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Canopy Tumbles on Slim Margins as Pot Firm Spends on Growth

Canopy Falls After Pot Firm Reports Bigger-Than-Expected Loss

(Bloomberg) -- Canopy Growth Corp. shares fell the most since December after the world’s biggest cannabis company reported a steeper-than-expected loss and weak gross margins.

The message from the company Friday is that it’s short-term pain for long-term gain as it builds new facilities for growing and processing cannabis and spends to prepare for the launch of beverage, edible and vape products in Canada.

Canopy Tumbles on Slim Margins as Pot Firm Spends on Growth

The Smiths Falls, Ontario-based company reported adjusted gross margin of 16% for the fiscal fourth quarter ended March 31. That was below the consensus analyst estimate of 24% and a decline from 22% in the prior quarter. Its loss before interest, taxes, depreciation and amortization was C$98 million ($74 million), much wider than the expected C$64 million loss.

At the end of 2017, Canopy had 600,000 square feet of licensed growing space and a gross margin above 50%, said Chief Executive Officer Bruce Linton.

“We could have stayed there and we would have been a nice tidy little company, probably quite profitable,” Linton said on the company’s earnings call Friday. But when it attracted a $4 billion investment from Constellation Brands Inc., “you need to use that capital to build scale, and we did.”

Canopy expects production to more than double to 34,000 kilograms in the current quarter.

Linton said the fiscal fourth quarter represented “the bottom of our margin trough,” and gross margins are expected to rise above 40% by the end of fiscal 2020, which runs until March 31. Canopy should also report positive Ebitda from its Canadian operations by the end of fiscal 2021, according to Chief Financial Officer Mike Lee.

Canopy Tumbles on Slim Margins as Pot Firm Spends on Growth

However, Lee also forecast a “material net loss” in the current quarter due to non-cash charges for stock compensation and the rising price of Canopy’s convertible bonds.

The stock fell as much as 9% in Toronto, the biggest intraday drop since Dec. 5.

In an interview, Linton compared Canopy to Amazon.com Inc., which was unprofitable for years as it built itself into one of the biggest companies in the world -- although he doesn’t expect Canopy to take as long to reach profitability as Amazon did.

“Probably what’s happening today is some retail people who are selling their stock are getting replaced by institutional people who see this as the buying window,” Linton said in a phone interview. “Quite a few people bought Amazon over the years when they were creating a long-term valuable asset that would dominate the world.”

Canopy also gave an update on its U.S. plans, where it’s building up hemp operations in seven states in order to sell products containing the popular compound CBD.

Linton said he expects to have a range of products on shelves by the fourth quarter of this year, including skincare, beverages and possibly vape products, as well as food containing hemp protein. He sees CBD products for pets hitting U.S. shelves by the first quarter of 2020.

“We haven’t had any shortage of interested audiences” who want to sell Canopy’s CBD products, he said.

Canopy’s quarterly revenue of C$94 million was ahead of the consensus estimate of C$92 million but core cannabis revenue declined 7.4% to C$70 million from C$76 million in the previous quarter, according to Canaccord Genuity analyst Matt Bottomley.

“As the company continues to ramp up its infrastructure, operating losses fell a bit shy of our expectations,” Bottomley wrote. “But given that the industry is still in a rather steep ramp-up phase and with C$4.5 billion of cash on its balance sheet, we are not overly concerned with profitability for the quarter.”

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jacqueline Thorpe, Morwenna Coniam

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