“We were experiencing headwinds, and it takes time to claw your way back” — Canopy stock slumps on poor sales ramp-up

Canopy Growth Corp. said weak quarterly earnings for the period ending March 31, 2019 were primarily due to challenges scaling up at its largest greenhouse facilities in British Columbia and Quebec — roadblocks that cost the company $24 million in operating expenses for facilities “not yet cultivating, cultivating but not yet harvesting, or facilities that had under-utilized capacity.”

Canopy’s stock plunged almost eight per cent within an hour of Friday morning trading.

Between Jan. 1 and the end of March this year, Canopy sold 9,326 kilograms of cannabis to domestic and international markets, roughly 800 kilograms less than what it sold the previous quarter, which reflected just 10 weeks of post-legalization recreational sales.

The company generated $82.3 million in gross revenue from cannabis sales, with $68.9 million coming from the recreational market, a slight decline from $71.6 million in the previous quarter.

Canopy brought in $94.1 million in net revenue in its fourth fiscal quarter, up slightly from the previous three months. About a quarter of the company’s overall gross revenue came from other streams besides cannabis, including sales from medical cannabis device manufacturer Storz and Bickel, that Canopy acquired earlier this year.

“When you’re retrofitting greenhouses, if you get a heavy snow load, you have to get the heat cranked up, for instance. It’s a challenge to grow and operate when you’re retrofitting,” said Mike Lee, acting chief financial officer during a conference call with analysts Friday morning.

“There’s nothing systemic to be concerned about,” Lee added.

Canopy shipped 24,300 kilograms of cannabis during its financial fiscal year ending March 31, including 16,300 kilograms of dry flower and 8000 kilogram-equivalents of oil and soft gels. The company says that despite “headwinds” it faced over the last year related to ramping up, it expects its harvest capacity to increase to approximately 34,000 kilograms in Q1 fiscal 2020.

“We were at the tail end of renovation and retrofitting in BC Tweed and Mirabel. We were experiencing headwinds, and it takes time to claw your way back,” said company Chief Executive Bruce Linton in response to a question about what led to higher operating expenses this quarter.

The biggest revenue hit for the company by percentage came from a slump in sales on the medical market, which Linton attributed to supply issues that forced the company to serve its recreational channels over medical ones. In fiscal Q4 2018, medical revenue was $21.9 million versus just $13.4 million a year later.

International sales, particularly to the German market, were also lower this quarter, as the company directed its limited supply to focus on serving Canadian patients first. Linton told analysts that he expects Canopy’s Danish facility in Odense, Denmark to come online in “fiscal 2020”, which would then see it serve as a production hub to supply the European medical market.

Early analyst reports expressed some concern about Canopy’s flat sales and low margins. The company reported an annual net loss for fiscal 2019 of $670 million, with adjusted gross margins of 16 per cent, down from 22 per cent in the previous quarter.

“While revenues were flat to higher between Q3/Q4 (no surprise), we are somewhat concerned by medical sales that fell over the same period. While near-term financial results have generally been shrugged off, we believe the market may pay closer attention to Canopy’s margin profile which continues to track lower than consensus,” wrote Douglas Miehm, a cannabis analyst with Royal Bank of Canada.

“We expect margins to normalize in the coming quarters as management indicated much of Canopy’s production assets are beginning to come online; however, at this time the company is lagging the rest of the industry on this metric,” wrote Canaccord Genuity Corp. analyst Matt Bottomley.

Bank of Montreal cannabis analyst Tamy Chen had recently projected “flat to modest” sales growth for Canopy in the first three months of 2019, due to the challenges of growing at scale and managing various supply chain bottlenecks particularly related to packaging.

The Financial Post had previously reported that Canopy’s greenhouse facility in Aldergrove, B.C. was facing challenges in ramping up — only a third of the facility contained plants when the Financial Post visited in early March this year.

Linton provided some new information on the company’s plans to sell cannabis-infused beverages to the Canadian public come December 2019, saying that Canopy will be submitting photos of its bottling facility to Health Canada “very soon”.

“We’re now focused on drinks, chocolates and vapes. The finish line for beverages will be products containing two to 10 milligrams of THC,” he said.

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