Good morning. My name is Mariamma, and I will be your conference operator today. I would like to welcome you to Canopy Growth’s Fourth Quarter and Fiscal Year 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 the conference.

Thank you, Mariamma, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy's CEO, David Klein; and our CFO, Mike Lee. Before financial markets opened today, Canopy issued a press release announcing our financial results for our fourth quarter and fiscal year ended March 31, 2021. This news release is available on our website under the Investors tab and will be filed on our EDGAR and SEDAR profiles. We've also posted a supplemental earnings presentation on our website. 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, and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning's news release. Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. 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 question-and-answer session. To ensure that we get to questions from as many analysts as possible, we ask the analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning, everyone. I'd like to begin today's call reflecting on our past fiscal year, including our fourth quarter performance. Then, I'll provide some thoughts on the continued progress Canopy is making against our business transformation and share with you why we are confident about how Canopy is positioned to lead this dynamic industry. Mike will then discuss our quarterly and annual performance in more detail and offer some perspectives on our outlook. However, before we get underway this morning, it's important we take a moment to reflect on the news coming out of Canada this past week. An indigenous community uncovered the remains of 215 children on the grounds of a former residential school in Kamloops, British Columbia. This discovery is a sobering reminder of the atrocities indigenous communities were subjected to in Canada with thousands of children removed from their families, sent to schools never to return again to their communities. Our thoughts are with those who are affected by this tragic discovery. Turning to the business at hand, fiscal '21 was a year of transition for Canopy. Over the course of the year, significant work was done to right-size and rewire the organization. Through a series of strategic actions, we've built a more efficient and focused organization. Our full year results showcase the tremendous progress we've made as we not only had to contend with our own transformation, but do so while also navigating the global pandemic. We delivered 37% growth in net revenue in fiscal '21 versus fiscal '20 with double-digit growth seen across all of our businesses. Our adjusted EBITDA losses have narrowed significantly compared to fiscal '20, and we significantly reduced our cash burn as we became much more disciplined and selective in where we invest. Despite a challenging industry…

Alright. Thank you, David, and good morning, everyone. With Q4 complete, we are wrapping a year of business transformation during a volatile macro backdrop and an increasingly competitive market. During this past fiscal, we made tremendous progress in both our commercial and supply chain execution while also improving product quality. Our results are moving in the right direction, and we are confident that we can further scale our business on a path to profitability in fiscal '22. So with this, let me jump into our results. In fiscal '21, we generated net revenue of $547 million, representing a year-over-year increase of 37% with strong double-digit growth across all of our businesses. Our reported gross margin in the fiscal was 12%, and our adjusted gross margin, excluding restructuring charges incurred during the year was 17%. Our adjusted EBITDA loss during the fiscal was $340 million, an improvement of 24% versus prior year. And free cash flow in fiscal year narrowed to an outflow of $630 million, primarily driven by a 77% reduction in CapEx and a 24% improvement in our adjusted EBITDA. Now let me briefly summarize the fourth quarter. Revenue grew 38% year-over-year to $148 million. Our reported gross margin in Q4 was 7% and our adjusted gross margin was 14%. Our adjusted EBITDA loss in Q4 narrowed to $94 million, and our free cash flow in Q4 narrowed to an outflow of $124 million. Now before delving further into Q4 results, I would like to highlight a change that we made to our segment reporting which became effective this quarter. Prior to Q4, we had 2 operating segments, which were also our reportable segments as follows: we had cannabis, hemp and other consumer products and we had RIV Capital. Following the RIV Capital divestiture in February, we are now…

[Operator Instructions] Your first question comes from the line of Heather Balsky with Bank of America.

You reaffirmed your guidance for positive EBITDA in the back half of fiscal '22. And it would be great if you could just help bridge us from where you are currently to what gets you to positive levels. And just kind of thoughts about what sales need to do, what mix looks like and all that?

Yes. Thanks, Heather. I'll take first shot at it and then David could build. It all starts with growth. And as we mentioned in our remarks that each of our businesses posted double-digit growth in this past fiscal, and we're really happy with the momentum that we're seeing across each of our businesses. And in Q3, we did provide medium-term guidance around growing 40% to 50% a year for the next few years and our expectations are, in FY '22, are consistent with that. Additionally, we have the benefits of Ace Valley and Supreme, which will further provide tailwind in achieving our profit goals. But it does start with growth, and this really is going to be the year of growth across both Canada and the U.S. In Canada, our projections on market growth are really tied back to store count, projecting that stores are going to grow another 50% roughly to 2,400 stores by year-end, and we've been quite impressed with the progress that we've been seeing recently on store count. And in the U.S., our growth projections are really tied to all the brand launches that we've announced of recent. So we're getting real traction with Martha Stewart CBD gummies. We're getting traction with Quatreau, which is in early days. But with our Southern Wine and Spirits agreement, we're really confident that we're going to scale quickly. And then we've got BioSteel, which is leveraging the beer network to really drive distribution in the U.S. So we are counting on growth for our path to profitability. When you get to the underlying metrics in the P&L, there's no question about it that we are going through a business transformation in operations and supply chain. And we conducted a very thorough review of our operations and supply chain last fall, and we now have a roadmap that we're executing against. And as we sit here on June 1st, we're on track with that roadmap, and the cost savings that we projected on balance are coming through. And now it's just a matter of executing. The SG&A is also a critical piece of our cost savings program. We just exited our annual planning cycle in the wake of massive restructuring across the entire business. And now we have the entire organization programmed against new operating budgets across the company. And we simply need to adhere to those budgets and headcount plans, which we're confident that we will do because we built the org to really scale the right way. So look, a lot of work underway. A lot of the work is behind us. It's just a matter of it phasing through the P&L quarter-by-quarter over the next several quarters. David?

Heather, yes, the only thing that I would add is that we're doing all of that while we've continued to maintain the discipline to invest in insights, innovation and brand building in the U.S. and Canada and make investments in preparation for entering the U.S. THC market. But we think that we can do -- we can make those investments and still have a very high degree of confidence in being able to turn to profit by the end of the fiscal year.

Your next question comes from the line of Adam Buckham with Scotiabank.

So a bit of a follow-up on the storefront commentary before. There's been some commentary in the market about saturation of stores in specific markets. I was just wondering how your internal model incorporates the potential for diminishing returns as new stores are added or whether that's an issue in your view.

Yes. I think it's a market-by-market view at this point, Adam. And Ontario is still early days in its maturity. And although we're seeing pockets of, call it, diminishing returns on certain -- on stores in certain locations, broadly speaking, it's still early days. And we expect Canada to grow to several thousand stores over the next 5 to 10 years. So it's early days. I'd say the most saturation we're seeing is in Alberta and even that is pretty modest at this point. So not top of mind concern at this point, Adam. It's still a very robust market. The illicit market continues to convert. I think we hit that 50-50 milestone last fall and more and more consumers are coming in. I think 2.0 products helped to drive that interest in the category. And accessibility continues to be the #1 growth opportunity in Canada.

And I think the retailers are maturing their business models as we move along. You see in our retail channel, we have the 5% same-store sales growth that Mike called out. We're seeing retailers get more sophisticated in terms of product assortment and making their storefronts more attractive to people who currently purchase in the illicit market and actually new entrants to the space. So I think we're -- as an industry, we're counting on a lot of store openings, in particular, in Ontario to get over that 1,000-store hurdle. But I believe that the retail market will remain fairly robust for the foreseeable future.

Your next question comes from the line of Vivien Azer with Cowen.

David and Mike, just to follow up on the point that you just made, both on the need for growth to really drive the operating leverage and help you achieve your targets for profitability. Can you provide an update on what you're seeing in terms of the cadence of Ontario growth and how we should think about that in terms of flowing it through to the model? Because given that the adjusted EBITDA loss expanded sequentially in the quarter, it's hard to understand really kind of, from a quarter-to-quarter basis, when the business should really start to inflect. And then if I can just squeeze in a housekeeping item. Mike, you broke up when you were offering the SG&A savings for FY '22. So if you could repeat that, that would be helpful.

Okay, so I think it's a couple of things. And so first of all, when our expected growth in Canada would probably be in line with the current year's growth, right? So we're not expecting outsized growth in Canada but in most of that is the opening of additional stores, which pulls over more people from the illicit market. Also Vivien, I think it's -- when you're looking at our total business, I think you need to take into account the growth of our consumer brands, our consumer businesses as they start to accelerate penetration in the U.S. market. And Mike, I'll let you talk about the SG&A.

Yes. So Vivien, I don't know where I broke up but my remarks were really around the org work that we've done over the past fiscal year and we just exited our annual planning cycle, whereby we have built in about $45 million of savings year-over-year. My point is, the work is done, the orgs are in place. We simply need to execute against these budgets.

Your next question comes from the line of Graeme Kreindler with Eight Capital.

I wanted to follow up on an item that was listed in the press release about the grams sold in the quarter exceeding grams harvested by 40%. Putting that into context with all the restructuring that's been done at the various levels at cultivation and then bringing in some other acquisitions here from Canopy, I'm curious, when you think about these medium- to long-term targets on growth, does the company expect that it's going to be in a net buyer position on biomass? You talked about rightsizing supply versus demand. I'm just wondering what that looks like over the medium to long term here in terms of sourcing reliable product, putting that through down to the product level and what that might do on the cost structure.

Yes. So I'll start, Graeme. So first of all, the model that we're shooting for does assume that we're net buyers in the market. We think there are -- there is a component of your portfolio that you want to control and own production for and that's at the higher end of the spectrum. And then we want the ability to flex our business by buying from third parties. We think it's a much more efficient capital awaited -- a much more efficient way to deploy capital. And we think that at least for the foreseeable future, it will also be a cost-effective approach to meeting the consumer demand. So that -- we work here by design. And then I guess one tangential point, super excited around the production capability that we get out of Kincardine because of its premium nature of the output that's come out of that facility over the last couple of years. So we think that's exactly a good example of what we're trying to get to. We want to be able to produce the premium products and then we want to have flexibility to go to the market for everything else.

Your next question comes from the line of Rupesh Parikh with Oppenheimer.

So I just want to discuss just some of the consolidation that we've seen in the space recently. So I'm curious how you guys feel about your competitive positioning versus some of the new proposed combinations out there. And going forward, is M&A still a focus within Canada?

Yes. So first of all, I'd make the statement that consolidation in most categories and certainly in our categories is generally good for the market and the consumer and the players in the market. Everyone, of course, has to respond to the M&A activity that takes place around them. But in general, we're pretty positive about the activity in the marketplace. We're very pleased with the premium positioning we got from Ace Valley and we hope to get from Supreme as we come to the place where we can close that transaction. So we're very happy with our portfolio in Canada and with the ability of that portfolio to travel to the U.S. So then if you look at where we would focus next with our balance sheet and with an eye toward M&A, it's going to be the U.S. Again, we think we're positioned the way we want to be positioned in Canada. So yes, I wouldn't see us doing much more in the way of M&A in Canada.

Your next question comes from the line of Michael Lavery with Piper Sandler.

Just was curious if you could give some thoughts on beverages. And I guess since you report them together, maybe the whole sort of 2.0 bundle, how does that match with some of your expectations? Is it still adequate for every piece of those? And what's your outlook for how that evolves going forward? Does beverages, for example, really need on-premise or higher THC limits to really get going? Or just how do you think about -- how should we be thinking about the outlook for that segment?

Yes, Michael. So good question. We are -- we spent some time retrenching a little bit around innovation in drinks to get the proposition right for consumers. We see brands like our Deep Space doing really well at 10 milligrams, which, in some ways, makes sense in the Canadian market, which constricts the number of literally units that a consumer can purchase. And so you're, in many regards, better purchasing 10 milligrams in a unit than purchasing 2 or 2.5 milligrams, which are some of our offering. Now I still think there is a real reason for being at each THC level that's in our portfolio. But I think we need to -- before the real power of that unlocks in the Canadian market, we need to get past the equivalency standards that are restricting what consumers can take away. And we expect that, that will happen and we're going to be prepared for that when it happens. But that's the big unlock, in my mind, from a beverage standpoint in Canada.

And I think you're going to see accelerated NPD in Canada over the next fiscal year. We just launched Tweed iced tea. We had a line extension on Houseplant with its lime flavor. And I'm really proud of the work that we're doing within our NPD team and our R&D team to really scale up our internal capacity to get more drinks out into the market. And as David mentioned, there's going to be more variety at more THC levels that we think will match consumer needs in the market. With respect to the U.S., we're on the wake of a new launch of Quatreau CBD that we're extremely excited about. And the arrangement that we have with Southern Wines & Spirits is really going to position us well to scale this brand better than any other in the market. And at this point, it's just really about building distribution, supporting the rollout with local marketing activation and really leveraging this ecosystem that we've built in the U.S.

Yes. And I'm going to use Quatreau, Mike, as a jump-off to talk about what we mean when we talk about this CPG approach to our portfolio, right? If you look at Quatreau, it's a drink that our insights team identified early on is meeting a consumer need state for relaxation and calm and more focus, right? And so we set out to produce a product that was very effective in terms of its CBD delivery and its effect on the consumer that would consume the product. We also wanted to make sure that we got the taste profile right. We then launched it in Canada and we're able to quickly grow market share in Canada, ending up, at the end of the year, the #1 CBD beverage in Canada. We then brought that brand to the U.S. and started selling it through our direct-to-consumer channels. And then ultimately, because of our partnership with Constellation, really tapped into their alcohol distribution network and creating that distribution platform at Southern Glazers Wines and Spirits. So I think that, that's a picture of what we're trying to do across our entire portfolio, use insights, innovate outstanding products, launch great brands. And by the way, we've won -- or we're in the running for design awards on Quatreau. When we launched it, we had -- we reached about -- or we reached north of 1 billion kind of hits on the Quatreau brand, right? So it's that kind of ecosystem that we're talking about when we say we want to bring the CPG mindset across cannabis. I think Quatreau is a great example of that. And now we have to see how it performs in the market but we're growing distribution rapidly in the states Southern is in and I think we'll start to see results over the next couple of quarters.

Your next question comes from Aaron Grey with Alliance Global.

So I just want to dive in a little bit on gross margin, right? So 24%, if we exclude some of the inventory charges and payroll subsidy benefit. Last call, you had talked about 40% for the full year fiscal year 2022. Earlier on the call today, you talked about improvements come in the quarter but still some volatility near term. So would just love to get your perspective in terms of the outlook for the full year, potentially 40% and how important that is to kind of reach your target to profitability by the back half of the year?

Yes. Thanks, Aaron. Look, the 40% margin goal is important over the long haul but it is not critical to our path to profitability commitments that we've made. The work that we did over the fall on the operations and supply chain really are the pillar to our pathway to profitability. And as I mentioned earlier, that work is on track. When I think about the near term on gross margin, the volatility that I referenced earlier is really a function of 2 things: number one, it's -- when you think about the COVID impacts on our business in Canada, we have a high fixed-cost operating environment that is very sensitive to volume fluctuations. So even though I'm quite proud of the results that we posted in Q4 in revenue, it did translate into lower-than-expected production, which ends up creating a bit of a deleverage impact. And that impact, we expect to see continuing into the next quarter or 2. So it's the leveraging, deleveraging impact that we're facing. That's the biggest challenge. I'd say the secondary challenge that we're facing is just thinking about price and mix in the Canadian market. And for everyone that's watching market share data, you can see that Canopy has established nearly a 30% market share in value flower, which we're very happy about because going to my earlier remarks, volume matters in our facility and it does create economies of scale. But at the same time, we need to premiumize our business. And when you think about the discussion we just had about beverages and the gummies that David talked about earlier, the benefits of Supreme and Ace Valley will further premiumize our business and that premiumization is really going to pave the pathway to getting to that 40%. So 40% is still a goal, we're still very focused on it. We want to be above that over the long haul but it's not critical to our immediate path to profitability targets.

Your next question comes from the line of Glenn Mattson with Ladenburg Thalmann.

David, you -- unfortunately in this environment, all CEOs have become kind of political pundits to one degree or another. Various management teams have offered up their view over the last couple of weeks. They're in the earnings season on path of regulatory change in the U.S. Just a little more color on kind of the comments you made. It sounded slightly more -- less optimistic than some of the other management teams. Just you talked about maybe, hopefully, a bill -- Schumer bill would get voted on perhaps this year, just the tone of that. What you're looking for, what your kind of best case scenario is over the medium term on that front. And I guess maybe thoughts on what you would view as the ideal outcome perhaps this year? Just some comments around that.

Yes. So look, whatever any of us say as it relates to the political environment, we're going to be wrong. But I'm really bullish and have been for a while in terms of the speed that I think things are going to move. I believe we're in a position now where you have Republicans and Democrats who are each trying to craft their own bills. What they're not questioning is should cannabis be legalized? They're simply questioning the how, right? And so that's where the negotiation will take place. I think that it's going to move -- I personally believe it will move faster than maybe a lot of people think because when you get that many people aligned on the what, sometimes the how kind of gets negotiated. And so I expect to see that happening. The next big move will be to see what Senators Booker, Wyden and Schumer come out with in their bill to understand how passable their bill is in and of itself. And look, I think the right answer over time is we want full-up permissibility across the U.S. with a regulatory environment that properly ensures the right amount of quality and so forth from a consumer standpoint, we want to make sure that the regulatory environment supports all of the things that we're passionate about like avoiding underage use and so forth, right? So we want to get -- we want to see a proper regulatory bill, and we want to see full-up interstate commerce so that this business can function just like every other business in the United States. And again, I'm pretty bullish we're going to see all of that in the not-too-distant future.

Your next question comes from the line of John Chu with Desjardins Capital.

I just want to focus on the concept you were talking about just recently to premiumize the business. So it sounds like it's a bit of a tough balance here. You need the volume to drive the high fixed cost nature of the business, but you also need the premiumness of that to drive the margins higher on the other front. You're buying cheaper biomass that you also want to control the premium biomass. So I'm just trying to understand that balance there. And is there a chance that maybe you decide to shutter some more capacity, one that's focused more on the value biomass to then help be less reliant on needing that volume?

Yes. So good question. And I think this strikes to some of the volatility that Mike talked about in his comments, right? Because as you all know, this is an agricultural business and it takes a while to change your profile of what you're growing in your facilities. And then it takes a while even for that to flow its way through your inventory into finished goods that ultimately show up on your P&L. So we are absolutely undergoing, as part of our transformation, that change that you described, John, to drive toward more and more premium offerings. And we do think that we're helped by Supreme and Ace Valley. But I also want to point out the premiumization that's been going on in our own portfolio across the price points, even where we brought quality up on all of our brands from a consumer standpoint. We've -- we have an initiative in the premium segment around DOJA that's really being well received by the provincial boards and by our consumers. And so premiumization -- and look, I kind of believe our industry will look a lot like some other CPG categories where you'll have a very robust value segment and a very robust premium segment and then -- and there's a lot of business to be had in the middle, but you want to make sure that you're winning in 1 or both of the other 2 segments. So we are proud of the fact that we're #1 in value and #1 in premium. We have a lot to do but we think we're on the right path. And then we think that gives us the right production environment to get to the kinds of margins we want. It just takes a while to transition into that.

Your next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

David, just following up on the political questions. Do you have any views or insights in terms of the role of the Biden White House instead of Schumer's bill? Because at the end of the day, there are still -- the Biden White House seems to be against Washington, DC, how in rec sales, there's been previous commentary about staff questions there, about policies on cannabis. So just any thoughts on that? Because if it's in isolation, there's almost no input from the Biden White House, I don't really see where that deal really goes. And then related to that, if I may, how are you thinking of your contingent deals in the U.S.? I mean, Acreage and TerrAscend overlap in New Jersey and Pennsylvania so that could be an issue when you have your triggering event. I mean, does that mean that you have to think about other contingent deals in the near or medium term?

Yes. So I'll take that almost in 3 parts, Pablo. So as it relates to the Biden administration, again, anything can happen in the political world. But I don't believe that the Biden administration intends to stand in the way of the will of the people, which as I mentioned, there seems to be a lot of support across the political spectrum for legalization in cannabis. And I think if Congress can come forward with legislation, that gets enough boats to make it to President Biden's desk. I suspect that he won't stand in the way of it, and again, just my view. In terms of overlap, we actually quite like the fact that we -- if you divide up the United States, there are -- there's that big population corridor that is Pennsylvania, New York and New Jersey. Both TerrAscend and Acreage are well positioned there. I think the market is still fragmented enough that we're not going to have any obvious competition issues on day 1, but we'll keep watching that. I think you then look at the rest of the U.S. and you say there are other population areas that we're not strong in today, but I think you'll see Acreage and TerrAscend at least considering how to address those over a period of time. And as it relates to would we look at additional contingent deals, I'll just come back to the statement I made earlier. I think we've built out the footprint that we're very happy with in Canada. We're going to continue to use some of the $2.5 billion of cash we have on our balance sheet to drive innovation and create the consumer-connected brands that we want to create. But once we do that, the rest of our capital will be focused on the United States. And so we're going to watch very carefully how things unfold. And what are the events that allow us to come into the U.S., which again, when you look at the different forms of legislation, the wording will be really important because there are several paths to the U.S., and it's all going to depend upon the actual legislation as it comes forward.

This concludes the Q&A portion of today's call. I will now turn it back to Mr. Klein for final remarks.

So thanks again for joining us today. As we enter the summer season with businesses beginning to open up across our core markets, I'm personally excited about the prospect of reconnecting in person with coworkers, family and friends. And so as you begin your personal return to normal, I encourage you to try our products wherever you may be, whether it's our refreshing Quatreau beverages in either Canada or the U.S. or if it's a Tweed Iced Tea in Canada or our delicious Twd gummies or Martha Gummies or our newest addition, Ace Valley pre-rolls and vapes, really encourage you to play around in the category. As investors in this category, it's an amazing place to be and it's an amazing industry to be in, and I really encourage you to try some of our products because I think you'll then agree that we're doing some outstanding things as it relates to delivering on the consumer experience. And so with that, our Investor Relations team will be available to answer additional questions throughout the day. So have a great day, everyone.

This concludes Canopy Growth's Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. A replay of this conference call will be available until August 30, 2021, 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. Goodbye.