Good morning. My name is Carol, and I will be your conference operator today. I would like to welcome you to Canopy Growth’s First Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin your conference call.

Great. Thank you, Carol, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy Growth’s CEO, David Klein; and our CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for our first quarter ended June 30, 2020. This news release is available on Canopy Growth’s website under the Investors tab and will be filed on our EDGAR and SEDAR profiles. Before we begin, I would like to remind you that our discussion will include forward-looking statements that are based on management’s current views and assumptions, and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements that’s included at the end of this morning’s news release. Please review today’s earnings release and Canopy Growth’s reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from the projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release furnished to the SEC and Canadian securities regulators. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remarks by David and Mike, we will conduct a Q&A session, during which questions will be taken from analysts. To ensure that we get to questions from as many as possible, we ask the analysts to limit themselves to one question. With that, I’ll turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning everyone. I hope that you and your families are keeping safe and well. Although we’re still navigating through a global pandemic, I’m proud of how Canopy has responded to the challenges during this period. Since the last time we spoke, we’ve seen our nation’s rally behind social justice and racial equality, which has placed the spotlight on the challenges we face as a society as these deep racial divisions are exposed. Our thoughts and prayers go out to all of those who have been impacted by racial injustice and associated acts of violence. Canopy recognizes our responsibility to do more to increase the representation of black, indigenous and people of color employees at every level in our organization, while investing in social justice initiatives such as providing access to legal services for communities disproportionately impacted by the cannabis prohibition. Our purpose at Canopy is improving lives, ending prohibition and strengthening communities. Recently, I signed the BlackNorth CEO Pledge to ensure that progress on this issue continues to be a top priority for our company. The goal of the BlackNorth CEO Pledge is to address systemic racism in the boardroom, and includes having at least 3.5% of executive in board roles in Canada held by black leaders by 2025. I see this as a vital initiative for Canopy, given the disproportionate impact cannabis prohibition has had on people of color globally. In fact, as political pressure begins to build for cannabis permissibility in the US, I’d like to reiterate the case for an updated federal stance on cannabis. At a time when millions are marching to dismantle systemic racism, federal cannabis legalization would represent an important departure from the decades old war on drugs, which caused unfair rates of incarceration among minorities. We’re also facing…

Thank you, David, and good morning, everyone. Against a volatile macro backdrop and a continued dynamic market, Canopy delivered resilient financial performance in Q1, driven by diversified revenue sources and stronger cost discipline. In Q1, our net revenue increased 22% versus prior year. And total OpEx declined over 23% year-on-year, and CapEx continued to moderate both on a year-on-year basis and quarter-on-quarter basis. Our free cash flow was an outflow of CAD 181 million, which is over 50% improvement versus prior year. And we also maintained a strong balance sheet, with CAD 2 billion in cash and short-term investments at year-end. Now, let me review Q1 performance in more detail, starting with net revenue. We generated CAD 110 million of revenue or 22% growth versus prior year. Our global medical revenue increased 54% over the prior-year period, and we’re continuing to see strong growth in both our international flower business, with year-on-year growth of 181%, and C3 with year-on-year growth of 75%, in part due to the recognition of a full quarter of revenue in Q1 of this year versus a partial quarter last year due to acquisition timing. Adjusting for the timing of acquisition, our international medical sales grew 43% on an organic basis versus year ago. Our Canadian medical business grew 19% year-over-year as we lapped last year’s supply challenges, but enjoyed higher average basket sizes in Q1 of this year, in part due to pantry loading as a result of COVID-19. But we are pleased with our continuing ability to attract and retain veteran patients. And over the past year, the number of veterans that have registered with Spectrum has increased by 77%. Revenues generated by our strategic businesses increased by 70%, driven primarily by Storz & Bickel, which grew 76% year-over-year, and the increase was driven…

Thank you. [Operator Instructions] Your first question comes from Vivien Azer from Cowen. Please go ahead.

Hi. Thank you. Good morning. I wanted to focus on your outlook for pricing. David, you noted some price realignments on vapes and then layered on top of that, obviously, the value launch. So, as we think about kind of the evolution of pricing, we’ve got a couple of negative mix drivers. Just trying to think about kind of order of magnitude, where you think you’re going to see the most pressure on the top line from the price [ph] deflation (00:33:29) that you discussed? Thanks.

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Thanks. And if you could just comment on the vape price adjustments that you mentioned?

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That’s helpful. Thank you.

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

Yeah. Thanks. Good morning. Thanks for the question. I wanted to touch on the new high THC hurdles that you set on your product quality for flowers. So, when I think about your current [ph] grow (00:36:13) assets many are quite large and some are quite labor-intensive. And I think the focus for the company previously had been using cannabis as an ingredient for 2.0. So my question is, I mean how can these facilities, I guess, meet the new high THC hurdles that you’ve set for flower consistently at scale and do it at better margins than you’re doing now, particularly if pricing pressure continues to intensify?

- : - : - : I asked them to increase quality so that we can improve consumer pull over time and that includes the THC component, and the team has responded well. But it takes a while for that to pull-through at retail. So, you’re not even necessarily seeing the results of the work that we’ve done on shelf at retail yet. And then I asked them to give us a strategy to get us to best-in-class margins. That work is still underway. And as Mike mentioned, we hope to have some things to talk about on our next earnings call. - : - :

Yeah. I think really looking at the 7% gross margin reported in that quarter, I think it’s easy to bifurcate out between volume impacts on lower production volume versus extraordinary activities that come back to execution. And the 7% is really a reflection of around CAD 18 million of fixed cost absorption tied to lower volume than originally planned for the year. And when you adjust for that and look purely at what should have happened for the quarter just based on those impacts, that brought us to around 17% or 18% margin for the quarter. And we think that’s a good proxy of what to expect over the next quarter or so. As volume starts to ramp back up, we see a clear path to getting back to the high 30s that we demonstrated for Canada back in Q4. The other thing that dragged our margin down is really just executional items. So, getting our pack dates right, so that we can ship product with enough shelf life before it goes to the province. There were some production challenges in terms of getting the phasing of production lined up in such a way that allowed us to provide for adequate shelf life. So, it gets back to what David’s talked about countless times, which is we’ve got to have the right quality and quality is the function of just not THC level and terpenes, but it’s also going about to have the right shelf life remaining. And that’s where the complexity of our operation comes into play, and this is where the SKU rationalization is really providing us with a much simpler framework to run our supply chain off of. So, my view is when you look at the supply chain in Smiths Falls, we clearly have a large scale facility and as this business matures, as the industry matures, the fixed cost leverage that we’re expected to see here, provides us not just runway to 40%, but we see going north of that over time.

Thank you. Very helpful.

Your next question comes from Andrew Carter from Stifel. Please go ahead.

Good morning. I just wanted to ask and kind of pursuing the amendment with Acreage, I appreciate the potential reduction in dilution for Canopy and the downside protection here. But the disclosed business plan from Acreage suggests just 1% of the US market below your kind of 10% to 15%. I guess given the interest by Canopy in pursuing other options along not much work done to-date by Acreage, could you help us understand the incremental commitment here of at least CAD 87.5 million versus kind of letting this agreement run its course and potentially having full flexibility to pursue other options? Thanks.

Look, we think that Acreage, by their own admission, isn’t where they want to be. They have a really strong plan to correct those shortcomings, and we feel pretty good about that plan. I’d also say, Andrew, that the original transaction left very little wiggle room in terms of outs. And so, it wasn’t as simple as letting it play out and walking away. - : - :

Thanks. I’ll pass it on.

Your next question comes from Bryan Spillane from Bank of America. Please go ahead.

Hey, good morning, everyone.

Hey, Bryan.

I wanted to follow-up on Vivien’s question earlier just about value and pricing. And I guess what I was thinking about was just you think about the value offering getting into the market, how do we think about just how much of that will lift in market share, right? So, taking share from the illicit market. And then how much of that might be offset from a trade down from the more value-added product into the value segment? So, I’m just trying to get an understanding of just what that trade-off might be between gaining share but also potentially it cannibalizing your existing business?

- : I also think that we’re in our infancy as an industry, Bryan, in terms of trading consumers up and talking to them about the differences in experiences and quality that happens at different price points, and then demonstrating that with the products that we have in the marketplace. - : - : - : - : - :

All right. Thanks, David. I’ll pass it on.

Your next question comes from Pablo Zuanic from Cantor Fitzgerald. Please go ahead.

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Yeah, Pablo, good question because there are something like 2,700 brands of CBD in the US, right? So, there are a lot of products out there. I think what we have the ability to do by using brands like Martha Stewart, by using brands like even BioSteel as it begins to gain traction and This Works as it gains traction in the US and First & Free, we have the ability to make sure that we get in front of the consumer to talk about our brands. - : So, we think there’s an opportunity for the leaders in the space that have high-quality products and have the ability to kind of penetrate the consumer consciousness with names like Martha Stewart, we believe that there’s a way to build a bit of a moat around ourselves and to create differentiation against the 2,700 brands that are in the space. And the other point that I would add to that is as we look to engage with major retailers, as the FDA works its way through its process and opens the door so that the major retailers come into the space, we’re getting a lot of mindshare from them because of who Canopy is and our connection with Constellation Brands. And then we bring in things like the Martha Stewart brand name and the This Works brand name, we believe that we’ll be able to get a leg up on the competition that at this point is just throwing those 2,700 brands kind of against the digital wall, if you will. - : So, we think there’s an opportunity for the leaders in the space that have high-quality products and have the ability to kind of penetrate the consumer consciousness with names like Martha Stewart, we believe that there’s a way to build a bit of a moat around ourselves and to create differentiation against the 2,700 brands that are in the space. And the other point that I would add to that is as we look to engage with major retailers, as the FDA works its way through its process and opens the door so that the major retailers come into the space, we’re getting a lot of mindshare from them because of who Canopy is and our connection with Constellation Brands. And then we bring in things like the Martha Stewart brand name and the This Works brand name, we believe that we’ll be able to get a leg up on the competition that at this point is just throwing those 2,700 brands kind of against the digital wall, if you will.

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Yeah. We’re encouraged by what we’re seeing in Q2. The consumers are coming back to the stores. The number of trips are going up when we look at our own corporate retail. Dollars per transaction is up, partially due to continued stock-up activity, but as consumers are trying Cannabis 2.0 products, they’re actually spending more at retail. So, a lot of the fundamentals are strengthening across all of our corporate stores. And then more broadly, we think a lot of those trends are extending to the broader market. Just more trips and consumers are continuing to spend more per transaction. When we look at our own performance, a lot of it comes back to our fill rates that we talked about earlier. We are approaching our 95% fill rate, and that was a lost opportunity for us that we spoke about at our last call. And this is just a testament to the work that we’ve done operationally to really build in that muscle tissue to allow us to react to purchase orders as they come through on a much faster cycle time. So, look, there’s still lots to be done in terms of getting our fill rates up, getting in-stock rates up, a lot more stores need to be added to really mature this market, but we think Q2 is off to a good start.

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

Good morning. Thanks for taking the questions. Just curious if you could comment a little more on where you see the beverage market going, particularly in the Canadian market for THC-infused. Given what we’ve seen in the US, it’s a very small percentage of the market share for these sort of 2.0 type products, but it’s not really formulated product down there. So, I guess, two parts to the question. One, where is the market right now with respect to the percentage of the overall retail dollars that we’re seeing? I imagine, it’s still pretty nascent, but just curious if you have a range of what percentage beverages are. And where do you see that going relative in the US, given that you’ve started on a pretty good foot year-on-year rollout?

Yeah, so, Matt, I’ll take part of it and Mike can fill in maybe where I miss because as a recovering beer guy, I love the trends that we’re seeing in the drinks market in Canada. We’re still sourcing a majority of our consumers from existing cannabis users, which makes a lot of sense, right? Because you have to make a decision to go into a dispensary and buy the product and take it home. We’re getting all kinds of anecdotal evidence of people bringing it home and finding that that typically ends up being the mother-in-law, but like the mother-in-law is trying the product hasn’t been a cannabis user, decides that it makes them feel great and maybe they’re sleeping better than they ever have in the last 10 years, right? And so, they’re starting to order from some of the web delivery platforms like an OCS. We’re hearing all kinds of stories like that. - : - : - : - :

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And by the way, we’re not done, right? So, we have more drinks coming to market, and our innovation team is working like around the clock to understand what is the next version, what is the next iteration of our drinks product so that we continue to stay ahead?

That’s all very helpful. Thank you. And has the government come back at all with [indiscernible] that are in these beverages? Because I would guess that you can’t really start selling [indiscernible] things until that gets amended?

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We’re working on it. Yeah.

Thanks.

Your next question comes from John Chu from Desjardins Capital Markets. Please go ahead.

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Yeah, John. So, look, what we’ve been pleasantly surprised by is stores continuing to open even during a pandemic. And our latest estimate is that by the end of calendar year, we could be in excess of 1,200 stores across Canada. So, we’re continuing to ramp up for that. As we dial in our supply chain and continue to perform in terms of PO fulfillment, as we continue to perform in terms of Cannabis 2.0 execution, more beverages, more chocolates, more vape out in the market, as we continue to round out our value offerings and as we continue to improve quality across the board, we see a lot of tailwind heading into the next six to nine months. What we don’t know is what the outcome of the pandemic is going to be. And we know that there’s potentially some solutions coming over the next six to nine months but in the meantime, this has been a pretty good defensive play. Consumers are still spending on cannabis. And with more stores coming, we think that’s going to continue to open up the market. And I know that there’s lots of questions around the future of pricing and value and all of that, but we believe that it’s growing the market, and we believe that we’ve got the production capability that’s going to demonstrate real strong potential as we build toward that market. So, all signs are good for Q2. And balance of the year is really just going to be a function of those stores continuing to open.

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

- : And then related to that, what I’m curious about is, is it more important for the company to fill its cultivation sites in terms of absorption, that CAD 18 million? Or is it more important to fill the drinks distribution and manufacturing site?

Yeah. Look, I’ll take a stab at this, and David, you can jump in. So, two things, on market share, we are seeing improvements in market share. Quite generally, I would say, we hit a trough in the April, May timeframe. And as we look at recent trends on share across the provinces that we can actually calculate market share for, we do see an uptick across Canada in terms of Ontario, Quebec, Alberta, BC. And we’re confident that that uptick is going to continue for all the reasons I cited at the last question. In terms of utilization of facilities, it’s an interesting situation in Canada today because so many LPs have such a surplus across their system. We’ve taken the steps of getting our supply chain in balance. And we know that in the short run, that might impair our gross margin performance as we experience lower utilization levels. And we also know some of our competitors are taking a different path, which is still continuing to operate at high utilization levels, but producing perhaps three or four times their sales each quarter in their harvest, which puts all that on their balance sheet, and that’s going to come back at some point in terms of surpluses. So, we feel good and that we’re balanced from a supply and demand perspective, we know that we’ve got continued opportunity to continue to improve our margins, and we think the priority right now is to maintain a balanced supply chain versus just filling up facilities to keep our economies of scale going. So, that’s the path that we’re taking. And again, we continue to believe that the next six to nine months for this industry are going to be very positive in terms of store counts. Cannabis 2.0 continues to build interest in this space, and we think that we are well positioned to take advantage of that over the next six to nine months.

This concludes the question-and-answer portion of the call. And I would now like to turn it back to Mr. Klein for final remarks.

Yeah. Thank you again for joining us. We look forward to sharing further progress in the coming months. In the meantime, I hope all of you will try our amazing products, visit our Tokyo Smoke and Tweed stores, explore our shopcanopy.com website. From there, you can go to our BioSteel and This Works website. There are just some truly amazing products out there, and we hope that they will help you understand the future of Canopy and the future of cannabis. So, I encourage you to do that. Our Investor Relations team will be available to answer any additional questions. Have a great day, everyone.

This concludes Canopy Growth’s first quarter fiscal 2021 financial results conference call. A replay of this conference call will be available until November 8, 2020, 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.