Q3 2021 Canopy Growth Corp Earnings Call
With the SEC and SEDAR for various factors that could cause actual results to differ materially from projections.
In addition, reconciliations between any non-GAAP measures.
Furnished on SEC and Canadian Securities regulators.
Please note all financial information is provided and Canadian unless otherwise noted.
Following prepared remarks by David and Mike, We will conduct a question and answer session to ensure that we get to as many questions as possible. We ask analysts to limit themselves to one question with that I'll turn the call over to Steven.
David Please go ahead.
Thank you Judy and good morning, everyone.
Sincerely hope that you and your families remain safe and well and then we can begin to get control of this pandemic.
As I reflect upon my first year as CEO of canopy I am extremely proud of all the accomplishments, we've made and position and canopy to be the leading cannabis focused CPG company in the world.
I started my first earnings call outlining my early insights into our strategy and also mentioned to all of you that this was going to be a transition year.
Now and our fourth quarter were at the end of that transition year and our team has made great progress.
Throughout the transition we had to make difficult decisions to right size, our production footprint and say goodbye to teammates. This was typically a very public process.
But this fiscal year, we also hired almost 500 people and strategic roles to support our growth agenda into FY 'twenty two.
And as we look forward to the prospects of promising cannabis reform and the U S. Under the New administration and Congress I'm more excited than ever about achieving canopies vision of unleashing the power of cannabis to improve People's lives.
Now for the quarter at hand.
During the third quarter, we've continued to execute against our new strategy strengthening our competitive position and our core markets, improving our execution and accelerating our path to profitability.
There are four key themes that Mike and I will focus on this morning.
First we're building strong momentum and establishing a track record of winning and our core markets.
Second we're seeing tangible improvements in both our commercial and supply chain execution.
Third we are further accelerating our U S growth strategy as we expect significant cannabis reform during this Congress and.
And finally, we are firmly on a path to profitability.
So let's tie these things together and delve deeper into our performance and strategy.
First we further strengthen our competitive positioning and our Canadian recreational business our.
Our overall share is up 30 basis points to 15, 7% and Q3 versus Q2, and we've regained the number one market share position in the Canadian Rec market during Q3 based on our proprietary market share tracker.
This is led by our share and flower improving 180 basis points to 19, 2% and Q3, driven by continued strength and our value flower brand TWD.
Our beverages achieved over 34% market share and Q3, even as new beverage brands have entered the marketplace. We've retained the top three brands and our beverages are commanding higher velocity versus competitive set on a per SKU basis quite.
Quadro CBD beverages were launched during Q3 and the brand has already become the number one ready to drink CBD beverage brand.
Second our U S. CBD business is gaining momentum on the back of highly successful Martha Stewart and CBD product launches.
Martha Stewart branded CBD products have experienced strong consumer demand to date with Martha media appearances generating lots of brand awareness despite the crowded space.
And just four months since launch Martha Stewart and CBD products have already exceeded the annual sales of over 94% of all CBD brands sold in the U S.
And based upon the current run rate Martha would rank among the top 3% of all CBD brands.
Our consumer research shows that one third of Martha Gummy purchases were first time, CBD consumers', indicating that we are already achieving our ambition with Martha to bring new consumers into the category.
And the Martha Stewart and CBD collection is now sold and over 580 vitamin shop locations across the U S and we're focused on further expanding distribution into other brick and mortar locations.
We recently expanded the Martha Stewart product line to include Pet CBD products, which are now available on our shop canopy Dot com website as well as our E commerce partner sites.
The launch of Martha CBD pet products resulted in a record breaking day of press coverage, earning over 1 billion media impressions.
And just last week, we launched surety pro our new line of science backed CBD products for dogs formulated to deliver the most CBD per body weight on the market.
Both Martha and surety pro products are based on the industry, leading research conducted by canopy animal health.
However, surety protects a more customized approach to support the individual needs and health of each pet and is targeting pet specialty stores and the veterinary channel.
Surety pro has offered and more sizes and formulations to offer precise controlled and convenient delivery of the recommended CBD amount and contains additional ingredients to further support <unk> needs.
And finally, our CPG brands Bayou steel this works and stores and vehicle continue to build momentum.
<unk> ready to drink sports beverages are beginning to hit the retail shelves in the U S and the team has secured agreements with several large national chain accounts.
This works had a strong quarter driven by Amazon UK and U S expansion with our E commerce business doubling in Q3.
We launched this work stress check collection with hand care products and the U S. Late in Q3, and we're now focused on launching a broader range of our strict stress check products in the U S and the U K.
Stores and vehicle growth continues to be driven by strong consumer pull and the U S.
We're seeing sales to our distributors as well as our direct to consumer E Commerce channel continuing to grow and.
And December stores and vehicle celebrated the 20th anniversary of the volcano launching and ultra exclusive 100 unit release of the 24 Karat Gold signature edition volcano, and releasing a documentary and Rolling Stone magazine.
Let's now turn to improvements, we're seeing and our quality and execution.
First I'd like to highlight progress on our flower quality improvement program.
Over the past several months, we undertook our largest ever cannabis consumer study to dig into what drives satisfaction quality and willingness to pay for flower consumers.
This was done through first conducting a number of qualitative in-depth interviews with focus groups, which would followed up with a quantitative survey of 2500 consumers across Canada to.
To highlight a few key learnings.
When asked about their ideal experience with flower and.
Consumers claim the THC content effects price and flower quality as the most important contributors to their satisfaction with their flower.
What's interesting however is that when we dig deeper and Theres a whole list of attributes that knowingly or unknowingly drive overall satisfaction.
Great aroma and taste, whether the flowers and trim.
Effects that starts when expected or last as long as expected and.
In other words, it's not just about THC level or price. It's the overall consumer experience, starting with a positive and easy shopping experience than going into the consumption experience from opening and the product seeing fresh aromatic budd than ensuring great taste and smells while smoking.
And delivering the effects they were promised.
By delighting from beginning to end.
And our intent is that our brands deliver satisfaction every time.
And we've taken all of these insights to create a roadmap of our future product renovation and innovation pipeline.
And our design to value approach ensures that we are being purposeful and adding features and benefits that consumers are willing to pay up for that will drive premium position of our.
Flower portfolio overtime.
Elements of this work are already being incorporated in our product offerings.
For example, we shifted to using genetic strain names on tweet products with four new Skus and Quebec.
And where we saw initial success in December.
And we will have a number of new products across our premium mainstream and value flower segments entering the market over the coming months.
At the same time, our commercial and operational execution continues to improve.
Our fill rates have improved materially over the past year, reaching 98% and Q3 of fiscal 'twenty one.
We've accomplished this through a combination of better demand forecasting and supply management and I would like to thank our commercial and operations teams for all of their hard work over the past year.
Our commercial team has done an amazing job standing up joined integrated business planning processes with our provincial customers.
Through joint demand planning routines that align forecasts leveraging data and category management insights our demand forecasting has proved significantly.
On the supply side, our Canadian operations teams have made tremendous progress and fulfilling our customer orders and a timely manner.
One of the key enablers has been implementing a flexible workforce model that together with cross functional training provides for more agile and efficient operations as well as reduce costs.
As another testament to our progress the new operating models help canopy achieved 99% fill rates with our largest customer the Ontario cannabis store or Ocs during December of 2020.
We believe our ability to consistently deliver quality supply will be a key competitive advantage for canopy going forward.
Next I'd like to spend a few minutes on how we see the U S landscape progressing and how we are accelerating our U S growth strategy.
With the Democrats and now controlling the Whitehouse and both chambers of Commerce Congress, we expect significant cannabis reform to take place during this Congress.
Democratic control of the White House Senate and house creates a unique window of opportunity for advanced and cannabis reform through executive action and legislation.
Just last week, we saw the announcement from Senator Schumer widened and Booker that the Senate is committed to introducing and passing powerful cannabis reform legislation.
We anticipate that this legislation will include comprehensive reform to ensure restorative justice <unk>.
<unk> public health and implement responsible taxation, while ending cannabis prohibition.
We believe that this legislative package or a combination of reform measures could.
Could allow canopy to enter the U S THC market during calendar 2021.
Our government relations team is working very closely with key members of Congress to pave the way for cannabis reform that addresses both the much needed social Justice reform and provides a boost to the post pandemic economy by creating jobs and generating tax revenues.
In addition, it was announced yesterday that canopy is a founding member of the newly formed United States cannabis counsel or UCC.
The U S SEC.
This is an important milestone for the industry as the overwhelming feedback we heard and our conversations with elected officials and regulatory bodies is how disjointed and fragmented the industry currently is and its advocacy efforts.
FCC will provide one United voice, creating alignment across the nations top cannabis operators as well as cannabis organizations and we will address important issues such as regulations access for veterans diversity, and inclusion decriminalization and expunged ment of non violent cannabis records.
Sustainability and many other key topics important to canopy and others and our industry.
As we anticipate cannabis reform to gain momentum in the coming months. We're also accelerating our efforts to lay the foundation to win and the U S. THC market once it's permissible.
Canopy already has and efficient pathway to the U S through our acreage arrangement.
I am pleased with the new leadership now in place at acreage with CEO, Peter <unk>, and bringing a strong background of a success and CPG and healthcare industries.
Acreages renewed strategic focus combined with an attractive footprint positions the company well to deliver strong top and bottom line performance in the coming quarters.
It's cannabis intent to utilize our arrangement with acreage to assume a controlling position immediately upon federal permissibility.
In addition, pending closing of the announced plan of arrangement with canopy rivers are conditional steak and tariffs and will increase to approximately 20%, which provides additional optionality to strengthen our U S businesses.
We've also been investing and our U S infrastructure to set up the U S organization, including our manufacturing footprint.
Let's now turn to our medium term targets, including our expectations to achieve positive adjusted EBITDA during the second half of upcoming fiscal year 'twenty two.
Nick will walk you through the details, but I want to highlight a few points.
First the cannabis industry is a growth industry and I firmly believe that we will deliver superior top line growth over the next few years.
Second our cost saving program is well underway and I am confident we can achieve savings of $150 million to $200 million over the next 12 to 18 months.
Third, we'll continue to invest and consumer insights and R&D, which we believe will be key to creating a differentiated product portfolio that delights, our consumers and commands superior margins overtime.
Lastly, our medium term targets do not assume our entry into the U S THC market, which could provide further upside.
At this point I'll turn it over to Mike to review, our Q3 financial results and provide details around our financial targets.
Great. Thank you David and good morning, everyone.
I am pleased with our Q3 performance, which again demonstrated that we are building a track record of solid revenue growth.
Profit improvement and reduce cash burn.
To further highlight our results we generated a record quarter of revenue at $153 million.
Gross margin improved versus last quarter.
Our adjusted EBITDA and loss narrowed to $68 million and free cash flow narrowed to an outflow of $135 million.
Now, let's first cover Q3 results in detail and then ill discuss our financial targets starting with net revenue.
We generated $153 million of net revenue or 23% growth year over year, and an increase of 13% over the previous quarter.
Total Canadian recreational net revenue increased 9% versus the prior year.
Recreational <unk> net sales were flat versus year ago, but increased by 2% relative to Q2, driven by several factors such as store openings, particularly in Ontario and <unk>.
Share gains led by our flower products and.
And two <unk> products, which delivered 9% of gross revenue and Q3.
And these growth drivers were partially offset by a negative mix shift towards large pack size offerings, and our flour business, which was relatively undeveloped last year, so to better illustrate what's happening within flower and it's best for US day exam and Q3 relative to Q2 to further understand the price volume and mix impacts.
Within our flower portfolio.
Starting with volume we grew BTB rec flower gross revenue by 15% during the quarter with volume increases and nearly all of our package sizes with the exception of five Gram and 15 Gram which decreased slightly.
Across these packages average price decreased approximately 1% some of which was driven by Geo mix as more of our revenue came from Ontario, which has a lower average price and their average province.
Conversely size mix improved by 1% as the growth and our three five Gram and seven Gram packages grew faster than our 28 Gram package further highlighting mixed management is a critical lever and our business.
In summary, our flower price mix analysis suggests that the market is showing signs of stabilization.
Let me now provide additional market share metrics based on our internal share tracker.
Our recreational market share increased to 15, 7% during Q3 up 30 basis points versus Q2, and this includes market share improvements of 60 basis points, and Alberta, and 120 basis points and British Columbia.
Market share and Ontario decreased 80 basis points and the quarter, but we've seen a rebound in January where our share increased by 150 basis points and we now have the number two market share position for the month of January which we're very proud of.
Our share of the Canadian flower market increased to 19, 1% up 180 basis points versus last quarter and finally, our share of the Canadian beverage market was 34% and Q3.
And notably the total beverage category sales grew by over 25% during the quarter and now accounts for nearly 2% of total cannabis sales based on our market data.
Rec BDC sales increased 33% with same store sales.
Growing 26% versus Q3 of last year, and we note that BDC sales are a better reflection of demand trend as the <unk> sales that we report can be impacted by the provincial boards ordering patterns inventory levels and timing of new product launches.
Turning to medical our global medical net revenue increased 10% over the prior year period as increases and Canadian medical and <unk> were partially offset by a decline and German flower compared to last year.
Summarizing our global cannabis business canopy generated net revenue of $99 million.
Or 9% growth over the prior year.
Our strategic businesses also continued to perform well delivering 61% growth versus prior year.
Storz <unk> Bickel revenue grew 52% year over year benefiting from more effective distribution and the U S and strong consumer pool.
This works sales increased 32% compared to last year due to continued growth and E commerce and sales of distressed check hand, sanitizer launched and the U K and the U S.
And <unk> deal saw strong sales growth over the prior year due to expanded distribution and U S and we note that over half of biodiesel sales during the quarter came from the U S.
With this let's move on to gross margin for the quarter.
Reported gross margin, including restructuring and other related charges was 16%.
Adjusted gross margin, which excludes restructuring and other charges was 26% and Q3, representing an improvement of 700 basis points from 19% and Q2.
And relative to Q2, our gross margin improvements driven by improved revenues, resulting in better asset utilization, while cost savings initiatives had limited impact in Q3 as most of our initiatives started in December.
Next I would like to briefly cover operating expenses.
Overall, SG&A decreased 15% versus the prior year, driven by a 15% reduction and sales and marketing a 23% reduction in G&A and a 33% reduction and R&D and these decreases are a direct result of the improved cost discipline, we've instituted across the business.
As well as our new strategy and new Org design coming to life.
And with these cost reductions are head count decreased by 29% over the last 12 months, even as we hire new employees to strengthen our capabilities and key areas of the business.
Next I would like to cover free cash flow on.
Free cash flow and the third quarter was an outflow of 135 million, which represents an improvement over of over 62% versus the prior year, our working capital decreased year over year due to reduced inventory levels and capex declined to $48 million, which is down 72% from Q3 of <unk>.
Last year and over 47% from the prior quarter.
I would now like to provide some details around our reported net loss of $829 million.
First included and our net loss is the previously announced restructuring charge related to our end to end supply chain review and as a reminder, over 85% of the charge was noncash.
Second our net loss includes expenses reflected and the other income and expense section of our income statement and several of these charges are tied to noncash fair value adjustments related to our various financial instruments. Most of which are the result of the rise and canopy share price.
During Q3.
And the main drivers include fair value adjustments for our convertible debt.
The acreage instruments, and the constellation and B warrants.
Partially offsetting these losses as a sizeable gain on the tariffs and investments which have appreciated in value since Q2.
Now I would like to speak to our path to profitability and our medium term financial targets that we communicated today and.
The key targets that we intend to deliver and include the following.
Delivering 40% to 50% compounded annual revenue growth during the next three fiscal years, ending fiscal 2000 and for it.
<unk> positive adjusted EBITDA during the second half of fiscal 'twenty two.
Achieving a 20% adjusted EBITDA margin and FY 'twenty four.
Generating positive operating cash flow and FY 'twenty three.
And finally generating positive free cash flow and FY 'twenty four.
And before we delve into these specific targets I would like to provide some context for the drivers of canopies current EBITDA loss and FY 'twenty one.
Year to date, our adjusted EBITDA is a loss of $246 million.
And the key drivers of this loss or and this follows.
First we are investing in R&D, which is core to our strategy of building a differentiated portfolio that will position US ahead of our competitors and our R&D expenses of $55 million is greater than the combined R&D spend of the top five Canadian Lps.
Second, we're investing and building our U S infrastructure, which continues to be one of our top core markets and a key strategic priority and.
And third our Canadian operations were built to support significantly higher revenue, which we believe will be realized as Ontario, and other jurisdictions complete their retail build out but in the short term. This is obviously served as a sub optimal cost structure with high fixed costs.
So with this is and that backdrop, we intend to achieve these financial objectives through consistent topline growth.
Margin expansion and SG&A efficiencies, while continuing to invest and product innovation research and consumer insights.
First on top line growth, we expect 40% to 50% compounded annual sales growth between fiscal 'twenty, two and fiscal 'twenty four driven by the following.
Approximately 40% growth and the overall Canadian Rec market and FY 'twenty two from a continued increase in retail store openings.
We also estimate 25% to 35% compounded annual growth from the Canadian Rec market between FY 'twenty, two and FY 'twenty four.
Our Canadian Rec sales growth is expected to be driven by the growth of the overall market.
And market share gains.
We expect to grow our Canadian medical sales through market share gains and a stable to declining Canadian medical market.
Growth of our international medical business is expected to be driven mostly by the growth of the German medical market.
We expect to see growing sales contribution from our U S. CBD focused brands driven by distribution expansion and new products.
And growth from our strategic business units.
So steel storz <unk> Bickel and this works will be driven by distribution expansion and product innovation.
The second driver to our path to profitability as market margin expansion and SG&A efficiencies driven by our cost savings program that is underway and we expect to achieve cost savings of $150 million to $200 million over the next 12 to 18 months with the majority coming through and FY 'twenty two.
On cost of goods sold we are targeting savings of $100 million to $120 million from four main areas.
Network optimization, including Canadian facility closures that we announced in December will result in annual savings of $50 million to $60 million.
SKU and cultivar rationalization, which will unlock efficiencies across our operations and deliver savings of approximately $15 million.
Organizational changes, which will further optimize our operating model to be more focused on and to end productivity will generate savings of $15 million.
And finally, we expect $20 million to $30 million from logistics optimization and other supply chain initiatives.
We also expect to generate SG&A savings of around $50 million to $80 million.
And this includes <unk>.
Our organization will design efficiencies and other related savings of $20 million to $30 million.
Indirect procurement savings of $10 million to $20 million.
Office space and facility optimization of $10 million to $20 million.
And savings of $10 million from our planned divestiture of canopy rivers.
I'd like to emphasize that implementation of a number of these work streams is already well underway and from a gross margin cadence perspective, we expect Q4 gross margins to be and the high Twenty's.
Further we expect gross margins to gradually improve during the course of FY 'twenty two with the full year FY 'twenty to gross margin.
Approximately 40%.
So with the combination of strong top line growth lower cost of goods sold and operating expense reductions, we expect canopy to achieve positive adjusted EBITDA. During the second half of FY 'twenty, two and 20% adjusted EBITDA margin by FY 'twenty four.
Finally, we expect further moderation of our negative free cash flow through a disciplined capital allocation, we expect capex to below be below $200 million and FY 'twenty, one and FY 'twenty two.
And beginning in FY 'twenty, three our capex becomes mostly maintenance capital and for modeling purposes, we're assuming 5% to 6% of net sales and.
A key priority for canopy is maintaining balance sheet flexibility and with $1 6 billion of cash and short term investments at the end of Q3, we believe we have a strong foundation.
We're also continuing to assess various financing options to further enhance our financial flexibility to take advantage of potential opportunities and our core markets.
Before I close I would like to offer acute and a few key factors to consider as it relates to our Q4 outlook.
First from a net revenue perspective.
We expect our Canadian Rec business to continue to benefit from additional store openings on the Ontario, and our improved order attainment.
We expect modest headwinds from renewed COVID-19 restrictions, particularly and our owned retail businesses as well as provincial boards and retailers looking to carry fewer weeks of inventory.
Second our strategic businesses should continue to benefit from expanded distribution and strong consumer demand and the U S.
Third we are continuing to monitor the global COVID-19, pandemic and the extension of Lockdown measures and Germany is likely to provide a continued headwind and our international medical business.
And lastly, as I highlighted earlier, we expect gross margin to continue to improve and coming quarters with Q4 gross margins likely approaching the high <unk>.
In conclusion, we are executing against our cost savings program with several initiatives already underway to capture savings quickly and we believe the foundation is in place to accelerate our top and bottom line growth and achieve profitability. During the second half of next fiscal with further improvement anticipated.
<unk> and the out years.
This concludes my prepared comments, operator, David and I will be happy to take questions from analysts.
And.
Yes.
Okay.
Okay.
Okay.
Okay.
To ask a question. Please press star one on your telephone keypad and the first question is from John <unk> of CIBC. Please go ahead. Your line is open.
Thanks, and good morning.
I just wanted to get a bit more clarity on what you view as necessary to be able to operate without restrictions and U S. Phd and presumably candidates has to be removed from non controlled substances access David you'd referenced and in an interview recently that made you revise call memo combined with safe banking and executive action would put you in a position to operate and USD.
Phd and 21 and it seems like you're reiterating that today it doesn't seem like that's a bit more optimistic view than some of your peers. So just would like to get a bit more color here and ultimately ended up the canopy to interpret what is and isn't considered federal permissibility or is their input from constellation and then and the exchanges just anything else.
Incremental there would be helpful. Thank you.
Yes, so John Good question, we're working literally daily with constellation with our government relations team with.
With with our.
Our partners at the exchanges and banks rates and to work our way through this because I think the.
<unk>.
The.
The important thing will be if it's not on.
And.
And if it's not in the form of.
And of some variant of legislation such as the book or widen.
Schumer work.
And it comes and we were to hit the place where we had some executive action in terms of.
And our regulatory change it would really be dependent upon the wording in and a lot of the regulatory documents right. So so we're working very closely with our lawyers and with our partners to make sure that we are very careful and how we proceed here, but we remain pretty bullish on.
Our ability to to be able to step into the U S. At the right time I also want to point out two things really.
One is we're not just sitting around waiting for U S. Permissibility youre seeing a lot of.
And good progress being made at acreage a lot of good activity going on at.
Tariffs and and we're continuing to build our route to market and production capabilities around our CBD business, which will be helpful Post permissibility.
So I think theres good action going on today I think there is we're going to watch very carefully what happens from an executive and regulatory action fronts and make sure that.
And that if we actually meet the hurdles that make our teams comfortable that we then proceed.
And clearly we'll be quite supportive of the work that.
And the Senate and the house are doing to push legislation forward.
I'd also like to point out that in our.
Arrangement with acreage.
And that a triggering event as defined as straight up legalization and the U S or at the discretion of canopy right. So we have a little bit of flexibility. There. We're just going to we're going to be very careful that we that we don't violate any laws as we move forward.
Okay. That's great I appreciate the color. Thank you.
Your next question comes from Vivien <unk> of Cowen. Please go ahead. Your line is open.
And good morning.
David.
Good morning.
David.
And for you and I go.
Bob.
Alcohol and and you work it constantly and I've always need to be appropriately conservative and operating external guidance.
Proceed on your entry into the Canadian cannabis.
And the Staples and have a great track record on that side. So I was just hoping you could offer some color on how you thought about and betting conservatism entities financial target and we're on.
Thank you kind of expressed that most appropriately either from a geographic growth perspective. Thanks.
Yes, good question and one of the one of the things that I talk to the leadership team and canopy about is we need to we need to develop a little bit of credibility because it's somewhat lacking in the space at least it was a year ago.
So we've tried this year to ensure that we deliver.
As as expected as we've gone through the year and we've done an okay job of that there is a lot more volatility and cannabis than there is in a large alcohol company, but.
I think we've done a nice job of staying on track as it relates to our.
FY 'twenty, one being a transition year and so forth and so as we've looked forward.
We we we very carefully vetted, where we see the Canadian market going and.
We know that Theres significant growth just from the channel shift and the Canadian market and so our first assumption was that we would.
And hold share as that market grew but then gain share as we continue to execute well and I'm happy to say that those things are happening like we're seeing the legal market grow.
On an increasing pace in Canada, and we're seeing our execution from a sales execution and our operational execution standpoint deliver.
<unk> deliver up to the expectations of our provincial and retail partner so.
And Canada.
<unk>.
Well the targets are and easy to achieve we see a very clear path to achieving the Canadian targets.
The next area really is the United States and.
And the U S.
We brought the Martha Stewart and CBD brand to the market in early September and we wanted to demonstrate that we could actually bring consumer preferred CPG like brands to market and breakthrough and really proud of the performance of the Martha Stewart branded products and as we've said we are.
<unk>.
And we believe Martha is one of the top selling brands and the CBD space and and edible space and particular in the U S.
I will say that while.
While we are getting better and better each week literally on data collection, and Canada data collection and the U S is still a little a little sparse.
But we think that we have a good path to growing a very solid CBD business in the U S. And we were kind of extrapolating, our current trends into future product offerings and ultimately our sales targets.
The other area in the U S that we're seeing really strong growth is.
Through stores and vehicle as distribution has grown for stores and vehicle and.
I personally believe it's the best device on the planet and we are.
And we get that response from consumers all the time and it also happens to be not super well known and so we're working on that and a typical CPG fashion.
Expose people to this really well constructed high performing brand.
And then the last area in the U S that we're looking for for growth is and our biofuel business.
With with access to constellation Brands' Gold network, which is their beer distribution network, we see tremendous upside too.
And <unk> steel beginning in FY 'twenty, two quite honestly and factor.
Our products are beginning to be a.
Available at retail literally as we speak in terms of the ready to drink hydration products. So.
I think we were reasonably conservative and literally we built out our forecasts.
Almost on a.
Ah.
ACB basis, taking into account velocity, so points of distribution and velocity.
And then we're assuming we continue to grow along with the German medical market.
And so.
A lot of moving parts Vivien, but we feel that we've got our arms around enough of the detail to have.
High degree of comfort and being able to put these numbers out.
And we've been working on this for a while right, but we held off a little bit putting these numbers out because we wanted to see.
How long we would be affected by Covid and what those impacts would be and so yet maybe took a little longer than everyone would like for us to come out with this with this kind of.
Future estimates of where we'll be but we know we feel real confident Mike I'd ask you to dive and as well, yes, just to build on that and when you go beyond the top line and look at the guidance around cost structure. This too has been a long standing body of work for most of calendar 'twenty starting.
With the NDA and supply chain review that we announced last spring, but even delving into.
Each function across the organization to really make sure that every function was aligned to our overall strategy and making sure that we were achieving best in class benchmarks in terms of cost structure, making sure that we had good spans and layers and place making sure that we've got the right bands and.
And place across the organization. So we have been retooling the organization behind the scenes for a better part of seven to eight months, we haven't talked a lot about it publicly other than announcing some of our restructuring, but the work has been done and that gives us the confidence on the cost structure side of things now all of that being said there.
And some risks out there and this is why we were pretty broad on our direction around the topline and providing a three year CAGR because some years are going to be stronger than others. We do have a high fixed cost structure. So our margins are somewhat sensitive to changes in volume, but we do believe that we've built this with a bottoms up approach approach.
Is a balance point of view that gives us the confidence that we can deliver on these so.
More to come but we feel like we're definitely headed and the right direction and.
I would also emphasize that we're going to grow into this that and Q1 Q2 of next year, we're likely to continue to see EBITDA losses, as we scale up the business and when you think about breakeven points that $250 million revenue per quarter starts to be that magical number where we start to get a cross the breakeven point from an EBA.
<unk> perspective, so with that scale is going to continue to be really important.
Okay.
Your next question is from Bryan Spillane from Bank of America. Please go ahead. Your line is open hey, good morning, everyone.
Maybe just.
A question.
About the medium term goals and maybe just two things it was interested and one is just.
On the product mix that you were assuming so do beverages, how do you see the mix evolving with beverages and rec two <unk> products versus.
And maybe David if you could just.
Give us some perspective.
And on where we stand now and beverages in terms of.
Market penetration.
Trial repeat like you mentioned with Martha is it bringing new consumers and just just an update there as well it would be helpful.
Yes.
Yes, when we think about how the product mix is going to evolve over the next 12 to 18 months still going to be a very dominated flower pre roll business.
We're modeling at around 79%, 80% in terms of overall flower pre roll mix.
Vape, we have modeled in at high single digits again. This is our product mix projections beverages, and edibles again, continuing to grow but on beverages, a little bit muted and that until consumption lounges and consumption occasions open up we're largely governed by the points of distribution.
Abuse and that exist through the dispensaries.
And look the the flower and pre rolled business is still going to be a big part of the business for the next year to 18 months and hence we're really focused on driving share and driving quality, making sure we're cost competitive, but also making sure that we're competitive and the market in terms of retail prices, because it's going to continue to be important and.
Is just foundational to our overall Canadian business.
Yes.
And on drinks, Brian in terms of performance in Canada. There are a couple of things that are holding us back one is.
And the equivalency rules, which limit the quantity that someone can take away from our retail store, but even with that we think that.
We're.
Because.
Were limited and the amount and individual can take away.
And that.
We're not getting into new consumers the way, we would like we think that.
Over the next several months, we'll see movement in that regard in terms of equivalent and see where people will be able to purchase maybe up to 2004 cans of a beverage and we think that will help us when we start talking about bringing in new consumers into the space that set our brands are still sitting even with a lot of competition coming into the space we have.
The top three brands.
In the marketplace and our drinks are commanding higher velocity per SKU and then the competitive set.
And we feel good about what we're offering.
We think that the near term unlock will be a change and the equivalency rules and Canada.
And.
Your next question comes from the line of Jimmy <unk> with BMO capital markets.
Please proceed with your question.
Good morning, Thanks for the question.
I wanted to ask on the medium term targets.
How did you or did you factor in price compression, particularly on the flower segment and Canada within.
And 40% gross margin.
In fiscal 'twenty, two and all the figures you provided on board.
Subsequent to that and I'm just wondering if you can help on.
And when you did growth.
Projections and aligned that day.
Target well level.
Level on market share in Canada, and what level of expansion and that market share and thank you all of you.
For you to achieve in order to help you book.
Thanks, Tammy I'll take this one.
Price price mix is something that we're looking at almost on a monthly basis as we get our data and.
And it's been quite interesting over the last three to four months because the flower pricing has started to stabilize.
As I mentioned in my remarks.
We've seen 1% to 2% price compression across most of our price categories. Looking at Q3 versus Q2 mix continues to be opportunity for us with some of the smaller sized packages like the three five gram and the medium size seven gram.
But 28 Gram overall pricing Hasnt moved a lot and the last several months.
Our math says around 1% so when we looked at our algorithm for next year, we wanted to be conservative. So that we built and algorithm that gave us confidence and being able to achieve not just the top line, but also the margin because as you guys know excise taxes and things like that can be somewhat regressive and the category. So we've built in.
And high single digit price compression across the market.
And.
We think thats, a safe assumption some of that might be and vape, because vale continues to reset a little bit.
As many are tracking but from a flower perspective Tammy.
It's stabilized I don't think we're out of the woods, yet, but it has stabilized in terms of market share.
And we haven't made any aggressive assumptions on on share, it's assuming flat share with some improvements on.
Tactically across certain categories like on vape, where we're under indexed relative to where we'd like to be but we're not making aggressive market share assumptions across the board.
And maybe one thing that I would add and maybe this is circling back a little bit to Brian's question. One of the things that we're continuing to do in and out.
Our projections is to build and continued investment around.
Innovation.
And R&D activities, because we think that it is a big unlock for US we have what we believe is the best in industry science capabilities and some of the NPD the cannabis two.
2.0 products and maybe arguably the cannabis three point on products that we have and the pipeline are pretty exciting and while we didn't build in.
Upside as a result of the output of this work we fully expect that it will provide maybe a little bit of.
Buffer for the projections that we've put out there.
And Tammy just to clarify that high single digit price compression is reflected in our margin goals as well so we've already factored that and as part of our cost agenda.
Your next question comes from the line of Pablo <unk>.
With Cantor Fitzgerald. Please proceed with your question.
Thank you David just going back to the U S. I. Appreciate your conviction that you would be able to sales kind of at least and the U S and.
Before year end.
If that's the case and looking at the context of the Canadian stocks and generally FIFA actually outperformed the U S dogs.
Why not look other deals right now with other day missiles right because for sure. We would say wait to take control of acreage at year end and then use that on acquisition vehicle, but by then.
And what ratios would even be higher for the U S stocks of course right.
So just.
That's the question and the only thing on without also maybe a reminder, why acreage on Thursday and have the right.
You know assets for you and the U S.
Instead on San Antonio and 20% stake you have Jason while doing business with Bruce Linton our gauge cannabis.
So Peter with retrenchment mode. So just some color there and it would help thank you yes. So some good points there Pablo so I think.
As it relates to the U S.
We think that acreage has put itself on a really strong path, especially with its concentration on the northeast if we think that we have.
Permissibility or legalization actually in New York State, a massive market likely and our view Beall will be only second to California over time, and so we like that positioning there and as I.
And my prepared remarks, we like Peter called any we think is a really strong operator.
And so.
We don't rule out.
We don't rule out acreage actually looking at other potential acquisitions and the U S to expand their footprint.
And as it relates to tariffs and we think that's just a really well run business and we're highly respectful of what Jason Wild and Jason Ackerman have been able to do and that business and we think that those businesses in and of themselves.
Create a lot of value for us at some point down the road and the interim.
We're somewhat limited in what we can do and the U S. But that doesn't mean, we're not doing things like building out our routes to market building our production infrastructure.
And keeping keeping our eye very closely on the market developing products specifically for.
North American consumers that will test out and Canada and be able to bring to the U S. So we feel like we have a lot of good things going on and that will unlock value for our shareholders. Even if we can't be in the plant and touching business. During this calendar year, but if we can we think of.
Super exciting position again.
Your next question comes from the line of Doug Anmuth.
And with RBC capital markets.
Please proceed with your question.
Thank you and good morning.
First question again, it has to do with the U S. And then in the event you have the ability to launch on the THC front can you maybe walk us through your capabilities and in terms of getting product to the market and expected demand would be.
And significant and we saw the issues in Canada, what Theyre on the launch I know, it's different because of the msos, but alcohol.
Perhaps you could go into the detail there.
Yes, so again I think our ability to quickly enter the U S comes as a result of the arrangement, we have with acreage and so.
Immediately upon Permissibility, we would trigger our rights to purchase 70% of acreage.
We would then be able to deploy our balance sheet and our knowhow to help them.
Rapidly take advantage of the U S market.
And look I think there's a nuance here when we start looking at the ability to compete in the U S.
Early on and Canada, we learned that.
Just being on the shelf was enough right and that kind of carried a lot of Lps for the first year and I see a little bit of that happening and in the U S. Ultimately and my view of the game is going to be won by whoever produces the best experiences for the end consumer and thats going to be using all of the kind of CPG bag of tricks if you will.
Like having a really robust supply chain that includes Interstate commerce by the way that has strong routes to market that has experience.
Innovating and understanding the consumer and building brands and we think that.
And canopy with our capabilities combined with.
And with our partners and the U S.
Bind with the capabilities that.
Our beverage alcohol behemoth like.
Like like constellation has we.
Think that creates a powerful.
And.
A powerful competitor and that U S marketplace upon permissibility.
Okay.
This concludes our question and answer session for today and I'll turn the call back to the presenters for any closing remarks.
Yeah. Thanks, Thanks, again for joining us today.
Despite the challenges faced over the past year, our business transformation is on track, our new strategies and place our organizational changes complete and our operational cost savings program is now underway.
Our products are winning consumer mind share and I hope all of you get to experience our amazing products for those and the U S Center, Martha Stewart CBD Gummies sampler to your loved ones and our give your peso.
And <unk> surety pro CBD pet products for those and Canada pick up our newly released CWT TWD Strawberry Gummies and everyone should checkout, our Bayou steel ready to drink drinks when you see them and your local store.
Thanks, again for your interest and canopy or Investor relations team will be available to answer any additional questions have a great day.
And this concludes canopy growth third quarter fiscal 2021 financial results conference call.
Play out this conference call will be available until May 10, 2021, and can be accessed following the instructions provided on the company's press release issued earlier today.
Thank you for attending today's call and enjoy the rest of your day.
Goodbye.
[music].