Q1 2023 Canopy Growth Corp Earnings Call
marks by David and Judy. We will conduct a question and answer session where we will first address questions uploaded by verified shareholders using the state technology's platform. Following that, we will take questions from analysts to ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. Please go ahead. David, please go ahead.
Thank you, Tyler. Good morning, everyone, and thank you for joining our call. Today, I'll provide an update on our progress in Q1 against the strategic priorities we've outlined for TANAPI.
Judy will then discuss our Q1 results, including an update on our path to profitability and provide additional comments on our short-term outlook.
During our last conference call, I highlighted three clear strategic initiatives for Canopy. And in Q1, we made strides against all three priorities.
One, in Canada, we stabilized our revenue and market share performance, improved cash margins, and we're on track to achieve profitability in Canada as soon as possible. In Canada, it's as soon as possible.
Two, as part of our CPG portfolio, BioSteel had record quarterly revenue in stores in Bickel despite a temporary headwind to still on track for growth this year. This year is still on track for growth.
And three, we've continued to strengthen our US THC ecosystem to ensure canopy is positioned to lead in the largest cannabis market in the world. In the largest cannabis market in the world.
Starting with our Canadian cannabis business, we saw stabilization of canopy share of our core segments through Q1 and continue to deliver a positive mixed shift. And continue to deliver a positive mixed shift.
During the quarter, our premium and mainstream sales accounted for a combined 58% of our Canadian recreational B2B sales up from 50% last year.
Let me provide highlights in our course segment starting with premium flower and pre-rolls.
In the first quarter, we continue to lead with a number one market share, helped by strong consumer response to innovation.
This includes launching 11 new premium flower strains and pre-roll offerings in the quarter under our seven acres in Dogey-Brens, including the new seven acres Jack Hayes Bubble Hash infused pre-rolls.
Consumer response to these new infused pre-rolls, which combined seven acres, Jack Hayes Flower, that connoisseurs love, with bubble hash from Jack Hayes input, generated robust demand that exceeded our expectations. The new infused pre-rolls, which combined seven acres, created our expectations. The new infused pre-rolls, created our expectations. The new infused pre-rolls, created our expectations. The new infused pre-rolls, created our expectations.
We're actively working to scale our bubble hash production to increase our supply of infused pre-rolls, including additional SKUs expected to launch later this year. We're also working to scale our supply of infused pre-rolls, and we're also working to scale our supply of infused pre-rolls. We're also working to scale our supply of infused pre-rolls, here.
We saw a similar response to new DOJA OG Deluxe Flower, a 26% THD Flower grown in our Smith Falls facility. Our initial four weeks supply to the OCS sold out in less than two weeks, and were actively replenishing supply. And were actively replenishing supply.
This helped power our Doja brand to strong performance in the quarter with its market share in premium flower and pre-rolls increasing the 2.1%.
Next, touching on our core mainstream flower and pre-roll segment.
We're pleased with the response to our Tweed rebrand, which has generated strong consumer demand for the brand's recent flower, pre-roll, beverage, and edible innovations.
New Tweed branded Tiger Cake, Wedding Cake and Cushments Flower Strings, and Cushments Flower Strings, which was launched in Q1, contributed to the brand's positive performance. The Cushments Flower Strings, received the Cushments floweringsimple application of a team of $?1k personally. That was expected becoming possible?. The Cushments Flower Strings, form it.
The resurgence of the Tweed brand has enabled us to maintain our overall share of the mainstream flower and pre-roll joint market.
Another key component of our premiumization strategy has been revamping our beverage portfolio, an effort that has seen us bring a range of five milligram beverages to market under the Tweet Icede in Tweet Biz Brands, while also expanding our deep space 10 milligram beverage line up.
Strong demand for Tweet IST and Fizz beverages during Q1 help maintain Tweet's number one rank in the 5 milligram THC and undersegment with Tweet's share of the RTD beverage market increasing to 10.4%.
Deep space also gains share of the RTD beverage market in Q1.
We've established a multi-year, a new product pipeline, which has been critical to securing expanded distribution in key provincial markets.
We secured 17 new listings in Alberta, 20 in Ontario, and 23 in Quebec, all of which are now available or will be over the next few months.
And we're backing these high quality products with a strong on-the-ground presence.
As I highlighted during our last call, we're continuing to invest in our commercial ground game in Canada, including through higher education, our Blood Tender Engagement Program.
Since launching, this program has facilitated over 6,000 budtender interactions focused primarily on education and product knowledge to drive budtender recommendations.
Our investment in innovation, distribution, and budtender engagement are expected to help drive revenue growth in the Canadian rec market.
Let's turn to our progress against driving the growth of our high potential CPG brands.
Q1 was a record quarter for Biosheal with revenue of $18 million.
And we feel this brand truly has the potential to transform the sport hydration market.
A notable highlight in Q1 was welcoming Walmart as a Biosteel RTD retailer in the US.
This initial agreement will bring Biosteel RTD beverages to 2,200 Walmart stores across 39 states. This agreement will bring Biosteel RTD beverages to 2,200 Walmart stores across 39 states.
Initial shipments began in June and we expect additional shipments to these stores over the coming months.
We're also pleased to welcome Bruce Jacobson to the BioSteel team in the new role of President.
Bruce, together with co-founders John Salenza and Mike Camilleri, will be responsible for accelerating the growth of Biosteel.
Bruce Jones-Bioff Steel with a wealth of experience from the beverage industry, including as an experienced brand builder and business strategist who has led organizations to best-in-class growth.
Another important growth driver for BioSteel is the multi-year partnership naming BioSteel as the official hydration partner of the NHL and the NHL Players Association.
This agreement provides Biosteel with league-wide, ringside marketing and product supply rights, retail activation rights, and a community engagement platform.
Beginning in the 22-23 NHL season.
Fans will see NHL players hydrating with Biosteel during 1,400 games each season.
We're off to a fast start with this partnership having signed distribution agreements with several new retail chains in priority NHL markets representing over 1100 doors and are in positive discussions with additional retailers.
We see the investment in this partnership as a key element of increasing bio-steel brand awareness, distribution, and trial, which is critical to growing bio-steel to be a top five sports hydration beverage over time.
With the ongoing load-in into additional retailers, as well as increases in sales velocity driven by our brand activations, we're expecting to see a significant jump in bio-steel sales overcoming quarters. In bio-steel sales, overcoming quarters.
Now speaking, this door is in bickle.
With innovation coming to market in the coming months, designed to excite the brand's oil consumer following, we believe stores and bickle are set up for growth over the remainder of the year.
The continued effort of our team to work around third-party challenges will allow Storz & Bickel to defend its position as the global leading premium vaporizer brand.
Looking to the US and our THC ecosystem.
We hold an option to acquire acreage holdings.
We hold a sizable stake in Harrison, and we've paid for majority ownership of one of brands in JDX Stratx.
These agreements provide us with a strong foundation to enable rapid entry into the USTHC market as soon as we can and is a unique platform to realize our ambition of becoming the leading brand-driven cannabis company in North America.
Our business, when consolidated with Acreets, Juana, and Jetty, generates over $1 billion in revenue with strong gross margins.
Further, our USTHC ecosystem has significant room to grow within large addressable markets, including high-growth states in the Northeast, such as New Jersey and New York.
And in the case of Jetty, the opportunity to expand beyond California as the brand is scaled nationally.
Looking to acreage, their team made solid progress in the quarter ended March 31, 22, with revenue increasing 40% year over year while they delivered their fifth consecutive quarter of positive, positive adjusted EBITDA.
In April of 2022, ACRCH commenced recreational cannabis operations in New Jersey with their flagship brand, The Botanist, now available for consumers in multiple dispensaries across the state. The Botanist, now available for consumers in multiple dispensaries across the state.
We also continue to monitor developments leading to the opening of the REC market in New York, which we also see a virtual position to succeed in.
Wanna saw significant growth from April to June , both in footprint and innovation.
Juana entered new markets including Puerto Rico and Arkansas and began onboarding three additional states. Juana entered new markets including Puerto Rico and Arkansas and began onboarding three
One is delivering exciting NPD with the launch of Spectrum Live Rowsing gummies.
These gummies have resonated with consumers, quickly ranking highly in the competitive Colorado market. These Bilimbo
WANNA is advancing well with a robust pipeline of new consumer-focused products while entering new markets to capture consumers looking for high-quality products that deliver against desired needs dates. WANNA is advancing well with a robust pipeline of new consumer-based products that deliver
Finally, to illustrate our vision as a North American brand-driven cannabis company, we're excited to be actively working on bringing the jetty brand and its innovative products to the Canadian market as soon as possible.
We look forward to delighting consumers north of the border with Jetty's unique data, the current foundation therefore to give a understanding of the sonner, the audacity to poker off Shinne herself. technology.
We expect to have more to say about this effort over the coming month.
The footprint and capabilities of our US-THC ecosystem continue to grow. The
We're strengthening our competitive positioning and emphasizing fast growth categories backed by a balanced operational footprint that is primed for rapid growth. That is primed for rapid growth. That is primed for rapid growth. That is primed for rapid growth.
In summary, we've built and continue to strengthen the industry's strongest North American premium-branded cannabis company.
With that, I'll turn it over to Judy. Thank you very much, David, and good morning, everyone. I plan to focus my comments this morning on one, a brief review of our first quarter results.
Two, provide an update on our progress on our path to cheap profitability.
And three, provide some perspectives on our outlook.
So let's start with a review of our Q1 fiscal 23 financial results.
In Q1, we had strong performance from our international cannabis businesses, Fire Steel had its best revenue quarter ever, and the Canadian business stabilized its revenue.
Gross margin and adjusted EBITDA also improved sequentially compared to Q4 as we began to execute on our cost savings initiative that we announced in April .
We generated net revenue of 110 million, representing a 19% decline over the prior year, but down just 1% compared to 2.4%. But down just 1% compared to 2.4%.
Excluding the impact from the vestiture of C3, Net review in Q1 increased 1% as compared to Q4. Net review in Q1 increased 1% as compared to Q4.
In our cannabis segment, our international medical cannabis business showed strong year growth led by triple digit growth in Australia and bulk sales to Israel.
Canadian Recreational Business showed stable revenue compared to the prior quarter as our premiumization strategy is beginning to drive improved performance.
In her consumer product segment, record quarterly review at BioSeal in Q1 was partially offset by a decline in stores and vehicle sales.
Sales of stores and vehicle vaporizers drink Q1 fiscal 23 or negatively impacted by a few headwinds.
The first and primary headwind was financial challenges facing our largest distributor in the US, which caused the distributor to pass ordering, ordering devices in Q1. Which caused the distributor to pass ordering, ordering devices in Q1.
We're actively working to re-establish ordering patterns that were lost during Q1.
The second headwind is flowing consumer spending power in the current high inflationary environment across SMB's key markets. The third headwind is flowing consumer spending power
Given the high ticket associated with SMB's premium vaporizers, we are seeing more moderate sales in Europe and North America, which is consistent with headwinds felt across the luxury product segments in a range of industries.
The third headwind was ongoing supply challenges. We have spoken about this in the past and specifically the difficulties related to the supply of chipset.
This has negatively impacted Sorzenbickle's margins in Q1.
Our procurement, engineering, and manufacturing teams are working hard to identify solutions for these challenges, including alternate components and suppliers. We expect this to be manageable.
A reported gross margin in Q1 was negative 1%, and our adjusted gross margin was positive 2%.
Consumer product segments adjust the growth margin of 34% was an improvement compared to 32% a year ago. As the negative mid shift driven by lower stores and vehicle sales was offset by improved growth margin performance at dio steel driven in part by volume growth. NEWS
Our adjusted gross margin in the global cannabis segment was a negative 18%, which continues to be impacted by price compression, lower product output, and non-cash inventory write-offs in the Canadian business.
I'll provide more details on our gross margin performance a bit later on.
Adjusted it is assigned to one amount that is to a loss of 75 million. This was an improvement compared to Q4 driven by lower inventory write-offs and declines in S-GNA expenses which stem from our cost savings program.
Normalizing for the disposition of C3 and the impact of the payroll subsidy benefits, adjusted EBITDA in Q1 of FY23 would have improved by $9 million, or 10% from the prior year period. The C3 and the EBITDA benefits have improved by $9 million, and the impact of the payroll subsidy benefits have improved by $9 million.
I'd like to now provide an update on the efforts on the way to improve our profitability.
First, digging deeper into Gross Margin. Both are Adjust the Gross Margin and Cash Gross Margin in the Global Canada segment improved compared to Q4 of Physical 22.
Specifically, when adjusted for non-cash inventory charges, depreciation costs, and the benefits on payroll subsidies, our cash growth margin in global cannabis segment is estimated to be at positive 10% in Q1, which is an improvement versus negative cash growth margin during fiscal 2022.
The improvement is attributable to two main drivers. Number one, our mix continues to improve for the high margin products in the Canadian recreational business.
As we deliberately shifted away from low margin value flower sales, our net sales from value segment has further declined to 43% of total B2B sales in Q1 compared to 56% during the prior year period.
Number two, our cost savings program is driving reduction in our overall cost of goods sold, where we have committed to delivering savings of $30 to $50 million over the next 12 to 18 months. The cost of goods sold is $30 to $50 million over the next 12 to 18 months.
Some of these savings are being offset by higher wage inflation and supply chain costs, but we plan to continue looking for additional opportunities to capture more savings. But we plan to continue looking for additional opportunities to capture more savings.
And while the majority of these savings are expected to be recognized in the second half of fiscal 23 and into the first half of fiscal 24, we did achieve over $4 million of savings in Q1 of fiscal 23, primarily relating to headcount reductions, more efficient procurement activities and supply chain improvements.
We expect our cash gross margin to improve significantly over the balance of Fiscal 23, driven by continued progress on our premiumization strategy, as well as savings from the cost reduction program underway.
The other key initiative is reducing our SG&A expenses, where last quarter we announced that we have undertaken actions that we expect will reduce our SG&A expenses by $70 to $100 million over the next 12 to 18 months.
For selling, General is administrative.
General and administrative expenses in the first quarter decreased 8% versus prior year.
However, adjusting for the disposition of C3 and the impact of payroll subsidy benefits, which was significantly lower in Q1 of fiscal 23 versus 22, SG&A expenses in the first quarter decreased by 13% or $16 million on a year-over-year basis.
The reduction in our SGN expenses are coming from reduced head count across their businesses as we have further tightened our strategic focus and streamlined our business.
In addition, we expect to climb the professional fees, office cost, insurance fees, and IT costs throughout the year. We offer a interview with the NS and other? here.
We'd also note that some of these reductions are being offset by our strategic investments in key growth areas such as bio-steel, where we are increasing our advertising and marketing spending to increase brand awareness and drive velocity at retail.
Let me now spend a few minutes on our cashful and balance sheet.
Our free cash flow in Q1 was an outflow of 143 million.
This comprised of cash from operations of a negative 141 million, which includes 26 million in interest payments and change in the working capital, which was negatively impacted by one-time severance payments during Q1, which was related to a restructuring action.
Q1 CapEx came in at 2 million, significantly lower compared to a year ago.
For the full year 2023, we now expect CapEx to be in the range of 30 to 40 million.
We remain focused on reducing our cash burns through off-ex discipline, height working capital management, and continue discipline around capital management amount of cash guys in that 523.
Turning to our balance sheet, at the end of the first quarter, we announced an exchange transaction of the 4.25% convertible on-fictured notes due in July 23, which reduced their debt obligations by $263 million.
This has reduced our overall debt position and is expected to save the cash interest of around $12 million on an annualized basis.
For the Fulure Fiscal 23, we now anticipate cash interest payments of at least 130 million incorporating lower interest costs on the convert notes but higher interest expenses on the term loan that's tied to increase in liboards.
Regarding the remaining convertible notes, we've secured, we have several options that we're currently reviewing and will update once we have any additional news to share.
Our balance should remain strong with $1.2 billion of cash at our quarter end. We have $2 billion US dollars of base shelf available to us as well as additional debt capacity of $500 million US dollars.
We also expect proceeds from sales of previous the announced facility closures and look for additional opportunities to divest non-core assets. We also expect additional additional to to to
Let me now provide some perspectives on our outlook.
We continue to expect the execution of our premiumization strategy in Canada, our cost-daving initiatives, and growth in bio-steel and stores in Vickl will over time result in strong revenue growth, and margin profile, and free cash flow generation that are in line with premium branded CPTG company.
In terms of the balance of fiscal 23 outlook, first, we expect continued strong growth from bio-spheal as the team builds on the growth in the first quarter with increased marketing investments driving higher distribution and gains in sales velocity. In the meantime, we expect continued growth from bio-spheal as the team builds on the growth in the first quarter with increased marketing investments driving higher distribution
Our Canadian recreational B2B business is expected to show improved performance as it benefits from premiumization efforts and new product launches with the growth weighted towards the second half of the year.
Europe and rest of the world business is expected to show year-over-year growth in medical sales in Germany, Australia and other international medical markets, while sales to Israel are expected to be lumpy.
And while the distributor challenges and economic conditions in the first quarter created some hit wins for stores in Bickel were actively working for dress US distribution and to opportunistically use marketing investments to drive growth. And to drive growth. And to drive growth.
joined with innovation efforts.
Our US CBD business will continue to see a tighter focus against our brands with emphasis on the e-comm channel and key directorship accounts as we await for future regulatory progress.
We do note that we did benefit from more than $2 million in one-time cruise sales in Q1 in the US, which won't be recurring.
From a phasing standpoint, we expect revenue growth year-over-year to be weighted to the back half reflecting continued mix away from value flowered that began in earnest in mid-Fiscal 2022 and the timing of our new product shipments in Canada.
Second, we continue to expect fiscal 23 to show improvement in our profitability with expectation of the year being a transition year as we work towards profitability, building on the cost structure improvement with being in the first quarter while also making strategic investments in key growth areas of our business.
We remain on tracks to achieve positive adjustity with that in fiscal 24, excluding our strategic investments in bio-steel and US TEC. We remain on tracks to achieve positive adjustity with that in fiscal 24, including our strategic investments in bio-steel and US TEC. We remain on tracks to achieve positive adjustity with that in fiscal 24, USP-C.
In conclusion, we are advancing towards achieving profitability while we continue to invest in high potential growth opportunities. And as David mentioned, our business generates $1 billion in revenue with healthy and sustainable margins when consolidated with 8bridge, Rana, and JetE and is well positioned to deliver strong, profitable growth long term.
This includes my prepared comments. So now take any questions. So now take any questions.
To begin our Q&A session, we'll first address investor questions that were upvoted through the question and answer platform developed by State Technologies.
Tyler, can you please state the first question?
What are the biggest challenges facing the company and how are you going to address them? And how are you going to address them?
Great, I'll take that first question. I would say from a challenges standpoint, it really stems from the fact that...
The Canada market has really developed very differently than we had initially expected. Market fragmentation, elicit markets, still being a pretty sizable component of the market, has really developed differently than we had initially anticipated. We also saw very slow progress from a regulatory standpoint on both sides of the border, both TAC, CBD from a U.S. standpoint, as well as a lot of the regulatory.
hurdles that were continuing to face the Canadian market. Then I would say the third challenge has really been we had a large footprint from a Canada and global standpoint. We have streamlined a lot of the footprints that we've had, but we continue to see some underutilizations of those facilities which has impaired our margins more negatively than we had anticipated.
In terms of how we're really addressing it, I think it goes back to the priorities that David really mentioned. First, in terms of Canada, we're really looking to focus on high margin premium and mainstream categories. And we think that the efforts that has been on the way are starting to bear fruits. When you look at some of the new products in the marketplace, we are getting really good feedback from but tenders, we're getting really good comments from consumers on social media.
as soon as we can. And then thirdly, as I said earlier, we have cost savings programs that are underway that will really generate more cost savings and improve our profitability. You've seen our cash growth margin improve on a sequential basis, and we would expect that to continue with the course of the year.
David, anything to add to that? No, I think you covered it well, Judy. Maybe the only add that I would have is that we need to continue to focus on a few key things, a few key areas where we feel we can win, which is building premium and mainstream brands on both sides of the border and continuing to...
build out our go to market capabilities as evidenced by the work we've been doing in Canada with what we refer to as our ground game where we're out at retail and we're engaging with our consumers and our retailers and our budtenders. As this entire industry goes through transition after transition after transition, we just need to be prepared with strong brands and in good route to market capabilities and strong.
to discuss more slowly than we would like. Keep in mind today that today, two thirds of Americans already live in a location that has access to cannabis in some format, but the federal government still refuses to recognize that reality.
So putting that aside, as Judy said, we're not waiting. We continue to see the US as the largest and most important market in the world.
We've assembled a strong portfolio across North America that continues to grow and develop without a permissibility event. So the businesses like Juanan, Jedi, and Aikridge continue to grow their businesses and perform well and expand their offerings even prior to a permissibility event. The businesses like Juanan, Jedi, and Aikridge are the businesses that are in the business and are in the business. The businesses like Juanan, Jedi, and Aikridge Film Technology
And when you think about our
When you think about our portfolio or the offerings that we can take out on sales calls, they include premium brands like Stores and Bickle, J wanna, Jetty, Doja, Seven Acres, Deep Space, which all have opportunities to expand across the US and Canada. And history shows us that strong North American brands tend to do well globally. So that's why we continue to focus on our brand building here.
And so, you know, I would say maybe the good news is that absent federal permissibility in the US, these brands continue to grow in terms of geographies, in terms of offerings, and they can continue to build consumer loyalty.
So we think that will be prepared at some point to bring this all together as a consolidated entity that represents a very strong, creamy and branded cannabis company in North America and then we'll take those brands elsewhere in the world.
With that, operator, we're now happy to take questions from those in the queue.
To insert an efficient call.
That gets questions as to as many analysts as possible. The analysts are requested to limit themselves to one question.
The Q&A is now open.
Your first question comes from Pablo Zuanjic, from Cantor Fitzgerald. Please go ahead.
Thank you, good morning. David, it's a very simple, straightforward question, but does passage of SAFE as written constitute your triggering event or the permissibility event that you've talked about? Thanks.
Yeah, so Pablo and I, you and I have talked about this before, the passage of SAFE with the right language could get us there. I think it remains to be seen exactly what language ends up in the final bill because we've seen a few alternatives, but we're going to look at that really hard and try to get to the place where we can, as soon as possible with whatever form of legislation,
Sorry. Tammy, I think it's Tyler Burns here. I think you were next in the queue. Next, quote from Tammy.
Yes. Okay, thank you. Hopefully you guys can hear me. Good morning everyone. Question for me is on the off-ex or S-JNA. There's just a couple of moving parts here. So Judy, this is probably made me for you. How should we think about just this entire fiscal year going forward with respect to the S-JNA line? Like should we think that there is going to be decent improvement year over year? Because we also have to think about just evolutionary pressures, the investment in bio-steel. I think there's also some noise with respect.
investments that we're making from a bio-steel standpoint. But when you think about sales and marketing overhead, when you think about DNA expenses and we think about the R&D expenses, all free pockets of our...
Sorry for the interruption, it appears the host dropped. I will put the call on hold and we will call them back one second.
Sorry for that interruption. We will go ahead with the conference as planned.
Okay, could you please have us an opportunity to repeat the question that was answered by Ms. Tammy Chen. Apparently people on the call could not hear Judy's response. If we could back up for the question for Judy, please.
Judy, please go ahead with your question again.
Yes, so I'm addressing Tammy's questions around the OPEX in FI 2023. So, Tammy, I think I wanted to just give you a few highlights and a few buckets on how to think about SG&A in FI 23. So
Setting aside advertising and marketing expenses, because to your point, we are going to have some increases as it relates to bias deals, but when you look at our selling and marketing overhead, when you look at our R&D expenses and our G&A expenses, we do expect the benefit of our cost savings program that we announced, the $7,200 million over the next 12 to 18 months, to benefit all three buckets within our SG&A.
Now, some of the phasing of the savings will accrue as we go through FY 23, so not all of that will hit in the near term, but, you know, I think when you think about the savings that we announced, we expect the selling and marketing, G&A, and R&D, all of those three buckets to benefit from the cost savings program. Now, the other consideration is some of the moving parts on a year-over-year basis. When you look at FY 22...
We did have the benefit of payroll subsidy that benefited the GNA expenses. After Q1, we no longer have any subsidy benefits that will be the benefiting from. So the comp will get tougher from that perspective. And then in Q4, we did have the bonus of cool get reversed as we did not mint our target last year. So we will have...
some of that year-over-year comparison being not as favorable in Q4. But overall, I do expect that some of the total S-GNA expenses in terms of selling and marketing overhead, GNA, and R&D expenses to be down on a year-over-year basis, normalizing even for those factors. And normalizing even for those factors.
Thank you.
Your next question comes from Vivian Azir from Cohen & Co. Please go ahead.
Hi, good morning. This is actually Victor Maul on For Vivian Azer, and thank you for taking the question. Thank you for taking the question.
The results this quarter.
Don't buy us a dude, the results this quarter are encouraging and we're seeing solid growth in sales for storing the news and data. Can you discuss how the velocity improvement for buy us a dude is measuring up to your internal expectations?
Yeah, you cut out Victor. So I think you were talking about velocity. Now, velocity is something that grows with execution, once a product's been on the shelf for a little bit. So we're seeing and it benefits from in-store execution by our sales teams as well as...
consumer awareness. So we're seeing period over period improvements in velocity. We're not entirely where we want to be yet, but that's just because of where we are in the introduction cycle. And we believe that additional activities around awareness like the NHL sponsorship will help us hit those velocity hurdles that we're shooting for. But early signs are encouraging, but it's probably.
It's too early to say that we're there yet, but early signs are very encouraging.
Your next question comes from Andrew Carter from Steeple. Please go ahead.
Hey, thanks. Good morning. I want to ask, I want to zoom in on sorts of vehicle down 35% in quarter. And I think early on you said it can grow this year, which would be 13% over the back nine.
I guess kind of what gives you that confidence and kind of help us understand back up. I know you use distributors. How much of that is DTC where you have direct visibility into the consumer? And how does the DTC part of your business kind of compare to kind of the distribution and shipment? Thanks. Yeah, so the confidence comes from, we're still seeing really good consumer take away and we just had, we just had some issues with distributor during the border in the US I'm talking.
doing some work, Andrew, to try to bring more of the stores and BICL activity onto our own platforms and maybe control our destiny a little bit more, but that's a longer bill that gives you a better financial profile. It just takes longer to get to. So that's work that's going on, but I don't suspect that we'll see significant benefits from D to C or our own online B2B activities affecting the business this year.
Your next question comes from Aaron Gray from Alive Global Partners. Please call ahead.
All right, good morning and thanks for the question. So from now on, I know you guys are focused more so on the premium flower as well as pre-rolls. But one, talk about BAPE for a second. Because work that your market share, certainly under. Because work that your market share, certainly under.
indexing there by a pretty material amount. So is that kind of part of your strategy of shifting away from the low margin? You mentioned shifting away from low margin flower too. Is that also why you're seeing these kind of shared losses and shifting away from the vape side? And anything you're looking to do there to maybe more further entrench yourself in vape, especially on the back of the recent agreement to optionality to acquire jetty in California. So I love your option on how you're looking at vape within the Canadian market. Thank you. So you outlined it really well actually. When we were...
So, for us, the future for Vape will be at the premium end and will be led by Jetty. Again, it will take time for us to bring that into the market and ultimately get it into the consumer's hands in Canada, but we're really excited about that.
Yeah, and I would just add, Erin, just from our strategy standpoint again, when we kind of look at our market share performance and how we're tracking against our internal expectations or targets, we're really looking at the segments of the market where we think we can make good margins. So when we speak to our market share focus, it's really the premium mainstream flower, pre-roll joint, premium vape, vape segment of the market, edibles, beverages, and et cetera. The other point I would just make from a margin standpoint, is that we're not really talking
As we are also looking at using some of the contract manufacturers for some of the production, we are also optimizing our footprint better by just reducing some of that indirect cost that would have resided in our cost structure if we didn't pivot to some of the more variable models that we're pursuing so I think it benefits both the market share focus standpoint and then our margin standpoint.
Your next question comes from Glenn Matson from Latinburg. Please go ahead.
Hi, thanks for taking a question. David, when you talked about your US assets, one thing that you highlighted was acreages positioning and you highlighted especially their footprint in New York. And now curious, that market's taking a lot longer to develop. Others have recently noted how kind of scrambled that market has become with the illicit market, having kind of free reign and everything else. So he just gives a sense of how you see that market developing, what makes you so excited about it and that.
and just your background on New York in general, thanks. Yeah, so yeah, Glenn, good question because, you know, we talked coming in the questioning about challenges in the business and it really is lack of predictability and, you know, having to continue to adjust your business plans and business models. Look, as a New Yorker, I really can't wait for adult use permissibility or rep permissibility in New York.
And it's taking a ton of time and it's...
The direction is a bit unclear, right? So.
Yeah, it's really frustrating. What I would say though is that it's a very big market. It's a market that it has been a strong cannabis market for decades. From an elisted standpoint, we think that really good opportunities exist in particular to bring our brands like Wana and Jetty into that market and doing so by partnering with Acrid in Paris and so.
You know, I think like everything else in cannabis, it's not unfolding exactly as we would like, and it's taking longer than we would like, but we still think it's a really, it's a large market. We already have assets through acreage in that market that we can benefit from, and we have great brands that we can bring into the market.
That's really the basis for the excitement. Again, we'd like the time frame to move up a little bit, but I think we've already lost that battle.
Anything you'd add, Jenny? Something like that. Something like that. Something like that.
Your next question comes from Matt bottomly from Canaccord Genuity. Please go ahead. Good morning, everyone. We had a lot of good granularity in your prepared remarks in the Q&A on some of the cost-saving initiatives and where that might come from. Maybe taking a further step back and at a higher level, still sitting at about 140 million of cash from operations burn in this quarter. Can you give any indication, even if it's a high-level range, a quarter or third half, of what you think will
the burn will be of your current cash reserves of the 1.2 billion and also just give us a quick reminder on how much debt principle comes due in the next 12 months. Thanks.
Yeah, I'll take that. So thanks for the question, Matt. So let's just start with the point that we do still have a strong balance sheet, 1.2 billion that still resides in our balance sheet. We also believe we have flexibility to tap into capital markets for additional liquidity if needed. So I think we are in a good position just from a financial flexibility standpoint. You're right that we are...
So generating free cash outflow. And I think number one, we really do wanna make sure that we are reducing our cash burn as quickly as possible through our back discipline, right? So the cost savings initiative that's driving the improvement from our EBITDA's standpoint, we expect that will moderate the cash burn from an up-ex standpoint going forward. The second sort of use of cash is the interest expense payments. I said earlier.
becoming very modest. We do think that we've got a lot of the growth CAPEX that's been invested over the last few years and really it's down to maintenance CAPEX and very minimal from a CAPEX standpoint. We have reduced our CAPEX outlook this year to 30 to 40 million and we will continue to look to even right-side that further going forward so we feel pretty good about where we are from a CAPEX standpoint.
I think when you take all of that together, it's really reducing the cash burn as much as we can and we've talked about our target of achieving positive adjustability, but done in fiscal 24 with the exception of the investments that we're making in biosphere and USTC, modest cat-backs, and then it's really the interest payments that we are incurring. We have the July 23 convertible dose notes that still remain on our balance sheet. We are looking at addressing.
That before, before July , and we've got several options again, and we'll share updates on that as we go forward. And from a term move standpoint, we do still have ample time for for that term move to be coming to do. So from a maturity standpoint, it's really the convertible notes that we would be looking to manage over the next 12 months. moment.
Great, appreciate it. Thank you.
Yeah, I want to reiterate kind of the, you know, our overall like thinking around priorities and maybe we sound a bit like broken records here, but we placed a big bet on the US and it's taking longer to evolve than we would have liked. And we used a fair amount of our cash on those US assets, but we remain really excited about those assets because those assets are profitable and they're growing. They just don't show up in our financial statements yet. So we've got the bet on the US.
We remain absolutely determined to get profitable and stop the cash burn in Canada. And that means we're gonna focus on premium and mainstream. And then we have all of the activity we've been doing around right sizing, SGA and footprints to support the premium and mainstream focus. And it's really premium and mainstream in the segments that we can win in. And so maybe our aspirations for total size in Canada have changed over the last several years. But we believe that we...
can get ourselves with the right focus in the right categories to a profitable business that's not burning cash in the Canadian market. And then we said
We're going to continue to drive growth of our CPG brands where we have the very profitable and consumer love stores and Bickel brand, which we think is just beginning to scratch the surface of where the brand could go. And then Biosceil, we're beginning to see some of the returns on the work and the investments that have gone behind that brand. And we're excited about where that can go. So, I don't want anybody to think that we're not spending almost all of our waking hours on
there. Presumably your investments in BioSteel and USTHC aren't significant enough to be over $100 million a year. Is the delta to get to positive EBITDA by F24 more a product of sales growth? You mentioned other costs you're looking to cut, but I would like to get a better understanding of the pathway to profitability for that year. Thank you.
Yeah, and I think I go back to what are the levers to that profitability. And it's all, we've got three levers. One is profitable revenue growth. Profitable revenue growth is really about premiumization strategy that we are expecting to get the benefit of higher sales in premium categories that we participate in. So that's one lever to achieve profitability. The second lever is the gross margin improvement, particularly on the cost reduction side that we've outlined.
and really looking to reduce or endure costs. A number of productivity initiatives that's already in flight and additional opportunities that we will be looking into to further optimize our footprint and expect more savings on the cost of good side. And then the third driver is really the SGA expenses, which if you're really good about, that we're on track to deliver against that 70 to 100 million targets. And then Philz it's so easy to get that job called
To your point, we're in an inflationary period. The market's still volatile. There's some supply chain challenges. So I think it's really incumbent upon us to be very agile in identifying even additional opportunities and really giving, you know, and challenging everyone on our team to make sure that we are being as efficient and identifying those opportunities. So as David said, we are committed to achieving profitability in Canada as soon as we can.
And I think that that is really about those three levers, but I think we've got additional opportunities that we'll continue to challenge ourselves to make sure that we're doing that as quickly as possible. And even with some of the calls headwinds that we're facing from a broader macro standpoint.
Your next question comes from Michael Labrey from Piper Sandler. Please go ahead.
Your next question comes from Michael Labrey from Piper Sandler. Please go ahead.
Thank you. Good morning.
Hey Mike, I wanted to touch on Biosteel you've got the expansion into Walmart. That's 2200 stores it's close to half of their US total.
Can you give us a sense of what they have in common? Is it geographic, is it like the east or the west or is it just the stores that opted in versus didn't and what might it take to get a full distribution there? Yes.
Yeah, Michael, I actually, I'm not sure how the store selection, the store selected in.
So we can come back to you on that. What I would maybe switch it to is that we've seen really good retailer uptake of the brand throughout the US. And we saw a lot of. And we saw a lot of.
excitement and inbound calls coming from retailers post the NHL announcement and you know that activation doesn't obviously start to happen until we really get into the NHL season. But I think we're just seeing growth and distribution all over the place and we feel good about it. I think it's important for us to make sure that we can execute in the stores themselves as I said earlier around the velocity question because that's ultimately the key getting listed is just the first step actually having velocity to stay on the shelters but
to try one of our new premium flower and pre-role joint innovations, or a great-paced thing Tweet I-Style Guava, or Deep Space Ginger Ale Galaxy. If you're in the USA, encourage you to hydrate with a bio-steel RTD beverage or relax with some Martha Stewart CBD.
Enjoy the rest of your summer and once again thanks for being with us there.
This concludes Canobie Growth's first quarter of Fiscal 2023 Financial Results Conference Call. A replay of this conference call will be available until November 5, 2022, and can be accessed following the instructions provided on the companies press released earlier today.
Thank you for attending today's call and enjoy the rest of your day. Goodbye.