Q4 2022 Canopy Growth Corp Earnings Call
Good morning, My name is Dennis and I'll be your conference operator today.
I'd like to welcome you to canopy growth's fourth quarter and fiscal year 2022 financial results Conference call.
At this time all participants are in a listen only mode. I will now turn the call over to Tyler Burns director of Investor Relations. Tyler you May begin the conference call.
Thank you operator.
Good morning. Thank you all for joining us today on our call we have canopy Growth's, Chief Executive Officer, David Klein, and Chief Financial Officer, Judy Hong.
For financial markets opened today cannot be issued a news release announcing our fiscal results for the fourth quarter and full fiscal year ended March 31.
2022.
This news release is available on our website under the investors tab and will be filed on Edgar and SEDAR.
We have also posted a supplemental earnings presentation on our website.
Before I 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 assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward looking statements included at the end of this mornings news release. Please review today's earnings release.
And canopies reports filed with the SEC SEDAR.
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 measure are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise noted.
Following prepared remarks by David and Judy We will conduct a question and answer session, where we will first address questions up voted by verified shareholders using the same technologies platform. Following that we will take questions from analysts to ensure that we get to as many analyst questions as possible, we ask that they limit themselves.
To one question with that I will turn the call over to David David. Please go ahead. Thank you Tyler and good morning, everyone and thanks for joining our call today.
Canopy strategy and the foundation, we built over the past fiscal year, along with the key accomplishments in fiscal 'twenty, two which support our fiscal 'twenty three priorities. Judy will then discuss canopies Q4 in fiscal 'twenty two results and provide greater detail on our ongoing work to accelerate our path to profitability.
In fiscal 'twenty, two we build a solid foundation for growth and clearly defined how canopy will realize the massive opportunity ahead of us not only as a company, but it's part of a developing industry.
Canopy growth is it premium canopy growth is it premium branded North American cannabis company with a fairly simple strategy. We're.
We're focused on building beloved brands in markets and categories that will drive growth for the industry with strong routes to market that meet our consumers, where they prefer to purchase underpinned with operational excellence.
In fiscal 'twenty two three distinct work streams were completed to build this foundation.
First we premium I start cannabis branded portfolio in Canada.
We strengthened distribution of our high performing CPG brands in the U S and.
And third we took concrete actions to build a competitive U S THC ecosystem.
As it relates to premium rising our Canadian cannabis brand portfolio, we maintained the number one market leadership position in premium flower in Canada and through upgrades to our cultivation processes and facilities, we're consistently producing premium and mainstream flower with attributes that consumers demand.
Our share of mainstream flower nearly doubled a direct reflection of our focus on premium cultivation trickling down to our mainstream offerings.
We bolstered our premium cannabis portfolio by expanding <unk>, the best of the West coast into a truly national brand by bringing new flower and pre rolled joints and live resin based products to consumers across Canada.
Seven acres continue to innovate and deliver industry, leading premium flower and infuse pre rolled joints, which we've highlighted through the noted growth series, providing an inside look at the talent genetics and grow techniques behind the brand and flower portfolio highlighting the seven acres facility.
In addition, we rebranded our iconic Tweed brand, which coincided with new tweet flower and pre rolled joints that have drawn very positive consumer feedback.
The new look.
Formats, and strange easier to identify for consumers.
And new flower packaging was designed to preserve freshness.
We're also ensuring canopy has a strong roadmap of new genetics supported by exclusive breathing rights with top craft growers we've.
We've taken best practices from the seven acres facility and implemented Heng dry capabilities at our Smiths falls in Mirabel site as.
As well as upgraded feeding systems air circulation and humidity control and flower rooms to consistently grow product with high THC and other in demand attributes.
In the face of a highly competitive Canadian adult use market, we extended our beverage portfolio with deep displace the deep space Lyman splashdown.
Orange orbit flavors and launched new tweet iced tea and tweet is self serve beverage lines.
Strong demand for these new beverages raised tweet to the number one market share for under five milligram THC beverages.
And deep space is the fastest growing in number two brand in the over five milligram THC category.
We also introduced new gummies under the hero banners of deep space.
Sweet and Ace valley, ranging from two five milligrams to 10 milligrams with rapid onset.
We're investing significant resources in our commercial ground game in Canada with higher education, our Budtender engagement program.
Tenders are critical in guiding consumer purchase decisions.
All of higher education is to strengthen our relationship with Bud tenders through investments in educational resources and dedicated unboxing sessions.
We've had close to 4000 blood tender interactions and have received valuable feedback from this important group.
The second set of work we completed in fiscal 'twenty two.
Was the significant strides made to strengthen the distribution of our high performance CPG brands in the U S.
We're continuing to see strong demand for stores and vehicles gold standard <unk>, including the new volcano, Onyx and Mighty plus which helped propel stores and vehicle to its 20 <unk> consecutive year of revenue growth.
Storz <unk> Bickel vaporizers set the industry standard for quality and performance with strong recognition among connoisseurs and mainstream consumers.
In fact, the stores in backhaul Mighty was recently highlighted by the New York times for producing the best tasting vapors of any portable vaporizer they tested.
Biofuel saw gains in distribution and sales velocity of the ready to drink products, which drove a 50% increase in revenue in fiscal 'twenty two versus fiscal 'twenty one.
We believe that this challenger brand is quickly turning into a winter as we watch members of team Bayou steel dominate in the playoffs, including Luca <unk> of the Dallas Mavericks, Connor Mcdavid of the Edmonton Oilers and Andrew Wiggins with the Golden State Warriors.
Lastly, I am pleased to share the concrete actions completed in fiscal 'twenty two that have built a competitive U S. T to the ecosystem that will provide canopy with turnkey entry into the U S market.
Canopies model is fundamentally different from our competitive set giving us unique positioning in the U S. With our THC assets that include acreage <unk> brands jetty extracts and a sizable ownership stake in <unk>.
I want to be clear, we aren't waiting for U S legalization to start extracting value from these assets. We've already paid for majority ownership positions in Wanna, and jetty with acreage and tariffs and offering valuable routes to market.
Critically all these entities are already generating healthy profits.
Our U S ecosystem has significant room to grow with footprints in large addressable markets.
Acreage is well positioned to win in key northeast States, such as New York, New Jersey, and Pennsylvania and.
In fact, both acreage and tariffs and are benefiting from the recently opened adult use cannabis market in New Jersey.
We have a strong brand portfolio, including <unk>, which is the number one cannabis edibles brand in North America.
And jetty, a top 10 candidates brand in California, and a top five brand in the vape category.
As a leader in solvent less vape technology jetty has proven itself in the highly competitive, California cannabis market and is prime for rapid national expansion by leveraging canopies U S ecosystem.
<unk> also gives us a critical route to market in California, which will pave the way for our high impact Canadian brands, such as deep space and sweet.
And we're actively working to bring the jetty brand and its innovative products to the Canadian market.
We've seen the success that <unk>, a highly respected premium brand.
Had it in Canada, and look forward to bringing jetty to consumers north of the border.
When you add all these elements together canopy is amongst the top five candidates players across North America. In fact, if you consider canopies annual revenue combined with the reported revenue of our U S. THC ecosystem of acreage Juana and jetty canopy would generate over $1 billion in revenue with healthy margins.
I firmly believe in the strength and competitive positioning in the USDA THC ecosystem, we're building canopy.
<unk> unique model is poised for rapid growth.
On prioritized markets with fast growing categories.
<unk> brands and a balanced operations footprint.
Now I'd like to move to the strategic priorities that we focused on.
Hello.
Focus that will focus on in fiscal 'twenty three that are designed to build on the foundation, we built in fiscal 'twenty two.
Priority one is to continue improving performance of our Canadian cannabis business and achieve profitability as soon as possible.
Judy will outline our work on margin improvement as a core element of achieving positive EBITDA, but there are multiple aspects of this effort.
We must continue to drive to win in premium categories, which support higher margins.
We also expect our pipeline of new products coming to market in fiscal 'twenty, three will strengthen our competitive positioning and along with efforts to win the ground game with retailers, who will drive market share gains.
Our second priority is driving growth of our high potential CPG brands, we will be making strategic investments in marketing and new product development for our high growth CPG brands of stores <unk> and <unk>.
Considerable runway for both brands and investment will be to further build brand awareness and visibility amongst consumers and building a robust distribution pipeline.
I'd like to reiterate that storz <unk> bickel is already $100 million brand with attractive margins and Bayou steel is the fastest growing sports hydration drink in North America, and our near term aspiration is to grow the brand into a top five position as we significantly increased distribution through continued onboarding of major retailers.
And U S. CBD, we await the regulatory unlocked required to truly tap this categories potential and we are adapting our approach by increasing focus on direct to consumer E Commerce retail model and select key account partners. An approach that is currently winning with our Martha Stewart CBD brand.
While this narrower approach is likely to mean more measured growth for our U S. CBD business over the medium term, we remain optimistic that following the passage of clear regulations to support a national CBD market, our leading brands are positioned to win.
Lastly, we are focused on further strengthening our USDA ecosystem.
We remain firm in our belief that investing in high quality U S. T C assets gift canopy, the competitive positioning that will enable us to win in the largest cannabis market in the world and create significant value over time.
We've done this now and not waited for a number of reasons.
We believe the components of our ecosystem are highly complementary.
Most importantly, we have strong heritage brands that are highly scalable for the large east coast recreational market.
Working together in the future of these companies will create synergies that will result in significant business growth for our ecosystem, meaning greater shareholder value generated for canopy.
Finally, we continue to benefit from our strategic relationship with constellation brands by leveraging their experience and capabilities to support the continued advancement of our U S strategy, specifically in the area of commercial sales marketing and operations.
In summary over the past year, we've taken decisive steps to focus canopy aligned our operations with market realities and succeeded in premium rising our brand offerings to meet the desires of our consumers and to match our vision for growth.
Lastly, we built and continue to strengthen what we feel is the industry's strongest fully north American premium branded company.
With that I'll now turn it over to Judy.
Great. Thank you very much David and good morning, everyone I plan to focus my comments on a quick review of our fourth quarter and fiscal year 'twenty to 'twenty two results.
Discuss in detail the actions that we're taking to advance our path to profitability.
To provide some perspective on our fiscal 'twenty outlook.
Let's start with a review of our fourth quarter and our fiscal 'twenty two financial results.
In Q4 healthy performance in our CPG business was offset by softness in our Canadian recreational business.
Adjusted EBITDA was further impacted by continued gross margin challenges despite strong operating expense discipline.
In Q4, we generated net revenue of $112 million, representing a 25% decline over the prior year.
Excluding the impact from acquired businesses and divestiture of C. III net revenue in Q4 declined 26%.
Details and drivers of net revenue in Q4 and fiscal 2022 are provided in the press release that we issued earlier today.
Let me briefly touch on our Canadian Recreation of E&P revenue performance.
In fiscal 'twenty, two we made a deliberate decision to transition our Canadian business to focus on higher margin maintain premium products we.
We deliberately chose to not chase low margin value flower sales and for candidates company transitioning your product mix can be challenging.
As we continue to focus resources on actively pursuing low margin <unk> sale, our Canadian recreational cannabis business would have delivered significantly stronger revenue in fiscal 'twenty two.
Expense of doing what was right, which was putting our Canadian candidates business on a path to sustainable growth and profitability.
I am pleased that efforts that premium is a business in Canada.
Over 25% revenue growth in our premium brand with strong growth from dozer and deep faith, Brian during Q4.
We also delivered a positive mix shift with premium and mainstream sales accounted for a combined 56% of Canada recreational TWC sales in Q4 of fiscal 'twenty two.
32% in Q4 of last year.
Turning to gross margin our reported gross margin in Q4 was negative 142% and adjusted gross margin was negative, 32%, which excludes the impact of 4 million inventory step up charges from the Supreme acquisition as well as the $119 million charge, mostly related to inventory write downs, resulting from.
Strategic changes to our business.
Now similar to prior quarter gross margin in Q4 was further impacted by lower production output and price compression in the Canadian recreational business higher supply chain costs as well as inventory write downs.
Excluding inventory write downs and payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program Q4, adjusted gross margin would have been negative 18%.
Adjusted EBITDA in Q4 amounted to a loss of 122 million.
I'd like to now take this opportunity to speak to the efforts underway to improve our profitability.
As David mentioned, achieving profitability in our Canadian operation is a key priority for us and we've taken additional steps to improve our gross margins and reduced our SG&A spending.
First on gross margin.
Over the past couple of years with phase three key headwind for gross margins in Canada.
One lower production output driven by reduced sales put significant burden on our fixed cost structure and estimate falls manufacturing facility.
Second the combination of an unfavorable mix and price compression, particularly in our flour business pressured net revenue and gross margin.
And third we incurred significant noncash cost amounted to nearly $120 million and inventory write downs in fiscal 'twenty, two which we did not exclude from our adjusted gross margin as well as adjusted EBITDA and a $47 million depreciation costs, which is included in our cost of goods sold.
When adjusted for non cash cost and to benefit from payroll subsidy, our cash gross margin and the global Canada segment is estimated to be at 7% in fiscal 'twenty two.
We expect our cash gross margins in fiscal 'twenty three to improve significantly versus last year driven by a few factors.
Our premium position and strategy.
We anticipate continued shift in our Canadian recreational sales to higher margin premium and mainstream flower and pre rolled joints edibles beverages and date.
Second our cost savings program should drive reductions in our cost of goods sold.
Our cultivation productivity initiatives, including improvement in facility are expected to lower per gram cultivation costs.
We're also reducing indirect fixed cost in our operation as we move to a more flexible manufacturing platform by outsourcing production of certain products.
We've developed a number of productivity initiatives across manufacturing supply chain and procurement.
In addition, we've improved our demand forecasting process to ensure that we're more agile in adjusting our production. So we can further inventory write offs.
Now some of these savings are expected to be offset by higher wage inflation and supply chain cost, but we are committed to delivering savings of $30 million to $50 million over the next 12 to 18 months and we plan to look for additional opportunities to capture more savings throughout this fiscal year.
The other key initiative is reducing our SG&A expenses.
In fiscal 'twenty, two we incurred $400 million of selling and marketing G&A and R&D expenses.
Over the past few months, we took a hard look across all of our areas of our SG&A spending with realities that our expense structure with too high to support our near term revenue.
This has resulted in several cost savings initiatives, which we expect will reduce our SG&A expenses by $70 million to $100 million over the next 12 to 18 months.
Roughly half of the savings is expected to come from reduced head count across our businesses as we have further tightened our strategic focus and streamlined our business.
The remainder is expected to come from lower professional fees office costs insurance fees and it costs.
Let me now provide some perspective on our financial outlook.
Based on our fiscal 'twenty, two result changes to our business mix due in part to divestiture and continued volatility in the Canadian recreational market. We are removing our medium term financial targets that we provided in February of 'twenty one.
We also believe the shifting consumer preferences low barriers to entry in the Canadian recreational market.
So regulatory progress across Canada, and U S make it difficult for us to provide near to medium term targets.
That said, we expect the execution of our premium mutation strategy in Canada, our cost savings initiatives.
Growth in biofuel and assortment Peco will over time result in strong revenue growth attractive margin profile and free cash flow generation that are in line with premium branded CPG company.
So with that in mind, let me offer some perspective on our outlook for fiscal 'twenty.
First we expect significant revenue growth some bias deal as the team July higher distribution and sales velocity, which is supported by sizeable marketing investments in fiscal 'twenty three.
We expect another year of solid growth in stores of nickel building on its strong foundation with investments to increase higher awareness.
Our Canadian recreational PDP business is expected to show improved performance as the benefit from <unk> strategy and new product launches with the growth weighted towards the second half of the year.
Our Europe and rest of the World business is expected to show strong year over year growth in medical sales in Germany, Australia as well as continued opportunistic bulk sales to Israel.
Our U S CPG business will see a tighter focus against our brand with emphasis on the E. Comm channel. Thank key direct to ship accounts as it will wait for further regulatory progress.
From a phasing standpoint, we expect revenue growth on a year over year basis to be weighted to the back half reflecting continued mix away from value followed that really began in earnest in the second half of last year and the timing of our new product shipments in Canada.
Second we expect fiscal 'twenty three to show significant improvement in our profitability with the expectation that this year being a transition year as we work towards profitability.
We are already profitable in select areas of the business and we intend to further improve our profitability and F&B and this works in fiscal 'twenty three.
We're focused on achieving profitability in our Canadian business as soon as possible as we execute against our cost savings program to achieve profitability.
During fiscal 'twenty, three we intend to make strategic marketing investments and bias deal to drive increased velocity and will secure as we secured a significant number of doors over the past several months.
We also plan to make investments in our U S PC ecosystem strategy.
To be clear our P&L reflects investments that we're making against the development and execution of our strategy in the U S. But none of the revenue and profit in our U S. PC investments are included in our P&L.
We anticipate to achieve positive adjusted EBITDA in fiscal 'twenty, four with the exception of strategic investments and bias deal and advancement of our <unk> strategy.
Let me now speak to our cash flow and balance sheet.
We anticipate cash interest payments of at least $120 million based on our current debt position in fiscal 'twenty three.
And our full year Capex is expected to be in the range of $50 million to $60 million.
Our balance sheet remains strong with $1 $3 7 billion of cash and short term investments as of our fiscal year and we have $2 billion.
S B of a shelf available to us as well as additional debt capacity of 500 million USD.
Regarding our convertible notes that are set to mature in July of 'twenty. Three we have several options are currently reviewing and we'll update once we have any news to share.
So we are diligently working to reduce our cash burn through opex savings discipline around capex and other initiatives that we are planning to really look into for fiscal 'twenty. Three and also we expect cash proceeds from some of the divestiture of the noncore businesses.
In conclusion, achieving profitability is critical for us and we've undertaken initiatives to streamline and drive additional efficiencies for our global candidates business and we're focused on executing our path to profitability in Canada, while we continue to invest in high potential opportunities, particularly in our biofuel business and to further.
Developed by <unk> ecosystem.
This concludes my prepared comments, we'll now take questions.
To begin the Q&A session will first address investor questions that were uploaded through the question and answer platform developed by <unk> technologies Tyler can you take the first question.
How do you plan to incentivize shareholders as well as bring in new investors in this volatile market.
Thank you for the question. So I think the share price declines is really not unique to canopy. When you look at the share price performance of the U S and Canadian LP.
Any of those names are down pretty substantially from a share price standpoint, not from canopy standpoint, we are focused on really controlling what we can control, which is really laying the foundation for long term sustainable growth.
And really building a premium branded cannabis company as the market goes through these types of cycles.
Now for investors with long term focus we believe that cannot be really represents a compelling value as we do have a unique and compelling strategy to win in the North American cannabis market and we're really excited to engage and educate many of the the current shareholders and as well as new investors going forward.
Thank you Judy the second question, how is cannot be planning to make a name for itself in the U S market.
Yes, so so as I called out in my script, we're not waiting because we're already doing this.
Brands like one of them want to edibles.
Jody extracts.
And along with our MSL partners in acreage in Paris, and we already have is sizeable and profitable and growing U S presence.
Which would.
Basically our across North American cannabis with a focus on.
Brands as well as premium positioning so we think that.
Surely like everyone else, we would benefit from the opening of the U S market from a federal Permissibility standpoint, but we don't have to wait for that in order to to have our <unk>.
Businesses work together to create value in that marketplace as Judy pointed out that the difficult component of this strategy is communicating it because we don't consolidate their results into our results.
But for many of these assets, we've we've paid for them and so while the cash has left our balance sheet youre not seeing the P&L and cash flows from those business accrue to us.
But.
Rest assured that they're continuing to grow while the while the market grows in the U S and the other thing I just want to point out there as well as that.
We as well as.
People in the industry and experts around the industry continue to believe that the north American cannabis market is in that $60 billion to $80 billion range at revenue and Thats not the hope that you sometimes see in a nascent industry that consumers are going to adopt.
The products that you offer in that industry.
This is an industry thats.
That we're what we're looking at is how to shift consumers from the illicit market to the legal market. So I think that the size of the prize in the industry and in the U S. In particular remains dramatic and we think we're well positioned to perform there.
Yes.
Operator, Judy and I are now happy to take questions from the analysts.
Thank you, ladies and gentlemen, we will now conduct the question and answer session I would like to ask a question Press Star then the number one on your telephone keypad she'd like to withdraw your question Press Star two.
To ensure an efficient call they get to the question so that as many analysts as possible analyst questions gentlemen themselves to one question.
Your first question comes from Vivien <unk> with Cowen. Please go ahead.
Hi, Thank you good morning.
Good morning, good morning.
So Judy I just wanted to follow up on your commentary around the outlook for 2003, I appreciate but clearly it will be back half weighted given the accelerating year over year declines that you guys are seeing for the.
Total enterprise in particular for <unk>, but if I look at the <unk> segment, specifically it sounds like you guys are making.
Barry specific painful, but strategic decisions in terms of portfolio mix.
Given all the things that that segment can grow next year on a full year basis. Thanks.
Yes, so Vivian I'll make a couple of comments and David you can be you can also chime in as needed.
I think you have to think about the shift that we made throughout fiscal 'twenty two.
Premium mutation strategy, where when you look at the first half of last fiscal year, we still have sizable value forward sales that were flowing through our revenue base. So on a year over year basis, I would expect that that impact with continued to show up on a year over year basis with the value flower sales really being deemphasize within our core.
Folio.
I think the good news is that on a sequential basis. We're excited these stabilization even in our overall sales.
And I think be the other good news is when you look at the market share performance of our premium brands and markets. We really do think the evidence.
Our that that those brands are starting to gain traction in the marketplace and ensuing.
Showing good good good momentum with the consumers when you look at all of the premium.
Segment.
Including flower and pre rolled joints and other categories. We are number one in all of the premium segments collectively. So I think we've made really good strides the premium segments itself is also growing on a year over year basis. So we feel pretty confident that as we execute on our premium realization strategy that the growth of the category as well.
As our market share momentum will mean in the back half that will be much improved performance from a Canada perspective, yes.
Yes, the only thing I would add to that Judy is I think the key component of being able to win in mainstream and premium is the ability to consistently grow.
THC good therapy profile flower and we made some.
Some decisions during the course of the year or two.
Change the way we.
We grow our plants in terms of feeding schedules in irrigation and lighting.
We've made adaptations around our post harvest process in particular in areas like hanging dry.
We've started to add.
Two our final packaging.
Packets that allow us to retain moisture levels in our finished goods when they're going out to consumers. So we've done all these things so that we can continue to consistently deliver.
Flower in particular for the premium and mainstream segments and to me that's been the biggest the biggest issue not just for us but for many of the Lps over the last couple of years is the ability to consistently remain on the shelf with the right value proposition and we think given all the changes we've made we are there.
With the caveat as Julie as Judy called out that.
Because it's an AG business it takes a while.
Four four.
For us to be.
Fully producing at the attribute level that we want to be producing yet, but we're getting really close.
Your next question comes from Tami, Chen with BMO capital markets. Please go ahead.
Yeah. Thanks, good morning.
I wanted to go back to the.
Adjusted gross margin for the Canada segment, I guess, firstly, just a quick two part of the question here Judy sorry, you threw out a bunch of numbers like 18% gross margin. Excluding I think there was COVID-19 subsidies or write downs or something if you could just clarify that and then.
As a 7% gross margin that you also throughout so that's sort of the first of all housekeeping items and then just my second question is I just wanted to go back to why the Canada segment gross.
Margin was so low this quarter like was it just that.
Because of all the difficult changes you've had to make a really sort of a onetime bolus of.
Lower production that really couldnt offset the fixed cost or was there something was there something else there that just really caused.
To to capitulate, Darren and how do we think about that going forward. The next couple of quarters, yes. Thank you.
Sure Tobey so on your first question about sort of reconciling the adjusted gross margin percentages. So the adjusted gross margin of negative 18%. When you look at what we reported on an adjusted gross margin basis, the negative 32%.
That basically still include the non cash inventory write downs that are not related to any of the strategic decisions that we made in Q4.
So theres, a big chunk of that Thats dragging down our adjusted gross margin.
Did have a modest benefit in terms of our skus with the payroll subsidy payments. So when you account for those factors, we estimate that we would have been at around negative 18% in <unk>.
<unk> Canada's business from a gross margin standpoint.
Now the 7% gross margin comment really related to the full year number and that is really when you and as I said earlier, excluding some of the noncash costs. Because we also incurred some of that inventory write downs earlier than the year.
A full year basis, if we excluded noncash inventory write downs, which are still a part of the adjusted gross margin and adjusted EBITDA in our P&L, we excluded depreciation cost of noncash depreciation costs and then we also comp out there.
<unk> payments.
Payments.
The payroll subsidy that we do not expect to continue in FY 'twenty three we would have been at around 7% from a cash gross margin basis for the candidates business. So I hope that addresses your.
Your question on <unk>.
On the on those numbers.
Now some of them are.
Candidates gross margin performance in Q4, I would say the inventory write downs.
Theres been and frankly, a volatility in that number throughout the year and I think that is partially a function of.
Continued shifting consumer preferences, and our pivot in our strategy to really move away from value Fowler.
As that has has happened we've decided to take some of that inventory write downs.
As a result.
And then I think the other factor is some of the price compression and the margin compression that we have seen in the cannabis market broadly.
And I think as we come out of this premium realization shifts.
We expect our gross margins to benefit on a go forward basis as we benefit from the mix improvement.
And then as I said earlier, if we can really improve our demand forecasting process, which really have spent a lot of time on and we do some of that inventory write downs and then achieved the cost savings that we've allowed outlined we do expect sizable improvement in our cash gross margin outperformance.
Our Canadian operation.
Your next question comes from Chris Carey with Wells Fargo Securities. Please go ahead.
Good morning.
Good morning, gentlemen, I just wanted to.
Just wanted to follow up on.
Question around gross margins I think you mentioned the.
You kind of see a 70% gross margin underlying rate.
Obviously, that's much better than the adjusted number.
In the quarter, but probably not satisfying to you over time.
In order to run a profitable business and perhaps that becomes a bit of a challenge.
Even with the SG&A reductions, which you've announced so when when do we get through all of the mix.
Evolution.
The right sizing of the products that you want for the market.
Where do you see the gross margin for this business trending over a very long term horizon do you have some sort of idea of where that is and secondly on the non candidates gross margin I wonder if you can just expand a bit on some of the factors that drove the sequential decline clearly we're seeing inflation in <unk>.
<unk> a number of non candidates categories. So can you maybe expand on those and what youre doing to try and alleviate some of that pressure as we get into fiscal 'twenty three.
Sure Chris.
So yes, I mean, we look we are focused and committed to gross margin improvement across all areas of our business, including candidates in the CPG businesses now if I just go through each of our businesses.
Note that we are already profitable and carry a healthy gross margin in fluids and pickle This work and international medical business.
With the Canadian business.
Talk to about this in a prior question, but it's really some of the price compression.
And the noncash costs that we've been incurring thats been really pressuring the gross margin. So as we execute our premium mutation strategy and see the benefit of that mix improvement.
As we.
Achieve our cost savings that we've outlined we do believe that we can achieve 35% to 40% cash gross margin in our Canadian business over time, and I think that that is.
Our margin structure that we think is reasonably attractive.
Four bio steel.
Our gross margin in the near term and frankly in Q4 was hampered by a higher co packing costs as well as increased distribution and warehousing costs and this is in part a function of us scaling up in terms of the revenue as well as just the higher supply chain costs as everyone in the industry is incurring.
<unk> fuel costs, we do have a number of initiatives in flight to reduce our co packing cost distribution and warehousing expenses and we do expect improvement in gross margins in the biofuel business.
Fiscal 'twenty three and beyond.
Globally as you mentioned, we are dealing with some of the current inflationary pressure wage inflation the supply chain costs that are going up but we do believe that our cost savings program to drive overall improvement in gross margins in fiscal 'twenty three as well as on a go forward basis. So again, we can.
Think about our cash gross margin in the Canadian business in that 35% to 40% range and then the rest of the other business is actually carrying a higher gross margin. We do think that over time, we can be in that 40% plus gross margin as a total company.
Your next question comes from John <unk> with CIBC. Please go ahead.
Thanks, Good morning, I wanted to ask about the EBIT guide maybe from the revenue side and the cost cuts you announced get you to around one third of the Delta on current run rate EBITDA versus your target so presumably youre planning for some significant sales growth, but with the changes youre referencing especially in the Canadian market are also on as competitors.
<unk> are undergoing and this is a market that's now growing 20% to 30% a year. So so to get to your EBIT guide you'd need to grow significantly above that rate. So I'm wondering what gives you the confidence to be able to get there given the pace of the market growth and given the level of competition, you're seeing in presumably no end of price compression in sight.
Yeah. So.
I think that.
We're going to continue to see.
Strong competition in the Canadian market I believe that.
We have some brands that are beginning to resonate with consumers although it's.
Canada is still isn't a full up brand store yet.
Our ability to execute.
At retail is exceptionally strong and I talked about are our work with Bud tenders in our work with <unk>.
In general in our ground game.
To get out at retail and look we're in a challenged retail environment at the moment with a lot of retailers.
Having difficulty in the market right now and we're able to work hand in hand with them to help them performance. So we think that.
Those items, coupled with our ability to grow premium quality flower consistently at large scale in Canada ends up being a differentiator and I will point out that we.
We've retained the number one position in premium again this quarter and we doubled our share in particular on the back of our Tweed brand in the mainstream segment. So so the areas. We're focusing on are showing green shoots it's just.
The broader mix shift that Judy outlined.
Puts a significant drag on our revenue line.
And John the only comment I would add though is that we do.
Believe that making strategic investments in growth areas of the business like <unk> and our <unk> strategy is so critical part of our strategy. So I think from our perspective that we can be more profitable if we choose not to invest in those areas.
<unk>.
With that in mind, but we really do buy are bullish on the prospects of <unk> being the challenger brand in the in the fast growing premium hydration segment in the U S market and as I said, we do have a compelling <unk> strategy that we are willing to invest against them. So it's really the investments in those areas but.
Ensuring that we can be profitable in all the other areas of our business.
Your next question comes from Andrew Carter with Stifel. Please go ahead.
Thank you. Good morning. My first question is actually all kind of related to the ecosystem in general first one is you've now done jetty and want a correct me if I'm wrong on the agreement with the acreage. They have a first right of refusal ability to look at that so I assume that they're going to be launching those brands.
Soon in New Jersey, New York and I believe there is also an MSA fee, which I think would help them and therefore help you second part of my question is with kind of what you've kind of committed to today on the cost structure side and pushing breakeven breakeven EBITDA. After 2024, how does this not put constellation in a position to where.
They can either realize the success of your successful or be in that position of last resort resort resort to extract value or just simply walk away. Thanks.
Yeah, So what else what I will say Andrew is that.
Constellation remains committed to our business.
Judy talked about some of the.
Supply chain issues for example around distribution for Bayou steel well, we actually have a constellation person.
<unk> fully dedicated to helping us unlock value from an operation standpoint, we also have people working in field and trade marketing as well as.
As well as in distribution in sales. So we're working very well together I think for constellation.
They they remain committed.
Yes.
We still have a controlling stake in the business.
They intend to retain that controlling stake in the business and.
There were.
Everything we do in particular as it relates to the U S has done joint.
<unk> with them and so I believe it continues to be a very productive relationship.
Our companies and their expectation is that.
The combination of getting profitable with our premium Canadian strategy and.
Being able to deliver on our already profitable and fast growth.
<unk> ecosystem and bring it altogether.
Believe along with us that that creates a really big value unlock at the right point in the future.
Your next question comes from Michael Lavery with Piper Sandler. Please go ahead.
Okay.
Thank you good morning.
I just want to come back to the EBITDA guidance, and just sort of unpack it a little bit.
<unk> tried to understand the magnitude of the profitability headwinds that.
That you anticipate from <unk> and <unk>.
By fiscal 'twenty, four and I guess, partly would love to understand.
If the M&A activity Youre doing in the U S.
It doesn't flow through the P&L and those deals obviously are conditional on U S. Federal laws changing what operating costs do come through that are related to U S. THC and how significant are those and on the biofuel side. It was.
Going quickly, but obviously just a little under 10% of revenues last year, what does it take for that to be profitable and is it is it so unprofitable that it overshadows, obviously the entire rest of the business, but just would love to put all that together.
Yeah, I'll start and David you can you can also add any additional color. So.
Michael as I said earlier, we do view those.
I assume when you as PHC strategy.
The critical strategic investments that we're making are not going to give you an exact dollar amount in terms of the investments that we do have.
Monster ships that were signed on with.
Putting teams and athletes.
We also are really excited about the distributions that we've gained over the last several months. We've got 53000 doors that are committed that we got commitments for FY 'twenty. Three so we really view of FY 'twenty three as a as an important year for Bayou steel to unleash all of that distribution points that we've gotten.
To drive sales velocity in those stores and that investment and in field marketing brand activation in all other areas, where we can really leverage the sponsorships and the athlete partnerships and to really unleash that that brands in the marketplace. So we.
We are excited about the brand, but it is a sizable investments that we are planning to make in FY 'twenty three as it relates to the U S C.
<unk>.
Strategy related expenses.
As you as you've seen we've done acquisitions.
Acquisition expenses that are related to our M&A.
Team.
We really have worked on creating a compelling strategy for development of all of that the U S.
E <unk> strategy and others are really kind of built into that at that USDA investments now if we.
I think the point is that that is that those are the investments.
That we're making today, but the profit that we are actually generating through those of U S investments just don't show up in our P&L right. So it makes our P&L just look worse.
Versus if we can really consolidate the revenue and the profits of the investments that we have so.
Is it just the expense shows up but none of the benefits associated with it and the only thing I would add.
Judy is.
When you look at Bayou steel distribution. So we know the brand with its kind of clean healthy hydration differentiator does well when it gets in the hands of consumers.
Last year we.
We put all of the effort into building out those points of distribution that Judy called out so going from about 500 points of distribution last year two by the time, we get them all up and running this year will be over 50000.
And so the spend in Bayou steel is to make sure that now that we have points of distribution and we know we have a product that consumers love we want to make sure that the consumer is aware of the product and pulls it off the shelf for that initial trial, because we know when we get <unk>.
Consumer trial that we build a fan so that's the investment.
That we're talking about there.
We think we will pay really big dividends in the near term.
Your next question comes from Adam <unk> with Scotiabank. Please go ahead.
Hey, good morning, Thanks for the question.
On the U S THC investments that canopy has made.
Just curious to what stipulations are in the deal in the bank clarity on legalization doesn't come from a federal level anytime soon.
I guess, what I'm asking is how do you realize the financial upside of these assets in the event candidates all the ever becomes a regulated or state level.
Yes. So there is a fair amount of flexibility because each of our agreements state.
States that.
Yes.
We can exercise our rights to.
Full control and when we say we don't consolidate it it's because we don't technically control the businesses, even though we owned them. So.
But our ability to take full control is upon federal permissibility or at canopies discretion.
And we would want to get comfortable from a legal standpoint in the controlled substances Act standpoint, but.
It leaves us.
The ability to.
To take control of these businesses.
Short of full up federal Permissibility, but it would depend on the incremental legislation.
That would get passed.
Well, we're all thinking right now and I'm sure you guys are as well as the federal Permissibility feels like maybe it's not entirely in the near term, but incremental change does look to be on the horizon as we talk about more and more things like.
Like like like Safe banking.
<unk> initiatives of that sort.
Your next question comes from Pablo <unk> with Cantor. Please go ahead.
Yes, good morning, David So actually itself precisely related to your last comment on safe.
It's a two part question right.
Think of the one.
On a deal and J D.
Does that mean that you are seeing the triggering event.
Maybe sooner than expected right I mean, one from outside wishing that you wouldn't be making these investments if you're seeing that that's being delayed and now it's much further out.
A quick question in terms of defining the triggering event.
Is safe enough for the U S. A triggering event or would say you need to have.
They need to be followed by up listing and U S exchanges for transaction assets for usually find the triggering event. If you can expand on that please yeah sure. So good question as it relates to the.
Triggering events.
Definition I think that it has a lot to do with with what gets included in any of the incremental legislation.
And what sort of.
Safe harbors get created and.
How.
Agencies, such as exchanges and banks and so forth react to that.
And so I think it's it's hard to say Pablo whether safe banking is enough, but there could be some scenarios, where say banking is at least very helpful.
In terms of in terms of timing when we think about a brand like <unk>.
One is doing quite well in Canada. It's the number one edibles brand in Canada I'll also point out that one in Canada is not in our financial statements.
But one is the number one edibles brand in Canada and so.
For us we do have the ability to do some different things with with the U S brands when they're when they're operating in our home market in Canada, and we'll look on that will continue to work on that.
And then just as importantly, our ability to bring a brand like jetty, which doesn't exist in Canada.
But has really strong IP really good brand credibility and heritage in maybe the most difficult cannabis market in the world in California be able to bring that to Canada is pretty exciting for us. So we do have ways to unlock some value prior to permissibility and we're going to keep looking for.
Ways to unlock value and ultimately cash flows.
As soon as we possibly can.
Yeah.
Your next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Hi, Good morning, everyone. Just wanted to go back on the strategy.
Our new goal of inflection for adjusted EBITDA, and maybe just if you could speak a little bit more on the potential disposition side I know you chatted a lot on the Bios deal in stores in bigger prospects, but what are the prospects for canopies longer term views and participation in things like Canadian retail international infrastructure and cultivation outside of Canada things.
Like that I'm, just wondering is there an expectation that maybe that will start coming off the books through disposition within this upcoming fiscal year.
Thanks, Matt So I'll start.
So first of all.
I'd say, we've already made significant strides in simplifying our businesses exiting several non core categories and businesses that we just didn't feel like it but it does fit.
<unk> fit our strategy and you know that we divest the C III in last year.
So I would say.
We made significant progress now.
Now I think for US really we continue to look for ways of sharpening. Our focus then I think there are areas, where we will continue to.
<unk> investment because we believe in the in the prospects of the growth.
Aspiration of those businesses and then I think there are other areas, whether the market dynamics are shifting or we need to further simplify our business as well we're consistently and constantly review those businesses. Some of the proceeds that I mentioned that we expect to come in FY 'twenty three are already there are businesses that we either.
Now or have made decisions to walk away from so.
It doesn't include additional activities that we potentially would look into but I think the we do have a pretty compelling strategy and we'll continue to look for opportunities to simplify and sharpen our focus.
Your next question comes from Jay Cohen with <unk> capital. Please go ahead.
Hi, Thanks for taking my question I just wanted to follow up on the cost reduction announcement that you made last month.
Some more color on the plans to leverage third party manufacturing whats the rationale behind that particular action and which product formats would that relate to.
Yes so.
We want to be able to produce.
The best quality products that can put on the market.
I guess, when I say best quality, what I really mean is I want the right attributes that our consumers love and I'm talking specifically about flower.
So when we look outside of our own facilities. We're really we're really looking to engage with craft growers both for their ability to grow through our seven acres craft collective.
Offerings as well as connecting with them.
On some of the strain development and evolution, that's going on in the market. We just think it's a way to keep our offerings fresh and.
And at that highest level of of attributes in the market that the consumers want when we look outside of flower.
Into our other some of our other categories.
There are just producers that.
Can take our formulations and produce them in an asset light way to canopy, which is just.
Creates better returns for us and better margins for us. So we continue to look at.
How to just put the best product, we can in the market and if that means we produce it we will and if it means someone else produces it on our behalf, we'll do that as well.
And the only thing I would add.
Our first I think it's really aligned to US building a premium branded company might so we really do want to lean in in terms of a brand led strategy number two it's really about flexibility.
As we've mentioned some of the.
Heavy indirect fixed costs that we've been incurring in our Canadian operation. If we can look to very lives.
Some components of those costs and reduce our indirect.
Labor costs, we do actually think that Thats, a flexible strategy, where we can flex up or down as the as we as needed from a from a demand perspective.
Your next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good morning, and thanks for the question.
So can I just wanted to talk about the U S.
Any acquisition you, obviously had a ship now of JD and want it to brands more silicon Msos previously so just want to kind of get your kind of overarching view number one why do you believe now is the appropriate time to really focus more on the brands, obviously very early days and many people believe in terms of brand equity within space.
And then number two because you don't have ownership how are you able to leverage.
Core competencies.
<unk> strong presence in California, one in alumina in California, but <unk>, obviously is stronger in terms of licensing in other markets and you also have acreage and tariffs and as well Andrew slashes overarching kind of brand versus Msos.
Do you look at it.
Building the brands, considering Saracen and you guys have their own brands and then you're also bringing on your brands through these purchases of the <unk>. Thank you.
Yes so.
I'll come at this from a couple of different ways and Judy filling the holes here. So again, we start from the from the point, where we believe that sustainable value was created by being that North American.
Brand driven premium focused company and so we see brands like Juana and jetty really almost in their emerging phase where they have really good credibility with their consumer basis. They are well regarded in the markets that they exist in today and.
Quite honestly one of has shown that they do really well when they come to new markets as well.
We think the same thing is true with Jedi Ware.
We look forward to the day, where new Yorkers can consume jetty vape product.
Relying on that California.
Experience and heritage and recognition from a consumer standpoint, so we think that the brands are important.
To build a.
Base for consumers, but the brand has to have a reason for being and Thats why we like brands like Juana and jetty because they already have the provenance.
I'd like to get that you'd like to see in our brand over time in terms of why now we think that.
The timing is right to.
To begin to work together.
To have the brands work together to find ways to.
To grow so for example, you talked about one is.
Our success running their licensing model jetty hasn't really begun to expand outside of California.
It will be great for those businesses to work together to take the learnings that <unk> had supply them to jetty and be able to bring <unk> into the legal markets across the U S.
In terms of.
Control I guess is what you're really talking about around without us being able to be in there on a day in day out basis. The way. The agreements work is that we have guardrails in place in terms of what.
<unk>.
What the companies can do and cannot do.
But most importantly, and maybe maybe maybe almost as important as the brands we chose to invest in these companies because they have very strong management team and so we have a lot of confidence in the ability of the individuals running.
Acreage in paraffin and jetty and want to.
To be able to find the best path forward and create a lot of value before permissibility.
Yeah.
There are no further questions at this time Mr. Clean you May proceed.
So thanks again for joining joining us today. If you are in Canada, I really encourage you to try one of our new seven acres, Jack Hayes infuse pre roll joint innovations for one of our new great tasting.
Kind of as beverages, such as tweet ice tea guava. These are superior experiences and I would really love for you to give them a try.
If you are in the U S. I encourage you to try <unk>.
<unk> ready to drink beverage to hydrate over the memorial day weekend.
Better relations will be available to answer additional questions throughout the day have a great day everyone.
This concludes canopy growth's fourth quarter and fiscal year 2022 financial results Conference call. A replay of this conference call will be available until August 26, 2022, and can be accessed following the instructions provided in the company's press release issued earlier today.
Richard in today's call and enjoy the rest of your day Goodbye.