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 third quarter fiscal 2026 financial results conference call. Currently, all participants are in the 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 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 third quarter fiscal 2026 and in December 31st, 2025. The news release and financial statements have been filed on EDGAR and CDAR and will be available on the 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. 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 Luke and Tom, we will conduct a question and answer session where we will take questions from analysts. With that, I will turn the call over to Luke.

Thank you, Tyler. Good morning, everyone. And thank you for joining us today. Q3 was a quarter where Canopy Growth delivered significant progress on multiple levels, and it reinforced my confidence that we're building stronger business. For me, the fundamentals of the business are both about how the business is performing and our financial strength, which allows us to execute with discipline. Across the organization, our teams are focused on the right things, and that focus is starting to pay dividends. We're building a company that can consistently deliver superior experiences for consumers and patients, grow and manufacture high-quality products, and create consistent value over time. On the balance sheet, we ended the quarter with $371 million in cash and cash equivalents and a net cash possession of $146 million, putting us on solid footing as we move into the next phase of execution. Post-quarter end, we completed a $150 million U.S. recapitalization that improved our liquidity and extended all debt majorities to 2031. This gives us more flexibility around near-term financing, including how and when we use tools like the ATM, and more room to make the right long-term decisions. This financial strength matters because it allows us to act intentionally. A good example is a proposed acquisition of MTL Cannabis, which we announced during Q3. MTL brings in a creative profile, a strong entrepreneurial leadership team, and high quality cultivation capabilities to our platform. They built a profitable, task-generating business that we expect to be accretive to the combined organization. High-quality flour, cost-efficiency, and operational discipline are the foundation of any scale cannabis company, and MTL strengthens our ability to achieve all three. Following closing, MTL will strengthen our leadership position in Canadian medical cannabis, enhance our presence in Quebec adult use, and importantly, provide high-quality flower supply that we can leverage to drive growth domestically and in international markets. Turning to our Q3 business results, the focus on fundamentals is really paying off. In Q3, we delivered our slimmest adjusted even though lost to date driven by continued cost discipline and improving execution across our Canadian medical and adult use channels. In Canada Medical, net revenue grew 15% year-over-year, our sixth consecutive quarter of growth, supported by a high-quality, best-in-class patient experience, strong service levels, and increasing engagement with insured patients. We've also taken deliberate actions to preemptively mitigate the financial impact of the proposed changes to the Veterans Reimbursement Program, while continuing to support veterans with best-in-class care and innovative, high-quality products. We expect to continue strengthening this platform, maintain our leadership position in Canadian medical cannabis, and use our scale to elevate service and drive margin improvement over time. In Canadian adult use, we're seeing continuing momentum as well, with net revenue up 8% year over year. Growth this quarter was driven by strength in pre-rolls and vapes, supported by focused innovation and improved execution at retail. What really gives me confidence here is not just the growth we're seeing today, but where we're directing our attention. We're shifting our focus toward elevating the quality of our brands, straightening product innovation, and improving the quality, potency, and cost of our flour to delight consumers and patients alike. Looking ahead, our focus now turns to unlocking the next phase of growth. particularly in Europe where we are spending significant time and attention. In Q3, we started sub-stabilizing this national business, improving execution and laying the groundwork for growth with net revenue of 22% sequentially. Progress on EU GMP certification at our Smith Falls facility Combined with our continued focus on elevating flower quality across our sites, it's expected to position us to better serve international medical markets as demand continues to develop and regulation continues to evolve. Additionally, access to NTL's high-quality supply will fuel our strategy. There's more work to do, but I see a meaningful opportunity ahead. At stores and Bickel, net revenue grew 45% sequentially, with the new VZ Reparizer reinforcing our strategy around affordability and portability. Our focus remains on accelerating product development and strengthening sales and market execution, especially in North America, where we believe cannabis consumers should experience the joy and fullness of flavor that an SMB device offers. In the U.S., we remain indirectly invested in one of the world's largest THC markets, providing us with long-term strategic optionality as the regulatory environment continues to evolve. So overall, this was a quarter of real progress. Our balance sheet is stronger, Canadian cannabis sales are growing, and the confidence of our team continues to build. Looking ahead, the business is well-positioned to unlock additional value to elevated cultivation, innovative brands, and disciplined execution. I'll now turn it over to Tom to walk through the financial results in more details.

Thanks, Luke. Accurate sentiments and remaining confident in the direction our business is heading. The third quarter reflects our continued focus on disciplined execution across the business while sustaining cost savings and significantly improving our balance sheet. With our aggressive cost-saving actions taken to date, we have been able to identify and capture $29 million of annualized savings far exceeding our initial expectations. This, coupled with the growth we are witnessing in the Canadian business, gives us the confidence that we can achieve our goal of positive adjusted EBITDA during fiscal 2027. Turning quickly to the balance sheet, We ended the quarter with our strongest net cash position since fiscal 2022, with $371 million of cash short-term investments and a net cash position of $146 million. We further strengthened our balance sheet subsequent to quarter end with the previously announced recapitalization, which enhanced our near-term available cash while extending our debt maturities to 2031. These actions reinforce our financial foundation as we continue to execute against our operating and strategic priorities, while expanding our near-term financing flexibility, including greater discretion over the timing and use of our remaining ATM capacity. With this level of balance sheet strength and expected sustained improvements to our operations, I'm extremely encouraged as we close out the fiscal year. I will now review our detailed segment results, starting with global cannabis. Q3 cannabis net revenue was $52 million, up 4% compared to a year ago. This growth was led by Canada medical cannabis, with revenue increasing 15% year-over-year to $23 million, marking another record quarter. This growth was driven by continued expansion in insured patient registrations and larger order sizes. Our medical team's focus on improving service levels, including faster fulfillment of reduced shipping times, continues to generate positive results. Canada adult use cannabis revenue increased 8% year-over-year to $23 million, supported by growth in infused pre-roll joints and our new all-in-one vapes from Tweed and Claiborne. In addition, disrupted retail operations in British Columbia reduced purchases by the province during the quarter, which created revenue headwinds not expected to recur in the fourth quarter. Turning to international cannabis, sales increased 22% quarter-over-quarter, reflecting stabilization and a return to growth. As we retooled our supply chain, we saw encouraging signs of operational improvements as we exited the quarter. Cannabis gross margin was 25% in Q3 as compared to 28% in Q3 last year. The year-over-year decrease in gross margin percentage was primarily attributable to lower sales in international markets and a change in sales mix within the Canadian adult use market. Turning to the performance of stores in Bickel. Stores and Bickel net revenue was $23 million in Q3, an increase of 45% sequentially, driven by traditionally strong seasonal sales, with Black Friday online sales increasing 16% year-over-year and the first full quarter of sales for the new VZ device, offset by softer demand in certain markets and tariff-related pressures. Stores and Bickel gross margins decreased to 37% in Q3 from 40% last year, with tariff impacts and lower volumes providing gross margin headwinds. Moving to operating expenses, excluding the impact of acquisition, divestiture, and other costs, which includes litigation costs and recoveries from previously divested businesses, SG&A expense decreased 12% year-over-year. This improvement is the direct result of our ongoing cost savings initiatives, which remain a central focus for Canopy. These savings, combined with the performance of our Canadian cannabis business, led to our narrowest adjusted EBITDA loss to date of $3 million. We remain focused on balancing cost discipline with maintaining the capabilities required to execute in our core markets. Free cash flow was an outflow of $19 million in Q3 fiscal 2026, down from an outflow of $28 million in the same period last year. The year-over-year decrease primarily reflects a reduction in the cash interest payments due to a reduction in our debt balances and decrease in working capital movements. As we move forward, our focus remains on delivering positive adjusted EBITDA in fiscal 2027, improving inventory turns, and tighter capital allocation, all of which support sustainable free cash flow improvements. Looking ahead, in Canada Cannabis, we expect continued strength in adult use driven by innovation, expanding distribution with key accounts, and elevating our flower capabilities. In Canada Medical, we remain focused on patient growth and service excellence, which we expect to continue to drive growth in the medical channel. In international cannabis, our priority is operational stability and execution, with sequential improvements expected in Q4 and into fiscal 2027, driven primarily by performance in our European markets. With this momentum, we expect to see improvements in our cannabis gross margins in Q4 and into fiscal 2027. At Storrs & Bickel, VZ momentum and cost discipline remain key drivers as we navigate near term macro and tariff headwinds. With Storrs & Bickel's strongest quarter being Q3 traditionally, we can expect the sequential top line comparison in Q4 to be challenged. With expected growth in top line revenue on improved gross margins, as well as the cost saving initiatives executed today, we would expect Canopy to achieve positive adjusted EBITDA during fiscal year 2027. Furthermore, Upon the expected closing of the MTL transaction, Canopy expects to consolidate MTL's results from the closing day onwards, which will contribute to net revenue, gross margin, and adjusted EBITDA improvements. While integration planning is already underway, our immediate focus post-close will be on ensuring operational continuity and beginning to capture the strategic and cost synergies we have previously outlined, while also maintaining our disciplined approach to financial management. In closing, I want to underscore that our priorities across the business remain clear and unchanged. Rigorous operational execution, disciplined capital allocation, and achieving positive adjusted EBITDA. With these three elements, we are positioning Canopy for sustainable long-term success. I will now turn it back over to Luke for his closing remarks.

Thank you, Tom. For me, the takeaway from this quarter is clear. The focus we place on fundamentals is working. and it's straightening the foundation of our business. We have made real progress on the balance sheet, built momentum across our Canadian cannabis businesses, and took an important step forward with the proposed acquisition of FTL Cannabis. With that foundation in place, our focus now shifts to accelerating Europe, expanding the reach of stores in Bicol, and elevating cultivation, quality, and efficiency at scale across our platform. From my very first day, I believe that Canopy Growth has the potential to transform, refine its focus, improve its cost structure, and deliver on its promise of a sustainable and profitable cannabis company. With each quarter, we're demonstrating sustainable improvement, and I'm confident we're positioned to get further momentum as we move into fiscal 2027. Thank you. Operator 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. First question comes from Aaron Gray from Alliance Global Partners. Please go ahead.

Hi. Thank you very much for the questions. First for me, just wanted to dig a bit more in terms of the international business and what to expect maybe for the next, you know, 12 to 18 months for growth opportunities. You know, MTL had a small international business, you know, today, but it does seem their production capabilities could help you improve your international supply chain. So maybe any color in terms of how I think about the timing of that flowing through. And is there any additional capacity needs to ensure MTL's legacy domestic business continues to be serviced? And then additionally, in terms of the EU GMP at Smith Falls, how should we think about potential timing of that and that improving your international supply chain capabilities? Thanks.

Good morning. Hope you're well. Thank you for the question. Okay, there's a lot to unpack here. Let's start with... Let's start with flour. So we've demonstrated in the past when we have flour in Europe, our capabilities out there, whether it's sale, distribution, I mean, deliver results. And so the focus is really on ensuring that we have the right supply of flour going to Europe. So the team have been doing quite a bit of work in recent weeks and months to ensure that our – Demand signal that we're seeing in Europe are well integrated with our growth capabilities in North America. And this has been pretty much fully resolved. So we're in a good place where we can really meet the demand better than we did in the past. Let me give you a bit of a data point. So during Q3, our sales team in Europe had about two strains for a long period of time, two strains to sell. We forecast that in early fiscal 27, they'll have over a dozen different strains to sell. So, you know, we're confident that we're unlocking supply of flour there. This will build on the unique capabilities that Canopy has established over the years. So, Smith Falls is already EUGMP qualified. We're going for a, let's call it a second level of certification. All the docs are in a row to get this approved, so we feel confident there. As well, we have the facility in Europe. We have a facility in Germany, in SLR, that can receive, clear, and distribute flour in Europe. And we're continually doing operational improvements there. We feel really good there. As for MTL expanding capacity, we've met with the extremely qualified team there. They have amazing growers. Plans are in place to ensure capacity improves. As well, we're working on our facilities at Canopy to improve yield out of our facilities and the work streams are there. We're seeing great progress. So our level of confidence to build step change performance in Europe next year is building every week.

I appreciate the color and data points there. That was really helpful and thorough. The second question for me is maybe just touching on the expectations for the gross margin, both on the legacy business and how you expect those to trend, particularly for cannabis, which has been volatile the past few quarters, both on the up and downside, and then how best to think about layering on MTL, which has had a higher legacy gross margin profile.

Yeah, thanks, Aaron. I'll take that one. As Luke said, we're excited about the acquisition of MTL and believe it really complements and enhances the existing business in Canada as well as abroad. You know, with MTL's historical margin performance, which you're right, does exceed ours, you know, we're targeting, you know, in the near term here, a blended gross margin of, say, mid to high 30s. But I think there's still a lot of runway after that as we see the European business stabilize and grow, just given the high price points in the European market. So, definitely we expect the MTL transaction to be accretive to gross margin as well as to our adjusted EBITDA.

Thank you. The next question comes from Bill Kirk from Roth Capital Partners. Please go ahead.

Hey, good morning, everybody. Tom, when you said a positive adjusted EBITDA during 2027, does that mean for the full year or does that mean one of the quarters in the fiscal 27 will be positive? And do you expect positive numbers if you were to exclude the contribution from NTL?

Yeah, so a couple parts there. So, as I said on the call, Bill, I am encouraged by the progress, you know, we continue to make to grow the business and, of course, correct our cost structure. We continue to work towards achieving even adjust even a positivity as soon as possible. we will benefit or we will see headwinds with the veteran changes. And that's a lot of the reason why you're seeing us take more aggressive cost-saving actions now. So I'll say we're trying to get there as quickly as we can, Bill. And we would expect to be there at some point during fiscal 2027. Okay.

And then for my second question, the indebtedness maturities are out to 2031. You're sitting on net cash. So would you expect The period, the last five quarters or so, that period of large equity issuance and dilution, would you expect that to be over?

Yeah, so we're pleased with the current balance sheet position we're in after completing the January recap with all the cash we have on hand now. I would fully expect that does reduce our utilization of APM in the coming quarters, but we will preserve capacity for future strategic opportunities as and if they arise.

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1. The next question comes from Pablo Zwanek at Zwanek and Associates. Please go ahead.

Thank you, and good morning, everyone. Luke, can you comment in terms of domestic medical business, does this proposal in the budget to reduce the cap for veterans from $8 per gram to $6 per gram, that could become effective April 1st? You know, where are we with that? Is there room, do you think that that will be delayed or scratched?

Good morning, Pablo. Thank you for the question. This is a very, very important subject. And we want to make it clear that Canopy is really not in support of this reduction because it can potentially impact the level of care that veterans receive. So as you can imagine, We've channeled a lot of efforts to work with the authorities to see if this could be either delayed or the reduction maybe minimized. So far, we have not been successful. So we're taking all the actions to maintain both the integrity of the quality of the care and service the veterans are receiving. And at the same time, we're taking all the actions to maintain the integrity of our margins. So as Tom said, we took additional actions to be even more stringent on our efficiencies, cost savings. We're able to find more cost savings. So we're doing everything we can to maintain the integrity of our margins. Tom, anything to add?

No, I think, you know, it definitely presents a headwind for us that we're taking the actions now prior to the changes come into effect to make sure we can preserve, you know, just even a performance to the full extent possible. Right.

Thank you. And before I ask my follow-up, I mean, according to my math, the veteran part of the domestic medical business, it's almost about two-thirds of the market. Or am I wrong in that calculation?

You mean the total cannabis market on the medical side in Canada, Pablo?

Right, yeah. Would the veteran piece be about two-thirds of the total market, roughly? Two-thirds of the total medical?

Yep, of the market in Canada. Yeah, no, that's – we can follow up with you. For me, I look at the market in a couple of ways. The adult use market in Canada is close to $5 billion, growing at 46% every year. The medical market is about somewhere between $300 million to $400 million. We can get back to you with the exact numbers. medical markets, but there are a new large group of insured and non-insured medical patients in Canada as well. So, you know, what's important there, Pablo, is that, look at it, you know, in the last quarter, we grew at 50% in this highly profitable market. NTL is growing at double digits as Combined together, we're going to be the number one player there. We care about the veterans. We care about all cannabis patients in Canada. And we're doing everything, as I mentioned, to maintain the integrity of our service and So, as we come together with MTL, we'll look at every single synergies possible there. We'll have the benefit of greater scale to maintain margin integrity and more to follow.

Thank you. Next question comes from Brenna Cunnington at ATB Capital Markets. Please go ahead.

Thank you, and good morning, everyone. So, just looping back to the balance sheet here. So, cash balance of roughly 376 ending the quarter and roughly 425 following the recapitalization. So, quite the war chest that you're building up here. We know that some of the cash will be going towards the consideration for MTL. So, kind of a two-pronged question here. So, could you shed some light on roughly how much cash you're wanting to keep on hand and the top priorities for the excess cash? And then also, could you remind us of roughly how much spend will be needed right off the bat for MTL integration?

Good morning, Brenna. So, I would say from a cash standpoint, we want to make sure we have sufficient flexibility and we want to maintain sufficient cash if we find opportunities in the market. So, I'm not going to pinpoint that to a number, but I would say, you know, this is a healthier position than probably you would expect in terms of cash level. For the MTL acquisition, and again, this is math you could do here, but it'll be probably between 40 and 50 million of cost is what we're expecting the cash outlay to be Canadian dollars for the MTL acquisition.

Okay, perfect. Thank you for that, Collier. And then just looking at Storrs and Bickel, so good to see some of the improvements here. Looking ahead, and apologies if I missed the tread remarks, but given the dynamics at play here, what can be done to help improve sales and make it sort of more stable going forward?

Yes, thank you for the question. It stores the vehicle, amazing brand, amazing products, amazing company. I strongly suggest to anybody who has never used a device to try it. It's still a brand that has very low brand awareness, very low trial and everything, especially in the U.S. So it's – The strategy to drive growth and value creation is two-pronged. Real expansion of market penetration usage in the U.S. and as well acceleration of the innovation. And innovation we see in a couple ways. Price point expansion. As we expand into affordability, we see the brand really exploding. We're seeing it with the VZ right now, which is the entry-level. device and it's doing extremely well and we will continue to expand that way and right now we're only offering devices that are suited to flower and we can expand the brand into devices that that you of the market that we're not playing in. So, multiple avenues for growth and value creation expansion for the fund.

Thank you. This concludes Canopy Growth's third quarter fiscal 2026 financial results conference call. A replay of this conference call will be available until May 7th, 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.