Canopy released their June 30, 2021 earnings Friday morning August 6, 2021.  They published financials after their earnings call, much to my chagrin.  

We will be tracking this through the year… “Medium-Term Financial Milestones (from December 31, 2020 financials on February 9, 2021 earnings release)

“With our new strategy in place, our organizational changes complete, and our operational cost savings program now underway, the Company is in position to establish the following medium-term financial targets:

• Net revenue CAGR of 40%-50% from FY 2022 to FY 2024;
• Positive Adjusted EBITDA during the second half of FY 2022 and 20% Adjusted EBITDA margin for the full year FY 2024; and
• Positive operating cash flow for the full year FY 2023 and positive free cash flow for the full year FY 2024.”

So, what do they have to hit in F2022? Let’s keep track:

• Sales growth of 40% would be $850 million annual F2022 revenue… they are tracking at $544 million or short by 36%.  I expect them to amend guidance or suggest guidance is more for F2023 and F2024 than F2022.
• +EBITDA to get there they need to mow down a -$94 million Q4 F2021 deficit… they are at -$73 million. They get there via…
• SGA improvement of $45 million which would put Q4 F2022 SGA at $66 million… they are at $96 million Q1 when backing out covid subsidy. Need to trim $30 million still.
• GM improvement of $50 million which would put Q4 F2022 GM at $60 million… they are at $27 million which includes a $7 million covid subsidy so $20 million.  Without sales increases there is no way they make this number. They must triple the Q1 to get there.  STEEP hill.

Constellation has until November 1, 2023 to pull trigger on increasing ownership to +50% with an $4.5 billion (88.5 million shares at $50.40) incremental investment.  They will be watching progress eagerly as they will need to raise equity or term debt to fund the payment.

What I said last Q:               

Pluses

• Cash increases to $2.3 billion, as they drawdown USD 750 million debt facility that carries a C$ 20 million a Q interest price tag
• End to end restructuring complete.

Minuses

• Sales decreased 3% QoQ with Cdn Rec and Med and Other CPG revenue slipping, while international medical was flat
• Gross Margin (YAY, segmentation!!) decreased to 7% (Boo!!) with Cannabis GM -5% (+5% without $10 million impairment) and Other GM 33% – 2% QoQ
• I backed into their unabsorbed overhead, as they changed disclosure, and it is troubling.
• Combined SGA increase QoQ
• Interest expenses will ramp next Q … hard.

This Q:

Pluses

• Gross Margin increase… to 20% of which covid subsidy ($7 million) adjusted would be 16%
• SGA (net of covid subsidy of $13 million) decreased QoQ by $22 million and is below sales for first time since I have been spreading since Dec 2016.
• Adj EBITDA (I removed covid subsidy, they did not) improved by $28 million QoQ… to -$73 million
• Other income swung an aggregate of $948 million QoQ to a positive $581 million, which provided the +Net Income of +$390 million

Minuses

• Sales decreased 8% QoQ with every reported segment contracting QoQ.  Second Q in a row of reduced sales.
• Gross Margin in Other revenue segment decreased to 32%, an all-time low.
• Another $89 million in asset impairment… fixed asset impairments over last six Q’s aggregates $1.2 billion

MDA only speaks to comparing quarter to the same quarter the prior year.  Its Ok… we have it covered.

Open the financials and Management Discussion and Analysis and follow along.

Overview of Quarter:

Sales:

For the quarter ending June 30, 2021, CGC evidenced $136 million sales net of excise tax, backtracking from the previous Q of $148 million.  This was a 8% decrease from the previous quarter. They went backwards three quarters with this sales figure.

Table 1: Revenue

Rec sales were $30 million net of excise tax versus $61 million last Q, a decrease of $1.0 million or -1.7%.  B2C, despite having 34 stores for the entire Q versus half a Q previously, slid $0.4 million or -2.3% to $17.3 million.  COVID is likely having an issue as click and collect gives little opportunity for upselling.

Cdn Medical has been flat all for five Q’s at $13-14 million. Slight decrease QoQ -1.6%.

International medical cannabis sales were took the biggest hit QoQ at $19.4 million a decrease of 27% with both C3 and Other down 27% and 26%, respectively.  German lock down was the reason given.

Global cannabis sales net of excise tax creased -8.2% to $93 million from $101 million. This is lower than September 2020 results.

Other Sales were down $3.9 million or -8% to $43 million. This is lower than September 2020 figures.

• Storz & Bickel +$6.2 million +35% to $24 million.  This is a bounce back to Dec 2020 results and just off a record.
• This Works -$2.0 million -23% to $6.6 million the lowest since June 30, 2020.
• Biosteel gets its own revenue line this Q… $6.6 million up substantially from same Q prior fiscal of $2.4 million.  It would appear that BioSteel Net Income/losses doubled QoQ from $6.7 million to $13.4 million.
• The balance includes CBD US business and clinic partners was $6 million and is not comparable as a stand-alone item QoQ.  But aggregated with Biosteel (as it was previously reported) it is don $12.6 million QoQ or -39%. 

Table 2: Revenue by Form

I put a flag on this as the Revenue by Form also consists of all the product they sell through their Tokyo Smoke stores. This includes double counting TWD and any other branded sales PLUS what they sell of other LP products.

Sales mix for Rec continue to shift from pre 2.0 mix of 90-10 Dry-Oil to 82-7-11 Dry-Oil-2.0, respectively.  Provisions remained consistent at $3.0 million in the Q.

• Rec dried saw a decrease of $1.8 million -3% giving back last Q’s gain.
• Oil evidenced a decrease of $1.0 million and was $5.7 million, lowest in past five Q’s
• 2.0 formats increased +28% by $2.0 million to $9.2 million slightly under Dec 31, 2020 record figures.
• Rec Provisions stabilized to $3.0 million QoQ from $3.1 million.
• NOTE: These improvements are not solely CGC product sales as they include products sold at CGC stores.

All in Rec was down post excise by $1.0 million -1.7%.

Medical is saw flower gain in mix at the expense of 2.0 to 29-62-13% split with flower-oil-2.0

• Medical Dried saw a moderate decrease at $0.1 million -1% to $9.6 million.
• Oil saw a $5.0 million decrease or -20% to $20.5 million.  
• 2.0 formats saw a $2.3 million decrease or -35% to $4.2 million

Gross medical was $33 million post-excise, down $7.3 million or -18% QoQ.

Other Revenue was $43.7 million down $3.4 million QoQ or -7.3%.

Adult Use Revenue: Peer and Trend

Provisions are included in the above. 

Canopy ceded top spot to Tilray this Q and we await Hexo next Q with Redecan.  Canopy has $17 million retail sales included in their figure.

Medical Revenue: Peer and Trend

Canadian medical has stabilized in the $13-14 million sales range at $13.5 million this Q, no change QoQ. ACB remains the market leader followed by Canopy.

International medical sales fell sizably QoQ to $33 million.

 Gross Margin:

WE HAVE SEGMENTATION.  The above is simply cannabis GM%.

Table 3: Gross Margin Adjusted for Non-Producing Assets Inventory Step Ups

I usually only show five quarters in this type of chart, but this is truly remarkable. 

Actual GM has been so bad for so long, despite all the promises to get to the mythical 40%.  Over eleven quarters spanning Adult use launch (Sept 2018 is last Q of medical and is provided as reference) they have once been over 30% (33.8% in Dec 2019, which then was wacked by impairments the next Q).  they nose into 20% but they also included $7 million in covid subsidies.  Without same it was 16%,

No mention of unabsorbed overhead.

Table 4: Gross Margin Segmentation

Cannabis GM, not adjusted for $7.3 million covid subsidy (they did not indicate if the subsidies were only in Canada or on which segment), improved 19% to 14% or to $13 million.  They had a full Q of Ace Valley in the mix and only a week of Supreme, which should pull higher GM%.

They do need to increase cannabis sales substantially to get a better usage from remaining facilities. IF they get the sales increase and GM% does not follow… worry.

Other segment showed its lowest GM% in five quarters at 32% or $14 million.

To get to the mythical 40% GM level they will need both cannabis and Other to ratchet up substantially.

Gross Margin: Larger Peer Group

CGC is the in second place in this peer group. Wow.  20% gets a second place medal, says a lot oabout the peer group.

Gross Margin: North American Peer Group

I do note that Tilray has a substantial portion of non-cannabis lower GM% business in their sales mix.

Operating Expenses:

SGA & SBC as % of Sales: Trend

Note: Asset impairments and the like have been moved to Other Income/Expenses to maintain peer comparability.

We have added back $13 million to G&A for Covid subsidy.

Selling expenses decreased to $51 million from $60 million, a nice decrease QoQ but it remains above Sept 2020 quarter.  They ramped Martha Stewart Gummies and Biosteel last Q.  They need to get sales follow through or this will be more spent money not an “investment”.

G&A expenses decreased to $46 million reducing $5.4 million. This is lowest they have been since December 2018 and three Q’s in a row of $ reductions.

Transaction expenses $5.8 million as they purchased stable QoQ, as Ace Valley was added in the prior Q and Supreme this Q.

SBC was dropped to $13 million from $19 million.  Lower stock price and less employee options.

SGA and SBC total 71% of sales, a decrease from 75% last Q.

R&D decreased by half QoQ to $8 million from $16 million. Winding up R&D at some closed facilities and less product development underway.

Depreciation of non-production facilities decreased to $14 million from $16 million QoQ.   

Total Opex was $126 million versus $167 million last Q. This represents 92% of sales and is the first time since I started spreading that it was less than sales.

SGA & SBC as % of Sales: Peer

CGC is highest in selling expense, second best in G&A (given scale, that makes sense), and fourth worst in aggregate.

Net Operating Profit was negative $98 million versus negative $157 million last quarter, aided partially by $20 million in covid subsidies. The $17 million increase in GM and the decrease $41 million in Opex are the reason for the swing.

+NOP Breakeven: Canadian Peer Group

At current GM% and OPEX$’s CGC needs 361% increase in sales to hit +NOP. 

+NOP Breakeven: North American Peer Group

Other Income and Expenses:

This was +$491 million versus the last Q -$454 million.

• Asset impairment of $89 million versus $75 million last Q. Six Q’s in a row with impairment.
• Other gain (below) of +$581 million versus -$367 million last Q. Price decreases in Acreage and TerrAscend the main contributors, as is the decrease in CGC stock price which decrease value of STZ warrants.

Other Income Table

Interest expense ramped to $25 million from $5 million and as we said last Q “should quadruple next Q with a full Q of the new term debt”.  That is the USD 750 million loan that has not been put into action.

Subtract $2.9 million in tax and you get a Net Income of + $390 millionversus negative $617 million last Q.

Non-Controlling Interests:

NCI was -$2.4 million.

• BioSteel (CGC owns 72%) For the Q1 had Negative Income of -$13.4 million doubling its loss from last Q -$6.7 million. BioSteel has a cumulative loss of $42 million since acquisition.

• Vert Mirabel (CGC owns 55% increasing): For the Q4 had Positive Income of $2.8 million an improvement from the Q4 F21 loss of $12 million.

Adjusted EBITDA:

EBITDA Trend and Peer

I backed the $20 million in covid subsidies from EBITDA, and I added back the entire asset impairment of $89 million, whereas they only used $79 million.  Not sure why they did not pull the entire amount.

EBITDA went from -$94 million to -$73 million this Q an improvement of $21 million.  GM improvement  and lower cash OPEX the reasons.

Keep in mind they had interest expense of $25 million.  Getting to $0 EBITDA is still a long way off but covering interest is even further.

At the 40% MYTHICAL GM, with current SGA & R&D, they would need Q sales increase of $119 million to cover it, over double current sales.

+EBITDA Breakeven Canadian Larger Peer Group:

Using current GM% and cash OPEX$’s, CGC would need an incremental increase of 307% in sales to post +EBITDA.

+EBITDA Breakeven North American Larger Peer Group:

Cash Flow Statement:

Cashflow from Operations: Trend

Quarterly

• Cash used in operating activities $166 million (net of above)
• Cash Used (generated) in investing activities $375 million.
• Cash provided by (Source) in financing activities $45 million
• Net increase (decrease) in cash and equivalents -$595 million.   

Balance Sheet Items of Note:

• Cash and marketable securities total $2.0 billion a decrease of $248 million.
• Annualized interest and P payments $109 million.

Gas in the Tank: Trend

• Total inventory is an industry leading $412 million +$44 million for the Q.  They indicate they outsold their harvest in the prior Q.  They no longer give harvest or sales figures, so you will have to take their word for it. No mention this quarter.
• Finished Goods is $80 million an decrease from $89 million from last Q. FG will include retail inventory at stores.
• WIP was $260 million up $36 million.
• Raw Materials was down $6 million to $50 million.

Sold vs Inventory and Production Costs vs Inventory:

On a GAAP basis CGC has 3.6 Q’s of inventory a slide QoQ. Getting close to that 4.0 figure where we have seen impairments.

Cannabis $ Inventory to $ Sales; Peer and Trend

• Canopy, Cronos and Tilray are reporting as per GAAP so no IFRS fluffing. Trend line reversed.  Keep an eye on this.

• PPE increases $68 million as asset impairment was offset with acquiring Supreme and Ace Valley PPE aggregating $179 million.

• Goodwill and intangibles increase an aggregate of $150 million with purchase of Supreme and Ace Valley G/I aggregating $170 million.  Some of that asset impairment was like in G/I.

• Long term Debt $1.5 billion.

• Acreage liability decreases $150 million to $450 million with Acreage increase in stock price. Reversed last quarters gain of the same amount.

• Warrant derivative liability decreased $316 million to $298 million. Constellation Warrants. decreasing due to CGC stock price increase.

• Share capital increased $295 million to $7.4 billion.

What I said last Q:

If last Q was a small “p” progress quarter, this Q is a step backwards:

• Sales decrease in each segment
• GM is in a bad place
• SGA increased with G&A stalled for last two Q’s
• EBITDA gave back previous Q gains and decreased
• They took on more debt that needs to generate some value to cover the $20 million a Q interest expense.

The hill to meet their Q4F22 guidance is steep.  Klein has been in drivers’ seat for over a year.  This is now his vehicle. 

This Q:

Another step backwards on sales and management signaling “two quarters out” we will see improvements in sales and GM.

• Sales decrease in each segment
• GM remains in a bad place
• SGA decrease is a glimmer of hope but is is still 92% of sales.  
• EBITDA improvements but still -$73 million and a $25 million quarterly interest bill

The hill to meet their Q4F22 guidance got even steeper this Q.  Klein has been in drivers’ seat for over a year.  This is now his vehicle and it feels like it is up to the door handles in mud.  If Klein could get the mud down to the rocker boards it would be an improvement.  The market has been told to “wait” yet again.

That’s all I got.

GoBlue

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in CGC and will not start one in the next five days.