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Canopy Growth to shut another Canadian facility, shrink global operations

A sign for Tweed, one of Canopy Growth Corporation's brands, is pictured at their facility in Smiths Falls, Ontario, Canada, January 4, 2018. Picture taken January 4, 2018. To match Insight CANADA-MARIJUANA/INNOVATION   REUTERS/Chris Wattie
REUTERS/Chris Wattie

Canopy Growth (WEED.TO)(CGC) has announced it will shut down another facility in Canada, cease cultivation at a New York facility, and pare back its global operations.

The company expects a charge of up to $800 million and a headcount reduction of 85 full-time positions. The move is the latest phase of chief executive officer David Klein’s strategic review to bring the cannabis giant’s footprint in line with current market conditions.

“When I arrived at Canopy Growth in January, I committed to conducting a strategic review in order to lower our cost structure and reduce our cash burn," Klein said in a statement on Thursday.


“I believe the changes outlined today are an important step in our continuing efforts to focus the company's priorities, and will result in a healthier, stronger organization that will continue to be an innovator and leader in this industry.”

In Canada, Canopy plans to shut down its Tweed Grasslands indoor facility in Yorkton, Sask. The company said the decision will not impact its ability to meet demand in its home market. The facility represents a small portion of Canopy’s overall cultivation capacity, yielding an estimated 6,000 kilograms per year. The company said it harvested nearly 30,000 kilograms in its latest quarter alone.

Canopy has invested millions in a hemp industrial park in New York to produce CBD products for the United States market. The company said cultivation operations will cease at its Springfield, NY farming operation, due to an abundance of hemp produced in the 2019 growing season.

Beyond North America, Canopy announced it will exit its operations in South Africa and Lesotho, and has entered into an agreement targeting local ownership that it expects to close in the coming weeks.

It is also halting cultivation at its Colombia facility in a move towards an “asset-light model” that leverages local suppliers.

Canopy said the pre-tax charge of $700 million to $800 million is expected in the quarter ending March 31.

Jefferies analyst Owen Bennett praised the announcement. He expects the market will reward decisions demonstrating stricter financial discipline.

“It shows that management are willing to make some big decisions in order to form a more sustainable business,” he wrote in a note to clients on Thursday.

The changes follow the shutdown of two large growing facilities in British Columbia last month, resulting in the elimination of about 500 jobs.

“I want to sincerely thank the members of the teams affected by these decisions for their contributions in helping build Canopy Growth,” Klein added in the statement.

Cowen analyst Vivien Azer said the global reductions reinforce her “outperform” rating on Canopy, the lone Canadian cannabis company under her coverage to receive that designation. Azer has a price target of $35 on Toronto-listed shares.

“Our thesis continues to be driven by the quality of its management team, namely CEO and former [Constellation Brands] CFO David Klein, as well as its balance sheet,” she wrote in a research note.

Hours prior to the announcement, Bennett upgraded Canopy shares to “hold” from an “underperform” rating. However, he shaved a dollar off his price target for Toronto-listed shares, lowering it to $22.

TSX-listed shares dipped about two per cent in mid-afternoon trading to $20.48.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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