Canadian pot producer Canopy may face challenges offloading assets, CEO says

A sign featuring Canopy Growth Corporation's logo is pictured at their facility in Smiths Falls, Ontario, Canada, January 4, 2018 .Picture taken January 4, 2018. REUTERS/Chris Wattie

Canada’s biggest cannabis producer, Canopy Growth Corp, could face challenges offloading assets as it seeks to winnow its facilities down to focus on its most lucrative markets and products, its chief executive told Reuters.

The company, which reported a smaller-than-expected third-quarter loss on Friday, is conducting a “thorough strategic review” of its production facilities as it seeks to cut costs and become profitable, executives said.

“There’s not a lot of market demand for cannabis production facilities,” David Klein, former finance chief of the company’s biggest shareholder Constellation Brands (STZ.N), said in an interview. “There’s a lot of capacity in Canada and no logical buyers.”

More than a year after Canada legalized recreational marijuana, producers are scrambling to turn a profit as lower-than-expected demand and exuberant expansion hit sales and lift costs, while a cash crunch threatens many companies’ survival.

Canopy first needs to ensure it generates as much cash as possible, said Klein, who became Canopy’s CEO last month.

“Then, what we do as a secondary step with the assets… we’ll figure that out over time,” he added.

Canopy shares were up 16.2% at C$30.10 in afternoon trade in Toronto, paring its one-year loss to 53%.

Canopy had cash and equivalents of C$1.56 billion as of December, down from C$2.48 billion at the end of March 2019.

“We will be pretty aggressive in managing capital expenditure going forward,” Klein said. “If we just take those measures, we have cash for the foreseeable future.”

Canopy also plans to expand in the U.S. cannabidiol (CBD) market, he said.

CBD is a non-psychoactive compound in cannabis, and is also derived from hemp plant, the production and distribution of which the United States legalized in late 2018.

“We’re in the process of building out a sales infrastructure in the U.S. so that we can call on the large retailers and get shelf placements,” Klein said.

The company could move some Canadian resources to the United States to enable the expansion, he said.

Canopy executives said they aim to lift gross margin to 40% in the short term, from 34% in the third quarter, and will reduce share-based compensation by as much as 40% from the third quarter’s C$56.8 million.

“They’re nowhere close to posting a profit… and their free cash flow is quite negative, but it’s going in the right direction,” said Jason Zandberg, an analyst at PI Financial, who expects Canopy to follow rivals Aurora Cannabis, Tilray and Hexo in cutting jobs.

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