Good morning, and welcome to Canopy Growth First Quarter and Fiscal Year 2020 Financial Results Conference Canopy Growth issued after financial market closed on August 14, 2019, a news release announcing its financial results for the first quarter and fiscal 2020 ended June 30, 2019. This news release is available on Canopy Growth's website and has been filed on SEDAR. On this call this morning, we have Mark Zekulin, Canopy Growth's Chief Executive Officer; and Mike Lee, Canopy Growth's Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Certain matters discussed in today's conference call or answers that may be given to questions could constitute Forward-Looking Statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the Company's annual information form and other public filings that are made available on SEDAR. During this conference call, Canopy Growth will refer to supplemental non-GAAP measure, adjusted EBITDA. These measure do not have any standardized meeting prescribed by IFRS. Adjusted EBITDA is defined in the press release issued yesterday as well as in this period's management's discussion and analysis document that will be filed on SEDAR. Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by Mr. Zekulin and Mr. Lee, the Company will conduct a question-and-answer session, during which questions will be taken from analysts. [Operator Instructions]. I would now like to turn our meeting over to Mr. Zekulin. Sir, please go ahead.

Thank you Carol and good morning everyone. So as usual of our Canopy, I would like to begin the call with a brief summary of our objectives as a Company, and then speak to our execution as it relates to those objectives. I will also discuss how that execution in turn translates into our financial performance and hit on our broad expectations heading into the future. I will warn now that you can expect a little bit more detail than we have historically given for better or worse. After I speak, our CFO, Mike Lee will provide a more detailed overview of the financial performance of our business. And finally as mentioned, we look forward to taking any questions you may have. On that note, I will add that Rade Kovacevic, Canopy’s President, is also here and will be available to participate in the Q&A session. So, what has Canopy been doing? As a first objective, we are focused on laying the foundation for dominance in an emerging global opportunity. To us this means developing intellectual property, building brands, building international reach and ensuring scaled production capability for current and future products. It means having a formula and level of credibility to ensure smooth and efficient expansion into new product forms, markets and channels. But also, as a second objective, we are fixated on the process of evolving from builders to operators over the remainder of this Fiscal year, meaning that as our expansion program comes to a close in Canada, and as new value-add products come to market in Canada, we demonstrate a sustainable, high margin, profitable Canadian business. The ambition of our first goal impacts the speed at which we achieve our second goal. Canadian headquarters resources serve not just our Canadian operations but our global ambition. But…

Great, thanks Mark. Good morning, everyone. I will begin my remarks with a brief review of our top-line performance. During the first quarter of fiscal 2020, we generated net revenue of 90.5 million on net cannabis revenue of 71.7 million. This includes sales of 10,549 kilogram per kilogram equivalents, which is up 13% versus Q4 of fiscal 2019 or up 291% versus Q1 of fiscal 2019. Looking at revenue by channel, gross revenue in the Canadian rec market totaled 61 million, including 50.4 million in product wholesale to the provinces, and 10.6 million of revenue from our retail stores. Our gross revenue for the rec channel includes an $8 million provision for returns that I will speak about in more detailed in a few minutes. Gross revenue from our global medical channel reached 23.6 million, including 13.1 million of gross revenue from our Canadian medical channel, and 10.5 million from our international medical channel. As you will likely recall, we recently acquired a C3, which accounted for 8.8 million of our international medical channel sales. Looking at our medical channel trends, the Canadian medical business rebounded in Q1 with growth of 13%, driven by increased supply that Mark highlighted earlier, with continued improvements to our export process and higher inventory levels available for export. We expect International Medical to grow in coming quarters. We also had other revenues of 18.8 million, which includes revenue from stores and Deco, This Works, as well as revenue from our clinics and merchandise sales. And now a quick look at volume sales, I would like to highlight the following. During the quarter, we sold 9,060 kilogram and kilogram equivalents into direct channel, which is up 14% versus Q4. Of this 7,673 kilograms for dry cannabis, which is an increase of 94% versus Q4 of…

[Operator Instructions]. Our first question this morning comes from Andrew Carter from Stifel. Please go ahead.

Hey thanks good morning. So I guess, first thing I wanted to ask is the building brands has been a long-term focus for the Company that you have reiterated. And you have obviously outlined some pretty compelling products for the next generation. But wanted to ask about kind of where you stand today. And you have spent a lot of money on retail infrastructure obviously participated in campaigns where you can, but really, is there any differentiation for what your brand stands for and outside compelling product, there are still quite a bit of marketing restrictions. What is going to change in the second wave of the market?

Yes excellent question. Thank you. So as I mentioned, we do have Rade Kovacevic here our President. So he is a guy who hasn't had a chance to talk. So we will let him fill this one.

Hi, thank you so much for the question. I think what I would say is you know we are really proud that many of the brands we brought to the recreational sector we started building five years ago. So we have lots of times to explain the propositions to consumers to build up brand opinion so far. I think in addition to that, through the retail strategy we have had, we have had the opportunity in the early days of recreational legalization for consumers to interact directly with the brands and have sort of a hands-on feel for them. We have been able to leverage that in terms of sort of the good, better and best pricing scheme to ensure that each of these brands has a clear place to live, they didn't mapped out well in terms of different consumer segmentation. And I think as Mark spoke to, the goal would be to take the intellectual property, align it with the brand, and then leverage what we have built in the current market as we move to sort of Cannabis 2.0.

Got it. And then just kind of a second kind of question about Cannabis 2.0. Have you been able really to share any of your innovation details with some of your retail partners or customers. And kind of help us to understand how receptive they are to kind of understanding this new category? And, in the speech, particularly to the beverages where you have made a lot of investment or made investment? Is the infrastructure out there going to be there to support that form and maybe push it above, what we see here in the U.S.?

Yes, for sure. So I think a few points on that. I would say we started discussing our innovation segments with the Cannabis Boards about six months ago. So we had our innovation team go around do a road show and help the boards understand the formats that were coming sort of with a consumer first mindset on our side, in terms of why would the demand exist? How are these products disruptive and so forth. Second to that, in the past I would say one to two months across probably the majority of Cannabis Board at this point we have submitted actual SKU listings with pricing and so forth and had those in person conversations with the Cannabis Boards. I think, overall, across the market, there is excitement about the Cannabis 2.0 products, the ability to convert further cannabis consumers from the black market to the legal market, to grow the overall size of the cannabis market and increase sales. On specifically new formats, I think one of the advantages to the Cannabis Board is being full of people used to be Alcohol Boards, is they are fairly comfortable with the beverage sector. So to your question, yes, we have worked through on the logistics, shelf spacing considerations and things of that nature with beverages. I would say we had a strong trademark in educational plan in terms of helping consumers understand and I think the big difference you see with our beverages compared to the U.S., market is really looking at our beverages as all the IP work we have done and scientific development work to ensure that our beverages are analogous to alcohol, in terms of on-site time, duration and so forth. I think it is a very different approach than has been taken in the U.S., recreational market where it has been very focused on sort of a high dose, high strength, single use as opposed to occasion based approach to beverages. So from the outset, we think it will be stronger than the U.S., that said we have a moderated approach with moderated building of inventory going into that, we are able to react to levels of demand and so forth.

Thanks, I will pass it on.

Our next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.

Yes, thanks. My first question is could you just comment on your revenue performance in the quarter in the rec channel, we have seen some of your peers increase share while yours has been largely flat. What would you attribute it to, is it not the right mix of products and your rec average selling price was also down even backing out the return provision? So just wondering what factors played a part in all of this?

Yes. Thanks Tamy. So Mark here. The way I see it is Canopy had incredible success coming out of the gate in October. Not perfect of course, but between our ability to get our scale facilities running, our logistics, our distribution, our sales, we really got out to a great start that allowed us to achieve a very good market share. And in this sector, there is not enough data to pinpoint exactly what the market share is, but you know I would confidently say it is between one-fourth to one-third of the markets at Canopy market share. So we are incredibly pleased with that. What has happened now over the last eight-months or so, is a couple things. Firstly, obviously, our competitors have now began to ramp up with their own supply, which means they are able to increase revenue from a lower base, but to have that revenue increase and taking some market share back. And the second thing, frankly, is that we have gone through a process of doing some retrofitted and some changes to our facilities that were brought online to make sure that they have the right yields, the right output over the long-term. So I think, what we have seen is, in my view, we are still within that one-fourth to one-third market share, it is probably where as we are at the top of that band and we are out towards the lower end of that band. But I feel pretty good and I would say in terms of narrative, if you gave me the choice between having a 10 share moving to 15 to 20, or having a 35 moving to 30 or 25, I would still take the 25 ending point. And as we look forward, obviously with the harvest that we just had with the value add products coming online with the scale and the systems, we certainly expect to maintain and increase our market share and as the market grows clearly that means to increase our revenues. Hopefully that hit on point one, I think Mike, do you want to speak to point two?

Sure, yes. So Tamy on your question about ASP and pricing. What I will say is overall our pricing is up about 1% total Company global sales Q1 versus Q4. When you look at the Canadian medical channel, our average price is up around 8% versus Q4. When you look at recreation average price versus Q4 is down about 13% entirely driven by mix between bud and our softgels and oils. So in Q4, we have about a 50/50 mix between bud and softgels and oils. Whereas in Q1, our mix was heavily weighted toward bud and less weighted on oil and softgels and oils and softgels being average higher price had a negative mix impact. So we would expect that to normalize going forward.

Okay, thanks. And just my follow-up is on the return provisions you took in the quarter. I appreciate the color you gave earlier. Just wondering, did the inventory review was that spurred by provinces thinking about optimizing their inventory that they have bought and did any of the discussions if it involved provinces, did that also involve how the provinces are thinking about even flower SKUs that they have got at their warehouses?

Hi, Tamy, Rade here. So what I would say is for us working with all the provinces business planning is an ongoing thing, you need to on a routine basis, either weekly or monthly, depending on the province. And so as the market evolves, as retail stores get launched, we are constantly reviewing various SKUs, inventory levels at provinces and rates of sale between those various SKUs. So I think for us its more part of an ongoing conversation, as opposed to something new and looking at where the market is at, how many stores are planned in what period and us being proactive and cautious to ensure that we have the profession in place. I think it is more from a normalizing of rate of sale across SKUs as opposed to initial forecast, as opposed to a cause to concern going forward.

Okay, thank you.

Our next question comes from the Vivien Azer from Cowen and Company. Please go ahead.

Hi, good morning. Just a housekeeping guidance and then my real question, Mike you enumerated the sequential change in pricing for both medical and adult use in Canada, that the real eye popper is the 6138 from international. Can you explain what that is, that looks like an anomaly.

Yes, it is entirely driven by the C3 acquisitions during the quarter and as you know these are pharma grade products that have a much higher price point than our existing softgel, oil cannabis business.

So is that a good number to think about going forward?

Yes, certainly and maybe Rade can jump in on expansion plans, but for C3 we can talk a little bit about what our expansion plans are going forward. I would also say that the mix is going to continue to evolve as the supply situation for our international markets improves. So it is going to be entirely driven by mix. So Rade why don’t you to cover the C3.

Yes. So I think to that points, we are looking at how to leverage C3 across various international markets. And to Mike's point, it is a high quality pharmaceutical products and so the lead time to expansion is longer than medical cannabis flower and so forth. So I think in the short-term, you will see that mix start to lean more towards cannabis flower as there are various regions come online sales, export, process with Health Canada has improved significantly in the past quarter. And so you see growth there, we will average the price toward what flower sales are and then more in the medium to long-term working with the team at C3 through their integration in terms of leveraging those high quality pharmaceutical projects, globally to other regions.

Terrific. And then my real question, Mike is on gross margin. So I think kind of first impressions last night been from a conversation that I was having. The sequential deterioration in your reported gross margin was quite disappointing. I think I'm actually even more surprised by your commentary on the call. Last quarter your adjusted gross margin excluding costs associated with underutilized assets and non-recurring expenses was 41%. In this quarter it is 32%. So how is it possible that you guys grew your kilograms harvested by over 300% and your underlying adjusted gross margin deteriorated that much sequentially? Thanks.

Yes, sure. So the going back to the starting point of the normalized 32% that I talked about on the call, there is about six points of negative sales mix in the quarter due to more dry cannabis sales and less gel caps and oils during the quarter. That was a full six points of headwinds. In addition to that, we had an increase in royalty payments related to houseplants that were as further headwind on margin. So when we normalize for that and get back to a normal softgels and oil mix. The normalized margin would be much closer to that 40% that we keep talking about in terms of Q4 target. But admittedly, we are also counting on productivity gains to get to that 40% margin as well.

Okay. Thank you very much.

Our next question comes from Chris Carey from Bank of America. Please go ahead.

Hi, good morning. So, I guess, just so I take a step back right just given kind of the quarter, which we expected to be underwhelming but the market's reaction. And I think there are a number of reasons to suggest here that Canopy set trials on sales and margins, right and that you should see pretty significant improvement ahead. But on the other hand, clearly the market needs some confidence on this front, especially around gross margins, right and so, I think it is important to kind of lay this out, right. You alluded to something in the prior question around gaining share early in Canada. And that required you to kind of - you acquired the facilities in British Columbia, you really ramped production in facilities that weren't purpose built for cannabis. And it is usually you were like 2X kilos sold versus all competitors, right. But as you started to perhaps, see some issues in those facilities, you started to close them down and retrofit. And we saw harvest has decelerated, gross margins have come in and I guess, I'm just wondering, were the challenges you saw on those facilities significant and has the retrofits really been driving a lot of the harvest, which has decelerated and the margins which have decelerated. And then are we now at the point where those retrofits are coming to an end and that the sales leverage that should really start to be taking off on the margin front, because I think if you just have a year of historical perspective on how the cultivation versus skill sold played out some of the gross margin, pressure and sales stagnation could make some sense. So just some perspective on that I think would be really helpful in the context and everything? Thanks.

Yes. So Rade here. So I think, a few things to take a step back and think about, when we brought those facilities online, we brought almost three million square feet of production capacity online all at once to ramp up product for the start of recreational and legalization, which is what allowed us to take a strong position from the outset. So we are very happy of that decision. I think there basic things that we needed to improve that we knew were the case in the greenhouses, but we didn't want to miss that opportunity for initial inventory creation and sales in the first quarter of legalization to get that strong market share, get our brand solidified and customer of family built. And so when we took them offline, we did planned upgrades that we knew were in place and what we have seen over quarter Q1 both in terms of the overall increase in harvest, our ability through our planning process out 70% of the strings would be high THC and a significant increase in the percent of the product that is high quality flower coming to markets, where demand currently is quite strong is that we were able to execute on that plan as we had hoped. And so we are quite happy with the situation. We are leading to legalization. We have strong supply, strong market share, and that we have been able to bring these properly online now to the capacities we wanted, where we can now look at fine tuning and finding efficiencies both to reduce our cogs and increase overall yields. And so I think, the margins are seeing play out is just the nature of scaling, these products have four to six months lead time, if you start at the time you have to grow the mother plants to get to market. And so there is a large amounts of labor as you bring these sites online. But I think the harvest in Q1 and you will see going forward speak to that being a strong success and position us very well to dominate the flower market. And particularly given the flexibility to take these kilograms and determine flower versus new products based on rates of demand. So I think it sets us up for a very good position and as Mike alluded to before, puts us in a place where we have this margin build as we go into Q4.

And if I could further add, just for perspective, having just finished Q1 harvest with a lion’s share of this work completed, we generated a harvest of 40,900 kilograms. In retrospect, in all of FY19, our harvest was 47,000 KG. So when one quarter, we produced a large, large percentage of what was produced all of last year. So that is just a critical, critical thing for investors to understand.

And Chris, I will give it a threefold answer, I mean just on another example that that we spoke earlier, right, pre-rolled joint as an example. In Smiths Falls, in order to get pre-roll joints to market, we shutdown growing things, right, and we changed those rooms into a facility that could on a semi-manual, semi-automated basis create pre-roll joints. And now with the infrastructure completed here in Smiths Falls that production gets moved to a new place a new license place, where it will be automated, where it will be in its proper home and the old parts certainly will go back to being grow operation. So these are the natural things, so that we did in an early market to make sure that we got products online and served our customer needs, but that lead to inefficiencies and that will fully get fixed as restlessness all comes properly online.

Yes, okay. That is kind of helpful perspective, right. And then, I guess, as my follow-up, right, the 41,000 kilos harvested this quarter, I think by my model you are probably would be now at a position where you have almost 90,000 kilos, just ready to go you $90 million of finished goods $250 million of work in progress. And so I'm trying to understand why this sort of foundations shouldn't be sort of kind of a real acceleration in quarter-to-quarter sales from here. And then maybe just comment on the size of your inventory right now and why that shouldn't maybe give you the uplift in the fiscal Q2? Thank you.

Yes. So Rade here. So I think the important thing to look at the market, and Mark spoke to it earlier about retail stores per capita in Canada, compared to saturation points you see in Colorado, in the United States. And so the two big movers we see are retail - in Ontario and Quebec, both of which provinces with our that is applauding them have aggressive rollout plans for additional retail over the rest of our fiscal year. And so what the problems they have been facing, they need the flowers to come online to be able to do this. And that is what our Q1 harvest of 40,000 kilos represents. The next part post harvest is how quickly we can get to markets. And so I think to your question, a good example is in the first 10-days of August, which I will note include a long weekend, our quality assurance team released for sale, 3.5 tons of flower products and over 2.1 million pre-roll joints. So it gives you an idea of us being able to now take those harvests in Q1, get them through our manufacturing finished good and quality assurance process and have them approved for sale and ready to go again to you as a snapshot of the proximity through the system. I think what we now or being able to go to provinces and tell them down to the finished goods SKU level to give them confidence is we have the flower to be able to meet existing demand based on number of retail stores and for them to be able to confidently rollout more retail stores as they go forward. So I think the leg in the system is that rollout and understandably the provinces have been waiting to hear that the flowers online for them to be able to do that. So what you will see is us building inventory that gives provinces now comforts that they can rollout more and more stores and others are great example of a province that is already begun that process. And then that will allow them to drive further demand through further points of distribution, which in turn allows us to further drive sales. I think the other great part for us is it allows us to have finished with inventory that as we move into scaling new process or Candidates 2.0 that those products are in finished good forum and available while we focus on building a new inventory to be able to sell in December of those new Cannabis 2.0 products.

Okay. Thanks.

Our next question comes from Graeme Kreindler from Eight Capital. Please go ahead.

Hi, good morning and thanks for taking my question here. Just a follow-up on the discussion there on the harvest figure in the overall inventory. I was just wondering if you could give any color just to get a bit more specific on. I understood that the future landscape of retail is not going to look like what it is now. But by all accounts, I think what you harvested this quarter could really sufficiently supply Canada in its existing format right now. So is there any view to hold back a large portion of that inventory and get it ready for the extractable products, as well is there any thought about potentially adjusting prices in order to climb back up in the market share position or it was pretty flat quarter-over-quarter on the ASP. So just wondering if you could provide some color on those thoughts there? Thank you.

Yes. For sure. So I would say in terms of hold back, there isn't a desire to hold back product, it is more about allocating flower inputs to the right product based on rate of sale and so forth. And building appropriate levels of finished goods inventory to give our customers or provinces comfort that finished goods are ready and on-demand as they scale. We will not overcome into a certain channels that we think are fairly agile and able to respond to demands. On the pricing question, we have seen great growth in our TWD, which is our value brands across markets. And I think quite happy with the strategy of we initially focused our flower inventories on our better and best brands, Tweed, [indiscernible] Tokyo Smoke and all those brands. And so we want to make sure that the continuity of those products on shelf to build customer affinity. We didn't focus on value flower from the outset. Now, as you have heard us come online, we are in a place where we can continue to support SKUs being in stock on our better and best brands, which long-term is well out of differentiation and affinity. Well really start to drive the value side of the market as well. And so it wasn't an area we chose to focus on the starts, very confident that that was the right play well say so in a year from now as well. But it is an opposite category where we haven't played in a big way into place where now with the scale we have and the cost of goods sold will be able to drive down where we can play quite aggressively and pick up additional market share from a Canopy growth perspective.

Okay. Thank you. And just to follow-up. With respect to the eight million charge against sales. Is that a one-time event or is that something we could expect to have coming in future quarters here? Thanks.

Yes, Mike here. So it is normal for [CPG] (Ph) companies that have an ongoing revenue provision for estimated ongoing returns, I would remind you that the supply agreements with the provinces allow for returns at any point in the future. But I would say that now that this is established, and we have processes in place, where the information from the wholesale level inventories is now becoming more available more frequently. I would say that this is something that I wouldn’t expect to move the P&L in the future.

Okay. Thank you for that. I appreciate it.

Our next question comes from Matt Bottomley from Canaccord Genuity. Please go ahead.

Yes, thanks for taking the question. I just wanted to go back to the sales mix, particular on the recreational side of things. Can you just give us a little more color as to why the oil and gel caps of this quarter went essentially to zero. I think you were in 30 million or 35 million last quarter. Was that a decision in terms of allocation or was there any issues with production in getting those types of products out the door. It didn't seem to be a problem on the medical side? So just more color would be helpful.

Yes, thanks Matt. No it is not related to our production flow here, simply related to the product mix that we see demand for and ensuring that we allocate products appropriately to that mix. So certainly, as you say, our oils and softgel products remain exceptionally popular and an increasing share of our Canadian medical base and an increasing share of our global exports to medical market. So I think it is just an indication of properly seating the market with what customers are buying at the tail. And I think it is also important to reference that at the tail part because, we still see softgel increasing in demand at the tail at the retail store with customers purchasing, right. So it is just a matter of ensuring that education continues. People understand that product increasingly better and we continue that velocity.

Great. And my follow-up just again on the provision. Has there been any communications from any wholesalers themselves that returns are more likely than not or is this just your own analysis you guys have done in making that determination?

Yes, I think it is as Rade alluded to before, it is normal course of business. We are always having these conversations, it is sort of like when somebody asks us do you have any conversations going on with Health Canada? We always have conversations going on with the Health Canada through the regular process. So it is the same thing, we are always talking, we are always looking at the mix of what they have, the mix of what we are preparing, the mix of what customers are buying and for us through those conversations, we decided it was a prudent time to take that provision as we look forward.

Thank you.

Our next question comes from John Zamparo from CIBC. Please go ahead.

Good morning. I want to ask about the revenue as well. You mentioned the lack of retail distribution points versus Colorado which is fair, but we have seen much of the rest of the sector advance revenues in Q2 versus Q1 on a calendar basis. I'm just trying to reconcile that with your B2B and B2C which are down sequentially. So could you helped us understand that and maybe talk about the ordering process of the provinces, I understand there is some lumpiness there, but just some commentary on that would be helpful?

Yes, absolutely, thanks, John. I think it is fair to say that - it sort of goes back to the answer I gave before, we have had a great start and our goal is to maintain that share as the market continues to grow. And as our competitors have brought on increased supply, I think there is some natural expectation that they will increase their share. But I think, it is starting frankly from a lower base. So certainly, our intention is as we have talked about the product mix in the high THC products coming online and our ability to push even more going forward. We are very confident in our ability to grow shares going forward. But as you say, there is an element of the pie has to continue to get bigger and I think we are seeing the provinces start do that.

Okay, thanks. And then a follow-up on a question from earlier. You mentioned, you were decommissioning some assets for retrofitting, but you still hit record production level in the quarter. I mean, should we interpret that as stockpiling for Q4 and do you have the ability to shift your product mix in the back half of or the remainder of this year? Thanks.

Hi, Rade here. So I think he was slightly misunderstood. What we were referencing was that in sort of mid-Q3 and into Q4 of last year. We had retrofit our large greenhouses in British Columbia and some work in Mirabel as well. Those came back online sort of early mid-Q4 and then those are the harvest you are seeing resulting in Q1. So it is not anything has been taken offline now, that was that historical retrofits. And now the facilities are fully online and producing and glad to see I was out in Vancouver two days ago touring the facility and they are doing great.

Yes. John and I will say, it is a bit of a fluid process, right. And if you could imagine a large facility like that. You will grow across, you will take it down, you will clean, you will put up a new crop, right. And so it might be a case that we don't fill the area for an extra couple of weeks, because we are filling the blank updating the irrigation line or the lighting system or gait track or whatever it is. So it is not so much on and off sort of thing. It is continual improvement, but we think we are there now.

Okay. Thank you.

Our next question comes from Doug Miehm from RBC Capital Markets. Please go ahead.

Yes. I just want to circle back to pricing issue with respect to product that was returned. Correct me if I'm wrong. But I think a majority was gel caps and in the event we move ahead over the next sort of while and you have a little bit more share gel caps. But it appears that these four products that were having difficulty being sold, but you can correct me if I'm wrong. Why would you expect margins to jump back so dramatically to previous levels, when those levels of gel caps and oils were probably too high to begin with?

Yes. Thank you. I think, so just to clarify it is not that - there actually have been return, provision reflects our assessment of the overall inventory levels versus rate of sale and precautionary step to account for that now, because we think it will - it has a probability of coming in the future. So it is not that they have actually been return yet. So I think speaking probably more importantly to your point about the rate of confidence. Even in, let's say, the most ambitious product mix forecast for the existing SKUs, Flower and pre-roll joints on the one hand and oils and softgels. Oils and softgels were always going to be a smaller part of that mix. So I think what actually gives the greatest confidence is thinking ahead to when what we call Cannabis 2.0 comes online, you have a whole range of products from vape, the beverages and chocolates, those are the ones we have talked about, but of course there are others even right. And I think with those products online, I think you are nearly certain to see what looks like flower sitting out let's say a 90% share today falling to something closer to 50%, which is consistent with what you see in other markets. So that opens up a big range and even bigger range then we see today of value add higher margin products and that can of course includes softgels or oils or sprays, but it can also include all of those other products that will come online.

Okay, so we will see some benefits, but in the next quarter or two, but honestly you are going to feel the real impact of that in your fiscal Q4. My follow-up question has to do with your very well connected company in the Canadian and international markets. But where do you think the rollout of the new retail stores in Ontario is going to be over the next two years given how important it is to your point here? And I will leave it there. Thanks.

Yes, thank you. I mean, I think you hit it on the head, Ontario is a major market, it is an important market. That is obviously the markets where we are based. I think if we think back after the change of government, their position was that they wanted an open full market, right. I mean, that that anybody wants to apply to run a retail store could do so. And as we have talked about this chicken and egg game of is there enough supplies to justify the stores and then how these things turn, but at the end of the day, every indication I have is government remain committed to an open private cannabis market. So, as you say two years out, we would expect a fully open, as you say saturated retail market in Ontario.

Our next question comes from Michael Lavery from Piper Jaffray. Please go ahead.

Good morning. I just wanted to get the outlook a little bit better. And two pieces maybe specifically, when you look at 4Q and talk about a billion run rate obviously something around 250 million. How do you think in rough terms that breaks down and specifically just trying to understand how much contribution from something like U.S. CBD or second wave products. What are some of the components of how we should think about getting to that number? And then a little further out when you look at the EBITDA positive guidance for 2022, how should we think about how that compares to the cash flow, would that be net cash flow positive from operations as well?

Yes, thank you. So, on the billion dollar run rate, it is a great question. Our goal remains to hit that billion dollar run rate in that quarter. We certainly believe it is obtainable. We do depend on the Canadian market still, right. So as we talked about, we are in full crafts to get revenues online across the world and in particular in the U.S., and I highlighted all the things we are doing to make that happen and to hopefully have a major contribution towards that but still at the end of the day, I think it is probably fair to say the Lion share of that will rely on the Canadian market. There are macro factors that we have talked about new product formats coming online that will contribute towards that, about new store openings and the rate that allows that pie to get bigger to achieve that. Certainly from an execution point of view, we are not concerning our ability to hit that, as long as the macro environment allows for it.

And so I guess just follow-up of a couple things, I mean any specific color at all on how much U.S. contribution, if any you are counting on even now you said sales by the end of the year is that just a trickle or is that a meaningful piece of it and what is the right way to think about that?

I think it is a little early for you to try to quantify that. Obviously, as we look into the U.S., we are thinking big right, but there is still a number of questions in terms of retailer lineup and those types of things. So I think it would be premature, obviously there is the FDA and the rules that they set out. So I think, we are confident we will be there. And obviously the team is working very hard to make those meaningful. But it would be premature for me to try to quantify that. Mike, did you want to hit on the 2022?

On cash flow yes. So Mike, I think your question really is about free cash flow. So cash flow from operations certainly we would expect to be in-line with overall EBITDA meaning aside from normal inventory fluctuations and all of that it should correlate pretty tightly. So then the question then becomes what is your capital investment at that point in the business. I would expect that by FY22, a Lion share of our infrastructure build. And Canada is behind us a good chunk of the U.S., is behind us. And then depending on federal permits ability and all of that, I think depending on when that happens that could be a binary event that changes the entire equation. But assuming that doesn't happen, I would expect that we would start to approach at a minimum breakeven operating cash flow and then depending on CapEx could be slightly positive, slightly negative.

Okay. Thank you very much.

Our next question comes from Owen Bennett from Jefferies. Please go ahead.

Good morning guys, hope all are well. I just had a question around the quality of the sales outlook, I guess particularly around flower. So I mean, if you think cynical, you could say share support to-date has being driven by essentially stuff in the channel. And by that I mean initially I mean you guys can see where the lead is, because you are the ones at the supply. But now over to coming online, you are seeing share pressure. And so I just wanted to kind of gauge what is the risk around this new flowers that is coming online and you said, you will see support, we should be able to push out retail stores new supply. But I mean, how confident are you once you kind of fill the channel in terms of us speaking and kind of longer channels over the next few quarters. I mean is there rigs there similar to what you see with the softgels and the oils now, where you are going to have to put in provisions to returns on some of these flowers?

Thanks Owen. We remain very confident. I think part of our effort to push product out early and obtain market share, wasn't strictly for the purpose of obtaining market share, it was for getting our brands out there and building that affinity that Rade was talking about, right. So even with those brands, supply limitations meant certain inconsistency that would undermine that effort. But overall, there has been a huge push to make sure our brands are there and they are reliable and in some cases, we have divided brands into certain regions to ensure that continuity to build a customer loyalty for each brand. So, we feel good about that. And I think the next step for us is to really make sure we now push a little bit further down into the TWD lineup to make sure that while we maintain that affinity and drive for the Tweed brand, DNA brand - all of those, we also really now push TWD compared that dominance in what we would call the good level.

Okay. Alright, thank you.

Our next question comes from Brett Hundley from Seaport Global. Please go ahead.

Hey good morning. And thank you for taking the question. So I hate to beat a dead horse here. But I just want to go back to the nature of discussions with regulators by province, particularly in Ontario and Quebec. When they talk about store footprint and build out, how mindful would you say they are of actually trying to keep page real time with oncoming supply across the industry and are there any other major concerns that they relate when discussing their speed at which they bring new stores to market, just because they really are moving - you know Ontario in particular really is moving slowly compared to other provinces and a number of U.S., states out there?

Yes, so I would say they are very student aware of the supply situation, I think Ontario and Quebec as provinces, regulating retail in the case - except Quebec operating retail. They are looking for supply to come on to meet demand across the product mix. And so our harvest of flower products in Q1 has allowed us to go to them with confidence. But what they want to see is results and those harvest existing and that is in a place we are today. So we are now able to have those conversations and give them confidence that, one, both province in terms of any planned rollouts they have that we have the flower to support those rollouts, and two, for them to start looking out are their future waves and when do those waves come of additional rollout. I think in both of those provinces, you are starting to see based on [indiscernible] data, the percentage of overall retail sales across Canada is starting to more appropriately reflect the populations in those provinces. An example I would give you is Ontario has significantly increased the percentage of retail sales from a national perspective, and is now at 30%, right. So there is way to go, it is 4% of the population at SKUs high in terms of disposable income. But that was only 25 stores. You move up to 50 stores and more points of distribution and more communities in Ontario that are able to access retail cannabis sales, and I think you will see strong growth there. And I would say the same for Quebec. And again, going back to what Mark spoke about, Alberta is in a place now where they are at about one store for every 30,000 people. Based on what we excepted Ontario and Quebec, they will be at about one store for every 185,000 people by the end of our fiscal year. So there are significant rollouts plans. There are significant improvement in terms of point of distribution in turns sales. They have taken measured approach waiting for proof that power supplies online and we think we are at a place now where we are quite happily having those discussions and offering our support and quite pleased with the plans they have.

I appreciate that answer. And, it is got me thinking just as a follow-up here you know maybe as we think about not only you guys, but the broader industry and - that occurs with these regulatory bodies and store footprints opening across a number of these important provinces in the months and quarters ahead for you guys in particular. Do you have - well let me ask it this way, what is your view on willing financial partners to work with them and maybe taking some ownership and some type of sale leaseback transactions with regards to your production facilities going forward?

Yes, thank you. So, we have in fact spoken about that before. It is something that we continue to examine, I would say for us, we do still have a lot of cash on the books and the plan to make sure that we use that prudently and are cash flow positive. So I think it is something we look at, and as we look at any sort of financing instruments, but we are not in a hurry, we will wait for the right opportunity.

Thank you.

I will turn the call back to the presenters for some closing remarks.

Okay. Well, thank you, everybody for joining for the questions. I hope it comes across that we remain very excited for the future. We are excited of what is happening in Canada. Excited of what is happening in the U.S., and globally. And to continue to get that balance of making the right investments for the future, while focusing on the effectiveness and efficiency of our operations. So, thank you very much and look forward I'm sure talking to as many of you during the course of the day. Thank you.

This concludes Canopy Growth first quarter fiscal 2020 financial results conference call. A replay of this conference call will be available until September 15, 2019 and can be accessed following the instructions provided in the Company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day. Good bye.