Q4 2020 Earnings Call
[music].
Good morning, many Miss Denise and I'll be your conference operator today.
I would like to welcome everyone to canopies growth fourth quarter in fiscal year 2020 financial results Conference call. At this time all participants are in listen only mode. I will now turn the call over to Judy Hong Vice President Investor Relations. Judy you May begin the conference call.
Thank you need a and good morning, everyone. Thank you all for joining us today.
On our call today, we have cannot be gross CEO, David Cline and CFO, Mike Leigh.
Before financial markets opened today cannot be issued a news release announcing our financial results for fourth quarter and fiscal year 2020 ended March 31 2020.
Yes, Yes, released is available on canopy grosses website under the investors path and had been filed and our Edgar and SEDAR profiles.
Please note that our fourth quarter at fiscal year 2020 financial results presented in the press release issued earlier today and to be discussed during our conference call today had been prepared in accordance with U.S. gap.
I would like to note that certain matters, we discussed in todays conference call could constitute forward looking statements.
Based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected into forward looking statements, including as a result of the factors described in the cautionary statement and risk factors included in the company's earnings release and regulatory filings by with any forward looking statements made.
During this call are qualified in their entirety.
[noise] risk factors that could affect results are detailed in the company's most recent annual information form and other public filings on the Companys Edgar and SEDAR profile I will be despite further in our annual report on form 10-K for the fiscal year ended March 31 kind of 20.
Further during this call will refer to supplement so non U.S. GAAP measures, which are not recognized under us GAAP hundreds. It finds in the press release issued this morning, we'll be described further in our annual report on form 10-K for the fiscal year ended March 31 2020.
We believe that these non-GAAP measures assistant management, and planning for testing and evaluating business and financial performance, including allocating resources.
Reconciliations of these non-GAAP measures to their close as reported GAAP measures are included in our earnings press release furnished to the FCC.
Please note that often answering commission is provided in Canadian dollars unless otherwise noted.
Following prepared remarks by David and like we will conduct a question answer session during which questions will be taken from analysts.
To ensure that we get to as many questions as possible, yes analysts to limit themselves to one question.
With that I'll turn the call over to David David [noise].
Thank you Judy and good morning, everyone.
We've a lot to cover this morning. So we've provided a supplemental earnings presentation to help you follow along with our call.
We're operating at unprecedented circumstances due to cope with 19.
On behalf of our entire company our thoughts go out to all who've been impacted by this global pandemic.
We sincerely thank those who have been working to keep all of a safe.
We also want to recognize the work all of our employees suppliers customers and retail partners during this difficult huh.
From canopy standpoint from day, one our number one priority has been to keep our employees and customers safe and healthy to ensure business continuity and to support the communities in which we work.
The majority of our non production related stuff continue to work remotely.
And we had a cobiz response team handling the day to day issues closely coordinating with myself and my senior management team.
In our retail operations, we temporarily closed down or 22 corporate owned retail stores in mid March but as of today 20 of those stores have reopened and the final two will reopen this coming Monday.
We've successfully rolled out click and collect to all of our Tokyo smoking tweets stores as well is added home delivery for nine of our Tokyo smoke and Tweed partner stores in Ontario.
For production facilities, we implemented a daily screening process in the beginning of March and we've added additional safety in social distancing measures at all of our facilities.
Luckily we've seen only minor disruptions to date, mostly related to staff scheduling.
Our supply chain is in good shape, having had ample inventory of consumables on hand, pre kobe and ensuring continuity of production thus far.
A key pillar of canopies culture is giving back we've donated over 75000 pieces of personal protective equipment to be used by frontline workers in various provinces and local organizations across Canada.
And I'm proud that bio steal his pledged up to $2 million worth of its hydration mixed products to frontline workers hospitals and patients well. This works is providing hand sanitizers to homeless shelters.
The U.S. team has also supported nurses in various hospitals by donating first in free CBD products.
Turning to our business.
Our Q4 performance was mixed our topline performance didn't meet our expectations and we lost market share in the Canadian recreational market.
On the positive side, we finished the full year with 76% year over year growth and reduced our cash burn.
Mike will walk through our financial results in more details.
[noise] over the past couple of months, we moved our business forward with the launch of a number of new products globally with more to come.
First.
We have three ready to drink candidates beverages in the market in Canada tweet houndstooth in soda tweet Baker Street, and Ginger and houseplant great fruit.
And as a late late its latest update we began shipping deep space. This week.
Early response from consumers for all of our beverages has been very positive in fact tweet houndstooth. Instead. It was the number one selling cannabis beverage and Ontario in April and let me share with you. Some quotes from a recent online review of tweet houndstooth in soda.
I love to taste minimalistic book complex, similar and taste to Hendrix, Genon soda really nice effervescent and Botanicals and the second quote it was like drinking one beer same kind of miles by us.
In addition, we now have a number of based products in the market in Q4 Juju power 510 battery was our top selling accessories skew in our own stores.
We also launched 510 based cartridges under the Tweed in TWB brands.
And our Tokyo smoke Luma pod based based devices Luma go pod and paused pods are also available in the can't Canadian recreational market.
We've expanded our chocolate offerings and now have four skus in the market and we doubled chocolate production capacity last quarter.
In the U.S., we broaden our first in free portfolio, introducing a new line of hemp derive CBD creams.
And this works launched a line of CBD booster skin care, which are currently available through direct to consumer channels in the UK in the U.S. and just late last month. This works also launched its stress free hand, Sanitizers, which led to the best ecommerce selling day on the this work site on the day it was launched.
Since our last earnings call. We've made several changes to our operations aimed at improving our focus and rightsizing our cost structure, we've reduced our production capacity in Canada by 40% by closing down our two greenhouses in British Columbia, as well as an indoor facility in Saskatchewan.
We shuttered a hemp farming operation in New York, we transferred all of our operations in Africa to a local partner and are moving to an asset light model in Colombia and.
And we've significantly reduced our headcount.
Finally, our strategic review of the business is a 100% on track and our change agenda is already underway I'm going to stop here in turn it over to Mike to review, our financial results and then I'll come back with more details around our revised strategy.
Thank you very much David good morning, everyone.
I will begin my remarks with a brief summary of our financial results for the fiscal year, ending 2020, and as part of this discussion I will review the details of our restructuring program that was announced in March.
Will then provide a brief overview of the cobot 19 impacts to our business and what this means for Q1 of our new fiscal year. So with this let's jump into the financial results for fiscal 2000.
Let me first covered net revenue.
With our first full year of recreational cannabis behind us I'm happy to report that we generated 399 million of revenue or 76% growth versus prior year.
And despite strong year over year growth, we know we missed opportunities along the way as our supply chain grappled with some complex products and production systems and work to gear itself against a very dynamic market with shifting demand and evolving consumer preferences and quite honestly.
Volatile ordering patterns.
And these challenges continued into Q4 as we generated 108 million of net revenue, which was not only below our internal projections, but it was well below demonstrated demand.
Simply put we missed opportunities.
But the good news is we are making changes to our operations and supply chain some of which has already been announced and some of which will be discussed later today when we get into the strategy portion of our remarks, but for now let me reassure you. We are focused on improving our agility and cost structure. So that we can improve execution across our son.
Hi, Jane and deliver on the margin commitments to our shareholders.
Notwithstanding the above we are making progress on gross margins and I'm pleased to announce that our adjusted gross margin in Q4 was 42% after excluding onetime restructuring costs and inventory step up costs and we are seeing margin accretion as our diversified portfolio strategic business units.
Continues to grow and this is clear demonstrated progress against previous communications around achieving in 40% margin by year end.
Adjusted EBITDA in the fourth quarter was a loss of 102 million versus a loss of $97 million last quarter and free cash flow in the fourth quarter of fiscal 20 was an outflow of 305 million, which is a 15% improvement over the third quarter fiscal 2000.
Let me briefly cover our main channels of business.
Our global medical revenue increased 6% versus Q3, driven by strong international growth of 11%.
And we're continuing to see strong growth in both our international flower business with sequential growth of 14%.
And C with sequential growth of 10%.
Our Canadian medical business was flat, even though more consumers are purchasing cannabis and direct channels.
Our other strategic businesses collectively performed inline with expectations lapping the seasonal benefits of Q3, which included the November and December holidays.
Conversely, our rack business experienced sequential decreases and both b to B and B to C channels.
Our b to B gross sales decreased 31% as growth in soft sales and oils was more than offset by declines in flour and pre roles as we witnessed a number of changes in the marketplace.
And we estimate that our market share decreased from the low twentys to the high teens and given the importance of this category, let me make four points.
Number one the low end flower category came on strong in Q4, taking greater share of the overall flower category and we did not move quickly enough to the changes in the market and this will be addressed in coming weeks as we expect to be competitive in the value category.
Number two despite our progress in shifting more of our cultivation to high THC strains. We continue to Miss purchase orders as a result of high THC product availability and we're working to address this but we're simply bound by the lead times of our harvest cycles.
Number three following an exhaustive review of our portfolio. We've recently rationalized our skews by approximately one third and this is going to improve our agility as a supply chain, increasing our ability to meet demand, while also reducing cost and complexity.
Lastly number four.
Our phased rollout of 2.0 products hindered our Q4 sales performance as 2.0 items collectively represented less than 2% of our sales.
And although we recognize the significant headwind to our performance we are committed to phasing these products and to the market to ensure that we maintain the quality that our consumers demand, while being able to produce enough product to fill the pipeline.
And we are making progress as illustrated by our quarter to date sales in Q1 were 2.0 products are now greater than 9% of our sales.
So in summary, we are taking actions to improve our b to B performance.
Our BDC sales decreased 14% versus Q3, primarily as a result of Covance 19 store closures in mid March and we estimate same store sales would've been up 4% after adjusting for store closures.
Before I move to restructuring charges, let me briefly cover our operating expenses.
Overall, SGN a increased 17% over the prior quarter as we continue to ramp up our U.S CBD business, while also launching our new 2.0 products.
But as we recently announced we've taken actions to right size, our cost structure to match the Ics expected market opportunity over the next 12 to 24 months and you'll start to see the benefits of these actions in our Q O Q1 results.
Next let me provide some details around our restructuring charge in total we recorded a $743 million charge, which is in line with a range of seven to 800 million that we announced in March.
And of this total $715 million was noncash.
And this charge was primarily driven by fixed asset impairments of 563 million of which 335 million was for property plant and equipment, mostly tied to the cultivation assets and 193 million was for impairment of intangible assets, mostly tied to our exit from very.
These international markets.
We also recorded 132 million for inventory write offs related to obsolete packaging.
Flour and biomass inventory across our North American market.
And finally, we recorded share based compensation expenses related to acquisition milestones of $33 million.
As David mentioned in his first month, it's critically important that we aligned supply and demand and this restructuring program addresses that.
But I should also highlight that we have many options to increase our supply, including outdoor grow offtake agreements and continuous improvement initiatives within our own facilities to further optimize supply and we are adequately positioned to take advantage of forecast growth in demand over the next several years.
Next I'd like to share how cobot 19 is impacting our Q1 performance starting with Canada.
So our Canadian beaten direct business has been impacted by reduced traffic to physical retail stores due to social business.
And then the case of Ontario cannabis was temporarily moved from essential services to non essential services, which resulted in physical store closures from the beginning of April through May 19th.
We've also seen key provinces, including BC, Alberta, and Ontario undertake rebalancing actions of their inventory levels as they look to hold only six weeks of supply versus 12 to 15 weeks prior to covert 19, and this has resulted in lower purchase orders and Rick.
Clinicians to their warehouses.
Quarter to date, our B to B business is seeing a 15% reduction versus our rolling 13 week average during the six months ended March 2020.
Our Canada BDC business is more heavily impacted as the majority of our corporate owned retail stores are now open but currently operate on a click and collect model and with reduced hours.
And through the first week eight weeks of Q1, our BDC business is saying approximately a 50% reduction versus the same 13 week rolling average relative to you the six months ending March 2020.
Conversely, our Canadian business is benefiting from a proven ecommerce channel and sales have reverted to pre cobot levels and have been quite stable in recent weeks.
Further our international Medical business also operates on a pharmacy model and thus far the negative impact of covert 19 has been modest.
Our other strategic businesses are seeing a 20% to 40% reduction versus their average sales during the six months ended March 2020.
And looking broadly given the challenges that we're facing to our topline we are taking measures to limit our spending flex down our staffing and deferred or canceled non binding commitments, where possible, but considering that around 50% of our production costs are fixed we do expect margin pressure incoming CFO.
Orders as we lose some of our economies of scale.
But in trust is stress testing our business, let me remind investors that we have a very strong balance sheet with nearly $2 billion in cash at the end of the fourth quarter and we have an additional $245 million of cash inflow on may onest from constellation brands exercise of its November 2017 warrants.
So with these actions we believe our company will whether cobot 19 and emerged stronger on the other side.
Before I close I would like to provide a brief update on a few priorities that I previously highlighted during our quarterly earnings call.
On S&P.
Im happy to report that we launched S&P in the US under budget and ahead of schedule. In fact this was the first go live our third party implementer ever completed and a virtual setting as a result of cobot 19, and our experience with S&P was so positive that we've elected to Resequence our global rollout.
So that we can focus on Canada next and this will provide canopy with a single North American ERP solution that will allow us to drive down costs, an increase agility as an organization.
On our control environment, we have made tremendous progress in our internal controls over financial reporting and we recently remediated, our long standing material weakness on end user computing, while also reducing the number of significant deficiencies in our financial reporting processes, So simply put our country.
Oil environment continues to improve.
On financial reporting we recently completed our conversion to us GAAP.
And we'll meet our timelines as a large accelerated filer with our first ever 10-K filing on Monday, and we have provided an adjusted EBITDA under us GAAP for prior quarters in our press release.
This now concludes my remarks, and I would now like to turn the call back to David for our review of our recently completed organizational and strategic review of the business.
So I'd like to spend some time talking about a refocus strategic plan and we won't be able to covered all here today. So weve also scheduled a virtual investor meeting for June 22nd to provide more details.
Last quarter, I announced my intention to rapidly complete a strategic review of our business.
Since that announcement the canopy team has worked hard to clearly define a path forward that enables us to deliver on our objective of being the world's best cannabis company.
Im pleased to report the analysis is largely complete and has the full support of our board of directors and our largest investor constellation brands.
We are building the best cannabis company in the World, where we will use world class consumer insights to inform our already existing best in class R&D in science capabilities to produce high quality products for each need state and each price point and to deliver them to consumers as efficiently as possible.
Over the past four months I've done a deep dive into canopies operations in organizations.
As we all know canopy grew quickly to achieve a leading position in a rapidly expanding industry.
In through that time period being first was clearly rewarded.
But being first is in a sustainable strategy.
Or a point of differentiation.
Nor is it necessarily tied to creating value.
This is especially true in a sector where markets have taken longer to develop and as than was originally and perhaps optimistically expected.
The strategy of being first in all areas is no longer relevant.
Second in line with the former strategy the organization, Scott size and scope increased dramatically.
Cannot be went from 400 employees in Canada to more than 4000 employees in 15 global markets in just a few years.
While this was a great talking point that came with great consequences.
The company became less agile silos and was burning too much cash.
We've already taken decisive actions to bring some much needed focus.
We designed a new operating model that will focus on the consumer and will increase our speed and agility as an organization.
We've adjusted our organization structure to deliver that strategy and are working to ensure we have the best talent in the industry.
We will focus on three core markets and are taking meaningful steps to redeploy our resources to these geographies and they are Canada the us in Germany.
We've made substantive reductions to head count divested redundant production assets and exited some markets in order to reduce our cash burn and increase our focus.
This is not a quick transition, but the beginning of a journey that will put us firmly in the ranks with the top consumer products companies in the world.
The cannabis industry is still in its infancy, and we intend to lead the growth in evolution of this industry.
I believe we need to continue to invest in R&D consumer insights and route to market capability, while we become as efficient as we can in all other areas of the business.
These changes can be implemented overnight.
Coupled with a five month grow and production cycle, it'll take time for our results to become apparent.
Over the past few quarters, we've been slow to react to changing market dynamics in consumer preference shifts in the developing markets in which we participate.
It's my intent to ensure that we don't repeat those mistakes going forward.
We think theres, a huge demand with existing legal customers.
We intend to know what we need to do to win their business away from our competitors.
We know there's a large number of can consumers who prefer to purchase from the illicit market.
We intend to know what we need to do to win their business.
We believe there is a massive set of consumers who don't currently use hamper cannabis products and we intend to know what we need to do to win their business as a substitute for alcohol or as a replacement for over the counter medicines that address paying anxiety in sleep.
To do all of this we're building world class consumer insights and analytics capabilities.
To lead this function, we have created the role of Chief insights Officer, a new C suite position that will report directly to me and ensure we are leveraging data as a core differentiator.
Chris Edwards of proven executive from constellation brands, who led the analysis that drove constellation into the can have a space has accepted the role and we'll start next week.
Today, we have what I believe is the best science in R&D capability in the industry.
His talent has been diffused across too many initiatives.
We wanted to focus that capability using the insights I just described to developing solutions that amaze our consumers.
To lead this newly combined science innovation in R&D function, we've created a suisse as C suite role of Chief Innovation Officer, and I'm pleased to announce that we brought on Julian Cowen in this role.
Although Julian is in his first we could canopy he's not a stranger to us as we work closely with the team that developed our deep space and Cuattro beverages.
Turning to our focus markets. The three markets that have the largest and most tangible profit opportunities in the near term our Canada the us in Germany.
Our resources will be focused against these three markets, while we operate with asset light models in places like APAC or Latin America. This means we will not be seeking geographic expansion.
In the medical segment of our business, our focus will be on meeting the needs of our existing medical patients generally addressing the wellness category and creating substitutes for medications for pain anxiety and sleep.
This means we will not focus on developing pharmaceutical products.
Given the relative maturity of the medical markets around the world. We believe canopy is already well positioned to lead in this segment and we generate significant.
Growth in the near term in the medical segment.
We need to build highly effective routes to market in each of our core markets.
We therefore initiated a search for chief commercial officer, who will work with me and driving sales across the canopy portfolio and ensuring we have the right product in the right place at the right time.
We're transforming our supply chain to be more agile and responsive to changing consumer preferences.
I believe there's an opportunity to unlock significant cost savings in our supply chain.
We also recognized the need to consistently deliver higher quality experiences for our consumers.
And quality in this context means quality as measured by the consumer attributes such as the right amount of THC in a product optimal moisture levels levels in our flower products Howard pre roll joint Burns, how our edibles taste or how our consumers experience our drinks in terms of onset time in effect.
The work is well underway and we've initiated the search for a new Chief operations Officer, who will lead us to greater agility in expanded margins.
To drive this product led approach to the market I've asked Roddick kovacevich, two assumed the role of Chief product Officer.
Roger has held several important roles at canopy over the past five years.
It is a well known proven leader in the industry with an unmatched understanding of all aspects of the cannabis industry.
Im looking forward to see the results of his leadership in this function.
Those of you who attend our virtual Investor meeting will have access to this talented executive team. So that you can hear from them, how we plan to bring the strategy to life.
These are ambitious goals in our work has just begun.
For that reason expects fiscal 21 to be a transition here as we rapidly evolve.
Additionally, given the cobot 19 related uncertainties, where withdrawing our previously communicated milestones for achieving positive EBITDA and net income.
It's our intention to provide new financial targets during the second half of fiscal 21.
We also plan to report on our progress against our key strategic priorities in upcoming quarters.
In the interim let me offer a perspective on how our strategy will connect with our financial aspirations.
Our objective is to be number one or number two in value share within our core markets.
Canada, the us in Germany, and in our focus product categories of flower base, edibles and beverages and Topicals.
Now Canada in the US are already massive markets Canada's legal recreational market is already at about $2.1 billion and growing month over month and this was with just 60 stores in Ontario, which is Canadas largest province.
Behind Swede in Tokyo smoke retail banners, our production scale and our best in class 2.0 products canopies Canadian revenue will grow substantially.
The U.S CBD market is already a large industry and leading projections see it becoming a $10 billion industry over the next few years, we plan to win in this space.
With our collaboration with Martha Stewart or with brands like this works and bio steel, we expect to deliver on the promise of advanced CBD products in this lucrative use market.
So between the us in Canada, there's tremendous revenue opportunity for canopy over the next two to three years.
When added to the continued growth in the German medical market, we see immense near term opportunity for canopy.
This opportunity will be supplemented upon federal permits ability in the us through our acreage arrangement.
Second I'm pleased with our gross margin progress.
Getting to 40% was the stated objective and we made good on it.
We know we can do even better as we optimize our supply chain.
So we're going to to do a deep dive end to end review of our operations and we believe there will be significant opportunities to unlock efficiencies across that supply chain.
And finally, we have the balance sheet strength to responsibly invest in the right opportunities, while maintaining our financial cushion.
We remain resolute in our effort to reduce our cash burn and will emerge from this transformation period with a significant amount of cash that can be deployed to further enhance shareholder value.
We expect these actions to enable us to deliver significant profits over the medium term.
We are well pull it positioned to unleash the power of cannabis to the benefit of our consumers and our shareholders.
This concludes our prepared remarks, and now Mike and I are happy to take your questions.
You asked a question during this time, please press star and the number one on your telephone keypad to withdraw your question press the pound key to ensure and his question Paul that gets to the questions have as many analysts is possible analysts I requested to limit themselves to one question.
Your first question comes from Doug Niamh with RBC capital markets. Your line is open.
Yes, good morning.
What I was hoping to do is just go over your thoughts on the U.S. market I know, you're very familiar with that the opportunity in significant you indicated that over the next to the while could grow to $10 billion, but.
Relative to your share in Canada, I would you expect your share in the us.
To change over the next several years and why.
So we've we've launched an expanding line of products under our first in free products.
CBD brand in the us.
We have more skews and brands coming to market over the next several months.
I would say, we expect to be able to take meaningful share in the U.S CBD market.
In the categories in which we participate in you have to think about CBD is playing across a number of areas. So there are.
There are injectables.
Which first and free is.
Quite likely the best product in the market in that it uses a very specific different formulation, which outperforms the competitive set.
And that's a that's a growing segment in the U.S CBD market second area. We participate in CBD is through bio Steele, our sports Nutrition company, where we've added CBD to help.
Recovery in athletes.
We expect to do extremely well in that area. The largest category. However in the U.S market is in skin carrying topicals and we have first and free Topicals and we have this works the skin care in topicals in the marketplace, but that's that's an area that will be a little more challenging for us and take.
It's a little longer in order to really establish a toehold because there are some.
Sizable and well recognize competitors in that space, but I expect us to be able to grow meaningful share in the us we've been investing in the us in order to to position ourselves for that work and in fact, we've invested in the US ahead of being able to get the sales capability to.
Drive the revenue that we need from the us and look that puts a little bit of a drag on our operating margins clearly and it puts a little bit of a drag.
In terms of SDMA load for the business, but to me thats the benefit of having a $2 billion war chest. It's a lot of people assume thats to cover.
M&A sorts of activity in my mind.
That war chest should also be used to position us in the markets.
Where we can see significant amounts of growth overtime.
Thank you very much.
Your next question comes from Brian dealing with Bank of America. Your line is open.
Hey, good morning, everyone.
Hey, Brian Good morning, and private debt represents caring again welcome.
Hello.
I guess is the question I had David stepping back.
[music].
Yes.
Looking at 21, where there's a lot of internal work youre doing now to sort of rewired the organization.
Make more efficient at the same time, you talk about the aspirations for market share.
In the in the three priority markets.
And again. So my question is it's very good and Mike experienced with the types of things has been that when companies are going to a massive infertile 30 change it sometimes we'll have an effect on the on the external.
Is it reasonable to expect that you'd be able to sort of meet those marketshare operations in 21, given all the work you're doing internally or is that something you're looking at more as we get.
Yes trend this year.
So so Brian look Thats, that's partly why.
We've elected to kind of withdraw view on guidance bisque, because between cobot 19, and some of the work that we're doing we need a little more time in order to be able to give a well thought out.
Guidance in terms of where we where we see the financial metrics coming out, but you used to really good word around rewire, because that's what we're doing in the organization, it's not it might be simple to come in and cut a whole bunch of costs everywhere.
And.
You feel pretty good about it but I actually I'm pretty certain that you would see a significant topline effect. We just finished a fiscal year, where we grew our topline 76% and look I'm sitting here four months in the role believing that we can continue at that rate for the foreseeable future what I don't want to do is to come in.
And and got the organization.
In order to hit in order to hit some SGN a target at the expense of our topline. So we're trying to do a little bit of balance I think what you will see Brian as you will see volatility.
But you will see progress against the objectives around market share and around profitability, but you're just going to see some volatility, which I think is cause.
Any company when you go through the level of change that we're going through at canopy.
Your next question comes from Vivien Azer with Cowen Your line is open.
Hi, Thank you good morning.
Good morning.
Good morning, Mike.
The detailed run down on that.
Drivers that some of the market weakness in the quarter, what caught my attention with your commentary around addressing an explosive growth on in value.
We expect that on it sounds like you might have a value offering.
Yes.
Competitive Pat.
Wide array of how.
Argued leader now with value.
Segment, clearly has different margin implications. So a two part question. Please number one can you expand on your commentary around your attention is around value and then number two I guess thinking about margin. Thanks.
Yeah, that's great. Thanks, Vivien So look I, just taking a step back we shouldn't be surprised as an industry that value is taking off.
Value was 6% of the category not more than four five months ago, and it's now over 20% of the category and when you think about what's going on in the industry, coupled with a pandemic consumers are seeking value.
When you think about how we got to this point from a surplus perspective, the real root cause is that the number of stores and on in Ontario, and just broadly and candidate did not open quickly enough and hence you have a number of Lps that are.
Working to balance their inventories and what you see happening and value even though it's moved quickly there's nothing going on there that can't be replicated when you think about the four piece of marketing.
So the daily special has hit the market by getting good quality product at a really good price getting the distribution nationally and being able to replenish it in a in a timely fashion to keep it in stock. So clearly they're winning in that space just based on basic supply chain management.
So in our view values here to stay and our job is to make sure that were competitive in value. Our tw de brand has been our value offering and in terms of price points. We've been at the top end of the range in value and the new entrants that have come in recently, a really at the bottom end device.
You and we think we can get there.
But again it comes back to us being nimble and agile to move quickly as an organization and that's become a top priority for us is to get into value in earnest over the next several weeks, so thats coming but we also have to deliver on the margins and I don't expect us to deliver a 45 40, 45% margin on value, but we believe that.
Yet we can engineer our supply chain leveraging outdoor grow in the future to help achieve those targets for the low end, but we've got work to do to get there, but that being said we're going to go after it because it's an important category and we want to be competitive at our so more to come in so if I can just had a bit of a tenant strategy.
The overlay Vivian so you know the move toward value.
His and was predictable in terms of the using it as a way to generate cash.
We have excess inventory as the virtually all of the Lps and we intend to.
As Mike said kind of playing that game, but I think I think the four important question is where does it go in the future right. So we need to near term fine. We can play in the value space and will generate cash, but but over the medium term and I don't mean very long medium term, we need to get to the place where we can generate margins that are consistent with our.
Our total profitability and margin aspirations and then further we need to think about the low end of value as as as a place for us at canopy and the industry in aggregate to compete for share of the illicit market and to me the thats the more interesting component of this.
Move to value is being able to create offerings that have the right level of quality the right level of THC content and the right price point and the right margin. So that we can sustainably compete for the illicit market, which I think all of you know is larger than the legal market in Canada.
Hi.
Your next question comes from and John is apparel with Sabby see your line is open.
Thanks, Good morning.
I appreciate all the commentary on on value in the pivot in strategy there, but can you talk about your mainstream and in particularly your premium products. What do you see in terms of share in that regard and its value is is granted as we all think do you plan to lean on premium flower or pre roll or do you look to prioritize 2.0 products instead to perhaps.
Strat Shepherd thank you.
So so I'll start and then Mike you can fill in but but my view is we called out specifically that we're going to run the business under verticals of flower base Edibles, which includes beverages in topicals and skin care and our intent is to make sure that we're performing well in each of those in each of those verticals.
And clearly that means we need to perform well across across the flower segments. So we just talked about value.
Look where we need to get to as an organization is.
We need to be consistently on the shelf because.
We as along with many of the other Lps kind of bounced back and forth to being on the shelf versus not.
We need to fix that and Thats part of the supply chain work, that's underway and we're paying a lot more attention to consumer quality, we've always been.
As good as you could possibly be in terms of meeting.
Health, Canada guidelines in safety guidelines, and so forth, but right now I want to switch that focus to really.
To make sure that we're creating quality products as measured by the consumer because I think.
If we have a good value strategy I, then things we need to create products that are differentiated.
At at higher ends of the market I expect that the cannabis market will bifurcate just like most other CPG categories of bifurcated over the past five to seven years. So that you'll have a high end of the market and you will have a low end of the market and we expect to participate in in both assets.
David I, just build on that and say that we're very happy with our portfolio in the high end. The high end also is growing I know that value is taking share over all but the high end, but continues to grow and our biggest opportunity from a share perspective is stability of supply and that.
That continues to be our top focus.
Your next question comes from Andrew Carter with Stifel. Your line is open.
Yes, Thanks, good morning, and I appreciate you outlined kind of the business challenges, but if you Miss purchase orders on TTM than competitive on pricing and I guess one of the key to near term improvement will be getting your 2.0 products on shelf and in particular, you all youre doing disruptive things proprietary pod based systems wells beverages.
Can you can you kind of help us understand how that how the concept and we feel it's going to be giving the shelf space to do that in kind of the expense that you're willing to better to can demonstrate this this platform innovation. Thanks.
Yes, so theres about a 100 skus out in the marketplace on cannabis 2.0 today based on all of our competitive Intel and as you guys know we've launched a number of skews year to date, we've got four chocolate skews in the market with Tokyo spoke go and.
Tokyo smoke pausing tweet Baker Street, and Tweed Houndstooth, we've got fave Fiveeight skews in the market with the do do 510 battery that was launched in Q3. We've also launched our Tokyo Luma Veight pins, both go and pause than we've launched two vype 510 cartridges as well.
And then as David mentioned in his remarks, we've launched three beverages to thus far.
Coming in Q1.
There will be five more vape launches in for more beverages coming in Q1, Q2, Q3, so they're going to continue to phase out and we're getting distribution, there's there's minimal challenges and getting product on shelf and really that's why we're focused on this phased rollout is that we want to make sure that once we launch that we can.
And keep product on shelf nothing Hertz brand affinity more of an out of stocks. So we are focused on on providing that that pipeline as we go but we're not having any challenges and getting distribution. Obviously some of the products aren't legal everywhere in Canada, Quebec, Scott some challenges, but where products are legal we're getting the distribution.
And Andrew I would add the thing I would add to that is when you're when you're in a shelf space battle at retail the best thing that you can do is to really do things that drive consumer pull versus supplier push and Thats why.
We're spending time in efforts to build out a real robust insights function. So that we can build best in class products that the consumers want because look in Canada, we can't do the consumer pull sorts of things that we can do in other markets and in other categories and so we think that the 2.0 products that we put out half too.
Have.
The have to have attributes that deliver the expectations that the consumer will have so they actually want to go get the product we want people walking into the stores asking for houndstooth in soda as opposed to just finding it on the shelf when they get there and so thats the.
That's the that's the shift that we're making around.
Around our insights and innovation group.
Thanks.
Your next question comes from Adam Bucking playbook him with Scotiabank. Your line is open.
Hey, Thanks for taking my question.
Okay. So I guess out more of a high level question about the Canadian market. So one of the big expected catalysts for the sector. In 2020 was the plan storefront expansion, Ontario, obviously, the timeline has been pushed out.
Do you expect to see the same number of stores prior to covert 19 opening up long term.
There's clearly been increasing approval I guess I'm just wondering.
In box retailers as planned opening stores in here in the near to midterm.
But we're not we're not hearing it from our retail partners. In fact, some of them are trying to push forward as fast as they can and you're seeing an acceleration in Ontario, I think last month, the about 18 stores opened.
That number looks maybe it's a little bit higher in may I might be off a month here, but.
The that kind of 20 stores and month.
Routine seems to be.
Seems to be working and yes from our retail partners we're hearing.
That their their full speed ahead on this.
We're forecasting a store count go from 950 to 1200 for the year and I think David's remarks around Ontario alone will help to get it there. So cautiously optimistic I know that we've been surprise before but it's also worth noting that just with the 60 stores and Ontario, The Ontario Province is now the big.
Just buyer of cannabis and the industry. So just goes to show you how important Ontario stores are to the overall industry plus there's some innovation that I don't I I don't think we fully understand the effect of and I believe it will be positive, but some of some.
Direct delivery click and collect as well as we're looking forward to time when people tend to spend time in the stores, but I think.
Actually the adaptation to the crisis is going to create a different ways for consumers to be able to.
To get cannabis products, which will probably pay dividends over over the medium term.
Great. Thanks.
Yes.
Your next question comes from rupees Parikh with Oppenheimer. Your line is open.
Good morning, and thanks for taking my questions. So I wanted to drill down a little more on your operating expenses. So as we look forward just given some of the options you have already taken throughout analyzer business, what's the right way to think about some of the benefits on the operating expense line and what other initiatives underway that could help reduce a run rate we saw in Q4.
Yes, I'm happy to take out one so.
Look it starts with strategy right strategy always leads to function and what we've been doing over the last several months since David's arrival is really thinking about.
How we're going to improve our speed and agility as an organization, how we're going to get our cost structure in line, but also how we're going to position ourselves to deliver 76% growth year on year over the next several years right. Because we do believe that that growth is attainable, so starting with sales and marketing when we looked at our sale.
And marketing organization Theres no question that that was a big area of investment for canopy over the last couple of years and mind you. If we sat here a year ago. Our expectation was that cannot be would be a billion dollars company in year, one of of direct market and given the store count challenges, we found ourselves a bit.
Over our skis in terms of the size of the sales and marketing organization. So we did a lot of work to take a step back and say what growth that we expect over the next few years, what SGN a load should we have in sales and marketing by the time, we get there and what are the necessary course corrections that we need to make today in order to provide for that glide path to occur that's what led to.
Some of the announcements that we made earlier this year and we now think that we're positioned and our sales and marketing overhead to to achieve the targeted SG in a load.
By a fly 23, when you look more broadly at GNS may DNA has got a little more challenge in that Theres a lot of Theres, just a fixed cost of doing business and.
We know that we've got work to do on Gionee, <unk> and rather than cut DNA today and try to manage it and grow into it. If you will we elected to be a little more cautious on DNA recognizing that we have certain enablers that are coming over the next year year and a half like S&P that are going to allow.
Yes.
To to reduce our cost structure in certain areas of business, where we're well very manual and lot of our business processes. So theres a number of those types of enablers that are going to help us get there, but we are keenly focused on as part of our overall op model design, putting targets in place across every one of our leaders at the FMC the exact.
Give level, so that we know exactly what our SGN a low targets are not just today, but by F. why 23, and all the management team is going to be incented on that accordingly. So it's been taken very seriously. We're just taking a very judicious approach to make sure that.
That we're making the right balance to allow that growth to occur.
And the only thing that I would add to that is we're continuing to invest to open up the you us because of the size of that market.
We're going to continue to to make sure we have adequate.
Innovation and insights capabilities and we're going to require returns on all of those and then we're going to be we're going to be lean elsewhere and our order redesign work isn't finished we're still underway with that work.
In fact, we just announced to the names I listed off today were announced to our organization just yesterday, we now need to do the work below those levels to build out the or so so we're not we're not finished with a with the work we need to do from an SGN standpoint and as.
Both Mike and I have mentioned up to this point there is also.
And I know this isn't as generic but there are overhead costs.
In operations that we've kicked off a project to ensure is.
Is.
Appropriately being spent to to get the kind of value that we would expect out of it.
Great. Thank you.
Your next question comes from a Gram Chrysler with eight capital your line is open.
Hi, Good morning, and thank you for taking my question.
So just yet just a follow up on that similar line of discussion.
Look taking into account the comments made about that the strategic plan and what's been dining and Canada Africa, Latin American today, moving to more asset light model. You also mentioned on the call you know canopies reached as about 15 countries internationally. So looking at the the PPD intangibles goodwill balances.
That remain on the balance sheet.
Thank you expect that there's going to be further restructuring as you look to the remainder of the portfolio moving ahead on a go forward basis, and if you're if possible can you quantify what the magnitude or the timing of those sorts of decisions might be thank you.
Hi, Graham so.
Yes, we're very comfortable with where we are from a goodwill perspective.
Just having completed our year end as you know thats part of our annual assessment on all of our goodwill and one of the biggest triggers on goodwill is market cap. So we've got plenty of cushion on all of our good we'll testing as a result of our market cap, but if for some reason our market cap were to decrease.
We would have that would serve as a trigger to take another look at our at our and our goodwill for potential impairments, but as I sit here today, we're very comfortable that the restructuring charges are behind us we have restructured our cultivation capacity, which was a big step for us to make to get our balance our supply.
Hi, and demand and balance.
And we have literally addressed all of our inventory surpluses across North America, which some of it was the result of changes in the marketplace. Some of what was the result of just call. It infrastructure friction in terms of the market moving toward high THC versus mainstream Tc levels, but we feel good.
We've we've got full sign off from our auditors and our goodwill quite honestly, if you look at our benchmarks versus competition, our goodwill as much more modest than many of our competitors. So we're in a very good spot.
And I think.
Win win when you look at our investment in Pp any.
There's no denying that we overbuilt our facilities. However, the facilities. We have today are in our lined up with the demand that we expect in fact, there are a little light versus the demand that we expect going forward, which which.
We were certainly we can cover.
And actually we prefer a little bit of that outsourcing model, but but we have the facilities, we have and so it will be a drag on margins when you look at depreciation.
Over the next several years, but we like the fact that we have state of the art facilities and.
Yes, they might have been a bit over built but we are where we are and so you're not going to see an adjustment to our book values for this.
Yeah, and as much as you may be dislike the infrastructure today that infrastructure is going to service while when this market.
Gross three four times over the next few years, because that will provide us with tremendous economies of scale.
Understood. Thank you very much for the call.
Alright, thanks for.
Your next question comes from Aaron Gray with Alliance Global Partners. Your line is open.
Hi, good morning, and thank you for the question.
I want to come back to gross margins quickly. So so first also note was up Q over Q helped by mix, partially due to flower and we'll sales being down so just how best to think about that in the near term.
Especially where you've seen a flower three will rebound in normal you said two cannot products have increased in next quarter to date.
And then kind of a longer term question on gross margins just as we think about expectations for pricing on to kind of product categories going to early days today, and yes, I'm one of the more robust product offerings, but how do you expect to see the pricing and margins within the slipping to pull category in Canada. How did you see other appear come into the category increased.
Own offerings in potentially trying to gain share.
Through pricing thank you.
[laughter].
So let me unpack that so if you look at our overall Canadian infrastructure, our fixed costs or about 50% of our total costs and when we think about fixed cost, there's depreciation which is clearly a fixed non cash cost, but theres also fixed cash costs. So.
In the short run with the Covidien packs that we're facing we're going to be very sensitive to that fixed cost deleveraging in the system. So I would I would not expect to see 40% margins in the next couple of quarters as we work through this.
But we are making progress overall on margins and operating costs. The area that we have a lot of work to do in my opinion is in Canada, Canada. Today operates at a real 28, the 30% gross margin and we've been making progress quarter on quarter, but the progress.
Is somewhat slowed.
Over the last three to four months and this is one of the many reasons why we've launched this end to end review is because we believe not just based on looking at our own infrastructure, but also looking at some of the benchmarks in Canada that this business and the composition of products that we're making and the types of cost incurred in producing.
These products.
We should be well north of 40% and David's thrown out even more aggressive targets on the projects that were working on because we think that the opportunity is there I.
I think when it comes to the ability to serve the market across all price categories and flower some are going to be more challenging than others, but thats, where I think we need to adapt our overall operating footprint. So that four areas of value, which has got to be.
The most challenging category that we've got to have a very very efficient cost structure that leans more heavily on outdoor growth overtime, and we know that that's going to be important.
When I think about the margin opportunity of cannabis 2.0, we are still working through as part of the rollout dialing in all of our operating expenses from a productivity perspective. So we know we havent quite hit our stride on all of the advanced manufacturing that comes along with these products back.
In assure you as these products scale up we're going to enjoy a fixed cost leveraging because of the just the sheer volume going through these facilities. So we expect cannabis 2.0 products to be margin accretive over time and should start to look like you know some of the us other CPG products that we.
Benchmark in this category as well, so 50% margins would be would be the goal and can we be that in some categories like beverage I think there's possibility to do that if we can get the volume up to.
You know to be 567% of the category versus one person that category.
Your next question comes from Michael Lavery with Piper Sandler Your line is open.
Thanks, Good morning, just want to dig into the market bifurcation, a little more that's you were talking about and and maybe see how much we can pilots so to the 76 or so percent growth you.
Indicated you expect to be able to repeat.
Specifically just curious in 10 of the middle of the market, how you see the consumer approaching that and what differentiates that if if there's the downtrading, that's obviously pretty significant in a market for the high THC products.
What are what are you forecasting for the metal what drives demand there how sustainable is that and how much of a mixed erosion risk is there from.
Tumors trading down whether it's to someone else's products or your own.
Yes so.
I will take a stab at that but we may need to come back to you Michael.
To get more in depth around individual up.
Segment performances in the marketplace, but I think the point is if we're going to sit to the extent that you have products that are in value. So value is its own thing in my mind and again, you see that in a bunch of CPG categories, if youre going to sit outside of value you need to have a defensible consistent value proposition.
And that your consumers are willing to pay for right and so that that's that's that's aligned with the quality work that that I outlined previously.
And.
And it also aligns with the design to value work that Mike discussed right. So you have to get your proposition right. I think then it with that every other categories settles into a place where you have a value ended the business and then you have consumer choice square for various attributes people can decide to buy a different in deferred.
At levels of the market and we have brands that are capable of addressing those other areas of the marketplace. I just think that the cannabis industry at this point and it from a legal standpoint is a bit.
Is a bit maybe.
Immature in order to be able to.
Have that have those clear bifurcation is at retail and so it's still a bit of a discovery industry for a lot of consumers and we have to help them by differentiating products enough. So that people understand the difference between.
Between the different price patent bands in the different in the different.
Brands and we're still seeing the premium segment as a third of the consumer dollar and growing and grown and mainstream is 45% of the business. So yes values here every consumer category that I know has a value category, it's going to play a role, but let's not forget about the high end.
Let's not forget about the mainstream because they are growing as well.
Yes, I see the main the high end momentum, that's pretty clear, but I guess I'm curious about the mainstream Pete do you think this quarter's results suggest that the consumer may feel like that's overpriced and you see even further momentum down or is there a reason to pay that mainstream price point being talked about quality, but I guess.
Im just curious how the what really compels the consumer to stick in the mid mid tier.
Yeah, and look I think you can look at a whole bunch of consumer categories that have the same erosion of mainstream it's what happens overtime I think or at least that's what's happened over the last five to seven years.
I do think there's a reason for being in the mainstream.
And so I in your end the whole market continues to grow.
But I think over time, yeah, you need to be able to compete aggressively at the high end you need to compete aggressively at the low end and then.
Using my beverage alcohol experience you can sell an awful lot of beer and wine and spirits in that mainstream category. It's just a it doesn't have maybe the sexiness of the high end or the or the buzz in turn that you get at the low end.
Okay. Thanks very much.
Your next question comes from Glenn Mattson with Ladenburg Thalmann. Your line is open.
Hi, mostly of questions have been touched on already but curious the.
International Medical market did perform well are in line as supposed has been doing well for a couple quarters. Now can you just maybe give us a little bit of color on.
Pricing their competitive landscape of a anything changed in there in the last three or so months. Thanks.
I think the Big story on Germany is we now have supply continuity and that's been a challenge really since since I started I can't be 16 months ago is that all of its supply was really coming from Canada and the.
Regulatory steps to get product out of Canada into Germany can be quite quite challenging. We recently commissioned our Denmark growth facility that is now being the German market I think our first shipment.
Was was just recent and now that the German market is adequately positioned to grow. So it's really the demand has been there. It's just been uncertain. So we're quite happy with the performance and this is really going to be a proving ground year for Germany.
We also have C, which continues to just grow quarter on quarter month on month, there their businesses remained relatively unaffected.
Through their pharma channel.
And up margins are holding up well, we know that didn't happen all its not a proprietary product, but quality does matter and they continue to get.
You know accolades for the quality. So it's it's Joe quite happy with our performance in Germany, and we expected to continue to perform well over the near term.
This concludes the Q any portion of the call I'd now turn the call back over to Mr. David Cline.
So thanks, everyone. Once again for joining us and you know as I've as I've met investors and I've talked to people about canopy since joining it.
As CEO I'm struck that often people treat our industry and our product offerings as a almost abstract products in so I'd like to encourage all of our investors in Canada to test out our new drink products.
In the US I'd encourage you to checkout, our first in free CBD offerings, and literally everyone should be using our bio steels sports nutrition products and our this works products.
So I encourage you to do that in a I'd love to hear your feedback overtime, our investor relations team will be available to answer any additional questions.
And we look forward to having many of you participate in our virtual Investor meeting on June 22nd have a great day.
This concludes Kennedy's group fourth quarter in fiscal year 2020 financial results Conference call.
Please note. This conference call will be available until August 27, 2020, and can be accessed following me instruction provided in the company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day Goodbye.
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