Q2 2023 Canopy Growth Corp Earnings Call
Between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release.
Please note that all financial information is provided in Canadian dollars unless otherwise noted.
Following remarks by David and Judy We will conduct a question and answer session. We will first address questions up voted by verified shareholders.
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 David. Please go ahead.
Good morning, and thank you for joining our call.
Before I get underway I would like to acknowledge the results from the mid term election yesterday.
With two additional states voting to legalize cannabis last night, we're seeing continued momentum for reform.
And while the overall results of last night are not yet fully clear what is abundantly clear is that Americans continue to demand access to legalized cannabis.
The bipartisan appeal of candidates cannot be overstated and I hope the results of these midterms will further push the Senate to act swiftly on cannabis reform during the lame duck period and fully unlock this once in a generation opportunity across the nation.
Moving back to our earnings today, I'll speak to canopies progress against our strategic priorities and discuss the transformational strategy. We recently announced two fast track entry into the U S cannabis market through cannot be USA.
Following my remarks, Judy will review, our Q2 results provide an update on our path to profitability and comment on our short term outlook.
Our second quarter marked an inflection point for canopy, demonstrating momentum across our key businesses and accelerating our entry into the U S cannabis market as we seek to seize the generational opportunity ahead of us.
Q2 highlights included in Canada, we stabilized business revenues improved cash margins and continue to make progress on our path to profitability.
This has been achieved amidst persistent industry wide challenges as well as an increasingly difficult macroeconomic backdrop.
In our CPG business <unk> delivered another record quarter with very strong sequential growth.
And we continue to pursue cost savings, while driving focus in our business as evidenced by the announcement that we are divesting our Canadian retail operations.
Now to provide more detail.
In Canada, our efforts to premium on our portfolio delivered a positive mix shift despite continued market fragmentation.
During the second quarter, our Canadian adult use BTB premium and mainstream sales accounted for a combined 58% of sales up from 56% last year.
This showcases our resiliency and our market challenged by labor and supply chain disruptions in three of the largest provinces, Quebec, Ontario, and British Columbia.
I'd like to take a moment to highlight our performance in the very competitive premium flower and pre rolled joints or <unk> segment.
Supported by the recent launch of Dota, Oh, Gee deluxe flower and <unk>, our <unk> brand increased market share by two basis points versus Q1, FY 'twenty three to two 4%.
We're also encouraged by the demand for our new seven acres flower and infuse <unk> that have recently entered the market.
Next in the mainstream flour NPR J segment, our Tweed brand increased share during the quarter helped by strong demand for new Tweed branded Cushman and wedding cake flour.
We're looking forward to introducing additional exciting new products in the second half of our fiscal year.
We continue to focus on operational changes in our cultivation as well as post harvest processes and genetics that are driving higher THC percentages and improved quality.
We're selling products into the market that allow for additional consumer choice like enhanced colors and distinct terpene profiles.
This is a result of listening to our consumer feedback.
Prime examples are the recently launched Tweed Lemon Kush, which is garnering positive comments for its flavor in the vibrant purple color of our new seven acres peripheral pancakes that has received high praise.
In the current quarter, we pushed the envelope with the launch of our Ace Valley sex Gummies left and thrust.
We're encouraged by the initial market response to these gummies, which represent the capabilities of canopies insights product development and marketing functions.
There was a clear gap in the market and a natural fit for our focus on cannabis products tailored to specific need states.
As proof these new gummies sold out at Ocs dossier in the first week of sales leading to an immediate reorder with expedited delivery as the Ocs anticipates high demand.
We also continue to support our quality products with investments in our commercial ground game in Canada.
As previously highlighted the investments, we're making in our Budtender engagement program higher education, which in its first year has facilitated over 10000 interactions focused on education and product knowledge.
Additionally, our commercial team continues to engage with retailers across the country, which led to strong distribution gains for our top new flower PR Jae Bae and edible products hitting the market in the current quarter.
As a result of the divestiture of our retail operations, we've reduced channel conflict, which has created an opportunity to work with over 100 additional stores.
It is our expectation that our Canadian adult use <unk> cannabis business will continue to show improvement in the second half of fiscal 'twenty three due to ongoing innovation and distribution drives.
Closing out our Canadian cannabis business in Q2, our Canadian medical revenue grew 8% year over year, driven by expanded product offerings.
Next I'll speak to progress in our CPG portfolio.
First <unk> delivered another record quarter in Q2 helped by strategic investments that have driven distribution and velocity gains. This.
This resulted in nearly $30 million in revenue in the quarter, which represents sequential quarterly and year over year growth of 67% and 299% respectively.
In the first half of fiscal 'twenty three.
Bayou steel secured distribution with major retailers, including Walmart Rite aid and Winn Dixie.
This has helped increase ACB to 34% in the U S, which represents a sequential increase of 520 basis points. According to IRI data for the 13 weeks ended on October <unk>.
Now moving to Canada.
<unk> is seeing strong market share growth.
According to Nielsen data covered covering the convenience and gas channel for the four week period ended October eight bio steel share of isotonic beverage sales in Ontario reached 11, 2% representing.
Representing an increase of 630 basis points versus the prior year.
Bio steels share nationally was seven 4%, which is 450 basis points higher than the prior year period.
Our homegrown Canadian brand <unk> was born in an NHL locker room, and resonates with athletes from across the country.
This is a blueprint for the growth that we're starting to see in the United States with a multi year partnership that named <unk> as the official hydration partner of the National Hockey League and the National Hockey League Players Association.
The partnership provides <unk> deal with ringside marketing product supply and retail activation rates as well as community engagement platforms.
If you watch hockey the brand is highly visible on and off the ice and we've secured several distribution agreements in the U S. As a result.
We anticipate additional growth for the brand.
The hockey season continues and athletes both professional and aspiring enjoy the benefits of clean healthy hydration courtesy of Bayou steel.
Earlier this morning, <unk> completed the acquisition of a manufacturing facility in Verona, Virginia. The acquisition of the facility from the brands existing contract manufacturer will support the rapid growth strategy and expansion of U S footprint for <unk>.
This is a natural next step for the brand and creates additional business value as <unk> continues its is sent to the top of the sports hydration category.
Looking to stores in vehicle sales were flat when excluding foreign exchange effects, which is an improvement versus the trend established in the first quarter of fiscal 'twenty three.
With this said we are steadfast in our view that Essent re has a strong platform for growth given the brand's global reputation and highly premium positioning.
As recreational and medical consumers continue to look for the highest quality vaporizer is available we look forward to bringing additional storz <unk> bickel innovation to market in the future.
As you can see the momentum is building in our Canadian cannabis and CPG businesses and I believe we're at an inflection point as we look towards our next phase with canopy USA.
Firstly are frankly, I think cannot be USA represents a pivotal moment in the history of canopy growth as we expect to fast track our entry into the U S cannabis market by bringing together acreage holdings jetty extracts and want our brands under the umbrella that is canopy USA.
We expect the closing of the acquisitions by cannot be USA will be will meaningfully enhance <unk>.
Canopy growth and profitability overtime once cannot be USA closes the announced acquisitions of acreage jetty and water.
In terms of next steps, we are appreciative that the CEO of <unk> group the owner of the PSX has publicly indicated support for our plans and we remain committed to continuing dialogue with our partners at NASDAQ.
Additionally, we anticipate receiving comments from the SEC on our preliminary proxy statement. However, we expect to be on track to hold our shareholder vote in early calendar 2023.
In summary cannot be USA is expected to accelerate growth and market expansion through the creation of a leading house of brands capitalizing on a once in a generation opportunity as we fast track our entry into the U S cannabis market.
Q2 marked a key inflection point for canopy as.
As we continue to drive innovation distribution focus and efficiency in our Canadian business.
As Bayou steel blazes, a path forward in the sports hydration category.
And as our canopy USA strategy progresses, we've taken destiny into our own hands to rapidly achieve profitable growth.
With that I'll turn it over to Judy.
Thank you very much David and good morning, everyone.
My comments will focus on one a brief summary of our second quarter results.
A review of new segment reporting that we have introduced this quarter and the performance of those segments.
Three an update on our path to achieve profitability and for some perspectives on the balance of our fiscal 'twenty outlook.
Let's start with a review of our second quarter fiscal 'twenty three financial results in.
In Q2, we generated net revenue of $118 million, representing a 10% decline over the prior year period.
When adjusting for both the impact of C III and the impact of our Canadian retail business, which you are divesting revenues increased 2%.
Sequentially net revenues increased 7% compared to Q1.
Revenue highlights include <unk>, delivering another record quarter nearly quadrupling its revenue versus the prior year period.
Our Australian candidates business, having a six quarter in a row of.
A record revenues.
And our Canadian cannabis business delivered a second consecutive quarter of stable revenue. Despite the impact of labor disruptions in Quebec in British Columbia, as well as the supply chain disruptions at the Ocs in Ontario.
Gross margins and adjusted EBITDA would have improved significantly year over year, driven by lower inventory charges in the current period as compared to the prior year as well as the impact of our cost savings initiatives announced in April .
Our SG&A expenses, excluding acquisition costs declined by 10% year over year, even as we significantly increase our investments in bias deal with new initiatives like the NHL partnership.
Free cash flow improved modestly on a sequential basis as compared to Q1.
Following the completion of certain restructuring actions tie to our cost savings initiatives announced in April which were aligned with our strategic review of our business. We have changed the structure of our internal management reporting.
Accordingly in the second quarter, we're reporting our financial results for the following five reportable segments, one Canada candidates to rest of world candidates, which includes U S CBD business.
Three stores in pickle for biofuel and $5. This works.
These segments reflect how our operations are managed with the performance of these segments evaluated with a focus on segment net revenue and segment gross margin occur.
Accordingly, we're now including these metrics in our financial reporting for the first time this quarter.
Canada, Canada's revenue declined 27% compared to the prior year period, yet stable sequentially compared to Q1 and Q4.
We grew our Canadian medical revenue by 8% versus Q2 up last year.
Our adult use <unk> revenue declined 40% year over year and declined 5% compared to the prior quarter.
We estimate that the labor strikes in British Columbia, and Quebec, as well as the cyber attack impacting deals yet negatively impacted our Canadian adult use revenue by approximately $2 million during Q2.
Canada, Canada's adjusted gross margin was a negative 15% in Q2 as margins continued to be negatively impacted by under absorption of fixed cost and price compression offsetting improved product mix and cost savings initiatives.
Excluding depreciation and certain noncash inventory charges and the impact of Canada employment wage subsidy program, which was zero during Q2 of this year normalized cash gross margins for Canada cannabis improved to 16% from 7% in the prior period.
In our rest of World cannabis segment revenues, excluding <unk> experienced a modest decline year over year as strong growth in Australia was also.
Set by a decline in the U S CBD business and the impact of shipments to Israel.
We have previously referred to bulk sales to Israel is opportunistic and the current quarter did not have any shipments to Israel.
Adjusted gross margin adjusting for inventory charges related to U S. CBD with 23% in the current period down from 46% in part driven by the <unk> divestiture.
<unk> delivered its second quarter in a row of record revenue, increasing 299% as compared to the prior year period, and 67% compared to Q1.
Gross margins for biofuel improved from a negative 5% in the prior year period to 15% in the current period with the improvement due to higher revenue, increasing operating leverage and improvements to supply chain operation.
Adjusted gross margin was 26% after adjusting for certain nonrecurring contract manufacturing costs.
So it doesn't equal revenues decreased 7% as compared to the prior year period due in part to the impact of the weakening euro in relation to the Canadian dollar.
On a constant currency basis, <unk> revenue would have been approximately $1 million higher or stable versus the prior year period.
We are seeing cautious consumer spending and an uncertain inflationary environment in select European markets and we also continue to see headwinds from distributor and ongoing supply chain challenges.
That being said, we are seeing strong growth in markets like Australia, and our direct to consumer sales in the U S remains resilient.
Gross margins for stores and Pickle also increased to 44% from 37% in the prior year period.
This works revenue decreased 24% of the current period compared to the prior year due to foreign exchange headwinds with the pound weakening significantly relative to the Canadian dollar and solar consumer spending impacting demand for discretionary items.
On a constant currency basis. This works revenue declined 12% versus the prior year.
Adjusted gross margin in the current period, 49% an improvement over the prior year due to product mix and less discounting activity.
Adjusted EBITDA in Q2 on a consolidated basis amounted to a loss of $78 million.
This was an $85 million improvement in adjusted EBITDA loss versus Q2 of fiscal 'twenty, two primarily driven by the improvement in gross margin.
We note that last years, adjusted EBITDA included $87 million and inventory write off.
Now normalizing for the disposition of C. III the impacts of the Canada employment wage subsidy program and the inventory write off adjusted EBITDA in Q2, FY 'twenty three we would have improved by $20 million on a year over year basis.
Relative to Q1, adjusted EBITDA loss widened by $3 million, which was entirely driven by increased marketing investments behind <unk> deal.
I'd like to I'll provide an update on the efforts underway to improve our profitability.
On a consolidated basis gross margin improved in Q2 versus the prior year and sequentially versus Q1, as we continue to improve our product mix in Canada, Canada segment and execute on our cost savings programs, where we have committed to delivering savings of $30 million to $50 million and cost of goods sold.
Yeah.
While the majority of these savings are expected to be recognized in the second half of fiscal 'twenty three and into first half fiscal 'twenty. Four we did achieve $8 million of savings in Q2, primarily relating to head count reductions more efficient procurement activities and supply chain improvements.
To date, the cost savings programs have realized over $11 million of the expected, 30% to $50 million in cost savings.
In addition, as David mentioned <unk> acquired a manufacturing facility in Verona, Virginia, which will enable bayou steel to bring production of its ready to drink beverages in house.
This is expected to improve biofuels gross margins closer to that of similar premium beverages over time.
The other key initiative is it reducing our SG&A expenses were in April we announced that we have undertaken actions that we expect will reduce our SG&A expenses by 70% to $100 million over the next six over the next 12 months to 18 months.
Our selling general and administrative expenses in the second quarter were flat versus prior year, which includes $12 million a year year over year increase in acquisition cost.
Adjusting for the impact of the acquisition cost the disposition of <unk>, which contributed $3 million to SG&A in Q2 of fiscal 'twenty two.
And the impact of the payroll subsidy benefit, which positively impacted SG&A by $11 million in Q2 fiscal 'twenty, two and zero in Q2 of fiscal 'twenty three SG&A expenses in the second quarter decreased by 15% or $20 million year over year.
This $20 million savings is net of the impact of wage inflation as well as incremental sales and marketing investments and bias deal, including the activation of the NHL partnership which took effect in Q2 fiscal 'twenty three.
To date the cost savings program has reduced SG&A expenses by approximately $36 million, even as we have increased our investments in key growth initiatives.
At the end of Q2 of fiscal 'twenty, three we announced the divestiture of our retail operations in Canada. The.
The operational savings from this step are expected to result in projected SG&A cost savings being closer to the high end of the annualized $70 million to $100 million target range.
Pressing forward on our path to profitability, we continue to evaluate opportunities to bring additional focus to our Canadian cannabis operations, including portfolio optimization with a focus on streamlining our SKU count as we continue to premium <unk>, our portfolio and further tightened our focus.
Capturing additional efficiencies across our operations and reducing costs.
And applying focus and discipline to our overall SG&A costs with an eye towards variable lighting spend where feasible to match spend with business levels.
Let me now spend a few minutes on our cash flow and balance sheet are.
Our free cash flow in Q2 was an outflow of $135 million.
This comprised of cash outflow of operation of $133 million, which includes $41 million in interest payments in the quarter.
Q2, Capex came in at 2 million significantly lower compared to the prior year period.
For the full year 2023, we now estimate capex to be in the range of $10 million to $20 million.
In conjunction with our canopy USDA announcements, we announced two major steps, we're taking to improve our balance sheet and reduced our cash interest expenses.
First we have entered into an agreement with certain of our lenders under which cannot be will tender approximately.
$87 $5 million of the outstanding term loan at a discounted price of $930 per thousand.
The first half of the pay down will occur during this quarter.
In addition, no earlier than the following the creation of the canopy growth exchangeable shares we intend to negotiate an exchange agreement with affiliates of constellation brands. The purchase for cancellation up to a 100 million principal amount of our unsecured senior notes due July 23 in exchange for additional.
Canopy shares.
These actions plus the partial exchange transaction of our unsecured senior notes that took.
That took place in July are expected to reduce our overall debt position by nearly $600 million.
We remain committed to further enhancing the strength and financial flexibility of our balance sheet and improve our cash burn while continuing to pursue growth investments and other strategic initiatives.
Our balance sheet remains strong with a $1 $1 billion of cash at hand at the end of Q2 and $2 billion of U S dollars a base shelf available.
Let me now provide some perspective on our balance of fiscal 'twenty three outlook.
First we expect continued year over year growth from bias deal in the second half as the team build on the growth in the first half with increased marketing investments driving gains in sales velocity and use distribution.
On a sequential basis, we expect Q3 to be slightly down versus Q2 with a stronger Q4 based on the timing of shipments.
Our Canadian adult <unk> business is expected to show continued improvement as the benefits from our premium position strategy and new product launches.
However, we expect some choppiness in the near term as we work through our portfolio optimization strategy.
Our rest of the World, Canada segment is expected to show year over year growth in medical sales in Germany, Australia, and other international markets, while sales to Israel are expected to be minimal in the back half of the year.
While the distributor challenges in economic conditions in the first half created some headwinds for storz <unk> Bickel, we are seeing improved U S distribution in the third quarter, which we expect will drive sequential growth in the second half of the year. The prior year comparisons will be challenging to repeat.
I'd also note that with the disposition of the Canada retail operation has already seen 10 locations closed which will begin to impact the Canada retail revenues starting in Q3.
Second we expect the balance of fiscal 'twenty three to show continued progress in our profitability with expectation of this year being a transition year as we work towards profitability building on the cost structure improvement as we've seen in the first half while also making strategic investments in key growth areas of our business.
<unk>.
Lastly, assuming a successful shareholder vote in favor of the upcoming proposal canopy USA is expected to exercise the rights to acquire acreage jetty and Lana.
And once these transactions close we expect to consolidate canopy USAID financial performance into canopies financial statements.
And as we continue to improve our focus and our Canadian business and once cannot be USA closes the acquisition of acreage jetty and Lana, we expect canopies global cannabis business to be profitable on a consolidated adjusted EBITDA basis.
In conclusion, we are focused on executing our path to profitability in Canada, we continued to invest in high potential opportunities, particularly in biopsy business, which is seeing strong results and we expect canopy USA to meaningfully improve canopy growth and profitability overtime.
This concludes my prepared comments, we will now take questions.
To begin our Q&A session.
Sorry go ahead operator.
I'm sorry.
Operator, we will take.
Operator. This is Tyler Burns will take a couple of questions first that we have in the queue from RSA technologies platform.
Okay. Thank you.
Okay.
Our first question is what is the plan for entering the U S market and what is the projected timeframe for this happening.
So there are a number of steps related to entering the U S market.
Under the Kenneth USA structure that we announced a few weeks ago.
So the steps are.
First we are canopy shareholders will vote to approve the accretion of exchangeable shares we expect that to happen in early calendar 2003.
And then canopy will create those exchangeable debt exchangeable share class immediately upon a successful vote. We then would expect constellation brands to elect to convert their common shares into those exchangeable shares.
Acreage shareholders also have to have a vote to approve.
The acquisition of the floating shares and we expect that to happen in early calendar 'twenty three as well.
And then canopy USA, we will exercise the options to acquire acreage Jedi and Wanna, We expect jetty and want us to close in the first half of calendar 'twenty three and we expect that the acreage closing will take longer it could take.
As long as nine to 12 months in order to get all the necessary regulatory approvals.
But as we said once we get through all of that.
All of that work as well as driving continued focus on our Canadian business, we expect that our business will be growing and profitable.
The second question is what is your plan if NASDAQ denies the pending acquisition.
So I'll take that question. So just taking a step back first of all canopy shares are listed on PSX, which is obviously a major exchange and as David mentioned, we are pleased that the PSX is supportive of our structure and strategy of canopy USA.
In terms of NASDAQ They have objected to the financial consolidation of Kenneth USA into the financial results of canopy growth. So it's not the structure or the strategy or the plan that they have really objected to at this point.
It's also helpful to understand that that NASDAQ is not a regulator and so we're not we don't require the approval of the transaction per se.
It's also important to understand that there is no imminent risk to our listing on NASDAQ and we are continuing to engage in constructive dialogue with NASDAQ to really ensure that we are in compliance with their rules and regulations and general policy.
Now even in the event the NASDAQ continues with an objection to the consolidation there are a number of potential path.
And that really includes you know NASDAQ may accept the heightened level of disclosure for the USA assets. We could also appeal a decision by NASDAQ to delist our shares if we get to that point.
I just want to remind people that there is a lot of things that have to happen in the next few months and certainly we'll share more details with with people as we get more updates.
Operator, Julian David will now be happy to take questions from the analysts.
Thank you ladies and gentlemen, we will now begin the question and answer session.
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To ensure an efficient call that gets to the questions of as many analysts as possible analysts are requested to limit themselves to one question.
The first question comes from Vivien <unk> of Cowen and company. Please go ahead.
Hi, Good morning. This is victor on for digging easier and thank you for taking the question.
So I just wanted to touch on <unk> were helped by the higher Walmart.
Versus $1 23.
Continued strong velocities, we seen scanner data.
As you look to move some of that RTG manufacturing in house, what is your strategy on in house versus contract manufacturing and is there a target mix in a target gross margin you had in mind. Thank you.
Yes, Hey, Victor I'll I'll take that question so.
The acquisition that we announced.
On the Verona facility. This is really about two things one is it really ensures the supply of Tetra Pak packaging.
In the U S and and even in Canada, because as you May know there is limited supply and capacity of Tetra Pak packaging just across the industry. So it really ensures that we have supply that we can leverage internally and really ensure that we can continue to capitalize on.
The rapid growth that we're seeing for biofuels across both the U S and the Canadian market.
Secondly, this is really also about margin improvement as you probably saw in our segment that margin disclosure bio sales margin. This quarter was around 26%. We think as we bring production in house through this acquisition closed.
Gross margin certainly we will see significant improvement as we reduce our obviously eliminate all the co packing costs is additional savings that we would garner from from owning the production facility and so over time, we would expect Biofuels gross margin to mirror, what you would typically see from other premium.
Beverage players standpoint, so all in all it ensure supply and and obviously, it's a margin improvement efforts as well.
Thank you. The next question comes from Chris Carey of Wells Fargo. Please go ahead.
Hi, good morning.
Good morning, Chris.
I think your prior expectation correct me if I'm wrong.
As for the canopy USA vote to happen perhaps in January .
And now it sounds like early calendar 2023.
Can you just help us understand your.
Expectation for what appears to be a bit deeper.
SEC review here.
And maybe explain.
The extent you can where you think they're taking a deeper look.
Clearly other cannabis companies based in U S have filings with the SEC.
Wondering why your case would be different so I'd love any perspective, there on how you think this impacts your timeline. Thank you.
I would say Chris that.
Our expectation on timeline really hasnt changed all that much we filed our proxy.
On October 25th there is a period in which the FCC can provide comments.
And so.
Maybe the just the change in tone into first.
Half of the calendar year is just more.
Being conservative than anything else, because our internal expectations really hasnt changed.
Thank you. The next question comes from Tami Chen of BMO capital markets. Please go ahead.
Hi, Good morning. Thanks for the question I wanted to ask about your Canadian cannabis business.
But just the production side the com.
So I would call a couple of quarters ago. There were some samples that you were working to improve the quality of your mainstream and premium flower production.
Could you just give a.
Update on that progress are you through all of the challenges that you previously experienced and.
Our Canadian footprint still in a position that essentially you need a lot more volume of mainstream and premium flower sales in order to get that segment into positive gross profit territory. Thank you.
Yes.
Good questions Tim.
So as it relates to performance from our production facilities in Canada. We've made I think tremendous progress in terms of our ability to deliver high quality.
Flower in particular to our consumer base, and we see that with some <unk>.
Market share growth and distribution growth and new products that we've launched.
And it's been a combination of things that have gotten us there.
<unk> <unk>.
Continue to improve our grow processes, we've continued to look for ways to.
To improve our post harvest processing, we've introduced new genetics, and we now have a very robust pipeline of genetics that we can bring into the market. So we're feeling really good about our ability to supply that.
That's super high quality.
Flower into the Canadian market right, So I think I.
I wouldn't say, we're over all of the hurdles because we're growing our plants and.
At the end of the day the <unk>.
AG cultural.
The agricultural cycle to create its own issues from.
Individual lots of growth.
The next slot.
But I would say that we're really pleased with where we are and feel pretty confident in our path forward from a footprint standpoint.
We need a footprint that is capable of delivering our aspiration to.
To be a leader in the premium and mainstream categories and we'll continue to do.
<unk>.
Take actions necessary as we always have to improve our ability to grow and grow profitable. So.
Again, I would say that we're on we're on track with where we'd like to be from a production standpoint. The only thing I would add Tammy is obviously, we are seeing sequential improvement from that from a cash gross margin standpoint, and this is happening amidst lie.
Rising path as you know across the industry.
And unlike other industries, Canada, CPI is actually still down right and so we're facing rising costs, but pricing compression is.
Is not helpful.
<unk> in the industry.
And there is still a lot of <unk>.
Evolving dynamics happening in the Canadian market to buy so.
And just to give you one of the examples of what we are.
Facing with and I think I can speak for a lot of the producers.
I think the market really needs a more equitable distribution of profit pool. So we can adjust the footprint, we can adjust a lot of the cost structures, but the market really needs to move forward to being having a more equitable distribution of the profit pool.
I mean by that is as you probably have seen many of the producers are basically getting 30% of sales of revenue.
<unk>.
And that's.
That's split in terms of the value chain split is just not sustainable I think for for the industry and are not healthy for the industry as a whole too.
Thank you. The next question comes from Pablo <unk> of Cantor Fitzgerald. Please go ahead.
Hi, good morning.
Judy I guess two part question, but.
So Julie maybe youre going to explain by what you mean.
By heightened level of disclosure.
With the Cubs.
And David for you I guess the question is.
Here, we are trying to balance what the auditor's ones and maybe the ACC.
NASDAQ1s right.
Scenario.
Yeah.
We would come to August nine months from now acreage transaction was closed.
And you would you would.
You would remain listed on NASDAQ.
And I guess pursue or all the doors not to consolidate because NASDAQ is depending.
And just provide pro forma numbers right. So we can all see what the company would look like.
On the plus side consolidated basis pro forma.
With the U S assets.
That could be a plausible scenario and please tell me if I'm wrong and I guess the last one David as part of the same subject.
Yesterday said that the board has taken place generally 23.
So what you find with floating shareholder Ob acreage.
I'll give my shares.
What would you guess on the 23rd in theory I would get my CGC shares in August .
Nine months, that's actually closes and then maybe you'll still be soon Nasdaq because they're still.
What are the items that I just spoke about.
And I would be <unk>, but getting some <unk> that I'll, just say NASDAQ potentially besides of music. If you can just touch on that first maybe you can start Julien the heightened level of disclosure on what he said about.
Four months not consolidating.
Leasing Nasdaq that way and I guess cycle moves in euro the doses that can be done.
Yes, so thanks for the question Pablo.
Yes so.
I'll say that in general there's been just a lot of discussion around the structure of the transaction.
We are going to continue to work with with NASDAQ will work with our auditors we worked with the <unk> will work with all of our partners. So that we create the.
The most value for the totality of our shareholders and I remain optimistic that we get an answer that everyone can be can be comfortable with we just we have to go through the process.
Fortunately or unfortunately, unfortunately or fortunately.
We're innovators in this space and that means there is some messiness in how we describe it and so as I said I remain.
I remain.
Confident that we're going to we're going to end up in a place that is good for all of our investors and as we talk about the structure I don't want to lose the point.
What we're doing here is we're taking.
Acreage and want to and jetty with the with the outstanding brands that they have in the core capabilities that each of the businesses have in distinct markets and we're putting them together under one umbrella so that they can create value.
And generate profitable.
<unk> and generate cash flow for our shareholders and so.
Again, there's a lot of discussion around structure and it's important because we need to structure to execute on our on our business model, but I want to make sure that we keep coming back to these are really good businesses that we're putting together thats going to make them, even better businesses and.
As I said I remain confident that we'll work through all of the issues related to listings and disclosures and audit and so forth.
Thank you. The next question comes from Andrew Carter of Stifel. Please go ahead.
Thank you very much good morning, I wanted to ask thinking through Canada. We're multiple years in as you said Judy the profit pool is still under pressure in the categories.
So I guess I'd ask with $200 million of costs supporting that business back into what the retail why continue down that road it, especially when canopy USA is probably going to be your top use of capital I guess I want to add to that if you were to take some more significant steps what flexibility do you have under your term debt agreement to do that and I guess the.
The final thing is when you closed canopy USA will your lenders have any recourse on the canopy USAA assets. Thanks.
So I'll take the first Angela I do think we are making progress on our key Canada path to profitability effort then.
Make no mistake, we are continuing to assess all of our operations beyond what we have announced just to really get to the point, where we are profitable in Canada and I think David mentioned really the focus is we have a footprint that can support our premium and mainstream businesses that really focused on.
Additional effort that we are reviewing including really optimizing our portfolio looking at variable rising our cost as much as we can and continuing to look at all of our operating costs with both direct and indirect costs. So.
I think we really do think it's important to have a self sustaining Canada business.
While we really at our scale growth and in the U S.
In terms of the terminal really and to address your questions about any limitations on the term loan as we think about the Canadian footprint really no limitations.
Two there to really call out.
And some of them are.
Can it be USAID standpoint.
It's essentially.
<unk>.
The way that it works is is before they did not have any collateral of say an acreage as part of that.
Package the lender package now just the extent of the.
Canopy growth is exchangeable shares ownership without ownership they essentially have.
An asset that they can really think about.
That's credit enhancing from from their point of view just given the the ownership structure of canopy growth's sake to a canopy USA.
Thank you. The next question comes from John Some payroll of CIBC. Please go ahead.
Thank you good morning, I wanted to ask about your path to achieving positive EBITDA in F. 'twenty four so two parts to this first just to clarify that that guide now includes your U S assets and second if so given the remaining cost cuts you're planning seem to only get you about 40% of the way there is a positive EBITDA on the exist.
<unk> business should we interpret that as you do not expect the existing business as is to achieve positive EBITDA in 2014.
Yes, so I'll take that so first.
The comment we made about adjusted EBITDA positive in FY 'twenty four it was for all of our businesses. Excluding the investments that we're making in bias deal right. So just to level set everyone. If you look at our adjusted EBITDA losses to date will lead to the main drags are Canada and diodes deal and <unk>.
We're making a strategic choice to invest and Youre seeing that are really driving the top top line results that were seeing in our performance and we continue to expect very strong performance out of bias deal leveraging the investments that we're making in years to come from our Canada standpoint, I think I've addressed.
In my prior comments that we are really committed to having our Canada business in a profitable shape. So as we deliver on the cost savings as we look at premium rising are mixed and continuing to look for additional opportunities.
We expect we should be in position to have a positive.
Profitability in Canada on a go forward basis, and then if you layer and then potentially the positive adjusted EBITDA that they cannot be USA could bring you're really looking at a business that we think is pretty attractive.
Growth and profitability standpoint, but all of that will likely to occur once we close on the triplet once canopy USA causes on the transactions of acreage Juana and jetty, which as David alluded to could take.
A number of months before we get there yes.
Yes, and John to address your question maybe to build on.
Some comments that both Judy and I made during our scripts right. If you think about our business and it aligns to our new segments that we're reporting in we have our Canadian business that we're going to continue to drive innovation, we're going to drive distribution and we're going to.
We really work toward the focus and efficiency in our in our Canadian business that gets us the results that we wanted and a.
A proof point and that is the.
The divestiture that we've announced of our retail assets. We then talk about biotech deal, which is a brand that we're investing in but showed almost 300% year over year growth and we really love the trajectory, we're seeing in markets like Ontario, where the brand is maybe a little more well known and established but.
Is really starting to hit an inflection point, so that gives us a reach.
Our reasons to be excited about that.
We've talked a lot about our cana for USA strategy, but that's really about growing our businesses that are profitable.
In really strong markets in the U S. So that we can take a share of the $50 billion total market, but then I also want to layer in our stores and digital business, which is coming off a 20 years of consecutive growth.
We are continuing to look at driving distribution in that business.
And.
We are working on working through some exciting innovation in that business as well and that's a business that is.
Standalone profitable and.
Again, resonates well with our consumers and then lastly, we really have our rest of world businesses, which includes our U S. CBD, we're going to continue to function in those markets in an asset light fashion and be opportunistic as the regulatory environment evolves and so I think.
Putting our business kind of in that perspective, using our new.
The new reporting segments. I think is is a helpful way to think about it because then you can get under the components of profitability.
As Judy described.
We have some work to do in Canada, and we're investing in <unk>.
Thank you. The next question comes from Nadine sorry.
Of Bernstein. Please go ahead.
Hi, Thank you for taking my question I appreciate you, saying that including canopy USA will get canopy growth global Cros to globally profitable on a consolidated basis.
But my understanding is you actually won't get access to any of those cash flows so beyond the cost synergies, which those U S assets with enjoy by being under the same umbrella could you explain the benefits to canopy growth's shareholders today from the creation of canopy USA.
<unk>.
Yeah, I'll take that the deal so I'd say from mechanically growth shareholder standpoint, obviously, having some visibility to the performance of the Kennedy USA business that.
That canopy growth has already paid for in owning with majority of those assets are not showing up in our P&L just having that visibility. We think this is beneficial to canopy growth. The second benefit would be when you think about some of the resources both management's time.
Cash.
Uses that we are making at canopy growth level to really advance our USP strategy.
And we've talked about this before that there is not insignificant amount of money and time, that's been spent by canopy growth to really advance our <unk> strategy. So by having this cannot be USA structure, we can really streamline the management and.
The resources that mechanically growth has also been spending on canopy USA, while canopy. USA. Also then takes advantage of the consolidation of their businesses and really generate revenue and cost synergies over time.
And ultimately.
We do expect regulatory progress to happen at some point, maybe not in the next year, but we do think that that will happen in all of the benefits that cannot be USA would be generating both from a profitability standpoint, and a cash generation standpoint, all of that at that point, we will accrue to canopy growth shareholders.
And it gives us a head start into that market. So that we don't.
We don't wait until we have a permissibility event and then put the assets together. So I think the head start as is important and it is a legitimate.
Economic asset.
That's that's available to our shareholders and clearly cash flow is available to our shareholders upon permissibility.
Thank you. The next question comes from Doug <unk> of RBC capital markets. Please go ahead.
Thank you my question just relates to borrowings steel given the growth and it.
It looks like the opportunity for this product relative to the Canadian cannabis business number one.
Within the next year to 18 months do you expect steel to be a.
A larger business than the Canadian cannabis business and then number two.
As you think about other opportunities and what's gone on the Canadian cannabis side, when you think about M&A or other products.
That are similar let's say to Bayou steel would they come to the top on the list on a return on invested capital basis now.
Seeing what you've seen over the last one.
Yeah, So Doug we're going to continue to drive bio steel because we think that.
We think that we have something really special and the brand proposition and.
The way it resonates with professional athletes and aspiring athletes and then.
The common consumer so we're going to we're going to continue.
To drive bias deal as hard as we can from an M&A standpoint.
As a company, we're going to remain focused on delivering against the business opportunities that we have in front of us.
As we talked about incremental focus.
Inefficiency in our Canadian cannabis business.
And.
Really stay focused on.
On what we have.
With the potential on a very small scale to be opportunistic.
And building.
And building out our portfolio. So that we can go to market ultimately in the U S.
Okay. Thanks.
Thank you. The next question comes from Bill Kirk MCM Partners. Please go ahead.
Thank you for the question. So I think as part of the deal with flow Youll be youll be co packing for them at the Virginia facility for a bit so I guess, how much revenue would that co packing arrangement generate and what.
Is it the duration of that agreement and then on Storz <unk> Bickel, Judy I think you said you expected it to sequentially grow is that just normal holiday seasonality or is there something improving sequentially with with discretionary purchases. Thank you.
Yes, so I'll take the SMB and then and then go back to flow. So from an SMB standpoint, I think the encouraging thing is when you look at the Q2 performance, we were down 7%, but when you exclude currency were flat so sequentially. It is an improvement.
Relative to what we saw in Q1 and really the challenges that we've had with some of the distributors in the U S. A lot of that has now been worked through and were.
Getting reorders now from from the distributor that had some some challenges and we had to pause some shipments there. So we are seeing some of that improvement coming through.
And so I think a lot of that is sort of the challenges that we had on the distribution side.
We're behind.
A lot of that we've had some supply chain challenges in Q2, as well and Thats also improving so understand that certainly in the European markets, where the inflationary pressure in the war.
Crane is really posing additional challenges in those markets.
But I think we are seeing improved trends just from working through some of the.
The internal challenges that F&B head.
In terms of flow.
Yes, you are correct in that there will be a period of time that we will be look I still will be contract manufacturing for flows.
Production. This is really to ensure that we are utilizing the capacity as best as we can so that also helps.
Margins, so it's really less about the revenue, but really efficiently utilized in the capacity of that facility asbestos to Ken.
Thank you our last question comes from Michael Lavery of Piper Sandler. Please go ahead.
Yes.
Thank you and good morning.
Good morning.
I just want to come back to the NASDAQ listing and I appreciate that.
Quite some time before there may be better clarity on where that lands.
Obviously, you mentioned the appeal potential as well, but if the big.
A big push to delist and then deny an appeal.
Can you just.
Clarify if your decision is to close the cannot be USA deal in D list or to give that up and stay on the NASDAQ listing which would you peg.
So Michael I would just go back to what David said the decision to announce Kenneth USA is to optimize the value of our U S. T. C investment right. So when you think about what we what we wanted to do and what our priority is really the structure allows us to.
Optimize the value of our.
Investments in the U S and really generate revenue and cost synergies for that entity over time.
<unk>.
And so we will continue to work with NASDAQ will continue to have dialogue with with with them to make sure that we can.
Come to a constructive.
Asian, but if you think about our primary motivation for canopy USA. It is really about value creation.
And so that's really where we have.
Set on.
Thank you.
That concludes the Q&A portion of the call I will turn the call back to Mr. Klein for closing remarks.
Thank you again for joining us today I mentioned that we feel that we're at an inflection point in Tennessee, and we're really excited about.
Where we sit today in the future in front of us if youre in Canada I encourage you to try one of our new premium flower MPR J innovations.
We're a great tasting tweet IC guava or deep space Ginger Ale Galaxy, if youre in the U S. I encourage you to hydrate with Bayou steel RTD beverages, or try and want a gummy or JV.
Investor Relations will be available to answer additional questions have a great day.
This concludes canopy growth's second quarter fiscal 2023 financial results Conference call. A replay of this conference will be available until February seven 2023.
Can be accessed following the instructions provided in the company's press release issued earlier today.
Thank you for attending today's call and enjoy the rest of your day Goodbye.
[music].