Canopy Growth Corporation

Good morning. My name is Joanna and I will be your conference operator today. I would like to welcome you to Canopy Growth's fourth quarter and fiscal year 2024 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 call.

Good morning and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, David Klein. and Chief Financial Officer Judy Hong. Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our fourth quarter and fiscal year ended March 31, 2024. The news release and financial statements have been filed on Edgar and CDAR and will be available on our website under the Investors tab. 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 the news release issued today. 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 stated. Following remarks by David and Judy, we will conduct a question and answer session where we will take questions from analysts. With that, I will turn the call over to David.

Good morning, everyone, and thank you for joining us today to review Canopy During the call, I'll share key highlights and achievements from the past fiscal year, demonstrating how Canopy is a stronger, fully cannabis-focused business that is poised for profitable growth in the year ahead across all of the most exciting global cannabis markets. First, let's touch on the transformative year that fiscal 24 was for Canopy. During the year, we took decisive actions to streamline our business by implementing an asset-light model. This has enabled us to focus on our core strengths while leveraging third parties to add scale and capacity when and where we need it without the requirement to maintain extensive infrastructure or invest ahead of growth. This has improved our margins and accelerated our time to market as we focus on growth across all of our priority categories. In parallel, we took bold action to drive greater focus and reduce our cash burn, by divesting Canopy's non-cannabis businesses as we go all in on what we believe is one of the most exciting consumer trends of our lifetime. These changes weren't easy, and I'm very proud of the work that the entire Canopy team undertook to execute this strategic evolution and to ensure its success, all while enhancing our commercial execution, strengthening our financial position, and establishing a platform for Canopy's future growth. As a result, Canopy is entering fiscal 25 with a strong foundation. We have a focused business. We're well positioned in the geographies and categories of greatest potential, and we've built a business that can deliver profitable growth. Looking to our performance in fiscal 24, I'm pleased to report that our results in the year already demonstrate the positive impact of the changes we've implemented. Canopy now has an attractive gross margin profile across all of our businesses, a lean and agile organization that can support growth without a step change in costs, a strengthened balance sheet that has ample runway to support our business while investing for growth, and financial performance that is nearing consolidated, adjusted EBITDA profitability. Focusing on flour is the central pillar of our business. The consistent production of high-quality flour from our Kincardine and Doja sites has strengthened our competitive positioning in the Canadian adult-use market, highlighted by the national resurgence of Tweed. Additionally, we added over 2,300 points of distribution across Canada during the fourth quarter, including over 900 points for Tweed flour and 650 points for our deep-space beverages, ensuring increased access to consumers as we enter the important summer selling season. In our Canadian medical business, an expanded product assortment in the Spectrum Therapeutics online store, as well as industry-leading care for our insured patients, has delivered a 16% increase in revenue year over year, marking the fifth consecutive quarter of revenue growth. Our international markets cannabis business also continues to benefit from increased demand for our high-quality Canadian cannabis, including in Australia, which delivered record revenue in fiscal 24. In addition, an expanded product assortment and improved commercial execution in Poland, the Czech Republic, and Germany also contributed to growth in our international markets cannabis business in fiscal 24. Moving on to our Storz & Bickel vaporizer business, exceptional demand for the brand's new Venti portable vaporizer, which was launched early in the third quarter of fiscal 24, required us to double production to meet higher than expected initial demand. When paired with continued demand for other Storz and Bickel devices, including the legendary Volcano, this contributed to Storz and Bickel delivering its best fourth quarter ever, with net revenue increasing 43% year over year. In addition to these advancements, In our commercial businesses, we also executed a number of actions to strengthen Canopy's balance sheet in fiscal 24. Collectively, these actions reduced Canopy's debt by over $700 million in fiscal 24, which brings our total debt reduction to over $1.1 billion since the beginning of fiscal 23. Further, subsequent to the end of fiscal 24, we have also estimated or eliminated a $100 million short-term debt obligation and extended the maturity of a convertible note by five years. As a result, Canopy has no material debt due until March 2026 and has a healthy cash balance of over $200 million. Our strengthened balance sheet provides us with the certainty and flexibility required to power future growth, and we believe positions Canopy ahead of our industry peers. Our commercial businesses are showing momentum as we exited fiscal 24 And our plan set the stage for a fiscal 25 that we believe will be a banner year for Canopy. Our Canadian production platform continues to deliver high-quality flour that is winning and retaining customers both domestically and internationally. Upgrades are also already underway at our Kincardine facility to increase our flour capacity in addition to securing flour through strategic procurement from third-party producers. As the Canadian cannabis market continues to mature and consolidate, we expect excess capacity within the industry to present canopy with tangible opportunities to accelerate speed to market, avoid capital investments until critical sales volumes are achieved, and to provide us with surge capacity during peak periods. We believe our plans, which reflect our focus on profitable growth versus chasing market share at all costs, will deliver healthy annual growth in Canada in fiscal 25, with stronger growth in the back half of the year. This growth will be driven by expanded flower capacity, increased distribution, a strengthened sales force, and share gains across the pre-roll, vape, and soft gel categories through the introduction of new products which are arriving in the market as we speak. We also believe our plans for Canopy's international business will deliver healthy annual growth in fiscal 25. In addition to continued gains across our international markets, we anticipate Germany's legalization of cannabis will drive a significant increase in the size of the country's medical market as more doctors become comfortable prescribing cannabis and more patients explore its medical benefits. As a long-term leader in Germany, we believe Canopy is well-positioned to capitalize on this growth. and we're actively working to expand our supply to Germany and to add additional third-party European-based suppliers to our offering. Looking to our premium Storzenbickel vaporizer business, we plan to keep building on the brand's momentum and expect continued demand for the Venti, as well as expanded distribution in the U.S. to drive significant growth for Storzenbickel in fiscal 25. We also feel that this homegrown German brand will benefit from greater cannabis adoption among German consumers. Further illustrating the strength of Storzenbickel's connection and importance in the German cannabis industry, I'm pleased to highlight that Jürgen Bickel, Canopy's Managing Director of Storzenbickel and the brand's co-founder, was recently elected as a board member of the German Cannabis Business Association. We're pleased that Canopy and Storzenbickel have strong representation within the association, the largest of its kind, as it continues to play a critical role in shaping the advancement of the medical and recreational cannabis markets in Germany. Tipping focus to the US, Canopy USA is moving forward rapidly, and I would like to take the opportunity to reiterate our thanks to Canopy shareholders for their overwhelming support for the resolution required to advance the strategy. Overall, we remain highly optimistic about the potential of Canopy USA which continues to lay the groundwork for accelerated growth across a number of key state-level cannabis markets. In the quarter ended March 2024, Juana finalized plans for expansion into three new states, New York, Connecticut, and Vermont, while also launching new gummy skews in Colorado to continue expanding the brand's product assortment. In addition, Jetty's award-winning products launched in the state of New Jersey as the Jetty team takes the best of the West Coast to the Northeast. It's also important to note that Jetty's solventless vapes rank as the number one live rosin vape nationally in the US, which is really quite impressive when you consider that Jetty vape products are currently available in only four states, California, Colorado, New York, and more recently, New Jersey. Shifting to acreage, I'd like to take the opportunity to acknowledge that the company has recently been operating as a distressed asset. However, we believe that acreage continues to have tremendous upside. Recently, acreage entered the New York market and continues to hone its presence in other key states, including Ohio, the seventh largest state in the U.S., which is turning adult use in the month of June, and where its operations are well positioned with botanist dispensaries in Cleveland, Canton, Akron, Columbus, and Wycliffe. Notably, in addition to locations in the largest population centers in the state, Acreage's retail operations have received multiple Best Dispensary awards over the last four years. Acreage also has a Tier 1 cultivation and processing facility in the state with significant expansion potential. We believe that with this setup and its entry into the Canopy USA ecosystem, Acreage is well-positioned to realize significant and profitable growth ahead. The timing for the advancement of our U.S. strategy is also aligning nicely with major strides on the regulatory front, including rescheduling. We've been unequivocal in our support for rescheduling and believe that this change represents a leap forward for the industry. And from a financial perspective, I'd like to emphasize that rescheduling is especially significant as it will provide an immediate and meaningful improvement to the cash flow of all state legal cannabis businesses, including those within Canopy USA. In closing, fiscal 24 was a year of significant progress for Canopy growth, where we demonstrated our capabilities and our enduring belief in the opportunity that is global cannabis. Looking to the year ahead, we're optimistic about our future. We have great exposure to the most attractive markets. We've got great brands, and we have a strong and experienced team. We continue to believe the opportunities ahead are significant, and with the plans we have in place, we think fiscal 25 is poised to be Canopy's best year yet. With that, I'll pass the call to Judy to review our financials in greater detail.

Thank you very much, David, and good morning, everyone. I'll start by reviewing our fourth quarter and full year fiscal 2024 results, including the significant progress we've made across our P&L this year. I'll then discuss additional actions that we've taken to improve our balance sheet and cash flow, followed by our priorities and outlook for the fiscal 2025. Let's begin with our fourth quarter results. Q4 FY24 cast a transformative year for Canopy by showcasing organic revenue growth of 16% compared to Q4 of FY23 and a year-over-year improvement in gross margins, adjusted EBITDA, and free cash flow. Canopy delivered consolidated net revenue of $73 million in Q4, with all three business units delivering growth year-over-year, led by Storz and Bickel, which increased its revenue by 43% compared to the year ago. Consolidated gross margin in Q4 was 21%, again, a significant improvement compared to 11% last year. Q4 gross margin was negatively impacted by temporary factors in Canada that I'll address later in the call. Full-year gross margin was 27%, and cash gross margin, adding back non-cash depreciation expenses and costs, was 35%. Q4 adjusted EBITDA was a loss of $15 million, an improvement of 63% versus last year. Free cash flow was an outflow of $23 million, an improvement of $75 million compared to Q4 of last year, and nearly a 50% improvement over the last quarter. I'd like to now review the results of our key businesses in more detail, including progress against their path to profitability. Starting with Canada, Q4 net revenue was $37 million, up 4% compared to a year ago. Canada medical sales continued to grow strongly, increasing 16% compared to last year, benefiting from customer mix towards a greater number of insured patients and larger product assortments in the spectrum online store. Our adult use B2B business was down 4% as growth in 7 Acres brand and contributions from Wana Edibles was offset by the declines in the Twink brand this quarter, as we were supply-constrained on certain SKUs. Canada gross margin in Q4 was 0%, and cash gross margin adding back non-cash depreciation costs and COGS was 13%. Let me unpack Canada gross margin for Q4, which came in softer than planned. We continue to generate year-over-year reductions in COGS from the Cost Reduction Program. However, Q4 gross margin was negatively impacted by a few temporary factors. First, we experienced lower cultivation yields at the King-Carton facility, driven by seasonality and unplanned disruptions, which resulted in higher-than-expected inventory costs per unit. Second, with lower cultivation yields, the utilization of our manufacturing operations was reduced, driving under-absorption of our indirect costs. Lastly, the consumption of higher cost inventory, which was produced prior to our shuttering of the former Hershey facility, also negatively impacted gross margins. All of these factors are transient and we're already seeing improvement in cultivation yields and higher utilization of our manufacturing operation in Q1. And notwithstanding the lumpiness in our Canadian gross margins this year, we are pleased that our Canadian business achieved 31% cash gross margin performance in full year fiscal 2024. In addition, we expect further improvement in Canada gross margins in FY25 driven by installation of new LED lighting at King Cardin in the first half of fiscal 2025 is expected to increase our cultivation yields in the upcoming winter months. In addition, We've already expanded grow roads to increase our cultivation capacity. Strategic sourcing of our flower supply at favorable cost is also expected to reduce our overall flower cost. And a new and flexible pre-roll machine is now up and running and is expected to significantly increase pre-roll production and reduce labor costs. International markets cannabis sales increased 32% year-over-year. We saw outsized Triple-digit sales growth in Poland in Q4. Germany also grew at a double-digit rate. And these were partially offset by the declines in its source and vehicle device sales in Australia in Q4. International market cannabis growth margin was 40% in Q4, FI24, driven by a favorable shift in country mix with higher margin Poland sales contributing to a greater portion of sales this year as compared to the prior year period. Stores and vehicle revenue of $22 million in Q4 was up 43% compared to last year and also up 20% sequentially. We saw continued strong consumer demand for the new Venti portable vaporizer that was launched in Q3 and we successfully ramped up production to meet demand for the Venti. And Q4 also benefited from strong distributor and retailer load-in of all stores and vehicle devices ahead of 420 events and sales promotions. North America gross margin was 41% compared to 34% last year, driven primarily by stronger sales coming from products and geographies that carry higher margins year-over-year. Looking at our SG&A expenses for Q4 fiscal 2024, total SG&A expenses declined 23% year-over-year, primarily driven by cost reduction program undertaken to date. Q4 fiscal 24 adjusted EBITDA loss was a negative 15 million, an improvement of 25 million compared to a loss of 40 million a year ago. Q4 adjusted EBITDA was impacted by a softer gross margin in Canada due to the temporary factors that I outlined earlier in the call. International markets and stores in Bickel achieved profitability in Q4, driven by revenue growth and improvement in gross margins year-over-year. And we leave Canada, but for the temporary factors, would have achieved positive adjustity without exiting fiscal 24th. Through the strategic transformation initiatives announced in April 2022 and February 2023, Canopy has now realized 280 million of cumulative cost savings, which is within our announced target cost savings of 270 to 300 million. We've identified additional 10 to 15 million of cost reduction opportunities, mostly in corporate GNA, including savings in IT, insurance, professional fees, legal, and public company costs that we expect to realize by the end of fiscal 2025. I'd like to now review our cash flow and balance sheet. Free cash flow was an outflow of $23 million in Q4, an improvement of 77% compared to the prior year. Cash used from continuous operation was $22 million, which includes cash interest payments of $18 million, which was down from $36 million last year. Cash flow from investments of $26 million in Q4 included proceeds received from the BioSteel asset sale. And during Q4, we also completed a private placement with proceeds of approximately $47 million, of which $30 million was used for pay down of our senior secure return loan at a discount to FAR. Turning to the balance sheet, as of March 31, 2024, we had $203 million in cash and short-term investments and debt balance of $597 million. Subsequent to the quarter end, we've completed several transactions that further reduced our debt and improved our balance sheet. First, We exchanged $81 million of the principal amount of the $100 million promissory note plus accrued interest held by Constellation into Canopy's exchangeable shares and canceled the remaining balance. Second, we issued a new five-year convertible note with gross proceeds of approximately USD $50 million and exchanged the CAD $28 million note maturing in September 2025 to a note now maturing in May of 2029. Third, we've made additional CAD $7.5 million pay down of the term loan with the proceeds from the BioSteel asset sale. These actions have significantly enhanced our balance sheet by eliminating substantially all of our short-term debt obligations, reducing the senior secure term loan principal balance from USD $750 million original to now USD $354 million, which matures in March of 2026, and enhancing our cash position, which will provide flexibility to invest for future growth while funding our operations. We remain focused on executing additional activities to further deliver on our commitment to improve our financial position over the coming months. I'd like to now provide our key priorities and outlook for fiscal 25. In Canada cannabis, the business is now on a stable footing and we're focused on driving growth and profitably gaining market share in both the adult use and medical channels by continuing to invest in product quality and expanding distribution while further improving our margins. In international market cannabis, we expect to see growth in our key markets of Germany, Poland, and Czech Republic, and remain focused on ensuring consistent supply of high-quality products, as well as launch new products into these markets in the near term. For Storz & Bickel, we're focused on accelerating growth in key markets driven by Venti, as well as other product lines, which we believe will mitigate potential impact to Storz & Bickel's Australian sales following a recently implemented vape ban in the non-medical channel. And finally, we also know that the impact from divested businesses will continue to negatively impact reported sales growth. And specifically, F5 2024 results included $21 million of revenue from This Works, which was divested in December of 23, and $5 million of revenue from KeyLeaf, which was divested in February of 2024. From a phasing standpoint, we expect stronger year-over-year growth in the second half of our fiscal 2025, driven by increased forward supply and ramp-up of new products, as well as lessening impact from divested businesses. We believe that we're on a firm path to achieving positive adjusted EBITDA at the consolidated level, inclusive of corporate cost, driven by sales growth from increased supply and expanded distribution, improvement in gross margins, and additional G&A savings. In closing, we're excited about the growth opportunity ahead of us and now have a strong foundation in place to achieve healthy profit margins and enhance shareholder value over time. This includes my prepared comments. We'll take questions from the analysts.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. To ensure an efficient call that gets to the questions of as many analysts as possible, analysts are requested to ask an initial question, and then if necessary, re-enter the question queue to ask any additional questions. First question comes from Aaron Gray at Alliance Global. Please go ahead.

Hi, and thank you very much for the question here. So, a first question for me, or my question. Hi, Judy, how are you? Regarding your comments on the gross margin, thanks for the color in terms of, you know, how it's transitory in nature somewhat. Just if you could provide some commentary in terms of the cadence of the improvements from the greater utilization and some of the other initiatives you have by the lighting and expanded grow rooms. You know, how should we think about the timing of that improvement? You had seen gross margins, you know, 30% or more within the Canadian cannabis segment. So how do we think about the ramping of that and then the impacts of the overall profitability of the company from the Canadian gross margins going forward? Thank you.

Sure, Aaron. So if you take a step back, we did deliver a significant improvement on a year-for-year basis in our Canadian business with full-year gross margin of 16% and cash gross margin of 31%. And I think on a full-year basis that's within our expectation of achieving close to mid-30% cash gross margin post all the restructuring actions that we've taken in Q1. I think if you think about the Q4 margin, as I said on the call, there are really a few transient factors that negatively impacted margins. I estimate those factors would have impacted the gross margin size in the magnitude of several million dollars. So if you adjust for those, I think we're kind of back to low to mid 30% gross margin in Canada. If you look at Q1 and beyond, so just really looking at the rest of fiscal 25, we see further improvement, I said on the call, with all of the improved actions that we're taking in King-Carton. Some of that is going to be a bit more back-calf loaded, so the increased capacity on the flower side from expanded row rooms will come in a little bit earlier, but I think the Kincardine, the lighting, the LED installation that's happening in the coming months, and that will really help the winter months as we go into the back half of the year. So all in all, we think the Canada cash growth margin should be in the mid to high 30% for the four-year basis, probably stronger in the back half versus first half. But we're pleased to really show continued progress on the Canada front. And I do think that this will be a positive driver in achieving positive adjusted EBITDA at the consolidated level, particularly as you think about the back half of the year.

Thank you. Next question comes from John Zamparo from CIBC.

Please go ahead.

Thank you. Good morning. My question is on the balance sheet and I'm trying to better understand the comments about being able to invest for growth and I wonder how we should interpret that given the level of debt remaining and what is the plan to repay that debt?

Sure. Thanks, John. So as I said on the call, I think that the big change in terms of our financial position is that we don't have any near-term debt maturity of any substantial amount. Really, the next tranche of the debt maturity is in March of 2026. We think that our underlying businesses are also showing improvement, that we're reducing cash burn in a significant way, and we've been able to also reduce our interest expenses in a meaningful way as we've reduced our debt. So really, the investing for growth is just given our cash position that we have today, as well as the ability to really deal with the maturity of debt in a prolonged timeframe. I think it really gives us the flexibility to look for opportunities to invest in the greatest potential markets that we operate in as we speak. That doesn't mean that we are going to be investing in stocks in asset heavy way. I think we've really transitioned to really being asset light and opportunistic in finding partners. But I think it just gives us a lot more flexibility to look for those opportunities with the improved balance sheet position.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one.

Next question comes from Yiwan Kang at Canada Coach Annuity. Please go ahead. Hi there.

This is Yiwan Kang on behalf of Mount Bottomley. Thank you for the question. My question is just on the international segment. Obviously, you guys saw 11% growth quarter-over-quarter on the top line under the segment, and you guys called out the continued strength in Germany and Poland alongside some non-recurring U.S. CBD business opportunity there that overall help the top line sequential growth there. Can you provide more color behind this US CBD business opportunity? And if you have any plans to kind of expand on this going forward, because it seems like it also had kind of a positive impact on the market under the segment as well. Thanks.

Yeah, I think I can take that. I mean, I think if you look at our international markets, you really should think about our key priority markets as Germany, Poland, Australia, and Czech Republic. The U.S. CBD business, as you may recall, have evolved within the Canopy organization. We've really been looking at very, very targeted approach with that business as the regulatory unlock, frankly, hasn't happened the way that we thought we would. We have also decided that the best place for the U.S. CBD business to reside is actually Canopy USA. And so we are in the process of winding down the business, at least from a Canopy perspective, and then transitioning that business over to Canopy USA that we expect to happen sometime in Q2 of fiscal 2025.

Thank you. Next question comes from Pablo Zwanek at Zwanek & Associates.

Please go ahead.

Thank you. Good morning, everyone. David, just regarding Canopy USA, can you remind us about what's left or has everything been done in terms of shareholder approvals and also approval in terms of AIC, REACH, and WANA? And related to that, if you can remind us, assuming that rescheduling doesn't meet your standard of federal permissibility, what actually changes for those U.S. assets, right? I'm thinking acreage, they need to fund the expansion in Ohio, but if you don't have federal permissibility yet, how can you help them and how does the canopy USA structure, if in any way, help them to achieve that type of funding and potential to fund growth? Thank you.

Yes, so Pablo, in terms of approvals, we don't need any shareholder approval or anything of that nature. We do need to go through the approval process in each state where we have a license. And so what we've done is we've exercised our option. Accuses exercised their option to purchase Juana and Jetty. That's going through the regulatory approval process right now. We don't expect there to be any problems with those approvals. Canopy has the obligation to exercise its right to purchase acreage and then move it into Canopy USA. That hasn't happened yet, but we expect that will happen in the near term. We don't see any major regulatory hurdles, but as you know, it will take some time to get through each individual state's process. In terms of the ability, like what will happen with the businesses and, you know, how they improve their capital situation across CUSA, I really think it is a function of putting those CUSA businesses together. Not included in our cash balance is a significant cash balance sitting at Juana and Jetty. which the CUSA assets would all have access to. And so we expect actually that acreage's challenges related to capital structure will be able to be resolved through kind of amalgamation with CUSA. And also keep in mind, when we put those businesses together, there will be top line synergies available to all of the QSA entities, but there will also be some significant bottom line synergies available as well when you eliminate the public company costs that are currently associated with acreage.

Thank you. This concludes the conference call. I will turn the call back over to Mr. Klein for final remarks.

Great. Thank you for attending today's call. To wrap up, as we started, we're singularly focused on cannabis. Our businesses are growing and have delivered healthy improvements in gross margins. Our business is approaching positive adjusted EBITDA on a consolidated basis, and Canopy USA is moving forward rapidly. We're excited about where our business is going, and I firmly believe that Canopy offers a unique option for exposure to growth across the world's most exciting cannabis markets. Thanks again for joining us, and I encourage you to try some of our outstanding products as you enjoy the summer ahead. Our investor relations team will be available to answer additional questions. Have a great day, and thank you, everyone.

This concludes Canopy Girls' fourth quarter and fiscal year 2024 financial results conference call. A replay of this conference call will be available until August 28, 2024. and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you everyone for attending today's call.