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 first quarter fiscal 2027 financial results conference call. Currently, all participants are in a listen-only mode. I will now turn the call over to John Bensick, Investor Relations. John, you may begin the conference call.

Thank you, operator, and good morning, and thank you to everyone for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau, and Chief Financial Officer, Tom Stewart. Prior to the opening of financial markets today, Canopy Growth issued a news release announcing the financial results for its first quarter ended June 30, 2026. 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. 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 penny and dollars unless otherwise stated. Following the remarks by Luc and Tom, we will conduct a question and answer session where we will take questions from analysts. And with that, I would like to turn the call over to Luc.

Thank you.

Good morning, everyone. and thank you for joining us today. Pisco 2027 is off to a strong start and it's built on real momentum from Pisco 2026. I'm confident to say that our first quarter results have us well positioned to build on that momentum all year long. Pisco 2026 was all about sharpening our focus, tightening execution and positioning us for growth, including the strategic acquisition of MTL Cannabis.

That work is truly paying off.

Since I joined as Cannabis CEO in January of 2025, this is the first quarter we've reported year-over-year growth in every single business. This Goal 2027 is about growth. and moving our focus to cultivation to improve yields and accelerate growth, especially in Europe. And it says well about increasing our manufacturing efforts to improve margin and accelerate our journey to positive adjusted EBITDA. In the quarter, net revenue was $81.2 million, an increase of 13% from Q1 of last year. with our cannabis segment growing at 14% and stores and big gold growing at 6%. And importantly, adjusted gross margin was up 600 basis points over last year, reflecting the effort we've made across our supply chain to reduce our cost rupture and improve execution.

This gives us confidence our strategy is working.

Our province's growth was led by our Canadian medical business, which reported net revenue of $25.8 million, up 22% from Q1 2026. Strong year-over-year growth in medical was driven by a steady increase in patient count over the past year. Our medical business was recently strengthened by the addition of MTL Cannabis with its Canada Isles Clinics and Alba Medics online distribution platform. As a combined company, we continue to add patients and increase the number of orders we fill during the first quarter, helping to cement our position as the number one Canadian medical cannabis provider. Our Apollo Cannabis Clinic We recently voted Best Medical Cannabis Clinic in the Toronto Star Reader's Choice Award. This recognition reflects our commitment to positive patient outcomes and to making medical cannabis care accessible.

We are trusted by patients and will strive to continue to earn that trust. Even with these successes,

Given our significant focus on veteran care, we have felt the impact of the reduced reimbursement rates for our products on Veteran Affairs Canada. We have done our utmost, mitigating the impacts of these changes on our patients and veterans, and continue to work to broaden our patient base to build on our leadership position. Despite this headwind, We remain strongly committed to our medical patients in Canada. We continue to offer the best product assortment, consistent availability, and a best-in-class service experience for veterans and all patients alike. We strongly believe staying true to our core values will enable us to continue to add new patients and ensure the ongoing expansion of the business. Our Canadian adult use net revenue of $29.7 million was up 10% from Q1 of last year, building on the impressive 20% growth rate we delivered in fiscal 2026. Our recreational business has benefited from ongoing strengthening of our product portfolio, including the addition of the popular MTL cannabis brand. We plan to leverage Canopy's distribution capabilities to further expand the reach of the MTL brands across the country. The most recent market share data shows that Canopy is now ranked at number six overall, up from number eight. We also moved into the top two position in premium flour and infused pre-rolls, and number one is sub-jobs. We are confident this growth will continue The other progress we are making in cultivation and the additional flower we plan to bring to market as well as plant innovation around the Claiborne and Tweed plants. In international cannabis, net revenue rose 10% year over year as we reset our operations and continue to lay out the end-to-end supply chain to grow in the European market. Europe remains a major catalyst for our growth, driven by particularly robust sales performance in Poland during Q1, where we are now a top three supplier. This was our third consecutive quarter of sequential growth in international, driven by solid execution, in particular, our ability to consistently supply high-quality flour. We also plan to begin shipments of flowers to the UK imminently, with revenue contributions expected to start in the second half of the fiscal year. We are energized by the tremendous opportunities in Europe and by our strengthening ability to supply the market with quality products that meet the growing needs of European cannabis patients. returned to year-over-year growth in Q1, reporting a 6% net revenue increase to $16.1 million, as well as a very strong gross margin of 48%, compared to 29% in Q1 of 2026. Q1 was Storson-Mickle's first full quarter. Under the new leadership team, it has been implementing a focused go-to-market strategy. We're pleased to see increased sales in markets outside the traditional strongholds of the U.S. and Germany, clearly demonstrating that Storz & Bickel is diversifying its revenue stream and building on its position as the number one global provider of medical vaporizers. While these results are encouraging, our strategy remains anchored on building upon our capabilities in three key areas. Thank you for joining us. takes off as sharing of best practices and expertise across the organization. We're implementing a wide range of improvements, ranging from growing techniques to lightning upgrades and environmental controls. The early results are positive, with promising improvements to yield, THC levels, and cost per gram.

We have begun growing popular MTL strain at Kidd Garden, under the leadership of the MTL Master Growers, as well as cultivating new strains to enhance our genetic portfolio. These initiatives promise to increase our supply of high quality flour.

Our business has already benefited from more consistent supply, and I'm excited to see there is significant room for further gains. As throughput increases throughout the year, we expect to see a direct positive impact on revenue. Post-quarter end, we kicked off a comprehensive end-to-end supply chain initiative to streamline our processes, right-size our distribution footprint and optimize labor. As we grow revenue, we're targeting significant improvements in gross margin beyond what we have already seen. Turning to international supply, Tentapie has a complete EU GMP flower supply chain, starting with our EU GMP certified kindergarten facility and extending to our distribution facility in Germany. We have also already completed our EUGMP inspection for finished products and cannabis 2.0 products manufacturing in our Smith's Fall facility, for which we expect to receive certification during this fiscal year. That certification will make Canopy one of the only domestic companies with end-to-end EUGMP cultivation, manufacturing, and finished product processing and packaging of products intended for the international market. This capability will be a core differentiator for Canopy, and we see it as a competitive edge that can spare growth. As yields and manufacturing capacity increase throughout the year, we expect to see improved gross margin, and we will be better positioned to compete and win in the competitive Canadian medical and recreational space, as well as winning in global markets. This is what truly excites me most about the future of our company. I will now ask Tom to provide more details on our first quarter financial results.

Thank you, Luc, and good morning, everyone. Canopy reported a solid first quarter, showing good progress on both the top line and key profitability measures. We recorded $81.2 million of net revenue in Q1 fiscal 2017, up 13% from the same period last year. Net revenue increased in our cannabis segment, with growth across all channels, as well as in the stores and bagels segment. Despite the Veteran Affairs reimbursement changes, Canada Medical Cannabis reported strong growth, with net revenue increasing 22% year-over-year to $25.8 million. We are also taking steps to further mitigate the impact of the Veteran Affairs changes on margins of EBITDA. These include saving costs by integrating functions like customer care with the MTL organization, renegotiating pricing with therapy suppliers and partners to share the impact, and adding more large product formats, which deliver greater value to patients by allowing them to buy more product up front while reducing costs for the company. We have consistently demonstrated our ability to grow patients and gain traction in Canada medical, despite broader market pressures. As we navigate the impact of the Veteran Affairs reimbursement changes, we remain focused on executing the same proven strategy that has driven our success to date. Growing our patient base, increasing engagement with our patients, and operating the business to deliver a best-in-class customer service experience. Overall, our Q1 results are on track with the commentary we provided on our most recent investor call issue. At that time, we said we expect to report year-over-year revenue growth throughout fiscal 2027. We also described a transition period in the first half of the year as we integrate the MTL cannabis operations and focus on our key priorities. On that basis, we continue to expect to report consistent improvement in our operations throughout the fiscal year. The consolidated gross margin was 31% in Q1 2027 on an adjusted basis. up from 25% a year ago and outpacing our full-year adjusted gross margin performance in fiscal 2026. We delivered an adjusted gross margin of 26% in the cannabis segment in Q1 2027, demonstrating meaningful year-over-year margin expansion and continued progress against our profitability objectives. Reported gross margin was 22%, reflecting a $2.6 million non-cash inventory closing charge associated with the MTL acquisition. We expect cannabis margins to continue strengthening as we capture the benefits of the MTL integration and execute on our key priorities. Increased production from our existing cultivation facilities, combined with ongoing efficiency gains, should further reduce our cost per unit and support meaningful margin expansion over time. Stores and Bickel delivered an exceptional gross margin of 48% in Q1, up from 29% a year ago, demonstrating the significant progress the business has made in improving profitability. The improvement was driven primarily by operational and cost efficiency initiatives executed over the past year, with an additional benefit from tariff refunds recognized during the quarter. Even excluding the tariff impact, margins were substantially ahead of the prior year. This performance demonstrates the success of the new Stewart & Bickle leadership team in optimizing their business. We would expect to see continued improvements across the remainder of fiscal 2027. Turning to operating expenses. SG&A increased by $2.1 million as compared to Q1 fiscal 2026, despite operating a significantly larger business following the MTL acquisition. Absorbing those operations while keeping costs suddenly controlled is a direct result of our ongoing cost reduction efforts and the immediate synergies we are capturing from the MTL integration. As a reminder, our stated target is to reach a run rate of $10 million of synergies within 18 months of the March closing of the MTL transactions. We are now actively executing against 8 million of those synergies, up from the 6 million we reported last quarter. On that basis, we believe there is upside potential to our initial target, both in terms of timing as well as in the total dollar amount. Improved margins and discipline on OpEx led to an adjusted EBITDA loss of 3.2 million in Q1 2027, representing a 59% improvement from the prior year. With the additional revenue growth opportunities Luke described and further integration efficiencies still to be realized, we remain on track to report positive adjusted EBITDA during fiscal 2027. Turning to our financial position, we had $337 million of cash at June 30th, 2026. I will note that the $25 million of cash used in operating activities in the first quarter is higher than the runway we'd expect to see over the course of fiscal 2027, as an increase in working capital is expected to balance out during the remainder of the year. and we would expect one-time transaction and restructuring costs to decline throughout the year. We remain confident in the strength of our balance sheet following the recapitalization completed during fiscal 2026. Our strong cash position underpins our financial capacity to support strategic growth opportunities that may arise. Before handing the call back to move, I will remind shareholders we are holding our annual general and special meeting on September 25th. We are filing proxy materials today with information on how to vote and we urge all shareholders to cast a vote. I will now turn the call back to Luke for closing remarks.

Thank you very much, Tom. Starting fiscal 2027 with broad-based growth across all our business line and improved margins sets a strong tone for the year. We're confident, we're energized, and everyone is pulling in the same direction with pace and with common purpose to build a global cannabis company. Don't get me wrong. While first quarter results are definitely a step in the right direction, we're not satisfied yet. We're taking tangible action towards increasing yield and cultivation, accelerating supply chain efficiencies, and straightening our global supply chain to drive growth and improve margins for quarters to come.

We're becoming focused and disciplined operators,

We launch as an execution, strategic prioritization, and financial performance. Today we unveil a new corporate visual identity to match our growing ambition and reinvigorated organization. This identity reflects who we are and what we're building. A company that believes in the power of cannabis as a catalyst for elevating human potential. We believe cannabis is a global economic force, one that will rival the largest consumer categories in the world, and we intend to be among the companies that lead it. Building a global, consumer-centric company with a clear and uncompromising ambition to lead the world in bettering lives through cannabis. That's the company behind the results we've just shared with you. and is the company you'll see reflected in our new identity. None of our progress offline on today's call happens without our people. Thank you to our entire team for their relentless hard work and passion. We're just getting started. Operator, 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 touchtone 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 the speakerphone, please lift the handset before pressing any keys. We do ask that you limit yourself to one question. If you have additional questions, you may hit star one again. First question comes from Aaron Gray with Elias Global Partners. Please go ahead.

Hi. Thank you very much for the questions here. Just want to talk a bit about international and some of your initiatives with added GMP certifications. Can you talk about the broader landscape of international? We're hearing about countries getting tighter in terms of companies need to adhere to GMP compliance. How does this potentially set up for you to be in a more advanced position that you referred to in your prepared remarks? And do you feel like you'll now have enough cultivation as well as processing to through the GMP supply chain to ramp up those international sales through the rest of fiscal year 27 and beyond. Thank you.

Thank you for your question.

Good morning.

Listen, we're taking all the right actions and to really set up an extremely robust end-to-end supply chain to win for quarters to come in Europe. One thing I can say about TENAPI is that We take cannabis extremely seriously. We've got the internal capabilities to really build integrity, reliability, and trust in the supply chain. We've been working for quarters in really building the supply chain that meets and qualifies for EU GMP. So as I said in my remark, we're now end-to-end when it comes to flour, growing and importing and distributing flour. in Germany and across Europe. a complete range of product end-to-end to meet the market so we're really building something that meets all the demands and if it was even more stringent lack of a better word enforcement of the EU GMP we're extremely well positioned to meet this and that's what gives us confidence that we will continue to grow this business for quarters to come.

Thank you very much. We'll come back in the queue.

Ken Ritz, hi. What kind of question do you have? Please go ahead.

Thank you. Good morning. Tom, one of the key themes throughout the prepared remarks was the discussion around margin and margin expansion, I think specifically material expected margin expansion on some of the initiatives. Could you speak to, you know, what is the baseline you're working from? Obviously, we saw some 230-odd bips year on year in this quarter. When you speak to, and I'm thinking about your margin profile going forward, are we talking something, you know, bracketing that 30%, 30% plus level? Anything you could provide there to help us, you know, as we're trying, you know, it would be appreciated.

Yeah, good morning, Karen. I mean, obviously, long term, we're trying to get that margin up, you know, closer to some of our competitive set, like closer to the 50% margin. We know that's going to be a long way in the future. I would say for kind of baseline, we're looking at this quarter on an adjusted basis, we were 31%. So I would say kind of in the near term, we're targeting to get up to the mid 30s. And hopefully on the higher end, as we're exiting this year. But as Luke laid out, a lot of the initiatives we're talking about improving The amount of output that we have from a yield standpoint, improvement quality, all of that will fuel our margin improvement, as well as the integration activities of MT Atlas. We really become one organization with one set of assets that we're leveraging for the full portfolio. So definitely, you know, I would say in the near term, we're targeting mid-30s, hopefully accident at a bit higher rate as we go into this year. Luke, anything?

For me, those are not pie-in-the-sky dreams. As you can imagine, we spent a lot of time last year really working on fixing the foundations of the business. We took an approach where we want to measure twice and cut once. So we're, you know, I mean, we spent a lot of time last year really ensuring that what we were aiming for, we have the plans for. And as I said in my remarks, post quarter end, we press a button, the work has started. And as I said, the teams are working in one direction with pace, which gives us really a high level of confidence that we will see that margin and continue to inch upwards for quarters to come.

Great. Thank you. I'll get back to you.

Federico Gomez with ATP Coremark. Please go ahead.

Thank you. Good morning. I want to ask about cultivation. It seems like cultivation efficiency is a big part of your plan to expand margins and with EMZL integration as well. How far along are you in that journey of getting cultivation where it needs to be? I imagine that's going to take some time to trickle through financials, but how much of that margin expansion just comes from cultivation efficiency, and how far along are you in that? Thank you.

Yes, thank you for your question. Listen, we're passionate about flour, and we have intentions to be a low-trust country. and Mark Whitflower. It started with the acquisition of MTL. We've been very vocal about that. We brought in the expertise, the passion, The know-how to grow great flour to achieve great level of THC yield and decent costs per gram. As you can imagine, that was one of the priorities as soon as we started integrating the business. As I said earlier, we've been measuring twice and hoping to cut once. So the last few quarters have really been spent working together. with the master growers of MTL to ensure that we understand our strain, we understand the capabilities of our facilities. We've been working on defining the CAPEX program, making sure the new processes are really well defined. As you can understand with cultivation, it takes an amount of time. while you put, you know, it seems to the ground and you can harvest, we should really start seeing impact at the end of Q2, beginning of Q3 when we start realizing, gradually realizing the benefits of improved yield and improved quality.

Thank you very much.

So, Kirk West Capital, please go ahead.

Hey, good morning, everyone. So my question is on capital spending. You know, your capital spending amounts are below some of your peers. And so are those areas where you're trying to make some progress on gross margin and international growth. So I guess my question is, do you need to increase capital spending in any meaningful way to improve those yields that unlock gross margin? or need to increase capital spend to develop those international assets to unlock more growth there?

Great question. So I think from our standpoint, there will be some modest capex. Right now, we do think the operational assets we have in place are sufficient. So we're not talking greenfield-type facility builds. But in terms of investing in the facilities, that is something we will be doing. But I would preface it with just a modest amount of capital. but yeah we are probably under spending historically on the CapEx side and this is an area where we see kind of the investment and that kind of the year-term return there as we get improved kind of cultivation and really helping with the yield but overall I think you know I think we have the right assets in place now it's using those assets to their full potential that might include a little bit of CapEx to get it get it going.

Okay and if I could sneak a housekeeping in on on the Canadian medical I didn't see it in the queue, but maybe I missed it. What was the MTL contribution to that segment in the quarter? And I'm basically asking to try to get a sense for how large the reimbursement change headwind was in the period.

Yeah, so we don't disclose MTL medical separate bill because we manage it all as one business both across kind of the cannabis segment and then within our revenue channel.

So that's not disclosed separately.

separately, but obviously the headline reimbursement reduction was 29% that we had, and I would say we weathered that storm better than probably some of our competitors in the quarter.

Okay, thank you.

If I can just add color, I mean, building on what Tom said, I think we weathered the storm with this change, and we now have a new basis upon which we really need to grow. So, Even though these changes happen, in our remarks, we were able to continue to improve patient count and number of orders, which really are the main drivers of your revenues. And we were able, as well as Tom mentioned, to take the right action to mitigate the impact on our margins. So for us, it is a business that we strongly believe in. We believe in providing the right care. for patients and veterans, and we will continue to deploy efforts to expand this business going forward.

Thank you, Luc.

Thank you, Tom.

Ladies and gentlemen, as a reminder, if you have any questions, please press star 1.

Pablo Zwanek at Zwanek & Associates, please go ahead.

Thank you, and good morning, everyone. Just following up on the domestic medical question,

Look, I mean, the industry has done a great job in terms of increasing penetration with veterans. I think it was 4% back in 2021, 8% now. Where do you see that going? I mean, is the 15% penetration level, you know, three, four years down the road reasonable? How do you think about that? And then related to that, any further commentary you can make about how these patients, the reimbursed patients, have any changes in consumer behavior, if we can use that term here, or it's all been pretty much absorbed by the companies in terms of pricing. Thank you.

Yeah, so I'll start, Lone. Good morning. So in terms of penetration, I think 15% is probably fairly high. I mean, we do see continued growth in the Canadian cannabis market with veterans. We've demonstrated that we can grow in a declining market in the medical space as well over the past few years. In terms of buying patterns, I would say we are seeing, you know, we are adding new patients. Obviously, order values are going down as a result of the reimbursement. But our focus is really new patient acquisition, new veteran acquisitions. It's still one of the most profitable markets in the globe. So Canadian medical clearly is continuing to be a point of focus for us. But I think it will be 15% is probably a bit high from market penetration standpoint. But for us, it's really Q1, as Luc said, it was a bit of a reset in terms of our baseline, and I would expect that we continue to have steady growth over the past as we've demonstrated in prior years on the medical side. I don't know, Luc, if you want to.

Thank you. Look, I mean, can I ask just to follow up, and obviously, congratulations on all the progress the company's making on domestic reg, domestic medical, international, the NTL deal. So I find maybe it's not fair for us analysts to ask you about the U.S., right? But there's so much focus on the U.S. from the investor side, given all the changes that are taking place there. And historically, we thought of canopy growth as having the best each head, if I can use that term, with A, Creech, Juana, and Jetty there. But how should we think about that now going forward? Obviously, it doesn't seem as big a priority as it was in the past for canopy growth. Any caller would help. Thank you.

Yes, thank you for the question. Listen, we continue to monitor the position, the situation of the market in the U.S. very, very closely. You and me, we've been consistent about fixing the foundations, ensuring that we build a core canopy growth organization, Canadian and internationally, that is sustainable. that provides positivity. That's where we continue to focus the bulk of our efforts. And it is paying. It is paying off. As I said, you know, we continue to monitor our position in the U.S. We're happy with what Jetty is, the performance of Jetty in Thank you. Thank you.

This concludes Canopy Growth's first quarter 2027 financial results conference call. A replay of this conference call will be available until November 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.