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Canopy saw sales drop 15 per cent in its latest quarter, while Aurora reported a 24-per-cent fall in revenue.

Ryan Remiorz/The Canadian Press

Canada’s two largest cannabis producers reported big losses and steep revenue declines on Thursday, as the once-booming sector turns to bust just a year after recreational cannabis was legalized.

Canopy Growth Corp., the long-time industry bellwether, saw sales drop 15 per cent in its latest quarter compared with the preceding three months, while rival Aurora Cannabis Inc. reported a 24-per-cent fall in revenue. The results led to a sharp drop in the price of both company’s shares, wiping out more than $2-billion worth of combined market value on Thursday.

The results are also a bad sign for the entire sector, which is suffering amid a months-long sell-off in pot stocks and weak financials. Cannabis growers are already having to downsize operations and rethink expansion, as access to capital has dried up and consumers are proving reluctant to switch over from the black market.

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Canopy chief executive officer Mark Zekulin described the current market conditions in Canada as a “perfect storm.” There are not enough legal retail stores in Ontario, where just 24 are open, and provincial wholesalers across the country are placing fewer purchase orders because of a buildup of unsold inventory, Mr. Zekulin said on an analyst call.

Canopy president Rade Kovacevic added that the Canadian market is six to 12 months behind where they had expected it to be.

With so much uncertainty, Canopy has withdrawn its revenue target of $250-million for the fourth quarter of fiscal 2020. “There are just too many variables for us to try to give direct guidance,” Mr. Zekulin said.

This week has been crucial for the sector, with many of the largest companies reporting earnings. Organigram Holdings Inc. set the tone on Monday when it said its quarterly sales had dropped 34 per cent. Cronos Group Inc. and Tilray Inc. followed with stronger results on Tuesday, both showing sales growth but higher-than-expected losses.

On Thursday, Supreme Cannabis Co. Inc. reported a 40-per-cent drop in sales, while Zenabis Global Inc. reported a quarterly revenue decline of 52 per cent.

Alongside financial results, Edmonton-based Aurora announced on Thursday that it is deferring “for the foreseeable future” the completion of a 1.6-million-square-foot growing facility in Medicine Hat and is halting construction work on a greenhouse in Denmark. The company said it expects to save $190-million over the next year by reducing capital expenditures.

Aurora is not the first company to start rolling back its cultivation footprint. Hexo Corp., which last month reported a sharp drop in revenue, shuttered one of its greenhouses in Ontario and laid off 200 employees. Green Organic Dutchman Holdings Ltd. announced in October that it was delaying indefinitely the completion of a 1.3-million-square-foot greenhouse in Quebec.

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The move to reduce cultivation capacity is a dramatic shift from a year ago. In the lead-up to legalization, Canadian marijuana companies expanded their real estate footprints at an extraordinary pace, buying old vegetable greenhouses and building indoor growing operations worth tens or hundreds of millions of dollars.

What the recent wave of earnings has shown, however, is that growers are producing far more cannabis than provincial wholesalers are able to sell along to legal stores.

“The provinces have a significant backlog of inventory," Aurora chairman Michael Singer said in an interview.

"They were holding at some point, I understand, up to 52 weeks of inventory, so their model is changing slightly where that’s going to drop significantly. So that’s why we believe we haven’t seen significant orders from the provinces,” he said.

Canopy of Smiths Falls, Ont., for its part, ran into trouble by producing products that recreational consumers don’t seem to want. Most of the company’s sequential sales decline was because of a $32.7-million “revenue adjustment," which came largely from cannabis oil and gel cap products that were returned unsold or had their prices cut to entice buyers.

The adjustment, which Mr. Zekulin said was a one-time measure, gave Canopy a negative gross margin of 13 per cent, meaning it spent more money producing and selling product than it brought in. The company also took a $15.9-million writedown on inventory.

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Mr. Zekulin said Canopy’s inventories are now better aligned with market demand. However, the company is relying on a rapid increase in the number of retail stores in Ontario to absorb $288-million worth of inventory Canopy has on hand. Company projections indicate that Ontario needs to open 40 new stores every month starting in January, just for Canopy’s supply of dried cannabis flower to match consumer demand by the middle of 2020.

“Ontario represents 40 per cent of the country’s population, yet has one retail cannabis store per 600,000 people. When one year into the market, the addressable market is nearly half of what is expected, there’s going to be meaningful short-term problems," Mr. Zekulin said.

In a note about Canopy’s earnings published Thursday, Bank of Montreal analyst Tamy Chen called into question the projected pace of Ontario retail openings.

“While Ontario is expected to accelerate stores openings at some point, it is difficult to envision that enough stores could open over the next year to fully absorb the industry’s increasing production output (including outdoor harvests),” she wrote.

Canopy shares dropped 14.3 per cent on Thursday, after the company reported an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $155.7-million, far higher than analysts had anticipated.

Aurora shares fell 6.6 per cent on Thursday. It reported its financial results after the market closed. Aurora’s adjusted EBITDA loss more than tripled quarter-over-quarter to $39.7-million.

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