5 Things You Can Expect From Canopy Growth in the Second Half of 2019

And two things you shouldn't expect for the big Canadian cannabis producer.

Keith Speights
Keith Speights
Jun 24, 2019 at 6:00AM
Health Care

Canopy Growth (NYSE:CGC) disappointed investors with its fiscal 2019 fourth-quarter results announced last Thursday evening. Although the company's net revenue increased, there were plenty of things to dislike. Canopy reported lower sales compared to the previous quarter for Canadian medical and recreational cannabis, as well as international medical cannabis.

Now that investors have had time to digest the Q4 results, the focus is now on what the future holds for Canopy Growth. The company's co-CEO, Bruce Linton, and its new acting CFO, Mike Lee, talked about what's on the horizon during Canopy's quarterly conference call Friday morning. Here are five things you can expect from Canopy Growth in the second half of 2019 -- and two things that you shouldn't.

Pile of cannabis leaves

Image source: Getty Images.

1. Capacity build-out

Lee perhaps said it best in his statement that Canopy is "building capacity in Canada, the U.S., and beyond." In the near term, it's the capacity expansion in Canada that will make the biggest difference for the company.

Canopy expects that it will harvest around 34,000 kilograms of cannabis in its fiscal 2020 first quarter, which ends on June 30, 2019. That's more than double the capacity the company had in Q4. Lee said that this higher level is "the beginning of a new normal" for Canopy. This added capacity should boost the company's sales as more retail stores open in Canada.

2. Improving margins

Although Canopy's gross margin declined in Q4 compared to the previous quarter, you can look for margins to improve in the second half of calendar year 2019. Lee said that the company is on track to deliver a gross margin of at least 40% by the end of its fiscal year, which ends on March 31, 2020.

The key to achieving this improvement ties into Canopy's capacity expansion. In the fourth quarter, underutilization at several large greenhouses hurt its gross margin. As renovations are completed, though, the company will generate higher revenue while its fixed costs remain relatively steady.

3. Rebounding Canadian medical cannabis sales

Canopy Growth's Canadian medical cannabis revenue in Q4 fell 41% from the previous quarter. Linton expressed confidence that the company's Canadian medical cannabis sales would rebound in the coming quarters, though.

One key reason behind Canopy's slumping medical cannabis revenue was its transition of brands, including Tweed, from focusing on the medical market to instead focus on the recreational market. But Linton said that Canopy's Spectrum medical cannabis brand is picking up sales momentum. In addition, he thinks that the company's clinical trials could produce positive results that enable it to attract more medical cannabis patients in the future. 

4. Stronger international sales

Look for Canopy's international sales to bounce back as well after slipping in the fourth quarter. Supply constraints primarily caused this decline. But Canopy expects its Denmark facility to come on line soon, which should enable the company to export more to the big German medical cannabis market. 

Canopy should also begin to generate revenue in the U.S. hemp cannabidiol (CBD) market by the end of 2019. Linton indicated that the company could launch CBD-infused skincare products and perhaps even beverages in New York state, although he didn't provide details on which types of products would be on the market this year. 

5. Major launch in Canada's new market

Speaking of beverages, Linton said that Canopy Growth is gearing up to launch cannabis-infused beverages, chocolates, and vapes later this year. He predicts that Canopy will be the global leader in these new product categories.

Linton stated that "probably half" of Canada's 10 provinces will be in a position to quickly launch a full range of products. However, he noted that sales could be limited this year. Companies must wait 60 days after notifying Health Canada about new cannabis products before they can market those products. That translates to a mid-December launch for Canopy. With the Christmas and Hanukkah holidays in December, the company will likely have a very limited shipping window in 2019.  

Two things you shouldn't expect

Don't expect Canopy Growth to report profits anytime soon. Linton and Lee were clear that the company would continue to invest significantly and wasn't focused on near-term profitability. However, Lee said that Canopy will be on track to deliver positive EBITDA in fiscal year 2021 -- at least for its Canadian operations.

Also, you shouldn't get your hopes up that Canopy will be able to pull the trigger on its deal to buy U.S.-based cannabis operator Acreage Holdings this year. Shareholders of both companies have approved the acquisition, but Canopy must wait until U.S. federal marijuana laws are revised. 

Linton was asked about the potential impact of last week's U.S. House of Representatives vote to prevent the Department of Justice from interfering in states that have legalized marijuana. He indicated that Canopy was closely following the progress of this legislation. However, he added that the bill doesn't make marijuana federally permissible but instead could make anti-marijuana laws "federally unenforceable."