Q1 2022 Canopy Growth Corp Earnings Call
Yeah.
[music].
Yeah.
Okay.
Yeah.
Good morning, My name is Michelle and I will be your conference operator today.
I would like to welcome you to canopy Growth's first quarter fiscal year 2022 financial results Conference call.
At this time all participants are in a listen only mode.
I would now like to turn the call over to Judy Hong Vice President Investor Relations.
Judy you may begin the conference call.
Great. Thank you Michelle and good morning, everyone. Thank you all for joining us this morning.
On our call today, we have canopy CEO, David Klein and CFO, Mike Lee.
For financial markets open today canopy issued a news release announcing our financial results for first quarter fiscal year ended June 30 of 2021.
News release is available on our website under the investors tab and will be filed on our Edgar and SEDAR profile.
We have also posted a supplemental earnings presentation on our website.
Before we begin I would like to remind you that our discussion. During this call will include forward looking statements that are based on management's current views and assumption and that this discussion is qualified and its entirety by the cautionary note regarding forward looking statements included at the end of this morning's release.
Please review today's earnings release, and canopy reports filed with the SEC and theater 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 our earnings release. Please note that 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 during which questions will be taken from analysts.
To ensure that we get to as many questions as possible we have analysts to limit themselves to 1 question with that I will now turn the call over to David Davis. Please go ahead.
Thank you Judy and good morning, everyone.
To begin today's call by providing some thoughts on the first quarter and the continued progress of the canopy is making and our business transformation during fiscal 'twenty to date.
And Mike will then discuss our quarterly performance in more detail and offer additional perspectives on our outlook.
During Q1, our canopy team continued to establish itself as a consumer led innovation driven organization with an efficient supply chain and of discipline cost structure and.
Key highlights that resulted include achieving another quarter of strong double digit revenue growth for both cannabis and consumer products businesses.
Closing on our acquisitions of East Valley and Supreme.
Continued emphasis on developing a robust pipeline of new products that are rooted in consumer insight and innovation with over 50, New Skus introduced and the last 2 quarters and over 100 on the way.
Our adjusted EBITDA loss narrowed significantly in comparison to last year and last quarter.
And we remain dedicated to furthering and the opportunity that lies before us with increasing canopies efforts and U S. THC.
We are delighted by the momentum within the U S too and cannabis prohibition and remain optimistic on the legislation that has been introduced to do so.
However, the first quarter of fiscal 'twenty, 2 was not without challenges.
The Canadian recreational market continued to be impacted by COVID-19 related lockdowns for much of the quarter.
Competition increase with single strain offerings at higher THC levels, and lower prices and we faced internal supply and execution challenges as a result, our market share softened.
And we're not where we want to be from a margin standpoint.
It's also important to keep in mind the magnitude of the transformation that canopy has gone through over the past 18 months.
And as with any organization undergoing a big transformation, there are growing pains and adjusting to new ways of working takes time.
We're actively taking steps to improve our performance and specifically looking at how we can scale, our new operating model to mitigate structural challenges and the industry, including a long production cycle and onerous regulations.
Now I'll take a few minutes to review highlights from the latest quarter.
Despite continued COVID-19 lockdowns, we're pleased to share that our Canadian recreational cannabis business grew 35% year over year.
Amid a very competitive environment, we maintain market share leadership with 15, 2% share of the track of provinces in Q1.2021.
This market.
Share now includes Ace Valley, and Supreme candidates, which we welcomed into the canopy family this past quarter.
Integration is progressing smoothly and we see these businesses, making positive contributions to our top and bottom lines over the coming quarters.
Following the <unk> Valley acquisition of our sales team has become fluent and the beloved Israeli brand and ready to enjoy products securing listings and several provinces and are driving incremental distribution of <unk> products that are already in market.
Since integration, we've launched a number of new products under the Ace Valley brand, including Ace Valley Dream, CB, and Gummies and Ace Valley printers.
We've also begun integrating the commercial and production operations of Supreme cannabis.
Our sales team is in market with the robust Supreme product portfolio and is actively working to increase listings and distribution across Canada.
On the production side, we're leveraging <unk> expertise and industry, leading knowledge of cultivating premium flower and we plan to integrate Supreme facility into our operational footprint.
Our U S. CBD business continues to build momentum driven by Martha Stewart and CBD, which is now the number of 3 CBD brand nationally across food drug mass and convenience channel channels per IRI.
Quadro is launched and 7 states and it's been sold into over 1000 doors.
Our consumer products brands delivered strong growth driven by stores and vehicle, which saw sales increased by 41% year over year.
In addition, <unk>, new Rtd's drove triple digit year over year sales growth.
Yes.
Since I became CEO of canopy I've spoken to the importance of investing and consumer insights and new product development to bring products to market that delight consumers.
I am very pleased to see this investment and beginning to pay off as our robust innovation pipeline has started to bring new differentiated products to market and we expect the pace of new product launches to accelerate over the coming quarters.
This is also being done alongside of our portfolio optimization optimization strategy, where we've already eliminated a significant number of underperforming skus and we're prioritizing high performing skus as we are adding new skus to our portfolio.
Many of our innovations are focused on addressing consumer need states, whether it's sleep relaxation, socialising with friends and delivering desired effects and mood management.
We're also launching premium quality products with new genetics turbines flavors and packaging aimed at enhancing the consumer experience.
Let me now highlight some of these innovations that have hit the market as well as provide a view into our exciting pipeline.
And flower and pre rolled joints.
To meet demand for our Quebec exclusive brand, we launched <unk>, which is on it and its way to becoming 1 of the top selling flower brands and Quebec.
Our new single strength, TWD, 28, Blue Dream, and Apple pie of flower offerings, where number of 5 and number 6 single strain offering products by volume nationally and the first quarter.
And our rapidly growing pre roll category, we recently launched tweet quickest and Ace Valley Pinner small size pre rolled joints to address consumer preference for sharing Canada, and a group setting without having to pass the single join around.
Following an extensive flower quality initiatives aimed at enhancing flower satisfaction, we're introducing Canadians to do Jeff our premium flower Blair brand, including recently introduced Dodger legend legendary Larry flower in Ontario, as well as the national rollout of Tweed lineage strength.
<unk>.
Our flowers team is excited about additional flower and pre roll innovation that we expect to bring to market over the coming months, including new packaging and new higher THC single strength genetics.
And base.
Strong consumer demand for the 5 ml and the 1 ml of 510 cartridges launched over the past 2 quarters has strengthened our Canadian based business.
And the first quarter of 2022, we launched our tweet citrus sealand all in 1 vape pens, which have been positively received by consumers.
This new 510, and all and 1 vape pens are driving a significant uptick in consumer poll.
And we have additional vape innovations that are scheduled to come to market over the coming quarters, including the introduction of live resin cartridges to the Canadian market.
Turning to beverages, we're seeing consumer purchasing trends currently pointing to a strong demand for beverages with higher THC.
In response, we have started to bring a range of higher THC beverages to market beginning with our new Tweed ice tea beverages with 5 milligrams of THC, which are available on refreshing lemon and raspberry flavors.
The feedback on these beverages from consumers and Bud tenders has been nothing short of fantastic.
We've also begun shipping our new tweet bus shelters and the current quarter.
Analogous to hard seltzer and the beverage alcohol world. They have 5 milligrams of THC income and 2 refreshing flavors watermelon and mango.
We're very excited about the range of new beverages that we will bring to consumers over the coming months, including an expansion of our best selling deep space beverage brand and.
We're on pace to more than double our assortment of beverages and market during fiscal 'twenty 2.
And edibles are portfolio of Gummies, and Canada has expanded rapidly over the past quarter under the Ace Valley and Tw from D brand.
Banners.
Building on the successful launch of TWD, Strawberry Gummies, which now have the number 2 market share of all gummies and Canada. We are launching the TWD mixed Berry gummies and the current quarter.
We also launched <unk> valley dessert flavor, gummies key lime pie and peaches, and hunting and have begun shipping our <unk> Valley Dream CB and gummies.
Available and a tasty Blackberry lemon flavor and containing CBD and a minor cannabinoid that lends itself well to restful sleep, the East Valley Dreams, CB and gummy addresses the consumer need state of sleep, which is in high demand.
And we're scheduled to bring a robust portfolio of new gummy innovations to market over the coming months, featuring gourmand flavors and better effects and preferred THC levels.
I'm very pleased at the new products that have been launched in the past quarter and look forward to the consumer response to the exciting innovation pipeline that we have planned in the months ahead.
Turning now to the U S.
We're focused on advancing our U S ecosystem and continue to believe that cannabis reform will happen during this congress.
Cannabis reform took an important step forward with release of the draft Cannabis administration and opportunity Act that was introduced by Senators Schumer Booker and widened on July 14th.
This bill takes and impressive approach and crafting of regulatory structure that is specific to canvas.
We enthusiastically support the sweeping social justice and social equity provisions within this package. These.
These measures will benefit those who have been disproportionately impacted by the criminalization of cannabis.
Social equity can only truly be achieved through full legalization and I firmly believe that cannabis should and will be legalized at the federal level, It's what Americans of overwhelmingly been asking for.
2 other pieces of legislation that together if passed could be of positive unlock for our CBD business and the U. S include HRA 41, which would require the FDA to regulate CBD is of dietary supplement and 60, and 98, which would mandate the FDA to regulate CBD is of dietary supplement.
And as well as food and beverage we.
We believe the passage of these bills would establish a national regulatory framework for various CBD products and would give retailers, including national mass retailers and the regulatory framework and <unk>.
And seeking to participate in the CBD market.
We believe this would be a material unlock for our CBD business and the U S.
Against this backdrop, we continue to advance our U S ecosystem position and canopy for success and the U S under various scenarios.
We've already established multiple routes to market and federally permissible THC markets.
Our plan of arrangement with acreage holdings, and our conditional investment and tariffs and provides an immediate turnkey path to enter the U S THC market.
We anticipate that acreage is performance will continue to improve and are excited about their plans to launch cannabis beverages and select U S states in the coming months under the Tweed brand banner.
In addition, we're actively seeking opportunities to make additional legally permitted investments and advance of U S. Federal Permissibility of THC that increase our exposure to that THC market.
Finally, achieving profitability and improving free cash flow remain our top priority. We are on track to deliver $150 million to $200 million of.
Cost savings across our Cogs and SG&A.
And we remain committed to accelerating topline growth and the second half of fiscal 'twenty, 2 and achieving positive adjusted EBITDA by the end of our fiscal 'twenty 2.
In summary, with a robust pipeline of product innovation hitting the market the integration of East Valley, and Supreme well underway and ongoing improvements to our supply chain I believe will strengthen our competitive position and our core markets and drive significant top line growth over the coming quarters.
With that ill now turn it over to Mike for a review of the financial results and more detail.
Alright, Thank you David and good morning, everyone.
Our Q1 results demonstrate our continued focus on financial discipline with adjusted EBITDA and improving both year over year and relative to Q4.
Despite softer than expected revenue and gross margin performance.
And the first quarter of fiscal 'twenty, 2 we generated net revenue of $136 million, representing a year over year increase of 23% with strong double digit growth seen across both cannabis and consumer products businesses.
Our reported gross margin and the quarter was 20%.
Our adjusted EBITDA loss during the quarter was $64 million with and improvement of 31% year over year.
And our free cash flow and the first quarter of fiscal 'twenty, 2 was an outflow of $186 million.
Now, let's dive further into Q1, starting with the global cannabis segment, which grew 17% year on year to $93 million.
Our Canadian Rec business grew 35% year over year to $60 million, driven by 22% growth and our <unk> channel and 84% growth and our BDC channel.
Our Canadian medical cannabis declined 3% to $13.5 million.
Our international medical and other cannabis business declined 8% year on year to $19.4 million as growth and our U S. CBD business was more than offset by sales declines and see 3 and Germany due to ongoing COVID-19 restrictions.
And increased competition.
Looking into our Canadian Rec business and a bit more detail our <unk> revenue growth benefited from increased store openings, particularly in Ontario and.
And growth from our flour value products as.
And as well as contribution from our 2 point of oil products and acquisitions.
Our <unk> revenue growth was driven by increased store count up from 22 last year to 34, this year and of 65% increase and same store sales when normalized for days closed due to COVID-19 during Q1 of last year.
Now given the importance of our Canadian Rec beat of <unk> business, Let me provide some additional details including some challenges that we faced during the quarter.
While we grew cannabis year over year performance came in below our expectations driven by continued price mix headwinds as well as some internal execution challenges, resulting in lost market share during the quarter.
I would like to dive into both points. So that I can highlight the actions we're taking to address these issues.
First price mix continued to be a sizable headwind on our flower business with product mix continuing to shift toward larger value priced offerings, including newer and lower price points.
Value flower across the industry accounted for nearly 52% of total flower sales in Q1 up from 44% a year ago.
Simultaneously our value flower sales increased to 59% of our flour and mix in Q1 compared to 34% a year ago. So we've gone from being under index relative to industry and value flower last year to now being over index.
And our increased focus on value flower made sense of the time as consumers are increasingly seeking value offerings during the COVID-19 pandemic.
And this volume is providing canopy with some increased volume leverage which has generated some productivity gains and our supply chain, but during the past year. We've also witnessed the value category itself, moving lower and price further amplifying, our mixed headwinds and leading to real price erosion.
And considering the regressive nature of the cannabis excise taxes. It is extremely difficult to achieve our long term financial objectives by being overdevelop and the value category.
Hence we've been shifting our focus and have already taken steps to premium is our product portfolio building, a robust pipeline of innovation and premium flower and.
Pre rolls and 2 point of products that David addressed earlier with more to come.
Additionally, we are encouraged by signs of premium <unk> and emerging in the industry and we expect price mix headwinds to abate in the coming quarters.
Second our market share declined in Q1 was in part driven by missed opportunities stemming from internal execution challenges.
While canopy maintain number 1 share of the total track market and Q1, our market share declined by 290 basis points sequentially to 15, 2%.
And flower cannot be again maintain number 1 market share on our market share declined 350 basis points sequentially to 17, 9%.
And as we've highlighted in past calls we've made good progress on execution during the past year, including raising our average fill rates from 55% and Q4 of fiscal 'twenty to above 90% throughout most of last fiscal year. However in Q1 of this fiscal we did not have enough supply of <unk>.
<unk> strain and high THC premium flour and.
We faced some growing pains of adjusting to our new operating model.
And we had some challenges associated with the increased complexity tied to our innovation and premium innovation efforts and we've taken.
And several steps to ensure increased supply of single string and high THC offerings to better meet market demand.
<unk>.
The acquisition of Supreme.
Greetings canopy, the top premium flower brand in Canada, which immediately improves our capacity to produce high quality high THC flower.
The cultivation of new genetics is underway and new products are beginning to hit the market with more on the way.
Third we secured additional third party supply to help us cover demand during the second half of the year and we have a sourcing strategy in place to move towards in sourcing most of our premium flower while outsourcing most of our value flower from third parties overtime.
And lastly, we are beginning to leverage <unk> expertise and producing premium flower in tandem with our other ongoing efforts to improve cultivation and post harvest processes of cross canopy, including our new Hain drain program, and Smiths falls, which increases our capacity to produce high quality high THC flower.
Now we also recognize that premium position and leads to increased complexity with long lead times and challenging regulations, but we view premium innovation and innovation is a critical driver of canopy success and we believe there is a path forward as we scale, our leaner footprint to improve execution.
Moving on to other consumer products, which grew 39% versus prior year of $243 million and net revenue.
Stores and decal grew 41% year over year benefiting from increased distribution and the U S and strong consumer pool, notably for the volcano classic and hybrid Mighty and crafty phosphate prices.
This works grew 7% year over year due to continued strong sales through Amazon and other third party E Commerce channel.
File of steel grew a 179% year over year.
Primarily due to the launch of biopsy on ready to drink beverages and the U S.
Let's now move on to gross margin for the quarter.
Gross margin for the quarter was 20%.
Adjusted gross margin, excluding $1.4 million of charges related to inventory step up on business combinations was 21%.
Gross margin in Q1 benefited from payroll subsidies of approximately $7 million received from the Canadian government pursuant to the COVID-19 relief program and excluding this benefit adjusted gross margin would've been 16% during the quarter.
Adjusted gross margin in Q1 was negatively impacted by lower than planned production output given flower supply shortages and unfavorable pack size and geo mix and our Canadian business as well as some startup costs and the U S.
But we expect gross margin to gradually improve over the course of fiscal 'twenty 2 as we accelerate sales growth premium on our portfolio and improve execution.
Turning to operating expenses, our overall SG&A and the fourth quarter decreased 17% versus prior year.
Unpacking. This further G&A expenses declined 48% year over year, primarily due to reductions in staffing and professional fees as well as the payroll subsidies.
Excluding payroll subsidies G&A expenses were down 28% year over year.
R&D expenses declined 39% year over year, driven by product timing and lower finished product development expenses.
Sales and marketing expenses increased 34% due to increased advertising and promotion and support of our U S CBD and consumer products businesses.
Moving on to our cost savings program through the end of Q1, we have generated approximately $38 million of cost savings across both Cogs, and SG&A, including $32 million and Q1 and with the savings that we've recognized to date, coupled with our expectation of future.
Savings and we're confident that we will recognize the $150 million to $200 million and savings by the end of the first half of next fiscal year.
Our net income during the quarter was $390 million inclusive of other income of 581 million most of which is tied to noncash fair value adjustments related to our various financial instruments, driven mainly by the decline and canopy share price during the quarter.
Turning to free cash flow, our free cash flow and the first quarter of fiscal 'twenty..2 was an outflow of $186 million, which is at 3% greater outflow versus the prior year.
Free cash flow during the quarter was impacted by the timing of certain payments totaling over 19 million and.
<unk> payments of $24 million and inventory increases of $23 million, primarily driven by the Supreme acquisition and the ramp up of <unk> RTD sales and the U S.
Canada inventory, excluding the impacts from Supreme was flat.
Capex declined to $20 million during the quarter down significantly from $62 million and Q1 of last year.
Now taking a step back our top priority remains achieving profitability and improving cash flow. So let me spend a few minutes, providing some perspective on the outlook for the balance of this year and the key drivers to our path to profitability.
I'll cover this and 3 parks looking at the building blocks behind our revenue outlook.
And what it means in terms of gross margin expectations and then finally, what we're expecting from an SG&A perspective, as we scale.
On revenue.
We're expecting strong top line growth, particularly and the second half of our fiscal year with the key drivers as follows.
And Canada, we expect of benefit from robust industry growth.
Market share gains and improved price mix.
Canada Rec market is on pace for 40% growth and fiscal 'twenty, 2 driven by increased store count and at the end of Q1, there were 2178 stores in operation and we expect store count to reach 2600 stores by the end of fiscal 'twenty 2.
We are also focused on improving our market share with gains expected through improved supply of high THC strains and distribution increases on existing products and new product launches expected to hit the market later this year.
And Europe, we expect our German flower business and <unk> to benefit from industry growth as the COVID-19 recovery leads to more selling opportunities and improve supply.
Okay.
And the U S. We're truly and the beginning stage of what we expect to be a strong sales ramp driven by distribution expansion of current products and the market as well as new product introductions and fiscal 'twenty 2.
4 of Martha and Cuatro, we are just under 4000 doors and Q1 with more distribution on the way.
4 bio steel, we're working closely with constellation's gold network to ramp up distribution with the next big wave of chain authorizations, beginning this fall.
And for stores and <unk>, we expect to see continued broad based growth across volcano classic and hybrid Mighty and craft plus as well as an exciting slate of innovation and the back half.
Moving on to gross margin, we expect the price mix impacts and Canada to moderate and we're already seeing some green shoots and the shift towards premium position and here are a few examples the mainstream flower segment. For example grew in line with value in Q1 versus Q4.
We're seeing increased premium innovation with store reopening is driven by greater upselling opportunities as Bud tenders re engage with consumers and the stores.
And finally, <unk> are growing 4% to 5 times faster than flower, which leads to margin incretion.
And with our innovation skewed to premium and mainstream flower PR Jays and 2 <unk> products, all of which carry higher margins, we expect to see improved gross margins as we head through the fiscal year.
And as for the U S. We expect our startup costs to moderate as we scale up our CBD and our CPG businesses, and we expect to grow into scale much more quickly and the U S and in Canada as we rely more on third party producers for some of our products and our internal production facilities and a much smaller in scale than our Canadian.
Facilities.
Lastly, with respect to SG&A, we expect most of our G&A cost to remain fixed as we scale with A&P expected to flex as revenue ramps.
R&D expenses will largely remain fixed as we scale with certain costs being tied to <unk> activities, all of which are budgeted and reflected and our outlook.
And as a reminder, our full year SG&A inclusive of the above is expected to be down $40 million to $50 million year over year.
From a phasing standpoint note that the expected acceleration and both revenue growth and profitability is likely to be much more pronounced during the second half of our fiscal 'twenty 2 given the timing of our new product launches and the timing of our expected distribution revenue.
In conclusion, we expect revenue acceleration in the back half driven by industry growth market share gains and improved execution, which allows us to significantly improve our profitability and the back half of this year.
This concludes my prepared comments, operator, David and I would be happy to take questions from analysts.
Thank you.
And I'm sure and of fishing call and that gets to the questions from as many analysts as possible and.
And <unk> are requested to limit themselves to 1 question.
Please press star 1 now if you have any questions.
Your first question comes from Vivien <unk> of Cowen. Please go ahead.
Uh huh.
Operator, we can't hear Vivian question.
Your next question comes from Heather <unk> Bank of America. Please go ahead.
Hi can you hear me finally, sorry, yeah, yeah, yeah, Okay, great yeah. Thanks for taking my question.
You talked about some of the execution challenges you had in the quarter and and some of the strategies you have in place to make sure you have the right supply can.
Can you just dig in a little bit more in terms of.
And what's behind you in terms of execution and what Youre still working on and Ed.
When you expect to see that improvement.
So I'll start and then Mike and can come and afterward, I think the issue is.
And just generally as you're as you're ramping of business. If you look at our Canadian business.
Rec business being up 35% year over year.
And we've added.
Consumer preferred skus into the mix so we've created.
Business in Canada.
Across I believe all of the Lps, that's reasonably complex and highly regulated right and so and it's and agricultural business and so you can't you can't turn on a dime as a result of.
Of the growth cycle that you have to adhere to so.
We've.
I think.
We've done a good job of of improving our planning processes and improving our ability to move product through the facilities improved our ability to forecast demand across the industry, even working with.
And the provincial boards like the Ocs, which is in Ontario.
To help us joy.
Jointly plan and the business on a go forward basis, and we've we've cleaned up a lot of the complexity that had existed in our supply chain previously so.
It's a complicated business, but I think we've.
We've covered some really good ground to vastly improve the execution of overtime.
I think thats right, David and I think just to provide some perspective over the last 18 months, we've made tremendous changes to our footprint shuttering.
Facilities across Canada.
And across the world.
And while also right sizing our labor force and also globalizing, our org structure and.
And we've put a lot of best in class CPG business processes in place that are now being.
Refined and optimized.
And we're making great progress, but we're not all the way there yet and.
And.
We're confident that we're doing the right work and it's just call a bit of growing pains as we normalize into this new model.
So more and more progress to come but we're confident that we're on the right path.
Great. Thank you and I had on.
Your next question comes from Doug <unk> RBC.
RBC capital markets. Please go ahead.
Well, thank you and.
And just wanted to speak a little bit of boat.
And EBITDA improvements that you're expecting and through this fiscal year I think the language has changed slightly as it relates to when you expect that to.
Occur such that now we are looking.
Towards the end of the fiscal year.
I'm curious to know what type of market share gains do you need.
Just seeing the positive EBITDA.
By the end of the year.
Yeah. Thanks, Doug So as we've talked about previously so much of our path of profitability comes down to revenue growth and getting economies of scale and we have previously indicated that our north star is getting to $250 million of revenue on a quarterly basis.
Becomes that that run rate whereby profitability starts to become.
Within our crosshairs and.
When you look at.
And the building blocks behind our mask a lot of that is going to come on the back of Canada, which is growing 40% year on year and as we indicated earlier, we're not happy with the share performance that we've seen over the last 12 weeks, but we're confident that the innovation that we're bringing to market over the next 3.
3 to 6 months is going to strengthen our market share and put us back on that trajectory to getting to that $250 million run rate. The other critical component and our trajectory is activating the U S and between all of the CPG brands that we highlighted and our CPD brands, we've got a lot.
On a momentum.
And we believe that over the next 3 to 4 months as these distributors start to activate locally is the national chain start to open up we're going to be a sea of significant ramp and our U S. Revenue. So we've got line of sight to getting to that $250 million, but it is going to come down to execution and it's going to come down.
And 2 activation across the distributor network and the U S and it is going to come down to new product development, but we're confident on all fronts that we're going to get there.
Thank you.
Yeah.
Your next question comes from Jimmy Chen of BMO Capital markets. Please go ahead.
Thanks, Good morning, I, just wanted to ask with respect to the net revenue opportunity because of execution challenges and I'm wondering is it possible if you could quantify that.
And all.
Joseph Thank you talked so much about product launches and critical on the back half of this year I'm wondering specifically.
<unk> from.
Sort of a change with respect to I think below 1 day will take on new products and they're pushing.
Questions on that window, and so you might just talking about <unk> and pod.
And your plan at all.
So Tom maybe I'll take the first part and David can address the Ocs question look and Q1, we know we had missed revenue opportunities on fill rates. We know that we had missed revenue opportunities on high THC strain specific supply.
And we know that we had missed revenue opportunities on timing of activation in the U S on certain products.
And it all comes back to execution and although I don't have specifics on.
And just to be able to quantify that for you and that is the largest driver behind our share loss in Canada is basic execution and inventory supply and so you can do the math on your own to figure that out but.
We're confident that we're taking the right steps to improve execution on all of those fronts. David do you want to take the Ocs, yes, Tammy and as it relates to the provincial boards and general first of all.
Each of the boards are getting more and more sophisticated as we go forward and we try to be really strong partners with them and so we've been.
Our party to all of the discussions around listing windows and so forth.
And.
Our NPD expectations for the rest of the year take those lifting windows into accounts and look we just think it's good for the industry to have that level of sophistication.
And for all of the players too.
Have to adhere to.
It's what I'm used to.
And my experience when youre dealing with with your customers and particularly of retailers. So.
We were comfortable that the projections when we are talking about them take those listing windows into account and.
And again, I think I think that increasing sophistication at the provincial board level is really good for the industry.
Your next question comes from Andrew Carter.
Please go ahead.
Thank you good morning, I wanted to focus specifically on the commentary around the THC investments I think it seems like Youre, a little less bullish on the humor Bill I'm not sure, but I did want to ask if you're kind of signaling that you might be a little bit more aggressive first off would those investments be outside acreage and kind of where does that relationship stand is using acreage.
Vehicle, because I believe theres, some license fee and you'd have to pay to them and then finally, given your relationship with constellation can you had the flexibility to move a little bit of aggressively and potentially dam.
Do I do and exchangeable share position like you had with Saracen.
Yes, so good questions Andrew the thing that I want to be really clear about is.
And when we're talking about USB C.
Permissibility, we're not waiting right. So so I was just wanted to remind everybody of how we're approaching and so first thing. We're doing is we're building our U S business.
Where we can today, meaning CBD.
CBD, where were we of the Martha Stewart brand, which is the number of 3 brand we have Bayou steel we have our consumer.
Products businesses like Storz <unk> bickel.
And which as Mike pointed out was up 41% year over year getting those routes to market built in the U S help us build that infrastructure that we can leverage upon permissibility. So that's the first thing of second thing and as you pointed out acreage, so we own 70% of acreage and 20% of tariffs and.
And that gives us a turnkey entry to the U S post from its ability, but it also allows those businesses to grow as they can.
Leading up to Permissibility, so to the extent that the msos are allowed to.
And to continue to drive their growth plans. We have some guys that are that are doing it and I think doing it well today then.
Your.
And your I guess to go further on to your points and so then when we talk about constellation constellation is already providing us capabilities around brand building and thinking about the company that has literally built the modelo brand into 1 of the strongest beer brands and the U S. We have access to that capability settings and canopy.
<unk> has a very strong distribution network, we are using that network today constellation has really good operational capabilities and as evidenced by what might be best in class EBITDA margins across CPG.
And then we have the $2 billion and cash on our balance sheet right. So all of those things together I think.
And we're just saying that I remain really bullish on U S. P&C permissibility, but even without Permissibility, we're doing things today that allow us to be real significant players in the U S. P&C market post Permissibility now in terms of what we would be willing to do today I would argue that we've actually.
And we led the industry in terms of.
Defining how we can enter the U S through transactions like acreage and tariffs and and we're not finished so we're going to continue to do that sort of activity.
Between now and the time, we get to the Permissibility and we're pretty excited about what some of the opportunities spring and as it relates to.
Our relationship with acreage and Paris, and and our agreements that we have between them I think that.
The businesses is.
As much as we can as much as we are allowed to under the current regulations and laws.
The businesses I think are really clear on what we're mutually trying to accomplish which is to build the strongest.
U S cannabis ecosystem.
We possibly can and I think CB CVI has been.
A huge positive and in this regard and so I think.
We've not been in any way limited by constellation in fact, our ability to address the U S market has actually been bolstered by the constellation presence.
Your next question comes from Bill Kirk and Okay.
Okay and partners. Please go ahead.
Okay. Thank you and good morning that was that was a pretty perfect segue for where I wanted to go and I wanted to spend a little time on the relationship with southern wine and spirits.
The Martha Stewart, Gummies, and sequential prod products, they're different from a lot of their portfolio and I would think and many states would likely go to the different retail accounts and southern would normally call on so I guess the question is how willing is southern to adjust their routes to help your products hit all of the potential accounts.
Not just existing southern accounts and and does that ability for them to do so how does that differ maybe between states.
Yes, so good question and you know.
I will tell you.
To begin with.
A lot of support for our CBD business at the highest levels.
And then southern they view this as and unlock for them over time.
As.
Cannabis and cannabinoid and it's become mainstream in the U S and so they're putting resources on this to make sure that they build out that capability set I would also say on that same vein, we're having the same discussions with the with the members of constellations.
Beer distribution network the gold network.
And so I think that.
I think that we have very willing partners and we want to be useful to them is there as these alcohol distributors are trying to build out their capabilities. In this regard and then as it relates to market coverage.
On the our agreement with southern as it relates to CBD brands is really focused on the state's first of all where where they can.
They can comfortably and legally take our CBD products into those states and it also.
Our agreement with them calls for southern to have access to those states, where the routes to market lineup with the kinds of our routes to market that the actual retailers that we think our brands are a good fit with and so I don't think there'll be a conflict.
<unk>.
And from that perspective.
And the 1 other comment I might make about this is that our sales teams and southern sales teams and Bayou steel sales teams and the beer network sales teams are just.
And the beginning stages of learning so we're learning to work together and that's the sort of thing that debt.
And I am really gives me a lot of optimism and our U S businesses because as and.
And as those partnerships grow and as we get better at it.
And at managing the relationships right down to retail and through that distribution channel.
Going to be really well positioned with the brands, we have and the market today and the brands and we'd like to bring to the market and the future. So.
I would say, it's going well and we have support at the highest levels and those organizations and Bill I know you know all of those folks. So you should you should ask them that question as well because I think that would give you the same response.
Your next question comes from John Zaro CIBC. Please go ahead.
Thank you and good morning, I also wanted to follow up on the commentary on the U S side as well.
Is it fair to say you'd prefer restructure that mimics the tariffs and deal rather than your acreage deal and and David What do you think is missing from your current U S. Optionality of investments, whether it's brands or geography, and you are different parts of that ecosystem that you referenced.
Yes, so John I think from a structure standpoint.
On.
And when we're looking at the U S. We're prepared.
To be flexible enough to meet the legal requirements and to and to.
To be able to drive that agenda forward, So I would say theres not theres not.
Theres not a predefined path and I think that all of our partners.
Have been have been really understanding of that and willing to flex.
And when I think about what's missing.
Let me tell you what I, let me maybe first day of what I have on what we have right. So we have I think really strong positioning and the highly populated east coast markets.
And.
And I see that as being a real tailwind for for our partners because those markets are just beginning to open now and so.
So we're going to see the power of the.
And the capability set behind acreage and tariffs and I think as those markets open more.
And when you look at the rest of the country I think that.
My when I think about maybe how I would.
Wood.
And would want to build out of the framework I think on less concerned about.
Some of the.
Having a multistate operator for example, that's that's.
And that has a large business in California, because I think the California business looks a lot like the liquor industry already with with a bit of a liquor store distribution model.
So for me.
It would be more about having other capabilities other than just <unk>.
And of seats of sales capabilities that you have within within the Msos. So.
I would say John maybe on <unk>.
I'm not being.
And really specific here on what we're looking for but you should know that we are out there looking to build out our capability set.
Your next question comes from Michael Library.
Piper Sandler. Please go ahead.
Thank you and good morning.
And Michael I, just wanted to I, just want to come back to the EBITDA profitability.
Operations and.
And just make sure I understand it really and how.
And you.
You feel like it is because.
I want to make sure first of all my hearing you right that it depends on hitting at least close 2 of 250 million sales run rate and.
And if so obviously for <unk> for example that would be up about 70% Youre talking about the Canadian market running up around 40, what my math, there be correct to imply that you've really.
Hit this it all depends on U S. CBD really gaining a lot of speed and also some outsize contributions from <unk> from.
It looked like like Germany.
Yes, I think thats generally accurate that.
Our path of profitability is and based on Canada growth alone, but it's the success and the U S and ramping up our new businesses that we spoke about earlier and.
1 of the biggest ones is on biopsy on and we've talked about that at length and prior calls, but this is a multibillion dollar sports nutrition category that we're going after and we're building HCV as we speak where and I think it's over 16000 doors as we speak.
The gold network at constellation is being activated as we speak and we've got a lot of wins under our belt already in terms of understanding the response and distribution and velocity from some of the local marketing that we're doing so.
That's 1 debt I would argue is our largest most meaningful upside opportunity and the back half, but I would not dismiss the.
The contribution from Martha and Cuatro, David spoke about how Martha is performing and market in terms of brand performance and velocity Cuatro still early days, but all signs are positive debt. We've got the right product with the right branding with the right flavor profile.
And we also have <unk>.
New products that are coming to market that we haven't announced yet, but we will be announcing those soon.
Debt.
And that of really entering markets that are of very large tam that virtually have no meaningful competitors and our way with we think differentiated attributes that will be very competitive.
So all of these things are assumed in our second half of the fiscal so we have to execute Michael but youre right that the U S is as large contributor to our path to profitability.
Your next question comes from Adam.
Scotiabank. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
I don't know if its already been touched on and I apologize I had to jump on all of late here, but I wanted to get a view on the dynamics and the Canadian market currently.
And of provinces, such as Ontario.
And being able to.
And sort of locked down on protocols for interest over 2 months now.
And I was just wondering if you've seen any changes and buying patterns from the provincial distributors on the back of that there.
Theres been a backlog of stores that have opened over the past 6 months and so you would think at some point they've hottest starts talking inventory again to offset those sort of out of new stores right.
And just any color on that front would be helpful. Thanks.
Yes, So let me take let me take first stab and David you can you can jump in but.
Look.
We do think we're on a road to recovery.
And in Canada, it's been a tough slog here for the last 4 or 5 months I would say.
And when you look at what's been different over the last few months store traffic.
Abated quite a lot over the last quarter and.
That has that has multiple implications because as as consumers revert back to online or click and collect where the engagement with the Bud tenders is nonexistent and then consumers quite traditionally of reverting back to what they know or just simply seeking <unk>.
Quantity at low price and it's not a surprise to us that we have seen this this.
Gration to value and consumers not exploring new products as much as they would be if they were face to face with a bud tender being sold on product attributes or being able to talk about what occasions, they're shopping for.
So that's been nonexistent and and we're starting to see some green shoots on that which I spoke about in my remarks that as we look at our store engagement with consumers as we get out and the market and talk with other Bud tenders and those interactions are really encouraging because consumers do want to discover and some other new products.
And they're out in the market and those interactions with a bunch of tenders are just key due to some of that.
As you guys know pretty.
Pretty challenging marketing rules and Canada in terms of being on advertised products and terms of provincial behavior on inventory.
<unk> clearly and the Jan Fed March timeframe, we felt a pull back of inventories across the board pretty consistently.
And that's starting to come back I don't know that Ontario has.
Rebuilt much of their inventory over the last couple of of months.
We're seeing some of that and Alberta, but it's been.
It's been a little hit and miss across the provinces, but generally speaking we think that the provinces are back and the mode of replenishing.
Their inventory to support the ongoing growth and store count and consumers coming back to the stores.
Yeah, and I would the only thing I would add to that Adam and then to build on my earlier comments of provincial.
And so ultimately our customers are becoming very efficient and and Theyre and theyre very well run and I think that continued evolution.
And in that regard is going to help us and others and the industry to be able to meet consumer needs on a consistent basis and again I think that just bodes well for those of us that know how to.
Worked well with our customers.
Your next question comes from re patch per week.
And Hymer. Please go ahead.
And thanks for taking my question, so I'd really 2 related questions on the Robin and the line. So first do you guys still feel comfortable of that CAGR of 40% to 50%. The next few years and then secondly is there any granularity you can provide in terms of of how you think about the revenue contribution relate to Supreme and as part.
This year.
So short answer is yes.
Maintaining our guidance on 40% to 50% CAGR annually for the next several years not not not changing that in terms of Ace Valley and Supreme look we're very excited about these 2 brands and we think we're just getting started.
The integration plans with Supreme are well underway.
It's been fairly seamless so far we we announced that with Supreme we would capture of $30 million of synergies over the next year. We're very confident that that will be delivered we've got innovation plans behind Supreme.
Better and progress we have.
Our Canadian sales force very excited on continuing to build out points of distribution on Supreme So it's a sizable contributor.
And FY 'twenty, 2 and and 1 of the things that we spoke about earlier, but just to reinforce is arguably 1 of the biggest intangibles on Supreme is going to be the knowledge transfer that we're getting on growing premium high THC flower and transferring some of those practices into some of our other.
<unk> facilities, and it's been quite productive in terms of Ace Valley.
And as valley when we acquired it it was a very Ontario centric brand and we're continuing to build out distribution across Canada on that we're very happy with the performance that we've seen so far and behind Ace Valley, we have additional and MPD plans as you would expect that will be coming to market.
Over the next 3 to 6 months so.
Again these are highly synergistic brands that we believe fit white space on our portfolio and all signs are positive David anything you want to add on those acquisition no I just think that the.
The ability to take a brand like Ace Valley and innovate around it is just really from the products that are coming out are totally dialed into consumer expectations and.
As I said and my comments <unk> I'm really excited about is valley Dream CB and gummies.
A real strong foray into the mood management and vision that we have here net.
Canopy, so exciting stuff from spokes premium is valid.
This concludes the Q&A portion of the call and I will now turn the call over to Mr. Klein for final comments.
Thank you again for joining US today. This is a really exciting time to be and the Canada space and as I as I mentioned and in my comments and in some of the questions that I answered, we're not waiting around for U S. Permissibility, while we remain very optimistic in terms of timing on Permissibility, we are executing against our.
<unk> today, and it's very exciting and and I'm glad you're along for the ride.
Hope that you and your families remain safe and healthy and have had an opportunity to enjoy the summer season and.
And also encourage you to try our fantastic cannabis brands as well as our non cannabis brands for those of you that arent and legal markets.
Look forward to updating you on further progress that canopy makes as of year progresses.
Our Investor Relations team will be available to answer any additional questions average.
Great day.
This concludes canopy growth's first quarter fiscal 2020 financial results conference call.
A replay of this conference call will be available until November 4th 2021, and can be accessed following the instructions provided in the company's press release issued earlier today.
Thank you for attending today's call and enjoy the rest of your day.
[music].