Aug 15, 2019

Canopy CEO sees revenue rebound after weak quarter batters stock

Canopy shares tumble on lower net cannabis sales


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Canopy Growth Corp.’s chief executive officer said the pot company can overcome an unexpectedly weak quarter that sent shares tumbling Thursday, and still thinks the firm will hit a target of $1 billion in annualized revenue by March.

“We are focused on maximizing our revenues, which in my view generally speaking translates into maximizing our market share,” Mark Zekulin said in a phone interview following the earnings call.

Zekulin became sole CEO after his counterpart Bruce Linton was fired in early July amid growing pressure from shareholder Constellation Brands Inc. to improve financial performance. Canopy is searching for a new CEO, after which Zekulin intends to step down.

Canopy’s stock slid as much as 15 per cent, the biggest decline since November, after the company reported fiscal first-quarter revenue of $90 million, a decline from the previous quarter and below the lowest analyst estimate. It also posted a second quarter-over-quarter decline in net cannabis revenue and took an $8 million writedown to account for unsold product. The largest pot company by market value has now erased almost all its gains for the year.

The Smiths Falls, Ontario-based company also appeared to lose its first-place share of the Canadian market to Aurora Cannabis Inc., according to Canaccord Genuity analyst Matt Bottomley.

Zekulin said the weak results were attributable to product mix -- the company didn’t have enough high-THC dried flower, which consumers are eager to buy -- and facilities that were taken offline for upgrades in prior quarters, hurting supply.

As those facilities came back online, Canopy harvested 40,960 kilograms of cannabis in the quarter that ended June 30. This is the largest quarterly harvest to date of any Canadian pot producer and “alone could service the vast majority of quarterly demand in the Canadian market in its existing form,” said Eight Capital analyst Graeme Kreindler.

Zekulin said oversupply shouldn’t be a problem as long as new retail outlets continue to open and new product formats like edibles, beverages and vape pens are legalized as scheduled in December.

Chicken, Egg

“It’s this chicken-and-egg scenario where the provinces need the confidence that particularly the high-THC products will be there for them to open the new stores, and we need new stores in which to sell those products,” he said. “That dialogue is certainly happening, those stores are rolling out, and as long as we continue on a path towards a normal saturated retail market and value-add products coming online then I think those production levels are just fine.”

On a call with analysts, Zekulin reiterated the company’s goal of reaching a $1 billion revenue run rate and gross margins of 40 per cent by the end of March. Canopy also expects its Canadian business to deliver positive adjusted earnings before interest, taxes, depreciation and amortization on a quarterly basis within fiscal 2021. It also expects consolidated operations to post positive adjusted Ebitda within fiscal 2022, and to report an overall net profit within three to five years.

The search for a new CEO is underway and should be completed in the “next several months,” he said.

Canopy is looking at CEO candidates from the consumer, pharmaceutical, alcohol and even technology sectors.

“If you look at the speed of growth and the complexity of market regulations, the key is finding the right experience and the right person, and I think there are a number of sector backgrounds that could work well,” Zekulin said.