Q4 2021 Canopy Growth Corp Earnings Call
[music].
Good morning, My name is Marianna and I will be your conference operator today I would like to welcome you to canopy growth fourth quarter and fiscal year 'twenty 'twenty 1 financial results conference call. At 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.
Thank you Mariano and good morning, everyone. Thank you all for joining us today on our call today, we have canopy CEO, David Klein and our CFO Mike Lee.
Before financial markets opened today canopy issued a press release announcing our financial results for our fourth quarter and fiscal year ended March 31.2021.
This news release is available on our website under the investors tab and will be followed on our Edgar and SEDAR profiles.
We have also posted a supplemental earnings presentation on our website.
Before we begin I would like to remind you that our the question. During this call will include forward looking statements that are based on management's current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward looking statements included at the end of this morning's news release.
Please review today's earnings release, and canopy reports filed 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 to their closest reported GAAP measures are included in the earnings release.
Please note that all financial information is provided in Canadian dollars unless otherwise noted.
Following prepared remarks by David and Mike We will conduct the question answer session.
To ensure that we get to questions from as many analysts as possible. We ask the analysts to limit themselves to 1 question with that I'll turn the call over to David Lowe. Please go ahead.
Thank you Judy and good morning, everyone I'd like to begin today's call, reflecting on our past fiscal year, including our fourth quarter performance.
Then I'll provide some thoughts on the continued progress canopy is making against our business transformation and share with you why we are confident about how canopy is positioned to lead this dynamic industry.
Mike will then discuss our quarterly and annual performance in more detail on offer some perspectives on our outlook.
However, before we get underway. This morning, it's important we take a moment to reflect on the news coming out of Canada. This past week and indigenous community uncovered the remains of 215 children on the grounds of the former residential school in Kamloops British Columbia.
This discovery is the Sobering reminder of the atrocities indigenous communities were subject to in Canada with thousands of children removed from their families centre schools never never to return again to their communities. Our thoughts are with those who are affected by this tragic discovery.
Turning to the business at hand fiscal 'twenty, 1 was a year of transition for canopy.
Over the course of the year significant work was done to right size and rewire the organization.
Through a series of strategic actions, we've built the more efficient and focused organization.
Our full year results showcase the tremendous progress we've made as we not only had to contend with our own transformation, but do so while also navigating the global pandemic.
We delivered 37% growth in net revenue in fiscal 'twenty, 1 versus fiscal 'twenty with double digit growth seen across all of our businesses.
Our adjusted EBITDA losses of narrowed significantly compared to fiscal 'twenty.
And we significantly reduced our cash burn as we became much more disciplined and selective in where we invest.
Despite the challenging industry backdrop in Canada. During Q4 canopy increased net revenue by 38% versus a year ago with our Canadian recreational cannabis business outperforming many of the Canadian Lps, who have reported thus far.
I am proud of all of that we've accomplished over the past year, but we are not done.
At canopy, we're on a mission to unleash the power of cannabis to improve lives.
In order to support the submission and to capitalize on the industry's immense growth potential for the next decade, we have built an organization with a strong foundation for the journey ahead of us.
Our organization has been developed to put the consumer at the heart of everything we do we leverage best in class insights to guide our innovation, creating authentic brands and high quality products, which will be widely distributed across all channels at the right price.
This allows us to produce at the scale and efficiency, which will ultimately lead to strong margins, which then can be reinvested to drive further momentum in our business.
This is what we at canopy referred to as our flywheel effect as our flywheel gains momentum it leads to stronger topline growth improve profitability and positions us for long term success.
And all of this will be done with our commitment to build our business for good to invest in communities to build economic opportunity and to deliver social justice reforms.
We're also stepping up our commitment to diversity equity and equity and inclusion or day, Eni and recently hired a VP of the Eni.
The Eni as the top priority for us and we're taking accountability by creating equity in our talent processes and encouraging an inclusive environment for all traditionally marginalized group groups.
Now, let me discuss the progress, we're making against our strategic priorities to become a stronger leaner company, that's well positioned for success.
We're building momentum across all of our product lines, and our recently announced acquisitions in Canada further enhance our competitive positioning and strengthen our product portfolio.
The <unk> Valley acquisition.
1 of Ontario's, leading premium cannabis brands with a loyal following of millennial and Gen Z consumers.
<unk> Valley has the strong focus on ready to enjoy products, including <unk> pre rolled joints and gummies that complement <unk> current product portfolio.
We plan to leverage our sales distribution and production strength to expand the product portfolio and rapidly scale Ace valley across Canada.
In addition, we announced our plan to acquire Supreme cannabis of top 10 licensed producer in Canada with the leading premium brand portfolio.
This acquisition brings in Supremes flagship 7 acres brand and ultra premium brand 7 acres craft collective.
The acquisition also adds of low cost scalable cultivation facility at Kincaid in Ontario.
This hybrid greenhouse facility has a proven track record of consistently producing premium flower from highly sought after strains at low cost.
Furthermore, we estimate $30 million in synergies to be captured across cost of goods sold and SG&A.
This transaction is pending regulatory approvals and Supreme shareholder vote and is expected to close before the end of June.
Turning to some highlights for our key products and brands in flower, we remain the market leader in the total flower category in the Canadian recreational market with Q4 market share exceeding 19% based on our internal market share tracker.
TWD has become the number 1 on flower brand in Canada with 6 out of the top 10 Skus as of Q4.
We've strengthened our Tweed brand with lineage strained named products now in stores in Ontario, and expanding to other region.
And we also launched <unk> brand in both flower and pre rolled formats exclusively in Quebec.
During Q4, our premium flower brands combined to capture of leading 10, 9% share of the premium flower segment in Canada, and we will significantly increase the share with the addition of 7 acres once the Supreme acquisition closes.
Looking forward leveraging learnings from our flour quality initiatives, we will introduce several new products that we believe will better resonate with consumers and offer superior experiences across key attributes such as taste aroma effects and packaging.
In <unk>, we strengthened our Canadian business following the transition of <unk> 5 ml cartridges from 4.2 ml, which is driving market share improvement.
We also began shipping 1 ml cartridges to select provinces with plans to further expand our offerings in the <unk> segment as well as in all in 1 <unk>.
Importantly, the addition of Ace Valley to our base portfolio immediately make immediately makes canopy. The number 3 overall producer for <unk> in Canada, and the number 1 for all in 1 vape pens in Q4.
Looking forward, we're focused on expanding distribution of Ace valley brands as well as new product launches across our base portfolio in both Canada and the U S.
Turning to beverages.
During fiscal 'twenty, 1 we launched our beverage portfolio in the Canadian Rec market and captured of 35% dollar share of the total beverage category during the full fiscal year 'twenty 1.
We're continuing to expand our beverage portfolio and started shipping our new tweak of ice tea beverages in lemon and raspberry flavors with 5 milligrams of THC.
Since launching late in Q3, our cuatro CBD beverages of captured the number 1 market share among ready to drink CBD beverages in Canada.
And during Q4, we launched Quadro CBD beverages in the U S and announced the distribution agreement with southern Glazer wine and spirits, becoming the first CBD beverage brand to sign with the national alcohol beverage distributor.
Looking forward, we plan to further expand our beverage portfolio with new line extensions and flavors during the key summer selling season.
In Edibles canopies first coming in Canada, TWD Strawberry hit the market in late February and both distribution and velocity have been climbing each week.
After 2 months in market Tw TWD Strawberry gummies are already a 4% share of the Canadian gummies market and that's with just 1 SKU.
In the U S. Martha Stewart CBD Gummies continued its success with sales continuing to grow month over month.
Based on IRI data Martha Stewart CBD was the number 9 brand in the CBD supplement category in the entire food drug and convenience channel for the 4 weeks ended April 18th.
Martha Stewart CBD has also won multiple industry awards recognizing the significant impact of this brand has made in the short timeframe since it launched last fall.
Martha Stewart CBD, 1.2 digit day awards and of Sabre Award.
Due to day awards recognize the companies and campaigns using modern content to modernize.
Media and marketing and the Saver awards recognize superior achievement and branding reputation and engagement.
We're very proud to be recognized for brand excellent against established brands and products outside of the CBD space and we look to further leverage our relationship with Martha Stewart and her new role as canopy strategic adviser.
Turning to our other consumer brands.
<unk> feels ready to drink sports beverages are now hitting the store shelves in earnest leveraging constellation's beer distribution network.
It's still early days, but results have been encouraging so far with the brand already the number 7 sports drink brand. According to IRI data with an ACB of just 3.6% for the 13 weeks ended may 16th.
Sports athlete partnerships continued to drive brand awareness and brand credibility.
Steel unveiled a long term brand ambassador partnership with all Star basketball player Luca <unk> of the Dallas Mavericks, who was also appointed as global Chief Hydration Officer at <unk> and.
And biofuel kicked off a multiyear partnership with the U S Soccer Federation.
Storz <unk> bickel celebrating its 20th year concluded a fantastic year with of 67% year over year growth driven by expanded distribution in the U S as well as the strong consumer pull forwards vaporizer products across many markets around the world.
We are actively working to expand capacity to meet consumer demands.
And this works achieved strong U S retail growth led by Amazon. This works Dot Com Ulta and Nordstrom.
Despite of challenging backdrop for the brick and mortar channel due to COVID-19.
With our businesses on a solid footing, we are now accelerating our innovation agenda to drive topline growth and profitability.
Our investments in insights and innovation are enabling us to fill of new product pipeline focused on premium innovation and enhanced 2 <unk> product offerings as well as consumer tested mood management products that target specific consumer need states, including formulas to help consumers connect focus.
Managed stress unwind and sleep.
Turning now to our U S strategy, we remain focused on advancing our U S ecosystem and expect significant Canada cannabis reform to take place during this Congress.
We've seen substantial bipartisan momentum over the last couple of months.
Safe banking pass the house for the third time with significant support from both sides of the aisle.
2 Republican members of the House, Dave Joyce and Don Young introduced a full of the scheduling package in recent weeks and.
And just the last Friday, the more act was reintroduced in the house of Representatives by Chairman enabler of comprehensive the scheduling bill that would legalize adult use cannabis and allow for Interstate commerce.
The Bill also includes social equity provisions to help on do the harms caused by cannabis prohibition and begin repairing the communities that have been disproportionately harmed by the war on drugs.
There is also an incredible amount of public support for federal legalization.
The United States, Canada, This council or UCC, just released some pulling information from some fairly conservative states, meaning, Arizona, Utah and West Virginia.
Which highlighted that there's overwhelming support for federal legalization in fact, 70% 70% of respondents in all 3 states support federal legalization.
All lines remain on the Senate as we expect book or widen schumer's cannabis legalization bill to be introduced in the coming weeks and the potential vote before the end of the year.
And at a state level I'm also very pleased to see New York State recently, passing adult use legalization and we expect additional states to pursue legalization.
Against that backdrop, we continue to lay the foundation and explore ways to further capitalize on the U S opportunity.
Specifically, we are encouraged by the performance of both acreage and tariffs and.
The acreage reported positive adjusted EBITDA for the first time in its history in the most recent quarter. Additionally, revenue growth reaccelerate it to 50% growth year over year also validating acreages refocused strategy.
Acreage is well positioned to grow in key states, such as New Jersey, New York and Pennsylvania.
Parison has been accelerating its growth strategy, while delivering top tier margins a combination of recent acquisitions in Pennsylvania, and Maryland, as well as the ramping of its existing operations should position <unk> well for further growth.
Acreage also has access to all of canopy brand IP or all of canopy as brands and IP through our arrangement.
Acreage already sales Tweed branded flower products and the dispensaries and is expected to launch THC infused beverages later this year.
And our recently announced distribution partnership for our CBD in CPG brands position us strongly in building out route to market infrastructure.
Finally, we are executing on our path to profitability, while still investing for growth.
We're on track to deliver $150 million to $200 million of cost savings across our Cogs and SG&A and we remain committed to delivering positive adjusted EBITDA by the end of our fiscal 'twenty 2.
In summary.
I am proud of the performance delivered by the canopy team during a dynamic and volatile year and pleased with the transformation, we've made to position us for long term success.
With that I'll turn it over to Mike for a review of financial results in more detail.
Alright, Thank you David and good morning, everyone with Q4 complete we are wrapping a year of business transformation during a volatile macro backdrop and in an increasingly competitive market.
And during this past fiscal we made tremendous progress on both our commercial and supply chain execution, while also improving product quality.
Our results are moving in the right direction and we are confident that we can further scale our business on a path to profitability in fiscal 'twenty..2 so with this let me jump into our results.
In fiscal 'twenty, 1 we generated net revenue of $547 million, representing a year over year increase of 37% with strong double digit growth across all of our businesses.
Our reported gross margin in the fiscal was 12% and our adjusted gross margin excluding restructuring charges incurred during the year was 17%.
Our adjusted EBITDA loss during the fiscal was $340 million, an improvement of 24% versus prior year.
And free cash flow in fiscal year.
Narrowed to an outflow of $630 million, primarily driven by of 77% reduction in Capex and a 24% improvement in our adjusted EBITDA.
Now, let me briefly summarize the fourth quarter.
Revenue grew 38% year over year 2 of $148 million.
Our reported gross margin in Q4 was 7% on our adjusted gross margin was 14%.
Our adjusted EBITDA loss in Q4 narrowed to $94 million and our free cash flow in Q4, it narrowed to an outflow of $124 million.
Now before delving further into Q4 results I would like to highlight of change that we made to our segment reporting which became effective this quarter.
Prior to Q4, we had 2 operating segments, which were also our reportable segments as follows.
We had cannabis hemp and other consumer products and we have re of capital.
Following the risk capital divestiture in February we are now reporting our financial results for the following 2 reportable segments global cannabis and other consumer products.
Our global cannabis segment includes our Canadian cannabis operations for both recreation and medical as well as our international medical and other cannabis businesses, including our U S hemp derived CBD business.
Our other consumer product segment includes Storz <unk> Bickel. This works Bayou steel and other ancillary revenue.
Now, let's dive further into Q4, starting with the global cannabis segment, which grew 27% year over year 2 of $101 million.
Our Canadian Rec business grew 39% to $61 million driven by 40% growth in our <unk> channel and 37% growth in our BDC channel.
Our Canadian medical business grew 1% to $14 million.
Our international medical and other cannabis business grew 20% to $27 million driven by growth in our U S CBD business.
Partially offset by sales declines in Germany, as a result of ongoing COVID-19 restrictions.
Moving further into Canada, our <unk> revenue growth was driven by several factors, including store openings, particularly in Ontario.
As well as volume growth from our value flower products.
<unk> contribution from our 2 <unk> products, which delivered 5% of gross <unk> revenue in Q4.
This growth was partially offset by a negative mix shift towards the value flower category, including newer lower price points as well as a shift to larger pack sizes and to further illustrate what's happening in our Canadian flower category. It's best to examine Q4 results relative to Q3 to further.
Understand the volume mix and price impacts.
<unk> with volume, we saw a 23% increase in overall flower volume driven primarily by 28 Gram packages in the value segment.
And partially offset by declines on the 1 gram 3.5 gram and 5 gram packages.
Moving on to mix, we saw a negative product mix impact of 9% due to a shift into large pack sizes during the quarter as well as of further shift into the value price segment.
On price, we saw a 5% negative price impact in part due to the provincial mix of sales across the provinces as we had a greater percentage of volume from Alberta, and Ontario, which have lower average prices compared to other provinces.
So in summary, our Canadian Rec flower sales grew 9% from Q3 to Q4 led by volume growth of 23% negative product mix of 9% and of negative price Geo mix of around 5%.
Our b to C. Cannabis sales in Q4 increased 37% versus the prior year due to an increase in store count up from 22 stores last year to 33, this year as well as a 5% increase in same store sales.
Let me now wrap up our cannabis topline discussion with a recap of market share in Canada, using our internal share tracker.
Our overall market share showed a slight decline of 20 basis points to 14, 8% in Q4, where we gained share in Ontario and lost share in BC and Alberta.
Our flower share increased by 60 basis points to 19% and we maintained the number 1 share position in total flower as well as the number 1 share position in both premium and value flower.
We captured a number to share in beverages with a 29, 9% share and we captured a number to share in edible extracts with the 22% share.
Moving on to our other consumer product segment, which grew 66% versus prior year to $47 million on net revenue.
Storz <unk> bickel grew 52% year over year benefiting from the more effective distribution in the U S and the strong consumer pool, notably for the volcano volcano hybrid the mighty and the crafty plus vaporizer.
This works grew 2% year over year due to continued strong e-commerce sales and sales of the stress check hand, sanitizer, which was launched in the U K and the U S. During this past fiscal.
<unk> experienced strong year over year growth in part due to distributor load ins for our ready to drink beverages in the U S.
Let's now move on to an analysis of gross margin for the quarter.
The reported gross margin in Q4 was 7% and adjusted gross margin, excluding $10 million of restructuring charges was 14%.
Adjusted gross margin in Q4 was negatively impacted by lower production during the quarter as a result of the ongoing COVID-19 restrictions on.
Unfavorable product mix as covered in my remarks of few moments ago as well as inventory charges due in part to the write down of certain packaging inventory ahead of a package change that is planned.
For many of our flower Skus, and we decided to modify our packaging on our flower products based on consumer insights coming out of our flower quality initiatives and this work showed the consumers preferred bags as a more approachable packaging thats easy to open that's resealable retains moisture better and retains of Rome.
The better creating a better experience for the overall consumer.
Adjusted gross margin in Q4 benefited from payroll subsidies of approximately $4.5 million received from the Canadian government pursuant to a COVID-19 relief program.
If you exclude both the inventory charges and the payroll subsidy benefit gross margins would have been approximately 24% during the quarter the.
The remaining shortfall to our expected gross margins for Q4 was driven by the negative flower mix that I discussed a few minutes ago.
Next I would like to cover our operating expenses overall.
The overall SG&A in the fourth quarter decreased 25% versus the prior year.
We had an 11% reduction in sales and marketing expense.
35% decline in G&A expense and a 23% reduction in R&D expense.
Stock based compensation decreased by 76% year over year.
Our net loss during the quarter was $617 million inclusive of other expenses of 367 million most of which is tied to noncash fair value adjustments related to our various financial instruments, driven mainly by the rise in canopy.
Share price during the quarter.
Our net loss also included $85 million of asset impairments and restructuring charges.
Now turning to free cash flow, our free cash flow during the quarter of fiscal 'twenty..1 was an outflow of 124 million, which represents an improvement of 59% versus the prior year.
Inventory decreased by 6% year over year of $2.368 million and Capex declined to $27 million down from $94 million in Q4 of last year.
Next I would like to briefly speak to the progress against our cost savings program and our path to profitability targets, which we announced during our last earnings call.
Our Canada site rationalization program that we announced in December is well underway and these sites of ceased production in our burn rate has largely been eliminated except for certain carrying costs that we will continue to incur until these assets are divested of.
Our ops team reorganized and <unk>.
Reorganization was completed during Q4, resulting in a leaner more integrated global ops team.
We announced the closure of our Denmark facility, which is currently underway and we completed the divestiture of risk capital in February.
And these initiatives generated approximately $7 million of the car.
Cost savings in the quarter as the savings begin to flow through towards the latter part of the quarter, but it is important to note that these underlying actions as well as the additional initiatives taken thus far have put in motion over $100 million of savings that will begin to phase in during the next several quarters.
For 1 of the site rationalization program will deliver savings of nearly $40 million in FY 'twenty, 2 in turn reducing our cultivation surplus and bringing supply and demand into balance.
The inland implementation of our operations Org redesign will reduce our cost of goods sold by $10 million.
Our initiative to specialized cultivars by site is phasing in and this will generate $10 million of savings through increased productivity.
And as you know we've completely overhauled our SG&A structure, leading to new efficiencies that will deliver $45 million of SG&A savings during this upcoming fiscal year.
We remain committed to our path to profitability as we continue to invest in things such as consumer insights.
Research and development and business development activities in the U S and we are focused on driving our top line, while meeting our Cogs and SG&A targets in fiscal 'twenty 2.
Before I close I would like to offer a few key factors to consider as it relates to the outlook for Q1.
First we expect our Canadian direct business to face continued headwinds from Covid, both from reduced traffic and tighter inventory management at the provincial boards.
Our international Medical business is also facing COVID-19 headwinds, but an improved supply situation plus lifting of lockdown measures in Germany should drive stronger growth in the coming quarters.
Our consumer products business, we expect SMB to continue its solid growth trajectory driven by strong demand.
Sales of bias deal, which benefited from some of the load end during Q4 could see more modest growth in Q1 as distributor sell through their inventory prior to reordering.
Lastly, we expect our gross margins to improve in coming quarters as the cost savings ramp, but there could continue to be some volatility in the near term.
In conclusion, despite near term headwinds our businesses are showing renewed momentum and we're excited.
Against the opportunities that we have in front of us, namely with the cost savings program as well as the investments, we're making for the long term and we believe we're on a sustainable growth trajectory to achieve profitability before the end of this fiscal year.
This now concludes my prepared comments, operator, David and I would be happy to take questions from the analyst.
As a reminder, you asked the question you will meet the press star 1 on your telephone.
With.
To withdraw your question press the pound key to ensure an efficient call that gets to the question that gets to the questions of as many analysts of possible analysts are requested to limit the themselves to 1 question. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Heather <unk> with Bank of America. Your line is open.
Hi, Good morning, Thank you for taking my question.
You reaffirmed your guidance for positive EBITDA in the backhaul.
Thank you and it would be great. Thank you.
The branch out from where you are currently to what gets you the positive level.
And just kind of thoughts about what world.
Would you what the mix looks like.
Thank you.
Yes, thanks ever Heather I'll take first shot at in the David could build.
It all starts with growth and as we mentioned in our remarks debt each of our businesses posted double digit growth in this past fiscal on we're really happy with the momentum that we're seeing across each of our businesses.
And in Q3, we did provide medium term guidance around growing 40% to 50% of year for the next few years and our expectations are in FY 'twenty 2 are consistent with that.
Additionally, we have the benefits of of Ace Valeant Supreme which will further provide tailwind in achieving our profit goals, but it does start with growth and this really is going to be the year of growth across both Canada and the U S and Canada.
Our projections on on market growth of really tied back to store count.
Checking that stores are going to grow another 50% roughly to 2400 stores by year end and we've been quite impressed with debt with the progress that we've been seeing recently on store count.
And in the U S. Our growth projections are really tied to all of the brand launches that we've announced of recent so we're getting real traction with Martha Stewart CBD Gummies, we're getting traction with with Cuatro, which is in early days spot with our southern wine and spirits agreement, we're really confident that were going on.
Calle quickly.
And then we've got the Io steel, which is leveraging the beer network to really drive distribution on the U S. So we.
We are counting on growth for our path to profitability when you get to the <unk>.
Underlying metrics in the P&L. There's no question about it that we are going through a business transformation and operations and supply chain and we.
We conducted a very thorough review of our operations and supply chain last fall and we now have a roadmap that we're executing against and as we sit here on on June <unk>.
We're on track with that roadmap and the cost savings that we projected on balance are coming through.
Now, it's just a matter of of executing.
The SG&A is also a critical piece of our cost savings program we.
We just exited our annual planning cycle in the wake of massive restructuring across the entire business and now we have the entire organization programmed against new operating budgets across the company and we simply need to adhere to those budgets and head count plans, which we're confident that we will do because we built the org to.
Really scale of the right way so look lot of a lot of work underway a lot of the work is behind us.
Just a matter of it phasing through the P&L quarter by quarter over the next several quarters David.
The only thing that I would add is that we're doing all of that while we've continued to maintain the discipline to invest in insights innovation and brand building in the U S and Canada and.
Make investments in preparation for entering the U S. THC market, but we think that we can do we can make those investments and still have a very high degree of confidence in being able to turn a profit by the end of the fiscal year.
Yeah.
Your next question comes from the line of Adam <unk> with Scotiabank. Your line is open.
Hey, good morning, and thanks for taking my question, so a bit of the follow up on the store side commentary before.
There's been some commentary on the market about saturation of stores on specific markets. I was just wondering how your internal model incorporates the <unk>.
Potential for diminishing returns as new stores are added or whether that's an issue in your view.
Yes, I think it's a market by market view at this point, Adam and Ontario still early days and its maturity.
And although we're seeing pockets of.
Call it diminishing returns on certain on stores in certain locations broadly speaking.
It's still early days and we expect Canada grow 2.7.
Several thousand stores over the next 5 to 10 years so.
It's early days I would say the most saturation, we're seeing is in Alberta, and even that is pretty modest at this point so.
On top of mind concern at this point, Adam it's still a very robust market. The illicit market continues to convert I think we hit that 50.50 milestone last fall.
On more and more consumers are coming in I think 2 point old products helped to drive that interest in the category.
And accessibility continues to be the number 1 growth opportunity in Canada, and I think the retailers are maturing their business models as we as we move along you see in our retail channel. We have the 5% same store sales growth that Mike called out.
Being retailers get more sophisticated in terms of product assortment and making there.
Their storefronts more attractive to people, who currently purchase in the illicit market in actually new entrants to the space. So.
I think we're.
Sure.
As an industry, we're counting on a lot of store openings in particular in Ontario to get over that thousands of store hurdle, but.
I believe that the retail market will remain fairly robust for the foreseeable future.
Your next question comes from the line of Vivien <unk> with Cowen Your line is open.
Hi, Thank you good morning.
The follow up on the point you just made.
Those on the the need for growth to really drive the operating leverage and.
And help you achieve your targets for profitability can you provide an update on what youre seeing in terms of the cadence of Ontario growth and how we should think about that in terms of flowing it through to the model the close.
Given the debt adjusted EBITDA loss expanded sequentially on the quarter, it's hard to understand really kind of quarter to quarter basis.
Of the business should really start to inflect and then if I can just squeeze in the housekeeping Mike you broke up when you were offering.
The savings for FY 'twenty tools, such as the pizza.
That would be helpful. Thank you.
Okay. So so I think it's I think it's a couple of things.
So first of all win.
Our expected growth in Canada would probably be in line with the with the current year's growth rate. So we're not expecting outsized growth in Canada and most of that is the opening of our.
Additional stores, which pulls over more people from the illicit market also Vivien I think.
<unk>.
When youre looking at our total business I think you need to take into account the.
Growth of our consumer our consumer brands, our consumer businesses.
As they start to accelerate penetration in the U S market and Mike I'll, let you.
You talk about the.
The SG&A.
Yes.
So Vivien I don't know where I broke up at my remarks were really around the world work that we've done over the past fiscal year and we just exited our annual planning cycle, whereby we have built in <unk>.
<unk> $45 million of savings year over year and my point is the worst on the orders are in place, we simply need to execute against these budgets.
Your next question comes from the line of Graeme Kreindler with 8 capital your line is open.
Hi, good morning, and thank you very much for taking my question I wanted to follow up on an item that was listed in the press release about the Gram sold in the quarter exceeding grams harvested by 40%.
Putting that into context with all of the restructuring that's been done at the various levels of that cultivation and then bringing in some other acquisitions here from canopy I'm curious.
When you think about these medium to long term targets on growth as the company expect that it's going to be in a net buyer position on biomass you've talked about right sizing supply versus demand I'm, just wondering what that looks like.
Over the medium to long term here in terms of sourcing reliable product putting that through down to the product level on what that might do on the cost structure. Thank you very much.
Yes, so I'll start Graham so.
First of all of the model that we're shooting for does assume that were net buyers in the market.
We think there are there is a component of your portfolio that you want to control and own production for and that's at the higher end of the spectrum.
And then we want the ability to flex our business by buying from third parties, we think it's a much more efficient.
Capital of weighted a much more efficient way to deploy capital.
And we think that at least for the foreseeable future.
Will also be.
Our cost effective approach.
2.
The meeting the consumer demand so.
We worked here by design.
And.
And then I guess, 1 tangential point Super excited around the production capability that we get out of Kincardine because of its premium nature.
All of the.
Output that's come out of that facility over the last couple of years. So we think we think that.
Thats exactly a good example of what we're trying to get to we want to be able to produce the premium products and then we want to have flexibility to go into the market for everything else.
Your next question comes from the line of repurchase <unk> with Oppenheimer. Your line is open.
Good morning, Thanks for taking my question. So I just wanted to discuss some of the consolidation that we've seen on the space recently, so I'm curious how you guys feel about your competitive positioning versus some of the new proposed combinations out there and going forward is M&A sort of focus within Canada.
Yes so.
First of all I would make the statement that consolidation in most categories and certainly in our categories is generally good for the market and the consumer and the players in the market everyone of course has to respond to the M&A activity that takes place around them, but in general we're pretty positive about the activity in the marketplace.
We're very pleased with the premium positioning we got from Ace Valley, and we hope to get from Supreme as we as we come to the place where we can close that transaction. So we're very happy with our portfolio in Canada and with the ability of that portfolio to travel to the U S. So then if you look at.
Where we would focus next.
With the with our balance sheet and with an eye toward M&A, it's going to be the U S. Again, we think we're positioned the way we want to be positioned in Canada. So.
Yes, I wouldn't see us doing much more on the way of M&A in Canada.
Your next question comes from the line of Michael <unk> with Piper Sandler Your line is open.
Okay.
Thank you.
<unk>.
Curious if you could give us some thoughts on beverages I guess since you report them together maybe of the whole sort of 2 point out of bundle.
Does that match with some of your expectations.
Is the skill adequate for every piece of those on what's your outlook for how that evolves going forward.
Does the beverages for example, really need the on premise.
Or higher THC limits.
To really get going or just how do you think about.
How should we be thinking about the outlook for that study.
Yes, Michael so so good question.
We are we spent some time.
Time, retrenching, a little bit around innovation in drinks to get the to get the proposition right for consumers, we see brands like our deep space doing really well at 10 milligrams.
Which in some ways makes sense in the Canadian market, which constricts the number of literally units.
The consumer can purchase and so.
You're in many regards better purchasing 10 milligrams and of unit than purchasing 2 or 2.5 milligrams, which for some of our offering now I still think there is there is a.
The real reason for being at each THC level thats in our portfolio, but I think we need to.
But before the real power of that unlocks in the Canadian market, we we.
We need to get past the equivalency standards that are restricting what consumers can take away and we expect that that will happen.
And we're going to be prepared for that when it happens but.
That's the big unlock in my mind from a from a beverage standpoint in Canada, and I think youre going to see accelerated MPD in Canada over the next fiscal year, we just launched tweet iced tea.
We had a line extension on house plant with its line flavor and I'm really proud of the work that we're doing within our MPD team on our R&D team to really scale up our internal capacity to get more drinks out into the market and as David mentioned, there's going to be more variety of more THC levels that we think will will match.
The consumer needs in the market.
With respect to the U S.
We're on the wake of a new launch of of Cuatro CBD that we're extremely excited about.
On the arrangement that we have with southern wines and spirits.
It's really going to position us well to scale this brand better than any other in the market and at this point, it's just really about building distribution supporting the rollout with local marketing activation and and really leveraging this ecosystem that we've built in the U S.
Use of <unk> as the jump up to talk about what we mean when we talk about the CPG approach to 2.
Through our portfolio right. If you look at cuatro, it's the drink debt our insights team.
<unk> identified early on as meeting of consumer need state.
For relaxation and calm and more focus right and so.
We set out to produce a product that was very effective.
In terms of its CBD delivery and its effect on the consumer that would that would consume the product.
We also wanted to make sure that we got the taste profile right. We then launched it in Canada and.
And we're able to quickly grow market share in Canada, ending up at the end of the year of the number 1 CVD.
CBD beverage and Canada. We then brought that brand into the U S and started selling it through our direct to consumer channels and then ultimately because of our partnership with constellation really tapped into.
Their alcohol distribution network and.
Creating that distribution platform at southern Glazers wines and spirits. So I think that that's a picture of what we're trying to do across our entire portfolio using sites innovate outstanding products launch great brands and by the way we've won.
We're in the running for design awards on.
On QUADRA, when we launched it we had.
We had.
We reached about <unk>.
Reached north of $1 billion.
Kind of hits on the on the Cuatro brand right. So so it's that kind of.
Ecosystem that we're talking about when we say we want to bring the CPG mindset across Canada second quarter is of Great example of that and now we have to see how it performs in the market, but we're growing distribution rapidly in the states southern is in and I think we'll start to see results over the next couple of quarters.
Your next question comes from Aaron Grey with Alliance Global Your line is open.
Yes.
Hi, good morning, and thanks for the question.
So I just wanted to dive in a little bit of on gross margin right. So of 24%. If we exclude some of the inventory charges and the paywall subsidy benefit.
In the last call you had talked about 40% for the full year fiscal year 2022.
Early on on the call today, you talked about improvements come in the quarter, but still some volatility near term. So just love to get your perspective in terms of the outlook for the full year.
On the 40% and how important that is to kind of reach your target of profitability by the back half of the year. Thank you.
Yes, thanks Darren.
The 40% margin goal is important over the long haul, but it is not critical to our path to profitability commitments that we've made.
The the work that we did over the fall on the operations and supply chain really are the pillar 2 our pathway to profitability and as I mentioned earlier that that work is on track when I think about the near term on gross margin the volatility that I referenced earlier.
<unk> is really a function of 2 things number 1.
<unk>.
When you think about the.
The COVID-19 impacts on our business in Canada.
We have a high fixed cost operating environment that is very sensitive to volume fluctuations. So.
Even though on quite proud of the results that we posted in Q4 on revenue.
It.
It did translate into lower than <unk>.
Expected production, which ends up creating a bit of of deleverage impact of net and that impact we expect to see continuing into the next quarter or 2 so it's the leveraging deleveraging impact that we're facing that's the.
The biggest challenge I would say the secondary challenge that we're facing is just thinking about.
The price and mix in the Canadian market and for everyone. That's watching market share data you can see that canopy has established nearly a 30% market share in value value flower, which we're very happy about because going to my earlier remarks volume matters in our facility and it does create.
Economies of scale, but at the same time.
We need the premium is our business and when you think about the the discussion we just had about beverages and the gummies.
Gummies that debt that David talked about earlier.
The benefits of Supreme and Ace Valley will further premium on our business on that premium is Asia is really going to.
Paved the pathway to getting to that 40%, so 40% still a goal we're still very focused on it we want to be above that over the long haul.
But it's not critical to our immediate past the profitability targets.
Your next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Your line is open.
Hi, Thanks for taking the question.
David you. Unfortunately on this.
Environment.
He knows of the become kind of political pundits to 1 degree or in other areas.
Management teams of all firmed up their view of the last couple of weeks or in the earnings season on.
Pat the regulatory change in the U S.
Just a little more color on kind of the comments you made it sounded.
Slightly more or less optimistic than some of the other.
Management team is just you talked about maybe hopefully of bill.
<unk> Bill would get voted on perhaps this year that just the just the tone of that what Youre looking for what your kind of best case scenario.
Over the medium term on that front and I.
I guess, maybe thoughts on what you would view as the ideal outcome.
Perhaps this year.
Some comments on that day.
So look whatever whatever any of us say as it relates to the political environment.
Going to be wrong, but.
I'm really.
Really bullish and have been for a while in terms of the speed that I think things are going to move I believe we're in a position now where.
You have Republicans and Democrats, who are.
Each trying to craft their own builds what theyre not questioning it should candidates be legalized or simply questioning the how right and so that's where the negotiation will take place.
I think that it's going to move I personally believe it will move faster than maybe a lot of people think because when you get that many people aligned on the what sometime.
Sometimes the how the.
How kind of gets negotiated and so I expect to see that happening. The next big move will be to see what senators book or widen and schumer come out with in their bill and to understand.
How possible there their bill is in and of itself.
And look I think the right answer over time is we want full up permissibility across the U S where the regulatory environment.
Properly.
Properly ensures the right amount of quality and so forth from a consumer standpoint.
We want to make sure that.
The regulatory environment supports all of the things that were.
That we're passionate about like.
Like avoiding underage use and so forth right. So we want to get we want to see a proper regulatory bill and we want to see full up Interstate commerce. So that this business can function just like every other business in the United States.
Again, I am pretty bullish we're going to see all of that of.
And in the not too distant future.
Your next question comes from the line of John Chu with Chardan Capital. Your line is open hi.
Good morning, I just wanted to focus on the concept you were talking about just recently 2 premier.
The debt.
It does.
So it sounds like it's a bit of a tough balance here you need the volume to drive the high fixed cost nature of the business.
But you also need the premium.
Of that to drive the margin is higher on the other front.
You are buying the cheaper bottleneck that you also want to control of the premium biomass. So I'm just I understand that balance there and is there a chance that maybe you. Besides the shutter some more.
Passing the 1 that's focused more on the <unk>.
The value of biomass to that help.
On the less reliant on moving that volume.
Yes. So so good question and I think the strikes to some of the volatility that Mike talked about in his comments right because.
As you all know this is an agricultural business and it takes a while to <unk>.
Change your your.
The profile of what Youre growing in your facilities and then it takes a while even for that to flow its way through your inventory into finished goods that ultimately show up on your P&L.
So we are absolutely undergoing as part of our transformation that change that you described John to drive toward more and more premium offerings and we do think that were helped by Supreme in <unk> Valley, but I also want to point out the premium position that's been going on in our own portfolio across the price per.
Even where we've brought quality up on on all of our brands from a consumer standpoint, we've.
We have an initiative in the premium segment around dose that's really.
Being well received by the provincial boards and and by our consumers and so premium position and look I kind of believe our industry will look a lot like some other CPG categories, where youll have a very robust value segment and a very robust premium segment and then.
There is a lot of business to be had in the middle but.
You want to make sure that youre, winning in 1 or both of the of the other the other 2 segments. So.
We are proud of the fact that we're number 1 in value and number 1 in premium we have a lot to do but.
We think were on the we think we're on the right path and then we think that gives us the right production environment to get to the kinds of the margins. We want it just takes a while the transition into that.
Your next.
Question comes from the line of Pablo <unk> with Cantor Fitzgerald. Your line is open.
Thank you David just following up on the on the political questions.
Do you have any views or insight in terms of of the role of the body in white house and instead of a so much bill because day.
The by the way how it seems to be against.
Washington D C <unk> sales theres been the previous commentary on staff questions. There about the policies on kind of abuse. So just any any thoughts on that because of its own in isolation on there's almost not knowing what's on the bite them quite closely.
You see where the deal.
Really goes and then related to that if I may.
How do you think Youll you of contingent deals in the U S acreage on <unk> overlapping new Joseph Pennsylvania, So that could be of Nishu. When do you have your triggering event I mean does that mean that you have to think about other contingent deals in the near or medium term. Thank you.
Yes, so ill take that almost in 3 parts Pablo so as it relates to the by the administration.
Again anything can happen in the political world, but I don't believe that the by the administration intends to stand in the way of the will of the people, which as I mentioned, there seems to be a lot of.
Support across the political spectrum for legalization of cannabis and I think if.
Congress can come forward with legislation that gets enough votes to make it to the bite and <unk>.
The items are precedent by Vince desk, I suspect that Heath on stand in the way of it and.
Again.
Just just my view in terms of overlap, we actually quite like the fact that we have.
If you divide up the United States. You know there are there is a big population corridor that is Pennsylvania, and New York and New Jersey.
Both tariffs and an acreage are well positioned there I think the market is still fragmented enough that we're not going to have any obvious competition issues on day, 1, but we'll keep watching that I think you then look at the rest of the U S. And you say there are other population areas that we that were not strong in today, but.
I think youll see acreage and tariffs and.
At least considering how to address those over a period of time and as it relates to would we look on would we look at additional contingent deals.
Just come back to the statement I made earlier I think we've built out the footprint that we're very happy with in Canada, We're going to continue to use some of the $2.5 billion of cash we have on our balance sheet to drive innovation and create the consumer connected brands that we want to create but once we do.
The rest of our capital will be focused on the United States and so we're going to watch very carefully how how things unfold in and what are the events that allow us to come into the U S which.
Which again when you look at the different forms of legislation. The wording will be really important because there are there are several paths to the U S and it's all going to depend upon the actual legislation as it comes forward.
This concludes the Q&A portion of today's call I will now turn it back to Mr. <unk> for final remarks.
So thanks again for joining us today as we enter the summer season with business is beginning to open up across our core markets I'm personally excited about the prospect of reconnecting in person with coworkers family and friends.
And so as you begin your personal returned to normal I encourage you to try our products wherever you may be whether it's our refreshing cuatro beverages in either Canada or the U S or if it's Tweed.
<unk>.
In Canada, or our delicious TWD gummies or Martha gummies or our newest edition is valley pre rolls and Bates really encourage you to to play around in the category as investors in this category.
It's an amazing place to be and it's an amazing industry to be in and I really encourage you to try some of our products because I think you'll you'll then agree that we're doing some outstanding things as it relates to delivering on the consumer experience.
And so with that our Investor relations team will be available to answer additional questions throughout the day, so have a great day everyone.
This concludes canopy growth's fourth quarter and fiscal year 2021 financial results Conference call. A replay of this conference call will be available until August 32021, and can be accessed following the instructions provided in the company's press release issued earlier today.
You for attending today's call and enjoy the rest of your day Goodbye.
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Yes.