Bankrupt Dean Foods deals assets to dairy-farming cooperative


The biggest U.S. dairy farming cooperative struck a $425 million deal to buy dozens of plants from bankrupt milk processor Dean Foods Co., in a deal executives said would preserve jobs and markets for farmers’ milk.

The deal, which was proposed by Dairy Farmers of America, requires approval of the bankruptcy court and the U.S. Department of Justice.

If consummated, it would see the Kansas City, Kan., agricultural cooperative take over the bulk of Dean’s plants, following the top U.S. milk company’s bankruptcy filing in November.

Read on: Trump agriculture secretary says during Wisconsin visit that family-run dairy farms may not survive

Dean’s

DFODQ, +2.29%

bankruptcy followed a yearslong decline in sales of fluid milk, the Dallas company’s main business. Bottled water, fruit juices and plant-based milk alternatives have crowded out milk cartons in grocery store beverage cases, pressuring the milk business. Dean also struggled as grocery sellers like Walmart Inc.

WMT, +0.38%

and Kroger Co.

KR, -1.40%

opened their own milk-bottling plants, expanding sales of store-brand milk that is often priced far below branded milk from processors like Dean.

Pressures are mounting on the U.S. milk sector beyond Dean. Borden Dairy Co., another Texas dairy company, filed for bankruptcy in January, also blaming falling milk consumption and retailers’ investment in bargain-priced milk. Battling low prices, thousands of dairy farmers have closed their milking parlors in recent years, according to the U.S. Department of Agriculture.

An expanded version of this report appears at WSJ.com.

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Three reasons why Canopy Growth’s cannabis sales grew as Aurora struggled


Canopy Growth Corp. reported earnings early Friday that gave investors a few reasons to cheer: In short, it wasn’t a total disaster.

Canopy

CGC, +13.37%

WEED, +15.84%

 logged fiscal third-quarter net revenue of C$123.8 million ($93.5 million), well higher than the FactSet consensus of C$105 million reflecting strong year-over-year and sequential growth. Canadian cannabis companies have struggled to produce those types of results of late, including Aurora Cannabis Inc.

ACB, +7.48%

ACB, +5.10%

 , which is No. 2 in marijuana sales behind Canopy and issued earnings the day before. Canopy’s U.S. shares closed up 13.4% to $22.13 Friday after the numbers were announced, and sparked a rally for other marijuana companies’ beleaguered stocks.

For more: Canopy earnings spark broad rally in cannabis sector

There were three reasons that Canopy executives and analysts pointed to for the revenue growth: Recreational weed sales grew, especially compared with the results Aurora reported Thursday; the domestic and international medical marijuana business ticked up, potentially due to Aurora’s struggles; and the company’s marijuana-paraphernalia acquisitions grew sales nearly 50%, while most Canadian cannabis companies, including Aurora, have not acquired large, established accessories businesses .

“Our top-line performance benefited from a broad base of growth in our core cannabis business, as well as our strategic acquisitions,” Canopy Chief Financial Officer Mike Lee said in a conference call Friday.

Lee said in the call that the company’s recreational weed revenue in Canada grew because it sold more of its expensive pot, while Aurora said its customers were more interested in cheap weed. Sales of pre-rolled joints jumped more than 50%, as Canopy’s balanced portfolio of marijuana brands seemed to pay off.

“Canopy does not need to chase sub-value pricing. Canopy’s recreational portfolio is balanced between tiers (40% premium, 30% mainstream, 30% value) with broad momentum, and it will not chase sub-value pricing,” Piper Sandler analyst Michael Lavery wrote in a note to clients Friday. Lavery raised his target price to $28 after the results and has the equivalent of a buy rating on Canopy stock.

See also: People want cheap weed, and Aurora Cannabis is paying the price

The company’s business-to-consumer sales also increased, which was in part a result of owning its own retail operations. Canopy added 12 retail locations during the quarter to bring its total retail footprint to 27 across the country, and increased same-store sales 11%. Aurora opted to become involved in retail operations via its investment in Alberta-based liquor retailer Alcanna Inc.

CLIQ, +0.77%

 instead of running its own retail shops.

Canopy’s medical cannabis sales expanded in the fiscal third quarter both in Canada and overseas, with the latter possibly helped by Aurora’s struggles. Aurora’s international sales declined in part because Germany held up some product Aurora shipped to patients in that country.

“Our sales in Germany benefited from opportunistic sales to fill supply gaps created by a regulatory hold on products of another vendor,” Lee said in the earnings call.

Read: Marijuana companies have just months to live on average, study says

A number of Canopy Growth’s acquisitions showed growth as well, amounting to a total of 22% of its revenue, with hardware used to consume marijuana a key focus. Its cannabinoid medicine maker C3 grew revenue by 5% versus the prior quarter. Vaporizer sales from its Storz & Bickle acquisition grew 46% over the last quarter, because of “organic growth” and the company’ benefited from seasonal sales of roughly C$5 million.

Storz & Bickle makes a number of cannabis consumption accessories, including vape devices, which includes the venerable Volcano, well-known among cannabis enthusiasts even prior to Canopy buying the German company. Other hardware acquisitions This Works and Biosteel also boosted the company’s sales, Lee said.

It was not all good news for Canopy, however. Jefferies analyst Owen Bennett wrote in a note to clients early Friday that while the headline numbers will “provide relief,” areas of concern remain in the details.

Bennett said the company’s market share declined to 22%, despite the fact that the company nearly doubled its retail footprint; Canopy also issued guidance with a “modest” fiscal fourth-quarter sales increase, which suggests their market share will continue to decline. Bennett has the equivalent of a sell rating on the name with a C$21 target price.

U.S.-traded shares of Canopy Growth have lost half their value in the past year as the S&P 500

SPX, +0.18%

 has gained 23%. The ETFMG Alternative Harvest ETF

MJ, +3.72%

 has fallen 53% in the past year and the Horizons Marijuana Life Sciences Index ETF

HMMJ, +5.85%

 fell 60%.



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This European company isn’t sugarcoating its coronavirus problem


Pernod Ricard, the maker of Jameson whiskey and Absolut vodka, cut its annual profit growth outlook for 2019-2020 on Thursday, as it said China’s coronavirus epidemic was likely to have a “severe” impact on its third-quarter performance.

The French spirits maker, which generates 10% of its global sales in China, said it couldn’t predict the “duration and extent of the impact,” but stressed it remained confident on overall strategy.

“In our view Pernod Ricard deserves credit for attempting to quantify the impact, which few other companies we follow have done,” said James Edwardes Jones, analyst at RBC Capital Markets.

He added: “We don’t believe that this should weigh heavily on the shares, albeit China is an important market for Pernod Ricard (we estimate 14% of sales and 20% of EBIT [earnings before interest and taxes]) if the lack of reaction for others in the sector is any guide.”

Shares in Pernod

RI, +3.80%

 closed up 3.8% on Thursday.

Pernod’s warning came as the European Union cautioned on Thursday that the coronavirus outbreak had emerged as a “new downside risk” for the eurozone’s growth prospects.

In its winter 2019 economic forecast, the European Commission said: “The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions.”

Paolo Gentiloni, European Commissioner for the Economy, added: “We still face significant policy uncertainty, which casts a shadow over manufacturing. As for the coronavirus, it is too soon to evaluate the extent of its negative economic impact.”

Pernod, the world’s second-biggest spirits group after the U.K.’s Diageo

DGE, -0.87%,

said operating profit from recurring operations would grow between 2% to 4% this year, down from the 5% to 7% it previously predicted, because of the impact of the coronavirus outbreak.

The French spirits maker reported a net profit of €1.03 billion ($1.12 billion), up 1% from a year earlier, while profit from recurring operations was €1.78 billion, up 4.3% on an organic basis. Sales reached €5.47 billion in the six months to Dec. 31, a 5.6% gain on the year earlier, and 2.7% higher on an organic basis.

The company came under pressure to boost its margins and improve its corporate governance in December 2018, after U.S. activist investor Elliot Management built a 2.5% stake in the company.



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People want cheap weed, and Aurora Cannabis is paying the price


Canadians want cheap weed, which isn’t great for companies that want to make expensive cannabis.

Cannabis companies in Canada have long promised “super premium” products, some going as far as predicting demand for $100 grams of the plant. Canadian consumers are heading the other way, however, as Aurora Cannabis Inc.

ACB, +0.68%

ACB, +2.08%

 outlined Thursday in an earnings report that revealed quarterly losses of more than C$1 billion.

Chief Financial Officer Glen Ibbott said in a conference call that 17% of the Canadian cannabis market was purchases of cheap weed — less than C$9 ($6.79) a gram — as of December, up from just 2% over the summer. Meanwhile, premium pot went from a market share in the mid-30% range to 17%.

“So, [it took] a hard turn,” Ibbott said in the call.

Aurora focused on high-grade cannabis at its Whistler facility and in specific brands under Chief Executive Terry Booth and former Chief Corporate Officer Cam Battley. Aurora changed its leadership, however, and executives said Thursday that it plans to launch a cheaper brand called Daily Special.

See also: Aurora Cannabis covets California’s weed culture, but can’t pronounce one word correctly

Aurora’s statements in the call Thursday reflect a broad trend in the sector across Canada, in every jurisdiction — people who enjoy and buy cannabis want cheap, strong weed and will speak with their wallets, according to PI Financial analyst Jason Zandberg. Pressure for inexpensive pot was nearly inevitable, he said, but Zandberg and industry executives were caught off-guard by how quickly the demand arrived.

“Clearly, there is more production of cannabis than demand, but I didn’t expect downward pricing pressure for weed this soon, just over a year into the legal market,” Zandberg said in a phone interview late Thursday.

Demand for less costly marijuana has already driven down the price at which Aurora can sell its weed by 10%, to C$4.76 a gram, in just three months, and Zandberg said his team expects a similar drop in the current quarter. Aurora is paying the same costs for growing, packaging and selling pot, which means lower margins, Zandberg pointed out.

Full earnings coverage: Aurora Cannabis shares rise after a dire earnings report and $1 billion loss

Cheaper weed may also hurt Aurora in other ways. The company recently promised its bankers that in exchange for easing its immediate obligations, it will report positive earnings before interest depreciation taxes and amortization by the end of the fiscal year. Failing to do so would breach the terms of C$162 million of senior secured term loans.

“Aurora faces a lot of headwinds,” Zandberg said. “When you start to see the price of cannabis decline, it’s going to be harder to hit that [Ebitda] milestone. They’re not especially cash-rich for an organization of its size and there are a lot of factors at play here.”

The desire for cheap marijuana also damaged Supreme Cannabis Co. Inc.’s

FIRE, +0.00%

SPRWF, +1.14%

 results — the company cited demand for cheaper weed as one of four reasons why it abandoned its fiscal 2020 guidance Thursday afternoon.

Aurora’s U.S.-traded shares added a penny to $1.47 in Thursday trading following the earnings report. The Cannabis ETF

THCX, +0.18%

 closed up 0.2%.

See all of MarketWatch’s cannabis coverage here



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Aurora Cannabis earnings: Here comes a billion-dollar loss


When Aurora Cannabis Inc. announced last week that co-founder and Chief Executive Terry Booth would retire, it also revealed another loss to come: A quarterly deficit of roughly a billion dollars.

Aurora

ACB, -1.28%

ACB, -1.44%

 is scheduled to report fiscal second-quarter results Thursday morning, and it is expected to reveal a loss of about C$1 billion ($750 million) thanks to goodwill and asset-impairment charges that it disclosed amid a big shakeup for the Canadian cannabis company. Aurora said it planned write-downs of C$740 million to C$775 million in goodwill as well as C$190 million to C$225 million worth of intangible property, plant and equipment charges.

As MarketWatch has previously reported, Aurora — and other Canadian weed companies — made a batch of acquisitions in the heyday of pot-stock mania, buying assets at values that now appear to be inflated. Aurora was the king of such deals, accruing about $2.4 billion in goodwill on its balance sheet, a large portion of which was from its acquisition of Medreleaf.

For more: The $4 billion time bomb ticking away inside the biggest marijuana companies

In a conference call last Thursday, Chief Financial Officer Glen Ibbott said that the impairment charges were related to operations in South America and Denmark and that its core Canadian assets weren’t affected by the write-downs. Beyond the non-cash impairment charges, Aurora also said that it was expecting to record a C$12 million write-off for future product returns and price reductions related to products that were sold in prior quarters, mostly in the first half of calendar 2019.

Aurora also announced a 500-person layoff, capital expenditure reductions to roughly C$100 million and restructuring of its debt. Executive Chairman Michael Singer will take the helm as interim CEO until a permanent replacement can be found.

In Thursday’s earnings conference call, investors should expect to hear executives discuss how the company plans to forge ahead in spite of financing challenges and management turmoil, as well as get more details on the company’s plans and forecast for the remainder of the fiscal year.

What to expect

Earnings: The FactSet consensus calls for losses of C$0.08 a share, versus a loss of C$0.25 a share in the year-ago period. Aurora said it expects its cash costs per gram of dried pot will remain below C$1.

Revenue: Analysts polled by FactSet expect Aurora to report fiscal second-quarter revenue of C$61.7 million, versus C$54.2 million a year ago. But the company’s second-quarter sales are expected to decline sequentially from first-quarter revenue of C$75.2 million. The vast majority of the company’s sales are from Canadian recreational and medical cannabis.

Aurora said Thursday it expects net cannabis revenue of $C50 million and C$54 million for the fiscal second quarter and cannabis revenues of C$62 million to C$66 million. Singer said that the company expected little or no sequential sales growth in the fiscal third quarter.

Stock movement: U.S.-traded shares of Aurora lost a little more than half their value in the past three months, while the S&P 500 index

SPX, +0.17%

 notched a gain of 8.6%. In the past three months, the ETFMG Alternative Harvest ETF

MJ, +1.33%

, which tracks a basket of pot stocks, fell 19.4% as the Cannabis ETF

THCX, +1.66%

 fell 26%.

What analysts are saying

Analysts haven’t had much nice to say following the announcement last week. Stifel analyst W. Andrew Carter wrote in a Feb. 7 note that, “We believe Aurora’s status as a going concern is now in question, and we believe that even if the company navigates through the challenging environment, there will be limited value for the equity holders.”

Carter, who has a sell rating on Aurora with a C$1 target price, wrote that Aurora won’t be able to keep pace with the “demands of a dynamic market” and that the company’s outlook leaves “little room for error.”

See also: Analyst says ‘it would be fair for investors not to believe’ Aurora Cannabis

Jefferies analyst Owen Bennett wrote in a note to clients last week that Terry Booth stepping down was “not a major surprise” because he faced criticism over his “lack of publicity” and that the company needed a “leadership profile” geared toward execution versus entrepreneurship and promotion. Bennett said that the new CEO is expected to have significant CPG (consumer packaged goods) experience in line with the two new board members also announced Thursday.

Jefferies has a C$1.90 price target on the name and rates the stock a hold.

In a January note to clients, MKM Partners analyst Bill Kirk wrote that Aurora’s executives had a 50% chance of getting their predictions correct. Aurora was right all of the time when making negative predictions, but only 46.2% of the time when making positive forecasts, according to an analysis.

See also: Marijuana companies are bad at forecasting, analyst says

“Aurora management, led by Terry Booth and Cam Battley, offered some of the most optimistic and ultimately incorrect predictions,” Kirk wrote in a second note just after Aurora’s announcement last week. “We believe this optimism, particularly around growth and profitability created an organization with a bloated cost structure and a capital structure with burdensome convertibles and a heavily diluted equity base.”

Kirk rates the name a sell with a C$2 target price.

Of the 19 sell-side analysts who cover Aurora, four have the equivalent of a buy, 11 rate the stock a hold and four have the equivalent of a sell on the name. The average price target is $2.08, which represents a 33% gain from Monday’s close of $1.56.



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