Canopy Facility Shutdowns, Layoffs ‘Not a Surprise’

- March 5th, 2020

After trading hours on Wednesday, Canopy confirmed it was closing its facilities in Aldergrove and Delta, BC, eliminating about 500 positions.

Investors shouldn’t be apprehensive about the recent facility shutdowns from the biggest cannabis name in Canada, one portfolio manager said.

“It’s a big announcement (but) I don’t think it’s a surprise,” Charles Taerk, CEO of Faircourt Asset Management, a sub-advisor to Ninepoint Partners’ cannabis-focused fund, said in reaction to the shutdown of operations at two key facilities in British Columbia (BC) owned by Canopy Growth (NYSE:CGC,TSX:WEED).

After trading hours on Wednesday (March 4), Canopy confirmed it was closing its facilities in Aldergrove and Delta, BC, eliminating approximately 500 positions.

In an interview with the Investing News Network (INN), Taerk said Canopy’s move to end its operations at these facilities is ultimately a positive one.

He noted that rightsizing plans for Canopy had been previously discussed with the February release of its Q3 2020 results.

In an earnings call with investors and analysts at the time, CEO David Klein said the firm wanted to streamline its business in the coming months.

“Mindful of future market growth, we’re prepared to take initial steps to rightsize our business over the next 90 days,” Klein said during the call.

Aside from cost cutting measures, Taerk said that Canopy’s BC operations were allegedly rife with issues of quality concerns and inconsistency since the company took over the two facilities in 2018.

Canopy, for its part, saw a drop in the open market in Toronto. On Thursday (March 5), shares fell over 5 percent nearing the end of the trading session with prices sitting at C$22.48 as of 2:45 p.m. EST.

The Ontario-based producer also announced it is scraping a plan to build a third greenhouse in Niagara-on-the-Lake and expects to record about C$700 million to C$800 million in pre-tax charges for the quarter ending March 31.

“Today’s decision moves us in this direction, and although the decision to close these facilities was not taken lightly, we know this is a necessary step to ensure that we maintain our leadership position for the long-term,” Klein said in a press release.

Canopy told investors that these recent moves, which were done in order to slim down operations, will aid to “align supply and demand while improving production efficiencies over time.”

The combined size of the two BC facilities comes up to about 3 million square feet of licensed cultivation space, Canopy Growth said, originally retrofitted to keep up with projected demand. In its November MD&A filing, Canopy said they had approximately 5.4 million in licensed cultivation capacity, meaning that the closures have more than halved its production capacity, dropping it by 55.6 percent.

Struggles facing the Canadian cannabis sector, including regulatory hurdles and a small retail space, have somewhat suppressed the industry’s growth.

“Nearly 17 months after the creation of the legal adult-use market, the Canadian recreational market has developed slower than anticipated, creating working capital and profitability challenges across the industry,” Canopy Growth noted.

Canopy plans to focus instead on its outdoor production site for more cost-effective cultivation.

Taerk said these moves by Canopy are indicative of a shift to productivity over size for the industry.

The fund manager mentioned that other larger licensed producers in Canada, such as Aurora Cannabis (NYSE:ACB,TSX:ACB) and HEXO (NYSE:HEXO,TSX:HEXO), were on a quick path to build cultivation.

Now, however, the winners of the space will be the ones that are keen to carefully use capital.

“To be the biggest isn’t necessarily going to make you the most efficient,” he said, adding that some cannabis firms have gone on to become cashflow positive by lowering operation and cultivation costs. “They’re showing shareholders that they are better stewards of capital.”

The pressure felt across the sector is something Taerk said is largely a result of a tight capital market.

“I think that there are many companies that are finding it difficult to operate in this capital constrained environment,” he said. Despite the difficulties, Taerk explained that investors are willing to contribute to companies that can prove they’re generating revenue.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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