Canada's Cannabis Market So Far

episodes that we did a few months ago. So if you recall, in mid October, Canada legalized recreational cannabis that coincided with a boom and stocks relating to cannabis, lots of interest in this, but still so much uncertainty about how the market would actually play out and who would really make money, and what kind of margins there would be, and just what kind of roll out there would be in general of the operations of legalized recreational marijuana in Canada.

And so a few months ago we talked to Craig Wiggins. He is a part of a trio of analysts known as the Canalysts. They have a popular Reddit page called the Canalysts where they do pretty serious, deep dive financial analysis of the publicly traded cannabis companies. They have a very big following that's grown over time and they do events and podcasts and other stuff really become They've become the sort of go to destination for serious analysis of

these companies. And so we talked to Craig right before the legalization, right before recreational is about to come out, and so he wanted to go back and talk to Craig again about what he's learned and what he's seen in the first few months of the recreational market in Canada. And so we have him back now. Craig Wiggins, thank you very much for joining us. Thank you very much for having me. I. Oh, I hope I'm not the reason Tracey didn't show you are I said Tracy, we're

gonna have Craig back. And she's like, oh, I got food poisoning last night. Suddenly I can't do it. No, she wishes she could do it, but due to the time zone she's in Hong Kong, she couldn't make it

this time. UM, so what's your overall You know, you warned a lot about a lot of different things when we talked about the market and the impending legalization of recreational and the fact that, um, you know, there's just all kinds of issues with the supply chain, the sort of the separation between the distributors and the retailers and the provinces putting themselves in the middle. What have you

seen so far? How smooth has the rollout been? Well, I'm not sure the age of your listeners, but the term gung show would probably be apropos for how adult wreck has been rolled out throughout Canada. Okay, so I take that as a negative. What has been the biggest problems of them? I think there's a multitude of problems and uh, we have no shortage of people pointing fingers at each other. In Canada, we have two distinct streams with respect to cannabis. We have the medical cannabis and

we have the adult rack. The medical cannabis is all done online and ship directly from an LP, a licensed producer who is licensed by Health Canada, direct to patient or Shoppers Drug Market, Canada's largest drug store chain, has gotten involved in distribution of cannabis, but not from the retail stores. Again, all online the wreck side. Each province

in Canada is responsible for distribution, most of them. I think nine out of the ten major provinces all elected to be the wholesale er of cannabis, and some of them elected to also be the retailer of cannabis, and each events is different, so we really have a patchwork

of different models throughout Canada. And what we've really seen is the theme that we've heard from the provinces who are strapped for inventory, so much so that the Quebec government who's actually running their own retail stores, have closed their retail stores Monday through Wednesday because there's not enough product New bruns a similar situation. Alberta stopped issuing new

retail licenses. In Alberta, it is private distribution, even though the government sees the need that they have to receive the product before distributing it to the retail. So it's really been a patchwork and most of those provinces have not done a very good job of their retail rollout, whether it's private or or government run. That's just what I was about to ask. Of the two main models, neither one is looking particularly good right now. Yeah, and

that's where some of the fingerpoint it comes in. A lot of the provinces said the LPs, the license producers over promised and under delivered, and there's a lot over promising going on the term funded capacity was bandied about greatly in the industry because it's clear before when you say the LPs, these are the producers, the license producers whose names investors have come to know, like a canopy growth or in Afria. Yeah, they're cultivators, primarily cultivators. The

canopy has gone into the retail side. Aurora has purchased an interest in the retail operation. But yes, the LPs are are the ones that are producing, cultivating and then shipping the product, whether it is medical or whether it is adut rack, same distributor, the same growers feeding two

different screens. So if there's a shortage of supply and the LPs haven't been able to deliver on what they promised, does that, in your view speak to some fundamental problem or is this just like, look that maybe there's still growing pains. They didn't really appreciate the scope of the demand for it. But you know, in a few quarters, in a few years, as they continue to build out their growth facilities, that should stabilize. Yes, and no, the

quality that's coming out. There's only two form factors that are presently allowed in Canada. One is flour but and the other is oil. And it's oil that has has been provided in a diluted carrier oil like mct or or olive oil or something like that. So there's only presently two legal form factors in Canada, the edibles right that edibles and formed factor two point oh if you would. The discussion period just ended last week if I remember correctly, and those new formats will be out by October of

this year. But the the bud side of the equation, there's some pretty scraggly looking flower that's that's getting delivered to customers that are used to if they're they're from the black market or what we've been calling lately. The legacy market is not nearly as good. So there are some premium flower out there, no question about it. There's some gorgeous flower out there, but there's a lot of flower that's coming through that. Uh. We see pictures posted

on Twitter that just do not look appeal. So one of the questions that I had, and that I've been really curious about prior to the introduction of recreational is the degree to which consumers or new consumers of cannabis would gravitate towards specific brands. Because we know that in other sort of vice industries. People of their favorite beers and they can you know, maybe they dabble with some others, but there's ones that they really like. Obviously, people have

loyalty to certain cigarettes that they like. Are we seeing any trends play out where there are certain strains or certain brands that people have shown a consistent affinity towards or is it too early to know. There's a lot of brand hopping in the mid mid range and the lower priced product as people try to figure out what

they like from each of the producers. The premium brand names, the Broken Coasts, the Cantalus Labs, the Supreme Pharmaceuticals or Fire is what the what their tickers and what people call them. Those Premium and Flower are doing very well. They're they're selling very well, a lot of social media on the product. So something like a Broken Coast, are we is this like this the cannabis equivalent of some you know, I p a microbrew. Yes, they don't put out a lot of product, but the product they put

out is gorgeous. It's Broken Coast is my favorite. I've tried Cantaalists, I haven't tried to Fire yet, but those those those higher end quality ones, and they're a little bit more pricier. They're they're plus ten dollars Graham through the retail outlets, so they are more pricey than legacy market or black market. But at the same time, they're head and shoulders about what we're seeing from some of the mass brands that are out there. Do the mass

brands also have their sort of premium lines? Are they trying? You know, they're sort of the faux indie lines that you see in beer. They have them. But there's, as I said, there's a lot of brand hopping right now as people try to figure out what's good and what's not good and uh, in this day of social media, if you ship a container of stems and seeds, it ends up on the Internet and people know pretty quickly.

So if you're if you're trying to build a brand, it's probably not a good idea to build the brand without the quality there first. So let's talk about this side of it, because obviously, as you say, ay, there's not enough supply, and be when there is supply, a lot of times the flower is mediocre and it looks really terrible on social media. Is this is that again?

I'm still trying to wrap my head around this question of how much is just growing pains demands strain on the system versus maybe they're not that good at growing at scale, or maybe there's going to be some issue that's going to permanently be an issue with growing at scale, Like how much of this is do you expect to be solved over the coming years. Well, I think a lot of it gets solved through genetics. Yet you have to remember cannabis has been grown in small scale in

Canada indoor simply because you have to hide it. So going to these mass greenhouses, the genetics are going to take a while to dial in. The genetics have to come along to be able to grow in a different, less controlled environment than an indoor shop, the indoors. And it's interesting because the three premium brands I mentioned to you are the ones that I see premium. Broken Coast is indoor grown, U Tantalus is a craft greenhouse that's only an acre in size, and fire Is is also

a hybrid greenhouse. So growing in greenhouse, which a lot of people thought, you know what, it's not gonna work because the genetics weren't there. We're seeing it so it's a matter of the genetics and really dialing in these large facilities. It just hasn't been done before, especially in greenhouses on this level. So the genetics will take a while to dial in. Is there growing paints. There's always going to be growing paints. We even hear from the indoor guys that it's a two year dial in to

get get what they're growing perfectly right. So you can only be as good as the plant you're growing. So the genetics are really important, but also the genetics need certain things to thrive to be their best. And if you've taken indoor genetics and you're trying to transform into a greenhouse environment, it's going to take you a while to dial that in. We know the big some of

the big names, your Canopies, Auroras and so on. What's the actual number for how many publicly traded cannabis companies that are in Canada? Wow, publicly traded. I've got to think it's north of fifty right now. I think there's a hundred licenses. One company can hold multiple licenses like Canopy and and Afrian and the like. But there is a there's a lot of companies out there, and we are seeing some of them do well in the first

quarter because the wholesale markets still surprisingly strong. So we have some of these big companies, despite their growing capacity, are still buying wholesale to leave it to sell out to retail, which is quite shocking given some of the the amounts of inventory we see on their books and

what they should be growing versus their square footage. So let's talk about metrics, because, as I mentioned in the introduction, your crew, the Canalysts are known for really top shelf, deep dive analysis into these companies and you really sort of pick apart the financials and as you just mentioned, you also tour the facilities. You really sort of get to know them on an operational scale for an investor

who's looking in this space. And it's worth noting that many of these cannabis companies have had a phenomenal start to the year in the stock market. After slumping after the bubble or the boom last year, they slumped, now they're really back on fire. What should people look at now to see who's getting traction in the recreational space and who's growing in some manner that you know, looks like they're growing efficiently and uh, scaling nicely. What should

people look for in their earnings filings and so forth. Well, what I look at and we run not only peer groups, but we run trends on individual companies. The sales growth is important. The gross margin they are all over the map these days. The gross margin. I'd like to see gross margin in the companies that I invest in start creeping into the seventy percent range. Canopy, just to give

you an idea. Their last quarter they were at they dropped from two and I even think are the folks over at Aurora dropped a little bit down to fifty? You're not going to get good returns on the amount that they're spending below the line without a strong gross margin. Explain that. So what is going on in the business that is causing gross margins to deteriorate. Well, there's a

lot of launching of new facilities. So as those new facilities come on, you might not be matched against your revenue in that quarter, so there might be a lag. Like for instance, Aurora Sky finally got all their licenses and we're actually touring a Roora Sky today with video cameras. So I'm actually looking forward to seeing what my colleagues bring back on that. But Aurora Sky just got all

their licenses. They've actually planted the flag. They said in UH for their fourth quarter of this year, which is actually second calendar quarter there, they planted the ebitda flag and said they're gonna be ebit de positive. They've got a hill to client. They're they're running at a bout minus thirty three million and adjusted. But it does as I calculated, and it's interesting to see will they be

able to bridge that gap in order to adjusted. But that, just for your audience, is one of my favorite metrics. I'm an old school commercial lender, so that's how you get paid back. Looking at that line. So what you need to drive that is you need your sales growth to drive uh the top line. Then you need your gross margin to convert it into how much money after my production cost do I have to pay my s

g n A and my operating expenses? Just just to give you an idea, last quarter, Canopy did eighty three million in net revenue net of excise tax, and they had a hundred and seventy million in our backs. And the folks over at Aurora also had over two of their sale was at x so it's tough to make money when when when you're ax is outpacing your sales

at the two to one level. So do these companies I mean, I'm thinking of like and it's kind of unrelated from a business model standpoint, but the question, the fundamental issue, man is like thinking about some of the fast growing startups in the US, say like an Uber or a Lift, and they obviously have spending growth that's much fast, that's incredibly fast, and they're losing money, but they say, well, this is all worth it. But then the question that investors faces like, okay, but when is

the spending going to slow down? Like, what is the timetable for when you're gonna be able to stop investing and actually produce growing cash flow and growing margins and stuff. Do these companies and obviously because of the demand and the growing pains, obviously they have rapidly expanding costs and new facilities. Do they have a timetable for when this ends? Or is their view that look, there's a lot of growth ahead, We're just going to keep investing in the future.

And at this point it's premature to talk about slowing down the expense side. I think there's some In each each of those camps, we hunt inflection points. We are looking for when will the break even and sales and the break even for a positive net operating profit on a break even for adjusted EPA. We're hunting those inflection points. That's what we do with with our charting and our graphic. We're trying to see when that happens. And we're we've

seen some inflection points last quarter. Do those inflection points become trends and at the end of the day, like I think Canopy went from last quarter uh SE, s g n A or APEX to sales, so that that's a big improvement, all driven by the sales line. So what we're hunting is to see are the gen A is going to plateau? Are the selling expenses going to start trending down as a percentage of sales And we're

starting to see that in some companies. So those are the things we're hunting, and we believe the investors should be paying attention to those things because depending on where you are on your your investment horizon. I'm fifty two years old, I don't want to take as much risk as say someone in their early twenties. I don't have the runway to recover versus versus some if I make a mistake at my age versus someone who's much younger.

So if you believe in the story that cannabis is going to be everywhere and global and the light, maybe maybe you're more bullish on that story. But for me, I'm still concerned about can you produce a product at a decent gross margin to cover those those expenses. That that's what I look at. I want something that that I can believe in with respect to their fundamentals. Fundamentals isn't always the answer, but for where I am in my investment horizon, I am looking more for fundamentals than um.

I care about the stake, not the sizzle so much, And there's a lot of people are throwing a lot of sizzle out there for sure. You know, Craig, I've been meaning to ask um, what's happened to the medical side of the market, because everybody knows a lot of the medical marijuana consumption, probably in the US and Canada was just recreational consumption in disguise. What is the future of the medical side now that someone can just go

onto a dispensary without a prescription or anything like that. Well, actually, for for a lot of the bigger companies so far, their medical actually either stayed relatively stable, a little optick or a little downtick. So we did. We're through our first reporting quarter of full rack, which was October November seven, so companies like Canopy and or are reporting full quarters of that. So I think Canopy went down a little

bit and Aurora went down. But also the other thing, and here's the crazy thing in Canada on the medical side, our government is charging an excise tax on medical cannabis because and I think this is a very lazy way of approaching it. They're they're seeing it, well, if you want to game the system and you want to pay less, well you'll go into medical. Uh. But what they've tried to do is even the playing field and thrown excise tax on it. And there is a lot of medical

benefit with respect to cannabis. I use it from my arthritis, I use it for for sleep as well. And I shouldn't be that dismissive of medical consumption and just saying it's recreational and disguise, you'll really get get the folks that that use it riled up quite frankly, but the yeah, the excise tax that are that our government as has put on it is crazy. And you asked, like, what's part of the problem, and I said, there's a lot

of finger pointing. These excise stamps, which are about half an inch wide by by an inch long, are by province and every producer, every license producer who ships it out has to put one on all these disparate packages from pouches, tubes, bottles, boxes, and they didn't get the XI stamps still about two weeks before RED kicked off,

and there was no glue on them. So they all these companies designed all their packaging and then we're given these excise stamps that that have to go on the opening and when the products opened, it still has to stay. It'll tear, but it has to stay affixed. So that that's our government helping out. I was touring Afrey yesterday and they are hand sticking excise stamp stickers on the pouches, on the bottles and that that is just not efficient.

But because all the packaging is different and these stamps have to be affixed and they have to stay affixed after opening. Mond, you torn, it's a silly silly person in this day and age in my mind. But the government once they're they're sharing the excise stamps, go on it. It's very very colonial, colonial British, I think, Craig, I remember the last time we chatted, you used the phrase

to describe the government's role in this. You said, you have to put yourself in the position of a greedy provincial finance minister to understand both their role as a middleman but also their desire to maximize taxation revenue. What kind of taxation revenue are they seeing, are they happy with it? And how is it impacting expected profits within the industry. Well, you know what, I'm glad that resonated with you, because it certainly is the case between the

federal and the provincial taxes. I think they're taking forty of the net purchase price into taxes in one form or another, whether it's sales tax, excise tax, or what have you. The the government's role as a middle in the provincial government, it is slapstick comedy. If you look at Ontario. We had a liberal government when C. Forty five, which was the legislation was coming out uh provincially in Ontario, and they said we're gonna open forty stores, will run

them ourselves. They probably got three on the drawing board before they lost power income the Conservatives. The Conservatives take a look and say, you know what, We're gonna open this up to retail, private retail. We're not going to own the stores. Everyone was very, very happy about that.

Then the Conservative government looked around and looked at Quebec with their operating hours or their operating days being cut to Thursday through Sunday, and uh and Alberta stopping giving new retail licenses because the short store shelves were empty. So the government had the idea that they were going to do a lottery system for twenty five retail licenses. And this wasn't a vetted licensing system for the lottery.

They a actually took anybody's seventy five dollars who wanted to put in an application, and there were twenty five winners drawn. More than half of them are sole proprietors and they cannot, under the rules of the lottery change their ownership for over a year. So we have twenty five retail stories coming to Ontario supposedly by April one,

but the government has botched it. So much bad that there these aren't season retailers coming into the market, and the big LPs are trying to figure out their way

around the red so they can partner with these. But this is the type of rollout that that we've gotten in Ontario, which is the biggest province, and actually November to December the purchases purchases of cannabis went down in Ontario despite despite the rollout, and Alberta is doing better because they have more retail establishments, because the new buyer wants to go in, they want to take a look at things, they want to talk to people going on

the internet, right, something that you've never bought before. Um, that's a different, different end of the stick, quite for ittly. So so when you talk about greedy provincial provincial finance ministers, it is very very true that not only are they taking taxes, but they're really not adding a lot of value into the equation. Craig, I feel like we should just schedule you on the podcast like every six months or so, because obviously a big change between now and

the pre reck era. But it just feels like because there's still so much in flux in terms of business models and distribution models and scaling up that we should just regularly check in with you. Really appreciate you coming on. Got to have you back again. Hopefully Tracey will be here uh this time, and thank you very much for joining. If you don't mind, I'd love to plug our YouTube

channel if you don't mind. As as far I have, we've gone to a paywalled subscription service for some of our work, but we have a lot of our work is still open source and our YouTube channel has so much investor information in there if you're interested to see what a indoor grow up is. From soup to nuts. We have a documentary on Broken Coast and Uh, We're hoping to do some new new work and maybe we can invite Joe to come and play his guitar and uh sit down on one of our podcasts one of

these days. I'd love I'd love to do that sometimes. Thank you very much, and I will as soon as I'm out of the studio. I'm gonna go check out your YouTube. But I appreciate it. Craig Wiggins, he's one of the cannabists. Definitely check out their stuff. And that does it for this episode of The Odd Loans Podcast. I'm Joe wisn'hal. You can follow me on Twitter at The Stalwart. You can follow my co host on Twitter, Tracy Alloway. She's at Tracy Alloway. Definitely follow Craig on Twitter.

He's at Go Blue cd N, and be sure to follow our producer to for Foreheads. He's at Foreheads T, as well as the Bloomberg head of podcast, Francesca Levie at Francesca Today. Thanks for listening.