Good morning. My name is Sylvie, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Second Quarter Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] I would like to turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.

Thank you. Good morning, everyone. Thank you all for joining us. On our call today, we have Canopy's CEO, David Klein; and CFO, Mike Lee. Before financial markets open today, Canopy issued a news release announcing our financial results for second quarter fiscal year ended September 30, 2021. This news release is available on our website under the Investors tab and will be filed on our EDGAR and SEDAR profile. We have also posted our 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 as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. David, Please go ahead.

Thank you, Judy. Good morning, everyone, and welcome to our second quarter call. Let me begin today's call with some perspectives on the current state of Canopy's business, a follow-up with key highlights for Q2 and offer some comments on our priorities. Mike will then discuss our quarterly performance in more detail and provide perspectives on our outlook. While there are encouraging elements in this quarter's earnings, there remained a number of factors that impacted our Q2 performance, and overall, we're not satisfied with where we are today. However, I'm confident that we've built a focused strategy with a foundation for growth at Canopy. And management, along with the Board, continue to believe we're on the right path for long-term prosperity and shareholder returns. And make no mistake like any new industry where potential is immense, progress is rarely seen in a straight line. The legalized cannabis industry is still in its infancy. And we firmly believe that our strong portfolio of brands, routes to market and CPG=modeled supply chain will provide Canopy with a competitive advantage. Let me remind you of the reasons why I believe Canopy is well positioned for long-term success. First, our U.S. strategy is well-established with the burgeoning ecosystem. Our MSO partners, Acreage and TerrAscend, are performing well, capitalizing on strong market growth in their respective states and building their footprints. They're also ideally positioned to realize the untapped opportunity presented by newly legal cannabis markets in the highly populated Northeast United States. In addition, we further enhanced our U.S. ecosystem with a plan to acquire Wana Brands, the #1 North American edibles brand upon U.S. permissibility of THC. Wana's asset-light licensing model provides outstanding coverage across the United States. We're continuing to build our U.S. CBD and CPG businesses, which, taken together with our…

Thank you, David, and good morning, everyone. Let me dive right into the review of our second quarter fiscal '22 results. In the second quarter of fiscal '22, we generated net revenue of $131 million, representing a 3% decline over the prior year. Excluding acquisitions, our net revenue was down 13% versus the prior year. Our reported gross margin in the second quarter of fiscal '22 was a negative 54%, impacted by a material inventory write-down related to our excess Canadian cannabis inventory as a result of under-performance in sales relative to forecast as well as our updated expectations for near-term demand. Our adjusted EBITDA loss during the second quarter of fiscal '22 was a loss of $163 million, widened by 90% versus prior year and again was impacted by the inventory write-downs. Excluding these write downs, our adjusted EBITDA loss would have been $76 million. Free cash flow in the second quarter of fiscal '22 was an outflow of $101 million, representing a 47% improvement over the prior year. Let's now dive into Q2, starting with the global cannabis segment, which increased 1% year-over-year to $95 million or down 14% excluding acquisitions. Our total Canadian rec business declined 4% year-over-year to $59 million, driven by a 1% decline in our B2B channel and an 11% decline in our B2C channel. Our Canadian medical cannabis declined around 6% to $13 million as higher average order size was offset by a lower number of orders. Our international and other cannabis business increased 21% year-over-year to $24 million, driven primarily by the growth in our U.S. CBD business, partially offset by declines in C3 and our German flower business due to increased competition as well as negative FX impacts. Looking into our Canadian rec business in a bit more detail. B2B revenue…

[Operator Instructions] And your first question will be from Pablo Zuanic at Cantor Fitzgerald.

David, just -- maybe it's a simplistic question. But can you try to characterize the competition out there? There used to be this view that it was because of overcapacity and smaller operators were just trying to raise cash and down production in the market. And we all thought, well, that's temporary. And the bigger guys will eventually benefit as these smaller players fall out of the market. But there's the other view that some people maybe are just better, right, at the village farms of the world at better farmers that the ogles of the world better in 2.0. And then, it's a different story then on the competition front. Can you just expand on that, characterize the competition and you've been very clear about what you're trying to do to fix the business?

Yes. So thanks, Pablo. So Canada is a large market and a growing market, and consumers and retailers are evolving quickly. And we think some of that -- some of that volatility from a consumer preference and a retailer preference standpoint will abate over time, right? So then, when you look at the competitive set, I think that the -- our ability to grow high-quality, premium, single strain, high-THC product is good as anyone out there, including the smaller players. They can bring -- they've shown the ability to bring product to market. I don't know of how quickly, but it seems to hit the market quickly. Mike talked about the initiatives we have going on, in which, we're going to dramatically shrink the time it takes us to bring our new genetics to market. And we're just building agility into our system, so that we can respond to changes in the market. And look, I don't also -- I want to make sure that I don't lose the point that there are a lot of players out there. But we still have the #1 position in premium in the market. So the brands like DOJA and 7Acres continue to do really well for our retailers, for our customers and ultimately for our consumers. And so, I think as we're working our way through the evolution of the market in Canada, we're continuing to adapt, so that we can be more nimble. But I don't see Canopy or the other larger players at a disadvantage when it comes to competing with smaller LPs.

Next question will be from Tamy Chen at BMO Capital Markets.

I just wanted to ask, first, just a quick housekeeping. Did I hear correctly that your B2B business was down 34% year-over-year, excluding Ace Valley and Supreme? And then, after that clarification question, I wanted to take a step back and thinking about what you've said, what you're working on to stabilize share in Canada. It's pretty consistent with what you said in past quarters after you've done that whole analysis of your business plan and the go-forward strategy. So I'm just wondering, these last few quarters of challenges, like is it just that your plan is just taking longer to execute or are things that you had in your original turnaround plan like or they -- or some things just not working out and you've got to kind of go back to the drawing board here, whether it's the premium flower supply or that demand planning system that you're talking about?

Yes. Thanks, Tamy. Look, the -- just to answer your first housekeeping question, yes, down 34% on an organic basis. So stepping back and thinking about the Canadian market, our challenge has been that in this market, consumer preferences continue to shift rapidly. And Canopy has not kept up in responding fast enough. And when you think about the components to our growth strategy, it really is focused on and reducing our cycle time for introducing new strains to the market, which will make us more nimble. It really is about focusing our business on premium and mainstream and participating in value to the extent that we have waterfall products from our premium and mainstream growth, but really that focus on premium business. And to take a consumer-led approach through all of this. So we believe that nimbleness is going to be key. And our goal is to get the ability to introduce new strains into the market down to 90 days, which gives us the ability to bring new news to the market, to follow trends more quickly. But then also through our sourcing strategy, it's the ability to identify and introduce new strains ahead of the market. Because at the end of the day, in Canada, 70% of the market continues to be flower and pre-roll. And we've got to be superior in providing the right products to the right consumers at the right time. And if we miss it, it's tough to recover. David, anything you want to add?

Yes. So the thing that I would say Tamy is there hasn't been like wholesale changes. It does take time when we have a 4 to 6-month cycle from cutting to beating in the consumer's hands. It just takes a while to respond, which is why we have been talking about some of these things for a little bit. It just takes a while to get through our system and into the market, which is why we said we expect to be functioning with the right production mix by the end of this fiscal, beginning of next fiscal year.

Next question will be from Andrew Carter at Stifel.

So you pushed off the first milestone in the medium-term target. So maybe you could highlight the revised timeline for achieving positive EBITDA, also provide us a sense of what overall revenue growth for FY '21 is and how that's -- and how that affects the 40% to 50% growth FY '21 through '24? And finally, could you update us on where the operating cash flow and free cash flow targets are today, previously, FY '23-'24? And do you have a projection for cash burn necessary to get to free cash flow?

Thanks, Andrew. So let me start with maybe some building blocks to profitability because I think that's the most near term, most relevant topic. And as we said previously that our P&L starts to make sense of $250 million in revenue. When you look at our cost structure, and you look at our operating expenses, you look at our gross margin profile. And we continue to focus on $250 million is that main catalyst that gets us to that breakeven territory. So further breaking that down, looking at our Canadian business, we expect the Canadian market to grow approximately 40% this year. We're expecting the market to grow around 20% to 25% next year. And our goal is to get a 20% share in the Canadian Rec market. Now, recognizing we're not there yet, ties back to the growth strategy that we talked about, the innovation that we talked about. And we think we can get to a 20 share over the medium term. And at a 20 share, the economies of scale associated with our Canadian Infrastructure starts to kick in, and then we start to get line of sight to a 30% gross margin. So that's our Canadian business. And mind you that we're continuing to deliver on our cost savings initiatives as well, and we believe that we're on track. So then you pivot to the rest of the building blocks across our business. BioSteel, our goal is to achieve 20% ACV by fiscal year-end, which is about 3x the ACV that we're at today. This will essentially triple our run-rate on U.S. revenue for BioSteel. And in FY '23, we're targeting to further double our ACV as we continue to build out distribution. And at that point, BioSteel becomes a fairly significant contributor to that $250…

Next question will be from Vivien Azer at Cowen.

I wanted to dive in on the BioSteel outlook and specifically the timing of the distribution gains. I appreciate that timing of shelf resets is a little bit more volatile or dynamic with COVID and all that. But given the deep institutional relationships, David, that you have with these distributors and retailers as well as your partners at Constellation brands. I'm a little bit surprised that this seems to have caught you off guard a little bit. We certainly talked about it extensively last time that we were together. So if you can offer just any more color on what changed and when? I think that would be very helpful.

Yes. So Vivien, we're working through the contracting cycle with many of the major national accounts. As you know, this is kind of the time of the year that happens. And we expected sooner cut ins and sooner loading for those resets. I will say, and I think Mike called this out in his script that we're seeing really good retailer response to BioSteel. And so, we remain as bullish as ever in aggregate on the BioSteel brands. It's kind of timing of cut ins that that's the risk that we're seeing. And so, I think we need to wait until we have the orders in hand at this point before we can say whether it's fourth quarter orders or first quarter orders when we start getting those initial cut ins. So it's really not -- with BioSteel, there hasn't been a change of view. The timing has slid a little bit really in terms of when we get into the market.

Next question will be from Aaron Grey at Alliance Global Partners.

So just turning back to the Canadian adult-use market. You guys talked about some of the initiatives you have to stabilize market share. Just curious, you mentioned a lot about organic initiatives that you have. I just want to get your take on potentially using acquisitions also as a lever and organic growth. You've obviously done that in the past with some recent acquisitions of Ace Valley as well as Supreme. So as you look at the growth of kind of the other category outside the top 5, do you feel like that might be part of the strategy in the near to medium term? And do you see some opportunities first some acquisitions, particularly with Wana, here in the U.S., also doing very well in Canada as well, where they're licensing it out to another operator. So just your take on maybe inorganic growth within Canada kind of to improve market share versus the organic initiatives that you mentioned?

Yes. So Aaron, I think that we'll focus most of our efforts in capital on building our U.S. THC infrastructure in the U.S. We are pretty excited about bringing Wana into the group. I think if you look at Wana and TerrAscend and Acreage, there, we have coverage now in 24 states across the U.S. in terms of THC and growing. Those businesses are all profitable and growing. And they clearly don't make their way into our financial statements at this point. So we're going to continue to build that platform, because we believe that that's where -- that's where we ultimately need to win. There is -- in Canada, for us, the game is getting the right throughput through our facilities, which is the ultimate issue around us getting to positive gross margin. But we feel, as Mike outlined, that from an organic standpoint, we can get the throughput that gets us the margins that we need out of Canada. We can solidify our position in Canada and turn Canada into a cash generator instead of a cash burner and then focus on continuing to build out the U.S. THC ecosystem supported by the CBD businesses that we walked through in the U.S. as well.

Your next question will be from Graeme Kreindler at Eight Capital.

I wanted to follow-up on the comments made about increasing the efficiencies of operations in the quest to get to positive adjusted EBITDA, specifically with the gross margin here. Does management believe that the 40% portfolio-wide target is still a realistic goal? I know Canopy has moved into a net buyer position, offset by trying to harvest more of the high potency streams internally. But given the competitive factors that you're seeing in the ongoing market trends, I'm wondering if that's something that's still held in mind or is that internal target has been adjusted.

So I'll take a quick shot at that and say that, Mike talked about a more concentrated optimized portfolio of SKUs. When we look at that particular set of SKUs, we're comfortable with the margins that we can get to that, in aggregate, get us to 40% margins. But there's -- we have to execute, as Mike also defined the initiatives that we're undertaking. But the question is, can you -- can Canopy function the kind of margins that we put out in our medium-term guidance, the answer is yes. If we look at it on a SKU-by-SKU basis, and now we need the throughput.

Your next question will be from Glenn Mattson at Ladenburg Thalmann.

Just most of my questions have been asked, but just curious about -- you talked about being much less CapEx-intensive going forward that the Canadian footprint is built out, and that's an asset-light model in the United States. But just looking out further ahead, like when U.S. legalization happens and you moved bigger into this market, would you -- would you envision needing to make a lot of investment at that point in time or you feel like the investments that you've made or that they're doing the legwork for you now?

Yes. I think it's more -- your second point, it's the investments that we have today and look like we're not running those businesses today. But we have a lot of confidence in the management teams at Acreage. You see that their business is in growth and they're profitable, love the management team at Wana, led by Nancy Whiteman and TerrAscend, we've always said it's a well-run company. And so they're building out their footprints. We would see no reason to come in over the top. And I think everybody is going to have the question what your footprint looks like post permissibility depending upon the provisions of permissibility. And so, we're -- I would say, we would be reluctant to invest heavily in the U.S.-based upon our experiences in Canada with regards to fix assets on the ground. So we would intend to stay asset-light, even post permissibility.

Next question will be from Michael Lavery of Piper Sandler.

I just want to follow-up on some of the building blocks you laid out and this -- the target for the $250 million revenues. And I guess, really the question is, is that the right number? You've got the BioSteel target of 20% ACV that could potentially triple its size, but would still leave you at less than 10% of that quarterly target. It's close to double what you just reported. You're talking about 40% Canadian growth in cannabis that is, I think, a retail number, so it could even be haircut for what you get, even if you have your fair share. You're a long ways off of really doubling the size of your business and its entirety. What makes you so wedded to the $250 million as opposed to kind of maybe rightsize your expenses and fixed costs to closer to where you are now?

Yes. So I'll take a shot at that, Michael. So I think that when you look at the growth in our -- so point part by the components, I think the U.S. CBD business is attractive and is growing and has a lot of runway, especially as we start to get bricks-and-mortar placements in places like California. I think BioSteel is business that as we grow ACV, we're going to see a very hard ramp in the total revenue of BioSteel. And then, when you look at our Canadian business, we're really talking about being able to supply the right product attributes into the market, which we said a couple of months ago, we were struggling with during Q2. But we expect to have those problems behind us and return more or get inline more quickly with the share that we had captured in the past. So we think -- we think that the revenue number that we call out is, there's a really clear path to get there. Like on your other point, we continue to adjust the infrastructure of our business. We talked about the COGS improvement plan, and that's still underway. And we did -- we're not stopping there. We're continuing to do that work. And we continue to look at ways to lower our overall operating costs and optimize our business. That works just ongoing. We're just trying to lay out. As everything sits here today, the path to profitability does revolve around that mid-200s number. And we see a path to get there, but that doesn't suggest that we're not looking at other ways to get there as well.

Next question will be from John Zamparo at CIBC.

I wanted to ask about the cost-cutting program. And I'd like to get a sense of what the net savings on COGS and SG&A are going to be. I guess the $150 million to $200 million figure that's out there. But SG&A was up quarter-over-quarter, even tax stock-based comp. And now you're talking about an SAP implementation, higher sales and marketing as we kind of return to a normal environment. You're building some of your U.S. businesses. So I'd like to get a sense of what total SG&A will look like once you're through the cost cutting program?

Yes. Look, we continue on focusing SG&A savings in terms of SG&A load as a percentage of revenue. But we're also continuing to drive out hard costs quarter-on-quarter. A lot of it does come back to balancing the need for cost efficiency with still allowing for a foundation for growth. And we -- as I quoted in my script, we've taken a lot of SG&A costs out this year. And for the foreseeable future, our algorithm is to hold SG&A costs flattish year-on-year, as we scale the company. And all of those my EMC brethren have SG&A targets going out 2 to 3 years to make sure that we drive those economies of scale to our bottom line. So I'm confident that as we scale, our SG&A load is going to improve and that will manage to essentially flattish to slight inflationary type costs. So economies of scale are going to be key.

Thank you. And at this time, I would like to turn the call back over to Mr. Klein for final remarks.

Thank you, and thanks, everybody, for joining us today. As we now head towards the holiday season, I hope then we'll be able to enjoy some time with your family. And also, I hope that you have or will soon be able to try our fantastic cannabis products. Including the range of mood management options we now have in the market as well as our existing or exciting CPG brands. Look forward to updating you on the progress Canopy is making in the second half of the fiscal year. Our IR team will be available to answer any additional questions. Have a great day, everyone.

Thank you, sir. This concludes Canopy Growth's Second Quarter Fiscal 2022 Financial Results Conference Call. A replay of this conference call will be available until February 3, 2022, 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.