Q2 2021 Canopy Growth Corp Earnings Call

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This time all participants are in a 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 Sharon and good morning, everyone. Thank you all for joining us today.

On our call today, we have cannot be group CEO, David Klein and CFO likely.

Before financial markets opened today cannot be issued a news release announcing our financial results for second quarter ended September Thirtyth 2020.

This news release is available on kind of People's website under the investors tab and will be filed on our Edgar and SEDAR profiles.

Before we begin I would like to remind you that our discussion. During this conference call will include forward looking statements that are based on management's current views and assumptions and that this is the discussion is qualified in its entirety by the cautionary note regarding forward looking statements included at the end of this morning's news release please.

Please review today's earnings release, and Kinda People's reports filed with the FCC and SEDAR for various factors cause actual results to differ materially from projections.

In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the FCC and Canadian Securities regulators. Please.

Please note that all financial information is provided in Canadian dollars unless otherwise specified.

Following prepared remarks by then Mike we will conduct a question and answer session with analysts to ensure that we get to questions from as many analysts as possible. We ask analysts to limit them to one question with that I'll turn the call over to David David. Please go ahead.

Thank you Julie and good morning, everyone.

I hope that you and your families are keeping safety as we begin to see cobiz infection rates increased in all of our core markets.

Also like to take this opportunity to thank our veterans across Canada, and the U.S. as we prepare to observe Remembrance day in Canada and veterans day in the U.S.

I'm pleased with the continued progress, we're making as our renewed strategy of winning consumer mindshare, along with increased agility and execution drove record revenue in the second quarter.

Before I discuss our performance I'd like to take a few minutes to talk about how we see the U.S. landscape evolving post last week's election, and provide an update on our U.S. strategy.

First we believe the biden when there is an important step on the path to <unk> federal Permissibility of cannabis in the U.S. market through decriminalization and de scheduling.

Second and maybe more importantly, the results of the ballot initiatives clearly showcase that support for adult use marijuana legalization extends across geographic and party lines and is supported by a majority of Americans.

Legal marijuana is becoming the American norm as ballot measures passed in Arizona, Mississippi, Montana, New Jersey in South Dakota.

36 States plus Washington, DC have now legalize candidates for medical or recreational purposes.

This will likely increase pressure on Congress to pass major federal marijuana reform in the very near future.

By having states like New Jersey, legalize adult recreational use we are de Stigmatising and normalizing the use of candidates.

In 2021, we expect to see a lot of positive activity at the state level Governor Cuomo in New York for example has made legalization a priority.

In addition, there are also significant deficits within state state budgets and cannabis provides a net new industry to combat this with new job creation and new tax revenues.

Further we think Thats states, which border legalized States for example, New York and Pennsylvania, bordering New Jersey will see increased pressure to legalize.

We're excited by the prospects of participating in the U.S. THC market and Weve already developed a U.S. ecosystem that positions us well as hemp.

And candidates powerhouse when not if U.S. permissibility happens.

So let me highlight some of the key components of our U.S strategy.

We are building a portfolio of scalable brands across cannabis and CPG. Our goal is to become a cannabis focus CPG company.

We're bringing our THC brands, such as tweet in house plan into the U.S. market through multi state operator relationships or CBD line extensions.

We are growing new to world CBD brands, such as Martha Stewart to meet consumer needs.

We're establishing routes to market with our CPG brands, such as bio steel this works in stores in vehicle.

These are strong brands in their own right with distinct value propositions building. These brands today allows us to generate revenues without the headwinds of regulatory challenges.

And then we plan to align extend these brands into CBD or even THC as regulations evolve.

Will we will layer in additional brands overtime, which will create further scale with our existing distribution networks and further build our relationships with retailers.

We are leveraging our insights and innovation capabilities across North America.

Gathering consumer insights and recreational states like Colorado, or California, we can adjust our product development activities in portfolio mix.

We can also develop and test new products in Canada based on those insights from the U.S. market.

Our agreement with acreage gives us a fast start into the U.S. THC market with acreage already deployed and canopies IP to build brand awareness in the U.S. for our brands such as tweet.

In addition, our relationship with Harrison, which continues to perform extremely well provides additional optionality to strengthen our us business.

Our retail banners, such as Tokyo smoking Tweed retail stores will build brand awareness and serve as a testing ground for innovation.

And finally, we have a great strategic partnering constellation brands.

Not only giving us the balance sheet strength and access to capital, but also we're leveraging constellations powerful distribution network and their key account relationships, we're sharing best practices across insights R&D and operations and both companies government relations and legal teams are collaborating and engaging with pellet.

Titians and regulators to help shape legislative policies and regulations in Canada and in the U.S.

Now, let's discuss the tangible progress we've made against our strategic plan.

There are three key themes that Mike and I would like to focus on this morning.

First momentum is building across our key businesses as our new strategy is coming to fruition.

We achieved record quarterly revenue in Q2 led by our Canadian recreational business and strength across our strategic businesses, including stores in vehicle This works and bio steel.

Second, we're continuing to improve execution and agility.

Our fill rates are now consistently exceeding 90% our flower quality improvement program is generating positive results and we've improved our new product development process to allow us to bring better products to market faster.

Third we are accelerating our path to profitability, notably in our largest market Canada let.

Let me tie these themes together and give you more details on how our key strategic priorities are driving improved performance in our business.

The first point I would like to make is we're winning consumer mindshare driven by insights and innovation we.

We strengthened our competitive positioning in the recreational market in Canada, gaining market share by 200 basis points to 15.5% from Q2 in Q2 from Q1.

We grew share in the flower category by 320 basis points to 17.3% with further improvement to 19.4% in the latest four weeks ended October 25th.

In Ontario, we grew our flower our value flowers share by 930 basis points led by our TWB brand.

We established a leadership position across total cannabis infused beverages during Q2 accounting for nearly 54% dollar share with five of our beverages under Tweed houseplant in deep space brands.

Within the ready to drink category in Ontario, our share was nearly 70% in Q2.

We recently launched Cuattro CBD beverages across Canada, and have now shipped over 2 million cans of our drinks.

Now I know you all have any questions about our market share methodology. So Mike will provide details on our internal proprietary market share tracking tool. During his remarks. The point however is that our insights team.

Which we defined as a key component of our CPG strategy is already beginning to drive value for by providing a near real time measure of our market performance.

Turning to the US we're accelerating growth by bringing our differentiated brands to consumers and quickly expanding distribution.

We launched our Martha Stewart branded health and wellness CBD gummies oil in softer sales in the us in September.

This new line brings together the exquisite flavors that you'd expect for Marta with the science and distribution power of canopy.

The launch generated significant earned media driving record sales on shop canopy Dotcom. The day after the New York Times ran a story.

The products are now getting listed in brick and mortar retail stores and we expect to see Martha Stewart's CBD products in thousands of stores as we launch additional skus in the coming weeks.

Biofuel continued to accelerate its momentum signing distribution agreements with leading beer distribution companies such as Reyes holdings in Manhattan beer alongside several other partnerships through constellation brands Gold network.

We expect to cover 100% of the us market by a direct store delivery by January of next year.

The bio steel team is currently in discussions with a number of large national accounts and expects to have products on shelf across food drug mass convenience and gas channels over the course of calendar 2021.

Stores in vehicle continued to expand its distribution in the us while repeat orders from newly added distributors confirm that stores in vehicle vaporizers are seeing strong consumer poll stores.

Stores and vehicle will be celebrating its twentyth anniversary on December 5th as they continue to expand their leadership in the vaporizer category.

Another key milestone we achieved in the US is the implementation of the amended agreement with acreage, which obtained overwhelming support from incurred shareholders.

As I stated on our previous call. The amended agreement is a win win for both acreage and canopy.

For canopy the agreement reduced our total purchase obligation, thus conserving $71 million canopy growth shares for canopy shareholders.

There are also additional closing conditions that need to be met by acreage, which didn't exist in the original agreement.

We look forward to acreage launching THC infused beverages, which leverages canopy formulations and brands in the states of California, and Illinois next summer.

The recently improved focus from the acreage board and leadership team causes me to be extremely bullish on acreage as they work to drive profitability and growth in their core states.

I'm highly confident that acreage will emerge as one of the top us multi state operators as the us heads toward permissibility.

The next point I would like to make is that we are improving execution across our organization.

In Canada rack, our revamped integrated business planning process is driving much better forecasting and we continue to see our fill rates improve resulting in increased market share performance.

We're strengthening our retail presence and improving execution, we opened nine corporate owned stores and Alberta drilling during Q2 with additional store opening in October bringing total corporate owned stores to 33 as of today. So.

The number of partner stores has also increased to 16 in total up from 14 in the first quarter.

And we're executing against our plans to increase our market share at our corporate owned stores our share within known retail improved by six points to 54% in Q2 versus Q1 and is approaching 60% in recent weeks.

We're making significant progress in our comprehensive flower improvement programs. We completed the first phase of a consumer research project aimed at defining the product attributes that matter most to consumers along with their willingness to pay for those attributes. We're leveraging this work to lay the foundation for our brand and product strategy in.

Ensuring our dried flower products have tangible attributes such as moisture level harvest methodology grow location or packaging solutions that directly correlate with consumer expectations at each particular price point.

And the last point is that we're accelerating our path to profitability, Mike will provide more details in this area, but just to highlight a few examples we moved quickly to reduce our labor costs in our Canadian operations, we held our SG in a broadly stable versus last quarter, despite higher revenue driving improvement in our SGN a ratio.

And our end to end supply chain review has identified significant savings across our cost structure.

We plan to provide our medium term financial targets. When we report our Q3 earnings in February but I'm confident that we are now firmly on a path to achieve positive adjusted EBITDA at some point next fiscal year.

At this point I'll turn it over to Mike to review, our Q2 financial results.

Thank you David and good morning, everyone.

During Q2 canopy achieved record net revenue growth.

Gross margins came in line with our expectations and we saw another quarter of improvement in our operating expense ratio.

Our free cash flow was an outflow of $190 million, which represents an improvement of 57% over the prior year and we ended the quarter with over $1.7 billion in cash and short term investments at quarter end.

Let me review Q2 performance in more detail starting with net revenue.

We generated $135 million of net revenue or 24% growth year over year after adjusting for a $33 million portfolio restructuring charge incurred in Q2 of last year for returns return provisions and pricing allowances related to our recreational soft gel soft gel in oil.

Portfolio.

Net revenue increased 23% versus the previous quarter.

Canadian recreational net revenue increased 12% versus the prior year, excluding the same portfolio restructuring charge and 38% over the prior quarter benefiting from growth in both the B to C and the B to B channels.

Recreational b to B sales increased by 21% over the prior quarter driven by a number of factors first the pace of retail store openings accelerated in key provincial markets, especially Ontario contributing to increased sell in during the quarter and total active store count nationwide group.

By 185 stores in Q2, with Ontario, seeing 46 additional stores open bringing the total to 147 at quarter end and looking ahead, we expect more store openings to continue to have a positive impact on industry sales and we now expect there will be over 1200 50.

Stores in Canada, and over 240 stores in Ontario by the end of this calendar year.

We continue to improve our customer order fill rate with our supply team is exceeding 90% during the quarter and we grew market share in the dried flower category. Following the repositioning of our value flower offerings as well as flower quality improvements implemented across the range of flower products that we offer.

Our 2.0 products drove 8% of our BTB gross revenue in Q1, driven by strong demand for our THC beverages.

As David mentioned in his remarks, I'd like to share details on our market share performance based on our own market share tracker.

To help the team better understand the performance of our products in Canada. We've developed an internal proprietary market share tracker utilizing point of sales data supplied by third party data providers.

Data provided by government agencies, and then our own a retail store operations data across the country.

And while we compile here is what we believe to be the most comprehensive view of the Canadian rack market give.

Giving us a real competitive advantage that allows for accurate market share reporting and market insights on a near real time basis.

Recognizing that many of you utilize other third party information such as headset or essay.

I'd like to highlight some distinguishing elements for our internal tool.

First our tracker has broad coverage, we cover nine out of 10 provinces compared to five currently offered by headset.

Second.

Our tracker provides deeper coverage within the provinces, we track in Alberta, British Columbia, Scotch won men, Manitoba, and Newfoundland we capture on average 32% of stores point of sale data.

And New Brunswick, Nova Scotia, and Prince Edward Island, we captured 100% of Pos data.

In Ontario, because we do not have Pos data, we use depletions, which are provincial sales to the retailers as well as E commerce data from the Lcs, which provides us with full coverage.

We do not have visibility to Quebec, So that's the one province missing from our dataset.

Now as with any retail sales data such as Nielsen or IRI. There are limitations as this data does not capture 100% of the stores in every province, and the stores were including in scatter on Manitoba, and Newfoundland SKU to our own retail stores as we have a disproportionate.

Lee higher market share that.

That being said, we believe our market visibility is broader deeper and closer to real time compared to existing third party research data used by the Lps as well as the investment community let.

Let me provide some recent market share metrics based on our share tracker.

Our Canada recreational market share based on the province's tracked in the data increased to 15.5% during Q2 up 200 basis points versus Q1.

And notably our market share grew by 190 basis points in Ontario, and 140 basis points and British Columbia, while it declined by 40 basis points in Alberta, All Q2 performance versus Q1.

Our flower market share increased by 320 basis points quarter over quarter to 17.3%.

Our market share of the value flower category increased 800 basis points to 16.5%.

And in Ontario.

Our share of value flower more than doubled to 13.7%.

More recently in the four weeks ended October 25th our share of the value flower market increased further to 19.5% and improved to 16.9% in Ontario.

Our share of the premium flower segment in Ontario decreased 60 basis points to 15.5% in Q2 as strong gains from house plant was offset by softer performance in our other premium brands.

Our dollar share of the beverage market was 54% and we're we remain number one in Ontario, with 51% market share in Q2 and for clarity. This is against all cannabis infused beverages, not just ready to drink beverages.

Our beverage market share during the last four weeks ending October 25th was 40% maintaining market leadership position, even as new entrants have come into the market.

Now turning to volume price and mix trends in a wreck flower business.

Our rack flower b to B business saw gross sales increased 50% in Q2 compared to Q1, driven by volume growth of 90%.

And during this period, our average selling price and rec fee to be flower decreased by 40% of which 38% was negative mix and 2% was true price.

The mixed impact within flower this quarter was exceptionally large as we saw a sizable shift toward larger size value offerings and these trends are further exacerbated as value flower accounted for 60% of our flower mix in Q2 up from 40% in Q1 as we.

Further established our value offerings across the market.

We do anticipate that average selling price will decline further in coming quarters, though the rate of decline should moderate.

Recreational BDC sales increased 43% over Q2 and more than doubled compared to the previous quarter same store sales increased 44% compared to Q2 of last year.

Growth versus Q1 was driven by store operations, returning to pre covance levels as well as increased foot traffic from a broader product assortment across both cannabis 1.0 and 2.0 products.

Additionally, we opened nine new stores in Q2 with 32 corporate owned stores operating at the end of the quarter.

Turning to medical our global medical net revenue increased 1% versus Q2 of last year.

Our Canadian medical net revenue increased 7% year over year, driven primarily by higher average order sizes.

Our international and C businesses experienced slight declines compared to last year dry.

Dried flower sales in Germany decreased 5% year over year due to slower market growth and intensifying flower competition.

Our C business declined 3% year over year due to a packaging supply issue with one distributor which has since been resolved.

To summarize our global cannabis business cannot be generated total cannabis revenue of $92 million, which represents an increase of 18% over the prior quarter.

Revenues generated by our strategic businesses increased by 82% year over year and 60% on an organic basis adjusting for the timing of the bio steel acquisition.

Stores and vehicle Vaporizer revenue increased 100% year over year benefiting from expanded distribution in the us and a broader product portfolio and increased consumer pool.

This works revenue increased 34% compared to last year due to strengthened E commerce sales.

Sell ins to UK brick and mortar stores ahead of the holiday season, and the launch of a new stressed check hand sanitizer in the U.S.

Bio steel sales benefited from reopening a bit big box retailers after the pandemic as well as expanded retail networks in Canada and increased contributions from the U.S.

With that lets move onto an analysis of gross margin for the quarter gross margin of 19% was up 1400 basis points versus Q2 of 2020 gross margin was broadly in line with our expectations and was impacted by the following factors.

First our gross margin continues to be negatively impacted by under absorption of fixed costs with an estimated 21 percentage points or $28 million of impact in Q2.

Second we saw adverse business mix impacts of 12 percentage points relative to Q1, driven primarily by lower sales contribution from our high margin C medical business.

Third gross margin benefited from head count reductions completed during the quarter that saw operation staff head count lowered by approximately 14%.

And finally, we saw lower inventory adjustments compared to Q1.

We remain committed to delivering at least 40% gross margin over time and in support of achieving this target. We are nearing completion of the operations and supply chain review that we began in Q1 and we are now moving quickly to admit and implement these initiatives and expect potential savings of 150 debt.

$200 million of.

Across cost of goods sold and operating expenses over the next 24 months.

And these initiatives include further optimizing our footprint.

Organizational design that includes further rightsizing of our labor.

Procurement savings some of which is tied to our design to value program and finally supply chain optimization, which includes improved inventory management.

Now, let me briefly cover our operating expenses.

Overall, SDMA, including acquisition costs decreased by 19% versus Q2 of last year, driven by year over year reductions in sales and marketing and general and administrative expenses, partially offset by higher research and development expenses.

Sales and marketing expenses declined by 30% year over year, driven by a number of factors.

First marketing and promo expenses decreased by over $17 million versus prior year due to the switching of trade marketing from print to lower cost digital programs and from small store displays to lower cost national programs as well as overlapping elevated spending from last.

Last year to capture retail space and build brands ahead of the 2.0 launch.

Second compensation expenses decreased year over year due to head count reductions, partially offset by higher investments and the U.S.

Lastly, marketing and promo expenses also declined versus prior year due to lower travel expenses as a result of the restricted business travel in response to the COVID-19 pandemic.

General and administrative expenses decreased 26% year over year due in part to lower compensation expenses, resulting from corporate restructuring cost taken earlier in the year as well as reduced insurance costs and lower travel costs.

R&D expenses rose by 19%, mainly driven by ongoing research studies that commenced after Q2 of last year.

Stock based compensation expense in Q2 of 21 decreased 76% year over year to $20 million.

And this is lower than the forecast of 45 million that I communicated during our last conference call and the decline from the Q2 forecast was primarily related to higher forfeitures of options, resulting from staff reductions that occurred during the quarter.

Stock based compensation is expected to be in the range of 25% to $35 million per quarter for the remainder of this fiscal year.

Now moving on to free cash flow.

Our free cash flow in the second quarter of fiscal 21 was an outflow of $190 million, which represents an improvement of 57% versus the prior year.

The cash outflow during the quarter includes by annual interest payments of our outstanding convertible debt of $13 million and excluding these interest payments our free cash flow was flat to the previous quarter.

Our working capital decreased year over year, due to lower inventory levels, but increase versus previous quarter due to the timing of accounts receivable as well as modest increases in inventory.

Capex declined to $29 million down, 87% from Q2 of last year and down 50% from the previous quarter and we now expect our full year capex to be in the range of $200 million to $245 million.

As you can see from our results in Q2, we continue to make progress against the key financial metrics that we laid out during our June investor meeting.

On our profitability metrics, we have delivered a reduction in the SGN a as a percentage of sales.

And we are working to get back to our 40% gross margin target.

Our on our cash flow metrics, both working capital and Capex have declined on a year over year basis.

Before I close I would like to offer a few key factors to consider as it relates to our Q3 outlook.

First from a net revenue perspective, we expect our Canadian RAC business to continue to improve with additional store openings in Ontario, and our improved flower market share continuing to provide momentum.

In addition, we expect continued contribution from our 2.0 products as we refocus our veight portfolio and our beverages benefit from the launch of Cuattro.

Second we expect strategic business units to continue to benefit from expanded distribution in the United States.

Bias steel is expected to see growth accelerate as it's ready to drink sports hydration beverages gain access to thousands of retailers through our new direct store delivery network. This.

This works has a number of new product launches planned across the UK and the us and should benefit from holiday selling season.

Third we're continuing to monitor the global COVID-19 pandemic and response to rising case numbers over the past couple of months various jurisdictions, including Germany have reentered some form of Lockdown Andy.

And the adoption of new and prolong lockdown measures within our core markets is worth is worth Mark monitoring.

Lastly, we expect gross margins to continue to improve in coming quarters, resuming a path to achieving our 40% gross margin target over time.

And as we improve execution and address our supply chain efficiencies and returned to positive operating leverage we expect gross margins to be in the low twentys as savings from our initiatives wont start to kick in until Q4.

In conclusion momentum is building across our key businesses as our new strategy is coming to life and we are seeing strong growth in our Canadian rack cannabis business.

With our improved market share and our US business is evolving as we build a diversified ecosystem that has multiple routes to market and many ways to win in the U.S.

And finally, we are doing this while also maintaining our financial discipline.

This now concludes my prepared remarks, and operator, David and I would be happy to take questions from the analysts.

Thank you I'd like to ask a question at this time. Please press star one on your telephone keypad to withdraw your question press the pound to ensure an efficient call that gets to the questions have as many analysts as possible analysts are requested to limit themselves to one question.

First question comes from Bryan Spillane with Bank of America.

Hey, good morning, everyone.

David I guess, one of the step back and just ask about the the cost savings that you announced this morning or described this morning, and I guess two questions related to that one is.

What does that contemplate in terms of.

Yes, the evolution of the us market, so and again with underneath my question is.

Is that subject to change if the market opens faster if we get you like a full federal legalization.

And then second I guess related to it also is.

In terms of both pacing of can you give us any sense of just how quickly you think you can achieve those goals.

Yeah, So Brian so the in terms of the cost reductions there. They are mostly focused on the Canadian market.

We continued one of the reasons one of our drivers of our loss is.

We continue to invest ahead of revenue in the us, although we see that swinging around as.

As we begin to grow revenue in the U.S. as we as we discussed throughout our prepared remarks, so the us.

The U.S. activity wouldn't necessarily affected now now that said I think we should be really clear that if we get a permissibility triggering events in the us.

You know, it's a it's probably a 60 day window to until we would be able to take over full control of acreage at which point, we might want to bring our balance sheet. Our know how in our brands to bear on the us market. So I.

I would I would hold that a bit off to the side, but that will not affect this $150 million to $200 million.

Savings initiative that we outlined and then in terms of speed.

So we're really talking about implementation and so we've begun the implementation process already.

The real timing of when it comes through our piano will mostly be affected by.

The length of time in that execution, which has which won't be that long and then flow through from inventory alright. Thank dividend I guess that with what we are really under the play question is we're thinking about flowing through the savings.

Just want to make sure I'm hearing you correctly, it's possible that we would be impacted by the triggering event right. So theres a decision were allocated to the opportunity with that.

That might affect how much of the savings you decide to flow through versus invest at least in the in the in the medium term.

Yes, so I would say.

Now I understand your question, Brian So maybe just around semantic so would we were going to continue to execute on these initiatives. However, as I said, if the us where to open I think we would want to make sure that we.

We took control of acreage as soon as possible and then we would begin to try to build out that market, but we're also seeing that acreage has a pretty clean path to profitability and so.

It's quite possible that we could we we wouldnt slowdown our timeline to profitability, even as we invest in the U.S understood great. Thanks, David.

Next question comes from Michael Lavery with Piper Sandler.

Yes.

Thank you good morning.

Hey, Michael.

You bet.

Talked a lot about the 2.0 opportunities and.

Now, we're lapping a year ago, the write down on on oils and soft gels, but it's interesting that the product splits you give for Canadian branch. So those sales to be pretty similar how should we think about and softer sales in oil is actually up pretty significantly.

How should we think about the opportunity for 2.0 relative to your expectations and what's ahead is it tracking where you expected to should we see a step up from.

Things like the Cuattro launch or what how does it look against where you expect business to be at this point.

So I'll start out and Michael and then I'll, let OLED might fill in but I think.

You know the write down last year. It was really more about mis estimating how quickly the market demand would arrive but.

But we are seeing good demand in the market for.

Soft sales in oils and the same the same kind of issue may be as we launch drinks as you're going through a channel fill and trying to understand the consumer demand view.

You have to build in the drinks instance, we had to build our production to meet that demand in the oil and soft. Joe instance, we had a slow production down. So I think it's just the the nuances of launching products in it in a in a new ended need a new products into new industry that have maybe created some of the fits and starts because I would.

Say in general we are happy about how we are growing across all of the categories. In 2.0, yes. It's a very broad question. Michael So just on the soft sales in oil as the soft sales and oils are a lion's share of the medical channel and continue to perform well.

As you know the medical channel patient.

Patients have decreased a month on month since the rack channel was created two years ago, but within that medical channel patients the retention rates been high the spend per patient and it continues to grow and it's been quite a stable business for us from a price and volume perspective looking more.

Broadly at 2.0 in terms of what's coming and what the learnings have been.

And what you can look from canopy to over the next several months look we've we've we've looked hard at our fate portfolio and recognize that price continues to compress within the Veight category.

We will be introducing cartridges later this year that increased the fill rate from 0.42 to 0.5 miles.

Which will get us more competitive in the market.

Where we've done some price resets on the chocolate category and we're continuing to plan for new product introductions, there as well and then it really is about leaning into beverages in every way shape or form.

We're excited about our results, but we're also excited in some ways that competitors are also validating this space and bringing new offerings into the category because we believe thats going to further build the category and Thats going to further open up points of distribution over time, putting pressure on the provinces to provide for our on premise consumption and things.

Like that so.

We welcome the competition, we think our beverages will stack up against any competitor out there and more coming from canopy over time in the beverages category as well.

That's really helpful color I'll pass it on thanks.

Next question comes from Vivien Azer with Cowen.

Hi, good morning.

Yes.

Your desire to consummate the acreage deal, but also acknowledging the Republican controlled the Senate is probably a pretty meaningful limiting factor there. It seems like your focus needs to continue to be market share for the adult market in Canada.

Matt Damon David and Mike I'm curious to understand how you guys are thinking about navigating kind of im Ken in your operating model relative to Q.

Operator are you guys.

Equally on the big retail presence some of the early.

Retail competitors have not taken kindly to that so how do you think about managing your assets.

Dave on in terms of driving overall mark here. Thanks.

Yes. So look Vivian. This is a this is an issue that a lot of companies as you well know wrestle with.

I think that Theres, an opportunity for us to bring the learnings that we take from our company owned stores and pass them on to.

To our retail partners in the marketplace. So I think there is a there is a way that we can really make sure that were a value added partner, we're not we're not looking to build a retail locations across Canada, I think we're fairly comfortable with the footprint that.

That we that we have today.

And so yes, I understand that there is.

The risk of channel conflict, we believe that we're going to be.

Open end.

And helpful to our retail partners in such a way that make it a positive experience.

I would just add to that that channel conflicts not new to canopy, we've experienced that over the times and the medical channel even with some of our craft CRO partners. This is something that canopy has had experience with over a number of years.

And at the end of the day we.

We have very strong relationships with many of the key accounts across Canada and they want our brands. Our brands are growing in terms of popularity are as demonstrated by our market share and these retailers one our brand. So clearly it's a fine line to walk, but we rest on the strength of our brands.

Understood. Thank you.

Next question comes from Timmy, Chen with BMO capital markets.

Well thanks for the question.

I wanted to ask a little bit more on the cost savings initiatives that you've announced I.

I guess two quick parts first did.

I understand your Canadian business, what you envision for the final footprint or ask what they look like coming out of that.

And then just secondly on that or are you.

Glad business accelerating the profitability on it I think.

Kind of take a step back on some of your previous comments well founded as though you were looking to take a bit more of a glide tool portfolio.

Going to call because people want to affect your ability to close so I'm just wondering just with the language of accelerating.

Thanks, holding your outlook of global Canada that prompted this.

Sort of acceleration thanks.

No not at all Tammy I think what's what's actually changed is we.

It was important to me that we didnt come in.

I came into the company anyway, and just start cutting things.

That would be detrimental to building brands connecting with our consumers and growing our topline I feel that we now have we've gone through many many months of reorganization on the commercial side of our business and so we now feel we have the right commercial organization the right product and marketing organization, we are beginning to build that inside.

Its muscle and we've really focus the innovation muscle in the in the business and so now that those things are in place.

And they're beginning its very early but they are beginning to produce some results.

Now we can really look at the areas of our business that are we just we just haven't been running efficiently because we grew so quickly and so.

We worked through and outside in process, where we we looked at our the entirety of our cost infrastructure now we have a very clear view as to where we need to go and Mike and Mike can provide more details on what that might look like yes. Its a great question Tammy win win when you go back to the March announcement when.

We announced the closure of our facilities in Vancouver in many ways that was a no regrets move that.

Was easy to make based on how the facilities were performing and call. It the near to medium term requirements from a supply and demand perspective, we just weren't remotely balanced at that time and allowed US again just to remind everybody. This comes back to how quickly. This industry has evolved everyone can agree it's evolved slower than what EPS.

Everyone expected and then enhance you a lot of Lps have had a bit of a.

Overhang.

That being said.

For the last several months, we have been in deep deep analytics on our entire operations and supply chain and have now built a fact based data driven approach on all the elements that we need to go after in order to achieve what's really we talk about 40%, but our.

Aspiration is to have a real CPG BNL with margins even in excess of that so we're positioning ourselves really hard on this and what we've learned is.

Across our operations supply chain in Canada, there's really four broad themes of opportunity number one we've bid off too much complexity across the business. We have too. Many finished goods skews in the market, which is a natural outcome of a brand new market, where can it be like many other license producers.

We are aggressively introducing as many products to the market as possible without having real consumer insights or history on what consumer needs were and now that we're two years and we have got a very honed view on what skews matter and which ones don't so SKU rationalization is going to be key.

Cultivar rationalization is also going to be key when you think about the economics of a greenhouse.

Cultivars tried complexity in complexity is a drag on productivity. So we are going to rationalize cultivars and again based on consumer insights and based on design to value to make sure that we are just as competitive if not more competitive on the other side of this program to.

To make sure that we're not we're not burning furniture, if you will so thats one managing complexity number to optimizing our network. So we continue to challenge ourselves on our site infrastructure. We've continued to hone the purpose and strategy behind each facility some.

Facilities are really great quality, some are really great at volume, but there hasn't been a good marriage between what that facility is doing today and what it should be doing so were restructuring each of our facilities. So they really are purpose driven with the Cape size that are tied back to that strategy. We're also going to optimize our Ics.

Attraction capacity extraction today looks very different than it did two or three years ago. When most of the LP thought that was going to be a bottleneck capability will today, we've got plenty of capacity and we have an opportunity to drive savings through rationalizing our extraction capacity, we think that in that same vein we have.

So tens of millions of dollars of procurement savings both direct procurement savings tied to procurement for items that go into our production process as well as procurement savings on indirect items, meaning items that aren't involved in production, but are more around the opex side of things. So that's number two.

Number three improving processes and improving our operating model. We have made a lot of progress on fill rates getting to 90%, but the inverse of that is we're missing 10% and we believe that we can get to 98 or 99% over the next year to two years by optimizing our essence.

P. processes, honing, our demand forecasting and really making sure that we're producing the right product at the right time with the minimal amount of inventory.

Increasing productivity is the fourth area of opportunity and this is around org structure and making sure that we're right sized for the current state of the organization, but also making sure that our supply chain is productive on things like use of backhaul routes that were paying for or migrating to.

Two more competitive common carrier rates or.

Or even looking at packaging opportunities using design to value where many on this call have talk to me about some of our packaging being over engineered in the past so were going after that so those are really the four pillars of this program and they're all phased out over the next two years and I can tell you without getting into the phasing of how.

Now this lands in each quarter over the next two years that we're going to pursue as much of this as quickly as possible with a forward leaning approach on our infrastructure.

And hopefully that gives the street confidence that we've done the homework here and we're very confident that we can deliver this over the next two years.

Dave anything else you want to add.

That's very helpful. Thank you.

Youre welcome. Thanks.

Next question comes from Aaron Green with the line Global partners.

Hi, good morning, and thanks for the question.

So I want to dive back in terms of incremental flower sales, we saw in the quarter.

Good to see obviously lot of that was driven by two to be de Eneura large format value segments. Just wanted to get to any color you can provide on the sell through especially in terms of retail on some initial consumer adoption, because obviously still pretty competitive category. It seems like you still saw some market share growth in October from your commentary in the prepared remarks.

Thanks, but just any incremental color you find there as there is still lot of your competitors out there who are also competing in that low value low priced segment. Thanks.

Yes were very happy with the progress that we've made on all of our flower products, including TWB and simple stack simple.

Simple stash has been a good opportunity for us to help balance our inventory.

And TWB has just been a good value proposition, we're offering that end packages up to 28 grams and theres been strong demand. We've continued to build out distribution across Canada I'd say, we're just about there in terms of the distribution build out so its look its a valid category our market share Intel tell.

Yes that it's going to be it's around 30% to 33% of overall flower consumption today and when you take a step back this category likely would have existed last year. At this time had not every LP been short on supply.

Every CPG category that I'm familiar with has a value hierarchy, and we think that the value category is here to stay.

Big question will be what's going to happen with value category pricing over time I'm of the opinion that it will continue to move around but over time, it's going to start to tighten up but time will tell on that the key is making sure that we've got the right production strategy behind each tier of product which ties into my.

Earlier remarks, which is making sure that every one of our facilities as purpose driven to.

To make sure that we are growing the right product for the right category out of the REIT facility in hitting the right cost. So we believe even at the price points that you see in the market. We can hit our margin targets with Tw de being you know a third of a third of our business overtime and the thing I would I'd like to add to that Aaron is that said we have a key.

Couple of objectives, one is to grow our market share, which means we need to sales the consumers what they want at the price point that they are willing to pay which is why the insights work that we're doing is pretty exciting because we think it will position us to drive a little bit of a trade up.

On attributes that are relevant to the consumer.

And we're also looking to balance our inventory.

We're not interested in showing good gross margins this quarter only to have to have big write offs in the future and so we're working toward that balanced inventory and I would say we for the most part achieved that this quarter and then irrespective of the price points were committed to achieving that at least 40% gross margin number that we put out so.

So we think thats a that the value category is actually helpful. On on on all of those three points that I just made and.

We're actually really pleased with where we are able to get to in the quarter with it.

Okay, great. Thanks for the color.

Our next question comes from Andrew Carter with Stifel.

Thanks, Good morning, I wanted to double click on the beverages for a second because of the headset sales. We have it's Joe the sales did close plateau early and kind of declined some numbers you've given on shipments would suggest you're kind of quarter to date I think it's 300000 units you did 150000 units last week, a genius, which then investor day.

It seemed like the shipments are picking up so could you help us understand kind of what you're seeing with the traction by the consumer that platform. Thanks.

Yes, I think what we're seeing is you know we continue to get a strong consumer response, I would say that as competitors come into this space.

We do know that we are getting trial across the competitive entrants, but the repurchase rate on our product remains pretty high and as Mike said, I think bringing as as that the point here is we have to grow the whole category and so.

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I would say the biggest barrier to growing the category is really going to be.

Related to equivalency standards changing overtime in Canada, so that people can.

By more than a couple of units at a time and then we think the entire category gets to grow and right now I believe the latest data side I saw we have five of the top seven known skews in the marketplace and we feel pretty good with our positioning but yes, we are looking forward to being able to grow the entire category.

Which which means we're going to need to see a bit of a move from a regulatory standpoint, and just some of our consumer insights on beverages are quite compelling.

Our data tells us we have a 70% to 80% satisfaction rate that.

That we have.

Greater than 75% satisfaction with taste across tweet in house plant brands.

60% of customers are recommending our product to other consumers and at the end of the day, it's a bit of the remarks that I made earlier, which is building. This category is a positive thing because the biggest gating item is points of distribution. So we're optimistic that that will start to open up over time, and then from a production perspective.

We're we're ready to grow we've done a lot of work within our beverage facility and we can grow this business significantly with no additional capex. So we're excited about it and look forward to continued growth.

Thanks, I'll pass it on.

Next question comes from John some barrel with yes.

Thanks, Good morning, I wanted us with the other revenue line I know you don't disclose exact numbers, but can you give some sense of order of magnitude on the three largest business units in that category. It does seem like it's growing quite materially. So it would just be hopefully get a better understanding of of those threeq. Thanks.

Yeah, we sorry, we don't we don't disclose that maybe at some point, we will start to disclose it but for the time being were not.

Okay. Thank you.

Okay.

Next question comes from Glenn Mattson with Ladenburg.

Hi, Thanks for taking the question on the medical side can you just talk about that a little bit first on Canadian you said I think that it was up 7% sequentially I believe it.

In Canada due to hydro older sizes. So curious what drove that like maybe bush stocking up because of pandemic needs is that maybe transitory. So anything on that and then on the international side I realize like might be a little bit hard to forecast in the very short does various countries going additional down and things, but maybe you can give us some detail.

Bill or some color on how you see that.

Competitively as as the markets have.

Fared a little bit thanks.

Yes, I guess, taking can that Canada medical business I mean, it's another strong quarter in Q2.

Matching performance in Q1 and.

And its up 70% over over prior year and look I get at Health, Canada continues to report declines in the medical market.

And.

That count of registrations continues to go down I think there was an extension and auto extension of prescriptions up through.

Certain patients that had.

Subscriptions prescriptions could extend up through December, but look we see growth across.

All the products that we're seeing in the medical channel in Canada.

Vaibs are starting to materialize in the in the category soft sales in oil is continue to grow flowers continues to grow its been a healthy business for us that being said over the next five seven years that business is probably going to moderate as more and more patients convert to the rep channel, but for now it's been a very healthy.

And profitable business with strong gross margins internationally did you want to add something to internationally I'm look we have seen some more competition on the C business I think the first new entrant into the trend Amphenol business case.

Came in Q2, and we know that with the prescription model in Germany that providers are required to provide the lowest cost alternative which is something that we've modeled out over time.

But with the gross margins that we have on C. We've got plenty of opportunity compete and we're we're committed to keeping our number one position.

And then in Q2, we did have a bit of up production disruption really tied to a one off that has already been remediated. So we would expect C to return to growth and then for the flower business in Germany.

Again, there has been a little bit more disruption from COVID-19.

We havent had our sales guys on the street as much over the last few months as theres been a bit of a lockdown.

And we did have a small supply interruption, there as well, but again, we've been very encouraged with the German flower business and the C business over the last year and it was really the beginning of an inflection point about six months ago, when our German flower business really started to grow.

So we still think it's a big growth opportunity for us growing going forward and we think it will be a profitable growth opportunity going forward.

And at this time I will turn the call over to Mr. Cline.

Thank you again, everyone for joining us today as we approach the holiday season, I hope that all of you get to experience, our amazing products, including Martha Stewart CBD gummies in the U.S. and our newly released Cuattro drinks in Canada.

And to our Investor relations team will be available to answer any additional questions throughout the day have a great day everyone.

This concludes cannot be growth second quarter fiscal 2021 financial results conference call. A replay of this conference call will be available until February seven 2021, 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 good bye.

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