Q1 2021 Canopy Growth Corp Earnings Call
And in the industry. So let me share my perspective on this.
First I think the value segment plays an important role in converting illicit sales into legal sales, which should be positive for the broader category.
Second we intend to use our consumer insights to create differentiated quality flower products. So that we can also trade up our value consumers to our mainstream in premium products.
And third our ability to compete in all price segments will help build scale, which will enhance our margins.
In addition to value flower, we're seeing the process of repositioning.
Select mainstream and premium flower brands in the market implementing higher in more consistent THC ranges, while actively engaging with Budd tenders to bring awareness of our product quality.
We've initiated a consumer research initiative to better understand the flower consumer, including how they define overall product satisfaction and the critical elements that drive those perceptions.
This will also serve as a foundation for our design to value initiatives.
We're implementing pricing adjustments on select faith offerings and will be refining our lineup of 510 cartridges with a more focused approach.
We're unleashing our innovation pipeline with our differentiated product portfolio as we now have four beverages in market and if achieved a number one dollar share in beverages accounting for 74% of all ready to drink cannabis beverages sold year to date in Canada.
In fact, we've shipped over 1.2 million units of our beverages since the end of March.
Compared to 4.2 million units sold across all brands throughout the entire use in all of 2019.
We're on track to expand our market leadership in beverages with shipments of houseplant, Lemon and Cuattro CBD beverages in the coming months.
In the US we now have over 25 us hemp derive CBD skus across our first and free this works in bio steel brands with more to come.
Stores in vehicle is seeing strong consumer pull in both Europe and expanded distribution in North America behind our differentiated volcano classic in hybrid vaporizers, and portable vaporizers Mighty in crafty plus lines.
In fact volcano classic is celebrating its 20 to 20 year anniversary. This year with a limited edition of gold plated volcano classics in 24 karat gold.
And our this works team launched a timely innovation stress check hand, sanitizers that was very well received in the UK market, which we are now bringing to the U.S market.
The second area of our strategic focus is to win in our focused markets of Canada us in Germany.
Sure I'd like to take this opportunity to outline a number of exciting developments in the U.S market the biggest cannabis market in the world.
First we recently launched shop canopy, dotcom and new ecommerce website dedicated to our growing portfolio of us hemp derived CBD product lines.
We believe this website offers our consumers a convenient one stop destination to explore in purchase over 25 product SK use from brands, including first in free this works in bio steel.
The site will continue to feature canopies, new brands, including the highly anticipated launch of Martha Stewart branded CBD products, which will take place within the next month.
Second we're very excited about that traction bio steel is getting in the U.S market bio steels ready to drink non CBD hydration sports drinks have been launched in environmentally friendly Tetra Pak packaging and are currently available for sale online in the U.S.
In addition, we're actively engaging with major retailers as we look to expand distribution of bio steel products across the U.S.
And finally last week Bios deals signed a multiyear partnership with Patrick Mahoney, a Super Bowl of Super Bowl MVP.
Patrick joins the bio steel roster of elite athletes as a partner and we're thrilled to have such an influential sports thought leader on the bio steel team.
Turning to acreage, we announced in June and amended plan of arrangement with acreage that solidifies our path forward.
We believe the updated arrangement, which must be approved by acreage shareholders provides cash for acreage to develop and grow its federally legal tempt to rise CBD business, while reducing canopies purchase obligation and conserving 65 million shares of canopy growth stock.
Acreage will continue to target delivering profits in growth by narrowing its focus on key profitable operations.
Canopy is already license acreage with rights to certain canopy, IP, including IP related to our beverages in base as well as our brands as part of the original agreement.
Acreage has in fact launch our tweet branded flower in Illinois main Massachusetts in Oregon.
Acreage has rights to launch canopies best in class products and brands into the U.S market, including our cannabis infused beverages, and we expect to hear more about this from acreage shortly.
In addition to acreage Terrace and provides us with additional optionality in the us THC market upon federal Permissibility.
Harrison also owns arise bioscience in the US a leader in the production and distribution of hemp derive health and wellness products with access to over 10000 retail locations nationwide.
The third strategic priority for us is quality execution, and we're making progress here as we improve our execution and increase our agility throughout the organization.
We've got a number of flower quality improvement programs underway based upon consumer insights to name just a couple we're optimizing our drying processes to raise the moisture content of our flower products.
And we're also looking at maximizing aroma and turpin profile throughout our drying and carrying processes and working with sensory panels to ensure that our products aligned with consumer preferences.
The new organizational structure is largely complete with our product teams now organized by gold by global product lines of flower base edibles and beverages in skincare and Topicals supported by our insights and innovation teams.
The new commercial team will work closely with the product and insight teams to keep our pipeline of amazing products flowing through all of our sales and distribution channels.
Our new operating model is already driving quicker decision, making in increased agility as an organization.
We've made strides in our supply chain, ensuring that we can better fulfill our customer orders with the right products at the right time just to highlight a couple of examples for our Canadian medical business confidence in supply of spectrum yellow oil is at a level, where we've decided to reduce the cost of this medical product by 25.
Percent for patients in need.
And our beverage production has increased significantly more than doubling from June to July and is expected to nearly double again in August to ensure we keep our beverages fully stocked at retail.
Finally, we're improving our cost structure in financial discipline, Mike will provide more details in this area, but just to highlight a few examples our head count is down more than 18% since the beginning of the year. Our total opex declined by 23% compared to a year ago, and we've reduced our cash burn by.
More than 50% from the prior year period.
During our virtual Investor day in June we provided you with key metrics to gauge our progress and I'm going to update you now on how we're doing against those metrics.
First our weve, winning with the consumer as measured by market share in our core markets in net sales growth year over year.
In Q1, we've maintained number to market share in Canada medical and number one market share in the German flower market.
In Canada recreational remain we remain top three in most provinces. However, we're not satisfied with our current positioning.
To that end you will see continued improvement in flower quality and performance continued optimization of our SKU offerings and product portfolio.
Improved sales and operational execution to ensure that we're continuously on shelf at retail.
And consumer promotional activity, which builds on the strength of our Tweed Tokyo smoke in house plant brand names.
Second our we improving our execution as measured by increases in our customer order fill rates in reducing out of stocks at retail.
We made progress during Q1 with our supply attainment rates, averaging 87% in Q1 versus 56% in Q4.
In recent weeks, our supply attainment rates have risen above 90%.
And our internal checks suggest we have reduced out of stock issues at retail and we're looking for further improvement in this area to help us gain share as I just outlined.
Mike will address the key financial metrics in his remarks.
We know there's more work ahead of us and we continue to expect fight 21 to be a transition year for us, but I'm confident that our renewed focus in new operating model along with a talented team and a strong balance sheet will power our transformation into a world class consumer centric organization and deliver on our key.
Commitment for strong topline growth, while improving profitability.
And now Mike will review, our Q1 financial results.
Thank you David and good morning, everyone.
I guess that volatile Mike macro backdrop, and a continued dynamic market canopy delivered resilient financial performance in Q1, driven by diversified revenue sources and stronger cost discipline.
In Q1, our net revenue increased 22% versus prior year.
And total Opex declined over 23% year on year, and Capex continue to moderate both on a year on year basis and quarter on quarter basis.
Our free cash flow was an outflow of 181 million, which is over 50% improvement versus prior year and we also maintained a strong balance sheet with 2 billion in cash and short term investments at year end.
Now, let me review Q1 performance in more details starting with net revenue.
We generated 110 million of revenue or 22% growth versus prior year, our global medical revenue increased 54% over the prior year period, and we're continuing to see strong growth in both our international flower business with year on year growth of 181% and so.
Cthree with year on year growth of 75% in part to the due to the recognition of a full quarter of revenue in Q1 of this year versus a partial quarter last year due to acquisition timing.
Adjusting for the timing of acquisition, our international medical sales grew 43% on organic basis versus year ago.
Our Canadian medical business grew 19% year over year as we lapped last year supply challenges, but enjoyed higher average basket sizes in Q1 of this year in part due to pantry loading as result of KOVA 19, but we are pleased with our continuing ability to attract and retain veteran patients.
And over the past year, the number of veterans that have registered with spectrum has increased by 77%.
Revenues generated by our strategic businesses increased by 70% driven primarily by stores and vehicle, which grew 76% year over year and the increase was driven by strong consumer pull as well as expanded distribution in the U.S.
This works and bias deal performed inline with expectations and the restricted cobot 19 environment for bio steel and increase in sales from our ecommerce channel was offset by a significant decline in traditional retail sales caused by the closure of many brick and mortar retailers in Canada due to covert 19.
But we expect improved performance from bias deal driven by the easing of Cobot 19 retail restrictions in Canada, as well as expanded distribution and the use in coming months.
Our Canadian rack never net revenue decreased 11% year on year due in part to the restricted cannabis retail operating environment and response to the cobot 19 pandemic as well as increased competition.
Our b to B net revenue decreased 10% over the comparison period last year with sales of new rack 2.0 products being more than offset by declines in flower and pre roles driven by increased competition and decreased market share. However, our rack b to b business.
Cost sequential improvement through the quarter driven by four factors.
First adjustments to our cultivation planning and supply chain drove short term improvements and our ability to fulfill customer peos with supply attainment, increasing from 56% in Q4, 287% in Q1 and in recent weeks our supply attainment performance has exceeded.
90%.
Second the continued rollout of our 2.0 product portfolio drove 13% of our BTB net revenue in Q1 up from 2% in Q4.
Third and as David highlighted earlier, our nimbleness to react quickly to the growing value segment drove improved performance for our value brand Tw D. Starting in June with further improvement throughout the current quarter.
And lastly, we believe that continued pace of retail store licensing and openings in key provincial markets, especially Ontario contributed to increased cell and during the quarter.
And total active store count nationwide grew by 130 stores in Q1 versus Q4, with Ontario, seeing 61 additional stores to now over 100 stores operating.
Looking ahead, we expect the pace of store openings in Ontario over the next number of months to continue to have a positive impact on the sector sell in and to that province, and the province is delivering on its commitment to license 20 stores per month, meaning we can expect an additional 100 stores to be licensed by the end of this calendar.
Our year.
Moving on.
We are no longer providing our kilograms sold an average selling prices as our business shifts to a more diversified product line from flower. So let me offer you some color on price and mix impacts during Q1.
Our flower B to B business saw sales decline, 20% in Q1 compared to Q4, driven by volume decline of 5% and an average selling price decline of 15% the decline in the SP is mainly driven by geographic mix.
As product sales in Alberta were lower and product sales in Ontario were higher.
As well as our migration toward higher size.
Package offerings.
In Q1, Tw de accounted for 40% of our flower sales up from 26% in Q4, and we expect continued declines in ASP in the current quarter as we've completed our value flower price pack architecture and now are in the process of resetting prices in certain mainstream flower products.
In addition, with the expectation of a large number of stores opening in Ontario over the coming quarters, we would expect us to be reflected in geographic mix shift toward Ontario that will put further downward pressure on asps.
We plan to provide volume price mix changes by key format, beginning with our Q2 financial results.
Our BDC sales decreased by 12% over the prior quarter, primarily as a result of the continuation of store closures in response to Cobot 19 pandemic through mid May is worth noting that since our 22 corporate stores reopened and the latter half of Q1 BDC sales have returned to pre.
Cobot levels.
With this let's now move on to a full analysis of gross margin for the quarter.
Gross margins at 7% was below target. The biggest driver was an estimated $18 million impact related to under absorption of fixed costs, resulting from lower production output stemming from reduced demand and our SKU rationalization activities.
Our Canadian cost structure relies heavily on throughput as we have built a large scale infrastructure and to put this in context. We believe the current infrastructure in Canada can support growth for us to become a $2.5 billion to $3 billion business without much additional capital spending we've.
Already proven that we can deliver 40% plus gross margins and are confident that we will return to that level as we work toward higher capacity utilization across our facilities.
Taking beverages as an example, with the were robust demand were seeing for our beverages, we are ramping up production and the throughput of our beverage facility has doubled in July from June and we plan to double again in August and based on the continuing strong consumer pull we are seeing our beverage facility could reach.
Capacity much sooner than expected.
In addition, overall cannabis legal sales are continuing to grow as more retail stores open up and new value offerings are helping to convert the illicit market and as we capture our fair share of this industry growth, we expect further improvement and utilization of our facilities.
In the meantime, we have a number of initiatives underway both in the short term and the medium term that we believe will further bolster our margin performance and the short term, we're looking at ways to reduce our variable costs, including labor in the medium term. We're focused on further optimizing production through a full end to end strategy.
EBIT looks at people and process technology and infrastructure that we believe will lead to best in class margins over time, and we plan to share details of this project at our next earnings call.
Q1 margins were also negatively impacted by an estimated $11 million charge related to manufacturing variances, which included out of spec production that did not meet new targeted THC ranges.
And the quarter, we also recognized an inventory provision of $5 million based on revised forecast.
Relative to our inventory holding policies.
Now, let me briefly cover our operating expenses.
Overall, SGN a decreased by 7% over the comparison period last year.
Sales and marketing expenses decreased 25% year on year, and 44% quarter on quarter, driven by a couple of factors.
First marketing and promo expense declined by over $10 million versus the prior year due to delayed or canceled activities. As a result of cobot 19, as well as elevated spending from last year to capture retail space.
Second compensation expenses increased year over year due to higher us investment, but Canada compensation expenses decreased due to head count reductions and relative to Q4 compensation expenses declined by $4 million following our corporate restructuring actions.
And the temporary furlough of corporate retail staff due to the closure of our corporate stores.
GNS costs increased by 2% year over year, but decreased 18% quarter over quarter due in part to a decline in professional fees lower facility expenses and lower travel costs.
R&D expenses increased 61% year over year, mainly driven by research studies that did not begin until Q2 of last year and increased activities to support cannabis 2.0 product development.
R&D expenses decreased by 34% quarter on quarter as we are now reallocating our R&D efforts to focus on projects that have high commercial return potential with less emphasis on pharmaceutical driven clinical trials.
Stock based compensation expense in Q1 decreased 63% versus prior year up to 228.6 million in part due to the forfeiture of options, resulting from staff reductions that occurred during the quarter.
Stock based compensation is expected to increased to approximately 45 million in Q2 as forfeitures are not expected to occur at the same level.
Next I would like to discuss free cash flow.
Our free cash flow in the first quarter of fiscal 21 was an outflow of 181 million, which is over 50% improvement compared to the prior year.
Our working capital declined year over year due to lower inventory levels and importantly, we ended the quarter with inventory of 389 million slightly down from the prior quarter and while we have more work to do we believe this demonstrates our effort over the past few quarters to better align our supply and demand.
Capex declined to 62 million down both on a year on year basis, and a quarter on quarter basis.
As you can see in our quarterly results, we are making progress against our key financial metrics that we presented at our June Investor meeting.
On profitability, we delivered a reduction in SGN, a load as a percentage of sales.
While we are working to get back to our 40% gross margin target and on cash flow, we achieved a decline in both working capital and capital expenditures.
Before I close I would like to offer a cute a few key factors to consider on Q2.
First from a net revenue standpoint, we expect gradual improvement and our Canadian Rec business as store openings in Ontario should provide continued tailwind.
Our strategic businesses should continue to see solid growth from a new product launch and expanded distribution, while we expect stores and vehicle to see more normalized growth in the second quarter.
Secondly, we expect our gross margins to continue to be pressured by under absorption of fixed costs in the near term and believe Q2, Mark margins are likely to come in below 20%.
Third while we expect a sequential pickup in marketing expenditures and trade promotion activities as cobot related restrictions are lifted we expect to see additional benefit from reduced head count as we complete our organizational review in coming months.
So to summarize.
We are progressing against our strategic priorities, we remain focused on strengthening our commercial and operational execution, while maintaining our financial discipline.
This now concludes my review of canopy gross financials for the first quarter of fiscal 2001.
Operator, David and I would be happy to take questions from analysts.
Thank you.
I'd like to ask a question. Please press Star then the number one on your telephone keypad.
If you would like to Mr. All your question. Please press the pound key.
And to ensure tissue call begging the question to this many analysts as possible.
Please request that you limit yourself to one question.
Your first question comes from the an answer from Cowen. Please go ahead.
Hi, Thank you good morning.
Okay on your outlook for replacing David you noted.
Hi, good alignment on.
Layered on top of that obviously the value line. So I think about evolution of pricing right. A couple of negative mix drivers. This I will think about kind of order of model, where you pulled your goal for the most pressed on the topline.
Right.
Okay.
Yes from a topline standpoint, Viv I think that we'll continue to see the value flower category grow.
And.
Again, I think that is good news to the extent that we're taking share away from the illicit market I think what we have to do at canopy is a better job of articulating some of the differentiating characteristics of our products that sit above value right. So I think.
You can see yes, we will see value continue to grow.
But again I believe that's just a healthy evolution in the market.
I also just want to comment on that as well as like the as as we continue to work through challenges as it relates to gross margins. Our objective is to deliver that.
Above 40% gross margin, even with a growing value segment, which means we just have to evolve our production assets. So that we can deliver profitably where the consumer wants to spend and Thats, where Mike talked about the strategic review we were we were doing.
Along are within our production footprint, that's really what we're trying to get it is the right there right mix adjusted production footprint. So that we can deliver topline growth by taking share from the illicit market.
While at the same time deliver the margin the margins that we set that we would get too.
Thank you maybe you could just comment on the base.
Gentlemen, you listened.
Yes, I think I think David we still have.
At the market so young its it feels different to me then more established markets, where you see a trend to begin and then people have to follow I just think that when we start looking at price per consumer experience, we're probably not where we need to be from of eight standpoint and.
We don't think that puts a lot of pressure on our topline because we're just not all that large and vape and we believe we have the margins to be a little bit more aggressive which is why we're going to be a bit more aggressive and five cents.
That's helpful. Thanks.
Yes.
Your next question comes from Tami Chen from BMO capital markets. Please go ahead.
Thanks, Good morning, Thanks to the question.
I wanted to touch on the the new high TC hurdles that you said on your product quality for flowers. So when I think about your current grow assets. We many are quite large and some are quite labor intensive than I think the focus for the company previously had been.
Cannabis as an ingredient so 2.0, so my question.
How can these facilities I guess like the new high keeps the hurdles that you've said, we're flower consistently at scale and do it at better margins than Youre doing now, particularly if pricing pressure continues to intensify.
Yes, Tammy so I think am I correct me, if I'm wrong here, but I think like 88% of.
Of our output in the quarter was high THC flower. So the facilities are clearly.
Capable of producing at that level.
We're also doing a lot of work around.
Optimizing that footprint will will look for some products.
Four to rely maybe a bit on outdoor grow as we go forward. So.
[music].
I think it's less about what we're capable of producing and maybe even less about.
The margins in each facility, but as Mike mentioned in his comments its throughput and so for us.
We have to get the throughput up in our facilities through growing the top line.
And or.
Completing that strategic review of our facilities. So that we we have that right set of assets going forward, but it's not really a function of being able to produce high THC flower now, it's really dialing in the Cogs and it probably warrants a bit of a discussion about cogs that I'll tag team a little bit with Mike.
We.
When I when I was brought in I was passed by the board to too.
Ensure that canopy as a multiyear growth story with the path to profitability right. So for me job one was to make sure that we had the appropriate output coming out of our production assets.
And and not have so many empty shelves or skews stocking out at retail in Canada, and I think the team has responded well in Q1 I asked him to increase quality. So that we can improve consumer pull over time.
And that includes the THC component and the team has responded well, but it takes awhile for that to pull through a retail so you're not even necessarily seen the results of the work that we've done on shelf at retail yet and then I asked them to give us a strategy to get us to best in class margins that works is still underway and.
As Mike mentioned, we hope to have some.
Things to talk about on on our next earnings call and so.
And then lastly, I also asked them to not build inventories so that.
We could have more attractive gross margins, if we put more throughput through our plants, but we would just be building inventory. So I think that we've executed on the near term components of the plan I think from here is where is we have some work to do and Mike I'd like you to maybe walk through a builds in your mind.
And from where we where we ended in the quarter from a GP standpoint up to up to our margin target, Yes, I think really looking at the 7% gross margin report in the quarter I think it's easy to bifurcate out between volume impacts on lower production volume versus extraordinary activity.
Fees that come back to execution and the 7% is really a reflection of around $18 million of.
Fixed cost absorption tied to lower volume than originally planned for the year and when you adjust for that and look purely at what should have happened for the quarter just based on those impacts.
That brought us to around 17, or 18% margin for the quarter and we think thats a good proxy of what to expect over the next.
Quarter or so.
As volume starts to ramp back up we see a clear path to getting back to the high Thirtys that we demonstrated for Canada Bakken in Q4 gather thing that dragged our margin down is really just executional item. So getting our pack dates right. So that we can ship product with enough shelf life before it goes to the province.
There was some production challenges in terms of getting the phasing of production lined up and such away that allowed us to to provide for adequate shelf life. So it gets back to what David talked about countless times, which is we've got to have the right quality and quality as a function of just not THC level intervenes, but it's also had a.
At the right shelf life remaining and Thats, where the complexity of our operation comes into play and this is where the SKU rationalization is really providing us with a much simpler framework to run our supply chain off of so.
My view is when you look at the supply chain in Smis falls, we clearly have a large scale facility and as this business matures as the industry matures. The fixed cost leverage that were that were expected to see here provides us not just runway to 40%, but we see.
Going north of that overtime.
Thank you very helpful.
Your next question comes from Andrew Gardiner from Stifel. Please go ahead.
Good morning, I, just wanted to ask and kind of pursuing the amendment acreage I appreciate potential reduction in dilution for can be in the downside protection here, but the disclose business plan from acreage suggests just one person to us market below your kind of 10% to 15% I guess given the interest by cannot be in pursuing other options along not much work done to date.
Could you help us understand the incremental commitment here of at least $87.5 million versus kind of letting this agreement run its course potentially having full flexibility to pursue other options. Thanks.
Look we think that.
That acreage.
By their own admission isn't where they would they want to be they have a really strong plan to.
Two two to correct those shortcomings and we feel pretty good about that plan.
I'd also say Andrew that.
That the.
Trend the original transaction last very.
Little wiggle room in terms of outs in so it wasn't as simple as.
Letting letting it play out in walking away it was really.
The challenge for us and for the acreage team was to really.
We crafted a deal that would give them the maximum the highest probability of success because the the the other scenario where they they kind of limp along.
Wasnt palatable to acreage in their shareholders or canopy and our shareholders. So.
I think it was really.
Actually a good a good approach to to keep cannot be with the with the.
The ability to get a fast start in the us.
Upon permissibility, which by the way I think is coming faster than clearly people thought it would maybe a year ago.
And we're already seeing the benefit of having our brands in the U.S market and I can't wait to get our 2.0 products in the market. So I think it was.
I think it was it was the way to make.
You know to create a real victory auto the the original arrangement that we had with with acreage.
Thanks, I'll pass John.
Your next question comes from Bryan Spillane from Bank of America. Please go ahead.
Hey, good morning, everyone.
Hey, Brian one of the follow up on Vivian question earlier just about.
Well, you and pricing and I guess, what I'm thinking.
Thinking about was just we think about the value offering getting into the market. How do we think about just how much of that will the lift in market share rights of taking share from the illicit market and then how much of that might be offset from a trade down.
From the more value added product into the value segments I'm, just trying to to try to get understanding of.
What that trade off might be between of gaining share, but also potentially it cannibalizing your existing business.
Yes, so like it's a strange industry. When you think about that we talk about market share, but it doesn't really include the elicit market right. So you know I would say.
What we're doing is you almost have to look at those market side by side and say if a majority of the illicit market is.
It is kind of price sensitive and is already playing in value I think we're just saying we're taking share of the value market that already exists I also think that were in the our infancy as an industry, Brian in terms of trading consumers up and talking to them about the differences in experiences and.
Quality that happens at different price points and.
And then and then demonstrating that with the products that we have in the marketplace. This isn't this decisions.
Theres been a lot of discussion on the Canada space about it does it end up being a you know a commodity business. While this isn't we're not buying car parts here. We've got consumers that are ingesting products into their bodies to create an effect and we think that there is most definitely the ability to differentiate on.
On quality and experience and so.
I think that yeah, we're going to see the value share of the legal market approach 50%.
However, I think that the real real end game here is to grow the legal market pie as big as we can and then look to trade those consumers up which is again a little bit different than the way you might think about a normal CPG category because we most CPG categories don't have this big leakage into an illicit elicit space.
For me the most important thing the most important question. However is as we grow that pie.
Can we deliver on our margin expectations and we believe that we can because we'll be helped by the throughput through the facilities that we have and we believe there is tremendous opportunity to continue to optimize.
Through the designed to value initiatives the products that we offer in that value segment, and then create differentiation for mainstream in premium and Thats, but look thats not going to be an overnight game, which is why we're saying it's a bit of a transition year I would argue we've said, it's a transition year for cannot be I would argue it's a transition here for the industry while we.
While we recruit share from the illicit space.
Alright, Thank David I'll pass it on.
Your next question comes from Pablo Sonic from Cantor Fitzgerald. Please go ahead.
Thanks, Good morning.
Just on the U.S. CBD strategy can you just trying to frame it in terms of potential Hello.
The impact on profitability, obviously, it's a on industry with very little barriers to entry you hope to develop these brands out of besides Martha Stewart.
And also will known so how much would that be concerning disability and bugs your view of guns to getting to a positive profitability.
Yeah public question, because there are something like 2700 brands of CBD in the us right. So.
There are there are a lot of there a lot of products out there I think what we have the ability to do by using brand slide Mark.
Martha Stewart by by using brands like even bio steel as it begins to gain traction and this works as it gains traction in the us and first in free we have the ability to.
To make sure that we get in front of the consumer to talk about our brands I think youre right low barriers to entry, but I also think that theres a lot of bad product out there and we believe that as consumers try products like the.
The Martha Stewart products that will be in the market over the next couple of months they will notice a difference.
It's there's there is a visible are visible have an effect that you feel when you consume the Martha Stewart Gummies that you don't experience when you when you use many of the products in the space. So we think theres an opportunity for the leaders in this space that have high quality products and have the ability to kind of penetrate the consumer care.
Just miss with names like Martha Stewart.
We believe that Theres, a way to build a bit of a moat around ourselves since create differentiation against the 2700 brands that are that are in this space and.
The other point that I would add to that is as we look to engage with major retailers as.
The FDA works its way through its process.
And opens the door so that the major retailers come into this space.
We're getting a lot of mine share from them because of who cannot be is and our connection with constellation brands and then we bring in things like Martha the Martha Stewart brand name and into this works brand name, we believe that we'll be able to get.
A leg up on the competition that at this point is just.
Growing those 2700 brands kind of against the the digital wallet fuel.
Thank you guys quick follow up for Mike maybe on the on the rig sales trends.
Turning precedent doses, you believe that I feel a 5% growth on b to B sequentially.
Compared to the guidance you've given a minus 15 through end of May So I'm just understand what drove that improvement I mean, it seems that you were able to adjust flower value forward very quickly right you got to 40% over 40, but other things are still lagging. So just trying to get on understanding of July almost b to b. How much you have has improved sequentially on weird or what other factors at play these.
Abuse shown different but you won't retail stores that have maybe or the competition for your customers just trying to understand that because it seems that you would able to fix value very quickly, but other parts need steely addressing thank you.
Yes, we're encouraged by what we're seeing in Q2.
The consumers are coming back to the stores. The number of trips are going off when we look at our own corporate retail dollars per transaction is up partially due to continued stock up activity, but as consumers are trying cannabis 2.0 products that are actually spending more at retail so a lot of fundamentals are.
Strengthening across all of our corporate stores and then more broadly.
We think a lot of those trends are extending to the broader market.
Just more trips and consumers are continuing to spend more per transaction.
When we look at our own performance a lot of comes back to our fill rates that we talked about earlier, we are approaching our 95% fill rate and that was a lost opportunity for us that we spoke about at our last call and this is just a testament to the work that we've done operationally to really build in that muscle tissue to allow us to react too.
Purchase orders as they come through on a much faster.
Cycle time so.
Look.
There is still you know.
Still lots to be Don in terms of getting our fill rates operating units in stock rates up.
A lot more stores need to be added to really mature. This market bought we think Q2 is off to a good start.
Your next question comes from Matt bottom line from Canaccord Genuity. Please go ahead.
Okay.
Good morning, Thanks, Thank you.
The question.
A little more on where you see the beverage market going particularly in the Canadian market.
Key abused.
Given what we've seen in the US is very small percentage of the market share or the sort of 2.0 type product, but it's not really formulated product down there. So in two parts. The question one where is the market right now with respect to the percentage of the overall retail dollars that we're seeing I imagine, it's still pretty nascent but just curious if you have a range.
And what percentage beverages are and where do you see that going relative in the in the us given that you've started on a pretty good but year on year rollout.
Yes, so Matt I'll take part of it in my can Mike can fill and maybe where I miss because as a recovering beer guy.
I love the trends that we're seeing in.
In the drinks market in Canada, you know the.
We are still sourcing a majority of our consumers from existing cannabis users, which makes a lot of sense right because you have to make.
Make a decision to go into a dispensary and by the product can take at home, we're getting all kinds of anecdotal evidence of people, bringing at home and finding that you know that typically ends up being the mother in law, but like the mother laws trying the product hasn't been a cannabis user decides that it makes them feel great and maybe their sleep.
Being better than they ever have in the last 10 years right and so you know they are there they are starting to order from some of the web delivery platforms like yes, we're hearing all kinds of stories like that and so then I see like a lot of the data that we have on the percentage of.
The market that ends up in a 2.0 product like drinks is maybe skewed a little bit because it's only considering the current cannabis user. So as we look to expand that market and you say, okay in Canada, and I'll be off a little bit with these numbers there like 200 in 40 million cases of beer sold.
Oh, that's about that's more than 5 billion units and remember when we talk about our drinks. We're not talking about cases, we're talking about units and so we said we shipped 1.2 million units, there's an awful lot of.
Units to be had by sourcing a small share.
From the beer market as an example, so I think tremendous upside.
It will be a slow build though right because we'll I think we'll bring in those cannibalize. The current cannabis users sooner than later, but that might be the lower percentage that people see when they look at the the estimates for how big of a percentage drinks can be because again you are going to have experienced users that are going to want to use different delivery methods.
But.
Growing that noncurrent cannabis user into the Canada strengths space, just looks like it's just a tremendous opportunity quite frankly larger than the opportunity that I expected.
When I was part of constellation and we made the investment in canopy. So I think again I think the opportunity is bigger than we thought and just to build on a David were around and 80% share today with four skews in the market, it's around 3% to 4% of industry share and.
We are having out of stocks today. So we don't really know with a potential as yet what we do know is that we're scaling up production really quickly.
For folks that came to analyst day last December I think we quoted 19 in the half million cases up capacity off of ash.
Our cans of capacity off of a single shift. So we know that we can double may be triple that based on demand without jeopardizing quality. So we're pushing as much as we can we got very attractive price points out in the market and now it's just a distribution and fulfillment gain and by the way we're not done right. So we have more drinks.
Coming to market and our innovation team is working like around the clock to understand what is what is the next.
The next version what is the next iteration of our drinks product. So that we continue to to stay ahead.
Thats all very helpful. Thank you and has the government.
Back at all but.
Changing the equivalent a gram that are indeed beverages is I would get that you can't really turn selling through for the these things until that gets amended.
Yes look.
I think there is.
There is some support of it especially in the provincial organizations that that sell the product.
I, just think it's going to like anything when you're dealing with the regulatory environment, it's going to take some were working on chip.
Thanks.
Your next question comes from John Kim from Desjardins Capital markets. Please go ahead.
Hi, Good morning, I, just wanted to follow up on the call. It made earlier about net revenue gradually improving in the Canadian direct market.
More store openings, so when I reflect you've got your 22 corporate stores that are now fully open for the upcoming quarter.
Average production capacity doubled in July and again expected to do that August.
So that seems to be going wrong, you've done a national rollout.
Value brand that are fulfillment and into 2.0 in general So I'm just kind of curious on just the gradual improvement and also obviously yet more stores in Ontario, and Bcltwo. So kind of thought it would have been maybe more.
Celebrated growth in coming quarters ingest.
More gradual can you comment on just how you might see all those factors coming into play for the next couple of quarter.
Yes, John So look.
What we've been pleasantly surprised by is stores continuing to open even during a pandemic and our latest estimate is that by the end of calendar year, we can be in excess of 1200 stores across Canada.
So we're continuing to ramp up for that.
As we dial in our supply chain and continue to perform in terms appeal fulfillment as we continue to perform in terms of cannabis 2.0 execution more beverages more chocolates more vape out in the market as we continue to round out our value offerings and.
As we continue to improve quality across the board, we see a lot of tailwind heading into the next six to nine months, while we don't know as you know what the outcome of the pandemics going to be and we know that there's.
No.
Potentially some solutions coming over the next six to nine months, but in the meantime. This has been a pretty good defensive player consumers are still spending on cannabis and with more stores coming we think thats going to continue to open up the market and I know that theres lots of questions around the future of pricing and value and all of that but we believe that it's growing the market and we believe that we've got the.
The production capability that is going to demonstrate real strong potential as we as we build toward that market. So all signs are good for Q2.
And balance years, really just going to be a function of those stores continuing to open.
Your next question comes from Doug Ma'am from RBC capital markets. Please go ahead.
Thanks, very much and good morning.
My question just has to do with the well what is your market share right now in the valley market what does it change from Mike If we talked about that those five percentage points and then related to that one im curious about is.
Is it more important for the company to feel its cultivation sites in terms of.
Absorption.
Got $18 million or or is it more important to fill the.
Drinks distribution and and manufacturing site.
Yes look I'll I'll take a stab at this is David you can jump in.
So two things on market share, we're seeing improvements in market share I quite generally I would say we.
Hit a trough in the April may timeframe, and as we look at recent trends on share across the provinces that we can actually calculate market share for we do see an uptick across Canada in terms of Ontario, Quebec, Alberta, BC and we're confident that that uptick is going to continue for all the reasons I site.
But at the last question in terms of utilization of facilities.
Interesting situation in Canada today, because so many lps have such a surplus across their system. We've taken we've taken the steps of getting our supply chain and balance and we know that in the short Ron that might in impair our gross margin performance as we as we expand.
Variants.
Lower utilization levels and we also know some of our competitors are taking a different path, which is still continuing to operate at high utilization levels by producing perhaps three or four times their sales.
Each quarter in our harvest, which which puts all that on their balance sheet and that's going to that's going to come back at some point in terms of of of.
Surplus is so we feel good in that were balance from a supply and demand perspective, we know that we've got continued opportunity to continue to improve our margins and we think the priority right now is to maintain a balanced supply chain versus just filling up facilities to keep our economies of scale going so.
That's the path that we're taking and again.
We continue to believe that the next six to nine months for this industry are going to be very positive in terms of store counts cannabis 2.0 continues to build.
Interest in this space and we think that we are well positioned to take advantage of that over the next six to nine months.
This concludes the question and answer portion is the call and I would now like turn it back to Mr. client for final remarks.
Yes. Thank you again for joining us we look forward to sharing further progress in the coming months in the meantime, I hope all of you will try our amazing products visit our.
Tokyo smoking tweets stores explore our shop canopy dot com website from there you can go to our bias steel and this works websites or just some truly amazing products out there and we hope that that they will help you understand the future of canopy in the future of cannabis.
So encourage you to do that our Investor relations team will be available to answer any additional questions have a great day everyone.
Okay.
This concludes can it be gross first quarter fiscal 2021 financial results conference call.
A replay of this conference call will be available until November eight 2020 and can be accessed following instructions 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.
[music].
Okay.
[music].