CPI Accelerates and More Losses for Cannabis Stocks

[00:00:00] Welcome back to the Canadian Investor podcast. I'm here with Dan Cant and we're doing our earnings and use episode as we always do on Thursdays. But before we get started, Dan, how are you feeling? Are you a bit hungover from last night which unfortunately the Oilers

[00:00:31] couldn't make that comeback, which would have been I think the first one since the Maple Leafs in like the 1960s or something like that? 40s yeah. From what I heard it wasn't televised

[00:00:45] that much because it was during the Second World War. So this would have been like the first ever live televised comeback. But yeah it was pretty rough. Not feeling too good today, but not feeling too

[00:00:57] bad. I mean I think they'll be back. Yeah and they did a lot better than Montreal when they went to the Cup. I think Montreal lost in five if I remember correctly and I think Montreal's too was kind of

[00:01:09] a mirage where like you said the Oilers I think have a pretty good foundation especially if they can keep dry-sidle and make David for for years to come. But it was fun to watch. I

[00:01:19] was definitely cheering. On a side note I couldn't figure out how to watch it. I tried to subscribe to Roger as their site was the subscription site for sorry for Sportsnet. The subscription site was

[00:01:32] down then I tried TVA, the French broadcast. I kept getting an error with them so the only way I was able to finally get it was to through Amazon Prime so Prime Video you can add Sportsnet

[00:01:46] as a channel. So that's the way I was able to do it but if not like at someone was just like okay it's not meant to be I just won't watch it I'll just kind of keep up with the score. Yeah the

[00:01:57] Sportsnet app is really buggy. It goes down all the time like their Sportsnet Now subscription or whatever I've had that happen all the time. It's kind of annoying. It never happened to

[00:02:08] me thank god. Game seven I would have been I would have been freaking out but yeah I mean it doesn't feel as bad because they were down 0-3 so I mean if it was a close series I would definitely

[00:02:21] be crippled right now but I don't feel too bad. I guess it's another year and I think it's been what 31 years now since Montreal last won the cup and the last Canadian team so I guess we'll

[00:02:33] have to wait at least another year for that. Yeah next year okay they'll get next year exactly so I guess enough about hockey I know I think most of our listeners probably at least watch part of

[00:02:45] the game so they know the outcome at this point so we'll go ahead and talk about CPI print that came up for Canada just this morning before we started recording so do you want to go over that and then

[00:02:56] I'll give my thoughts and a few uh few notes as well that I took from the print. Yeah so it was it was a pretty surprising CPI release I mean one that will no doubt put the bank of

[00:03:08] Canada in a pretty tricky situation next month the markets believe this too so before this CPI print they projected that there was it was over 70% chance of a cut in July they've downgraded that to

[00:03:21] just 46% so the annual inflation rate came in at 2.9% which is actually a 20 basis point increase from a month ago core inflation also had its first month over month increase in nearly five months

[00:03:35] and month over month inflation came in at 0.6% which is way too high most estimates for inflation were around 2.6% year over year and month and most month over month estimates were coming in at around 0.3

[00:03:51] so the month over month came in way higher than expected rentals continue to soar I mean not not only just rentals but just shelter costs so national rent prices increased by 8.9% year over year and mortgage costs increased by 22.3% so CPI increased by more than the bank of Canada's

[00:04:11] annualized target in pretty much every segment outside of some discretionary spending like like household household items furnished like clothing footwear things like that and as I mentioned it does put the bank of Canada in a pretty tricky position I mean Canadian

[00:04:26] consumers desperately need rates to come down it's pretty clear our economy is weak you know everybody is struggling rising costs of living but ultimately I mean the main goal for the bank of Canada like their main priority is going to be protect protecting the Canadian financial system

[00:04:44] protecting protecting the Canadian dollar not Canadians who you know may have spent a bit too much money on a home or or carry too much debt so that their priority is going to lie with

[00:04:54] that and this this inflation print definitely you know doesn't paint a good picture for the future I think I think bond yields are up quite a bit this morning I I think they were at least this

[00:05:06] morning I'm not sure where they're settling right now but I mean they guess the one thing that I'll say is it's one print it's not really you know it's not like this has happened for two

[00:05:15] or three consecutive months there will be another print prior to the bank of Canada's rate decision in July and I'd be very curious like if things you know they kind of go back to a

[00:05:26] normalized level if they still continue to cut you know a 25 basis point cut but if we have two consecutive CPI prints like this it's hard to imagine you know they don't move into a situation

[00:05:39] where it's more of a hold than a than a continued decline yeah yeah exactly and I mean I think we'll have to see what happens and I think that was a good point that you made

[00:05:51] in terms of what happens with the next print I think it'll be mid-July and then the BOC decision if I remember correctly will be at the end of July July 24th around I think it's a 24th yeah yeah so

[00:06:03] they'll definitely have another print as you said to be working off on a couple of things for me obviously that I did notice in terms of core inflation was definitely something that

[00:06:15] picked up quite a bit and there's three measures of core inflation and I will explain it to people because we've talked about it in the past and different you'll hear people mention like core

[00:06:27] inflation quite a bit as well but they don't really they don't really explain what it is so I think it's always good for people to understand a bit better what it is so the first one is CPI

[00:06:38] common which was down to 2.4 percent from 2.6 percent so this was the only one of the three that actually declined the other two increased so this measures it assesses common price changes across categories in the CPI basket that's the best definition I could find CPI medium on the other

[00:06:59] hand was up to 2.8 percent from 2.6 last month of all the items they used the median or the 50th percentile of price increases so the best way to explain this to people let me take a really

[00:07:13] simple example of course this is just simplified just to make it easier to understand so if you had say 10 items that you looked at for inflation the first one of that item so the lowest inflation

[00:07:26] one was 1% inflation and the tenth one the highest inflation one was 15% inflation and then the fifth one which is the midpoint was 3% inflation then the CPI median in this example would be 3% CPI aside however mediums can be really useful when looking at stats especially if you compare

[00:07:47] the median to the average it can really help you figure out if the average is skewed one way or another and I think that's a big big thing that I am critical for macro stats in general

[00:08:00] they have a tendency to actually skew a little bit more towards the average which the average oftentimes just does not paint a full picture of what they're trying to describe you know the best example is

[00:08:12] when you hear like headline data whether it's this or other types of headline macroeconomic data or you hear that households are still spending a lot well oftentimes what we're seeing right now is that skewed right towards higher income earners and that's where the median

[00:08:28] would actually go a long way to put that into context and the last one here is CPI trim that one was up to 2.9% from 2.8% so CPI trim excludes the most volatile components on both ends so

[00:08:42] when people do think about core inflation that removes the volatile elements typically that's what at least the Fed right they'll remove that kind of food of energy for core and those

[00:08:55] tend to be a bit more volatile so if I take my previous example where the first data point was 1% and the 10th one was 15% for the trim let's say in this example you'd remove the two extreme points

[00:09:07] so the 1 and 15% and then you essentially would take all the other data points to come up with the CPI trim and I would suspect that this measure typically removes energy and food prices

[00:09:19] like I just mentioned for the Bank of Canada and I think that's why they prefer to use this one compared to other data points because it's a bit less volatile whether that's a good thing to do

[00:09:30] or not that's very debatable because at the end of the day you know people the population in general like I mean you don't really care where it's coming from whether something is volatile or not you

[00:09:41] just know that your cost of living is actually increasing and whether it's energy whether it's food these are things that touch everyone so I think it's a bit I understand on one hand

[00:09:52] why they would want to kind of smooth things out by removing them but on the other hand I think you do you really want to do that because you know it's not a true picture of what's actually

[00:10:03] what's happening well I was just gonna say like those are the two things that just hit everybody like it's unavoidable like a lot of the data that they you know highlight it might not impact

[00:10:16] some people but I mean food and energy are the two that are just no brainers they hit everybody yeah exactly and food you know that's a big component it was up 0.9 percent month over month

[00:10:27] in stats Canada mentioned that seasonal increases do happen at this time of the year which is not wrong I looked at the previous year and there was a bit of a gap but it was not as big as we

[00:10:38] saw right now so in April so from March to April there was a decline of 0.2 in food prices month over month and the increase of 0.9 percent is pretty substantial in terms of difference between

[00:10:52] the two months and that's why I wanted to look at last year what happened and the gap was much narrower compared to this year with energy being down 1.1 percent month over month and up 4.1 percent

[00:11:05] year over year I still think this is actually one of the biggest risk to rising inflation because you can actually make the case that energy has been relatively stable over the past year 4.1

[00:11:17] percent for energy is not that high in terms of how volatile it can be obviously can go the other way as well so this one I mean if energy starts picking up I think all bets are off

[00:11:29] everything goes out the window because that will definitely put some pressure on headline CPI data and I guess the last thing I've been hammering this but services inflation is staying very very

[00:11:43] sticky this one has not gone down I think below 4 percent year over year and I think maybe even 4.5 percent I didn't check like you know the past couple years or so but based on memory I know it's

[00:11:55] been relatively high and it was up 1 percent month over month and 4.6 percent year over year and that's actually a small acceleration compared to April on the year over year basis so something to keep in mind that there are still definitely some important pockets that are

[00:12:12] remaining very sticky and I think with the July out while the June print that will be out in July before the July meeting we'll probably have you know we'll decide which way they go and

[00:12:24] like you said I think one data point of CPI I think you have to take it with a grain of salt because it is volatile and I saw some headlines on BNN Bloomberg I think when it came out and

[00:12:35] I don't know the term they used but it was basically like you know saying that inflation was fully back on type of deal like re-accelerates or you know skyrockets or something like that

[00:12:46] but I think it's just one print right we have to take it with a grain of salt although you know if we see that increase continuing next next print and then that will probably

[00:12:57] stop the bank of Canada from further cuts at least in the near term yeah and the only other the only other point that I actually looked at was I was looking at the uh the food

[00:13:09] food purchase from stores and food purchase from restaurants and the food purchase from stores has gone like down to the point where it's under it's under a 2 percent annualized rate whereas restaurants are remaining you know they've gone down but they're still very sticky

[00:13:24] I think it was like 4.7 or 4.8 percent year over year growth and like restaurants you know they drive you know a decent chunk of the economy they employ a bunch of people and I mean they just

[00:13:37] I think I read a report at the end of 2023 or the start of 2024 that 52 percent of restaurants are losing money so I mean you move forward now because oh it's crazy tough especially now like

[00:13:50] food has gone up to the point where I mean margins are probably razor thin there there's higher there's more demand for higher wages which ultimately hits them as well plus you have the

[00:14:01] fact that just Canadians just aren't eating out as much I mean I know I'm not so uh the costs keep going up it's tougher for them to make money uh it's a pretty that industry is being

[00:14:12] hit huge and then you have the fact that you know a lot of those restaurants are probably heavily in debt from just trying to survive from the pandemic so you have inflation rising

[00:14:23] you know they need rates to go down probably to get some relief on that end and you know if you get too bad prints like this you might not get any relief at least in the short term

[00:14:32] yeah and that's where the services inflation right kind of shows up because services it's typically more wages that are earned by people and wage increases so I'm not surprising that restaurants are seeing prices go up faster than you know going to the grocery store

[00:14:48] I think we we've touched enough on this point do you want to get started with some earnings which was definitely uh I'll be honest a bit of a challenge to find some earnings uh definitely in between the

[00:15:00] shoulder season I guess between different earnings season here but we we did find a few I think it will still be a fun discussion yeah there's definitely not much going on right now but uh empire is pretty pretty important considering I mean considering the environment here for

[00:15:17] Canadians food like just you know choices of grocery stores so it's pretty crazy how different the earnings results are you know and the overall outlooks are from the three major groceries here

[00:15:29] in Canada like law laws you know they're continuing to spend a huge chunk of money on their on you know network expansion uh improvements of current stores all while just posting double digit earnings growth whereas empire who just reported I think they reported either I think it

[00:15:46] was late last week they're struggling quite a bit and issuing you know a bit of a more cautious tone so they reported earnings per share 63 cents which is a 10 decline from one year ago today

[00:15:59] and same-store sales increased by only 0.2 percent on a full-year basis the company reported a 0.8 increase in sales and a 2.8 decline in earnings per share the company's net earnings actually fell by 6.3 but it's been buying back quite a bit of shares it's repurchased 4.2 percent of its total shares

[00:16:19] outstanding over the course of the year so that obviously offsets a bit of the earnings decline on a per share basis the company has actually repurchased just under 7 percent of its total

[00:16:31] shares outstanding over the last few years I mean the only difficulty you have here and just with buy backs in general is the vast majority of the purchases were made at you know relatively big

[00:16:41] premiums to where you know the stock price is right now same-store sales growth came in on the year at 1.3 percent so this is a decline from last year's 2.3 percent over the course of the

[00:16:53] year the company actually closed down 38 total stores which is a large pretty large bump up from the 21 it closed in fiscal year 2023 they mentioned that it opened relocated or acquired

[00:17:06] 34 total stores to me I guess this would be a net loss of four stores but they don't really mention what is going on in regards of how many were opened how many were relocated and how many were

[00:17:18] you know acquired so it doesn't really give a big picture of how they're doing on a store count basis they bumped the dividend by 9.6 percent and they're planning around 700 million and capital expenditures in 2025 half of this will go into new store expansion and the renovation of

[00:17:36] previous stores while 25 percent will go into business development projects and like improving logistics and e-commerce network so the company had around 800 million and kpex last year so this is scaled back by by quite a bit margins remain relatively stable so really the overall weakness

[00:17:54] in results is just the slowing of revenue growth so results from empire are pretty much night and day from a company like law blah like I had mentioned they're seeing you know 3.5 plus same-store

[00:18:06] sales growth double digit earnings growth and as I've mentioned a few times I think this is just due to the fact that empire doesn't have all that big of a discount presence here in Canada at least not compared to law blahs groceries are becoming ridiculously expensive and many

[00:18:21] Canadian consumers are just heading to cheaper alternatives I mean I used to be pretty much exclusively shop at sobies and I've I'm not sure if I've been in there in the last year or two

[00:18:32] it's just you can get identical products at a place like no frills for often you know 10 to 20 percent less and then we factor in the amount you can save over the long term just by

[00:18:43] visiting you know a big box store like Costco I mean where you might pay more but you get more it's just you know overall there's more bang for your buck there I find it hard to imagine

[00:18:53] you know the popularity of places like sobies increasing anytime soon just simply do the fact that you know food prices may be slowing down to a more normalized level for growth but

[00:19:03] they aren't going to be coming down at any point I mean if they do I think Canada's you know we start seeing deflation in terms of food prices it's probably a bigger issue I mean I think the

[00:19:16] period of high food inflation we witness probably caused a permanent shift in the Canadian consumer as many realize you know just how much they can save by heading to simpler options I mean when

[00:19:27] money is more you know it when Canadians have more money maybe they pay a little more here and it's not an issue but when things start to get tight maybe they head to you know

[00:19:36] no frills a superstore a Costco and they kind of realize like oh man this is uh this is quite a bit cheaper and then just on a on a return basis so when we look at it on a

[00:19:46] 10-year basis Lobloss has actually returned 16.4% annually while Empire has only returned 6.19% but for many years these grocers produced very similar results return-wise and it was only when food prices started to skyrocket in late 2021 early 2022 where you really saw that divergence

[00:20:07] and Lobloss took off while Empire really hasn't done much since and I just think that's an element of the stores are just more expensive and Canadians just don't have a lot of money to spend right

[00:20:20] now and they're gonna they're gonna pinch wherever they can and especially on necessities like food yeah yeah I think you're right and I decided to just pull up for Empire a Lobloss and Metro

[00:20:32] just their operating margins but also free castle margins just to see how they compare all three of them and for those on joint TCI's you'll be able to see the graphics but Empire they're looking at

[00:20:44] a operating margin of 4.5% also known as EBIT same thing for people just wondering you can use those interchangeably and then free castle margin of 4.1% and then if you compare that with Lobloss

[00:21:00] Lobloss which is 6.4% of free castle margin and 6.1% of operating margin so you see Lobloss seems to be definitely doing better on boatfront compared to Empire and then you have Metro which is a

[00:21:16] little bit of a mix of both I would say so Metro has higher operating margins at 6.7% but the free castle margin is lower at 4.9% so I just I just thought it was interesting to compare

[00:21:30] all of those but I think the clear conclusion here is that the laggard is clearly Empire over the other two yeah yeah they just don't have a lot of like cheaper alternatives I mean I'm pretty sure

[00:21:46] they're kind of aggressively moving towards that discount brand right now like I think they're kind of revamping a lot of stores I'm pretty sure just off the top of my head I think they sold off

[00:21:57] their Safeway segment I might be wrong on that but like Safeway is one of the most expensive at least here it's one of the most expensive grocery stores you can go to yeah we don't have them here

[00:22:10] yeah yeah it's ridiculous how expensive it is it's up there with like a co-op or something like that but okay I think they're either they either sold them off or they're rebranding a bunch of them to

[00:22:22] kind of you know get that that discount element like a no frills something like that but yeah it's it's hard to see a turnaround unless you know we see maybe big rate cuts more you know excess capital

[00:22:35] for Canadians maybe they go back to something like this but I don't think I ever would just because I realized how much cheaper it is to go to like a cheaper store like a no frills like a Costco

[00:22:47] I just don't see myself ever returning there yeah and I think the last thing to mention here that I don't know if they do maybe they have a small brand that's like a pharmacy empire but

[00:22:59] I know obviously you have Loblaws that owns Shoppers Drug Mart or Pharmapri on the Quebec side and you also have Metro that owns Jean Couture that is a big pharmacy mostly located in the Quebec so

[00:23:11] I would think that is probably helping the results of the of Metro and Loblaws compared to Empire where they don't have that I do know Sobeys has pharmacies like the Sobeys where I'm at

[00:23:22] doesn't have a pharmacy but I'm pretty do I'm pretty sure they do have pharmacies but I've never noticed yeah they're not standalone uh they're kind of integrated I would think yeah yeah okay no I just

[00:23:33] thought I mentioned that because there were definitely bigger portion for the other two but no I think that was a good overview we'll move on to some cannabis earnings so it's been a while

[00:23:43] I think since we talked about that on the podcast I'll get started with Canopy so this one happened about a month ago so on May 30th they released it clearly it wasn't the bulk of it in terms of

[00:23:58] earnings so there was lots to talk about so we didn't talk about it but now it's a bit kind of a slower pace in terms of earnings so I think it was good to revisit that and then you'll be

[00:24:07] talking about Aurora after that so we'll be comparing it have a feeling it's a little bit of the same for both of them not great and I do feel first shareholders of the two companies

[00:24:18] unfortunately now revenues was uh were up 6.7 percent to 73 million which is the first time they had an increase in revenue in over two years now for additional context quarterly revenue peaked in at uh in 2021 at 141 million truth of form Canopy highlighted the top segment increase

[00:24:41] as the first line of their earnings release I've been very critical of them they were doing the same thing with BioSteel before we got you know they realized that there were some accounting shenanigans

[00:24:52] happening and they had to revise the the actual uh earnings that had come come out but I wish they would just highlight you know like most companies do actual total revenue as the first line not just trying to make some of the segments look better I've been very

[00:25:10] critical of them and they've been doing this for quite some time I don't know if you've noticed that on your end no I haven't paid attention to too many cannabis stocks in in quite some time but I mean

[00:25:22] just trying to what's it lipstick on a pig I guess I say I mean just trying to make it make it look better when in reality it's not it's not all that good yeah this is that's pretty I didn't

[00:25:34] even know that it's pretty sneaky so yeah he just took a particular segment which grew 43% just slapped it on the top yeah that's the first line so the Stortz and Bickle segment they had 43% revenue increase to 22 million which is their second largest segment after the Canadian

[00:25:53] cannabis sales Canadian cannabis sales includes recreational and also medicinal Stortz and Bickle for those not aware they make herb vaporizers that are typically used for cannabis so I think you know there's one that's fairly well known it's called the Volcano so if

[00:26:09] people are familiar with that it's actually them that produces that you know I am familiar like I said with the brand but and I think it's good quality I think it was German to begin with

[00:26:20] when they bought it but it is concerning like I said that they're highlighting this and it's not even the core part of the business like they are a cannabis producer and it's kind of funny

[00:26:30] that that's not even the segment that's doing the best right now and the problem is that Canadian cannabis sells only increased 4% with negative growth in the recreational cannabis space segment and then positive growth in the medicinal cannabis now they had a net loss of 92 million

[00:26:48] which was a massive improvement believe it or not over the last year in which they had a net loss of 604 million however there was a significant ride off of 1.7 billion taken off

[00:27:00] last year so of course it wouldn't have been as bad now for the full year they lost 285 million in free cash flow but it's the small free cash will burn the smallest free cash will burn

[00:27:11] that they've had since cannabis had been legalized in Canada so I guess it is kind of you know better than it was I would say still not great but some improvement again you have to

[00:27:24] really try hard to kind of show where there's been some improvement and you can see free cash flow the cash burn was massive in 2019 and 2020 they were burning every year more than a billion in free cash flow in 2019 and 2020 so you wonder why you know shareholders have been

[00:27:44] completely destroyed this would have been the reason right here and then you know some of one of the brighter spot I guess as well is that long-term depth has reduced significantly so from June 2021 up until their latest quarter so it went from 1.5 billion to just shy of 500

[00:28:05] million definitely a big improvement but one of the issues with that is that it's diluted shareholders a whole lot so they went from 39 million in shares outstanding in 2021 to more than 91 million the latest quarter I'm fairly sure this is adjusted because I believe they had a

[00:28:22] reverse stock split I think so I'm not 100% sure I know Aurora did but I feel like all kids cannabis company did that at some point to to not get delisted just based on the share

[00:28:33] price I guess overall I would say it's still not great there's been some improvement but I think it's a reality check for a lot of people that are looking at these companies to rip or become great businesses once the US become legalized on the federal level whenever that

[00:28:50] will actually happen I think it's a really difficult business to be profitable in I will say the same thing I've always said I think 10 15 20 years down the line we'll see one or two

[00:29:03] big players in North America they will be profitable but it will be razor thin margins and they'll make money on volume that's my prediction long term but again I think Canada is just not big enough

[00:29:15] of a market and we're seeing it right now I mean I don't know how they become profitable maybe they will in the next few years but sales are definitely taking a big hit as well yeah I think like again

[00:29:28] I don't follow the industry very well but I think a lot of them are moving away from recreational and more into like medicinal I mean at least a rower is in a big way I mean I think they just took on

[00:29:42] you know a ton of debt you know dumping money into expanding infrastructure like back when it was legalized and as you said like March 2020 like their fiscal 2020 year they burnt almost $1.5

[00:29:54] billion which is eventually just going to lead to either taking on a ton of debt or diluting the hell out of shareholders which they pretty much did both and it's just been it's been ugly for

[00:30:09] Canadian cannabis producers I can't think of a single one that's done well like not one I mean I what is the other one true true leave yeah yeah I have a nice graphic for you when you go over

[00:30:24] Aurora after that I'll show how they perform compared so Aurora canopy compared to the TSX composite XIC right the DTF and then SPDR for the S&P 500 since the day they were legalized in Canada

[00:30:43] and spoiler alert it's not good but I'll show people so I'll let you do Aurora first but before that I'm just so people see so I'm just showing Dernet income and free cash flow on an

[00:30:54] annual basis over the last 10 years and whichever way you look at it it's not good it's just a whole lot of negative numbers I'll just be put it that way and I have a feeling that Aurora is

[00:31:06] a bit of some of the some of the same yeah it's funny it's almost like as you are reading this it's almost an identical identical quarter so Aurora reported reported revenue of 67.4 million

[00:31:20] and close the euro with revenue of 270.6 million so this is around mid single-digit growth on a year over year basis and we look to when we look to fiscal 24 compared to 23 revenue is up around

[00:31:32] 56 percent but again the difficulty for these cannabis companies is not in growing the top line it's in profitability the company reported gross profits of 131 million but operating expenses of pretty much 178 million leading to an end net loss of around 70 million in fiscal year 24

[00:31:52] so the company's main top-line growth now comes from medical cannabis medicinal cannabis sales grew by 64 percent when compared to year over year so 24 to 23 while consumer sales rose only 9.5 percent free cash flow getting a little better but ultimately the company is still burning

[00:32:12] money at a pretty rapid pace so trailing 12 month free cash flow sit at negative 86 million and as a result of the cash burn much like much like canopy the company is at the issue a crazy amount of shares

[00:32:25] over the last two years share counts have effectively doubled increasing by 94 percent but again this is what i looked up at white charts i'm not sure if they would have like offset you know

[00:32:36] what i mean like adjusted for the split so i'm not exactly sure if this is like post reverse split i would say they do adjust it out and it has been diluted this much but i'm not exactly sure

[00:32:47] judging by a lot of the comments on the mdna the company seems to be focusing primarily on the medicinal side and not the consumer side as margins are higher and demand is continuing to grow they stated that they're prioritizing the supply of their gmp manufactured manufactured products to

[00:33:05] our high margin international business rather than the consumer business which offsets lower margins and apparently from what i've been reading again i don't know the industry that well but gmp means good manufacturing practices so in canada cannabis sold doesn't need to fit gmp whereas

[00:33:26] in the international markets like europe uh you have it has to be gmp to be sold so this kind of gives me the impression they're choosing to sell it internationally the higher quality stuff where

[00:33:39] it you know is required to be sold rather than here in canada where you know the margins are lower and the product really isn't all that required so the company's debt levels much like canopy they've come down massively but this has again resulted in huge shareholder dilution so

[00:33:56] peak debt for aurora was 795 million in 2019 and the company now has only 57 million in long-term debt uh it really seems to me like the focus on consumers isn't necessarily dead but it's really on the back burner for aurora they're pushing hard into medicinal

[00:34:13] cannabis and are ultimately benefiting from you know changing regulations i think particularly you know in europe they issued their fiscal 20 their fiscal q1 25 guidance and they expect revenue growth in the high teens on a sequential basis so compared to this quarter so the company believes

[00:34:31] they can achieve positive free cash flow by the end of calendar year 2024 so that that should put them like you know in the next two quarters they expect to be free cash flow positive so they expect operating margins to rain relatively stable throughout the year which

[00:34:47] ultimately you know should should result in more ebita generated by the company again don't follow the industry very much so i can't speak on whether or not the you know the medicinal cannabis industry

[00:34:58] is what's going to cause the company to break out of a very long funk but outside of the top line growth and the debt reduction i mean everything else looks fairly ugly i mean it'll

[00:35:08] be interesting to see if they can turn it around and in terms of just you were looking at you were mentioning the returns so share prices share prices for aurora are down 99.75 percent

[00:35:20] since their peak in 2018 so at that time aurora at that time aurora was trading at 180x sales it's currently trading at about 1x right now yeah so i mean that lines up with what i have so

[00:35:36] i was looking well first on this shares outstanding i think it's reverse split adjusted i think because if not you'd see yeah if not you'd see a sharp decline in share outstanding

[00:35:46] right i think they did like was it like a 10 to 1 or sorry one one for 10 there you know i think so yeah because their share price that's so low yeah exactly and then so we're looking at this here so

[00:35:58] for people just listening on join tci so you have essentially canopy and aurora pick whichever poison you like best that's pretty much the same they're both down i think 98.5 percent for canopy and 99.5 or right around their total returns for for aurora whereas if you would have invested during

[00:36:22] that same period of time and that's since the legalization legalization happened on october 17 i think 2018 i got this from october 19 2018 so you know i don't think the two days will

[00:36:34] change much in terms of returns and then you compare that to the xic so um the etf that tracks the composite the tsx composite that one is doing much better so total returns 67.5 percent and

[00:36:50] you compare it to the spy which is just the s and p 500 and 116 percent total returns so you know and that's obviously then you factor in a gap with between the cannabis companies and your underperformance is just massive right it's just it's over you underperform by what 160 ish

[00:37:12] percent and 100 and you know 17 percent that's 270 percent so it's uh it's pretty crazy yeah yeah but i mean as the saying goes you don't lose if you don't sell that's correct that's the worst the worst

[00:37:28] phrase in the investing world let's talk let's talk again in 15 20 years see how it goes but now i just thought it it's interesting to look back right like brayden and i obviously um

[00:37:40] you were on the podcast ambit we kept hammering when we started the podcast even back in 2019 2020 like these are trading evaluations that are just kind of crazy and you remember these companies were just like purchasing throwing a billion here another billion there and purchasing like

[00:37:58] different like grow uh companies so they're like just you know mna like crazy and just didn't make sense and now they're clearly paying for it we'll see if it turns around obviously roa said this year

[00:38:11] they should be uh freecast will positive i'll uh believe it when i see it i'll just say that yeah yeah i mean it's not i think like these two have taken a particular beat down because uh you know

[00:38:23] they were the major players in the space i i'm pretty sure from what i remember like canopy had a larger market cap than like the entire total addressable market and that's just one

[00:38:34] that's just of the canadian canadian tam which like that should just tell you something i mean it was just absurd but the i looked up the global x well and even the even the tam right that was

[00:38:47] the issue is you couldn't really know what the total addressable market was because it was coming from a black market and you know how truthful are people with their you know their marijuana habits when you know it was illegal maybe people are not fully truthful

[00:39:05] whether they use it or not and then from those people i when it becomes legalized it kind of assumed that everyone would switch to the legal market and i know you know one of my friends

[00:39:15] who's a daily user i mean he's still i think buys from like this bc place which he orders online that's kind of a gray zone but i think a lot of people still use buy it from either the

[00:39:29] black market or something that's kind of you know in between legal and not legal so i think a lot of the assumption was just that everyone would switch to the legal markets would clearly didn't happen

[00:39:40] and then the tam i mean the estimates were just out of whack i mean it's just so hard to establish yeah and they were like they were out of whack and still these companies like single companies

[00:39:52] larger than the entire you know likely most bullish addressable market possible but i looked up the global x marijuana etf i think it's h m mj and i mean even that is down from you know it was highs of around

[00:40:08] 107 dollars in 2018 and it's down to 10 bucks so i mean only 90 roughly it's outperforming this performing these two these two got obliterated just because like at their peaks like they were the most popular ones so yeah yeah it's been ugly yeah exactly so now we'll we'll finish off with

[00:40:32] win and bago industries you thought it was hilarious that i decided to do that but you know i think it's a fun one to look at we talked about it on the poscat podcast

[00:40:43] braden and i a couple years ago and obviously i think they had a while they had a big boost during the pandemic because clearly with the lockdowns people didn't have much to do you know having a

[00:40:56] rv was actually pretty sweet right you could travel you didn't have to book an hotel you know all the restrictions regarding that you could just you know use your rv travel canada

[00:41:08] maybe figure out how to get into the u.s i don't remember all the restrictions back then but regardless even if you had to stay in canada we have a big country so you can go from east to west

[00:41:18] and see a lot of different things and not have to worry as much about all the restriction so they definitely benefit from that and their revenues actually peaked around in 2022 at just shy of five billion and then the last 12 months they're looking at three billion so it's

[00:41:35] been declining and revenues pre-pandemic were right around two billion 2018 and 2019 so i think it's interesting just to look at that obviously it's been a steep decline since and in terms of quarters revenue peaked in mid 2022 at 1.5 billion and have been in decline ever since now the stock

[00:41:55] has not had a good year so far it's down 25 percent i can tell you one thing it's crushing those cannabis stocks but nonetheless nonetheless it's been struggling this year but in their latest

[00:42:08] quarter which ended on may 25th and was just released last week they saw revenue decline 15% to 786 million management said that market conditions remain a challenge clearly the man remains inconsistent and sluggish they expect softness to continue in q4 but they are seeing encouraging sign for 2025

[00:42:29] and beyond again pretty vague on that we'll have to see and i will give my take i do have an interesting take on this so their backlog for motorhome rvs went from 800 million to 355 million which is a

[00:42:44] 56 decline operating margins fells more than 300 basis point to 5.5 percent eps fell 43 percent to a 96 cents per share net income declined by half to 29 million but again they are profitable so uh you know listen to that canopy and aurora free cash will fell 20 to 70 million and on the

[00:43:08] bright side they did return 25 at 29 million to shareholders via buybacks and dividend during the quarter and the stock is currently yielding 2.3 percent it's still a relatively small company i didn't realize it was that small but it's a market cap of 1.5 billion with any enterprise

[00:43:27] enterprise value of 2 billion so i thought it would have been maybe slightly bigger than that but um it's quite small and the bullish case i think for them and let me know what you think but

[00:43:40] as housing not only in canada but in the us as well becomes more and more expensive you can make an argument that this could present an option for some people that are just priced out

[00:43:53] of the housing market and you know if you have your remote worker doesn't matter where you work you can get set up in that i mean i was looking at these things and i found like this website it's

[00:44:05] like a company in ottawa that sells like used and u rvs i mean these things are pretty sweet like you can look and you get like these massive things used of course but you're you know you're getting like these they're literally like almost buses that you can

[00:44:22] you can kind of live with you have like the thing opens on the side and you can get some i think new ones for around 150 200 000 uh but if not i mean you can get some used ones for like

[00:44:36] around 100 k so clearly you know better than buying a home more affordable so i don't know there could be a bullish case for them as an alternative for people who want a home

[00:44:48] yeah i mean i've been in a few like really nice rvs and they are nice like they're like a like a full blown house i mean obviously they're a little more compact but like i mean i could see somebody

[00:45:01] realistically owning one of these over a home i mean even i'm seeing like even you know like double wide trailers where i'm at selling for 300 000 and they're not as nice as a rv you know

[00:45:16] probably like a 40 foot rv you could probably pay 200 grand for brand new yeah it's better than better than a shubah condo yeah exactly i mean a lot of them are really nice they don't really

[00:45:28] have any like you know you're not gonna get one well maybe you could i can't imagine you're gonna get one with like granite countertops and stuff just because they like to make them a little

[00:45:36] lightweight but uh yeah i've been in some pretty nice rvs the one thing i'll say about the popularity is probably just due to financing as well like you could probably you could have

[00:45:46] bought one of these in the pandemic and because most people even though it's kind of the wrong way to look at it they don't really look at the total cost of own they just look at the

[00:45:53] monthly payment like they don't care how much they're paying they just look at how much they're paying per month which i would imagine would have driven a huge surge in popularity i didn't

[00:46:04] even know they were publicly traded yeah well yeah i knew i think they have a few competitors but i thought it was just fun to look at with a pandemic and i think i wanted to touch on it

[00:46:13] by for god i think that's a great point what you said in terms of the interest rates clearly a lot of people will buy these on financing so that will definitely impact the demand for it

[00:46:23] but again i mean there is probably a bullish case to be made because if you can't afford a home you're a remote worker i mean it's not a bad option like clearly i mean compared to paying like

[00:46:38] 2,500 two grand a month for like a one bedroom condo that's like probably smaller in living space than that even or pretty close to it obviously if you don't have a remote option

[00:46:48] in terms of working it's a different conversation but you know you can make a case that for a lot of people it couldn't make sense yeah yeah you could definitely like i could probably do it

[00:47:00] i mean i i could pretty much work from everywhere i know i wouldn't but uh i mean i could see it i mean you just got to find i guess you got to find a place to park and get water and electricity

[00:47:11] which yeah like a lot of those places the only difficulty there is they charge like 50 70 bucks a night for full hookup so that adds a little bit of expenses but uh no it's

[00:47:23] it's definitely a viable option i mean the first thing when i saw this winnebago is i just thought of the winnebago man i don't know if you've ever seen those videos no oh you got to

[00:47:34] watch him it's like he's like a winnebago salesman and it's all like his bloopers they're absolutely hilarious that's the first thing i thought of it was like a youtube video probably 15 years ago

[00:47:46] that went viral of this uh this winnebago salesman okay well i think you know i'll go watch some of those videos i think you know this has been long enough in terms of no obviously we

[00:47:57] had to get creative with earnings a little bit but i think it was a fun episode nonetheless and our next episode because we will be taking a little bit of a week off from recording uh we'll

[00:48:08] record the next one a bit in advance so if you listen to this on first thing thursday morning when it comes out feel free to reach out to dan and i on twitter at fiat underscore iceberg for me

[00:48:20] and for then at stock trade stock trades can you say it for me stock trades underscore ca underscore ca so you can just uh you know tweet at us or send us a dm if you have some questions because

[00:48:34] friday uh the day after we'll be recording an episode a bit early and we'll do a bit more of a mail bag episode because we'll be doing in advance so if you hear this first thing

[00:48:43] thursday morning feel free to send us some questions you can also go on our website and send us some questions over there so it's uh it's in the description of this episode so

[00:48:56] you'll be able to find it there so i hope you enjoy the episode we'll sign off on this and we'll see everyone next week the canadian investor podcast should not be construed as investment or financial advice the hosts and guests featured may own securities or assets

[00:49:14] discussed on this podcast always do your own due diligence or consult with a financial professional before making any financial or investment decisions