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Canopy Growth moving toward pot-infused drinks

Canadian Press logoCanadian Press 2018-02-14 Armina Ligaya

TORONTO - Licensed marijuana producer Canopy Growth Corp. is already collaborating with the maker of Corona Beer on cannabis-infused beverages even though government regulations on pot edibles won't crystallize until July 2019 at the earliest.

Canopy's chief executive Bruce Linton is betting on the fact that sales and distribution of the drug in many provinces is being handled by liquor authorities, which he hopes will be open to adding cannabis in liquid form to retail shelves.

"We are on to specifics of brands, flavourings, formats," Linton told analysts on a conference call discussing their third-quarter earnings. "We're heading down, making sure we'll have great stuff by 2019."

His comments come as Canada's biggest licensed producer announced it was one of six licensed producers to sign a supply deal with Quebec's liquor board. As part of the agreement with the Societe des alcools du Quebec, which will handle sales of recreational cannabis in the province when it is legal in Canada later this year, Canopy will provide 12,000 kilograms of cannabis annually.

Recreational cannabis sales will either be handled or regulated by liquor authorities in several other provinces and territories including Ontario, Prince Edward Island, and Nova Scotia, where it will be sold alongside alcohol. In B.C., both private and public sales will be allowed, but retailers will get their supply from the government's wholesale distribution system used for alcohol.

"The persons running retail will have a very, very specific and direct impact on what gets retailed," Linton said in an interview.

Canopy's collaboration with U.S.-based Constellation Brands was a core part of a deal announced in October that saw the alcohol producer acquire a nearly 10 per cent stake in the cannabis company for $245 million.

Shares of the Smiths Falls, Ont.-based cannabis company were up as much as six per cent on Wednesday to $28.50 on the Toronto Stock Exchange amidst news of the Quebec supply deal and its latest quarterly earnings. Its stock was trading at $27.45 by the late afternoon.

Canopy more than doubled its third-quarter revenue compared with a year ago but fell short of analysts' expectations for even stronger sales, as Canada gears up for legalization of cannabis for recreational use later this year.

It reported revenue of $21.7 million for the quarter ended Dec. 31, more than double the $9.8 million earned in the last three months of 2016.

The results were driven by a significant increase in domestic sales as well as sales in the German medical market, Linton said.

However, the market was expecting quarterly revenues of $24.2 million, according to analysts surveyed by Thomson Reuters.

The growth came as Canopy's profits attributable to the company fell to $1.6 million or a penny per diluted share, from nearly $3 million or two cents per diluted share a year ago.

Linton said its profits were impacted by costs associated with its expansion plans and international ambitions.

"My business actually could be very profitable, right now," he said. "But I would limit the scope and size of the ultimate business."

Canopy said it sold 2,330 kilograms and kilogram equivalents of marijuana in the quarter at an average price of $8.30 per gram. That compared with 1,245 kilograms at $7.36 per gram a year earlier.

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The higher average price stemmed from the addition of more oil products, such as softgel capsules — which have a higher margin than dried cannabis — and the higher selling price of medical cannabis in Germany.

Cannabis oil sales accounted 23 per cent of Canopy's revenue for the latest quarter, compared to 13 per cent in the same period a year ago.

Canopy's adjusted earnings before interest, tax and other items was a loss of $7.1 million, compared to a loss of $1.4 million during the same period a year ago.

That figure removes the impact of international accounting rules for the agricultural industry that requires cannabis companies to record the value of their plants as income as they grow, before the product is sold, lifting the bottom line.

As well, the company's gross margins before fair value adjustments shrunk from 58 per cent of sales or $12.5 million, compared to 64 per cent of sales or $6.2 million in the fiscal third quarter a year ago.

That was in part due to operating costs associated with subsidiaries, such as its BC Tweed joint venture to develop greenhouse growing capacity in British Columbia, which are not yet cultivating or selling cannabis.

Companies in this story: (TSX:WEED)

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