Constellation Brands Inc. was “not pleased” with Ottawa-area pot firm Canopy Growth’s recent year-end results as the alcohol giant recorded a US$106-million loss in its own financial first quarter in connection with its stake in the Canadian cannabis company.
The New York-based alcoholic beverage company’s chief executive Bill Newlands, however, said challenges were to be expected, pointing to the slow rollout of recreational pot stores in Ontario, among other headwinds for the pot industry.
“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results,” Newlands said on a call discussing Constellation’s quarterly earnings on Friday.
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“However, we continue to aggressively support Canopy on a more focused, long-term strategy to win markets and form factors that matter while paving a clear path to profitability.”
Newlands’ comments come as the U.S.-based maker of Corona beer and Kim Crawford wines posted its financial first-quarter 2020 results, delivering revenues that beat market expectations as its earnings were weighed down by Canopy Growth’s equity losses.
Constellation posted net sales of US$2.1 billion for the three-month period ended May 31, up from US$2.05 billion a year earlier and more than the US$2.07 billion expected by analysts, according to Thomson Reuters Eikon.
Constellation reported a loss attributable to shareholders for the quarter of US$245.4 million or US$1.30, down from a quarterly profit of US$743.8 million or $3.77 a year prior.
However, on a diluted comparable basis commonly referred to as adjusted, Constellation reported earnings per share of US$2.21, up from US$2.20 a year ago and beating the US$2.04 expected by analysts.
Excluding Canopy Growth equity losses, the New York-based company says it earned US$2.40 per share during the quarter.
Constellation said equity losses in connection with its significant stake in the Canadian cannabis company totalled US$106 million on a reported basis or US$54.4 million on a comparable basis.
Shares of the alcoholic beverage company on the New York Stock Exchange were up 4.8 per cent in early afternoon on Friday to US$197.21. Canopy’s stock on the Toronto Stock Exchange was down 0.7 per cent to $52.97.
Constellation, which recognizes earnings from Canopy’s results on a two-month lag, holds a 38 per cent stake in the cannabis company.
Last week, Canopy reported a wider-than-expected fourth-quarter net loss attributable to shareholders of $335.6 million or 98 cents per share, despite a jump in net revenue to $94.1 million that beat market estimates.
Bruce Linton, the chief executive of the Smiths Falls-based company, said Canopy invested heavily during the quarter for longer-term growth, such as boosting its production capacity and preparing for the launch of edibles and other next-generation pot products once legal later this year.
He added that as Canopy pushes into the legal U.S. market for CBD – or cannabidiol, the non-intoxicating compound found in hemp and cannabis – the company is aiming to be EBITDA-positive in roughly two years.
Newlands on Friday spoke optimistically about Canopy’s U.S. CBD products and the rollout of cannabis vapes, beverages and edibles in Canada, the latter of which he expects “will command high margins.”
Constellation is also “very excited” about Canopy’s recently completed deal to acquire U.S. multi-state operator Acreage Holdings once federally permissible, as it provides a path to a “leading position,” he said.
Cannabis is legal for medical or recreational use in several U.S. states, but remains an illegal Schedule 1 drug under federal law.
Shareholders of Canopy and Acreage voted last week to approve the deal, valued at roughly US$3.4 billion.
“What we remain excited about is that this is going to be a big, long-term business,” Newlands said Friday.
“And we are working with Canopy, almost on a daily basis, to ensure that we are all focused on the right things. The things that are going to drive the business, the things and the form factors that are going to matter in a way that gets to ultimate profitability for that business in an appropriate time frame.”