Canopy Growth to lay off 500 staff, shut down two B.C. facilities

Canopy Growth (WEED.TO)(CGC) said it will lay off about 500 staff in a restructuring plan involving the shut down of about three million square feet of production space in British Columbia.

The move is aimed at better aligning its supply with consumer demand as the sector grapples with a glut of production capacity and unsold inventory.

The company, based in Smiths Falls, Ont., said on Wednesday it will close its facilities in Aldergrove and Delta, B.C., its two largest greenhouses in the province. It will also stop plans to build a greenhouse in Niagara-on-the-Lake, Ont., the company said.

“Although difficult, today’s decision was made in order to align Canopy Growth’s supply with consumer demand and improve production efficiencies over time,” chief executive officer David Klein said in a statement. “These facilities are no longer essential to [Canopy’s] cultivation footprint.”

The cuts were not unexpected.

Klein said last month when Canopy reported third-quarter financial results that the company would undergo a “strategic review” to “right-size” the business over 90 days.

Canopy said in November that it has about 5.4 million square feet of licenced capacity in Canada, spanning indoor, greenhouse, post-harvest processing and other manufacturing functions. Wednesday’s announcement represents a roughly 55 per cent reduction.

The closures will result in Canopy taking an impairment charge between $700 million to $800 million in its fiscal fourth quarter of 2020, the company said.

The world’s largest cannabis producer by market value is the latest company to cut staff in a rash of layoffs that have recently swept across the sector.

Last month, Aurora (ACB.TO)(ACB) laid off 500 staff, including approximately 25 per cent of its corporate positions. Tilray (TLRY) also slashed about 10 per cent of its roughly 1,400 global workforce in February. Smaller companies including Zenabis (ZENA.TO), TerrAscend (TER.CN), Sundial Growers (SNDL), and the Supreme Cannabis Company (FIRE.TO) have also faced recent job cuts and management departures.

Canopy began its B.C. greenhouse expansion in October 2017, through the establishment of a joint venture called BC Tweed. The company took 100 per cent ownership in July 2018, agreeing to pay up to $374 million in shares for the outstanding 33 per cent stake.

At the time, Canopy touted the B.C. greenhouses as the largest licensed cannabis facilities in the world.

“We estimate Canopy may have invested up to $500 million in BC Tweed,” BMO analysts Tamy Chen and Peter Sklar wrote in a note to clients on Wednesday. “We believe this highlights the undisciplined capital spending by previous management.”

Chen and Sklar said Canopy’s decision to close its BC Tweed operations should “meaningfully reduce the company's cost structure and quarterly cash burn.”

They estimate the two facilities accounted for at least half of the 30,000 kilograms of cannabis Canopy produced in its last quarter.

“Today's development highlights the significant oversupply of cannabis in the industry,” Chen and Sklar wrote. “Based on our visits to many of Canopy's production facilities, we consider BC Tweed to have been problematic assets. Their size and design as legacy produce greenhouses presented numerous challenges when they were quickly converted to cannabis cultivation.”

Canaccord Genuity analyst Matt Bottomley notes Canopy’s plan to shrink its indoor cultivation footprint is not surprising, given current market dynamics.

“We continue to witness a widening gap between Canadian sales throughput compared to the volume of dried cannabis still sitting in supply channels,” he wrote in a research note on Wednesday.

Klein said regulations permitting outdoor cannabis cultivation were introduced after the company had invested in its greenhouse assets, and outdoor growing is a more cost-effective way to produce biomass for extracted products like vapes.

Canopy announced in July that it received a licence to grow cannabis at a seven million square foot outdoor site in northern Saskatchewan.

Jefferies analyst Owen Bennett said while outdoor cultivation has cost-saving benefits, the strategy shift has other implications.

“We note the very limited positive results for those who pivoted to outdoor grow this past season, and therefore can we expect similar issues at Canopy? Second, it may also point to the near-term limited expected contribution from extracted products,” he wrote in a note on Thursday. “We question what such a strategy suggests for Canopy's view toward product quality. To us, it signals a focus on isolate/distillate at scale, which is arguably okay for edibles and beverages but could lead to a lack of differentiation in vapour.”

New York-listed Canopy shares fell 2.48 per cent to $17.31 in after hours trading at 7:17 p.m. ET, after closing up 2.36 per cent in Wednesday’s trading session.