Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome you to Canopy Growth’s First Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I would now like to turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.

Great. Thank you, Michelle, and good morning, everyone. Thank you all for joining this morning. On our call today, we have Canopy's CEO, David Klein; and CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for our second quarter fiscal year ended June 30th, 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 during which questions will be taken from analysts. To ensure that we get to as many questions from 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 by providing some thoughts on the first quarter and the continued progress that Canopy is making in our business transformation during fiscal 2022 to date. Mike will then discuss our quarterly performance in more detail and offer additional perspectives on our outlook. During Q1, our Canopy team continue to establish itself as a consumer-led, innovation-driven organization with an efficient supply chain and a disciplined cost structure. Key highlights that resulted include achieving another quarter of strong double-digit revenue growth for both cannabis and consumer product businesses, closing on our acquisitions of Ace Valley and Supreme, continued emphasis on developing a robust pipeline of new products that are rooted in consumer insight and innovation with over 50 new SKUs introduced in the last two quarters and over 100 on the way, our adjusted EBITDA loss narrowed significantly in comparison to last year and last quarter, and we remain dedicated to furthering the opportunity that lies before us with increasing Canopy's efforts in U.S. THC. We're delighted by the momentum within the U.S. to end cannabis prohibition and remain optimistic on the legislation that has been introduced to do so. However, the first quarter of fiscal 2022 was not without challenges. The Canadian recreational market continued to be impacted by COVID-related lockdowns for much of the quarter. Competition increased with single strain offerings at higher THC levels and lower prices and we faced internal supply and execution challenges. As a result, our market share softened. And we're not where we want to be from a margin standpoint. It's also important to keep in mind the magnitude of the transformation that Canopy has gone through over the past 18 months. And as with any organization undergoing a big transformation, there…

All right, thank you, David and good morning, everyone. Our Q1 results demonstrate our continued focus on financial discipline, with adjusted EBITDA improving both year-over-year, and relative to Q4 despite softer than expected revenue and gross margin performance. In the first quarter of fiscal 2022, we generated net revenue of CAD136 million representing a year-over-year increase of 23%, with strong double-digit growth seen across both cannabis and consumer products businesses. Our reported gross margin in the quarter was 20%. Our adjusted EBITDA loss during the quarter was CAD64 million with an improvement of 31% year-over-year and our free cash flow in the first quarter of fiscal 3022 was an outflow of CAD186 million. Now, let's dive further into Q1 starting with the global cannabis segment, which grew 17% year-on-year to CAD93 million. Our Canadian rec business grew 35% year-over-year to CAD60 million driven by 22% growth in our b2b channel, and 84% growth in our b2c channel. Canadian medical cannabis declined 3% to CAD13.5 million. Our international medical and other cannabis business declined 8% year-on-year to CAD19.4 million as growth in our U.S. CBD business was more than offset by sales declines and C3 and Germany due to ongoing COVID restrictions and increased competition. Looking into our Canadian rec business in a bit more detail, our b2b revenue growth benefited from increased store openings, particularly in Ontario, and growth from our flower value products, as well as contribution from our 2.0 products and acquisitions. Our B2C revenue growth was driven by increased store count up from 22 last year to 34 this year, and a 65% increase in same store sales were normalized for days closed due to COVID during Q1 of last year. Now, given the importance of our Canadian rec B2B business, let me provide some additional details,…

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

Operator, we can't hear Vivien's question.

Your next question comes from Heather Balsky, Bank of America. Please go ahead.

Hi, can you hear me? Just want to make sure.

Yes.

Okay, great. Yes. Thanks for taking my question. You talked about some of the execution challenges you had in the quarter and some of the strategies you have in place to make sure you have the right supply. Can you just dig in a little bit more in terms of, what's behind you in terms of execution, what you're still working on? And when you expect to see the improvement?

So I'll start and then Mike can come in afterward. I think, the issue is just generally as you're ramping a business, if you look at our Canadian business, our record business being up 35% year-over-year. And we've added these consumer preferred SKUs into the mix. So we've created our business in Canada across, I believe, all of the LPs that's reasonably complex and highly regulated, right? And so - and it's an agricultural business. And so you can't turn on a dime as a result of the growth cycle that you have to adhere to. So we've, I think, done a good job of improving our planning processes, improving our ability to move products through the facilities, improved our ability to forecast demand across the industry, even working with the provincial boards, like the OCS, which is an Ontario to help us jointly plan the business on a go-forward basis. And we've cleaned up a lot of the complexity that has existed in our supply chain previously. So it's a complicated business, but I think we've covered some really good ground to vastly improve the execution over time.

I think that's right, David. And I think just to provide some perspective, over the last 18 months, we've made tremendous changes to our footprint shuttering facilities across Canada and across the world, while also right sizing our labor force and also globalizing our org structure. And we've put a lot of best-in-class CPG business processes in place that are now being refined and optimized. And we're making great progress. But we're not all the way there yet. And we're confident that we're doing the right work. And it's just, call it, a bit of growing pains as we normalize into this new model. So, more thing -- more progress to come. But we're confident that we're on the right path.

Great. Thank you. And I had a [Technical Difficulty]

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

Thank you. I just wanted to speak a little bit about the EBITDA improvements that you're expecting through this fiscal year, I think the language has changed slightly as it relates to when you expect that to occur such that now we're looking towards the end of the fiscal year. I'm curious to know, what type of market share gains do you need to see the positive EBITDA by the end of the year?

Yeah, thanks, Doug. So, as we've talked about previously, so much of our path to profitability comes down to revenue growth and getting economies of scale. And we've previously indicated that our North Star is getting to $250 million of revenue on a quarterly basis becomes that, that run rate whereby profitability starts to become within the crosshairs. And when you look at the building blocks behind our math, a lot of that's going to come on the back of Canada, which is growing 40% year-on-year. And as we indicated earlier, we're not happy with the share performance that we've seen over the last 12 weeks. But we're confident that the innovation that we're bringing to market over the next three to six months is going to strengthen our market share, and put us back on that trajectory to getting to that $250 million run rate. The other critical component in our trajectory is activating the U.S. and between all of the CPG brands that we highlighted in our CBD brands, we've got a lot of momentum. And we believe that over the next three to four months, as these distributors start to activate locally, as the national chain starts to open-up, we're going to see a significant ramp in our U.S. revenue. So we've got line of sight to getting to that $250 million, but it is going to come down to execution. It's going to come down to activation across the distributor network in the U.S. and it's going to come down to new product development. But we're confident on all fronts that we're going to get there.

Thank you.

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

Thanks. Good morning. I just wanted to ask, with respect to the missed revenue opportunity because of execution challenges, wondering if it's possible if you could quantify that. And then just because you've talked so much about product launches being critical in the back half of this year, I'm wondering specifically, the OCS recently made some sort of change with respect to, I think, delaying when they'll take on new products and they're pushing back that window. So do you mind just talking about that? Does that impact your plan at all? Thanks.

So, Tamy, maybe I'll take the first part and David can address the OCS question. Look, in Q1, we know we had missed revenue opportunities on fill rates. We know that we had missed revenue opportunities on high THC or strain specific supply. And we know that we had missed revenue opportunities on timing of activation in the U.S. on certain products. It all comes back to execution. And although, I don't have specifics on to be able to quantify that for you, that is the largest driver behind our share loss in Canada is basic execution and inventory supply. So you can do the math on your own to figure that out, but we're confident that we're taking the right steps to improve execution on all those fronts. David, do you want to take the OCS?

Yeah, Tamy, as relates to the provincial boards in general, first of all, each of the boards are getting more and more sophisticated as we go forward. And, we try to be really strong partners with them. And so we've been a party to all of the discussions around listing windows and so forth. And our NPD expectations for the rest of the year, take those listing windows into account. And look, we just think it's good for the industry to have that level of sophistication for all of the players to have to adhere to. It's what I'm used to, in my experience, when you're dealing with your customers, and particularly a retailer. So, we're comfortable that the projections when we're talking about them, take those listing windows into account. And, again, I think I think that increasing sophistication at the provincial board level is really good for the industry.

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

Thank you. Good morning, I wanted to focus specifically on the commentary around the THC investments, I think, it seems like you're a little less bullish on the Schumer bill, not sure. But I did want to ask if you're kind of signaling that you might be a little bit more aggressive. First off, with those investments be outside acreage, and kind of where does that relationship stand is using acres as vehicle because I believe there's some license fees you'd have to pay to them? And then finally, given your relationship with constellation, do you have the flexibility to move a little bit aggressively and potentially they do a do an exchangeable share position, like you have a TerrAscend? Thanks.

Yeah. Good, good questions. Andrew. The thing that I want to be really clear about is, when we're talking about US THC permissibility, we're not waiting, right? So I just want to remind everybody of, how we're approaching this. So first thing we're doing is we're building our US business where we can today meaning CBD where we're, we have the Martha Stewart Brand, which is the number three brand. We have BioSteel, we have our consumer products, businesses like Storz & Bickel, which is my point I was up 41% year-over-year, getting those routes to market built in the US help us build that infrastructure that we can leverage upon permissibility. So that's the first thing. The second thing is you point out acreage. So we own 70% of acreage and 20% of TerrAscend. And that gives us a turnkey entry to the US post permissibility. But it also allows those businesses to grow as they can, leading up to permissibility. So to the extent that the MSOs are allowed to continue to drive their growth plans, we have some guys that are doing it, and I think doing it well today. Then you're, I guess, to go further on to your points, and so then when we talk about Constellation. Constellation is already providing us capabilities around brand building, think about the company that has literally built the Modelo brand into one of the strongest beer brands in the US. We have access to that capability settings at Canopy. Constellation has a very strong distribution network. We are using that network today. Constellation has really good operational capabilities as evidenced by what might be best-in-class EBITDA margins across CPG. And then we have the CAD2 billion in cash on our balance sheet, right. So all of those things…

Your next question comes from Bill Kirk, MKM Partners. Please go ahead.

Thank you, and good morning. That was a pretty perfect segue for where I wanted to go. I wanted to spend a little time on the relationship with Southern Wine & Spirits, the Martha Stewart gummies, the Quanto products; they're different from a lot of their portfolio. And I would think in many states would likely go to different retail accounts than then Southern would normally call on. So I guess the question is, how willing is Southern to adjust the routes to help your products hit all the potential accounts, not just existing Southern accounts? And desirability for them to do so, how does that different maybe between states?

Yes. So Bill, good question. And I will tell you to begin with, we have a lot of support for our CBD business at the highest levels within Southern. They view this as an unlock for them over time, as cannabis and cannabinoids become mainstream in the US. And so they're putting resources on this to make sure that they build out that capability set. I would also say on that same thing, we're having the same discussions with the members of Constellation’s beer distribution network, the Gold Network. And so I think that we have very willing partners and we want to be useful to them as they're -- as these alcohol distributors are trying to build out their capabilities in this regard. And then as it relates to market coverage, our agreement with Southern as a relates to CBD brands is really focused on the states, first of all, where they can comfortably and legally take our CBD products into those states. And it also, our agreement with them calls for Southern to have access to those states, where the routes to market line up with this -- the kinds of routes to market, the actual retailers that we think our brands are a good fit with. And so I don't think there'll be a conflict from that perspective. And the one other comment I might make about this is that, our sales teams and Southern sales teams and BioSteel sales teams and the beer network sales teams are just in the beginning stages of learning to work together. And that's the sort of thing that that, I'm really gives me a lot of optimism in our US businesses, because as those partnerships grow, and as we get better at managing the relationships right down to retail and through that distribution channel, we're going to be really well positioned with the brands we have in the market today and the brands we'd like to bring to the market in the future. So I would say, it's going well, and we have support at the highest levels in those organizations. And Bill, I know you know all those folks. So you should ask them that question as well, because I think they would give you the same response.

Your next question comes from John Zamparo, CIBC. Please go ahead.

Thank you. Good morning. I also wanted to follow-up on the commentary on the US side as well. Is it fair to say, you'd prefer a structure that mimics the TerrAscend deal rather than your Acreage deal? And in David, what do you think is missing from your current US optionality investments? Whether it's brands or geography or different parts of that ecosystem that you referenced?

Yes. So John, I think from a structure standpoint, when we're looking at the US, we're prepared to be flexible enough to meet the legal requirements and to be able to drive that agenda forward. So I would say, there's not a predefined path. And I think that all of our partners have been really understanding of that and willing to flex. When I think about what's missing, let me tell you what I -- let me maybe first say what I have or what we have, right? So, we have, I think, really strong positioning in the highly populated East Coast markets, and I see that as being a real tailwind for our partners, because those markets are just beginning to open now. And so we're going to see the power of the capability set behind Acreage and TerrAscend, I think, as those markets open more. When you look at the rest of the country, I think that my -- when I think about maybe, how I would want to build out the framework, I think, I'm less concerned about some of the having a multi-state operator, for example, that's -- that has a large business in California, because I think the California business looks a lot like the liquor industry already with a bit of a liquor store distribution model. So, for me, it would be more about having other capabilities other than just kind of seed to sale capabilities that you have within the MSO. So I would say, John, maybe I'm not being really specific here on what we're looking for, but you should know that we are out there looking to build out our capability set.

Your next question comes from Michael Lavery, Piper Sandler. Please go ahead.

Thank you. Good morning.

Hey, Michael.

Just want to -- I just want back to the EBITDA profitability aspiration, and just make sure I understand that really, and how achievable you feel like it is, because I guess I want to make sure first of my hearing you right, that it depends on hitting at least close to a 250 million sales run rate. And if so, obviously 4Q for example, that would be up about 70%. You're talking about the Canadian market running up around 40? Would my math there be correct to imply that you really to hit this at all depends on US CBD really gaining a lot of speed and also some outsize contributions from someplace like Germany?

Yes, I think that's generally accurate that our path to profitability isn't based on Canada growth alone, but it's the success in the US and ramping up our new businesses that we spoke about earlier. And one of the biggest one is on BioSteel. And we've talked about that at length in prior calls. But this is a multi-billion dollar sports nutrition category that we're going after. And we're building ACV, as we speak, we're in I think it's over 16,000 doors as we speak. The Gold Network at Constellation is being activated as we speak. And we've got a lot of wins under our belt already in terms of understanding the response in distribution and velocity from some of the local marketing that we're doing. So, that's one that I would argue is our largest, most meaningful upside opportunity in the back half. But I would not dismiss the contribution from Martha and Quatreau, David spoke about how Martha's performing in market terms of brand performance and velocity, Quatreau is still early days, but all signs are positive, that we've got the right product with the right branding with the right flavor profile. And we also have new products that are coming to market that we haven't announced yet, but we will be announcing those soon that are really entering markets that are very large tam that virtually have no meaningful competitors in our way with we think, differentiated attributes that will be very competitive. So all of these things are assumed in our second half of the fiscal so we have to execute, Michael, but you're right that the US is as large contributor to our path to profitability.

Your next question comes from Adam Buckham, Scotiabank. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I don't know if it's already been touched on. I apologize. I had to jump on real late here. But I wanted to get a view on the dynamics in the Canadian market currently, particularly in a province such as Ontario. We know there is sort of locked down protocols for just over two months now. And I was just wondering if you've seen any changes in buying patterns from the provincial distributors on the back of that there has been a backlog of stores have opened over the past six months. And so you would think at some point, they'd have to start stocking inventory again to offset those sort of new stores, right. Just any color on that front would be helpful. Thanks.

Yeah. So let me take let me take first stab and David, you can jump in. But look we do think we're on a road to recovery. In Canada, it's been a tough slog here for the last four or five months, I'd say. When you look at what's been different over the last few months, store traffic abated quite a lot over the last quarter. And that has multiple implications because as consumers revert back to online or click and collect where the engagement with the bud tenders is non-existent, then consumers quite traditionally are reverting back to what they know or just simply seeking large quantity at low price. And it's not a surprise to us that we've seen this this migration to value and consumers not exploring new products as much as they would be, if they were face to face with a budtender being sold on product attributes or being able to talk about what occasions they're shopping for. So that's been non-existent. And we're starting to see some green shoots on that which I spoke about my remarks that as we look at our store engagement with consumers, as we get out in the market and talk with other bud tenders, those interactions are really encouraging because consumers do want to discover some of the new products that are out in the market. And those interactions with the bud tenders are just key due to some of the as you guys know, pretty challenging marketing rules in Canada in terms of being able to advertise products. And terms of provincial behavior on inventory, it's mixed. Clearly, in the Jan, Feb, March timeframe, we felt a pullback of inventories across the board pretty consistently. that's starting to come back. I know that Ontario has rebuilt much of their inventory over the last couple of months. We're seeing some of that in Alberta. But it's been -- it's been a little hit and miss across the provinces. But generally speaking, we think that the provinces are back in the mode of replenishing their inventory to support the ongoing growth in store count and consumers coming back to the stores.

Yeah, I wouldn't -- the only thing I would add to that, Adam, and it's a build on my earlier comments, the provincial board. So ultimately, our customers are becoming very efficient and very -- in their very well run. And I think that continued evolution in that regard is going to help us and others in the industry to be able to meet consumer needs on a consistent basis. And, again, I think that just bodes well for those of us that that know how to work well with our customers.

Your next question comes from Rupesh Parikh, Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question. So, I really two related questions on the Robin rewind. So first, do you guys still feel comfortable dive CAGR 40% to 50%, the next few years? And then secondly, is there any granularity you can provide in terms of how you think about the revenue contribution related to supreme and Ace for this year?

So short answer is yes. We're maintaining our guidance on 40% to 50%, CAGR annually for the next several years not changing that. In terms of Ace Valley and Supreme -- but we're very excited about these two brands. And we think we're just getting started. The integration plans with Supreme are well underway. It's been fairly seamless so far. We announced that with Supreme we would capture CAD30 million of synergies over the next year. We're very confident that that will be delivered. We've got innovation plans behind Supreme that are in progress. We have our Canadian sales force, very excited on continuing to build out points of distribution on Supreme. So it's a sizable contributor in FY 2022. And one of the things that we spoke about earlier, but just to reinforce is arguably one of the biggest intangibles on Supreme is going to be the knowledge transfer that we're getting on growing premium high THC flower and transferring some of those practices into some of our other growth facilities and it's been quite productive. In terms of Ace Valley. Again, Ace Valley, when we acquired it, it was a very Ontario centric brand. And we're continuing to build out distribution across Canada on that. We're very happy with the performance that we've seen so far. And behind Ace Valley, we have additional NPD plans, as you would expect, that will be coming to market over the next three to six months. So, again, we're -- these are highly synergistic brands that we believe fit white space in our portfolio. And all signs are positive. David, anything you want to add on those acquisitions?

No, I just think that the ability to take a brand like Ace Valley and innovate around it is just really fun. The products that are coming out are totally dialed into consumer expectations. And as I said in my comments re-patched I'm really excited about Ace Valley dream CBN gummies the real strong foray into the mood management vision that we have here at canopy, so exciting stuff from both Supreme and Ace Valley.

This concludes the Q&A portion of the call. And I will now turn the call over to Mr. Klein, for final comments.

Thank you again for joining us today. This is a really exciting time to be in the Canopy space. And as I mentioned in my comments, and in some of the questions that I answered, we're not waiting around for US permissibility, while we remain very optimistic in terms of timing on permissibility. We're executing against our strategy today. It's very exciting. And I'm glad you're along for the ride. I hope that you and your families remain safe and healthy and have had an opportunity to enjoy the summer season. And I also encourage you to try our fantastic cannabis brands, as well as our non-cannabis brands for those of you that aren't in legal markets. I look forward to updating you on further progress that Canopy makes as the year progresses. Our Investor Relations team will be available to answer any additional questions. Have a great day.

This concludes Canopy Growth's first quarter fiscal 2022 financial results conference call. A replay of this conference call will be available until November 4, 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.