Q3 2023 Canopy Growth Corp Earnings Call
Speaker 1: of revenue with a 40% market share and faces virtually no risk of enforcement.
Speaker 2: The legal sector, out of necessity, is forced to be price competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer. The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come, and as a result, the sustainability of this legal sector is in question.
Speaker 3: Make no mistake building an industry from the ground up is not linear and the knowledge gained has been significant.
Speaker 4: We stand ready to work with regulators, politicians, and provincial boards to improve the punitive regulatory environment based on experiences from the front lines.
Speaker 5: However, despite these market realities, Canada remains a large market.
Speaker 6: In which canopy is well positioned with strong brand recognition, a diversified portfolio of products in the adult youth segment, and a growing share of the medical market.
Speaker 7: The backdrop I just outlined formed the catalyst for the actions announced today, which are intended to position our Canadian business to be profitable and self-sustaining.
Speaker 8: The Canadian Business Transformation Plan includes consolidating our production and operational footprint.
Speaker 9: shifting to a brand-led, asset-like model, and completing an organizational restructuring that better aligns our resources with market realities.
Speaker 10: Specifically, we intend to exit our 1 Hershey Drive, Smith Falls, Ontario facility as we consolidate cultivation at existing facilities in Kincardine, Ontario, and Kelowna, British Columbia. And where necessary, enhance our offering with a flexible flower sourcing strategy.
Speaker 11: Similarly, we will be outsourcing non-flower formats such as beverages, edibles, vapes, and extracts as we implement an nimble asset light model that allows us to be dynamic and actively respond to market demands.
Speaker 12: In Quebec, we will cease sourcing of flower from the Mirabelle facility.
Speaker 13: As the Meribel facility is operated through a joint venture structure, we're engaging with our JV partners on the long-term feature of that site.
Speaker 14: We recognize our core competency is brand development with strong routes to market.
Speaker 15: The Canadian transformation is intended to closely mirror the planned structure of CanopyUSA, which we believe to be a winning model.
Speaker 16: The changes announced today are in addition to the following cost savings initiatives that were completed in Q3, including the divestiture of national retail operations, the development
Speaker 17: closure of our Scarborough Ontario research facility, and outsourcing of our genetics program to Quebec-based ExCA.
Speaker 18: the restructuring of our Canadian cannabis business into a standalone business unit.
Speaker 19: And the reduction of our skewed count by approximately 50% as we focus on the highest performing segments within the Canadian Adult Use cannabis market.
Speaker 20: The changes announced today.
Speaker 21: will result in approximately 800 employees exiting the business over the coming months, with 40% of that reduction occurring immediately.
Speaker 22: We expect these further adjustments to reduce annual SG&A in COGS by an additional combined $140 to $160 million over the next 12 months.
Speaker 23: Judy will speak to the financial aspects of our restructuring in greater detail during her prepared remarks. She's going to Similarly we are discussingY Thinsea atmosphere and onlineapist,
Speaker 24: Now let me spend a few minutes discussing business outside of Canadian cannabis, starting with our international markets.
Speaker 25: where Australia is worth highlighting as our sales in this market have increased nearly 200% year over year and demonstrated steady growth.
Speaker 26: Storz and Bickel, or S&B, continues to demonstrate its capabilities and appeal with core and limited time premium vape offerings like the Peace Volcano.
Speaker 27: In the third quarter, S&B delivered its best quarterly revenue since Q4 FY22.
Speaker 28: This growth was driven by traditionally strong seasonal demand for premium cannabis vaporizers.
Speaker 29: Overall, S&B continues to be a key profit contributor in the Canopy brand portfolio and is poised for innovation and growth.
Speaker 30: Turning to Biosteel, we're very pleased with the strong momentum at retail despite quarter over quarter volatility in reported revenue due to the timing of distributor load-ins.
Speaker 31: According to Nielsen data, Biosteel share of isotonic beverage sales in the Canadian National Convenience and Gas Channel reached 10.4% in the third quarter and 13.8% in Ontario.
Speaker 32: In the US, the branch has also made impressive distribution gains over the past year with IRI data showing BioSteel's ACV at 34% for the quarter.
This was matched by notable sales gains, with scanned sales in the US region increasing 157% from the prior year.
With expected distribution gains in velocity growth driven by our investment in brand activation, we expect to see revenues increase significantly over coming quarters.
Finally, I'd like to speak to CanopyUSA, which continues to progress the USDA T strategy.
With the lack of developments in Washington, I strongly believe that through CanopyUSA, we've taken control of our destiny to capitalize on the once-in-a-generation opportunity in the largest cannabis market in the world.
Our primary objective for Canopy USA is to optimize the value of our entire US cannabis ecosystem.
Anchorage, Wana, Jettie, and Terracelland.
by leveraging their brand portfolios routes to market and operations.
We're pleased to see the ecosystem exploring opportunities to collaborate and grow, with examples including Juana and Terrace bringing Juana edibles to New Jersey and the expanded availability of Juana in the state of Maryland.
One launching in New Mexico and Missouri in addition to releasing a suite of new sleep product offerings.
and Jedi extract announcing upcoming product availability in the state of New York.
After closing, Canopy USA expects to reduce the annual operating expenditures, including eliminating redundancies and the public company reporting costs of acreage.
All of which are expected to be realized shortly after closing these transactions.
This is a novel and groundbreaking strategy where resolute in remaining dualisted as the CanopyUSA strategy progresses.
And as we continue to finalize our proxy, we anticipate holding our shareholder vote as early as April 2023.
With that, I'll turn it over to Judy. Thank you very much, David, and good morning, everyone.
I'll focus my remarks on one brief summary of our third quarter results.
an overview of the financial details of our transformation plan for Canadian cannabis business.
And three, discussion of our cash flow imbalance sheet.
Beginning with the review of our third quarter fiscal 23 financial results.
Include three, we generated net revenue of 101 million, representing a 28% decline over the prior year period.
When adjusting for the impact of the vestitures of C3 and the Canadian retail business, revenues decreased 23%.
Webbing you highlights includes Canadian medical cannabis increasing 9% versus the prior year period.
Schrozenbickle increasing 50% sequentially compared to Q2.
and our Australian cannabis business having its seventh quarter in a row of record revenue.
Gross margins declined year over year, with the decline due to a shift in the business mix from the divestiture of C3, the impact of last year's COVID-19 relief program, and a decline in biofuels gross margins.
Adjust the David's Law laws increased by $21 million to $88 million compared to a year ago.
Approximately 8 million of the adjusted EBITDA loss during Q3 resulted from a few discrete items including costs associated with returns in our USPBD business following our strategic change.
The right down of aging inventory advice deal and a credit to a distributor which is related to the previous sales made to Israel.
Pre-cash flow improved 13% year-over-year due in part to lower capital expenditures.
Now let's take a look at the results from each area of our business.
Canada cannabis revenue declined 23% compared to the prior year periods and declined 11% sequentially compared to Q2 with the decrease due to lower adult use B2B revenues partially offset by a 9% growth in our medical cannabis revenue.
The impact of the retail divestiture during Q3 was approximately 1 million.
Canada cannabis adjusted gross margin was negative 8%.
But cash growth margins improved to 29% when normalizing for the impact of depreciation and certain non-cash inventory charges.
The year-over-year improvement in cash flows margins is driven by mixed improvement and the cost reduction actions announced in April of 2022.
And today's announcement is expected to further improve cash gross margins and address the gross profit dollar headwinds that have stemmed from lower revenue. In our Rest the World cannabis segment, revenues excluding C3 experienced a 54% decline year over year.
due to a decline in the U.S. DVD business and the impact of shipments to Israel.
The current quarter did not have any shipments to Israel, which negatively impacted by fails by 4.7 million compared to the prior year period.
This was offset by strong performance in Australia, newly tripling revenue compared to 2-3 of last year.
Year-to-date, our international cannabis sales, excluding US CBD business, are up 43% despite the decline in sales to Israel.
Adjust the growth margins for this segment was negative 33% in the current period compared to positive 32% a year ago, which reflects the discrete factors that impacted sales that I discussed earlier in the call.
We expect gross margins in this business to revert back to the historical level going forward.
Bio-stue revenues were relatively fat to the prior year period, and lower than Q2 mostly due to the impact of timing of distribution loadings.
The timing boosted Q2 sales, while Q3 revenues were also impacted by shipment timing shifts into Q4.
Year to date, bio-still revenues have more than doubled and we expect to see strong growth resuming in Q4.
Adjusted gross margins for biosteal were negative 37% in the period, which was impacted by inventory write-downs and higher third-party shipping, distribution, and warehousing costs across North America.
The inventory write-downs relate to an aging inventory of ready-to-drink products, which is primarily due to the previous inventory build ahead of distribution gains that progressed slower than anticipated in the U.S.
The acquisition of a manufacturing facility in Verona, Virginia during Q3 is expected to improve biofuels growth margins by reducing contract manufacturing costs, and the biopill team has several initiatives in place to further reduce its cost of goods sold in the coming quarters. For more information, visit www.fema.gov
We expect biofuels growth margins to approach industry standards at sales scale over time.
Sores and vehicle revenues decrease 20% as compared to the prior year period, yet increase 50% sequentially compared to Q2.
While cautious consumer spending in an uncertain inflationary environment is impacting demand on higher-priced items, we did begin to see resumption of sales to key distributors in the U.S. market. We discussion about the real price session and security of stock beanpacked stocks in
Note that this also represents Sorzenbickle's best revenue quarter since Q4 of FY22.
Growth margins for Sorsum Bickel remained healthy at 45% in the current period.
This first revenue decreased 22% in the current period compared to the prior year due to challenging UK retail dynamics.
Growth margins decline slightly to 49% from 51% in the prior period.
I'd like to not provide an update on our actions to achieve profitability.
Our previously announced cost reduction initiatives are already driving improvement in cash growth margins in the Canadian cannabis segment.
However, our adjusted EBTEL losses have not improved meaningfully due to the decline in our Canadian cannabis revenue as well as investments behind BioSteel.
As David mentioned this morning, we announced a plan to transform our Canadian business to an asset-like, brand-driven model, significantly reducing our operational footprint as well as headcount across our organization.
As a result of these actions, we expect to reduce our overall cost by an additional 140-160 million comprised of a 90-100 million reduction in cost of goods sold and 50-60 million reduction in S-GNA expenses.
The reduction is incremental to the $250 million of cost reduction plan that we announced in April of 2022.
The additional cost reductions are expected to come from several areas.
One, reduction of our Canadian cannabis operational footprint.
Our plan to exit cannabis flower cultivation in our Smith Falls, Ontario facility and seizing the sourcing of cannabis flower from the Maribyrtle-Dal Quebec facility is expected to result in a much smaller cultivation footprint.
In addition, we plan to close the one-horshey drive facility in Smith Falls and move manufacturing close smaller footprints while moving production of all cannabis 2.0 formats to third-party partners.
And we've already closed the Scarborough Ontario Research Facility.
These operational footprint adjustments are estimated to deliver $35 to $40 million in annualized cost savings.
and reduce our distribution cost as well as other supply chain related costs by an additional 100 million or 10 million in annualized costs of goods sold.
We anticipate these operational changes will be completed in Q2 of FY24.
2. Reduction and headcount across our operations. Headcount reductions across cultivation, manufacturing, and other areas of operations are expected to generate 45 to 50 million in annualized cost of goods sold savings.
Three, reorganization of our sales and marketing organizations.
We have streamlined the sales and marketing functions under the creation of a standalone Canadian business unit with focus on key accounts, high margin customers and our medical sales
This is expected to result in a leaner selling organization and reduction in certain marketing expenses with an estimated cost reduction of 10 to 50 million in annualized sales and marketing costs.
and for reduction in R&D and GNA spending.
We've eliminated our central R&D resources, outsourced their genetics program, and embedded innovation functions within the Canadian Business Unit.
This is expected to deliver 10 to 15 million in annualized cost savings.
And right sizing of our central support teams from both a headcount and operational span perspective to the size of the current business and market realities is expected to generate an additional $30 million in annualized G&A expense savings. Overall, we expect to reduce our total cost of our internal savings by about $30 million.
canopy to be profitable in our Canadian operation even with no improvement in revenue from the current run rate.
And as such, we reaffirm our previous expectation of achieving positive adjusted EBITDA in FY24 with the exception of investments in bio-steel.
Let me now spend a few minutes on our cashful and balance sheet. Our cash balance declined by $354 million during Q3 compared to Q2, which is higher than the recent quarterly cash outflow.
So let me walk through the various drivers.
First, we paid off 117.5 million of our term loans, which was the first of the two payments as part of our agreement to tender USD 187.5 million of the outstanding term loans.
Second, cash used for acquisitions and investments during Q3 included $24 million in acquisition of a manufacturing facility for BioSeal, which should provide an attractive return on investment and $38 million related to an option premium payment to purchase acreage's debt.
Third, our free cash flow in Q3 was an outflow of 146 million.
This included cash interest payments of $28 million in Q3.
Cash outlays also included approximately 20 million that are not part of our adjusted EBITDA, which includes acquisition-related costs, primarily related to the reorganization of Canopy USA and divestiture of our retail business, as well as certain cash restructuring costs.
Two-three CAPEX came in at 2 million, significantly lower compared to the prior year period, and for the four-year 2023, we continue to estimate CAPEX to be in the range of 10 to 20 million.
Our cash and cash recouplance remains strong at $789 million, and our overall debt position has been reduced to $1.2 billion as of Q3 quarter end down from $1.5 billion at the end of Q4 of fiscal 22. We also have many liquidity options available to us.
million principal amount.
Second, we have a very constructive relationship with all our debt holders and we continue to consider ways to reduce debt in an accretive manner, balancing our focus on remaining and maintaining our financial flexibility and cost of capital.
Third, we are in active discussions around monetizing numerous non-core assets that we have, which includes facilities that we've already closed.
Fourth, our USD 2 billion base shelf remains fully available to us. And importantly, we expect the cost reduction initiative to reduce our operating cash outflow by more than half with significant quarter over quarter improvement.
starting in Q1 of our fiscal 24. Let me now provide some perspective on the balance of fiscal 23 revenue outlook.
First, we expect strong growth from BioSPEAL in Q4 with increased marketing investments driving gains and sales velocity as well as new distribution.
Our Canadian cannabis business is expected to show stabilization in net revenue as we undergo our business transformation plan. Note that with the disposition of our Canada retail being completed at the end of 2-3, the Canadian adult use business to consumer revenues will now be eliminated.
going forward.
For stores in Bickle, we're encouraged by improved US distribution in the third quarter, but note that Q3 results benefited from Black Friday and the holiday season, so we expect seasonality to contribute to a modest decline in Q4 versus Q3.
In conclusion, achieving profitability is critical for us and with the decisive actions we announced today, we're focused on executing this transformation in Canada and significantly reducing our cash burn over the coming quarters.
This concludes my prepare comments. We will now move into the question and answer session.
So to begin with our Q&A session, we'll first address an investor question that was uploaded through the question and answer platform developed by SAE Technologies.
Tyler, can you please state the first question?
What do you feel the effects of legalization in the United States will have on the company and the industry as a whole?
So thanks Tyler.
Look, with the lack of developments in Washington on federal legalization, we've decided not to wait for regulatory reform to happen in order to reap some benefits through our ecosystem in CanopyUSA.
just to reiterate what that is. That's really putting together our want-a-brand, our jetty-brand acreage together so that they can operate in a collaborative fashion, grow their business faster than they might do if they were to continue to operate at separate companies.
and realize cost synergies. And so we continue to work on our canopy U.S.A. strategy, which we commented on both in the earnings release as well as
as well as in our prepared remarks. So, yeah, I think that we were all hopeful that at some point we have full federal legalization in the US, but we see that happening, continuing to happen very slowly. So we've taken matters into our own hands.
With that operator Judy and I will now take questions from our analysts.
Thank you, sir.
Ladies and gentlemen, if you would like to ask a question, please press star, followed by the number one on your telephone keypad. And if your question has been answered and you would like to withdraw from the queue, please press star, followed by the number two.
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.
Your first question will come from Tammy Chen at BMO Capital Markets. Please go ahead.
Thank you. Good morning. Judy, I just wanted to ask, in terms of the EBITDA, could you comment a bit on what the EBITDA loss looks like between the particularly the Canadian cannabis segment and then your consumer segment?
I'm just looking at based on your total cost announcements to date and your reaffirming EBITDA guidance that it seems the majority if not possibly all of the currently reported consolidated EBITDA loss is due to the Canadian cannabis segment and not possibly the consumer segment EBITDA.
maybe already in the positive, are you able to comment on that? And can you just give a little bit more detail on the cadence of all these cost savings as they progress through the quarters in Cisco 2024? Thank you.
Sure, Tammy. So, I would say when you look at our total adjusted EBITDA losses,
The way I would think about it is sort of break into a few different segments, right? So number one, to your point, right now the two main drags in terms of our justity, bit del losses, or one Canada, and second, the investments that we're making in Bio Steel.
So with all the actions that we've announced in terms of our Canadian Business Transformation Plan, our expectation is that once we're complete with the plan, that all of our operations across our businesses will be profitable with the exception of the investments that we're making in biases.
So that's the outline of my comment around FY24. So when you look at the businesses that we have, Soars and Bickle is a profitable business. You can see that in the gross margins and obviously the highest price points that that brand garners. It is a profitable business. The International Cannabis, there's some noise in that business just give
If you look at, and if you get this works and others, we think we're pretty close to profitability in all those segments. So it's really about making sure that all the cost savings are driving Canada to be self-sustaining and profitable. And for BioSteel, we do think the investments will eventually pay off.
So I would say, you know, we obviously did announce the changes this morning and there is a big portion of the savings that will begin to flow through starting in Q1. But as we complete those actions in Q2, we think that the bigger chunk of those savings and the progression from a quarter to a quarter.
comes from Vivian Azer of Cowan & Company. Please go ahead.
Hi, good morning. This is actually Victor Ma on for Vivian Azer and thank you for taking the question.
So broad-based inflation headwinds are persisting in North America. While flower downtrading has been evident in Canada, have you seen that accelerate at all as consumers absorb higher energy prices this winter?
I think we've seen across Canada and I would argue in the U.S., we've just seen growth in the value segment which we don't play heavily in. But that's really, that's I think where we're seeing campaign Steppati, the Fifi Project she's got the
I think it's less about overall price compression and more about this growth of the low end of the market.
Just in terms of our business in Canada, we are looking at now the impact from some of the price compression moderating in our business. If you look at our product mix as we are premiumizing our portfolio, the decline in terms of our average pricing is beginning to moderate. We see that Unit C and then the continuing rise maybe in ingredients in communities that
David, you, I think you noted that the shareholder vote on Knapp USA was still planned for April of 2023 or is planned for April of 2023. Please correct me if I heard that wrong.
There's a lot of details in the press release this morning about potential remedies.
That would make the NASDAQ, and I presume the SEC more comfortable with this transaction. I'm still struggling a little bit, just to understand the practical considerations here. You talk about a smaller percentage ownership among other things. Just just an endpoint.
probably under the changes that they still be reporting can to be an equity income. Um, you know, but I'm not sure. So, um, anyway, so you can tell just just trying to maybe, um, you know, just dump this down a bit and understand kind of the practical consideration of what's actually being contemplated here. Thanks so much. Yeah, Chris, it looked, it's a complicated transaction and that's partly why it's taking maybe longer than we would
affect how Constellation ultimately treats their investment in Canopy. And so to simplify where we are really, again the value of Canopy USA is in putting these businesses together, letting them generate revenue synergies because they can effectively open markets.
maybe faster generate cost synergies by working together to drive routes to market and route to market activation within individual marketplaces and then look at other more more G&A sorts of synergies across their businesses. So, we think.
putting the businesses together is the value unlock. How we go about doing it is the complicated set of activities that we're working through with SEC, as well as the exchanges that we trade on. And so, simplistically, put...
We would have to ensure that our economic ownership is in more than 90 percent, which was a likely or potential outcome anyway as we put this business together. We need to make sure that...
that we would only have three members on the board. So we would have one viewer seat on the board and that seat would come from a canopy nomination to the board. We don't think that affects the performance of the business whatsoever. And then we'd have to, you know, Susan, our earnings release eliminate certain negative cupidants.
And these kind of technical things are just required for us to have an appropriate level of distance from specific control of that enterprise as we go forward.
Your next question will come from John Zamparo of CIBC. Please go ahead.
Thank you, good morning. My question's on the profitability goals and even at the high end of the combined savings plan that doesn't get you particularly close to break even on EBITDA at least compared to the current quarters. So how do you square that with the outlook for F-24 of being positive? And...
Presumably, you're spending on file steal isn't that material. So is it that you're including results from your US businesses, even though those won't be consolidated? There's also the comment about revenue not needing revenue growth. So just trying to better understand the profitability, God. Thank you.
Sure, I'll start and David, as well. So just in terms of the overall profitability goal and how that ties to the cost reduction, look, again, I do think when you combine the announcement we made in April and what we're now today, it is a pretty size.
And I think that's a decision that we made, particularly in the current fiscal year, as we really were standing up the investments behind the NHL sponsorship, really with the anticipation that that will drive strong velocity and strong distribution across both the Canadian market.
and the US market. And as you see in the retail data, we're very pleased with the performance of Biosteal. You see that at least in the retail data, despite some of the lumpiness that you see on a quarter over quarter basis. So we do think that that investment that we're making will pay off in the coming quarters.
So again, I think as I said to Tammy, if you think about the cost actions that we announced in Canada and the other businesses that are already profitable that we think we can get to a profitable business for total canopy with the exception of the investments that
next question comes from Nadine Sarwatt of Bernstein. Please go ahead.
Thank you, Jeremy. A deeper question for me. So the first, many of your initiatives focus on improving profitability that you announced today, which is really great to hear. However, the weaker top line growth for Canopy, and to be honest, more broadly for Canadian cannabis industry, remains a fundamental challenge. So,
Could you just walk us through what you're planning as part of your initiatives that in particular address improving top line given the challenges you guys highlighted at the start of the call? And then my second part of the question is, you know, many investors have expressed concern that CanopyUSA is adding to your costs or
taking management attention away from the core business without contributing positive cash flows until federal legalization occurs, which you know, here increasingly unlikely for the moment. So what would you say to those investors who are concerned about that? Thank you.
So let's take a shot at these duty and then you can fill in the blanks. But in terms of top line, as Judy pointed out, we aren't anticipating or we don't require top line to meet the profitability objectives that Judy outlined as a result of these changes that we've announced today.
What gives us confidence in being able to sustain the current level of performance in Canada is really the continuous improvement we've made over the last several quarters in terms of the offerings that we have in the marketplace, the general consumer experience
acceptance and appreciation of those offerings and the strength of our commercial team on the ground in Canada, which we believe is second to none. So we think that those have us in a good position to at least retain the current level of revenue that we're generating in the business and so we've sized our business accordingly.
which yields the profit objectives we talked about. As it relates to canopy USA, look the purpose of canopy USA is to create value by putting Jenny, Wana, and Acreage together in a way that they can work together in a collaborative fashion to extract value.
And that is something that those businesses need to do by working together and it's really less about resources being assigned from canopy growth. And so we don't see it as a major distraction from running the rest of our business, which...
It includes Canada, it includes Dors and Bickel, it includes Biosteel as well as of our international businesses.
And I would just add from a revenue standpoint, Nadine, so when you look at our Canadian total cannabis revenue over the last few quarters, it's been stabilizing in the range of 35 to 40 million. And that is, you know, there is some declines in the adult use cannabis side, but we've actually seen medical revenue growth as we...
and that's driving some of that improvement. We expect that to continue. And really from an adult use cannabis business standpoint, we're not expecting an improvement to the current run rate. And I think that is still enough for us to get to the profitability in Canada.
And then from a canopy USA standpoint, look, I think once we get Canada to be profitable, we think the cash flow generation or the contribution from from canopy USA is really not something that's required to support the canopy growth cash needs. And so from that perspective, it's really about optimizing the value of
a year and a half ago or so to not chase the value segment. And it doesn't mean we won't participate in parts of the value segment when we have a product that we can waterfall down into that segment, but we deliberately chose not to chase the value segment, which has had a dampening effect on our top line because of the growth of that segment.
which we've not participated in.
We did that because we didn't believe that we could build a profitable, sustainable business at the value level in the Canadian market. And so we focused on mainstream and premium offerings in the marketplace. However, our footprint was too large to support the
that segment of the market that we really want to go after. And so the actions today are all about getting our footprint right to address the market that we want to address within Canada. And that's, as Judy said, that's been running in that $35 to $40 million range quarter. We think that we can stabilize that and then begin to build from that as a base.
Our next question comes from Andrew Carter of Steeple. Please go ahead.
Morning. Thank you. So
But then, results, there's a big revenue miss mostly on bio steel and your commentary in November was a modest sequential client to capture if you had disability that's a distributed issue.
Today's commentary outline steps you can take if NASDAQ objects to the consolidation, which I don't know correct me if I'm wrong, you could have been hit head on in the release last call back in October .
My biggest question is, what's going to change from here?
Given the cash needs, I think viability requires successfully navigating the capital market, which requires properly setting expectations and credibility. And back to the cash needs, I guess, can this business with the assets in hand, including canopy USA, and the changes you've made today achieve positive free cash flow with the full run rate of interest.
expense on the remaining terms that. Thanks. I'll start from a cash needs standpoint and then David can add additional comments. So, so from a cash needs standpoint as I outlined on my prepare comments, we think we've
already have a strong balance sheet with just under 800 million debt that we have on our cash, as well as several options that we have available to us to increase liquidity and reduce debt. You've already seen our actions that we've taken to reduce our debt, including equitizing the portion of the converts last year.
We've obviously also paid off some of the term loans and that is going to drive the interest savings and reduce our cash burn going forward. We've also talked about the remaining convert notes with Constellation intending to exchange the 100 million into exchangeable shares.
We also have a very constructive relationship with the debt holders and we're in communications to address our desire to pay off some of the debt and in a very accretive manner. So we are looking at all those options. We have availability of USD 2 billion of cash available.
from a liquidity needs standpoint, I think we've got really several options that's available to us. But to Andrew, your point, the entire point of what we're doing today and we'll be announced this morning face to generate a sustainable business that will have positive cash flow over time.
We get that and so all the actions that were taking to significantly reduce our operating free cash flow in our Canadian business as well as inter savings that we get from our reduction plan and all the things that we're doing to monetize the assets we think we've got a very.
laser focused and strong plan in place to get to get to that place as quickly as possible. Yeah, I would just say, look, projecting revenue in a nascent industry and nascent businesses is difficult at best, which is why we don't provide guidance. I would point out that BioSteel has seen volatility, but BioSteel
I think that what we've laid out here today represents.
a strong path to getting profitable, to achieving cash flow favorability at a point in the future, and some, you know, very strong businesses that have a lot of economic value potential for our shareholders.
Your next question comes from Pablo Zwanik of Cantor Fitzgerald. Please go ahead. This is Matthew Baker on for Pablo. Thank you for taking our questions. Firstly, I just wanted to congratulate the company on reading the opening bell at NASDAQ on December . Thank you.
Thank you. you
Yes, so the first follow me start with the regulatory approval. That starts as soon as a canopy, USAID triggers the ownership interest in acreage, which hasn't happened yet, and then that takes...
As long as 9 to 12 months afterward in order to complete that regulatory approval as it relates to NASDAQ. You've outlined the issues appropriately. You know, we've already been really clear that we do not control Canopy USA and that's important here.
We had an accounting pronouncement that suggested that we would have to consolidate, which was in, which created an issue for NASDAQ. And we're now working on alternatives, which would solve the consolidation, meaning we wouldn't have to consolidate CanopyUSA into our results.
And we need to continue to do that work. But there's a lot of activity going on around that. And we expect that we'll be able to get through all of the open matters and ultimately proceed to a vote. As we said, our targeted date for that, shareholders vote, which means...
Number one, David, you did really call out today what you see as the sector challenges in Canada and it appears the inability to make any significant changes with respect to those.
Unless the government makes some changes. So my first part of my question is either ongoing discussions that you think will be fruitful. I'm not even saying in the near term, but let's say in the midterm. That's first part. And then the second one was...
Can you comment on the medical growth, which was positive this quarter, and if this is a function of taking share from other groups, or is this a function of the medical business overall growing perhaps a little bit faster than everyone believes?
Yeah, so starting with the Canadian regulatory situation looked at the legal industry was built on the back of a call for harm reduction.
That's kind of different from maybe building the industry around economic development and generating tax from this industry, which has an underlying rate of consumer participation. Are there anything going on that would affect?
the regulatory regime so that cannabis can be the economic development engine that we all started to experience immediately post-legalization in Canada. So I think it will take a long time, as I said in my script, which is why.
we made the changes to adapt our business for the realities of the market that we sit in today versus where the market could go in the future.
Your next question will come from Aaron Gray of Alliance Global Partners. Please go ahead.
Hi, good morning and thank you for the question. So for me, I just want to talk a little bit about Biles Steel. So you talked about expected growth to come back. Next quarter, but look for end-goat quarter of recorders. One of the more color there. 34% ACV, I believe that matches last quarter. So if you could provide some line of sight into the magnitude of timing, timing of additional distribution and maybe some ACV targets over the next 12-18 months.
of the brand in the marketplace. And so, when we work with retailers, but in particular when we work with distributors between us and retailers, there can be lumpiness in terms of our reported revenue. But what I think is interesting is are the stats that I called out on my prepare remarks where work.
just under a 14% market share in convenience and gas channel in Ontario. Where we scan sales in the US up by 157%. I think it's that kind of consumer takeaway activity that ultimately drives revenue growth.
And over time that cuts through the lumpiness that you get in forecasting reported revenue based on the punch improvements to the distributor. So.
I think I think you have to so instead of putting targets out there I think you have to just keep looking at the consumer take away data because that's going to determine. Obviously where the brand ends up in the medium.
Your next question will come from Matt Bottomley of Canaccord. Please go ahead.
Good morning, just to follow up with respect to the bio steel commentary, you just made with the margin profile of the overall company on an unadjusted basis, dipping back into negative territory. There's a few things called out in the press release and one of them was some write-downs with respect to age.
inventory and buy a steal so i don't expect that the material element of it but if you could just maybe give us some idea of the magnitude and then just the dynamic given that you know outside of the timing of shipments when you look at this business on uh... you know on a six month mood uh... basis or just sort of your over here you know growth is certainly um... continuing to
to be a theme for that brand, so just the rationale behind why there's a age inventory requiring a write down at this point.
Yeah, I'll have Judy handle that, but I first want to actually build a little bit of a bridge where Judy called out in her script that we expect that this brand achieves industry kind of standard margins for...
for the brand, which would really put that into the high 30s, low 40s kind of percent over time. And that was the driver behind our purchase of the Verona facility, which allows us to control more of the supply chain for bio-steel.
I think there are some cost savings to be had as we get scale from distribution costs, which on a per unit basis are quite high in an Aston brand, but shrink very quickly as you start to get scale. We think that we can do some more work. This is a... This is a...
a good price point, high price point really in the category. So there's a lot of margin available to us. We have to make sure we continue to do a good job of managing that kind of growth to net margin erosion. That happens when we go into retail and there's the team at BioSteel.
especially post closing on the Verona facility are laser focused on showing consistent improvements in that margin on its way to those industry standard margins. And yeah, there's some noise in the near term that Judy can comment to, but we think we have a very well defined path to industry margins that
that go along with the top-line growth we see in the brand. Yeah, so just in terms of the growth margins of bio-seal mass, so in Q3, we think roughly about a 5 million impact that's released to some of the inventory situation. And.
and that has impacted the negative, the most margins that bio-steel. And to be clear, this is really related to the inventory bill that we had previously built. And I think when you go back a year ago, we talked a lot about the lumpiness again in terms of the sales and distribution loadings happening.
slower than that we had anticipated, particularly in the US market. So this is really a result of that historical inventory build that we had in the bio-steel. And if you kind of look at Q2 bio-steel margins or year-to-date growth margins for bio-steel, that's probably...
more reflective of the margin profiles on today's basis and to David's point as we bring production and health with the Verona facility acquisition and all the other initiatives to drive gross margin improvement and as sales scale up, we expect the bio-steal gross margins to mirror end.
Yeah, thanks again for joining us today. The changes we announced today, while difficult, are necessary not only for us to reach profitability, but to sustain our business over the long term. We continue to believe Canopy has significant opportunity ahead, both in Canada and the United States. And today's actions coupled with our strategy for US entry.
We'll ensure we're able to realize this. Investor relations will be available to answer any questions that you have over the rest of the day. And again, thanks for joining us and have a good day, everyone.
Ladies and gentlemen, this concludes canopy growth's third quarter fiscal 2023 financial results conference call.
A replay of this conference call will be available until May 8, 2023, and can be accessed following the instructions provided in the company's press release issued earlier today.
Thank you all for attending todayís call and enjoy the rest of your day. You may now disconnect your lines.
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