3 Key Things From Canopy Growth's Earnings Call That Investors Should Know

The leading marijuana company's management talks gross margin, cannabis-infused beverages for the Canadian market, and hemp-derived CBD products for U.S. consumers.

Beth McKenna
Beth McKenna
Jun 27, 2019 at 7:53AM
Health Care

Last week Canopy Growth (NYSE:CGC), a leading Canadian cannabis grower, reported fourth-quarter and full-year results for fiscal 2019.

In Q4, net revenue soared 313% year over year to 94.1 million Canadian dollars, driven by the opening of Canada's recreational marijuana market in October. This new market brought in 65% of total gross revenue. Net loss widened considerably because the company is investing heavily in growth initiatives. It lost CA$323.4 million, compared with CA$54.4 million in the year-ago period. On a per-share basis, its loss widened to CA$0.98, from CA$0.31.

Earnings releases tell only part of the story. Here are three things from Canopy Growth's fiscal Q4 call that you should know. (Transcript via Seeking Alpha.) 

A cup filled with a green beverage with a cannabis leaf next to it.

Image source: Getty Images.

Gross margin is expected to be above 40% by the end of the fiscal year

From acting CFO Mike Lee's remarks:

Gross margin in the fourth quarter of fiscal '19 before the IFRS [International Financial Reporting Standards] fair value impacts was 15 million [Canadian dollars], or 16% of net revenue. Comparatively, gross margin in the fourth quarter of fiscal '18 was CA$7.7 million, or 34% of net revenue. The lower gross margin percentage ... was primarily attributed to CA$24 million of operating expenses for facilities not yet cultivating or facilities that had underutilized capacity. ...

We believe we are on a path for reported gross margin to be above 40% by the end of the fiscal year and [it] will increase further in the future with higher efficiencies and increased sales of value-added products as we approach full utilization of the new production capabilities. [Emphasis author's.]

This one largely speaks for itself. As utilization of Canopy's facilities increase and as its new platforms (which we'll get to in a moment) begin to produce higher-margin products, the gross margin is expected to rise.

As for Lee, this was his first Canopy earnings call. He's "acting CFO" because he's awaiting security clearance, which is expected to be received soon, from Health Canada. His background is largely in the alcoholic beverage industry, with his most recent position prior to Canopy being CFO of the wine and spirits division at Constellation Brands (NYSE:STZ).

Facility for production of cannabis-infused beverages expected to be complete by mid-September

From co-CEO Bruce Linton's remarks:

[Regarding] our beverage platform, the photos necessary to submit to Health Canada are scheduled to be prepared and could be submitted on or about June 28. That would follow where we will start to see tanks arriving early July, processing skids mid- and late July, things like piping equipment and consumables early August, qualification of the equipment August to September, so that we're looking at a mid-September finish construction.

Cannabis-infused beverages, along with edibles, are expected to get regulatory approval in Canada later this year. (Only dried flower and oils were legalized for recreational use last October.) Canopy should be ready to start churning out these beverages as soon as our neighbor to the north waves the green flag.

The company is developing these beverages with its strategic partner, Constellation Brands. Last fall, the maker of Corona and Modelo beers upped its ownership stake in Canopy to about 38%. The $4 billion that Canopy received in the deal made it flush with cash, which it's using to rapidly scale up.

Hemp-derived CBD products still targeted for availability in the U.S. by calendar Q4 2019

From Linton's remarks:

[Regarding] U.S. hemp, we announced our plan, and we're in full ramp-up mode. Contracts for farmers, announced sites, RFPs out for construction work [so] that we could begin refitting buildings, working on multiple states so that they ... follow a process that's very similar to New York state, developing brands, creating and testing products, and getting into production ramp that, while there is no absolute certainty, we certainly are aiming to have a Q4 in-channel product set.

Canopy Growth is building an industrial-scale hemp processing facility in New York state where it will make hemp-derived cannabidiol (CBD) products. (CBD is the nonpsychoactive chemical that's been associated with a host of medicinal benefits.) This platform marks the company's entrance into the U.S. market, which was made possible by the Jan. 1 enactment of the U.S. farm bill, which made processing hemp legal across the country.

Linton said the company is "investing a few 100 million [Canadian dollars] into U.S. processing assets that are great for hemp. But they'll also be functional and, I think, scalable for [processing marijuana] should that become a [federally] permissible activity."