Cash Flow Chronicles: Analyst Dissects Canadian Cannabis Balance Sheets, Market Trends Vs. The US
Benzinga recently reviewed the balance sheet and cash flow trends of Canadian LPs (licensed producers).
Zuanic & Associates presents crucial factual key findings:
- Year-to-date (YTD) the Canadian cannabis market has shown steady market growth, reported at +12%, with second-quarter (Q2) of 2023 showing a year-on-year (YoY) growth of +10%.
- The growth rate is good in the context of Canada's existing legal provinces, but it underperforms the U.S. market, which experienced a YoY growth rate of 9% during the same period.
- Canada's per capita metrics fall short of those in the U.S.
- Recreational consumption in Canada is around US$100 per person — much lower than even the less matured U.S. states that legalized recreational use after Canada.
Category Trends
Within the Canadian cannabis market, different product formats experienced varying levels of performance.
- Notably, flower sales decreased over time, now accounting for 39% of total sales (compared to 43% in Q2 of 2022 and 60% in Q2 of 2020).
- Pre-rolls (+23% YoY) and vape (+18%) outperformed other formats.
- Edibles (+17% YoY) and concentrates (+26% YoY) also saw positive growth
- Oils (-12% YoY) and beverages (-4% YoY) declined.
- Topicals remained largely unchanged and accounted for only 0.3% of sales.
Cash Flow and Balance Sheet Trends
Only three out of the 17 Canadian companies reviewed showed positive operating cash flow (OCF) in 2022, including Decibel (OTC:DBCCF), High Tide (NASDAQ:HITI) and Rubicon (OTC:ROMJF).
Most companies displayed improving trends, but still posted negative operating cash flow.
The report also highlights the disparity between positive EBITDA and positive OCF. While 12 companies reported positive EBITDA in Q1 of 2023, only seven had positive OCF.
Companies with high net debt-to-sales ratios — e.g., Auxly (OTC:CBWTF), Canopy Growth (NASDAQ:CGC), and HEXO Corp. (NASDAQ:HEXO) — could face challenges if cash flow trends don't improve.
LP Performance
Among the Canadian LPs, Tilray (NASDAQ:TLRY), including HEXO, held the largest market share at 12.1% in Q2 of 2023. After that:
- Decibel ranked second with a 7.5% share
- Village Farms International (NASDAQ:VFF) at 6.4%, showing a 15% year-on-year sales increase, mainly propelled by the flower segment, which now accounts for over 80% of sales.
- Organigram (NASDAQ:OGI) touts a 6.1% share, but saw an 11% year-on-year decline in sales in Q2 of 2023
- Auxly at 5.2%
- BZAM at 4.4%, faced a 9% sequential sales drop in Q2, with flowers, vapes, and pre-rolls as significant components of their sales mix.
- Cronos (NASDAQ:CRON) also held a 4.4% share, witnessing a 4% sales increase in Q2
- SNDL (NASDAQ:SNDL) held a 2.9% share, witnessing a 7% sequential sales decline in Q2 of 2023 after the Valens deal.
- Aurora (NASDAQ:ACB) had a 2.2% share, maintaining flat sequential sales growth in Q2 and showing a pivot towards more premium lines, resulting in a higher average flower price compared to peers.
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Photo: Pablo Zuanic - Cannabis Sector Equity Analyst - (Janon Stock on Shutterstock and 420Odysseus on Twitter).