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Cannabis Canopy earnings disappoint as posted loss is nearly four times expectations

Canopy Growth Corp.'s loss ballooned to $323-million in its most recent quarter, as the company struggles to find a path to profitability in Canada’s nascent recreational marijuana market.

The country’s largest cannabis grower, which boasts an $18-billion valuation that makes it worth more than household corporate names such as Shaw Communications and Canadian Tire, disclosed a fourth-quarter net loss late Thursday evening that was almost four times analysts’ expectations.

Smiths Falls, Ont.-based Canopy joined major cannabis cultivators Cronos Group, CannTrust and Supreme Cannabis in failing to meet earnings expectations in recent weeks, but co-chief executive Bruce Linton expects the impending launch of higher-margin infused foods, drinks and vape products to help turn the tide on profitability.

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“[Edibles] is what we’ve been built for. It is the whole point of this exercise, to create things that are a bit more complicated and have a much more desirable consumption pattern,” Mr. Linton said in an interview. “I think once these new products and distribution for them exists, I think that multiplies the sector and we are going to have the biggest market share. It is the next big wave.”

Canopy’s stock fell 7.6 per cent during Friday’s trading session to close out the week at $53.28 a share after the company reported a fourth-quarter net loss of 98 cents a share. Analysts had been expecting a loss of 25 cents a share. On a conference call with analysts before the markets opened, Mr. Linton said investors have “seen us sink to the bottom of our margin trough, which is about 16 per cent this quarter.” Acting chief financial officer Mike Lee promised a return to margins above 40 per cent over the next 12 months.

However, investors should not expect any dramatic improvements in the company’s next quarterly results, Mr. Lee warned, despite plans to harvest more than twice as much cannabis than before in its current quarter – roughly 34,000 kilograms. Fair-value adjustments to the position of Constellation Brands – the U.S.-based maker of Corona beer that owns a 38-per-cent stake in Canopy – will “contribute to a material net loss” in the first quarter of its 2020 fiscal year.

“There was a time when you guys were talking about getting [earnings] positive once you had adult-use revenues,” Vivian Azer of Cowen and Co. said on the analyst call, adding the situation had changed somewhat after Constellation’s late 2018 investment gave Canopy a $5-billion war chest. However, the analyst also noted “the magnitude of increase in your [net] losses really dwarfs anything we’re seeing from your peers.”

While the total net loss of $323-million “does dwarf our peers,” Mr. Linton said in response, "it all comes back to the war chest we’ve been talking about.

“Our focus in the near term is to demonstrate that Canada performs as a stand-alone model that we can take around the world, and … we are confident that as we get into fiscal 2021 you will start to see that positive [earnings] performance for Canada as a stand-alone business.”

Canopy also noted “an unusual weather event and other one-time activities” contributed to its wider-than-expected loss. Mr. Linton pointed to an unexpected and heavy snowfall in southern British Columbia that damaged a greenhouse; it was still being retrofitted and required the company to replace “kilometres” of broken water pipes.

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The results came just one day after shareholders of Acreage Holdings voted overwhelmingly in favour of Canopy’s US$3.4-billion offer to buy the U.S. cannabis firm active in several states. Because cannabis remains prohibited at the federal level in the United States, Canopy’s proposal involves an immediate US$300-million payment to Acreage along with the right to acquire all of its outstanding shares if U.S. laws change at any point over the next 7½ years.

On Thursday evening, the U.S. House of Representatives voted to prevent the Justice Department from spending any money to enforce federal cannabis prohibitions in states with legal markets. Asked whether a similar vote passing the Senate would constitute a “triggering event” for the acquisition, Mr. Linton said the legislation falls short.

“That is just saying you can’t buy gasoline, bullets or guns to go after [cannabis in legal markets], but it is not saying it is federally permissible, though it is well down the path of where we want [U.S. policy] to go,” he said, adding he hopes full U.S. legalization does not come for at least another 18 months “so Acreage has time to build up market share with our brands.”

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