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 second quarter fiscal 2026 financial results conference call. Currently, all participants are in a listen-only mode. I will now turn the call over to Taylor Burns, Director, Investor Relations. Taylor, 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, Luke Mongeau, and Chief Financial Officer, Tom Stewart. Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our second quarter fiscal 2026 ended September 30th, 2025. The news release and financial statements have been filed on EDGAR and CDAR that will be available on our website under the investors tab. Before we begin, I would like to remind you that our discussion during the 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 Kenyan dollars unless otherwise stated. Following remarks by Luke and Tom, we will conduct a question and answer session where we will take questions from analysts. With that, I'll turn the call over to Luke.

Good morning, everyone, and thank you for joining us today. It's great to be with you again to share the continued progress we're making in building a competitive, profitable, and trusted leader in the global cannabis market. The second quarter was one of our strongest to date, reflecting real, measurable progress driven by our continued disciplined focus on fundamentals. Q2 highlights, including continued momentum in our Canadian adult-use cannabis business, consistent growth in our Canadian medical cannabis business, and a stronger and significantly healthier balance sheet. Together, these actions give me confidence in our ability to sustain progress and deliver results for quarters to come. Turning to our Canadian adult-use cannabis business, Net revenue increased 30% year-over-year in Q2, driven by demand for our Claiborne-infused pre-rolls and our new all-in-one vapes from Tweed and Seven Acres. Stronger relationships with Canadian boards, large accounts, and independent retailers drove continued distribution gains, including a 20% year-over-year distribution increase amongst Alberta-independent retailers. We also improve our service levels with higher on-time, higher in full fill rates across key accounts, reinforcing our reliability with retail partners. For the six-month period ending September 30, 2025, revenue is up 37% compared to the same period last year. This growth reflects the renewed momentum of our adult-use cannabis business following the actions taken earlier this year to tighten our product portfolio, streamline execution with boards and retailers, and refine our sales model. Looking ahead, we're building on this momentum with additional Claiborne innovation, new genetics, across our core flower portfolio and PRJ brands and plans to reach a broader group of consumers later this year. We're also elevating our cultivation standards, including manual and refined post-harvest processes to deliver superior flower, ensuring consumers experience the very best of what Canopy has to offer. In our Canadian medical cannabis business, net revenue grew 17% year over year, marking another consecutive quarter of growth. We're staying true to our medical strategy, offering the right products, at the right price, consistently in stock, and for the right patient segments. During the quarter, our BC Doja site became an exclusive medical cultivation facility, producing craft and small batch cannabis dedicated to Spectrum patients. Doja is also exclusively end bucking and hand trimming all product, which is a deliberate investment to drive quality and consistency in the Spectrum patient experience. We're also seeing continued growth among insured patients with registration up 20% year over year and almost tripling since 2021. This continued growth speak to the reliability and care within our medical business. Looking ahead, delivering a superior patient experience remains central to how we will continue growing this business despite proposed government changes to medical reimbursement. In international markets, frankly, I'm disappointed with our performance during the quarter, where net revenues declined $3 million. Performance in Europe was primarily the result of supply constraint and internal process challenges. Lower stores from sales in Europe did not meet required quality standards, and internal process gaps limited our ability to deliver supply to Germany from our Canadian GMP facilities. I want to be clear. GMP growth is fully committed to the European market. We have already mobilized a dedicated effort to improve supply chain execution, which includes daily management, oversight of logistics, product roadmaps, and licensing. We expect operations to stabilize and begin improving as we exit the fiscal year, with international markets remaining a key part of our path to profitability. At Storrs & Beckel, the launch of the new EZ Vaporizer was received with great enthusiasm by consumers globally and generated early sales momentum, helping contribute to sequential quarter-over-quarter revenue growth. While Divisi only contributed to three weeks of performance during the quarter, we're seeing positive signals into Q3, and together with holiday seasonality, expect continued growth through a remainder of the year. Looking ahead, I'm encouraged by the momentum at Storz & Bickel. The team's commitment to precision engineering, medical grade quality, and design excellence continues to set the brand apart, and that's what will drive performance in the long run. On operating expenses, our SG&E savings program, launched earlier this fiscal, has delivered over $21 million and annualized savings, surpassing our $20 million target ahead of schedule. As we build a culture of fiscal responsibility, the team continues to identify additional savings opportunities while delivering top-line growth. On profitability, we made strong progress this quarter with margin expansion and disciplined cost management that's moving us closer to positive adjusted EBITDA. We're also taking further steps to meaningfully lower our cost of goods sold through steamlining processes, smart investment to deliver improved yield and quality, as well as tighter supplier management. Before I close, I'd like to touch on the Canadian federal government's recent proposal to reduce reimbursement for veterans who use prescribed medical cannabis. These proposed changes have the potential to seriously impact access and quality of the care and services that veterans have come to rely on. As one of Canada's leading medical cannabis providers, we believe consistency and fairness in access to care is critical. We're continuing to assess the proposed changes and are engaging across the country to ensure the needs of patients remain front and center. In closing, Q2 demonstrated continued progress across our core businesses, including positive momentum in our Canadian medical and adult use businesses, an expanded product lineup at stores and beckons, and a clear action plan on the way to improve execution in our international markets to drive future success. As we further sharpen our focus on quality, patient and consumer experiences, and disciplined execution, I'm confident we have the right strategy, focus, and team to become a trusted global provider of elevated cannabis experiences. Thank you. I will now turn the call over to Tom to walk through the financial results in more detail. Thank you, Luke, and good morning, everyone.

I am proud of our disciplined execution, including stronger financial performance, rigorous cost-saving initiatives, a significantly deleveraged balance sheet, and sustained cash flow improvements. Our adjusted EBITDA loss narrowed significantly year over year, driven by growth in the Canadian cannabis business, along with lower SG&A expenses and efficiency gains. As a result of the progress made, we have eliminated the conditions that once raised substantial doubt about the company's ability to continue as a going concern. This is a significant accomplishment for Canopy Growth. We had $298 million of cash and cash equivalents as of September 30, 2025, which exceeded debt balances by $70 million. During Q2, we prepaid $50 million U.S. dollars on our Senior Secured Term Loan, capturing roughly $6.5 million in annualized interest savings. As a reminder, the company has no significant debt maturities prior to September 2027. Moving to our detailed segment results and starting with cannabis. Q2 cannabis net revenue was $51 million, up 12% compared to a year ago. This growth was led by the Canadian adult use business, up 30% year over year. primarily driven by strong consumer demand for our Claiborne-infused pre-rolls and our new Tweed all-in-one vape offerings. Canada Medical also continued to perform well, up 17% from the prior year, supported by growth in patient registrations, larger order volumes, and a broader assortment of products on our Spectrum Therapeutics store. International cannabis sales underperformed during Q2, decreasing 39% from the prior year, which was driven by supply challenges. While we expect this decline in sales to improve in the back half of the year, we are proactively identifying opportunities to mitigate the near-term impact on revenue and preserve our focus on consolidated profitability. Cannabis gross margin in Q2 was 31%, down year over year, but up sequentially from 24% in Q1. The sequential improvement in cannabis gross margin primarily reflects the impact of price increases on select Canadian products, improved sales mix within Canada, and improvements to flower and fulfillment costs. These improvements were partially offset by the previously discussed European underperformance and inventory provisions. I will now speak about the performance of our stores and Bickel segment. Stores and Bickel net revenue in Q2 was 16 million, up 5% sequentially, driven by strong consumer demand for the new VZ vaporizer. Year over year, revenue declined 10% as the prior year period benefited from strong venti and mighty sales as well as strong performance on the back of favorable German regulatory reforms. Stores and Bickel gross margins increased to 38% in Q2 compared to 32% in the prior year period. Gross margins in the prior year were adversely impacted by discounts provided to clear out the remaining Mighty stock, which was retired in favor of the Mighty Plus device. Moving on to operating expenses. SG&A expenses in Q2 declined 13% year over year. reflecting disciplined cost management and the benefits of our ongoing restructuring program. The decline in SG&A expenses year over year was primarily driven by reductions in headcount and professional fees, partially offset by higher investments in advertising and promotions made in support of new product launches that occurred during the quarter. Since launching our cost-saving initiatives in March, we have achieved $21 million in annualized savings, exceeding our initial $20 million target. We are continuing to identify and implement additional cost reductions to further improve our structure while ensuring no disruption to our core capabilities and ability to execute in key markets. Turning to adjusted EBITDA, our Q2 loss was $3 million compared to a loss of $6 million a year ago. The year-over-year improvement was driven in part by the positive impact of our lower cost base and improved margins, partially offset by the negative impact of lower international cannabis revenues and inventory provisions. I'd like to now review our cash flow. Free cash flow was an outflow of $19 million in Q2 fiscal 26, down from an outflow of $56 million in the same period last year. The year-over-year decrease in free cash flow is primarily driven by a reduction in cash interest payments as a result of our debt paydowns, as well as year-over-year improvements in working capital. For fiscal 26, we expect to achieve significant improvement in free cash flow, driven primarily by reduction in cash interest costs due to lower debt balances, tighter management of working capital, and improved financial performance. I'd like to now provide our outlook and priorities for the remainder of fiscal 26. In our cannabis business, We expect improved performance in our Canada adult use channel over the remainder of fiscal 26 driven by robust innovation pipeline of focused product formats and tight alignment with cannabis boards and retailers. We will continue to monitor developments around the Canadian federal government's proposed changes to the medical cannabis reimbursement program for veteran and RCMP patients. As more information becomes available and should the budget pass, we will assess its impact on our business and what our next steps may be. Excluding any impact of these potential changes, we would expect Canada medical cannabis top line to continue to grow in the back half of fiscal 26. In international markets cannabis, we are focused on stabilizing and realigning operations in Europe. For the remainder of fiscal 26, we expect revenue in the region to remain generally consistent with the second quarter levels with growth expected as we exit the fiscal year. In Australia, we anticipate that our recently launched flour products, along with upcoming new format introductions, will support continued sequential growth in the second half of the fiscal year. For stores in Bickel, we expect stronger performance over the remainder of fiscal 26, driven by the successful launch of the VZ at the end of our second quarter, as well as strength coming from the holiday selling season. However, the year-over-year comparisons are likely to be challenged due to the ongoing economic uncertainty that exists, particularly in the U.S., and the negative impact this is having on consumer sentiment. While U.S. tariffs have created pressure on stores and vehicles profitability, we remain focused on mitigating their impact through discipline cost management and operational efficiencies. Turning to cannabis gross margins, excluding the potential impact to Canadian medical reimbursement levels, we expect sequential improvement in cannabis gross margins over the remainder of fiscal 26, driven by top-line growth and additional production efficiencies and cost savings. In our outlook for stores and Bickel gross margins, we expect sequential improvement over the remainder of fiscal 26, driven primarily by top-line growth and cost-saving initiatives. As we move into the second half of the year, our priorities remain firmly grounded in execution, efficiency, and disciplined financial stewardship. The deliberate actions we have taken to improve our operations, launch exciting new products in core categories, strengthen the balance sheet, and reduce costs have materially reinforced Canopy's foundation for long-term stability and growth. This concludes my prepared remarks. We will now take questions.

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. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. We do ask that you please limit yourself to two questions. Should you have additional questions, you may press star one again to rejoin the question queue. The first question comes from Bill Kirk at Roth Capital Partners. Please go ahead.

Good morning, everybody. Luke, you talked about the supply chain challenges impacting international. I know you mentioned quality standards. But what specifically do you have to change to reopen that pipeline? And is the solution going to be more costly than the prior product path into the German market?

Good morning. Thank you for the question. Let me just give you a bit more context. So I've been in the business with nine months. We pretty much started the transformation on the organization on day one. I'm thrilled overwhelmingly with everything that's happening in the business, and we see it in the results today. So we're driving growth on a Canadian medical and adult use business. margin is improving sequentially cost control uh we're well ahead of objective of uh targets and chasing for more supply chain is improving as i said europe um sadly i'm disappointed and i thought we would be ahead in the transformation that being said um we're on it uh we've moved to i as i mentioned a daily management oversight of the situation. We're retooling the route to market end to end, and we're making significant progress. Let me get now to the specific of your question. So we're retooling to a place where we will be able to satisfy European demand for the foreseeable future. from our Canadian GMP facilities. So Tom, please feel free to jump in while I'm done, but I do not see any increases in the cost of the flour that we will be providing to Europe. So we should be able to achieve superior margin there. in uh in the quarters to come and as we uh i see us uh you know the outlook for me is a much stronger position as we exit the fiscal uh fiscal year so tom anything to add no i think the only other thing i would i would say bill is there's not a lot of additional investment this is about execution with it with the assets that we we have today

So we also need to make sure we're, you know, we have a proper supply coming out of kindergarten, but overall, this is a story of execution and Luke and I are managing this quite closely.

Absolutely. And if I may add, um, as you can see by the amount of time we're spending on this, this is extremely important to us and we're extremely close to situation. We're expanding the number of strains we are growing. for Europe, which allows us to broaden our portfolio of products significantly. At the same time, we are broadening our distribution retail offering in Europe, which as well will open up the market for us quite significantly.

Thank you. Thank you for that both. And then, Tom, the ATM was used pretty aggressively in 2Q. Can you talk about the decision to use it now and in that size? And then given the magnitude in the quarter, how should we think about issuance going forward? Is it done?

So I would say, Bill, we're continuously evaluating our capital requirements and funding strategies to ensure we have an optimal capital structure that balances cost efficiency with financial flexibility. You're aware we launched a new program at the end of August. Ultimately for us, we want to make sure we have that optionality in the market, but I think it would be appropriate to speculate on how it would be used. We have the program in place to the extent we need to draw on it, but we're acting prudently with those proceeds.

The next question comes from Aaron Gray at Alliance Global Partners. Please go ahead.

Hi, thank you for the questions. First question for me, I just wanted to double back a bit on international. I know we've talked about it in the past. I just wanted to bring it up again in terms of your current supply chain. Are you guys still happy with some reliance on third-party products? Obviously, you guys have some of your own products. You can also export internationally. Do you feel like there's any need to increase the verticality that you have to supply the international markets because of some of the supply chain issues? Or do you feel like there's still a lot of opportunity to find, you know, quality product to sufficiently meet the potential demand in international markets? Thanks.

Yeah, some of our – thank you for the question, Aaron, and good morning. Some of the challenges came from flower source out of – out of Portugal, so we're out of this right now. As I said earlier, we have plenty of capacity within our own Canadian GMP facilities, so we're confident that we will be able to supply from our own source grown flour. We're not writing off Uh, having 3rd party flower in the future, but right now we're really retooling the entire route to market with our own growth flower, which we have enough capacity for the foreseeable future.

Okay, great. Thanks, Luke. 2nd, you make some nice progress on the profitability. Um. You mentioned continued progress towards positive EBITDA. Any updates in terms of some of the key levers and timing of when you might expect to get to profitability? I know it's something that you guys have stopped doing in terms of set the timelines, but fair to say you'd be disappointed if you didn't achieve it in some time of calendar 2026, your fiscal year out of the back half or front half of 2027. Thanks.

I would say, Aaron, we're controlling what we can control. And right now, the cost savings measures were taken. We know will empower us to get to an improved, adjusted performance. I think it's too early to speculate at this point in terms of when that would be. But I think, as you can see from the results, this has been our strongest quarter. While I'll be at a loss, it's our narrowest loss that we've had to date in my recent memory. So I think the changes we're making in the organization is going to fully support that, and we'll keep pushing as much as we can here.

Yeah, if I may add on top of this, positive adjustability is our main and remains our main priority. That's why we're over-indexing and really retooling Europe to make sure we fire on all cylinders.

Ladies and gentlemen, as a reminder, if you have any questions, please press star one. The next question comes from Federico Gomez at ATB Capital Markets. Please go ahead.

Good morning. Thanks for the questions. First question, just given the growth that you're seeing in your cannabis platform, the outlook for natural use, Canadian medical, international medical as well, how are you looking at your capacity right now? Do you foresee any any need to invest in additional capacity, I guess, in the near future, like meaningful investments, you know, if the business keeps growing?

Good morning. Thank you for the question. As I mentioned, we're doing smart investment to really unlock yield and quality of the flower that we're growing in our own facilities. We've looked at this large and wide. We're confident with limited investment that we can meet the demand and meet the growth targets that we have.

Yeah, thanks. Thanks for the question, Fred. Yeah, we believe our footprint primarily with our cultivation income is sufficient to meet A lot of the focus and investment that we're making is really to improve our yield and the quality of our flour coming out of that facility. But we wouldn't expect a significant amount of additional capital investment needed to meet the demand. So I think it's, again, it's executing with the assets that we have and improving utilization across the board.

Thank you. And then just a second question, just on the, I guess, related to that, you know, balance sheets now in that cash position. You obviously have access to capital and you're in a good position here, but I guess if you could talk about the capital allocation priorities that you have now that you have no significant liabilities to debt. Thanks.

Yeah, so from my view, Fred, the $300 million of cash with no near-term debt obligations, it really provides further optionality for us when it comes to evaluating our capital structure and evaluating potential investment opportunities to grow and strengthen our business. The cash also provides us with flexibility to capitalize on these potential opportunities, but also mitigate risks as market conditions fluctuate. As we all know, cannabis is a highly volatile space. So I think for right now, we're evaluating potential creative options that are out there, but ultimately we want to make sure we remain resilient and stabilize this company and focus on the business that we have today. Okay.

Thank you. The next question comes from Pablo Zwanek at Zwanek and Associates. Please go ahead.

Thank you, and good morning, everyone. Look, I will ask my two questions up front. One, on the VAVE launch, I mean, obviously, the Claiborne launching pre-rolls has been very successful. Can you give more color in terms of the VAVE launch? Is it just in all-in-ones, or are you also planning in 510 cartridges? Are we talking all-in-ones just in distillates or also live resin or live rosin, liquid diamonds? If you can just give more color on how you think about the category, especially in terms of room for innovation and also the price competition there. There's been a bit of a race to the bottom, it seems, on all-in-ones. That's in terms of vape. My second question is more in terms of... the U.S. business. I know that you said, Luke, the U.S. is more of a long-term opportunity, and I understand that. But it would help if you can give an update in terms of where things stand with Canopy USA, especially in terms of any help you had to give to Acreage in terms of a balance sheet or guarantees. I think in the past, the company bought debt from AFC Gamma. I don't know what happened recently in the June quarter or September quarter in terms of help acreage operate, especially from a balance sheet and cash flow perspective. Thank you.

Hey, good morning. Okay, doing well. Let's start with the vapes, and Tom will jump in for the U.S. So we're thrilled with the early results we're getting with our all-in-one. So as I mentioned, we launched Tween. seven acres. We did really well. We actually ran out of stock, so we had to accelerate replenishment of first wave. As I mentioned, we're launching, we're about to launch Claiborne in all-in-one vapes as a first entry. We're very encouraged by the gross margins that we're able to achieve uh with these uh with these uh products so we're putting out their product of superior quality so we're pricing them uh appropriately and they've been uh they've been marked margin and creative uh for us as it comes to the full spectrum of live resin and so on distillate and liquid diamonds and everything there's more developments to uh That will that will come there. We're committed to being a leader, uh, in all in one wave. So it is a key market key growing, uh, key growing market. So, more more news to come there and make sure to try the, uh. the new Claiborne all-in-ones as they come out. I was able to sample them this week, and it's what we stand for, superior elevated experiences with quality products, and those deliver on all of that. Tom, you want to give some insights about the U.S.?

Yeah, sure. So, Pablo, a couple points within your U.S. question there. So, There are no guarantees between Canopy Growth and Canopy USA. So Canopy USA is an independently run and managed enterprise. They did have new financing over the summer from their lender, and the team has been working diligently to deploy that capital in the areas where they see the highest returns. Overall, their focus now is on execution and really bringing the three companies together and executing well in the U.S. space. But to be clear, there's no funding, new or otherwise, with Canopy USA and Canopy Growth.

This concludes Canopy Growth's second quarter fiscal 2026 financial results conference call. A replay of this conference call will be available until February 5th, 2026. and can be accessed following the instructions provided in the company's press release issued earlier today. Canopy Growth's investor relations team will be available to answer additional questions. Thank you for attending today's call.