Canopy Growth Corporation

Good morning. My name is Michelle and I will be your conference operator today. I would like to welcome you to Canopy Growth's first quarter fiscal year 2022 financial results conference call. At this time, all participants are in a listen-only mode. I would now like to turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.

Great. Thank you, Michelle. And good morning, everyone. Thank you all for joining us this morning. 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 first quarter fiscal year ended June 30th, 2021. This news release is available on our website under the Investors tab and will be filed on our Edgar and Cedar profile. We have also posted our supplemental earnings presentation on our website. Before we begin, I would like to remind you that our discussion during this 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 forward-looking statements included at the end of this morning's release. Please review today's earnings release and cannabis reports filed with the SEC and CEDAR for various factors that could 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 release. 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 question and answer session during which questions will be taken from analysts. To ensure that we get to as many questions as possible, we ask the analysts to limit themselves to one question. With that, I will now turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning, everyone. I'd like to begin today's call by providing some thoughts on the first quarter and the continued progress that Canopy is making in our business transformation during fiscal 22 to date. Mike will then discuss our quarterly performance in more detail and offer additional perspectives on our outlook. During Q1, our Canopy team continued to establish itself as a consumer-led, innovation-driven organization with an efficient supply chain and a disciplined cost structure. Key highlights that resulted include achieving another quarter of strong double-digit revenue growth for both cannabis and consumer product businesses, closing on our acquisitions of Ace Valley and Supreme, continued emphasis on developing a robust pipeline of new products that are rooted in consumer insight and innovation, with over 50 new SKUs introduced in the last two quarters and over 100 on the way. Our adjusted EBITDA loss narrowed significantly in comparison to last year and last quarter. And we remain dedicated to furthering the opportunity that lies before us with increasing Canopy's efforts in US THC. We're delighted by the momentum within the US to end cannabis prohibition and remain optimistic on the legislation that has been introduced to do so. However, the first quarter of fiscal 22 was not without challenges. The Canadian recreational market continued to be impacted by COVID-related lockdowns for much of the quarter. Competition increased with single-strain offerings at higher THC levels and lower prices, and we faced internal supply and execution challenges. As a result, our market share softened. And we're not where we want to be from a margin standpoint. It's also important to keep in mind the magnitude of the transformation that Canopy has gone through over the past 18 months. And as with any organization undergoing a big transformation, there are growing pains and adjusting to new ways of working takes time. We're actively taking steps to improve our performance and specifically looking at how we can scale our new operating model to mitigate structural challenges in the industry. including a long production cycle and onerous regulations. Now I'll take a few minutes to review highlights from the latest quarter. Despite continued COVID lockdowns, we're pleased to share that our Canadian recreational cannabis business grew 35% year over year. Amid a very competitive environment, we maintain market share leadership with 15.2% share of the tract provinces in Q1 2021. This market share now includes Ace Valley and Supreme Cannabis, which we welcomed into the Canopy family this past quarter. Integration is progressing smoothly, and we see these businesses making positive contributions to our top and bottom lines over the coming quarters. Following the Ace Valley acquisition, our sales team has become fluent in the beloved Ace Valley brand and ready to enjoy products, securing listings in several provinces and are driving incremental distribution of Ace Valley products that are already in market. Since integration, we've launched a number of new products under the Ace Valley brand, including Ace Valley Dream CBN Gummies and Ace Valley Pinners. We've also begun integrating the commercial and production operations of Supreme Cannabis. Our sales team is in market with the robust Supreme product portfolio, and is actively working to increase listings and distribution across Canada. On the production side, we're leveraging Supreme's expertise and industry-leading knowledge of cultivating premium flour, and we plan to integrate Supreme's facility into our operational footprint. Our U.S. CBD business continues to build momentum, driven by Martha Stewart CBD, which is now the number three CBD brand nationally across food, drug, mass and convenience channels per IRI. Quattro has launched in seven states and has been sold into over 1,000 doors. Our consumer products brands delivered strong growth driven by stores in Bickel, which saw sales increase by 41% year-over-year. In addition, BioSteel's new RTDs drove triple-digit year-over-year sales growth. Since I became CEO of Canopy, I've spoken to the importance of investing in consumer insights and new product development to bring products to market that delight consumers. I'm very pleased to see this investment beginning to pay off as our robust innovation pipeline has started to bring new, differentiated products to market, and we expect the pace of new product launches to accelerate over the coming quarters. This is also being done alongside our portfolio optimization strategy, where we've already eliminated a significant number of underperforming SKUs, and we're prioritizing high-performing SKUs as we are adding new SKUs to our portfolio. Many of our innovations are focused on addressing consumer need states, whether it's sleep, relaxation, socializing with friends, and delivering desired effects in mood management. We're also launching premium quality products with new genetics, terpenes, flavors, and packaging aimed at enhancing the consumer experience. Let me now highlight some of these innovations that have hit the market as well as provide a view into our exciting pipeline. In flour and pre-rolled joints, to meet demand for a Quebec exclusive brand, we launched Barrett, which is on its way to becoming one of the top-selling flour brands in Quebec. Our new single-strain TWD, 28, Blue Dream, and Apple Pie flower offerings were number five and number six single-strain offering products by volume nationally in the first quarter. In a rapidly growing pre-roll category, we recently launched Tweed Quickies and Ace Valley Pinners, small-size pre-roll joints to address consumer preference for sharing cannabis in a group setting without having to pass a single joint around. Following an extensive flower quality initiative aimed at enhancing flower satisfaction, we're introducing Canadians to Doja, our premium flower brand, including recently introduced Doja Legendary Larry Flower in Ontario, as well as the national rollout of tweed lineage strains. Our flower team is excited about additional flower and pre-roll innovation that we expect to bring to market over the coming months, including new packaging in new, higher THC single-strain genetics. In vapes, strong consumer demand for the .5 ml and the 1 ml 510 cartridges launched over the past two quarters has strengthened our Canadian vape business. In the first quarter of 2022, we launched our Tweed Citrus Sealand all-in-one vape pens, which have been positively received by consumers. These new 510 and all-in-one vape pens are driving a significant uptick in consumer pull. And we have additional vape innovations that are scheduled to come to market over the coming quarters, including the introduction of live resin cartridges to the Canadian market. Turning to beverages, we're seeing consumer purchasing trends currently pointing to a strong demand for beverages with higher THC. In response, We've started to bring a range of higher THC beverages to market, beginning with our new Tweed iced tea beverages with five milligrams of THC, which are available in refreshing lemon and raspberry flavors. The feedback on these beverages from consumers and bud tenders has been nothing short of fantastic. We've also begun shipping our new Tweed fizz seltzers in the current quarter. Analogous to hard seltzer in the beverage alcohol world, they have five milligrams of THC and come in two refreshing flavors, watermelon and mango. We're very excited about the range of new beverages that we will bring to consumers over the coming months, including an expansion of our best-selling Deep Space beverage brand. We're on pace to more than double our assortment of beverages in market during fiscal 22. Inedibles. Our portfolio of gummies in Canada has expanded rapidly over the past quarter under the Ace Valley and TWD brand banners. Building on the successful launch of TWD strawberry gummies, which now have the number two market share of all gummies in Canada, we are launching the TWD mixed berry gummies in the current quarter. We also launched Ace Valley dessert flavor gummies, key lime pie, and peaches and honey. and have begun shipping our Ace Valley Dream CBN gummies. Available in a tasty blackberry lemon flavor and containing CBN, a minor cannabinoid that lends itself well to restful sleep, the Ace Valley Dream CBN gummy addresses the consumer need state of sleep, which is in high demand. We're scheduled to bring a robust portfolio of new gummy innovations to market over the coming months, featuring gourmand flavors, better effects, and preferred THC levels. I'm very pleased at the new products that have been launched in the past quarter and look forward to the consumer response to the exciting innovation pipeline that we have planned in the months ahead. Turning now to the U.S., we're focused on advancing our U.S. ecosystem and continue to believe that cannabis reform will happen during this Congress. Cannabis reform took an important step forward with release of the draft Cannabis Administration and Opportunity Act that was introduced by Senators Schumer, Booker, and Wyden on July 14. This bill takes an impressive approach in crafting a regulatory structure that is specific to cannabis. We enthusiastically support the sweeping social justice and social equity provisions within this package. These measures will benefit those who have been disproportionately impacted by the criminalization of cannabis. Social equity can only truly be achieved through full legalization, and I firmly believe that cannabis should and will be legalized at the federal level. It's what Americans have overwhelmingly been asking for. Two other pieces of legislation that together, if passed, could be a positive unlock for our CBD business in the U.S. include HRA 41, which would require the FDA to regulate CBD as a dietary supplement, and S1698, which would mandate the FDA to regulate CBD as a dietary supplement as well as food and beverage. We believe the passage of these bills would establish a national regulatory framework for various CBD products and would give retailers, including national mass retailers, the regulatory framework they've been seeking to participate in the CBD market. We believe this would be a material unlock for our CBD business in the U.S. Against this backdrop, we continue to advance our U.S. ecosystem, positioning Canopy for success in the U.S. under various scenarios. We've already established multiple routes to market in federally permissible THC markets. Our plan of arrangement with Acreage Holdings and our conditional investment in Terrasen provides an immediate turnkey path to enter the U.S. THC market. We anticipate that Acreage's performance will continue to improve and are excited about their plans to launch cannabis beverages in select U.S. states in the coming months under the Tweed brand banner. In addition, we're actively seeking opportunities to make additional legally permitted investments in advance of U.S. federal permissibility of THC that increase our exposure to that THC market. Finally, achieving profitability and improving free cash flow remain our top priorities. We are on track to deliver $150 million to $200 million of cost savings across our COGS and SG&A, and we remain committed to accelerating top-line growth in the second half of fiscal 22 and achieving positive adjusted EBITDA by the end of our fiscal 22. In summary, with a robust pipeline of product innovations hitting the market, the integration of Ace Valley and Supreme well underway, and ongoing improvements to our supply chain, I believe will strengthen our competitive position in our core markets and drive significant top-line growth over the coming quarters. With that, I'll now turn it over to Mike for a review of the financial results in more detail.