Canopy Growth CEO finds balance in production footprint, eyes wholesale market
After winding down operations at more than a half-dozen facilities last year, Canopy Growth Corp. isn’t expected to conduct further closures in Canada as it looks to become a significant buyer in the cannabis wholesale market, the company’s chief executive said.
“I think we have the right-size footprint now,” Canopy Growth’s CEO David Klein said in an interview. “I feel pretty confident in that. I think businesses always nip and tuck on an ongoing basis. As well, there’s been a lot of talk about the layoffs that we’ve had in the last year, but we’ve hired a fair amount of people as well with different specialties. I’ll never say that we’re finished modifying the organization.”
Canopy laid off roughly 1,000 staff from its workforce last year while reducing the amount of cannabis produced amid an oversupplied market as it looked to stem further losses from weighing on its bottom line. The company shut down facilities in B.C., Saskatchewan, Ontario, Alberta, New Brunswick and Newfoundland and Labrador last year, reducing its Canadian footprint by more than half and resulting in more than $1 billion in write-downs.
But the moves were necessary to help Canopy find a better balance in managing supply and demand expectations in the nascent Canadian recreational cannabis market. Outfits like Canopy as well as Aurora Cannabis Inc. and Tilray Inc. have closed down facilities that grew tens of thousands of kilograms of cannabis after realizing the consumer market was flooded with legal pot.
That kind of supply recalibration will happen again as Canopy looks to improve the quality of some of its dried flower products, launch new infused beverages and revisit the company’s vape products “with some tweaks” later this year, Klein said.
He added that the company expects to become a major buyer of wholesale cannabis within the next 12 to 18 months from other licensed producers, which he believes is a better business model than Canopy producing the raw biomass itself. A robust secondary market, where smaller producers make high-quality cannabis, will need to take time to develop in Canada, he noted.
“It’s a tough position to be in, if all of the LPs are trying to have all of the capacity themselves, because that’s how you get yourself in trouble,” Klein said. “Like how our industry got itself in trouble.”
Georgia Senate runoff results show clear pathway for U.S. cannabis legalization
Georgia was on a lot of people’s minds this week after the U.S. state’s Senate race resulted in two more Democrats joining the legislative body, giving the party control over both houses of Congress as well as the White House. That is expected to result in a clear pathway for cannabis to be legalized in the U.S. sometime in the next couple years, as a Democrat-led government is expected to move quickly to introduce pro-cannabis legislation. Pot stocks on both sides of the border rallied in the wake of Georgia’s results, with several U.S. companies taking advantage of the rise in sentiment and raising millions of dollars in fresh financing to help fuel further growth.
Canopy Growth CEO expects U.S. expansion to occur later this year
And U.S. legalization may happen sooner than that, according to Canopy Growth’s CEO. In an interview with BNN Bloomberg, David Klein expects Canopy to be operating in the U.S. by the end of the year once cannabis is deemed to be federally permissible. That should see Canopy wholly acquire Acreage Holdings while take a long look at expanding its presence through its ownership stake in TerrAscend. Canopy is also working “closer than ever” with its main financial backer Constellation Brands, with Klein expecting the beer maker to exercise its warrants to take majority control of the pot giant sometime after U.S. legalization occurs.
Ontario cannabis business to begin culling underselling pot products
Meanwhile, closer to home, Ontario’s provincial cannabis retailer plans to stop carrying products that don’t meet certain sales targets. The Ontario Cannabis Store will also introduce a “craft designation” as a way to boost smaller licensed producers. The OCS said during a webinar that products will be flagged for delisting if sales per store fall below 0.5 units per week or if the product is consistently out stock in spite of having been on the market for more than six months. The move is likely to cause further write-downs for cannabis companies that can’t meet sales targets, exacerbating an existing inventory problem that has accelerated over the past year.
Amsterdam to explore ending tourist access to cannabis coffee shops
Amsterdam appears to be taking a hard look at whether it wants tourists to have access to its famed cannabis coffee shops. Bloomberg News reports that the Dutch capital’s mayor recently proposed a new measure where only residents would be allowed to enter the cannabis-dealing outlets. The plan is currently being backed by local police and prosecutors who would like to stem the flow of illicit drugs and help clean up the city’s image. Prior to the pandemic, Amsterdam’s red-light district and marijuana shops helped attract about one million visitors a month. Amsterdam is home to 166 coffee shops and local demand will likely see only 68 survive, according to a recent government study.
Analyst Call of the Week – Columbia Care
Cantor Fitzgerald analyst Paolo Zuanic initiates coverage of Columbia Care with a “neutral” rating and a $7.30 per share 12-month price target. Zuanic said that the company is now the fifth-largest U.S. cannabis operator based on projected 2022 revenues. Following some recent M&A that resulted in more than US$400 million in new spending, the company now has operations in 14 states, with operations in three more states under development. Zuanic notes that Columbia Care’s stock is fairly valued at the time given the company’s single-digit EBITDA margins and lack of depth in some of its core states.
CANNABIS SPOT PRICE: $5.96 per gram — This week’s price is up 1.9 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$2,121 per pound at current exchange rates.
“Hopefully we learn from our mistakes, and the language in the trailer bill will make it fair and possible for Black and Brown people to get into the emerging business.”
— Illinois Rep. La Shawn Ford on how the state plans to add 75 new cannabis dispensaries to allow more minority ownership in the industry.
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