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Nov 14, 2018

Canopy revenue falls amid 'distraction' of pot legalization

Canopy Growth falls after missing second-quarter estimates


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Canopy Growth Corp.’s first quarter-over-quarter revenue drop in at least three years won’t be a regular occurrence as recreational marijuana swings into full gear, the Canadian company’s chief executive officer said.

“It is the first time in our history that I’m aware of where we actually had a slowdown, but I think it was more of a distraction than a pattern,” Bruce Linton, head of the No. 2 pot producer by market value said on the company’s earnings call Wednesday.

Canopy spent much of the fiscal second quarter, which ended two and a half weeks before Canada legalized recreational pot on Oct. 17, “stress-testing” the provinces’ sales systems at their request. This created “a bit of a distraction” for the company’s medical marijuana sales that was exacerbated by problems exporting cannabis to Germany, Linton said.

The Smiths Falls, Ontario-based company reported revenue of $23.3 million in the quarter ended Sept. 30, down from $25.9 million in the fiscal first quarter. That was well short of the average analyst estimate of $59.1 million. Canopy shares were down 7.7 per cent to $46.49 at 10:38 a.m.

Analysts were too early in their anticipated recreational sales volumes, Linton said.

“I think most were expecting that the provinces would be taking product in a material way and if you look across the entire sector, the provinces were not ready to take product,” he told analysts on the call. “You were early on the anticipated volumes but I don’t think you’re materially wrong on what the year could look like.”

For fiscal 2019, analysts expect Canopy to post revenue of $283.7 million, up 264 per cent from fiscal 2018.

Canopy products currently account for about 30 per cent of in-stock inventory at retail stores across Canada and it’s aiming for 30 per cent market share “at a minimum,” Linton said.

Canopy sold 2,197 kilograms at an average price of $9.87 a gram in the quarter, up from 2,020 kilograms at $7.99 a year earlier. That contrasted with Cronos Group Inc. and Tilray Inc., which both reported lower average selling prices on Tuesday.

Despite severe supply shortages across Canada since legalization, Canopy said it’s on track to meet its supply commitments to the provinces. The average number of kilograms shipped on a daily basis during the first 12 days of November more than doubled compared with the period from Oct. 17 to 31, the company said.

Canopy’s sales and marketing expenses rose to $39 million or 167 per cent of revenue, from $7.6 million in the prior period. The company said it expects marketing costs will be lower going forward.

Its net loss was $330.6 million, or $1.52 per share, compared with a loss of $1.6 million in the prior period. The loss was due in part to an increase in the fair value of its senior convertible notes.

Chief Financial Officer Tim Saunders described the quarter as a “period of transition” and said costs should fall and margins should improve as new facilities begin producing cannabis.