VIDEO: Canopy Growth Corp CEO Bruce Linton on the State of the Sector and Where it’s Headed
Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1) CEO Bruce Linton talks about what’s going on in the Cannabis sector. He talks to James about the affect of American politics on the business, potential NASDAQ listing, revenue opportunity and more. He touches on how Cannabis producers have created tremendous economic development. Jobs are created, infrastructure is being reused and recycled and many people have taken the opportunity to make a better life for themselves. He argues that for the near future, business execution in upgrading their product is key for creating margins and value. He also insists that IF American federal legislation becomes favourable and fully legal – Canopy is ready to be “all over it”.
James West: Bruce, we’re live today. I don’t know how you feel about that. How’s it going?
Bruce Linton: It’s going great. And how are you, James?
James West: Going fantastic. What can we talk about today? What’s happening in the land of Canopy?
Bruce Linton: Well, so I just presented at the Toronto – well, I guess maybe the Canadian Economic Club, which is kind of neat, because yesterday’s host or guest was the Minister of Finance Morneau, and tomorrow night the speaker is Ms. Mulroney in the context of becoming or wanting to become the leader. And in between, a marijuana person. And I think I drew better than both of them.
James West: Well that would not be a surprise.
Bruce Linton: Well it is kind of neat, because –
James West: Cannabis is always more interesting than politics.
Bruce Linton: It is, but it was also good because it allowed me to talk about really what I think is a good conversation, which is, when you start a cannabis company, you actually immediately have done something called economic development. And the reason is, almost all effective cannabis companies are in places which have empty buildings, they have high unemployment rate, and they have a ton of electricity on the grid that’s not being used.
Which means you have communities that welcome you. So when you think about that, where we landed across the country, you know, you’ve got Yorkton Saskatchewan, Smiths Falls, we took over an empty greenhouse down in Niagara-on-the-Lake, we move into St. John’s Newfoundland, into Fredericton…so the pattern kind of continues, but then you can understand why internationally, every person who’s elected anywhere has the job of making sure the people who vote for them have work and income and the capacity for a better life.
So when you think that way, you can understand why almost every jurisdiction views this as an opportunity of economic development rather than the importation of cannabis. And because of the governance globally which allows them to choose where they get it or build it or buy it, it starts to make sense.
So when I was speaking to the economic club, you know, you start laying that on, and they start talking about the fact that everyone who works for us has equity, which means that all of the people who build the company actually become no longer just unemployed, they actually create some capacity to improve their house or buy a house, and that you sort of create a much more sustainable community because you’ve upgraded everything.
And so I laid all that out there, and I said well, and this is in the context of you know, me having walked around that Hershey building with nobody else around going ‘it’s pretty big’ to now, it’s too small.
James West: It’s too small. So you built out the other 400,000 square feet.
Bruce Linton: Yeah, it’s all under construction. In fact, we’re looking at permitting for about another 150,000 square feet there because it’s a large site, which would bring it to about 750,000 square feet indoor, which is a nice size for your kind of home base. But it all kind of fits together. So when you’re at an economic forum – I didn’t have anybody asking me, you know, what strains are you growing now, they really wanted to understand that, they wanted to understand about the upgrading of our products. How do you take cannabis as a plant, turn it into an ingredient, turn the ingredient into finished consumer packaged goods, and/or do medical research so you can actually get to the end point of medical claims and RX status prescriptions.
And so you know, that forum, I think, is kind of where a lot of the sector is starting to think about this, which is: how do I create margin and value and defensibility through scale and structure, rather than just trying to pop it out the bottom at the lowest price? Because there’s not usually a very strong correlation with the cost of an ingredient and the price of a finished good.
There’s a long answer, James.
James West: Yes, that is long-winded, but very detailed. I like that. So okay, let me ask you about the Canopy strategy. Like, I see all these press releases: you’re doing BC, everywhere in the world. Is your strategy ideally to acquire a dominant market share in any market, and thereby block out competition over the long term?
Bruce Linton: So the strategy is, if it’s Federally legal, we want to be in the first couple, and we want to lead with the best combination. You can’t think about leading by shipping product, you’ve got to say, have I been building every day a methodology, an intellectual property suite, that allows me to be the best in any market that’s Federally legal? So that’s why we’re in Denmark to Germany, Spain to Brazil, Chile, Australia; and we’re not in the US, and I’ve harangued with you before, and I’m really still puzzled. Like, we looked at putting ourselves onto NASDAQ and did all the preparatory work in October, but we were also a little busy, there’s this company that makes quite a lot of beer and wine, and so we said, like, we’re going to have 12 variables, but 15 may be too many, so let’s just park it for now.
But I think NASDAQ’s done a good job of filtering who’s following the rules, and I don’t believe NASDAQ has a marijuana policy. I think what NASDAQ has is, if you’re a company that follows rules in the jurisdictions that you operate, you can list there, and that means that they haven’t made exemptions or special considerations for marijuana.
James West: Right.
Bruce Linton: The problem is in Canada, our regulators, which to my experience don’t do a lot of the regulating thing, actually have a marijuana policy that allows you to tell people ‘I’m going to break Federal laws’ and it used to say ‘and I’m not likely to get in trouble because they have this Cole Memorandum’. But when that kind of disappeared, they said, probably still not going to get much trouble. And my concern is, it keeps institutional investors out, but it also means, all it takes is Mr. Trump, in about 140 characters, to cause a lot of problems for all of us because his Twitter could say ‘Not happy Canada is funding all the marijuana operations that Mr. Sessions wants to talk to’.
James West: Well, Trump and Sessions are pretty much at loggerheads. I don’t know how much credibility the government of the United States has left in that regard.
Bruce Linton: Well, I’m not condoning it being illegal; I’m recognizing that it’s not legal.
James West: Right.
Bruce Linton: And so the credibility isn’t really political, it’s practical. They didn’t rescind the law; it is still Federally illegal, which is why you can’t list on NASDAQ if you’re a US company participating. It seems kind of odd to me when you speak of credibility: how is it you can be told you can’t list in your resident country for the activities you do in your country, but welcome to Canada, we love you here.
James West: Okay. So let’s say Jeff Sessions gets the boot because they’re fighting, and Trump recognizes that he needs wins because he’s on the popularity backfoot to say the least, and he looks at cannabis and says “I never had a problem with this. Sessions had the problem, he’s out, new guy in, Federally legal.” How fast –
Bruce Linton: We’re all over it. All over it. But we’re not – I don’t think the current model of production and products match with what a Federally legal system looks like. I suspect a hillside in Colorado is like the least efficient place to produce cannabis.
James West: Right.
Bruce Linton: So I think you’d probably find there’s quite a lot of flat areas that become less likely to grow corn and wheat and likely to grow a lot of marijuana, and I think the product formats and the regulatory structures, we would be on it.
James West: Okay. What about a place like Colombia?
Bruce Linton: To an extent. What you want to make sure, in my analysis, you have to make sure that whatever you do in any country actually has a domestic market that supports the capital you invest, because if everybody’s going to export, I don’t know who they’re exporting to. You can’t, under treaties, export for anybody who’s having a party. And you don’t get the right to tell a country they have to take it under medical. So you’ve got to say, like, I would do any of these countries so long as the domestic opportunity will give a rate of return on invested capital that makes it sensible.
James West: Sure. Okay, so let’s talk a bit about the market generally. Stocks have come off up to 30, 40 percent since mid-January.
Bruce Linton: Oh, you’re such a downside. Or if you bought in August you’re only up 5 times. If you bought in November, you’re only up 2.5 times. Oh my god. I was going to retire after two months of work, I planned – come on, James.
James West: We’ve got to address the idea that there’s a lot of capital out there sitting there going, oh my god, it’s been over-valued, the correction is in, that’s the peak we saw and it’s over in terms of the big unicorn formation.
Bruce Linton: I think that’s going to be true for a bunch, right? And the reason is, suppose you just got a bunch of money and now you’re going to grow cannabis. I would ask over the next two years, to whom are you selling all of that cannabis?
James West: It’s a very good question.
Bruce Linton: Because I think provinces are structuring acquisition agreements for cannabis which will allow them to have two years of certainty, and if you wish to knock on the door and say ‘I have some’ they’ll say, ‘can you come back in three years?’ And so I think that you’re going to start to see stratification based on distribution or offtake. Having a lot of marijuana is either going to be a huge asset or a hell of a problem.
James West: So a company that can grow it, extract it, package it and export it to GMP standards to an existing channel is going to be one of the winners?
Bruce Linton: I think so, because at the end of the day, you need to sell people things in a format that’s consistent and that a shelf doesn’t go empty, and to be able to evolve it upwards so that the regulators actually have differentiated a product, which is when brands really begin to thrive.
So the branding activities right now for everybody is doing it, which isn’t everybody, are really kind of pre-branding. You’re forming stuff up. But you’ve got to have brands, you’ve got to have production, you’ve got to have offtake agreements, you’ve got to have research, you’ve got to have patents. Like, this is becoming, I will call it, a somewhat sophisticated sector for the ones that I think next year will have more value than this year.
James West: Right. The European, the Euro Zone, different parts of Asia…I mean, there’s potential there for a market to develop, but in Europe especially, where you guys have made a bit of an investment, what is actually the opportunity in terms of number of potential consumers of a legal, medical product? I mean, Germany’s legally medical, but not everywhere is.
Bruce Linton: Yeah, so like, we were the first ones to export to Germany; we’ve been working, it’s going to be two years this July. So the first Canadian, second in the world company to do that. And we’ve been investing before that for two years. So I think what you’re going to find is, the difference in the market is about 10x the size of the market of Canada. That’s because we have 35 million people; they have about 360 million people through most of Europe. And I think if you said well, if Germany, Italy, Greece, Czech Republic, Demmark, clunk clunk clunk, if they all say that it’s on, and Poland, etcetera etcetera, I think you basically can include at a Federal level over some reasonable time frame, every country in Europe.
James West: Okay.
Bruce Linton: And that means that the ones who did the Brexit can still drink beer and maybe never have cannabis because they’re kind of the outliers in this whole thing.
James West: Yeah, right, right. Cool. So then, what’s next for Canopy? What’s the big event of 2018?
Bruce Linton: I think execution, right? It sounds pretty un-sexy, but still.
James West: More execution.
Bruce Linton: 2018 is just about continuing to execute, because if you have an obligation supply, if you execute that well, then you’re going to have an option to have more variable products, more demand. Execute in Canada.
I think internationally it’s about establishing methods by which each of the countries would prefer to have us in their country than not. And so that’s really kind of where the game is.
James West: Okay. Last one’s a tough question: Al Rosen, the famous forensic accountant who is uniformly critical of the accounting of the marijuana sector, categorizes the financial statements of marijuana companies generally, without specifying anybody in particular, as ‘audited financial hallucinations’. And he does that based on the accounting for biological assets, and how IFRS allows you to inflate the value of a biological asset into the point where exists on the balance sheet as positive cash flow practically.
Bruce Linton: Yeah, you know, it sounds wacky, and I will admit having spent many quarters and a lot of time and money with Deloitte. I actually think I’ve moved from where Al was to where I look at it and it actually has more information for shareholders than under GAAP. What I mean by that is, the reason biological assets shows up as a ballooning thing, it looks like you actually have negative costs of sales is, if this quarter my building is 5,000 square feet and I have this many plants, it should indicate what those plants will have in the future so if you’re investing now, you’ll know if I have something.
But if in the same period I go from 5,000 square feet to 10,000 square feet and then I go from 10 to 20,000, I’m continually increasing the asset base, which is, I’m increasing into the future the value the shareholders will realize. And what I think you’re going to find is that as we get up to sort of our 6 million square feet of operating, it will then sort of normalize and stabilize, and you’ll be able to see a very predictive model of, are the assets and the inventory and the finished goods all making sense.
James West: Are they being sold.
Bruce Linton: Right. But what he’s really critiquing is that IFRS and biological assets are very difficult to comprehend in a really rapid-expansion, rapid growth world. So I think the answer is that we should all stop what we’re doing and stabilize and grow slow, or he should get used to the accounting for something which recognizes there is a process of creating the value, and it’s called living, growing plant. And if you stabilize the number of plants you have now, you’re probably going to be useless and a dumb business in about six and 12 months. And so really, we have to keep doing that, and in three years, his criticism will have absolutely no merit because we’ll have actually all created the appropriate asset base.
James West: Okay.
Bruce Linton: So it’s about actually, the bad news is about rapid growth, success – I remember about two years ago, you know one of the other criticisms accounting? Just after Trudeau got elected, my analyst called and somebody say, you have a problem with having too much inventory.
And I remember my response was, the Liberals just won. I don’t anticipate that being a long-term problem. But people’s perception of inventory value, capital assets, IFRS, you know, for a while, we were all supposed to become profitable right away. Well again, I hate to tell you, but I was like, if you wish to buy a highly profitable company that pays a dividend, call a bank. What we’re doing is creating a platform that has scale.
James West: Right.
Bruce Linton: And so all these accounting questions aren’t irregular as a process, they’re just, it’s irregular to have such a rapid-growth, high expansion business sector.
James West: So you’re not concerned at all with the threat of over-supply and a subsequent price deterioration for cannabis products globally, once all of this capacity is built out and feeding the marketplace?
Bruce Linton: Well, I think it’s going to be a big problem for some people, and I think it’s going to have a bunch of grandmas crying because they bought the wrong stock.
James West: So we’re back to the distribution channels.
Bruce Linton: But if I’m only selling ingredients, I have limited margin opportunity. Do you think the liquor authorities of all of Canada in 2019 are going to have us just selling what we sell, or selling gummy bears, or selling things where we infuse in this beverage cannabinoids, and I sell you a nice bit of glass, a beautiful cap, maybe it goes pfft when you open it, a few things like…that’s where margin changes the amount of cannabinoids in finished goods change, and so the cost of the inputs actually if they go down mean we can make more profit.
I think you have to look kind of, what is going to become, not what is.
James West: All right. And on that note, I think we’ve talked enough for a live stream for one day. Thanks so much again for your time, Bruce.
Bruce Linton: Thank you, sir.
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