Breaking Down Earnings Calls For Top Canadian Cannabis Producers

Summary

• As the cannabis industry moves into a bull market, Canadian cannabis companies have been rebounding from recent lows.
• Inventory, equipment and facility write offs have led to cost reductions among the largest Canadian LPs.
• After restructuring these company hope to reach profitability in the near-term.

The Canadian cannabis industry has been nothing short of a disaster for investors and companies alike. The two largest Canadian provinces, Ontario and Quebec, limited the rollout of retail outlets and severely curtailed the ability of cannabis companies to get its product into the hands of consumers. This has resulted in an oversupply of cannabis in the market, driving down prices and forcing companies to close facilities and halt construction of partially completed projects. Certain companies have felt this negative pressure more than others, and it's been reflected in their earnings and share price.

Over the last month, the four largest Canadian licensed producers (LP's) reported their most recent quarterly financial results. Below are highlights from the financial statements and earnings calls of Canopy Growth (CGC), Aurora Cannabis (ACB), Cronos Group (CRON) and Aphria (APHA).

Aphria

Q3 2020 Earnings Highlights

• Net revenue of $144.4 million, up 96% Q3 2019 and 20% from the prior quarter
• Net income of $5.7 million, or $0.02 per share
• Operating income of $8.7 million, compared to a loss of $9.6 million in the prior quarter
• Adjusted EBITDA of $5.7 million
• A fourth consecutive quarter of positive adjusted EBITDA
• Cannabis-related EBITDA increased by 78%
• German distribution subsidiary sales increased by 50%
• Raised $100 million in January
• Both Aphria One and Aphria Diamond growing facilities are in full operation
• Cultivation cost per gram fell below $1; the all-in cost of sales per gram fell 14.6%
• 77% vape market share in Ontario; three of the top five brands
• Edibles, beverages and topicals to be released in the coming months

"We are proud of our sustained growth in Canada and continued expansion of our international capabilities. During this unprecedented time, the well-being of our employees, patients, consumers, partners and the communities we operate in is our primary focus. Our facilities, offices and patient care teams remain open and operational to continue to provide our patients and consumers with what we believe is best-in-class care and service with appropriate measures in place to protect the health and safety of employees. As we face uncertain times, I am proud of how the Aphria team has come together to navigate these uncharted waters. Going forward, we believe Aphria continues to be differentiated in the cannabis industry through our brands, cultivation expertise, high-quality standards, cash position and balance sheet. We continue to focus on the highest return opportunities for growth and long-term value creation," stated Aphria Chairman and CEO Irwin D. Simon.

• View Aphria's Q3 2020 Earnings Press Release
• Read/Listen to Aphria's Q3 2020 Earnings Call Transcript

Learn more about Aphria: Website | IR Website | Investor Deck

Aurora Cannabis

Q3 2020 Earnings Highlights

• Net revenue of $78.4 million, excluding provisions of $2.9 million, up 18% over the prior quarter
• Consumer cannabis net revenue of $41.5 million, excluding provisions, up 24% increase over the previous quarter
• Reduced SG&A + R&D expenses by 24%; reduced SG&A + R&D expense run rate by 45%
• CapEx spending under $100 million for the second half of 2020
• Cash cost to produce per gram of dried cannabis sold at $0.85, down from $0.88 last quarter
• German sales resumed; international revenue more than doubled
• Cash position of $230 million; $155 million in cash outflow during the quarter
• Projecting positive EBITDA by Q1 2021

"I am incredibly proud of the Aurora team for working through these challenging times in order to maintain uninterrupted operations at all of our production facilities and ensure we continue to meet the needs of our patients and consumers. I am also pleased that our third quarter 2020 financial results were in-line with our expectations and that we remain firmly on track with the cost-savings and capex goals we detailed during our business transformation plan in February 2020," Aurora Chairman and CEO Michael Singer.

• View Aurora's Q3 2020 Earnings Press Release
• Read/Listen to Aurora's Q3 2020 Earnings Call Transcript

Learn more about Aurora Cannabis: Website | IR Website | Investor Deck

Canopy Growth

Q4 & FY 2020 Earnings Highlights

• FY 2020 net revenue of $399 million, up 76% over FY 2019
• FY 2020 net loss of $1.39 billion and an adjusted EBITDA loss of $442.8 million
• Q4 2020 net revenue of $107.9 million, down 13% from last quarter and up 15% from Q4 2019
• Q4 2020 net loss of $1.33 billion and an adjusted EBITDA loss of $102 million
• $743 million in restructuring costs and asset impairments; wrote off $132 million in obsolete inventory
• Closed two Canadian production facilities, reducing capacity by 40%; closed New York hemp facility; sold off African and Colombian assets
• Launched CBD cream in the U.S. under First & Free brand; released CBD Booster skincare line and hand sanitizer under This Works brand
• Reduced number of available SKUs by one third

"Through the COVID-19 pandemic, we have worked hard to ensure the health and well-being of our teams and customers and the continuity of our business. During this time, our team has rolled out our exciting new cannabis-infused beverages and vape products in Canada and a portfolio of CBD products in the US. True to key priorities that I have outlined for Canopy, we have taken steps to align our capacity with the current market demand and focus our resources against the core markets with the largest and most tangible near-term profit opportunity," said Canopy Growth CEO David Klein.

• View Canopy's Q4 & FY 2020 Earnings Press Release
• Read/Listen to Canopy's Q4 & FY 2020 Earnings Call Transcript

Learn more about Canopy Growth: Website | IR Website | Investor Deck

Cronos Group

Q1 2020 Earnings Highlights

• Q1 net revenue of $8.4 million, up by $5.4 million from Q1 2019
• Q1 gross profit (loss) of $(6.5) million, decreased by $8.0 million from Q1 2019
• Q1 operating loss of $45.1 million, increased by $34.9 million from Q1 2019
• Released Lord Jones branded facial moisturizer in the U.S.; released Peace Naturals vaporizers in Canada
• Wrote off $8 million in inventory
• Colombian JV extraction facility completed; CBD formulations in development for export to the U.S
• Completed first dried flower shipment to Israel

"Cronos Group started 2020 energized and determined to continue to see through our core strategic initiatives to drive long-term and sustainable growth. This quarter, we moved closer to officially entering the Israeli medical cannabis market with our Cronos Israel operations preparing to sell PEACE NATURALS™ branded dried flower products to medical patients. The Israeli medical market is a growing channel, and we look forward to serving this market in 2020 and beyond," stated Mike Gorenstein, CEO of Cronos Group.

• View Cronos Group's Q1 2020 Earnings Press Release
• Read/Listen to Cronos Group's Q1 2020 Earnings Call Transcript

Learn more about Cronos Group: Website | IR Website | Investor Deck

Conclusion

For most investors in Canadian cannabis stocks, it has been a rough year. The inept rollout of retail outlets in Canada's most populous provinces has hamstrung the industry. After writing off a large amount of the extra capacity that was acquired over the last few years and rightsizing their operations, the largest Canadian cannabis companies are beginning to take meaningful steps to become leaner and more profitable. The next few quarters will tell if their efforts have been successful. Without more clarity, I would stick to U.S. cannabis companies and avoid Canada for now.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Donnascott]

In the long term which is what I feel most people should focus on, I feel there is much value to be gained from this market. Short term, expect it to be rocky. But the potential is there, like CanaFarma, I do not feel it’s an industry that will disappear. It’s just getting started in many ways. According to financial experts, the cannabis market in Canada is expected to generate approximately $7.17 billion and employ around 3500 local residents by the end of 2020.

[Balaland]

@Bay Area Kid ,
$CGC , " $132 Million write-off in Obsolete Product , Hmmm ..
But don't they have Extraction facilities ? …
Lots of ' Juggling ' going on there , Imo ..
That new CEO from $STZ seems to be hard at work , Haa ..
G.L.T.A. invested ...

[SA-NJ52]

i own Delta 9. Along with Valens, it is one of the few companies with a positive EPS.

It is a small company but it appears to be doing well.

The only other stock I owned was Canntrust that is effectively bankrupt now due to management greed and stupidity. You can google the tale of woe on this disasterous company that should have done well.

@gandc

[OneStrawRevolutionFarming2023]

@gandc
Yes, steady and visible progress at VRNDF - this looks like one definition of a "build out" :-)

[OneStrawRevolutionFarming2023]

The so-called conventional wisdom has sounded like excuse making :-)

Canada Cannabis 1.0 companies could not grow excellent quality cannabis so they made excuses and said their poor sales were due to a lack of dispensaries; however, now we can clearly see in the USA that excellent quality medicinal hemp sells very well on the Internet and it's delivered by the USPS :-) If the quality is excellent it will sell through in the dispensaries and also online with delivery :-)

Most of the Canada Cannabis 1.0 companies are limited by their mono-cultures: cannabis is a commodity (this is simply factually incorrect; cannabis is not exclusively a commodity: cannabis is what we do with it - saving lives and building out Wellness in communities) is an example; designing business plans based on mono-cropping in expensive facilities which were designed by architects and not necessarily the growers who would use them is another example of this singular/mono thought process :-(

Most Canada Cannabis 1.0 companies continue to invest in indoor hydroponic cannabis which is not as good quality as both Regeneratively "live soil" polyculture, intercropping natural farming and/or Aquaponics "live liquid soil" dual root zone polyculture natural farming; in addition, the costs of the inputs for indoor grows are significantly higher than Regenerative and Aquaponics which do not require NPK "baby bottles" of chemicals :-)

The Canada Cannabis 1.0 companies brought their aura of trying to "dominant" and this is especially unwelcome in the Wellness industry; companies that try to "dominate" with patents and "moats" and price "moats" will likely get boycotted out of business: we don't want unkind commodity metrics people in the Wellness industry; they can please go work in the unethical and immoral tech. industry which generates vast amounts of money and never helps the homeless for example :-( In the Wellness industry we want people who will build out Wellness town by town and live locally :-)

These issues are also seen in the USA where scant attention and meager resources have heretofore been devoted to helping patients and synthetic medication addicts and the homeless :-(

Additionally, segmenting the market based on prices appears to be a risky choice: providing excellent quality of cannabis at all price points - $2-$16 a gram - is working in the Oregon legal jurisdiction and might provide a template for other low-cost states like perhaps MS in the future: hitting all prices points puts pressures on the contiguous legal jurisdictions which might need to lower their prices (this might be true for the Panhandle section of FL when/if MS and AL open up) to compete - why companies are choosing to service only the premium market or only the discount market appears to be another vestige of Prohibition :-(

The companies that do well in the future likely will be the ones which remove all or nearly all of the Prohibition mindsets and work for a polyculture mindset that brings more plants as medicines and food as medicine simultaneously and in complimentary fashion - for example, a pre-roll containing medicinal cannabis and medicinal hemp rolled in mullein leaf - to the market :-)

Canada might also help itself with "farm-to-gate" and "farm-to-sale" and letting farms sell directly to the public :-)

This hopefully is not an attempt to replicate Big Ag (which is failing now and appears to be a fatally flawed model of scale which destroys and has destroyed the earth's biological diversity and topsoil and contaminated our water and depleted the nutrients in our food and in our livestock) nor Big Pharma (which has given us the death of the opioid crisis which kills about 4 people an hour in the USA) nor CPCs filled with chemicals :-(

APHA might be the only Canada Cannabis 1.0 company that has done any visible Wellness work in the community and its effort was to provide a temporary arboretum of sorts for a couple of weeks :-)

Hopefully this will be a horticulture matrix at the local level which endeavors to save lives and help people end their synthetic medication addicts :-)

[Bay Area Kid]

"Canada Cannabis 1.0 companies could not grow excellent quality cannabis so they made excuses and said their poor sales were due to a lack of dispensaries"

Well this is totally false. Ontario is by far the most populated province in Canada and had less dispensaries than some of the smallest. Notice sales are increasing along with new dispensary build outs.

[OneStrawRevolutionFarming2023]

Fair enough and thank you :-)

Let's see how those companies do when the outdoor harvests arrive :-)

[OneStrawRevolutionFarming2023]

Are those curbside :-) Or are they walk-in dispensaries :-)

[FringDook]

Why no $HEXO ?

They had an important ER yesterday for the industry.

[FringDook]

But I think that COVID will actually accelerate the trend for the Canadian Companies. More stores opening, MJ essential, and forcing the hand of people habitualizing visiting the dispensaries. Bullish.

Long $HEXO $APHA $MO.

thanks for the writeup.

[MyJourney]

SA Editor delay probably. Most articles seem to take about 2 days to get through. Not sure how long or who gets prioritized for review.

[Bay Area Kid]

This article ews submitted almost a week ago. Hexo isn't a top tier cannabis company, IMO