David George-Cosh

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Canopy Growth Corp. reported another steep year-end loss on Tuesday after writing off more than a half-billion dollars in impairment charges, while its fourth-quarter results fell below analyst expectations amid a continued focus on U.S. legalization efforts. 

The Smiths Falls, Ont.-based company reported $148 million in revenue for the quarter, up 38 per cent from the same period a year earlier but down about three per cent from Q3 as COVID-19 restrictions broadly weighed on the Canadian cannabis industry. On a full-year basis, Canopy reported $546.6 million in revenue, up 37 per cent from a year earlier. 

"Like all businesses in Canada, we had some COVID-19 headwinds … but I think in general, if I look at the entire year, we're up 37 per cent in net sales, we remain on our pathway to profitability and we completed a transition year," said David Klein, chief executive officer at Canopy Growth, in a phone interview. 

"We think that the work that we've done in the year positions us really well to win in the North American cannabis space. We're feeling very bullish on where we are." 

Canopy reported an adjusted earnings with interest, taxes, depreciation, and amortization (EBITDA) loss of $94 million, which is an eight per cent improvement from last year. It posted a net loss of $616.7 million in the fourth quarter and a year-end loss of $1.67 billion led by steep asset and inventory charges. 

Analysts polled by Bloomberg expected the pot giant to report $153 million in revenue while booking a $61.1 million adjusted EBITDA loss. 

Canopy's outsized adjusted EBITDA loss, which was about 37 per cent worse than the prior three-month period, was described by Canaccord Genuity Analyst Matt Bottomley as "troubling," and may see the company struggle to hit its profitability target by the second half of its fiscal 2022. 

Canopy said it was the top seller of dried flower products in Canada with a 19 per cent market share and that it has a leading position in vape and infused beverage products according to internal metrics. These metrics point to it controlling 18.1 per cent of the Canadian market, though other data providers put that figure closer to 14 per cent. The company expects to report similar growth next year in its Canadian operations, including its retail division which saw same-store-sales grow by about five per cent over the past year. However, some analysts expect the Canadian market to remain challenging for companies like Canopy. 

"​While revenue performance exceeded our expectations just trailing consensus, the profit performance underscores the ongoing capital intensity and growing expense of capturing market share in the Canadian market driving added scrutiny for Canopy’s ability to profitably accelerate sales growth to meet its medium-term targets," said Stifel Analyst Andrew Carter in a note to clients Tuesday. 

While Klein described the Canadian market as being relatively healthy given the number of products being sold while top industry players like Canopy begin to roll out smaller companies, he said much of his focus is tuned sharply toward the U.S. 

Klein said he expects U.S. Senate Majority Leader Chuck Schumer to introduce his widely anticipated cannabis reform bill in the "next couple of weeks" and that a large majority of the population in several conservative states now support cannabis legalization. 

"I don't think it's a question of 'do we want to legalize?', but I think it's a question of how and 'how' determines 'when,’" he said. 

Klein said the company remains on track to report positive adjusted EBITDA by the end of its next fiscal year, roughly the same period a year from now, and that it has up to $200 million in cost savings identified over the next 18 months. He also said Canopy had about $2.3 billion in cash on its balance sheet at the end of the quarter, most of it primarily earmarked for its U.S. plans.

"You can be pretty sure that almost all of that will be focused on opening up the U.S.," he said. 

Canopy also has begun to sell 40 per cent more cannabis in Canada than it harvests, bucking a recent trend that has caused a significant amount of product in the market to become unsellable and leading to steep writedowns. Klein describes right-sizing its operations as akin to how some wineries typically grow their grapes for more premium products while working with other growers to supply lower-valued items. 

"Our footprint now supports that go-forward strategy and we now feel that we've got that right size," he said. "It looks like the wine business but it looks like a lot of other CPG businesses, which I think is a more efficient operation to manage."