Canopy’s net revenue plunges as challenges pile up in Canadian cannabis sector

The lobby of Canopy Growth's Tweed facility in Smiths Falls, Ontario. (Photo by Justin Tang)

(This story has been updated to reflect comments from Canopy’s executives in a conference call with investors.)

Canopy Growth’s net revenue plunged 15% compared with the previous quarter, a development the Ontario-based company attributed to a “challenging” period in the Canadian cannabis sector marked by provincial wholesalers reducing purchases and disappointing retail store openings – particularly in its home province.

Canopy’s loss in its fiscal second quarter 2020 totaled 374.6 million Canadian dollars ($282.7 million), up 13% from CA$330.6 million a year earlier.

Canada’s biggest cannabis producer by market capitalization said revenue adjustments ballooned 309% sequentially to CA$32.7 million. That primarily relates to returns and pricing adjustments for the company’s oils and softgels.

In a conference call with investors, CEO Mark Zekulin joined the chorus of cannabis producers blaming lower-than-expected revenue on Ontario’s slow rollout of retail stores.

Overall, net revenue fell to CA$76.6 million in the second quarter ending Sept. 30, down from CA$90.5 million in the previous period. That’s well below analysts’ expectations of roughly CA$97 million.

Adjusted EBITDA, a measure of profitability, worsened 69% to a loss of CA$155.7 million for the second quarter.

Canopy mostly attributed the loss to operations and corporate overhead costs ballooning 89%, to CA$109 million.

“The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations, and Cannabis 2.0 products are yet to come to market,” Zekulin said in a statement.

Canopy sold CA$49.4 million of adult-use cannabis to other businesses, a decrease of 15%, and CA$13.1 million to consumers, a 24% increase.

International

For the first time, Canopy’s international ambitions are showing signs of coming to fruition with meaningful global contributions to the company’s bottom line.

Potential sales of medical cannabis in other countries – especially in Europe – underpin valuations for many Canadian marijuana firms.

International medical cannabis sales grew 72% to CA$18.1 million in the quarter.

In the call with analysts, Zekulin said Canopy’s Denmark facility has received its Good Manufacturing Practice (GMP) certification, which implies sales could begin there imminently.

“We expect the cannabis harvested and processed by the Danish facility to begin serving European markets in late calendar 2019,” Canopy disclosed in a regulatory filing. That is in line with its previously stated expectation that the facility would begin shipping product in the second half of 2019.

Canopy plans to start selling CBD products in South Africa “in the coming months.”

South Africa is one of a small number of federally regulated over-the-counter CBD markets in the world.

Canopy plans to launch CBD products in the United States by the end of the current fiscal year.

“The harvest of our 2019 hemp crop is nearing completion,” Zekulin said during the conference call. “This harvest puts Canopy in a strong position to meet anticipated high growth of consumer demand for CBD in the U.S. and abroad.”

Ontario shade

Canopy Growth added to the pressure on Ontario’s government to significantly expand the number of recreational cannabis points of sale in the province, which currently sit at only 24.

Canopy warned that its target of achieving CA$250 million in revenue in the fourth fiscal quarter is “increasingly unlikely” due to Canada’s slow retail build-out.

“While Canopy is geared up with product inventories, production capability and sales efforts to deliver on the CA$250 million objective, we do not believe at this time that there will be sufficient points of retail sales in the near term to unlock the necessary Q4 demand,” Zekulin said.

“The market opportunity today is simply not living up to expectations,” he added, referencing Ontario’s current cannabis landscape.

In a new regulatory filing, Canopy said Ontario can support more than 1,000 retail stores.

“Ontario represents 40% of Canada’s population, yet has one retail cannabis store per 600,000 people. One year into the (recreational) market, the addressable market is nearly half of what was expected,” the company told analysts.

Canopy expects Ontario to start opening 40 stores per month in January 2020, but province has not provided a specific timeline.

Medical bright spot

Medical sales in Canada and overseas were an upside for Canopy.

The company reported second-quarter gross revenue in the medical market of CA$32.2 million, up 34%, as registered medical patients in Canada rose to 75,000.

The amount of cannabis harvested declined quarter-over-quarter to 40,570 kilograms (89,442 pounds).

Overall operating expenses rose 15%, to CA$269.4 million.

Canopy’s largest operating expenses were:

  • CA$92.9 for share-based compensation.
  • CA$87.9 for general and administration.
  • CA$60.5 million for sales and marketing.

Canopy trades on the New York Stock Exchange as CGC and the Toronto Stock Exchange as WEED.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto, Ontario. He can be reached at [email protected]

A chart displaying the quarterly earnings for major cannabis companies is available here.
One comment on “Canopy’s net revenue plunges as challenges pile up in Canadian cannabis sector

Leave a Reply

Your email address will not be published. Required fields are marked *