Q3 2025 Canopy Growth Corp Earnings Call
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Joanna: Good morning. My name is Joanna and I will be your conference operator today. I would like to welcome you to Canopy Growth's 3rd Quarter Fiscal 2025 Financial Results Conference Call. Currently, all participants are in a listen-only mode. I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin the conference call.
Good morning and thank you for joining us.
Speaker Change: On our call today we have Canopy Growth Chief Executive Officer Luke Mongeau and Chief Financial Officer Judy Hong.
Speaker Change: Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our third quarter fiscal year 2025 ended December 31st, 2024.
Speaker Change: The news release and financial statements have been filed on EDGAR and CDAR and will be available on our website under the Investors tab.
Speaker Change: Before we begin, I would like to remind you that our discussion during this call will include forward-looking statements that are based on management's current views and assumptions.
Speaker Change: and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of the news release issued today.
Speaker Change: Please review today's earnings release and Canopy's reports filed with the SEC and on CDAR for various factors that could cause actual results to differ materially from projections.
Speaker Change: In addition, reconciliations between any non-GAP measures to their closest reported GAP measures are included in our earnings release.
Speaker Change: Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following remarks from Luke and Judy, we will conduct a question and answer session where we will take questions from analysts. With that, I will turn the call over to Luke.
Luke Mongeau: Thank you, Tyler. Good morning, everyone. And thank you for joining our quarter three fiscal year 2025 earnings conference call.
Luc Mongeau: My name is Luc Mongeau and I'm proud to join you for my first earnings call as CEO of Canopy Growth.
Luc Mongeau: I'm truly excited to lead the company forward as we start a new year and embark on a fresh chapter for Canopy.
Luc Mongeau: I would like to start by expressing my gratitude for the support that the Academy Board of Directors and our entire team have given me as I begin this new role.
Luc Mongeau: I would also like to thank David Klein for his leadership and support through the transition.
Luc Mongeau: For me, joining Canopy and stepping into the role of CEO to lead this Canadian and global organization is an honour and a privilege.
Speaker Change: And before we get into the results from Q3, which Judy will cover in greater depth,
I'd like to share some details about my prior experience.
Speaker Change: why I've joined as CEO and speak at a high level about my view on the company, the sector, and our path ahead.
Speaker Change: Over the last 25 years, I've had the privilege of leading and working within organizations across the consumer packaged goods industry.
Speaker Change: companies like Western Foods, Morse Pet Care, and Procter & Gamble.
Speaker Change: In all my roles, I've dedicated myself to identifying the most promising value creation opportunities.
Speaker Change: working to understand the needs and wants of consumers and customers while building greater organization that meet and exceeds demand with high quality innovative products.
Speaker Change: I've led product innovation R&D, revamped complex supply chains, executed global marketing campaigns, and developed fresh takes on commercial strategies all to power growth and profitability.
This brings me to Canopy.
Speaker Change: When I first got involved with Canopy two years ago, through my engagement with the board, I saw something unique.
Speaker Change: Cannabis, in my view, represents one of the most exciting consumer trends today.
Speaker Change: The sector is evolving rapidly and we're still at the beginning of transforming how people view and experience cannabis products.
whether it's delivering new experiences or redefining approaches to wellness.
Speaker Change: Cannabis has the capacity to shape and influence the future of the consumer goods sector while broadening cultural and lifestyle trends around the world.
However, my optimism is balanced with our reality today.
Speaker Change: As we all know, the cannabis sector has faced real challenges.
Regulations have not evolved as fast as expected.
Some consumer trends, like beverages, have taken longer to develop.
The illicit market still endures.
Speaker Change: And finally, the path to full legalization in the U.S. remains uncertain.
But for me, this is the exciting part.
The opportunities ahead are just beginning to unfold.
Speaker Change: We continue to see more people move away from alcohol and instead choose cannabis to enhance their social life and support their wellness.
Speaker Change: The shift in behaviors is not just a passing trend. It's a sign of deep, lasting change that will only continue to grow.
As I move forward, my focus is clear.
Speaker Change: to drive Canopy rapidly towards sustained profitability and positive cash generation.
Speaker Change: Right now, I'm working with the team to identify key areas of improvement to enhance Canopy in every way possible for the benefit of our consumers, our people, our business partners, and our shareholders.
Speaker Change: I'll have much more to say on this when we're together for Canopy's Q4 conference call in May.
Speaker Change: For now, I would like to highlight some of the areas of our business that are showing promise and strong performance.
First, our medical cannabis business.
Canopy is a recognized leader in medical cannabis.
Speaker Change: In Canada, our Spectrum Therapeutics team has built a powerful reputation for outstanding service and for meeting the diverse needs of medical cannabis patients through an ever-expanding product portfolio.
Speaker Change: Internationally, we have established a solid position across the markets with the highest potential. Germany, Poland, and Australia.
Across Europe, regulatory changes are helping power existing momentum.
Speaker Change: In Germany, we'll bring new ITHC string to market from our Canadian platform.
Speaker Change: In addition, collaboration with Europe-based flower suppliers is helping us deliver the variety of products that patients are seeking.
Speaker Change: Overall, I believe we can really build upon Canopy's medical cannabis business and continue to drive growth in the quarters and years ahead.
Speaker Change: Next, in our adult-use business, I'd like to highlight the recent launch of the award-winning Playboard Branding Canada.
Speaker Change: In less than six weeks, Claiborne has risen to become the No. 3 infused pre-roll in British Columbia and Ontario.
Speaker Change: This showcases our ability to successfully introduce innovative products that resonate with consumers and can quickly make an impact in the market.
Speaker Change: Overall, I believe our Canadian adults use business as the key ingredients necessary to grow our share of the market.
Speaker Change: Another example of canopy strains is our Storz and Bickel brand.
with its offering of premium vaporizers.
Speaker Change: including the iconic Volcano and the new high-performance Venti. Storrs & Beckel is a non-parallel leader in the premium vaporizer space.
Speaker Change: We are working to drive new innovation for stores and vehicles and keep up the momentum for what is already a leading portfolio.
Speaker Change: I'm really excited about where this brand is today, as well as where it's going.
Next, I would like to speak to Canopy USA.
Speaker Change: Canopy USA is an exciting, differentiated platform that we feel is well positioned to capitalize on its ecosystem of brands and operations.
Speaker Change: With the acquisitions of Juana, Jetty, and Acreage finalized, CanopyUSA is already well advanced on the process of integration.
Speaker Change: It is also now realizing cost synergies, as well as marketing and joint sales advantages across key markets and categories.
Speaker Change: As the final element of bringing CanopyUSA to life as a single cohesive organization, Brooks Jorgensen was appointed as the organization's first president in early January.
Speaker Change: Brooks brings a wealth of experience and a robust track record in building cannabis businesses.
Speaker Change: having recently led Kiva, the largest cannabis distributor in the U.S.
Speaker Change: Together with the broader CUSA team, Brooks is focused on driving strategic execution and growth of the Canopy USA platform.
Speaker Change: We see real potential in CanopyUSA and expect to see even more growth as they continue to build and refine their presence.
Speaker Change: As I wrap up today, I want to reiterate that I believe we have the right ingredients for success and are focused on positioning Canopy to grow profitably and sustainably.
Speaker Change: I look forward to sharing more detail about the company's plans and updated strategy in greater detail when we release our full year financials at the end of May this year.
Speaker Change: Thank you. Judy will now speak the results from the quarter.
Thank you very much, Luke, and good morning, everyone.
Speaker Change: I'll start by walking through our Q3 Fiscal 2025 results, including performance by key business units.
Speaker Change: I'll then discuss progress on our balance sheet and cash flow, followed by a discussion on our priorities and outlook for the balance of fiscal 2025 and into fiscal 2026.
Let's begin with our third quarter results.
Speaker Change: Q3 was a solid quarter marked by continued momentum in medical cannabis and sworzenvichol as well as improvement in our adult-use business in Canada and combined with cost efficiencies we significantly narrowed our adjusted EBITDA loss in the quarter.
Speaker Change: Canopy delivered consolidated net revenue of 75 million in Q3, a decrease of 5% or up 8% excluding the impact of divested businesses compared to Q3 of last year.
Speaker Change: Consolidated growth margin in Q3 was 32% down compared to 36% a year ago, but broadly in line with our target range.
Speaker Change: Q3 adjusted EBITDA with a loss of $3 million, an improvement of 61% versus last year.
Speaker Change: And free cash flow was an outflow of $28 million, an improvement of 17% compared to Q3 of fiscal 24, and a significant improvement relative to the first half run rate of the current fiscal year.
Speaker Change: I'd like to now review the results of our key businesses in more detail, starting with Canada.
Speaker Change: Q3 net revenue was $41 million, an increase of 1% compared to a year ago.
Speaker Change: Canada Medical continued its momentum, marking another record revenue quarter and posting year-over-year revenue growth of 16%.
Speaker Change: We're gaining market share with a growing number of insured patients and we've expanded our product assortment to meet the needs of our medical consumers.
Speaker Change: The growth relative to Q2 was also driven by a return of Wannagummies as well as contributions from our newly launched Claiborne infused pre-rolls.
Speaker Change: Our adult youth business was down 10% year-over-year, but increased 15% quarter-over-quarter.
Speaker Change: The improvement was driven by, one, Claiborne infused pre-rolls launched in mid-November are off to a strong start.
2. Wannagummies return to shelves after Q2 supply disruptions
Speaker Change: and three increased bulk flour sales as we captured opportunities to sell to other producers.
Speaker Change: And while some of our core brands are still facing competitive pressure in the marketplace, we've deployed targeted investments which are beginning to gain traction.
Speaker Change: And we're focused on accelerating growth in the adult use market with the continued Claiborne rollout, a strong pipeline of new products, and an enhanced field sales strategy to further grow DOORS and points of distribution.
Speaker Change: Canada growth margin in Q3 was 25% and cash growth margin adding back non-cash depreciation costs was 35%.
Speaker Change: The growth in Canada medical continues to be a positive contributor to overall Canada gross margin, with the declining gross margin in the quarter primarily attributable to higher initial costs to produce Claiborne.
Speaker Change: We're focused on improving the cost structure of Claiborne and expect cash gross margins to return to at least mid to high 30% targeted range based on the historical channel mix.
Speaker Change: International markets cannabis net revenue of $12 million in Q3 FY 2025 was up 14% compared to Q3 of last year.
Within international, we again generated outsized growth in Poland.
Speaker Change: Germany also saw strong growth from additional product registrations that we've secured in prior quarters.
Speaker Change: We launched Tweed brand of flower products in Germany during Q3 and have secured additional EU-based supply for the upcoming release of additional Tweed flower products.
Speaker Change: The growth in Europe was partially upset by the decline in sales in Australia's medical cannabis business, as well as US CBD sales which are no longer part of Canopy's business.
Speaker Change: In Australia, the medical cannabis market is expanding steadily, but there has been increased competition.
Speaker Change: We are sharpening our focus in Australia, transitioning the S&B business in Australia to S&B Germany to ensure dedicated support for our medical cannabis business in Australia.
Speaker Change: International markets Canada's gross margin was 41% in Q3 of FY25, up 100 basis points from Q3 FY2024, driven by increased sales in Poland which carry higher gross margin.
Speaker Change: Susan Bickel had another strong quarter with revenue of $22 million in Q3, up 19% compared to last year.
Speaker Change: Q3 is traditionally a strong quarter for SMB given the holiday selling season.
Speaker Change: The growth was also led by robust direct-to-consumer online sales, continued strong contribution from Venti, which was launched during Q3 of last year, as well as growth in Germany.
Speaker Change: tourism vehicle growth margin was 41% compared to 51% last year due to higher indirect costs including shipping cost
Speaker Change: Looking at our SG&A expenses for Q3 of fiscal 2025, sales and marketing and G&A expenses declined 24% year-over-year, primarily due to the cost reduction program undertaken during fiscal 2024.
Speaker Change: Year-to-date, our GNA costs, excluding the impact of divestitures, have also declined by approximately $10 million versus the prior year, and we're well on our way to achieving $10 to $15 million in GNA cost savings by the end of this fiscal year.
Speaker Change: Q3 fiscal 2025 adjusted EBITDA was a loss of $3 million compared to a loss of $9 million a year ago.
Speaker Change: This was led by positive EBITDA contributions from all three business units, offset by unallocated corporate overhead costs, including public company costs.
Speaker Change: I'd like to now review our cash flow and balance sheet.
Speaker Change: Free cash flow was an outflow of $28 million in Q3, an improvement of 17% compared to the prior year.
Speaker Change: Cash used from continuing operations was $27 million. This included cash interest payments in the quarter of $17 million, which was down from $21 million in Q3 of last year.
Speaker Change: As I indicated during the previous call, working capital improved significantly compared to the first half run rate driven by timing of certain payments and tight working capital management.
Speaker Change: Turning to the balance sheet, as of December 31, 2024, we had $178 million in cash and short-term investments and total principal debt balance of $460 million.
Speaker Change: In October, we further reduced our term loan balance by USD $100 million by making an early prepayment in the amount of USD $97.5 million, bringing term loan principal balance to approximately USD $250 million.
Speaker Change: We have an option to further extend maturity of the term loan to September 2027 from December 2026 by making additional USD $100 million payment at $97.5 to par before the end of March of this year.
Speaker Change: Under the current ATM program that was launched in June, we've generated total gross proceeds of USD 228 million, including additional USD 41 million that was completed post the end of Q3.
Speaker Change: We believe we have ample cash in our balance sheet to meet our near-term obligations, and the remaining ATM program should also provide us with the flexibility to invest in growth initiatives.
I'd like to now briefly discuss Canopy USA.
Speaker Change: Following the completion of acreage acquisition in December of 2024, Canopy USA has now moved forward with the full integration of the three businesses to capture revenue and cost synergies as quickly as possible.
Speaker Change: Given that it's only a little over a month since Acreage Acquisition has closed,
Speaker Change: and less than a month since the new president has been in place. We plan to provide more details around the business performance and financials of Canopy USA when we report our year-end earnings in late May.
Speaker Change: I'd like to now provide our key priorities and outlook for the balance of Fiscal 25 and into Fiscal 26.
In Canada, Cannabis
We expect continued strength in our medical business.
Speaker Change: and improved performance in our adult use business as we focus on building on the initial success of the Claiborne launch, new product introductions and continued efforts to drive expanded distribution and improve velocity of our products.
Speaker Change: In international market cannabis, we expect continued momentum in our European business as we focus on ensuring consistent product availability, expanding points of distribution, and launching new products.
Speaker Change: In Australia, we are in the process of transitioning stores and Bickel sales to stores in Bickel, Germany to ensure increased focus on the medical cannabis business in that market.
Speaker Change: For Q4, we note that international markets cannabis sales in Q4 of last year included over 1.7 million in sales in U.S. CBD, which is no longer part of our business.
Speaker Change: For stores in Bickel, we expect another solid quarter in Q4, but year-over-year growth is likely to be challenged given the tough year-over-year ago comparison.
Speaker Change: Note that Q4 FY24 benefited from outsized growth from VENCI as production caught up with sales following supply constraints in Q3 of last year.
Speaker Change: And finally, the impact from divested businesses plus the U.S. CBD sales will be approximately $2.1 million in Q4.
Speaker Change: Based on our expectation of continued momentum across our medical businesses, improvement in Canada adult use, and continued cost discipline, we believe achieving positive adjusted EBITDA at the consolidated level is firmly in sight in the coming quarters.
Speaker Change: And as we look forward to FY26, we're focused on driving long-term, sustainable growth in our businesses while further improving our profitability and cash flow.
This concludes my prepared comments. We will now take questions.
Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session. To ask a question, please press star 1 on your touchtone phone. You will hear a prompt that your hand has been raised.
Speaker Change: In consideration of other callers today, we ask that you please limit yourself to one question and may rejoin the queue if you have additional questions.
Speaker Change: The first question comes from Aaron Gray at Alliance Global Partners. Please go ahead.
Speaker Change: Hi Luke and Judy, thank you for the question here. Just wanted to dig a bit deeper in terms of plans for international to capitalize on some of the growth there.
Speaker Change: I know you mentioned some additional supply agreements that were signed, but I'm curious if you believe the Asset Light model will enable you to capture and maintain a healthy share of the growing international pie, and then would that preclude you from generating more robust margins compared to being vertical internationally? So any comment in terms of, you know, the outlook that you have for international, given the growth we're seeing from...
some of the competitors out there. Thank you.
Speaker Change: Sure, thanks. Thanks, Aaron, and I'll start and Luke may have a his view as well.
of the International Market Segment.
Speaker Change: We have a strong position in the Polish market and we're seeing continued outsized growth in that market and as I alluded to on the call, we've also had very strong growth in Germany from additional supply that we have secured. Overall, our European business in Q3 was up in excess of 70%.
Speaker Change: The Australian business, however, was down on a year-for-year basis. We did call out last quarter that we saw increased competition, particularly in the medical sales business for medical cannabis sales for Australia. That part of the business also includes our SMB sales in Australia, and we're really trying to transition that business into Germany to ensure that the Australian team can really focus on improving
of the medical cannabis sales in that market. Now,
Speaker Change: If we step back and think about the business going forward, number one, the market's growing. Based on the positive changes to regulation in Germany, the market's growing, and we think that that provides us with the tailwind to benefit from the market growth.
Speaker Change: Secondly, as I said, we are partnering up with additional supply partners, and we think that that gives us opportunity to really supply the market in an asset-light model. Keep in mind, we also have our Kincardine facility in Canada that is GMP certified, and we are leveraging that facility, our low-cost structure there, to service the international market.
Speaker Change: and Mark Gatz, we believe we have the right ingredients to really take advantage of the growth opportunities in that market.
Speaker Change: Thank you, Judy. Good morning, Aaron. Nice to meet you and thank you for the question. You know, building a bit on that, I'm five weeks in right now. The medical market, both in Canada and internationally, has very strong fundamentals. We've got some solid elements in place.
Speaker Change: As I dig deep in the business and look at the strategy, the approach, the resource allocation, these are all things that I'm considering, and I'll have more to share at the next call, but it is an extremely attractive category.
Thank you.
Speaker Change: Thank you. The next question comes from Bill Kirk at Roth Capital Partners. Please go ahead.
Speaker Change: and more. I'm going to be doing a little bit of a bit of a presentation on the importance of the the the the the the the the the the the the the the the the the the the the the the the the the the
Bill Kirk: Hey, good morning. Luke, I wanted to keep going there on that kind of management and strategy philosophy conversation. Like, you know, it's it's been I think five weeks, but in what ways do you view the company and opportunities differently than your predecessor and in what ways so far that you've seen do you agree with the path and strategy that was in place?
Bill Kirk: The business is that I am impressed with the quality of the talent overall.
Bill Kirk: The quality of the processes, the quality of the supply chain. And for me, I'm working very closely with the team right now, doing the analysis, doing the validation, or proving wrong some of the hypotheses and the approaches.
Bill Kirk: that are there right now, and I'm extremely encouraged with what I see.
More to come at the next call.
Speaker Change: Thank you. The next question comes from Matt Bottomley at Canna Cortunati. Please go ahead.
Speaker Change: Good morning everyone. Thanks for taking the questions. This question might be more for Judy. Just wondering, you know, understanding, you know, some of the success that you guys have had on the cost-cutting initiatives. You know, you've had a number of quarters now where the free cash flow burdens come down, but if you look at that sort of the the ATM line there, 250 some odd million of...
Speaker Change: of raises this year for the first nine months. I'm just wondering, you know, where you see the cadence of that going, just as you continue to progress towards breakeven. And obviously, you know, the question we all get just given the fact that the equity valuations right now continue to be challenged in the sector overall.
Speaker Change: Yeah. Hey, good morning. So as you said, we certainly did make significant progress on our balance sheet and our cash flow has improved significantly on a year-over-year basis and over the last few years. We do expect further improvement in FY 2026 from a cash flow perspective. Certainly the expectations for improved operations and improved profitability across our businesses
Speaker Change: We're also looking at, on a year-over-year basis, improvement in cash interest expenses following the pay-down of our term loan that we made in October. We also have an option to pay down an additional $100 million in the coming months as well. So when you unpack our cash flow for next year, really a significant portion of the outflow is expected to be in the interest expenses line.
Speaker Change: to the business as well to continue to fuel growth opportunities in our portfolio.
Speaker Change: Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1.
Speaker Change: The next question comes from Frederico Gomez at ATB Capital Markets. Please go ahead.
Good morning. Thanks for taking my question.
Frederico Gomez: Just a question on Poland. I think, Judy, you mentioned that you saw size growth in that market. So, could you talk a little bit more about that market specifically? What's the size right now? How fast it is growing? How the competitive environment in Poland looks like?
Speaker Change: in terms of market share that you have in that market. Any further call or thought about the polling market. Thanks.
Speaker Change: Sure, sure. Thank you for the question. So within our European business, as you called out, Poland has really been one of the strongest contributors to that growth in Europe.
Speaker Change: If you look at the marketplace itself, it is more insulated from some of the competitive pressure just because the government actually issues import permits and we've been able to secure those imports by really providing consistent supply and quality of the products that the patients are demanding. And so right now we're effectively fulfilling all of the import registrations that we have. Its demand is exceeding supply.
Speaker Change: We are excited about market dynamics and our leadership position in that market and our ability to really fulfill all of the import permits that we have secured in that market.
Speaker Change: or I or or or or or or or or or or or
Speaker Change: Thank you. The next question comes from Pablo Zwanek at Zwanek & Associates. Please go ahead.
Pablo Zwanek: I want to ask regarding Constellation Brands, and maybe just as a bit of a reminder for the audience, compared to three, four years ago, you know, how involved is Constellation Brands in the board, in the direction of cannabis growth?
Speaker Change: And can you leverage the distribution assets of constellation brands in the U.S. as WANA begins to roll out their HEM derivative products? That's one question, and the second one, if I may ask right now...
Speaker Change: I mean, of course, congratulations on the 60% growth in Europe, very impressive number. Maybe Judy, just a reminder for us in terms of the strength of your group to market capabilities there, distribution capabilities. We're beginning to realize that one thing is exporting from Canada, another thing is being able to distribute the product there. So just remind us whether those assets were impacted by cost cuts in the past or whether they are strong or do you need to rebuild them a bit? Thank you.
Speaker Change: So why don't I start with the second part of the questions and then we'll address your first part of your question as well. So the ZAR international infrastructure is primarily, we have supply coming in from Canada as well as the third party partners in those markets and we have distribution partners. So we have worked closely with our partners both in Germany and in some instances even in the UK.
and Jeanne Chen.
Speaker Change: I would say if you take a step back in an international market, the biggest constraint over the last couple of years has really been about supply. I think, as you know, we've gone through a big improvement in terms of our flour quality and supply continuity in the Canadian market, and that is also helping our international business with improved flour quality, more consistent supply, and higher THC going into those markets.
Speaker Change: I don't think there is expected to be a big step change in terms of really the investments required to change our business in that market. I think it's really leveraging what we have from a product perspective, our partnership with with this reverse perspective and taking advantage of the market growth.
Speaker Change: From your question on Constellation, I mean I think as you know they remain our largest shareholder. They are now more of a passive shareholder given the exchangeable share ownership that they have in Canopy. We still have relationship with them in in the context of just
Speaker Change: sharing best practices or just changing ideas. But I think, you know, from their perspective, it's really about investments as an investor in Canopy, less about operational exchanges in that sense.
Thank you.
Speaker Change: This concludes Canopy Growth's third quarter fiscal 2025 financial results conference call. A replay of this conference call will be available until May 8, 2025, and can be accessed following the instructions provided in the company's press release issued earlier today.
Speaker Change: Canopy Cove's investor relations team will be available to answer additional questions. Thank you for attending today's call.