Canopy Growth Corp (CVE:CGC) (OTCMKTS:TWMJF) returns to discuss subsidiary Tweed’s deal with rapper Snoop Dogg, and discusses the potentiality for growing the marijuana business internationally as recreational marijuana becomes federally permissible in other jurisdictions.
Listen to the podcast interview with Bruce Linton:
Full Transcript of the Podcast Interview
James West: Bruce, thanks for joining us again.
Bruce Linton: Thanks, James.
James West: Bruce, why don’t you give us a snapshot on what is the deal with the deal with Snoop Dogg?
Bruce Linton: Well, for about 18, almost 24 months, we’ve been working with his people so that we can come to a conclusion on what would happen over the next three to five years, if we made an exclusive relationship. So what was announced on Thursday was that we’ve started, but we didn’t fully set out everything that we want to do, and over three years we’ll invent things to do. But really, it starts with a brand announcement that says, Tweed is really focused on being ready for rec access, and Bedrocan is the pure play medical.
James West: Okay. So focusing on that for a sec, Canopy, you’ve obviously really battened down the hatches on distinguishing the two brands, Bedrocan and Tweed, into medical and recreational. What is your anticipation of the timeline for that happening in Canada?
Bruce Linton: I think the big factor driving it right now is, the more that these, I don’t want to just call them dispensaries, I’ll say the actual term, quick access medical marijuana sales points pop up in every community, the more I would say accelerated the intent of the Federal Liberals will be to get in place their methods of putting it out recreationally. And the reason I say that is, there is no lawful source of supply, and with the number that’s proliferating, obviously there’s a pretty good business for somebody growing lots of marijuana illegally and selling it at these venues. And I think that’s a big agenda driver on the Liberals’ program to get it done sooner than later.
James West: Sure. I’ve noticed that they have actually been cracking down in BC and denying licenses to a lot of dispensaries, or short term access locations as you call them. Is that part and parcel of what’s going to accelerate the legalization for recreational purposes, do you think?
Bruce Linton: Maybe. There’s been a bunch of that, and things like, there have been really clear statements in the last week from the Minister of Justice and other areas that say the rules have not changed. This is not a legal activity, and it’s not coming from a lawful supply, and it has no credibility in terms of content or what it doesn’t have. And so I think the number of people jumping into that sort of business is really going to cause that sort of business to disappear, because as soon as recreational access is defined, distribution points are agreed, and taxes are set, you realize that business is going to be closed pretty quickly, because there is not even, you can’t use the word ‘gray’ whatsoever, even though it seems to be quite clear what’s not permitted.
James West: Yeah. So what do you think of Premier Wynne’s strategy in Ontario to sell marijuana through the LCBO outlets?
Bruce Linton: I think it was bigger news that maybe there was a transport truck broke down on the 401, than her announcing that. It’s really, we want to put it out wherever, but no one even batted an eye, because if the goal is to make sure the taxes are collected, that the product’s sold and that it’s legal, and that kids under the age of 19 don’t get it, that sounds like something the LCBO’s good at.
James West: Sure. They’ve been doing it –
Bruce Linton: What people don’t know is that these are large organizations with really excellent training systems as well. So if you want to introduce a new line of product and you want to make sure that that product’s understood by the consumer, there’s a very good training protocol that they can implement. So I think for the consumers’ understanding of the product and the government’s goals of the product, it seems pretty straightforward.
James West: Okay. So in January we noticed you announced your true compassionate pricing plans stipulating the sale price of $5 per gram for patients with limited insurance. How does that compare with Bedrocan’s normal pricing?
Bruce Linton: When we bought Bedrocan, everything was 7.50, and it had been imported from Holland. And so the first crops produced here were sold essentially as we were acquiring them. What we want to do with Bedrocan is run the building full time and serve as many medical patients as possible. And so $5 pricing, it works in that this is medicine and we’re kind of sharing the pain with the patients while hopefully helping manage their pain.
Our goal behind that is, we’re spending a lot of cycles on, call it the lobbying to insurance companies, politicians, so that people with plans with limited income have this treated as any other product which they would use for the purpose of managing pain or other symptoms. So it’s kind of like a bunch of things that go in concert, and it says this is medicine. This is not anything else, and ultimately from an investment perspective what you like to know is, the more we run the building, the less the cost per gram, the more the market share we can have. So it’s good for the patient and good for the investor.
James West: Sure. So has it been effective in attracting a broad range of, call it, lower income patients?
Bruce Linton: I think we even underestimated the price sensitivity of getting quality, consistent product. So our biggest challenge when we did this was, we have pretty good infrastructure for the phones ringing and being answered, and we got annihilated for a few days. So yeah, it has been well received, and I think over the short term, medium term, when we’re speaking to physicians and there’s rollout oils and the whole this is medicine, the clinical trials, it all kind of hangs together, and you will never see the Bedrocan product offered in a recreational format. Meaning that if the LCBO or SAQ or BC Liquor was the point, you’re not going to see Bedrocan in those stores. And so it is intended to be played in exactly those clearly set out kind of divisions.
James West: Okay. So from your experience, to what extent do you believe price is a factor in marijuana consumers’ product selection versus other aspects like brand and celebrity endorsements, etcetera?
Bruce Linton: Well, I think as long as you can first consistently deliver good product, you can have differentiated prices. When you start to add celebrity support, you start to add a lot of the work – the reason that we’ve announced a partnership with DNA Genetics is because of the breeding programs that we’re implementing. Over time, if you start to create really unique strains, those differentiate on price. I think we find the margin of price really differentiated when you convert the plant material to an oil, and then the oil to finished goods, and those finished goods could be a soda, they could be an edible, but that they’re done in a way that the packaging, the professionalism, everything is consistent or high quality as you could possibly expect – that’s where you get both margin and, I’ll call it, price differentiation.
James West: And so how is that rollout of the oil products coming? I haven’t seen anything in the news about it.
Bruce Linton: So we’ve been inspected. We are waiting for the (unintelligible) [0:07:00] to confirm we can sell, but what we’ve been able to do in the intervening period is, we’ve been running two shifts for probably four and a half months producing and storing the oils. And so really what we wanted to do was make sure that we had, when we get our license, both a system for producing quantity and a quantity of inventory so that you don’t end up having the system happen like it did before, which is people kept running out of the dried cannabis. I think that’s not going to happen this time.
James West: So you’ve learned from that exercise.
Bruce Linton: Putting it on the shelf and having the shelf empty two days later is not the way to launch something.
James West: It’s a good problem but a bad problem, I guess.
Bruce Linton: Exactly.
James West: Okay. So what’s the status of your operations in Niagara? How much is being produced there now, relative to in Tweed, Ontario?
Bruce Linton: Yes, we had an announcement, I think it was September, that 100 percent of the facility had met the security and other control conditions. Health Canada said we could use it all if we wanted, but we were, at that time, still having to manage to move the plants back and forth between Smiths Falls for harvesting. And we were spending quite a lot of time and money to build out the plant facility, which had a vault and everything which is now being completed.
We invited Health Canada at the end of January. They came down and saw us, I guess about a week or two ago, and we’re hopeful they’ll give us the right to use that building for trimming so that the whole property can be processed there, and then we’ll expand operations. This winter grow, we’ve gone from using about 36,000 square feet last winter to, I guess we’re about 95,000 square feet that we’re using out of the total 350,000.
So we are expanding a little bit, not all of it at once.
James West: Okay. So your Q3 financial statements are probably due out in the next 10 days here, by my estimate. Can you give us a hint of what to expect in terms of earnings and profitability?
Bruce Linton: Well, we don’t want to take the tension off the trade by giving guidance, so we won’t doing that. But we have been, I think, fairly clear that we’ve been enjoying really solid and consistent growth in terms of client acquisition and the frequency of purchase. So at the last quarter, recall people asked a little bit about how do you try to manage your business, what do you think about for infrastructure? And we tend to think about 30 percent at least quarter over quarter, meaning Q2 to Q3 to Q4, onboarding of patients, because that’s the big thing: you’ve got to make sure you’re educating the doctors and onboarding the patients and getting that first order out efficiently. If you slow down and fall down, then the whole chain breaks. It seems like that’s gone well.
James West: Okay. So is that a sort of commensurate number, 20 to 30 percent new patients, with the actual growth in revenue, would you say?
Bruce Linton: Yeah, and if you try to do more than – as the numbers go up, if you try to be more than 35, 40 percent growth from Q1 to Q2 to Q3, what starts to happen in absolute numbers is, you have different choke points. So one month it might be the call centre, but the next month it could be the shipping infrastructure, the pre-pack. So you can always kind of keep moving through these; it hasn’t been a single point where it chokes at the same time each month or each quarter.
James West: Okay. So since you’ve merged Bedrocan and Tweed under the Canopy brand, have you set your sights on any other Canadian producers as potential acquisition targets?
Bruce Linton: Yeah, you know, the whole point of putting the Canopy out at top is to have more infrastructure underneath, and there’s quite a few people out there that, I think, are at that stage where they were trying to decide to run on our own gun and should we move over, a lot more of them private than public. So we see lots of field calls pretty much every week, and I do a lot of site visits, but the next thing to come up, you want to do it with the leverage of a public equity, you know, it essentially makes it much less costly to acquire the next ones. So we’re on it, and it’s nice to have so many people call and say ‘we’ve always liked your team’. That’s right, that’s what you were saying before. There’s a lot of people looking over the fence now.
James West: Sure, that’s great. Do you have any plans to branch out in the US market, or is Canada where you plan to maintain your focus?
Bruce Linton: We’d like to do some stuff where it’s federally permissible, so I think there are other really good federal markets that are now opening up for medicinal and I think they’re going to be a lot more orderly in the US. They’re going to take similar plans that Canada has implemented. So I expect we’ll have some things out over the next few weeks on that, but it really is, the opportunity to dominate in Canada and use that strength to grow internationally; I think when you do that in any business, you start to have the ability to do really well. If what you’re trying to do is exit your own country because you’re failing, and find someplace to succeed, that almost never works.
So we’re pretty happy with kind of what we’ve got going here, and it feels like we could actually establish some other points of sale in those countries when they go through what we’ve gone through in about the next 18 to 36 months. We’re there in part of it, and we don’t sponsor a big company coming out of those countries because they’ve gone on challenge. And I think that we’re kind of ready for that.
James West: Okay, awesome, Bruce. Well, congratulations on your clear progress. Thank you so much for your time again.
Bruce Linton: Sounds great, James. Thanks.
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