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 third 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 the conference.

Thank you, Operator. Good morning, and thank you all for joining us. On our call today, we have Canopy's Chief Executive Officer, David Klein, and Chief Financial Officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing the financial results for our third quarter ending December 31st, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and CDAR. 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 our actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures through their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following prepared remarks by David and Judy, we will conduct a question and answer session We will first address the question upvoted by verified shareholders using the state technologies platform. Following that, we will take questions from analysts, and 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.

Thank you, Tyler, and good morning, everyone. During our Q2 earnings call, I clearly outlined Canopy's top priorities in becoming a North American cannabis leader. which included actions to drive Canadian profitability and empowering CanopyUSA to progress the US THC strategy. On today's call, I'll provide comprehensive updates on both priorities, which are imperative to achieving our ambition of long-term North American cannabis market leadership. Following my remarks, Judy will review our Q3 results, provide an update on our path to profitability, and outline the cost savings anticipated from the business changes announced today. as well as discuss our balance sheet. The transformative plan introduced today addresses the actions needed to drive profitability, but also to secure the future of our business. The intent of establishing a legal cannabis industry in Canada was to combat the illicit market. At the outset, the legal sector was poised to be a source of immediate economic development with significant job creation and tax revenue. As a global first mover, The legal Canadian cannabis industry was originally projected to grow into a $7 billion market over time. However, that market aspiration has not come to fruition. Today, there are two very different cannabis markets in Canada. One that's legal, highly taxed and regulated, and one that's thriving and illicit. The unregulated illicit market is generating billions of dollars of revenue with a 40% market share and faces virtually no risk of enforcement. The legal sector, out of necessity, is forced to be price competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer. The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come, and as a result, the sustainability of this legal sector is in question. Make no mistake, building an industry from the ground up is not linear and the knowledge gained has been significant. We stand ready to work with regulators, politicians, and provincial boards to improve the punitive regulatory environment based on experiences from the front lines. However, despite these market realities, Canada remains a large market in which Canopy is well positioned with strong brand recognition, a diversified portfolio of products in the adult use segment, and a growing share of the medical market. The backdrop I just outlined formed the catalyst for the actions announced today, which are intended to position our Canadian business to be profitable and self-sustaining. The Canadian business transformation plan includes consolidating our production and operational footprint, shifting to a brand-led asset-like model, and completing an organizational restructuring that better aligns our resources with market realities. Specifically, we intend to exit our One Hershey Drive, Smith Falls, Ontario facility as we consolidate cultivation at existing facilities in Kincardine, Ontario and Kelowna, British Columbia, and where necessary, enhance our offering with a flexible flower sourcing strategy. Similarly, we will be outsourcing non-flower formats such as beverages, edibles, vapes and extracts as we implement a nimble asset-light model that allows us to be dynamic and actively respond to market demands. In Quebec, we will cease sourcing of flour from the Mirabelle facility. As the Mirabelle facility is operated through a joint venture structure, we're engaging with our JV partners on the long-term future of that site. We recognize our core competency is brand development with strong routes to market. The Canadian transformation is intended to closely mirror the plan structure of Canopy USA, which we believe to be a winning model. The changes announced today are in addition to the following cost savings initiatives that were completed in Q3, including the divestiture of national retail operations closure of our Scarborough, Ontario research facility, and outsourcing of our genetics program to Quebec-based EXCA, the restructuring of our Canadian cannabis business into a standalone business unit, and the reduction of our SKU count by approximately 50% as we focus on the highest performing segments within the Canadian adult use cannabis market. The changes announced today will result in approximately 800 employees exiting the business over the coming months, with 40% of that reduction occurring immediately. We expect these further adjustments to reduce annual SG&A and COGS by an additional combined $140 to $160 million over the next 12 months. Judy will speak to the financial aspects of our restructuring in greater detail during her prepared remarks. Now let me spend a few minutes discussing business outside of Canadian cannabis, starting with our international markets, where Australia is worth highlighting as our sales in this market have increased nearly 200% year over year and demonstrated steady growth. Stores in Bickel, or S&B, continues to demonstrate its capabilities and appeal with core and limited time premium vape offerings like the Peace Volcano. In the third quarter, S&B delivered its best quarterly revenue since Q4 FY22. This growth was driven by traditionally strong seasonal demand for premium cannabis vaporizers. Overall, S&B continues to be a key profit contributor in the Canopy brand portfolio and is poised for innovation and growth. Turning to BioSteel, we're very pleased with the strong momentum at retail despite quarter-over-quarter volatility in reported revenue due to the timing of distributor load-ins. According to Nielsen data, BioSteel's share of isotonic beverage sales in the Canadian national convenience and gas channel reached 10.4% in the third quarter and 13.8% in Ontario. In the U.S., the brand has also made impressive distribution gains over the past year, with IRI data showing BioSteel's ACV at 34% for the quarter. This was matched by notable sales gains, with scan sales in the U.S. region increasing 157% from the prior year. With expected distribution gains and velocity growth driven by our investment in brand activation, we expect to see revenues increase significantly over coming quarters. Finally, I'd like to speak to Canopy USA, which continues to progress the USDHC strategy. With the lack of developments in Washington, I strongly believe that through Canopy USA, we've taken control of our destiny to capitalize on the once-in-a-generation opportunity in the largest cannabis market in the world. Our primary objective for Canopy USA is to optimize the value of our entire U.S. cannabis ecosystem, Acreage, Juana, Jetty, and Terrasend, by leveraging their brand portfolios, routes to market, and operations. We're pleased to see the ecosystem exploring opportunities to collaborate and grow, with examples including Juana and Terrasend bringing Juana edibles to New Jersey, and the expanded availability of Juana in the state of Maryland. Juana launching in New Mexico and Missouri in addition to releasing a suite of new sleep product offerings. And Jetty Extract announcing upcoming product availability in the state of New York. After closing, Canopy USA expects to reduce its annual operating expenditures, including eliminating redundancies and the public company reporting costs of acreage, all of which are expected to be realized shortly after closing these transactions. This is a novel and groundbreaking strategy. We're resolute in remaining dual listed as the CanopyUSA strategy progresses. And as we continue to finalize our proxy, we anticipate holding our shareholder vote as early as April 2023. With that, I'll turn it over to Judy.