Canopy Growth Corporation

Good morning. My name is Carol and I will be your conference operator today. I would like to welcome you to K&P Growth's first quarter fiscal 2021 financial results conference call. At this time, all participants are in a listen-only mode. I will now turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin your conference call.

Thank you, Carol, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy Growth CEO David Klein and our CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for our first quarter ended June 30, 2020. This news release is available on Canopy Growth's website under the Investors tab and will be filed on our EDGAR and CEDAR profiles. Before we begin, I would like to remind you that our discussion will include forward-looking statements that are based on management's current views and assumptions, and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements that's included at the end of this morning's news release. Please review today's earnings release and canopy growth reports filed with the FCC and CDAR for various factors that could cause actual results to differ materially from the projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release furnished to the SEC and Canadian securities regulators. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remarks by David and Mike, we will conduct a Q&A session during which questions will be taken from analysts. To ensure that we get to questions from as many as possible, We ask panels to limit themselves to one question. With that, I'll turn the call over to David. David, go ahead.

Thank you, Judy, and good morning, everyone. I hope that you and your families are keeping safe and well. Although we're still navigating through a global pandemic, I'm proud of how Canopy has responded to the challenges during this period. Since the last time we spoke, we've seen our nations rally behind social justice and racial equality, which has placed a spotlight on the challenges we face as a society as these deep racial divisions are exposed. Our thoughts and prayers go out to all of those who have been impacted by racial injustice and associated acts of violence. Canopy recognizes our responsibility to do more to increase the representation of black, indigenous, and people of color employees at every level in our organization. while investing in social justice initiatives such as providing access to legal services for communities disproportionately impacted by the cannabis prohibition. Our purpose at Canopy is improving lives, ending prohibition, and strengthening communities. Recently, I signed the Black North CEO Pledge to ensure that progress on this issue continues to be a top priority for our company. The goal of the Black North CEO Pledge is to address systemic racism in the boardroom and includes having at least 3.5% of executive and board roles in Canada held by Black leaders by 2025. I see this as a vital initiative for Canopy given the disproportionate impact cannabis prohibition has had on people of color globally. In fact, as political pressure begins to build for cannabis permissibility in the U.S., I'd like to reiterate the case for an updated federal stance on cannabis. At a time when millions are marching to dismantle systemic racism, federal cannabis legalization would represent an important departure from the decades old war on drugs, which caused unfair rates of incarceration among minorities. We're also facing a recession caused by COVID-19. It's estimated that the legal sale of recreational cannabis in the US if legalized in all 50 states today would generate more than $175 billion by 2025 in federal sales, business, and payroll taxes and add nearly 1.6 million jobs by 2026. There is no question that our industry can be a key driver of the United States economic recovery when we gain control of the pandemic and begin to restart the economy. Congress seems to have recognized the same potential that we see in cannabis with bills like the Moore Act and with momentum growing across both sides of the aisle. It's our vision to unleash these enjoyable and remarkably safe products for adults to consume in a responsible manner. As we expand our presence in the U.S., we'll continue to contribute our knowledge in partnership with the appropriate regulatory bodies in order to ensure safe and effective standards are implemented. Now let's discuss the progress we're making at Canopy in our quest to create a cannabis-focused leading CPG company. There are four key themes that Mike and I would like to focus on this morning. First, Canopy is improving execution in nimbleness in Canada. We've quickly completed a rollout of our value flower strategy. We've significantly improved our customer order fill rates. Our cannabis 2.0 portfolio continues to gain momentum, and we're adapting quickly to the changes in the marketplace and competitive dynamics. Second, we're improving our quality. We've enhanced the moisture content of our flower products, and we've launched a number of research initiatives to further improve our flower quality. Our commercial team continues to engage with bud tenders and staff at retail stores to drive increased awareness of our quality initiatives. And consumer feedback on the quality of our cannabis beverages continues to be very positive. Third, we've got a number of exciting developments happening in the U.S. market. We launched our new e-commerce site, ShopCanopy.com, in the U.S. Our first and free brand has expanded into topicals and creams, and BioSteel ready to drink beverages in Tetra packs are now available, just to name a few. And finally, we continue to focus on financial discipline while also investing for future growth opportunities. Let me tie these themes and provide details on the progress we're making to the key strategic priorities I laid out during our Q4 investor call and reinforced during our virtual investor meeting. We said we're building a world-class consumer centric and innovation driven company. So let me give you a few examples of the progress we're making here. We've completed a nationwide repositioning of our TWD flour, including changes to price pack architecture with higher and more consistent THC ranges. We're seeing improved sales velocity and market share performance with our dollar share increasing nearly five points in value flour in the province of Ontario during the latest four weeks ended July 19th. I know some are concerned about the growth of the value segment and potential for further price compression in the industry. So let me share my perspective on this. First, I think the value segment plays an important role in converting illicit sales into legal sales, which should be positive for the broader category. Second, we intend to use our consumer insights to create differentiated quality flower products so that we can also trade up our value consumers to our mainstream and premium products. And third, our ability to compete in all price segments will help build scale, which will enhance our margins. In addition to value flour, we're seeing the process of repositioning select mainstream and premium flour brands in the market, implementing higher and more consistent THC ranges while actively engaging with bud tenders to bring awareness of our product quality. We've initiated a consumer research initiative to better understand the flower consumer, including how they define overall product satisfaction and the critical elements that drive those perceptions. This will also serve as a foundation for our design to value initiatives. We're implementing pricing adjustments on select vape offerings and we'll be refining our lineup of 510 cartridges with a more focused approach. We're unleashing our innovation pipeline with our differentiated product portfolio, as we now have four beverages in market and have achieved a number one dollar share in beverages, accounting for 74% of all ready-to-drink cannabis beverages sold year-to-date in Canada. In fact, we've shipped over 1.2 million units of our beverages since the end of March, compared to 4.2 million units sold across all brands throughout the entire U.S., in all of 2019. We're on track to expand our market leadership in beverages with shipments of houseplant lemon and Quattro CBD beverages in the coming months. In the US, we now have over 25 US hemp-derived CBD SKUs across our first and three This Works and BioSteel brands with more to come. Stores in Bickel are seeing strong consumer pull in both Europe and expanded distribution in North America behind our differentiated Volcano Classic and hybrid vaporizers and portable vaporizers, Mighty and Crafty Plus lines. In fact, Volcano Classic is celebrating its 20 year anniversary this year with a limited edition of gold plated Volcano Classics in 24 karat gold. And our This Works team launched a timely innovation, stress check hand sanitizers that was very well received in the UK market which we are now bringing to the U.S. market. The second area of our strategic focus is to win in our focused markets of Canada, U.S., and Germany. Here I'd like to take this opportunity to outline a number of exciting developments in the U.S. market, the biggest cannabis market in the world. First, we recently launched ShopCanopy.com, the new e-commerce website dedicated to our growing portfolio of U.S. hemp-derived CBD product lines. We believe this website offers our consumers a convenient one-stop destination to explore and purchase over 25 product SKUs from brands including Burst and Free, This Works, and BioSteel. The site will continue to feature Canopy's new brands, including the highly anticipated launch of Martha Stewart branded CBD products, which will take place within the next month. Thank you for joining us. Your partnership with Patrick Mahomes, a Super Bowl MVP. Patrick joins the BioSteel roster of elite athletes as a partner, and we're thrilled to have such an influential sports thought leader on the BioSteel team. Turning to acreage, we announced in June an amended plan of arrangement with acreage that solidifies our path forward. We believe the updated arrangement, which must be approved by acreage shareholders, provides cash for Acreage to develop and grow its federally legal hemp-derived CBD business while reducing Canopy's purchase obligation and conserving 65 million shares of Canopy growth stock. Acreage will continue to target delivering profits and growth by narrowing its focus on key profitable operations. Canopy has already licensed Acreage with rights to certain Canopy IP including IP related to our beverages and vapes as well as our brands as part of the original agreement. Acreage has in fact launched our tweed branded flower in Illinois, Maine, Massachusetts and Oregon. Acreage has rights to launch Canopy's best in class products and brands into the US market including our cannabis infused beverages and we expect to hear more about this from Acreage shortly. In addition to Acreage, Tarasen provides us with additional optionality in the US THC market upon federal permissibility. Tarasen also owns Arise Bioscience in the US, a leader in the production and distribution of hemp-derived health and wellness products, with access to over 10,000 retail locations nationwide. The third strategic priority for us is quality execution, and we're making progress here as we improve our execution and increase our agility throughout the organization. We've got a number of flower quality improvement programs underway based upon consumer insights. To name just a couple, we're optimizing our drying processes to raise the moisture content of our flower products. And we're also looking at maximizing aroma and terpene profiles throughout our drying and curing processes and working with sensory panels to ensure that our products align with consumer preferences. The new organizational structure is largely complete, with our product teams now organized by global product lines of flour, vapes, edibles and beverages, and skincare and topicals, supported by our insights and innovation teams. The new commercial team will work closely with the product and insight teams to keep our pipeline of amazing products flowing through all of our sales and distribution channels. Our new operating model is already driving quicker decision making and increased agility as an organization. We've made strides in our supply chain, ensuring that we can better fulfill our customer orders with the right products at the right time. Just to highlight a couple of examples, for our Canadian medical business, confidence in supply of Spectrum Yellow Oil is at a level where we've decided to reduce the cost of this medical product by 25% for patients in need. And our beverage production has increased significantly, more than doubling from June to July, and it's expected to nearly double again in August to ensure we keep our beverages fully stocked at retail. Finally, we're improving our cost structure in financial discipline. Mike will provide more details in this area, but just to highlight a few examples, our head count is down more than 18% since the beginning of the year. Our total OPEX declined by 23% compared to a year ago and we've reduced our cash burn by more than 50% from the prior year period. During our Virtual Investor Day in June, we provided you with key metrics to gauge our progress, and I'm going to update you now on how we're doing against those metrics. First, are we winning with the consumer as measured by market share in our core markets in net sales growth year over year? In Q1, we've maintained number two market share in Canada medical and number one market share in the German flower market. In Canada Recreational, we remain top three in most provinces. However, we're not satisfied with our current positioning. To that end, you will see continued improvement in flower quality and performance, continued optimization of our SKU offerings and product portfolio, improved sales and operational execution to ensure that we're continuously on shelf at retail, and consumer promotional activity, which builds on the strength of our tweed Tokyo Smoke, and Houseplant brand names. Second, are we improving our execution as measured by increases in our customer order fill rates and reducing out-of-stocks at retail? We made progress during Q1 with our supply attainment rates averaging 87% in Q1 versus 56% in Q4. In recent weeks, our supply attainment rates have risen above 90%. And our internal checks suggest We've reduced out-of-stock issues at retail, and we're looking for further improvement in this area to help us gain share as I just outlined. Mike will address the key financial metrics in his remarks. We know there's more work ahead of us, and we continue to expect FY21 to be a transition year for us. But I'm confident that our renewed focus and new operating model, along with a talented team and a strong balance sheet, will power our transformation into a world-class Thank you, David, and good morning, everyone. Against a volatile macro backdrop and a continued dynamic market, Canopy delivered resilient financial performance in Q1, driven by diversified revenue sources and stronger cost discipline.