Q2 2024 Canopy Growth Corp Earnings Call
<unk> asset light business.
To recap the core components of this transformation delivered include.
Divesting, our Canadian retail operations consolidating our cultivation platform from 12 sites to two centered at our purpose built and carbon in Cologne facilities.
And successfully moving to an adaptive third party sourcing model for all candidates beverages, edibles and Vapes and extracts.
As well as <unk>, the funding of Bayou steel, which significantly reduced our cash burn and further simplified our overall business.
These actions have resulted in the canopy that looks and operates fundamentally different than before.
Our canopy that is purpose built for the markets and geographies of greatest opportunity.
Today, almost 90% of our revenues come from candidates or candidates adjacent categories.
Simply put canopy is more focused and agile than ever before.
And while changes ever present in the sector and the sector. It is not always yielded positive outcomes.
Why I'm, especially pleased to note that our actions have led to a dramatic and measurable improvement in the financial performance of our business.
Our Canadian business grew revenue for the third consecutive quarter, while we cut our cost by nearly half and reduced our debt by $1 billion.
We have done the hard work to lay a firm foundation for sustainable growth.
Next I will speak to our efforts to drive profitable growth in our core businesses.
Our Canadian business has worked diligently to implement lasting enhancements to the quality of our cannabis flower.
Great flower in the market and it's being consistently well received by our consumers retailers and the boards.
And every day, we're finding ways to improve our team is passionate about enhancing every step of our cultivation and post harvest processes and we continue to up our game to meet and exceed consumer expectations for.
For those who haven't tried our flower lately I invite you to go out and experience the incredible quality that our teams at Kincardine and Colonna are delivering.
Further demonstrating the positive reception that our products are receiving cannot be reclaimed its place as the top III flowers supplier in the BC cannabis stores during the second quarter of fiscal 'twenty four.
This performance is a testament to the hard work and commitment of our Canadian team.
In addition, having taken control of the distribution of our Wanna Edibles brand in Canada towards the end of the quarter.
We have a robust plan to return to the number one edibles brand in the country.
Just this week, we relaunched the brand across Canada and are actively engaging with retailers as well as introducing new formulations that have already been successful in the United States.
We've also made one of gummies available to our registered medical cannabis patients in Canada through spectrum Therapeutics Dot com.
Further meet demand for these quality products and drive incremental growth in our Canadian medical platform.
And our global medical cannabis business I'm pleased to report that our Australian team has delivered its 10th consecutive quarter of record revenue.
In our other international markets, including Germany, Poland, and the Czech Republic, We believe theres, an opportunity for canopy to grow share leveraging the quality of the products that our Canadian platform is producing ensuring consistent supply and hence routes to market and better consumer engagement.
As an example to capitalize on this opportunity we are shipping five new flower skus cultivated in our newly EU GMP certified Kincardine facility to international markets during Q3.
Finally, storz <unk> Bickel recently launched its new <unk> portable vaporizer, a device that sets industry standards for portable performance, including adjustable air flow up to an industry, leading 20 liters per minute.
And a rapid twenty-second heat uptime.
Storz <unk> Bickel is now focused on following up the limited initial batch with broader commercial availability to meet the demand for this industry, leading device as well as preparing for holiday promotions, including Black Friday, which are expected to drive sales across the brands product lineup.
Finally, I would like to speak briefly about our canopy USA strategy.
We believe cannot be USA provides investors a truly novel exposure to the continued rapid growth of the U S cannabis market.
Importantly, this approach is informed by the lessons we've learned in Canada we've.
We've embraced scalability and capital efficiency, which have resulted in our asset light and wholesale focused strategy.
As we continue to work closely with the SEC to advance. This novel structure, we have been in active discussions with the most recent communication, indicating that there is more work to be done to enable us to deconsolidation the financials of canopy USA.
Meanwhile, remained we remain steadfast in our journey ahead buoyed by the continued advancement of Wanna jetty and acreage who are demonstrating impressive growth.
During the quarter Wanna executed two agreements for new state launches expected in Q1 of calendar 'twenty for.
Jody has introduced its award winning vape products in Colorado in coordination with Wanda and achieved the number three market share position and the solvent less vape cartridge category and the state just three months after launch.
Acreage leveraging their strategy for focusing on high potential markets like New York, New Jersey, Pennsylvania, and Ohio remains well positioned for further unlocks and has debuted its super flux craft cannabis brand in New Jersey.
These advancements are complemented by this week's news that Ohio has voted to legalize cannabis for adult gifts.
And congratulations to the people of Ohio and to the acreage team, which is already well positioned in the state through their retail footprint of five stores.
I'd also like to recognize terraces of which cannot be 117%, which reported its financial results today and generated over $82 million in revenue and over $24 million and adjusted EBITDA during the quarter.
To summarize.
Canopy growth has streamlined candidates focused and asset light.
We've demonstrated our resilience and strengthened our financial position.
Laid the foundation for profitable growth across each of our core businesses with the canopy growth that is purpose built for the markets and geographies of greatest opportunity.
And we stand apart with our unique exposure to the ongoing expansion of the U S market through canopy USA.
I'm proud of the transformation that this team has delivered and I'm more confident than ever in our ability to achieve north American cannabis leadership.
With that Judy will speak in further detail to our financial results.
Thank you very much David and good afternoon, everyone.
I'll start by reviewing our second quarter fiscal 2024 results, including the significant progress we've made across our P&L this quarter.
I will then discuss additional actions we've taken to delever the balance sheet and improve liquidity, followed by our priorities and outlook for the balance of fiscal 'twenty four.
Let's begin with our second quarter results.
Q2 was a pivotal quarter for canopy as the business transformation was undertaken over the past year drove substantial improvement in profitability and reduction in cash burn.
Please note that our financial results in the current period and prior period now exclude bias to results with Bayou steel consented on a standalone basis as a discontinued operation.
We delivered consolidated net revenue of $70 million in Q2, which is down 7% compared to Q2 of last year, excluding the Canadian retail divestiture.
Main drivers of year over year revenue declined four storz, <unk> bickel, which was negatively impacted by the timing of shipments and U S. CBD sales, which have undergone a strategic shift over the past year.
Canadian Canada sales were down slightly excluding detailed divestiture compared to a year ago and up from the prior quarter.
Q2, gross margin was 34% and adjusted gross margin was 33% a significant improvement compared to negative 1% last year.
The biggest driver of improvement with the business transformation initiatives executed in Canada, which has meaningfully reduced Canada operational cost.
Q2 gross margin also benefited from opportunistic.
Lower price inputs in the Canadian business, which may not recur.
Q2, adjusted EBITDA with a loss of $12 million, which was an improvement of over 79% versus last year, and 48% improvement versus last quarter.
Free cash flow was an outflow of 67 million an improvement of $32 million compared to Q2 of last year.
I'd like to now review the results of our <unk>.
Key businesses in more detail, including the progress against our path to profitability.
Starting with Canada.
Q2, net revenue was $40 million of third quarter in a row of sequential revenue increase.
The Canadian medical sales continued to show steady growth, increasing 6% compared to last year, even if the broader medical market is showing a decline.
Our adult use <unk> business was down six 6% compared to last year and was broadly in line with Q1.
We again saw strong growth from our Tweed flower and pre rolled product, despite our top selling skus being supply constrained due to stronger that stronger demand than expected during the quarter.
We also had supply challenges in our beverages as our transition to third party contract manufacturers took longer than expected. Our beverages are now back in stock and they're better than ever.
Canada adjusted gross margin in Q2 was 34% and cash gross margin, adding back noncash depreciation cost.
Cost of goods sold was 47%.
Let me unpack this gross margin performance.
The biggest driver of year for improvement if the cost reduction from the Canadian business transformation initiatives.
We had targeted 90 to 100 million reduction in cost of goods sold as part of these initiatives and we have achieved approximately $80 million of reductions through Q2 inclusive of savings realized during fiscal 2023.
Year to date operational cost in Canada have declined by $37 million in the first half or 47% year over year.
Reduction across all areas, including facility cost labor, both direct and indirect utilities insurance and distribution costs.
In addition, we also saw a significant reduction in excess and obsolete inventory expenses as we right size our inventory.
Finally, our Q2 gross margin benefited from opportunistic utilization of certain lower priced centric, which may not recur.
We continue to target cash gross margins in the mid 30% and our Canadian business and we believe that we're on track to achieve this margin performance in the second half of the year.
The rest of the World, Canada sales were down 15% year over year.
Australia, which now accounts for nearly 60% of total rest of the world sales at its 10th consecutive record revenue quarter growing over 20% year over year.
This was offset by the decline in our German flower sales in part due to the broader market decline.
U S. CBD sales were also down year over year, driven by a shift in focus to E Commerce channel for this business.
Rest of World gross margin was 33%, reflecting an improvement in our U S. CBD business post our strategy shift partially offset by a geographic mix shift to Australia, which carries lower gross margins than Europe.
Turning to Storz, <unk> bickel revenue of $12 million in Q2 was down 11% compared to last year.
Note that Q2 is a seasonally soft revenue quarter for stores and nickel sales were further impacted by the timing of shipments to certain U S distributors, which fell in October versus September.
In addition, some of the distributors in the U S continued to face financial difficulties and as a result shipments to those distributors have been disrupted.
Year to date tourism vehicle revenue is up 3% with the second half expected to show acceleration driven in part by the launch of the new Vaporizer Betsy.
Susan Baker gross margin was 33% down compared to last year in part due to lower revenue and associated fixed cost deleverage.
On a year to date basis gross margin is close to 40%, which is in line with recent trends.
This works grew at 3% year over year benefiting from increased contributions from its body care product line.
Gross margin remained healthy at 48%.
Let me now speak to the progress, we're making on our path to profitability.
Q2 fiscal 'twenty four adjusted EBITDA loss was a negative $12 million, an improvement of $44 million compared to a loss of $56 million a year ago.
The improvement is driven primarily by cost reduction of $54 million realized during Q2.
Also estimate that Q2, adjusted EBITDA benefited by approximately $5 million of a few nonrecurring items, including opportunistic use of lower cost inputs reversal of bad debt expense and a favorable legal settlement.
Looking at our SG&A expenses more closely.
Liam marketing G&A and R&D expenses declined by a combined $32 million or 45% compared to a year ago as a result of our cost reduction program.
Acquisition divestiture and other costs were $10 million, which included $7 million of costs related to the debt Amendment transaction, we completed in July.
Through the strategic transformation initiatives announced in April 2022, and February 2023 canopy has realized $227 million of cumulative cost savings.
We are tightening the target range of cost savings program to $270 million to $300 million from our previously target of $240 million to $310 million.
We expect the full completion of the cost reduction initiatives to position our businesses to achieve positive adjusted EBITDA exiting exiting fiscal 2024.
I'd like to now review, our cash flow and balance sheet.
Our cash and short term investment balance at September quarter end was $270 million, which excludes bias deals cash.
Q2 fiscal 'twenty four cash from continuing operations was an outflow of 67 million an improvement compared to $99 million in Q2 of fiscal 'twenty three.
We incurred $28 million in cash interest payments during Q2.
Cash from operations also included cash restructuring costs.
And facility holding costs, including our Hershey drive facility the sale of which we did not close until the end of Q2.
In addition, while Biofuels operating cash flow is not included in this figure. We do note that there are certain cash costs at canopy has continued to pay for bias still during the quarter.
We expect our cash flow from operations to continue to show improvement in the coming quarters, driven by cost reduction initiatives as well as lower interest payments from reduced debt balance.
Second within cash flow from investing activity due to install an additional inflow of $69 million and disposition of facility, including the sale of Hershey drive facility. We closed at the end of September.
Year to date gross proceeds from facility divestitures have totaled over $155 million.
Net financing activities resulted in the outflow of $274 million.
T down of $297 million comprised of payments to reduce our senior secured term loan at a discount to par as well as to settle our July 2023 unsecured notes as part of the July debt Amendment transaction.
The private placement we completed in September resulted in a net cash flow of $32 million.
Turning to the balance sheet as of September 32023, we had $270 million in cash and short term investments and total debt of $681 million, resulting in net debt balance of $411 million down from $474 million at the end of June.
Of 2023.
Following a series of balance sheet actions, we've completed over the past several months, we have significantly strengthened our financial position.
First our short term debt balance stands at $50 million, most of which relates to the term loan pay down earmarked from previously.
Facility to dispositions.
Second the principal balance on our senior secured term loan is expected to be approximately USD $400 million by the end of the current quarter. This.
This is a reduction of USD $350 million from the original loan amount.
We also expect the 100 million of promissory notes held by constellation to be settled and excellence.
Reflecting these factors, we expect our total debt to be around $570 million with minimal short term obligations.
We remain focused on executing additional activities to further deliver on our commitment to improve our financial position over the couple of months.
I'd like to now provide our key priorities and outlook for the balance of fiscal 2004.
In Canada candidates were firmly on a path to achieving profitability and our focus on accelerating top line growth on the back of a strengthened product portfolio.
And the rest of the World candidates, we expect continued growth in Australia and are focused on maximizing sales potential and an emerging medical markets, such as Poland and the Czech Republic are working on improving performance in Germany in the back half of our fiscal 'twenty four.
With Storz <unk> Bickel, we expect growth to accelerate in the back half following the launch of the new Vantiv paid pricer. So the pacing may be a bit lumpy, depending on the timing of a full rollout.
This work sales are expected to be stronger in Q3 versus Q4, as we enter the holiday season.
From a cash flow standpoint, we expect our cash from operations to continue to show improvement driven by expected narrowing of adjusted EBITA loss lower interest expenses and our stepped up focus on working capital management.
We're also focused on removing remaining costs related to shuttered location and certain contract we've exited.
So in closing we believe our Q2 results demonstrate that we are well underway to achieving our target of positive adjusted EBITDA across our businesses as we exit fiscal 2024, setting a firm foundation for the core businesses to drive profitable growth and enhance shareholder value.
Overtime.
This concludes my prepared comments, we will now take questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
Here three tone acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the two if you are using a speaker phone. Please lift the handset before pressing keys.
Your first question comes from Aaron Grey with Alliance Global partners.
Hi, good evening and thank you for the questions.
So now let's begin.
Okay.
Hi look at the company kind of post <unk> discontinued just wanted to talk a little bit more about the gross margin you gave a lot of commentary within there just want to make sure I have it down correct. So in terms of the gross margin expectations going forward I think you talked about 35% back half cash gross margins so to make sure.
Think about the correctly versus a 34% that you just reported and you talked about some one offs in there with some lower cost inputs that benefited you. This quarter. So just if you could help us in terms of maybe some of the near term.
Gross margin expectations before we get to what you expect in the back half it sounds like you had some one offs. It also benefited there. Thank you.
Sure I'll take that question. So the target of mid 30% to be clear is the cash gross margin in the Canadian business. So when you actually look at our gross margin performance in Canada in Q2.
The reported gross margin was 34% that you had cash gross margin of about 47% we.
We did have some favorable benefits.
We don't expect to recur in the back half of the year. So really what we're saying is we're expecting.
Target gross margin to be cash margin to be around mid 30% included in that is depreciation expenses, which is obviously non cash.
That's now running roughly about $4 million to $5 million a quarter. So it is about a 10 percentage point impact to the reported gross margin. So when you think about the Canadian business I would expect that.
Reported gross margins to be low to mid 20% cash gross margin to be closer to kind of that mid 30%. When you look at the international or the rest of the world margins, we think that 30% is probably going to.
See some improvement in the back half as some of the.
But the efforts that we're undertaking across our key markets drive better sales in the back half of the year and then storz <unk> bickel.
Our gross.
Gross margin in Q2 is typically a lower gross margin quarter, just because the revenue tends to be lower so in the back half we would expect storage vehicle gross margin to be.
To show improvement versus what we have shown in Q2. So I think that should give you a good sense of where we were banned from a gross margin standpoint in the back half of the year.
Your next question comes from John Zang apparel with CIBC. Please go ahead.
Thank you good evening, so I wanted to ask about the balance sheet and I'm trying to get a sense of how you address the debt from here, even with the significant reduction it's still a material amount. So is the plan to capture the economics of the U S businesses hopefully at some point in the future and if so are those free cash flow positive and in doing that.
Normal taxation environment or do you plan to raise equity to repay that debt. Thank you.
So I'll I'll take that job so.
First of all I wanted to note that we do not have any upcoming maturity until September of 2025.
As you can see your fleet undertaken significant actions to eliminate any near term obligations from a debt perspective, and we have maintained a strong cash position, we have over $270 million of cash on our balance sheet. So we think we have an ample runway.
With the cash balance that we have we also have additional proceeds that we expect to receive from sale of Bayou steel and we'll continue to look to monetize the businesses are.
Patients that are not core to canopy.
And that we have a very constructive dialogue with our <unk>.
Investors focus on the debt side.
And and others to ensure that we can reduce our debt in an accretive manner.
Which also saves our cash interest cost. So there are active plans in place to continue to look for ways of reducing our debt over time.
We'll have more update us.
Have announcements sure.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Your next question comes from Michael Lavery with Piper Sandler. Please go ahead.
Thank you. Thank you good afternoon.
Hey, Michael.
Could you.
First on tariffs and performance on the call.
Also pointed out in the prepared remarks.
There would be like a 17%.
Can you just give a sense of the longer term vision for that in bi.
Keeping it on investors' radar is the expectation that you would want to consolidate that someday.
And if so how would you anticipate going about that.
Yeah, Michael So we continue.
To be favorable on the U S market and so I would say tariffs and is just one of the assets that we hold in that market.
We'd like to work that.
That's going on at Harrison, especially in markets like New Jersey and Maryland.
We continue to have.
Our other companies interact a lot with.
With tariffs and so for example, tariffs and distributes one in Maryland, and it's working out quite well for both companies and so we look at Harrison is just one of the pieces to the puzzle for the U S along with one <unk>.
And.
And acreage.
The acreage has interesting positioning I think in markets like New York.
And Ohio and Illinois.
And so we think those are big opportunity markets.
Go forward so.
We just continue to watch the U S market very closely.
And we remain committed and impressed actually with our.
Our U S businesses.
I will now turn the call over to Mr. Klein for final remarks.
Great well. Thank you as you head into the holidays I want to encourage everyone to add the latest products from canopy to your gift list, including things like one quick edibles sweep flower or storz <unk> Bickel vaporizers.
I suspect anyone would be very excited to receive doses Christmas gifts.
As a reminder, investor relations will be available to answer additional questions.
Have a good evening and thank you for attending today's conference call.
This concludes canopy growth's second quarter fiscal 2024 financial results Conference call. A replay of this conference call will be available until February seven 2024, and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call Goodbye.
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