Canopy released their March 31, 2021 earnings Monday morning June 1, 2021. They published financials after their earnings call, much to my chagrin. And after seeing the details… I am unsurprised they did not want the analysts to have these before the call.
“Medium-Term Financial Milestones (from December 31, 2020 financials at 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.”
They reiterated these (but used their cushion on when EBITDA would be +) and gave details on March 31, 2021 CC. So, what do they have to hit in F2022? Let’s keep track:
- Sales growth of 40% would be $850 million annual F2022 revenue
- +EBITDA to get there they need to mow down a $94 million deficit. They get their by…
- SGA improvement of $45 million which would put Q4 F2022 SGA at $66 million
- GM improvement of $50 million which would put Q4 F2022 GM at $60 million
The above should be fun to track.
The first Q with under 10% sales growth will make the figures that much harder to reach. Could be why they equivocated and moved EBITDA to last Q of year versus last half, given sales retreated this Q by -3%.
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:
- Cash and Short-Term investments $1.6 billion
- Sales increase +12% split between rec +$4.2 million +5.5%, Medical +$4.2 million +12.8% (almost all International) and +$11 million + 25% in Other.
- *Dried flower, which was up 60% last Q, (*includes ALL flower sales through the B2C channel including other LPs flower sold at Tokyo Smoke owned stores) increased 4% or by $2.3 million.
- Other revenue increased 25% QoQ
- EBITDA improvement of $18 million.
- Gross Margin 16% with $15 million in restructuring charge that if backed out would lead to 26% GM.
- “under absorption of fixed costs” of $13.9 million. I said this last two times, but this is their biggest headwind for foreseeable future. Had this also been reversed from GM, GM would have been 36%.
- SGA & R&D improved by $7 million after increasing $14 million last Q.
- SGA + R&D is 5.6 times GM.
- Impairments of $400 million on PPE on closing cultivation facilities and $14 million more on expected credit loss on PharmHouse
- EBITDA improved $18 million to -$68 million after $7.5 million improvement last Q. Still remains worst in industry.
- 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.
- 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.
MDA has no quarterly information. They are burying a body, so the reader will need to do some sleuthing. We have you covered.
Open the financials and Management Discussion and Analysis and follow along.
Overview of Quarter:
For the quarter ending March 31, 2021, CGC evidenced $148 million sales net of excise tax, backtracking from the previous record last Q of $153 million. This was a 3% decrease from the previous quarter.
Table 1: Revenue
Rec sales were $61 million net of excise tax versus $63 million last Q, a decrease of $2.3 million or -4%. B2C, despite having 33 stores for the entire Q versus half a Q previously, slid $2.5 million or -3% to $18 million. COVID is likely having an issue, or maybe its Alberta retailers retaliating against them opening stores in Alberta by delisting. I heard Nova (Value Buds) pulled the CGC product and offered it to staff at a discount to move it.
Cdn Medical has been flat all year at $13-14 million. Slight decrease QoQ -2%.
International medical cannabis sales were flat QoQ at $26.5 million.
Global cannabis sales net of excise tax creased -2.5% to $101 million from $104 million.
Other Sales were down $1.5 million or -3% to $47 million. We are getting some segmentation of this now:
- Storz & Bickel -$6.3 million -26% to $18 million. The prior Q was a Holiday Q. This is well below the previous two Q’s.
- This Works -$2.4 million -22% to $8.5 million
- The balance includes Biosteel, CBD US business and clinic partners was +$7.1 million +52% to $21 million. There is some heavy load in to pressurize sales channels. Watch to see how the products start to move.
- Note: Biosteel also had negative Net Income of $6.7 million which is a slide from last Q loss of $6.3 million and exceeds the first two quarters of ownership loss of $6.1 million. Ramping costs and promotional payments no doubt.
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 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 83-8-8 Dry-Oil-2.0, respectively. Provisions remained consistent at $3.1 million in the Q.
- Rec dried saw an increase of $1.6 million +2% reaching its highest level since Dec 2019.
- Oil evidenced a decrease of $0.6 million and was $6.7 million, lowest of the fiscal.
- 2.0 formats decreased -25% by $2.4 million to $7.1 million giving back two quarters of growth.
- Rec Provisions stabilized to $3.1 million QoQ from $3.8 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 $2.3 million -4%.
Medical is consistent at 24-63-16% split with flower-oil-2.0
- Medical Dried saw flat at $9.7 million -4% to $9.7 million.
- Oil saw a $2.2 million decrease or -8% to $25.5 million.
- 2.0 formats saw a $2.4 million increase or + 58% to $6.4 million
Gross medical was $40 million post-excise, flat QoQ.
Other Revenue was $47 million down $2 million QoQ or -3%.
Adult Use Revenue: Peer and Trend
Provisions are included in the above.
Canopy’s is in top position in Adult Rec in Canada, Retail sales accounted for $18 million of sales. Without B2C, CGC sales would be $43 million. Hexo is likely to pass them in non-retail sales with Zena, 48 North and Redecan added.
Medical Revenue: Peer and Trend
Canadian medical has stabilized in the $13-14 million sales range at $13.7 million this Q, no change QoQ. ACB remains the market leader followed by Canopy.
International medical sales were flat at $26.5 million a high-water mark.
WE HAVE SEGMENTATION. The above is simply cannabis GM%.
They actually provided segmentation Q1-Q3 F21 in the presser but for some reason (snicker) they did not include the segmentation for Q4 in presser, and even in MDA you had to do gymnastics to get the Q4 by reading presser and then deducting Q1-Q3 from MDA annual.
Why?… Because it is as bad as we thought.
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 ten 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), and have not been in the +20% range since Dec 2018.
The combined GM for the past two fiscal years is $35 million on sales of $946 million, for a GM of 3.6%. Other CPG has totaled $105 million in GM over two fiscal periods. Cannabis has -$70 million.
Bruce Linton was fired July 2019 right after March 31, F2019 annual earnings were released. This is his mess.
Ok, here is a riddle that I cannot unravel:
They indicate that they had $66.4 million in restructuring and unabsorbed overhead YTD. From MDA:
- Restructuring charges totaling $15.6 million recorded in the third quarter of fiscal 2021, relating primarily to the closure of several of our production facilities in Canada as described above in “Recent Developments”.
- The impact of operating costs relating to facilities not yet cultivating or producing cannabis, not yet producing cannabis-related products or having under-utilized capacity. In the nine months ended December 31, 2020, these costs amounted to $50.8 million and primarily related to (i) start-up costs associated with our gummy production facility in Smiths Falls, our facilities in the United States, and our greenhouse in Denmark; and (ii) under-utilized capacity associated with our chocolate, beverage and vape production facilities in Smiths Falls, and our indoor facility in Newfoundland prior to its closure in early December, as discussed in “Recent Developments” above;
They have changed how they report this.
- An increase in operating costs relating to facilities not yet cultivating or producing cannabis, not yet producing cannabis-related products or having under-utilized capacity. In fiscal 2021, these costs amounted to $60.7 million and primarily related to (i) start-up costs associated with our gummie production facility in Smiths Falls, our facilities in the United States, and our greenhouse in Denmark prior to its closure in the fourth quarter of fiscal 2021; and (ii) under-utilized capacity associated with our chocolate, beverage and vape production facilities in Smith Falls, and our indoor facility in Newfoundland prior to its closure in early December. Comparatively, in fiscal 2020 these costs amounted to $39.6 million and primarily related to startup costs associated with our advanced manufacturing and beverage facilities in Smiths Falls, our greenhouse in Denmark, under-utilized capacity associated with our KeyLeaf extraction facility, and costs associated with our 2020 Canadian outdoor harvest.
- Lower production output, particularly in Canada, to align with expected market demand. Lower production output, coupled with our fixed costs representing a high proportion of our overall cultivation and manufacturing cost structure, resulted in the under-absorption of these fixed costs and an adverse impact on gross margin in the current fiscal year. In connection with these changes to our production strategy we also adjusted our cannabis production profile to focus on higher-potency strains which are more in-demand, resulted in the recognition of additional inventory charges, predominantly in the first quarter of fiscal 2021.
- An unfavorable product mix in fiscal 2021 due primarily to an increase in the volume of value-priced dried flower product sold in the Canadian recreational cannabis channel, compared to the prior year
OK, they are no longer breaking out unabsorbed overhead. But they do indicate a restructuring charge of $10.3 million in Q4. If we add the Q4 restructuring charge to the 9-month YTD we get $76.7 million less than what they report at $60.7 million, $16.7 million less than it should be.
I do not know what they have done here.
Table 4: Gross Margin Segmentation
What I said last Q:
They do not provide any GM breakdown by segment. But think of it this way… if their unsegmented “Other Revenue” has a GM of 40% that would be $21 million in GM. Does that mean cannabis is only $4 million in GM or 4% of sales?
Segmentation has arrived. Boy howdy, I was close last Q. Cannabis GM last Q was $7 million or 7% of sales versus my guess of $4 million and 4%. Other revenue was below my 40% and $21 million at 35% and $17 million.
GM has been brutal on cannabis business at -5% for the Q (+5% if we back out $10 million restructuring charge) a drop from an anemic 7% last Q. Cannabis GM for the year was 2% of sales and ranged from -9% to +13%.
Other CPG had a GM of $15 million or 33% last Q. GM was down QoQ from $17 million and 35% in Q3.
To get to the mythical 40% GM both segments need to improve dramatically. Will a clean slate on F2022 get them there? I am very doubtful. Even their Adjusted GM has never topped 30% and Other revenue has only topped 40% for one Q and has trended lower since. So, unless Other CPG GM improves Cannabis will need to be greater than 40% to get there.
Gross Margin: Larger Peer Group
CGC is the in sixth place in this peer group.
Gross Margin: North American Peer Group
I do note that Tilray and Aphria have a substantial portion of non-cannabis lower GM% business in their sales mix.
SGA & SBC as % of Sales: Trend
Note: Asset impairments and the like have been moved to Other Income/Expenses to maintain peer comparability.
Trend lines reversed in the Q.
Selling expenses increased to $60 million from $54 million, an increase of $17 million over two Q’s. They ramped Martha Stewart Gummies and Biosteel in the Q. They need to get sales follow through or this will be more spent money not an “investment”.
G&A expenses were stable at $52 million. The prior Q had a QoQ decrease of $18 million. Have they run out of gas? Not good, seeing they expect to SGA savings of $45 million by end of F2022.
Transaction expenses $5.6 million as they purchased Ace Valley versus $3.1 million QoQ. With purchase of Supreme this will likely increase.
SBC was relatively unchanged at $19 million from $20 million
For F2021 Selling, G&A and SBC all exceeded Gross Margin.
SGA and SBC total 88% of sales, an increase from 83% last Q.
R&D increased QoQ to $16 million from $14 million. Continued work on yet to be launched beverages, vapes, gummies and CBD.
Depreciation of non-production facilities decreased to $16 million from $21 million QoQ.
Total Opex was $167 million versus $164 million last Q. This represents 113% of sales.
SGA & SBC as % of Sales: Peer
CGC is highest in selling expense, second best in G&A (given scale, that makes sense), and second worst in aggregate.
Net Operating Profit was negative $157 million versus negative $140 million last quarter. The $15 million decrease in GM and the increase in Opex are the reason.
NOP for F2021 ranged from -$140 million to -$160 million per Q. Consistent but not in a good way.
+NOP Breakeven: Canadian Peer Group
At current GM% and OPEX$’s CGC needs 1,600% increase in sales to hit +NOP. As the denominator for this equation is GM%, this is getting wacked with the further decrease in GM% this Q.
+NOP Breakeven: North American Peer Group
Other Income and Expenses:
This was -$454 million versus the last Q -$705 million.
- Asset impairment of $74 million versus $400 million last Q. Hopefully this is behind them.
- Expected credit loss on financial asset of $1 million, add that to the $109 million last two Q’s all PharmHouse related. Investment, DIP, and other advances.
- -$12 million loss on equity method investment versus -$0.7 million last Q
- Other loss (below) of -$367 million versus -$290 million last Q. Price increases in Acreage and TerrAscend the main contributors, as is the increase in CGC stock price which increase value of STZ warrants.
Other Income Tables from Last two Q’s as comparison.
Interest expense ramped to $5 million from $1 million and should quadruple next Q with a full Q of the new term debt.
Subtract $5.0 million in tax and you get a Net Income of negative $616 millionversus negative $829 million last Q.
NCI was $74 million to the good. They got there by selling Rivers.
- BioSteel (CGC owns 72%) For the Q4 had Negative Income of -$6.7 million a slide from last Q -$6.3 million and lost $28 million for the year.
- Vert Mirabel (CGC owns 55% increasing from 41% last Q with divest of Rivers): For the Q4 had Negative Income of -$26 million a slide from last Q +$2.2 million and lost $36 million for the year.
EBITDA went from -$68 million to -$94 million this Q a slide of $26 million, giving back all the $18 million improvement last Q.
GM, net of impairment for restructuring, was the bigger driver sliding $20 million with cash Opex increasing $6 million.
At the 40% MYTHICAL GM, with current SGA & R&D, they would need Q sales increase of $172 million to cover it, over double current sales.
+EBITDA Breakeven Canadian Larger Peer Group:
Using current GM% and cash OPEX$’s, CGC would need an incremental increase of 956% in sales to post +EBITDA.
+EBITDA Breakeven North American Larger Peer Group:
Cash Flow Statement:
Cashflow from Operations: Trend
- Cash used in operating activities $97 million (net of above)
- Cash Used (generated) in investing activities $555 million.
- Cash provided by (Source) in financing activities $996 million (the USD $750 million term loan)
- Net increase (decrease) in cash and equivalents $330 million.
Balance Sheet Items of Note:
- Cash and marketable securities total $2.3 billion an increase of $706 million. Loan proceeds would have been approximately $925 million.
- Below is Gas in the Tank… CGC still has an oil tanker.
Gas in the Tank: Trend
- Total inventory is an industry leading $368 million -$26 million for the Q. They indicate they outsold their harvest in the Q. They no longer give harvest or sales figures, so you will have to take their word for it.
- Finished Goods is $88 million an increase from $70 million from last Q. FG will include retail inventory at stores.
- WIP was $224 million down $31 million.
- Raw Materials was down $14 million to $56 million.
This is the lowest GAAP inventory.
Sold vs Inventory and Production Costs vs Inventory:
On a GAAP basis CGC has 2.9 Q’s of inventory an improvement QoQ.
Cannabis $ Inventory to $ Sales; Peer and Trend
- Canopy and Cronos are reporting as per GAAP so no IFRS fluffing. A good trend line forming.
- PPE takes $73 million hit as facilities were closed and sold. PPE is now $1.1 billion.
- Goodwill and intangibles decreases an aggregate of $86 million with closure of facilities and totals $1.2 billion.
- Long term Debt increases $953 million
- Acreage liability increases $150 million to $600 million with Acreage increase in stock price
- Warrant derivative liability increased $200 million to $616 million. Constellation Warrants. Increasing due to CGC stock price increase.
- Share capital increased $380 million to $7.2 billion as Constellation allows others to finance CGC.
What I said last Q:
A small “p” progress quarter. If they were not in such negative territory, it would likely be leaning to a capital “P”.
Sales increase is largely being driven by Other Revenue and Non-Canadian revenue. Until they get their facilities running at rate that unabsorbed overhead will be absorbed these issues will hang around for a while.
Aggregate cash Opex saw a decent decrease but much more is required.
Until SGA is brought more in line AND a reasonable GM is in hand (likely not for a few more quarters), this oil tanker will move slowly.
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.
That’s all I got.
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.