Canopy Growth Corporation

Good morning. My name is Amy, and I will be your conference operator today. I would like to welcome you to Canobie Growth's third 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, please begin.

Great. Thank you, Amy, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy CEO David Klein and CFO Mike Lee. Before Financial Markets opened today, Canopy issued a news release announcing our financial results for our third quarter ended December 31, 2020. This news release is available on our website under the Investors tab and will be filed in our EDGAR and CEDAR profiles. We've also posted our Supplemental Earnings presentation on our website for you to follow along during this call. Before we begin, I would like to remind you that our discussion during this call will include bold 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 bold looking statements included at the end of this morning's news release. Please review today's earnings release and cannabis reports filed with the SEC and CDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures furnished by the SEC and Canadian securities regulators. Please note all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remarks by David and Mike, we will conduct a question and answer session. To ensure that we get to as many questions as possible, we ask 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 sincerely hope that you and your families remain safe and well and that we can begin to get control of this pandemic. As I reflect upon my first year as CEO of Canopy, I'm extremely proud of all the accomplishments we've made in positioning Canopy to be the leading cannabis-focused CPG company in the world. I started my first earnings call outlining my early insights into our strategy and also mentioned to all of you that this was going to be a transition year. Now, in our fourth quarter, we're at the end of that transition year and our team has made great progress. Throughout the transition, we had to make difficult decisions to right-size our production footprint and say goodbye to teammates. This was typically a very public process. But this fiscal year, we also hired almost 500 people in strategic roles to support a growth agenda into FY22. And as we look forward to the prospects of promising cannabis reform in the U.S. under the new administration in Congress, I'm more excited than ever about achieving Canopy's vision of unleashing the power of cannabis to improve people's lives. Now for the quarter at hand. During the third quarter, we've continued to execute against our new strategy, strengthening our competitive position in our core markets, improving our execution, and accelerating our path to profitability. There are four key themes that Mike and I will focus on this morning. First, we're building strong momentum in establishing a track record of winning in our core markets. Second, we're seeing tangible improvements in both our commercial and supply chain execution. Third, We're further accelerating our U.S. growth strategy as we expect significant cannabis reform during this Congress. And finally, we are firmly on a path to profitability. So let's tie these themes together and delve deeper into our performance and strategy. First, we further strengthen our competitive positioning in our Canadian recreational business. Our overall share is up 30 basis points to 15.7% in Q3 versus Q2, And we've regained the number one market share position in the Canadian rec market during Q3, based on our proprietary market share tracker. This is led by our share in flour, improving 180 basis points to 19.2% in Q3, driven by continued strength in our value flour brand, TWD. Our beverages achieved over 34% market share in Q3. Even as new beverage brands have entered the marketplace, we've retained the top three brands, and our beverages are commanding higher velocity versus competitive set on a per-skew basis. Cuatro CBD beverages were launched during Q3, and the brand has already become the number one ready-to-drink CBD beverage brand. Second, our U.S. CBD business is gaining momentum on the back of highly successful Martha Stewart CBD product launches. Martha Stewart branded CBD products have experienced strong consumer demand to date, with Martha's media appearances generating lots of brand awareness despite the crowded space. In just four months since launch, Martha Stewart CBD products have already exceeded the annual sales of over 94% of all CBD brands sold in the U.S. And based upon the current run rate, Martha would rank among the top 3% of all CBD brands. Our consumer research shows that one-third of Martha gummy purchases were first-time CBD consumers, indicating that we are already achieving our ambition with Martha to bring new consumers into the category. The Martha Stewart CBD collection is now sold in over 580 vitamin shop locations across the U.S., and we're focused on further expanding distribution into other brick-and-mortar locations. We recently expanded the Martha Stewart product line to include pet CBD products, which are now available on our ShopCanopy.com website, as well as our e-commerce partner sites. The launch of Martha's CBD pet products resulted in a record-breaking day of press coverage, earning over one billion media impressions. And just last week, we launched Surety Pro, a new line of Science Max CBD products for dogs, formulated to deliver the most CBD per body weight on the market. Both Martha Pet and Surety Pro products are based on the industry-leading research conducted by Canopy Animal Health. However, Surety Pro takes a more customized approach to support the individual needs and health of each pet and is targeting pet specialty stores and the veterinary channel. Surety Pro is offered in more sizes and formulations to offer precise and controlled and convenient delivery of the recommended CBD amount, and contains additional ingredients to further support pets' needs. And finally, our CPG brands, BioSteel, This Works, and Storrs & Bickel continue to build momentum. BioSteel ready-to-drink sports beverages are beginning to hit the retail shelves in the U.S., and the team has secured agreements with several large national chain accounts. This Works had a strong quarter driven by Amazon UK and U.S. expansion, with our e-commerce business doubling in Q3. We launched This Works stress check collection with hand care products in the U.S. late in Q3, and we're now focused on launching a broader range of our stress check products in the U.S. and the U.K. Stores and Bickel growth continues to be driven by strong consumer pull in the U.S., We're seeing sales to our distributors as well as our direct-to-consumer e-commerce channel continuing to grow. In December, Storrs & Bickel celebrated the 20th anniversary of the Volcano, launching an ultra-exclusive 100-unit release of the 24-karat gold Signature Edition Volcano and releasing a documentary in Rolling Stone magazine. Let's now turn to improvements we're seeing in our quality and execution. First, I'd like to highlight progress on our flower quality improvement program. Over the past several months, we undertook our largest ever cannabis consumer study to dig into what drives satisfaction, quality, and willingness to pay for flower consumers. This was done through first conducting a number of qualitative, in-depth interviews with focus groups, which would follow it up with a quantitative survey of 2,500 consumers across Canada to highlight a few key learnings. When asked about their ideal experience with flour, consumers claim that THC content affects price and flour quality as the most important contributors to their satisfaction with their flour. What's interesting, however, is that when we dig deeper, there's a whole list of attributes that knowingly or unknowingly drive overall satisfaction, like great aroma and taste, whether the flour is hand-trimmed. effects that starts when expected or lasts as long as expected. In other words, it's not just about THC level or price. It's the overall consumer experience, starting with a positive and easy shopping experience, then going into the consumption experience from opening the product, seeing fresh aromatic bud, then ensuring great taste and smells while smoking, and delivering the effects they were promised. By delighting from beginning to end, Our intent is that our brands deliver satisfaction every time. We've taken all of these insights to create a roadmap of our future product renovation and innovation pipeline. And our design-to-value approach ensures that we're being purposeful in adding features and benefits that consumers are willing to pay up for that will drive premiumization of our flower portfolio over time. Elements of this work are already being incorporated in our product offerings. For example, we shifted to using genetic strain names on tweed products with four new SKUs in Quebec, where we saw initial success in December. And we will have a number of new products across our premium, mainstream, and value flower segments entering the market over the coming months. At the same time, our commercial and operational execution continues to improve. Our fill rates have improved materially over the past year, reaching 98% in Q3 of fiscal 21. We've accomplished this through a combination of better demand forecasting and supply management. And I would like to thank our commercial and operations teams for all of their hard work over the past year. Our commercial team has done an amazing job standing up joint integrated business planning processes with our provincial customers. Through joint demand planning routines that align forecasts, leveraging data and category management insights, our demand forecasting has proved significantly. On the supply side, our Canadian operations teams have made tremendous progress in fulfilling our customer orders in a timely manner. One of the key enablers has been implementing a flexible workforce model. that together with cross-functional training provides for more agile and efficient operations as well as reduced costs. As another testament to our progress, the new operating models help Canopy achieve 99% fill rates with our largest customer, the Ontario Cannabis Store, or OCS, during December of 2020. We believe our ability to consistently deliver quality supply will be a key competitive advantage for Canopy going forward. Next, I'd like to spend a few minutes on how we see the U.S. landscape progressing and how we're accelerating our U.S. growth strategy. With the Democrats now controlling the White House and both chambers of Congress, we expect significant cannabis reform to take place during this Congress. Democratic control of the White House, Senate, and House creates a unique window of opportunity for advancing cannabis reform through executive action and legislation. Just last week, we saw the announcement from Senators Schumer, Wyden, and Booker that the Senate is committed to introducing and passing powerful cannabis reform legislation. We anticipate that this legislation will include comprehensive reform to ensure restorative justice, protect public health, and implement responsible taxation while ending cannabis prohibition. We believe that this legislative package or a combination of reform measures could allow canopy to enter the US THC market during calendar 2021. Our government relations team is working very closely with key members of Congress to pave the way for cannabis reform that addresses both the much needed social justice reform and provides a boost to the post pandemic economy by creating jobs and generating tax revenues. In addition, it was announced yesterday that Canopy is a founding member of the newly formed United States Cannabis Council, or UCC, the USCC. This is an important milestone for the industry as the overwhelming feedback we heard in our conversations with elected officials and regulatory bodies is how disjointed and fragmented the industry currently is in its advocacy efforts. The USCC will provide one united voice creating alignment across the nation's top cannabis operators, as well as cannabis organizations, and will address important issues such as regulations, access for veterans, diversity and inclusion, decriminalization and expungement of nonviolent cannabis records, sustainability, and many other key topics important to Canopy and others in our industry. As we anticipate cannabis reform to gain momentum in the coming months, we're also accelerating our efforts to lay the foundation to win in the US THC market once it's permissible. Canopy already has an efficient pathway to the US through our acreage arrangement. I'm pleased with the new leadership now in place at acreage with CEO Peter Caldini bringing a strong background of success in CPG and healthcare industries. Acreage's renewed strategic focus combined with an attractive footprint positions the company well to deliver strong top and bottom line performance in the coming quarters. It's Canopy's intent to utilize our arrangement with Acreage to assume a controlling position immediately upon federal permissibility. In addition, pending closing of the announced plan of arrangement with Canopy Rivers, our conditional stake in TerraSend will increase to approximately 20% which provides additional optionality to strengthen our U.S. businesses. We've also been investing in our U.S. infrastructure to set up the U.S. organization, including our manufacturing footprint. Let's now turn to our medium-term targets, including our expectations to achieve positive adjusted EBITDA during the second half of upcoming fiscal year 22. Mike will walk you through the details, but I want to highlight a few points. First, the cannabis industry is a growth industry. and I firmly believe that we will deliver superior top-line growth over the next few years. Second, our cost-saving program is well underway, and I'm confident we can achieve savings of $150 to $200 million over the next 12 to 18 months. Third, we'll continue to invest in consumer insights and R&D, which we believe will be key to creating a differentiated product portfolio that delights our consumers and commands superior margins over time. Lastly, our medium-term targets do not assume our entry into the U.S. THC market, which could provide further upside. At this point, I'll turn it over to Mike to review our Q3 financial results and provide details around our financial targets.