December 18, 2018

Canopy Growth Corp (TSE:WEED) CEO Bruce Linton Discusses Rec Growth

Midas Letter
Midas Letter
Canopy Growth Corp (TSE:WEED) CEO Bruce Linton Discusses Rec Growth

Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) CEO Bruce Linton shares details of the company’s 2019 strategy. Linton discusses the significance of the infused beverage market and the clear advantage Canopy Growth has over its competitors as it draws on Constellation’s formidable beverage experience. Linton explains why the company’s deal with established German manufacturer Storz & Bickel is important for Canopy’s product development. He stresses the importance of Canopy showing profitability in the Canadian market within 18 months and exporting that model to other markets. He notes that players in the cannabis space have to be forward-looking and reveals that Canopy has already anticipated what will happen when derivative products are legalized in Q4 2019. Canopy Growth Corp has been busy in December, inking deals with flower cultivators and extractors like 48North Cannabis Corp (CVE:NRTH) (OTCMKTS:NCNNF), Valens GroWorks Corp (CNSX:VGW) (OTCMKTS:MYMSF) (FRA:7LV), and MediPharm Labs Corp (CVE:LABS) (OTCMKTS:MLCPF).


James West:   Bruce, welcome back.

Bruce Linton: Thanks James, good to be back.

[stock_chart symbol=”WEED:TSX” align=”left” range=”1Y”]

James West:   Okay, so recreational cannabis is here and we’re starting to see some inkling of what it’s going to look like on the balance sheets, which categorically is unimpressive so far.

Bruce Linton: Really? So glad we haven’t reported yet, but I think, but it’s you know, if you said how has it turned out? I think it got a better start than anybody could have expected and the reason is like let’s have a little memory. If I came here in June and went on your show the question would have been do you think they’re going to pass the bill in the Senate? and then July, August, September, October, 4 months later please have a channel nationally filled to have products available that have non-uniform stickers for the whole country. So, you have to have unallocated inventory up until probably October 1 because you don’t know who wants what, when.

James West:   Right.

Bruce Linton: You know, there’s been a bit of like a take off and maybe a few things but feels like it’s sort of gaining momentum. From a Canopy perspective, it feels like we’re actually getting better and better each day. Our ability to get those containers through, the quantities, the volume, the product mix right.

When we launched we put in what we wanted in the store, which is basic. Then we added what we think are kind of like the Canadian version of a gummy bear; Tweed gel caps uniform 2.5 up to 10 milligrams, better than a gummy bear because you won’t get a cavity, won’t get stuck in your tooth. It’s uniform all the time which means if you liked it in this form and this function, come back it’s going to be the same. Now we’ve launched our role product. That role product uses a method we had to invent because we didn’t see scale and speed and accuracy to the level we expected in any available products. So, we invented and patented a fantastic rolling process and now those are in the market and if you get them you’ll go “wow that is actually a really well-done job.”

James West:   Hmm, we haven’t tried them yet.

Bruce Linton: Yeah so, we have single rolls now and in January we’ll launch five packs and then we’ve got our packaging called bottling plants. So in Smiths Falls, we couldn’t move a building so, we just knocked it down and now we’re building a 197,000 square foot bottling plant.

James West:   For the anticipation of legalization of beverages infused with cannabis?

Bruce Linton: Yeah.

James West:   So you see that continuing on pace on schedule because so far the track record has been to more less stick to the schedule.

Bruce Linton: Well if you think about it the first thing we could sell was dry cannabis, which is principally for smoking and inhalation and that was a medical delivery mechanism. Remarkable because if the first thing we delivered was anything but that we’d never get that approved again. So now you say, well when they’re going to have a recreational market with an expanded product offering are they going to make it so that you can inhale something or you can drink something and I think every doctor and every person would say when it goes into my gut and through my GI it’s a lot easier process to deliver and live with than if I’m inhaling stuff, your lungs are little more delicate. Then if the platform remains which is we want to keep it out of hands of kids. Kids understand and adults do and the people regulating every authority of liquor that a bottle with a control cap system that’s clearly the framework of an intoxicant is from Mommy and Daddy, the gummy bear is for me.

James West:   Therefore very attractive to a child.

Bruce Linton: Yes. Well, but so you can just start to see like if you’re governing it isn’t it a lot easier to contemplate a drinkable beverage that doesn’t have any form factor or appeal to children versus chocolates and gummy bears. So, when you factor that way you sort of say, of course we should build that plant we are and Constellation is pretty helpful when you’re building a bottling plant. They seem to have quite a lot of those.

James West:   They’ve done it before.

Bruce Linton: Yeah. I just learned the other day they actually apparently crossed the border from Mexico to the US every day with about 200 rail cars of Corona.

James West:   Wow, that’s a lot of Corona

Bruce Linton: That’s a lot of Corona. If you’re going to jump a train that would probably be good train to jump. [Laughter]

James West:   [Laughter] You’d never die of thirst. Anyway so tell me about this relationship with Battelle. This is really intriguing to me because strikes me that against the wishes of the TSX on the superficial side, you are actively operating in the United States in the capacity of research and development. Yes, but still you’re operating as a cannabis company.

Bruce Linton: With the consent and request of the DEA.

James West:   And the FDA.

Bruce Linton: And the FDA but principally the DEA, which is the Drug Enforcement Authority, right. So, all it would took was two years of interacting so that Battelle, US DEA..and we didn’t just ship one, now we’ve shipped several times. Battelle is a company that unless you know, you don’t know anything about them because they’re like 12,000 people they’re researchers that are nationally distributed in their considered, you know, obviously topped tier research platform. And so what I think we’re doing is we’re advancing the agenda of cannabis by giving stabilized ingredients into a partner who we can jointly develop IP with and the result is it may feed into a process world, you know elected officials can have more confidence and certainty to make decisions there. So, I think it’s a good thing we’re doing.

James West:   So, is that who’s sponsoring the research by Battelle, government sources?

Bruce Linton: No, but Battelle does a ton with the government, right? So, like these ingredients the key is it’s not marijuana what it is GMP certified products, which are going across as stabilized ingredients that could actually be used consistently through a research mechanism that isn’t going to change the ingredients.

James West:   Right.

Bruce Linton: And so this is a little bit more than you know, here’s a bag of weed. There’s a lot behind it.

James West:   Right, okay. So, then is the purpose then product quality research primarily?

Bruce Linton: I would say that it’s multi-prong. One is confirmed; hey, these guys have the best quality the best compliance and there’s a supplier. Second is once it’s in, it doesn’t have to just be Battelle we work with. So, you can start to have multiple parties in America that we worked with because the channel is open now.

James West:   So you think we can infer from this that the United States is firmly on the path towards federal de-prohibition?

Bruce Linton: I think the analogy there would be a bit like I have sloppy handwriting, all doctors have sloppy handwriting; therefore, must be a doctor.

James West:   [Laughter]

Bruce Linton: So like I would say you may have overreached in your assumptions.

James West:   But that’s what we do here.

Bruce Linton: I think what it means is that well-governed entities can contribute to a path that both creates intellectual property for us and diversified potential data sets for anybody who wants to use them in the US and that’s probably valuable stuff and it’s just getting going.

James West:   You bet. Okay, that’s interesting. Now, what about this that you acquired Storz & Bickel and this is like one of the number one vape brands in the world?

Bruce Linton: Correct.

James West:   So, how did that happen? And I mean that just makes perfect sense, but wow!

Bruce Linton: So Storz & Bickel, everybody wants one, not everybody can afford one. There’s nobody who says, you know, I like cannabis but I don’t; they do and the reason we started talking to him was several years ago was one of my first trips to Germany in this business that I got to meet with one of the guys and what was really happening is people knew their device but they didn’t know the brand or what they put in it. It’s pretty obvious you can start seeing now in our world where you can brand delivery mechanisms, you can brand stores and then over time you’re going to have differentiated products that you put in those places.

Right now people will say, you know, I know Storz & Bickel or I know PAX. They know the Tweed stores, they know Tokyo Smoke and they may not love every product that’s in there but they’ll come back because they know the store they trust the experience, the educated staff are good and they’ll come back and see what you have next. So we bought it because Storz & Bickel is a German company which has a hardware focus and a manufacturing platform that’s certified as a medical device, certified in Israel Germany and Canada, big deal, and when they make it because of their focus, they can produce anything we think of. So, they could only access dried cannabis not oils. What we’ve been doing in Canada is we’ve had these people working on liquids and mechanisms of delivery for liquids and software. When you put them together you got hardware, manufacturing, software and liquids. We think we had a really strong platform that maps out over multiple years to be, you know, a major differentiated distinctive sort of segment piece and that’s probably going to be very valuable because we don’t plan to make it proprietary just better in a whole bunch of ways.

James West:   Okay, so I guess I can infer from that that vaping is one of the most common ways to consume your products.

Bruce Linton: Well, I would say we saw an evolution obviously right now, you can still only get dried cannabis or gel caps, which can’t be vaped. We think there’s a vape market. We think there’s a beverage market. We think there’s a, you know Tweed gel cap market. We think there’s a bunch of markets and that there’s no benefit to us to not trying to be number one in each of the markets. So this acquisition this is a 19-year-old company that spent a lot of time on intellectual property and brand and excellence. There’s no other one. Like you can’t say well I’m going to buy the other guy that started 19 years ago and has a medical device and does these things, there isn’t one.

James West:   Okay.

Bruce Linton: You buy it when you can get it. Marcus was ready to start slowing down a little bit and Jürgen’s ready to start going faster a little bit and they’re 50/50 partners and now everybody’s happy. They can just go hard or go and sort of be an advisor to us and then enjoy life a little more.

James West:   Right.

Bruce Linton: So, right place right time and you know, how you do these deals you do them really quickly by talking to people for five or six years.

James West:   Yeah.

Bruce Linton: Five or six years and you get to know each other really.

James West:   These guys are in Germany?

Bruce Linton: They’re based in Germany. They’re bound.

James West:   So that’s where the devices are made.

Bruce Linton: Yeah. It’s a great factory. It’s exactly what you would expect for a German factory.

James West:   We’re going to send over Fraser and the camera crew to shoot it.

Bruce Linton: You’ve got to go check it out because it’s half there, like the whole thing works, but we can double the size right at the site, and there’s a reason the devices are certified and work amazing because they’re made exactly as you would expect every German device to be made.

James West:   Well, of course, ultimate precision.

Bruce Linton: You bet.

James West:   Interesting. Okay so now switching gears a bit here, let’s talk financials and one of the questions that I’m putting out in front of all the CEOs because it’s what the investors want to know is where does profitability occur in the timeline of Canopy Growth?

Bruce Linton: So, I would say that you have to think and segment that a little smaller. When does profitability on a normalized reported basis occur in Canada? Then I want to show that like on a TV screen. So, here’s Canada, here’s rec, here is medical, here’s the normal G&A, here’s the normal IT associated with this, here’s the normal R&D spend and that will look like a great business and then shareholders will say well, we’d like you to never do anything else in the world and just pay a dividend and we’ll tell them they should go buy a bank. Or this is a great business, can you replicate it over a population that adds at least a zero or maybe a zero and then multiplies it by 2 in terms of the total addressable market? And so, what we have to do is show an excellent business operating in Canada the next 18 months or less. Then everyone will say that is a fantastic business, I’m glad you’re trying to dominate the world. I want to buy more of it. That is really what we’re about. I won’t be profitable on some enterprise basis until the exponential growth opportunity diminishes. And then you know, it’s a totally different game.

James West:   But that is your plan, is to demonstrate profitability in the Canadian context

Bruce Linton: You got to show a great business, right. People got to go “I believe, I believe, I believe”. If you don’t believe then I don’t know, go buy a bank.

James West:   That’s the best answer I’ve had yet.

Bruce Linton: Buy a bank if you want a dividend.

James West:   I don’t want a dividend. I want to smoke weed.

Bruce Linton: As an entrepreneur and a builder I’ve been told we could have been highly profitable probably two or three years ago, but I wouldn’t be on your show because I wouldn’t have had a material advantage that we’ve created by not being profitable by creating a massive asset base, by getting a launch plan, by having differentiated technology and then I wouldn’t have 5 plus billion in the bank because I wouldn’t have been the asset that was the best in the sector when everybody does their due diligence and they pay the most to be in the best.

So I think you got to have a really good business, but a really good business doesn’t have to show profit across the platform. Ask Amazon Web Services and Amazon as a whole, how does it work? They’re earnings per share can go positive and negative but their valuation continues to go up because they’re building more and more functionality and benefit the people can’t live without

James West:   So, Canopy is going to be the Amazon of marijuana?

Bruce Linton: Why I always like Amazon’s chart and I actually really like how they run the business because AWS, I don’t know about you but if we shut down AWS, I would say that every business I’m involved with now and in the future can’t exist. So, what have they done? They’ve built a platform a preference and what’s probably a very in a sense commodity service, hosting, but it’s not commodity because they do it so many better ways you just stick to them and you keep adding more and so I think we have that platform opportunity. And so Canada will be great, we’ll show the rest of the world and you know, we’re not a dividend hander-outer because I think in our growth curve any dividend I give away means I didn’t have a way to make more money than you do and I think we have a better answer than giving you back your money.

James West:   Right. Interesting. Okay, so where in the whole business at this point do your challenges still lie?

Bruce Linton: Oh, that’s sad. That’s like a three-day segment.

James West:   [Laughter] Three days? It’s Friday. We can’t do that now.

Bruce Linton: Listen man, the company’s gone from one site to ten sites, one country to 12 countries, I could probably say we’re on the moon but these announcements are fictitious so, I’m just where we actually have people working. The world is opening up at such a rate, the challenges are principally making sure you finish Canada, button-down IP, keep shifting your form factors up because when you go from the plant to the extract to the finished good, the medical science and the package, you just keep driving the incremental value and if you keep doing all that while being very tight on CapEx, very tight on how you spend money because the seeds of disaster get sewn in good times. And so you got to be very, very, everybody’s got to act like there is no money and when you do that, you’re very thoughtful on do we need to spend this way at this time?

And so, I would say our challenges are always going to be how do you keep going fast? How do you keep cultures so the people know that we’re not a bad headline, we’re a good headline, that we expect people to be collaborative not isolationist, we expect people to be intelligent but kind. We want always to hear feedback that while you chose not to work with us, you were the most professional company we met. That kind of behavior. And so, we spent a lot of time saying to people well you’ve done a great job in Smiths Falls or Niagara, would you like to be in British Columbia? Or you’ve done a great job here, would you like to be in Denmark, Australia? And so we have people populating around the globe who understand the operations, procedures, the culture and the expectations. So, I’d say, you know, it’s just scale scale, scale, but it’s been saying the same thing for five, six years.

James West:   Okay, how much of that five billion dollars do you have left?

Bruce Linton: I think we got about all of it.

James West:   Really? [Laughter]

Bruce Linton: Yeah, because you know, we had cash before we raised it; it wasn’t about use of proceeds or a raise. It was really about we want to make a difference in the world. We want to make a difference in the world and really push this. They really want to lean in on and put the cash in the bank and then 100 percent compound on each other. And so it’s weird when you have cash people want to give you cash. Would you like a billion dollar loan becomes a phone call? That was not a phone call before we had five billion. So, we’re not pulling that billion in yet or those sorts of things but you really do think about how do we go and then all of a sudden we have cash and you build a building, people say would you like me to build that building for you and own it? Because I know you can pay the rent or before man, you couldn’t. So, I would say we’re just having to adjust to the expectation of how to use cash in a way that results in keeping it all.

James West:   I remember we had a conversation a few years ago about you know, monetizing the building, the Hershey factory and it was impossible because my God no bank would come near it.

Bruce Linton: [Laughter]

James West:   Now look at three short years later you’ve got every bank under the sun coming at you with loans.

Bruce Linton: Remember you came up to see us and one of the challenges then was we had about three or four hundred thousand square feet of empty space and what the hell was I going to do with it? I was either storing my snowmobile or my boat depending on the season. Now there’s no place because that one’s full. We bought across the road. Bought the other one across the road. We’ve expanded to the maximum lot coverage I think at that site, so it’s about a million square feet around there sort of give or take by the time we’re done the bottling plant. And you know now it’s not looking like a terrible idea to have occupied a substantial site with big growth area.

James West: Sure. Your growth strategies have been characterized by focusing on your own internal organic growth capacity wise, production wise, but you’ve also made strong partnerships with other craft growers, let’s call them craft grows because they’re not on an industrial scale per say and recently announced this multi-year partnership with Valens Groworks, an extractor. So, it seems to me like you’re more or less becoming a sort of a mothership of assets that are operating on their own and isolate you and diversify you, isolate you from risk to some degree and diversify.

Bruce Linton: Yeah.

James West:   That’s the strategy?

Bruce Linton: That’s a pretty good summary. Yeah. I would say all I would do is a little bit of wrapper on that is a bunch of the stuff ties into Rivers and Growth. Maybe we take product from a Rivers investment float over to Growth. Maybe we make an investment in an extractor so that we can then take an off take of that. It kind of becomes like a little ecosystem as well as a timing of product time to market because I think you can expect that Q1 is going to have a calendar, a continued big demand. You got to be thinking about what happens by Q4 when we have these new product formats and how am I building a massive share and coverage while making sure we’re also incrementing our delivery capability for all of what’s next. And so, you know, you can’t do that in June. You got to be doing that now.

So we’ve done three things in the last two weeks which involved extraction for two and flower or one.

James West:   Okay.

Bruce Linton: If you saw the pic that we had, there’s 48 North, Valens and I just said it badly, Medipharm. And so each of those deliver a proposition. I actually really like Valens and Medipharm, those are kind of evolutionary business models that I don’t think everybody’s picked up on the fact that there’s an actual intermediary step that will be specialized and valuable.

James West:   Hmm. Yeah, so Alison’s on our show regularly. She’s one of our favorites and so when we saw that deal it was, I thought well that’s interesting because it was done directly with Canopy and not through Rivers.

Bruce Linton: We just needed product right and then you know when you need product there’s a little bit of equity. Sometimes you buy up because then they’re building a bigger thing and we’ll get more product. If it was just a pure play it might have gone through Rivers and you know, we have part of things with Rivers, we have so many deals.

We have what we got in Canada, but then we’ve got you know expansions globally. I was chatting with the guys last night, you know, you’re starting to get in bounds where it’s like I’m from and pick a country, they’re finding Rivers. So we’re really looking at how do we make that a big international thing, not just a Canadian domestic, and we already have one investment in Italy.

James West:   Hmm interesting. Alright, Bruce, that’s enough for today. We’ll come back to you again in due course. Thanks for joining me today.

Bruce Linton: Thank you, sir. Have a good holiday.

James West:   Thank you, you too.


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