Canopy Growth Corporation

Good morning. My name is Sharon, and I will be your conference operator today. I would like to welcome you to Canopy Group's second 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 the conference call.

Thank you, Sharon, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy Group CEO David Klein and CFO Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for second quarter ended September 30th, 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 during this conference call 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 four looking statements included at the end of this morning's news release. Please review today's earnings release and canopy growth reports filed with the SEC and CDAR for various factors cause actual results to differ materially from projections. In addition, Reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the SEC and Canadian securities regulators. Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by David and Mike, we will conduct a question and answer session with analysts. To ensure that we get to your questions from as many analysts as possible, We asked the analysts to limit themselves to one question. With that, I'll turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning, everyone. I hope that you and your families are keeping safe as we begin to see COVID infection rates increase in all of our core markets. I'd also like to take this opportunity to thank our veterans across Canada and the U.S. as we prepare to observe Remembrance Day in Canada and Veterans Day in the U.S. I'm pleased with the continued progress we're making as our renewed strategy of winning consumer mindshare along with increased agility and execution drove record revenue in the second quarter. Before I discuss our performance, I'd like to take a few minutes to talk about how we see the U.S. landscape evolving post last week's election and provide an update on our U.S. strategy. First, we believe the Biden win is an important step on the path to federal permissibility of cannabis in the U.S. market through decriminalization and descheduling. Second, and maybe more important, the results of the ballot initiatives clearly showcase that support for adult use marijuana legalization extends across geographic and party lines and is supported by a majority of Americans. Legal marijuana is becoming the American norm as ballot measures pass in Arizona, Mississippi, Montana, New Jersey, and South Dakota. 36 states plus Washington, D.C., have now legalized cannabis for medical or recreational purposes. This will likely increase pressure on Congress to pass major federal marijuana reform in the very near future. By having states like New Jersey legalized adult recreational use, we are destigmatizing and normalizing the use of cannabis. In 2021, we expect to see a lot of positive activity at the state level. Governor Cuomo in New York, for example, has made legalization a priority. In addition, there are also significant deficits within state budgets, and cannabis provides a net new industry to combat this, with new job creation and new tax revenues. Further, we think that states which border legalized states, for example, New York and Pennsylvania bordering New Jersey, will see increased pressure to legalize. We're excited by the prospects of participating in the USTHC market. and we've already developed a U.S. ecosystem that positions us well as hemp and a cannabis powerhouse when, not if, U.S. permissibility happens. So let me highlight some of the key components of our U.S. strategy. We're building a portfolio of scalable brands across cannabis and CPG. Our goal is to become a cannabis-focused CPG company. We're bringing our THC brands such as Tweed and Houseplant into the U.S. market through Multistate Operator Relationships or CBD line extensions. We're growing new to world CBD brands such as Martha Stewart to meet consumer needs. We're establishing routes to market with our CPG brands such as BioSteel, This Works, and Storrs and Bickel. These are strong brands in their own right with distinct value propositions. Building these brands today allows us to generate revenues without the headwinds of regulatory challenges. We plan to line extend these brands into CBD or even THC as regulations evolve. We will layer in additional brands over time, which will create further scale with our existing distribution networks and further build our relationships with retailers. We're leveraging our insights and innovation capabilities across North America. By gathering consumer insights in recreational states like Colorado or California, We can adjust our product development activities and portfolio mix. We can also develop and test new products in Canada based on those insights from the U.S. market. Our agreement with Acreage gives us a fast start into the U.S. THC market, with Acreage already deploying Canopy's IP to build brand awareness in the U.S. for our brands such as Tweed. In addition, our relationship with Terrasyn, which continues to perform extremely well, provides additional optionality to strengthen our U.S. business. Our retail banners, such as Tokyo Smoke and Tweed retail stores, will build brand awareness and serve as a testing ground for innovation. And finally, we have a great strategic partner in Constellation Brands, not only giving us the balance sheet strength and access to capital, but also we're leveraging Constellation's powerful distribution network and their key account relationships. We're sharing best practices across insights, R&D, and operations. And both companies' government relations and legal teams are collaborating and engaging with politicians and regulators to help shape legislative policies and regulations in Canada and in the U.S. Now let's discuss the tangible progress we've made against our strategic plan. There are three key things that Mike and I would like to focus on this morning. Momentum is building across our key businesses as our new strategy is coming to fruition. We achieved record quarterly revenue in Q2 led by our Canadian recreational business and strength across our strategic businesses including Storz and Bickel, This Works, and BioSteel. Second, we're continuing to improve execution and agility. Our fill rates are now consistently exceeding 90%. Our flower quality improvement program is generating positive results. and we've improved our new product development process to allow us to bring better products to market faster. Third, we're accelerating our path to profitability, notably in our largest market, Canada. Let me tie these themes together and give you more details on how our key strategic priorities are driving improved performance in our business. The first point I'd like to make is we're winning consumer mind share driven by insights and innovation. We strengthened our competitive positioning in the recreational market in Canada, gaining market share by 200 basis points to 15.5% in Q2 from Q1. We grew share in the flower category by 320 basis points to 17.3%, with further improvement to 19.4% in the latest four weeks ended October 25th. In Ontario, we grew our flower our value flower share by 930 basis points led by our TWD brand. We established a leadership position across total cannabis-infused beverages during Q2, accounting for nearly 54% dollar share with five of our beverages under Tweed, Houseplant, and Deep Space brands. Within the ready-to-drink category in Ontario, our share was nearly 70% in Q2. We recently launched Quattro CBD beverages across Canada and have now shipped over 2 million cans of our drinks. Now, I know you'll have any questions about our market share methodology, so Mike will provide details on our internal proprietary market share tracking tool during his remarks. The point, however, is that our insights team, which we defined as a key component of our CPG strategy, is already beginning to drive value by providing a near real-time measure of our market performance. Turning to the U.S. We're accelerating growth by bringing our differentiated brands to consumers and quickly expanding distribution. We launched our Martha Stewart branded health and wellness CBD gummies, oil, and soft gels in the U.S. in September. This new line brings together the exquisite flavors that you'd expect from Martha with the science and distribution power of Canopy. The launch generated significant earned media. driving record sales on shopcanopy.com the day after the New York Times ran a story. The products are now getting listed in brick-and-mortar retail stores, and we expect to see Martha Stewart CBD products in thousands of stores as we launch additional SKUs in the coming weeks. BioSteel continued to accelerate its momentum, signing distribution agreements with leading beer distribution companies such as Reyes Holdings and Manhattan Beers. alongside several other partnerships through Constellation Brands Gold Network. We expect to cover 100% of the US market by a direct store delivery by January of next year. The BioSteel team is currently in discussions with a number of large national accounts and expects to have products on shelf across food, drug, mass convenience and gas channels over the course of calendar 2021. Storrs and Bickel continue to expand its distribution in the U.S., while repeat orders from newly added distributors confirm that Storrs and Bickel vaporizers are seeing strong consumer pull. Storrs and Bickel will be celebrating its 20th anniversary on December 5th, as they continue to expand their leadership in the vaporizer category. Another key milestone we achieved in the U.S. is the implementation of the amended agreement with Acreage, which obtained overwhelming support from Acreage shareholders. As I stated on our previous call, the amended agreement is a win-win for both Acreage and Canopy. For Canopy, the agreement reduced our total purchase obligation, thus conserving 71 million Canopy growth shares for Canopy shareholders. There are also additional closing conditions that need to be met by Acreage which didn't exist in the original agreement. We look forward to Acreage launching THC-infused beverages, which leverages canopy formulations and brands in the states of California and Illinois next summer. The recently improved focus from the acreage board and leadership team causes me to be extremely bullish on acreage as they work to drive profitability and growth in their core states. I'm highly confident that acreage will emerge as one of the top U.S. multi-state operators as the U.S. heads toward permissibility. The next point I'd like to make is that we're improving execution across our organization. In Canada REC, our revamped integrated business planning process is driving much better forecasting and we continue to see our fill rates improve, resulting in increased market share performance. We're strengthening our retail presence and improving execution. We opened nine corporate-owned stores in Alberta during Q2, with additional store opening in October. bringing total corporate owned stores to 33 as of today. The number of partner stores has also increased to 16 in total up from 14 in the first quarter. And we're executing against our plans to increase our market share at our corporate owned stores. Our share within owned retail improved by six points to 54% in Q2 versus Q1 and is approaching 60% in recent weeks. We're making significant progress in our comprehensive flower improvement programs. We completed the first phase of a consumer research project aimed at defining the product attributes that matter most to consumers, along with their willingness to pay for those attributes. We're leveraging this work to lay the foundation for our brand and product strategy, ensuring our dried flower products have tangible attributes such as moisture level, harvest methodology, grow location, or packaging solutions. that directly correlate with consumer expectations at each particular price point. And the last point is that we're accelerating our path to profitability. Mike will provide more details in this area, but just to highlight a few examples. We moved quickly to reduce our labor costs in our Canadian operations. We held our SG&A broadly stable versus last quarter despite higher revenue, driving improvement in our SG&A ratio. and our end-to-end supply chain review has identified significant savings across our cost structure. We plan to provide our medium term financial targets when we report our Q3 earnings in February, but I'm confident that we're now firmly on a path to achieve positive adjusted EBITDA at some point next fiscal year. At this point, I'll turn it over to Mike to review our Q2 financial results.