Canopy Growth doubles revenue in Q3, reports $7.1 million net loss

Medicinal cannabis consumers will take priority over recreational users post-legalization, CEO Bruce Linton says

Canopy Growth Corporation (TSX: WEED) reported that its revenue more than doubled (an increase of 123 per cent) in the third quarter over the same period in the previous year, CEO Bruce Linton and CFO Tim Saunders told shareholders on this morning's earnings call. Total revenue reported for the quarter was $21.7 million – a significant increase from the $9.8 million reported for the same period of 2016. But the company reported a net loss of $7.1 million for the time period, compared to a loss of $1.4 million in the same period a year prior.

Linton maintained optimism, declaring the period of August 1, 2018 to August 1, 2019 to be the window for “transformation of cannabis in Canada.”

Tweed Canopy Growth Smiths Falls

Canopy sold 2,330 kg at an average of $8.30 per gram compared to 1,245 kg at $7.36 per gram, accounting for the higher price due to an improved mix of products such as oils and a higher market price in Germany at $12.61 per gram. The company experienced record quarterly sales in Germany, reaching $1 million.

Over the same time period, the weighted average cost of production per gram decreased 32 per cent due to operating infrastructure improvements within the company. This was the sixth consecutive quarter where the production cost was below $1/g and continued to fall. Shipping costs increased over the previous quarter because of investments in a process for premium packaging, they said, with the aim of improving overall brand experience.

In addition, gross margins were impacted by operating costs of non-producing facilities as they're constructed, such as the BC Tweed joint venture.

“A lot of our construction will be wrapping up," said CFO Tim Saunders. "Most of it before the mid-point of this year.”

The medicinal market

Canopy's medicinal client base is increasing steadily, rising to 69,000 from 29,000 in the previous year. The number of patients buying Canopy products in Germany increased from approximately 1000 in March of 2017 to about 20,000 by the end of 2017.

During the call, Linton indicated that medicinal cannabis users will have a priority over recreational users when it comes to supply post-legalization.

The recreational market in Canada

Canopy is increasing overall inventory in preparation for the launch of the domestic recreational market in Canada. They reported that their inventory for the quarter was at 16,837 kg of dried cannabis in various stages of production, which is about double of what they had in March of last year. They also indicated that they had 5,919 litres of cannabis oil in inventory (in various stages of production) and 391 kg of capsules on hand.

Prior to the earnings call, Canopy Growth and the Society d’alcools du Quebec announced a signed letter of intent for Canopy to provide 12,000 kg of cannabis annually to the province. It is one of six companies signed on to supply the Quebec market. This is the fourth provincial deal signed by Canopy to date, bringing total commitments to 25,000 kg.

Canopy Growth is planning for a drawdown of inventory assuming that the recreational market launches in the summer as planned. 

“We can’t see a situation where we wouldn’t be adjusted EBITA positive later this year,” said CFO Tim Saunders, assuming that the recreational market is legal this summer.

The future

Acknowledging that oil and gel capsules have a higher margin for Canopy Growth than dried cannabis, further movement into processed products appears to be part of Canopy's plan. This is a logical extension of Canopy’s relationship with Constellation Brands that was announced in 2017, which was described on the call as falling into the "what's next" category.

Canopy will also move into patentable intellectual property, Linton said, and they are exploring propriety brands of cannabis oil and devices for consumption.

“Over time, you’ll want your device and your cannabis oils to communicate,” Linton said, because different oils have different optimum temperatures when vaporized.

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2 comments

  1. Maxcatski Reply

    How can you not make money selling pot?

    Normally, companies amortize capital expenses, like new buildings, over time. And the cannabis unicorns have been able to finance hundreds of millions of dollars in capital.

    Canopy seems to be depending on legalization so they can flush that 16,000 kg of inventory into the recreational market. At $8 a gram, this is $128 million worth of pot. At less than a dollar a gram production cost, however, it seems odd that Canopy has not been able to make a profit this quarter. They need to do better.

    The cost of legal cannabis needs to come down dramatically to take share from the black market.

    1. Maxcatski Reply

      Oops, ignore my comment about new buildings. It is operating cost and not capital cost that is running up the bills for Canopy. They are paying people and power to build inventory.