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 second quarter fiscal 2023 financial results conference call. At this time, all participants are in a listen-only mode. I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin your conference call.

Good morning. Thank you all for joining us. On our call today, we have Canopy's Chief Executive Officer, David Klein, and Chief Financial Officer, Judy Hahn. Before financial markets opened today, Canopy issued a news release announcing our financial results for our second quarter ended September 30th, 2022. This news release is available on our website under the Investors tab and will be filed on Edgar and CDAR. We have also posted a 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 news release. Please review today's earnings release and Canopy's 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 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 remarks by David and Judy, we will conduct a question and answer session. We will first address questions upvoted by verified shareholders. Following that, we will take questions from analysts. To ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.

Good morning and thank you for joining our call. Before I get underway, I'd like to acknowledge the results from the midterm election yesterday. With two additional states voting to legalize cannabis last night, we're seeing continued momentum for reform. And while the overall results of last night are not yet fully clear, what is abundantly clear is that Americans continue to demand access to legalized cannabis. The bipartisan appeal of cannabis cannot be overstated, and I hope the results of these midterms will further push the Senate to act swiftly on cannabis reform during the lame duck period, and fully unlock this once-in-a-generation opportunity across the nation. Moving back to our earnings, today I'll speak to Canopy's progress against our strategic priorities and discuss the transformational strategy we recently announced to fast-track entry into the U.S. cannabis market through Canopy USA. Following my remarks, Judy will review our Q2 results, provide an update on our path to profitability, and comment on our short-term outlook. Our second quarter marked an inflection point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the U.S. cannabis market as we seek to seize the generational opportunity ahead of us. Q2 highlights included in Canada, we stabilized business revenues, improved cash margins, and continue to make progress on our path to profitability. This has been achieved amidst persistent industry-wide challenges, as well as an increasingly difficult macroeconomic backdrop. In our CPG business, BioSteel delivered another record quarter with very strong sequential growth. And we continue to pursue cost savings while driving focus in our business, as evidenced by the announcement that we are divesting our Canadian retail operations. Now to provide more detail, in Canada, Our efforts to premiumize our portfolio delivered a positive mix shift despite continued market fragmentation. During the second quarter, our Canadian adult use B2B premium and mainstream sales accounted for a combined 58% of sales, up from 56% last year. This showcases our resiliency in a market challenged by labor and supply chain disruptions in three of the largest provinces, Quebec, Ontario, and British Columbia. I'd like to take a moment to highlight our performance in the very competitive premium flour in pre-roll joint, or PRJ segment. Supported by the recent launch of Doja OG Deluxe Flour and PRJs, our Doja brand increased market share by two basis points versus Q1 FY23 to 2.4%. We're also encouraged by the demand for our new seven acres flour and infused PRJs that have recently entered the market. Next, in the mainstream flower and PRJ segment, our Tweed brand increased share during the quarter, helped by strong demand for new Tweed-branded Cushmins and Wedding Cake flower. We're looking forward to introducing additional exciting new products in the second half of our fiscal year. We continue to focus on operational changes in our cultivation, as well as post-harvest processes and genetics that are driving higher THC percentages and improved quality. We're selling products into the market that allow for additional consumer choice, like enhanced colors and distinct terpene profiles. This is a result of listening to our consumer feedback. Prime examples are the recently launched Tweed Lemon Kush, which is garnering positive comments for its flavor, and the vibrant purple color of our new 7 Acres Purple Pancakes that has received high praise. In the current quarter, we pushed the envelope with the launch of our Ace Valley Sex Gummies, Lust and Thrust. We're encouraged by the initial market response to these gummies, which represent the capabilities of Canopy's insights, product development, and marketing function. There was a clear gap in the market and a natural fit for our focus on cannabis products tailored to specific needs states. As proof, these new gummies sold out at OCS.ca in the first week of sales leading to an immediate reorder with expedited delivery as the OCS anticipates high demand. We also continue to support our quality products with investments in our commercial ground game in Canada. I've previously highlighted the investments we're making in our bud tender engagement program, Higher Education, which in its first year has facilitated over 10,000 interactions focused on education and product knowledge. Additionally, our commercial team continues to engage with retailers across the country, which led to strong distribution gains for our top new flour, PRJ, vape, and edible products hitting the market in the current quarter. As a result of the divestiture of our retail operations, we've reduced channel conflict, which has created an opportunity to work with over 100 additional stores. It's our expectation that our Canadian adult use B2B cannabis business will continue to show improvement in the second half of fiscal 23 due to ongoing innovation and distribution drives. Closing out our Canadian cannabis business, in Q2, our Canadian medical revenue grew 8% year over year, driven by expanded product offerings. Next, I'll speak to progress in our CPG portfolio. First, BioSteel delivered another record quarter in Q2 helped by strategic investments that have driven distribution and velocity gains. This resulted in nearly $30 million in revenue in the quarter, which represents sequential quarterly and year-over-year growth of 67% and 299% respectively. In the first half of fiscal 23, BioSteel secured distribution with major retailers including Walmart, Rite Aid, and Winn-Dixie. This has helped increase ACB to 34% in the U.S., which represents a sequential increase of 520 basis points, according to IRI data for the 13 weeks ended on October 2nd. Now moving to Canada. BioSteel is seeing strong market share growth. According to Nielsen data covering the convenience and gas channel for the four-week period ended October 8th, BioSteel's share of isotonic beverage sales in Ontario reached 11.2%, representing an increase of 630 basis points versus the prior year. BioSteel's share nationally was 7.4%, which is 450 basis points higher than the prior year period. A homegrown Canadian brand, BioSteel was born in an NHL locker room and resonates with athletes from across the country. This is a blueprint for the growth that we're starting to see in the United States with a multi-year partnership that names BioSteel as the official hydration partner of the National Hockey League and the National Hockey League Players Association. The partnership provides BioSteel with ringside marketing, product supply, and retail activation rights, as well as community engagement platforms. If you watch hockey, The brand is highly visible on and off the ice, and we've secured several distribution agreements in the U.S. as a result. We anticipate additional growth for the brand as the hockey season continues and athletes, both professional and aspiring, enjoy the benefits of clean, healthy hydration, courtesy of BioSteel. Earlier this morning, BioSteel completed the acquisition of a manufacturing facility in Verona, Virginia. The acquisition of the facility from the brand's existing contract manufacturer will support the rapid growth strategy and expansion of U.S. footprint for BioSteel. This is a natural next step for the brand and creates additional business value as BioSteel continues its ascent to the top of the sports hydration category. Looking to stores and Bickels, sales were flat when excluding foreign exchange effects, which is an improvement versus the trend established in the first quarter of fiscal 23. With this said, we are steadfast in our view that S&B has a strong platform for growth given the brand's global reputation and highly premium positioning. As recreational and medical consumers continue to look for the highest quality vaporizers available, we look forward to bringing additional Storz & Bickel innovation to market in the future. As you can see, the momentum is building in our Canadian cannabis and CPG businesses, and I believe we're at an inflection point as we look toward our next phase with Canopy USA. Firstly, or frankly, I think Canopy USA represents a pivotal moment in the history of canopy growth, as we expect to fast-track our entry into the U.S. cannabis market by bringing together Acreage Holdings, Jetty Extracts, and Juana Brands under the umbrella that is Canopy USA. We expect the closing of the acquisitions by Canopy USA will meaningfully enhance Canopy's growth and profitability over time once Canopy USA closes the announced acquisitions of Acreage, Jetty, and Juana. In terms of next steps, we are appreciative that the CEO of TMX Group, the owner of the TSX, has publicly indicated support for our plans, and we remain committed to continuing dialogue with our partners at NASDAQ. Additionally, we anticipate receiving comments from the SEC on our preliminary proxy statement. However, we expect to be on track to hold our shareholder vote in early calendar 2023. In summary, Canopy USA is expected to accelerate growth and market expansion through the creation of a leading house of brands capitalizing on a once in a generation opportunity as we fast track our entry into the US cannabis market. Q2 marked a key inflection point for Canopy as we continue to drive innovation, distribution, focus, and efficiency in our Canadian business, as BioSteel blazes a path forward in the sports hydration category, and as our Canopy USA strategy progresses, we've taken destiny into our own hands to rapidly achieve profitable growth. With that, I'll turn it over to Judy.