformational as was thought” and other beverage spaces have greater opportunities for market penetration.
James West: Hey, welcome to Midas Letter Live for this Wednesday, August 1st. I’m a little bit slow today, don’t mind me; probably one glass of Malbec too many at lunch. Anyways, my first guest in our first segment is going to me Mr. Vic Neufeld, CEO of Aphria. Vic, welcome back to the show.
Vic Neufeld: Great being here.
James West: Vic, I’m going to pull the gorilla and the elephant in the room out into the open right away: everybody in the marketplace thought it was going to be Aphria and Molson-Coors, and then lo and behold, out of the blue, it’s Hydropothecary and Molson-Coors! What happened?
Vic Neufeld: It’s not what happened, it’s what didn’t happen.
James West: Right.
Vic Neufeld: And what didn’t happen is a major global beer brand making a real big statement in this space. If you read the, without a lot of clarity, the press release, it talks about a JV and a lot of research and development and going forward. There was no equity investment, there’s no injection of gray matter into Hydropothecary; rather it was their contributions into the JV of trying to create a brand – not a brand, per se, but the formulations of a non-alcoholic beer. It was not what I think the market expected. Forget the name Hydropothecary; the concept was not as transformational as was thought.
But to roll back in time several months ago, yes, the Miller-Coors team was absolutely in market doing interviews, understanding the strengths, probably concluding what the weaknesses of different companies, where did they want to go. They landed on an opportunity, I think, where the terms were correct. But the journey doesn’t stop there. Molson-Coors, not the Miller-Coors, is only one of many.
James West: Sure.
Vic Neufeld: And let’s not be very – let’s not restrict ourselves just to the beer. Yes, beer is going to be the biggest ‘loser’, if I can say that, if recreational comes; just look at Colorado, Washington, Oregon, California.
James West: You mean, people are going to drink cannabis instead of beer?
Vic Neufeld: Non-calorie, the high, the instantaneous, you don’t have to drink, well 8 beers for me, 12 beers for you, to get to that level. There are, and they’re the first losers when it comes to the entertainment dollar. They’re solid companies, don’t get me wrong. But there are other spaces of beverage that one really needs to understand has greater strengths of market penetration with their own brands.
James West: Red Bull?
Vic Neufeld: Energy drinks, is that what you just said? Energy drinks, absolutely. But does Pepsi or Coke really want to jump into this space? I’m going to suggest, no. So that would be the Gatorades of the world, but the energy drinks, absolutely.
Juices, just look at juices in total. Do not discount those. And then spirits, spirits including wines. There are, there’s a lot of risks to brands that deal with the entertainment dollar, beer being out of the box demonstrated by Oregon, Washington, losing market share, but others are also. And others have more of a global understanding, who is out there outside of just Canada. So there’s a global identity happening in terms of spirits, and I’d be remiss if I didn’t also say tobacco. Whether it’s JTI, it’s PM, it’s Altria, there are others that are other have tiptoed in the European marketplace, whether it’s Israel, Ireland, already looking and evaluating, investigating, but aren’t ready to jump in yet, for a couple of reasons.
One, October 17th: is it really happening or not? Cross that bridge first and foremost.
Then, what are the advertising rules? What are the penalties? What’s the enforcement when you go offside? They want clarity. Every best-in-class company wants clarity.
So, back to the Molson announcement today: when you read it, it doesn’t really say much. There’s not a lot of meat behind the business plan other than a JV.
James West: Well, the things that concern me about it, and I would like your sort of feedback on this, is that first of all Hydropothecary has put themselves in a minority position. Throughout Canadian history, any company that’s in a minority position with a major global partner is subject to that partner’s timeline and is no longer the author of their destiny, at least in that iteration.
Secondly, absent a capital injection from the larger partner, is it really an indication of faith, or is this just a science fair experiment for them?
Thirdly, the stipulation was that Hydropothecary was going to have to give a whole bunch of warrants to Molson-Coors to finalize the deal. So it essentially sounds like it was more or less a pay-for-play opportunity, and that’s why I suspect there were four contenders in the mix and Hydropothecary got it because they were the ones who were willing to bend over. Sorry, I don’t mean it that way. [laughter]
Vic Neufeld: Your latter point could not have been phrased any better. Listen, every CEO has to be accountable to their shareholders for value. The value that is on the books today, but the accretion of value tomorrow, and we have to champion that. We have to safeguard that. In my opinion, if there wasn’t some accretiveness that really had substance, a really broad value in beverages/non-alcoholic beer being one of those definitions, which we still don’t know if it is or not, and when; if it doesn’t bring value to me today in terms of gray matter, the intelligence, the consumer profile, the sharing of all that information with us, I’m not too crazy.
James West: Right.
Vic Neufeld: As I said, there are other spaces that, and very logically, so I’m not speaking out of turn here, very logically there are other spaces that have done a lot of work, a lot of analysis, just like the Miller-Coors team: bright guys, solid guys. They dotted every I, and they came away with a deal that, to me, is more one-sided than a win-win.
James West: So what’s Aphria’s strategy in all of this? I mean, the beer thing has been done, you know, Canopy has got their relationship with Constellation, now we have this Molson-Coors thing, which is, you know, doesn’t excite me greatly, however, it might –
Vic Neufeld: But it should have. That deal should have excited the entire space, but it didn’t.
James West: Well, absent some great – [laughter]
Vic Neufeld: Yeah, okay.
James West: So then what is the – so you mentioned energy drinks. I prefer to think of them as utility drinks, because, you know, the Five-Hour Energy drink, the Red Bull, but then you’ve also got drinks like chamomile tea and different drinks that are used and are marketed as remedies for different states of mind, which I think cannabis is an ingredient in anything is going to offer that, as well as with the CBD component, you know, maybe there’s a therapeutic benefit in there too.
So, but for me, personally as a consumer of both alcohol and cannabis, and yes I do consume them both at the same time on occasion, much to my regret sometimes, but you know, the bottom line is, I don’t really want cannabis in my beer, and I don’t really want alcohol in my cannabis, because the utilitarian aspect of both demands that, you know, I’ll do one in one circumstance, I’ll do the other in another circumstance. So do you think that it’s probably more advisable from the standpoint of looking out into the future where everything can have cannabis in it, that people are going to look to differentiate their consumption of cannabis from their consumption of alcohol, just naturally? Without the government interference that stipulates that that will never be allowed?
Vic Neufeld: Wow, where do I start on chiming in on some of these topics? So I want to first talk about the medical platform. Medical, yesterday, today and tomorrow, will not go away. There are forms of infused products that a medical patient would benefit from. Your mother –
James West: You know my mother? [laughter]
Vic Neufeld: She’s calling me right now. From minor to mild, moderate arthritis, what better – and she’s a tea drinker – David’s Tea, for example. What better branding than a tea bag that has and resonates with trust in a consumer – your mother – where, in her morning tea, she’s got the equivalency of whatever CBD is necessary to combat some of the pain of her mild to moderate arthritis. Or at night, the tea drinker, coffee, K-cup, Keurig, whatever, that has an element of THC and CBD for sleep disorder.
There are infused foods that are natural evolutions, that are medically inclined, from gums to mints, I mean…
James West: Cough drops.
Vic Neufeld: Suckers, lozenges, there’s a whole bevy of opportunities, but the government has to get there, and it’s going to take time. So, back to the October 17th, we know it’s dried flower, pre-rolls, oils, topical sprays, but no vape pens. And then after that, right now there’s conversation but nothing definitive on certain infused foods, and then I’m going to say beverages. So beverages are out there. And again, this deal is, it takes time to really do the R&D. I mean, you need to make sure that there’s no separation, there’s proper dissolution, dispersion, everything revolved around the safety, efficacy of the beverage. Water soluble needs to be part of the oil extraction output…there’s a lot of technology and equipment necessary. Again, that’s our centre of excellence. This is all leading toward that.
Where Hydropothecary sits is irrelevant to me. What’s important to me is, there are various forms of infused foods/beverages that need to come to the table. The first are vape pens. If you want to grab most of this – 15 percent of this underground economy are vape pen users. It’s not here on October 17th. You have now said goodbye to potentially capturing a billion – I’m picking a number here – a billion dollars worth of revenue from the underground consumer.
James West: Plus undermining your strategy of putting the black market out of business.
Vic Neufeld: Thank you, thank you. So back to your point: there are other spaces – energy, utility drinks, tobacco, spirits, wines – I mean, there are some women, perhaps, calorie-wise, the whole Weight Watcher thing, that maybe their red wine, the Cab-Sav that’s full of, obviously, sugars – it’s a lookalike. Probably artificial flavours, too, and it’s injected with a certain level of cannabinoids. I won’t even talk about CBD and THC levels. It’s going to be there. But is it really going to capture the lion’s share? No one really knows. People are throwing out anecdotal examples, estimates, that, well, look at what’s happening in Colorado, Oregon and Washington. I mean, one craft grower of beer out there is down 8 percent in volume already.
One could also argue that people are just not wanting to drink beer. They’ve moved on to something else. Have they looked at, have wine sales gone up?
The entertainment dollar is this big. It’s a matter of how much is cannabis, in total, the cannabis world, going to suck up, and leave the other entertainment dollars to beer, wine and spirits. It’s an unknown. But I can tell you with a high degree of certainty: many other global leaders have done their own investigation for a long time. This is not like last month. This has been a year to two years in the making, trying to put position papers together, getting their committee, their Board, eventually their Chair/CEOs on board with, do we or don’t we? What’s in it for our brand image? You know, is it good corporate conduct? There’s a whole bevy of hurdles and metrics they’ve got to pass.
James West: Cool. All right, Vic, let’s leave it there for now. We’ll come back to you in due course and pick up the conversation. Stay with us: when we come back after this next interview, Special Ed will be joining me for some technical analysis, and we’ll be looking at the cannabis market action for the day.
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