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Canopy Growth Corporation (CGC)

Q3 2023 Earnings Call· Thu, Feb 9, 2023

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Transcript

Operator

Operator

Good morning. My name is Michele and I will be your conference operator today. I would like to welcome you to the Canopy Growth Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin your conference call.

Tyler Burns

Management

Thank you, operator. Good morning. Thank you all for joining us. On our call today, we have Canopy’s Chief Executive Officer, David Klein; and Chief Financial Officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing our financial results for our third quarter ended December 31st, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR. 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 remarks by David and Judy, we will conduct a question-and-answer session, we will first address questions uploaded by verified shareholders using the Say Technologies platform. Following that, we will take questions from analysts and 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.

David Klein

Management

Thank you, Tyler. And good morning everyone. During our Q2 earnings call, I clearly outlined Canopy's top priorities in becoming a North American Cannabis leader, which included actions to drive Canadian profitability, and empowering Canopy USA to progress the US THC strategy. On today's call, I'll provide comprehensive updates on both priorities, which are imperative to achieving our ambition of long-term North American cannabis market leadership. Following my remarks, Judy will review our Q3 results, provide an update on our path to profitability, and outline the cost savings anticipated from the business changes announced today, as well as discuss our balance sheet. The transformative plan introduced today addresses the actions needed to drive profitability, but also to secure the future of our business. The intent of establishing a legal cannabis industry in Canada was to combat the illicit market. At the outset, the legal sector was poised to be a source of immediate economic development, with significant job creation and tax revenue. As a global first mover, the legal Canadian cannabis industry was originally projected to grow into a CAD7 billion market over time, however, that market aspiration has not come to fruition. Today, there are two very different cannabis markets in Canada; one that's legal, highly taxed and regulated, and one that's thriving in illicit. The unregulated illicit market is generating billions of dollars of revenue with a 40% market share, and faces virtually no risk of enforcement. The legal sector out of necessity, is forced to be price-competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer. The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect…

Judy Hong

Management

Thank you very much, David and good morning, everyone. I'll focus my remarks on one a brief summary of our third quarter results; two, an overview of the financial details of our transformation plan for Canadian cannabis business; and three, discussion of our cash flow and balance sheet. Beginning with a review of our third quarter fiscal 2023 financial results. In Q3, we generated net revenue of CAD101 million, representing a 28% decline over the prior year period. When adjusting for the impact of divestitures of C3 and the Canadian retail business, revenues decreased 23%. Revenue highlights include Canadian medical cannabis increasing 9% versus the prior year period; Storz & Bickel increasing 50% sequentially compared to Q2; and our Australian cannabis business having its seventh quarter in a row of record revenue. Gross margin declined year-over-year, with the decline due to a shift in the business mix from the divestiture of C3, the impact of last year's COVID-19 Relief Program, and a decline in BioSteel's gross margins. Adjusted EBITDA loss increased by CAD21 million to CAD88 million compared to a year ago. Approximately CAD8 million of the adjusted EBITDA loss during Q3 resulted from a few discrete items including costs associated with returns in our US CBD business following our strategic change; the write-down of aging inventory of BioSteel; and a credit to a distributor which is related to the previous sales made to Israel. Free cash flow improved 13% year-over-year due in part to lower capital expenditures. Now, let's take a look at the results from each area of our business. Canada cannabis revenue declined 23% compared to the prior year period, and declined 11% sequentially compared to Q2, with the decrease due to lower adult use B2B revenues, partially offset by a 9% growth in our medical cannabis…

A - Tyler Burns

Management

What do you feel the effects of legalization in the United States will have on the company and the industry as a whole?

David Klein

Management

So, -- thanks, Tyler. Look with the lack of developments in Washington on federal legalization, we've decided not to wait for regulatory reform to happen in order to reap some benefits through our ecosystem in Canopy USA. And you know that just to reiterate what that is that's really putting together our Wana brand, our Jetty brand, Acreage, together so that they can operate in a collaborative fashion, grow their business faster than they might do if they were to continue to operate as separate companies, and realize cost synergies. And so we continue to work on our Canopy USA strategy, which we commented on, both in the earnings release as well as in our prepared remarks. So, yes, I think that we're all hopeful that at some point, we have full federal legalization in the US, but we see that happening -- continuing to happen very slowly. So, we've taken matters into our own hands. With that, operator, Judy, and I will now take questions from our analysts.

Operator

Operator

Thank you, sir. [Operator Instructions] Your first question will come from Tamy Chen at BMO Capital Markets. Please go ahead.

Tamy Chen

Analyst

Thank you. Good morning. Judy, I just wanted to ask in terms of the EBITDA, could you comment a bit on what the EBITDA loss looks like between the particularly the Canadian cannabis segment and then your consumer segment? I'm just looking at based on your total cost announcements to-date and you're reaffirming EBITDA guidance, that it seems the majority if not possibly all of the currently reported consolidated EBITDA loss is due to the Canadian cannabis segment and that possibly the consumer segment EBITDA, maybe already in the positive. Are able to comment on that? And can you just give a little bit more detail on the cadence of all these cost savings as we progress through the quarters and fiscal 2024? Thank you.

Judy Hong

Management

Sure Tamy. So, I would say when you look at our total adjusted EBITDA losses, the way I would think about it is sort of break into a few different segments, right? So, number one, to your point, right now, the two main drags in terms of our adjusted EBITDA losses are one, Canada, and second, the investments that we're making in BioSteel. So, with all the actions that we've announced in terms of our Canadian Business Transformation Plan, our expectation is that once we're complete with the plan, that all of our operations across our businesses will be profitable, with the exception of the investments that we're making in BioSteel. So that's the outline of my comment around FY2024. So when you look at the businesses that we have Storz & Bickel is a profitable business, you can see that in the gross margins. And obviously the high price points that that brand Garner's it is a profitable business. The International Cannabis, there's some noise in that business, just given some of the actions that we've taken with US CBD business and the opportunistic sales that we had previously benefited from Israel, but all in all International Cannabis is achieving gross margin profitability, and if you look at, if you get This Works and others, we think we're pretty close to profitability in all those segments. So it's really about making sure that all the cost savings are driving Canada to be self-sustaining and profitable. And for BioSteel, we do think the investments will eventually pay off for Canopy shareholders one way or the other in terms of really the sales growth that we're benefiting from that business. And I think that that does create value for Canopy Growth shareholders. In terms of the cadence of the savings that are expected to flow through, I would say, we obviously did announce the changes this morning and there is a big portion of the savings that will begin to flow through starting in Q1. But as we complete those actions in Q2, we think the bigger chunk of those savings and the progression from a quarter-over-quarter basis we really begin to start to see in Q1 and Q2 of fiscal 2024.

Operator

Operator

Your next question comes from Vivien Azer of Cowen & Company. Please go ahead.

Victor Ma

Analyst

Hi, good morning. This is actually Victor Ma on for Vivien Azer. And thank you for taking the question. So broad based inflation headwinds are persisting in North America, while flower downtrading has been evident in Canada, have you seen that accelerate at all, as consumers absorb higher energy prices this winter?

David Klein

Management

I think we've seen across Canada, and I would argue in the US, we've just seen growth in the value segment, which we don't play heavily in. But that's really - that's, I think where we're seeing, I think it's less about overall price compression and more about this growth of the - of the low end of the market.

Judy Hong

Management

And just in terms of our business in Canada, we are looking at now the impacts from some of that price compression moderating in our business, if you look at our product mix, as we're premiumizing our portfolio, the decline in terms of our average pricing is beginning to moderate. So you see that in terms of the product mix shift.

Operator

Operator

Your next question comes from Chris Carey of Wells Fargo. Please go ahead.

Chris Carey

Analyst

Hi, good morning.

Judy Hong

Management

Good morning.

Chris Carey

Analyst

David, you - I think you noted that the shareholder vote on Canopy USA was still planned for April of 2023 or is planned for April of 2023? Please correct me, if I heard that wrong. You know that there's a lot of details in the press release this morning about potential remedies that would make the NASDAQ and I presume the SEC more comfortable with this transaction. I'm still struggling a little bit just to understand the practical considerations here. You talk about, a smaller percentage ownership, among other things. So, just in plain terms, what would need to change to get this deal through? And then, perhaps comment on how this changes the -- I suppose the reporting relationship with Constellation, my read here is, you know, probably under the changes that they'd still be reporting to Canopy and equity income but I'm not sure. So, anyway, so you could tell just trying to maybe, just dumb this down a bit and understand kind of practical considerations of what's actually being contemplated here. Thanks so much.

David Klein

Management

Yeah, Chris. So look it’s a complicated transaction and that’s partly why it’s taken, yeah, we're still we're still targeting in April 2023 shareholder meeting. I don't think it changes, any changes that we might make in the structure of our Canopy USA business won't affect how Constellation ultimately treats their investment in Canopy. And so to simplify, where we are really, again, the value of Canopy USA is in putting these businesses together, letting them generate revenue synergies, because they can effectively open markets maybe faster, generate cost synergies by working together to drive routes to market and route to market activation within individual marketplaces, and then look at other more G&A sorts of synergies across their businesses. So we think putting the businesses together is the value unlock. How we go about doing it is the complicated set of activities that we're working through with SEC, as well as our -- the exchanges that we trade on. And so, simplistically put, we would have to ensure that our economic ownership isn’t more than 90% which was a likely or potential outcome anyway, as we put this business together. We need to make sure that we would only have three members on the Board so we would have one fewer seat on the Board and that seat would come from a Canopy nomination to the Board we don't think that affects the performance of the business whatsoever, and then we'd have to – it says in our earnings release, eliminate certain negative covenants such as adjusting some things that Canopy would have ordinarily or originally hadn't had say over. So what we're really doing is we're just positioning the company to function like every other company would, gather synergies across their portfolio, drive their business in the marketplace. And these kinds of technical things are just required for us to have an appropriate level of distance from specific control of that enterprise as we go forward.

Operator

Operator

Your next question will come from John Zamparo of CIBC. Please go ahead.

John Zamparo

Analyst

Thank you. Good morning. My question is on the profitability goals, and even at the high end of the combined savings plan that doesn't get you particularly close to break even on EBITDA at least compared to the current quarter. So how do you square that with the outlook for F2024 being positive? And presumably you're spending on BioSteel? Isn't that material? So is it that you're including results from your US businesses, even though those won't be consolidated? There's also the comment about revenue not needing revenue growth. So just trying to better understand the profitability you’ve got? Thank you.

Judy Hong

Management

Sure, I'll start and, David, you can add, as well. So just in terms of the overall profitability goal and how that ties to the cost reduction? Look, again, I do think when you combine the announcement we made in April, and will were announced today, it is a pretty sizable cost reduction that we currently are underway. So there are some remaining cost savings as part of the April program. And then we obviously have additional cost savings that we announced. I would say the investments we're making in BioSteel are not insignificant. And I think that's a decision that we made, particularly in the current fiscal year as we really were standing up the investments behind the NHL sponsorship, really with the anticipation that that will drive strong velocity and strong distribution across both the Canadian market and the US market. And as you see in the retail data, we're very pleased with the performance of BioSteel, you see that at least in the retail data, despite some of the lumpiness that you see on a quarter-over-quarter basis. So we do think that that investments that we're making, will pay off in the coming quarters? So again, I think as I said to Tamy, if you think about the cost actions that we announced in Canada, and the other businesses that are you know, approved already profitable that we think we can get to a profitable business for Total Canopy with the exception of the investments and BioSteel. And I think the adjusted EBITDA losses as it relates to BioSteel really depends on how quickly the sales scale up in the coming quarters.

Operator

Operator

Your next question comes from Nadine Sarwat of Bernstein. Please go ahead.

Nadine Sarwat

Analyst

[Technical Difficulty] taking for question for me. So the first, many of your initiatives focus on improving profitability that you announced today, which is really great to hear. However, the weaker top line growth for Canopy and to be honest, more broadly for Canadian cannabis industry remains a fundamental challenge. So, could you just walk us through what you're planning as part of your initiatives that in particular address improving top line given the challenges you've got highlighted at the start of the call? And then my second part of the question is, many investors have expressed concern that Canopy USA is adding to your costs or taking management's attention away from the core business without contributing positive cash flows until federal legalization occurs, which appears increasingly unlikely for the moment. So what would you say to those investors who are concerned about that? Thank you.

David Klein

Management

So, I'll take a shot at these, Judy and then you can fill in the blanks. But in terms of top line as Judy pointed out. We aren't anticipating or we don't require a top line to meet the profitability objectives that Judy outlined, as a result of these changes that we've announced today. What gives us confidence in being able to sustain the current level of performance in Canada is really the continuous improvement we've made over the last several quarters in terms of the offerings that we have in the marketplace, the general consumer acceptance and appreciation of those offerings and the strength of our commercial team on the ground in Canada, which we believe is second to none. And so we think that those have us in a good position to at least retain the current level of revenue that we're generating in the business. And so we've sized our business accordingly, which yields the profit objectives we talked about. As it relates to Canopy USA, look, the purpose of Canopy USA is to create value by putting Jetty, Wana and Acreage together in a way that they can work together in a collaborative fashion to extract value. And that is something that those businesses need to do by working together. And it's really less about resources being assigned from Canopy Growth. And so we don't see it as a major distraction from running the rest of our business, which includes Canada, includes Storz & Bickel, and includes BioSteel as well as of our international businesses.

Judy Hong

Management

And I would just add, from a revenue standpoint, Nadine, so when you look at our Canadian total cannabis revenue over the last few quarters, it's been stabilizing in the range of CAD35 million to CAD40 million. And that is, there is some declines in the adult-use cannabis side, but we've actually seen medical revenue growth, as we pointed out on the call. So importantly, when you think about our profitability target for Canada, we're not expecting any changes to our current run rate. So we think that we've got an opportunity to continue to grow our medical business, and we've got increased product offerings, and that's driving some of that improvement, we expect that to continue. And really, from an adult-use cannabis business standpoint, we're not expecting an improvement to the current run rate. And I think that is still enough for us to get to profitability in Canada. And then from a Canopy USA standpoint, look, I think once we get Canada to be profitable, we think the cash flow generation or the contribution from Canopy USA is really not something that's required to support the Canopy Growth, cash needs. And so from that perspective, it's really about optimizing the value of Canopy USA through advancing the USP fee strategy. And then for Canada to be profitable and for the rest of the business to continue to be profitable.

David Klein

Management

I want to actually come back to a point as it relates to the top line as well. So we made a decision a year and a half ago or so to not chase the value segment. And it doesn't mean we won't participate in parts of the value segment when we have products that we can waterfall down into that segment. But we deliberately chose not to chase the value segment, which has had a dampening effect on our top line, because of the growth of that segment, which we've not participated in. We did that because we didn't believe that we could build a profitable sustainable business at the value level in the Canadian market. And so we focused on mainstream and premium offerings in the marketplace. However, our footprint was too large to support that segment of the market that we really want to go after and so the actions today are all about getting our footprint right to address the market that we want to address within Canada. And as Judy said, that's been running in that CAD35 million to CAD40 million range quarter. We think that we can stabilize at that and then begin to build from that as a base.

Operator

Operator

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

Andrew Carter

Analyst

Morning. Thank you. So within results there's a big revenue miss mostly on BioSteel and your commentary in November was a modest sequential climb. I'm not sure if you had visibility into that the distribution issues. Today's commentary outlines steps you can take if NASDAQ objects to the consolidation, which I don't know correct me if I'm wrong, you could I could have been hit head on in the release last call back in October. My biggest question is like what's going to change from here? Given the cash needs, I think viability requires successfully navigating the capital markets, which requires properly setting expectations and credibility. And back to the cash needs, I guess in this business with the assets in hand, including Canopy USA and the changes you've made today. achieve positive free cash flow with the full run rate of interest expense on the remaining term debt? Thanks.

Judy Hong

Management

I'll start from a from a cash needs standpoint, Andrew, and then David can add additional comments. So from a cash needs standpoint, as I outlined on my prepared comments, we think we already have a strong balance sheet with just under CAD800 million that we have on our cash, as well as several options that we have available to us to increase liquidity and reduce debt. You've already seen our actions that we've taken to reduce our debt, including equitizing the portion of the converts last year, we've obviously also paid off some of the term loans, and that is going to drive the interest savings and reduce our cash burn going forward. We've also talked about the remaining convert notes with Constellation interchange the 100 million into exchangeable shares, we also have very constructive relationship with the debt holders, and we're in communications to address our desire to pay off some of the debt in a very accreted manner. So we are looking at all those options. We have availability of $2 billion of cash available to us through the base shelf that we file. So we actually think we've got several options. We've already also are in active discussions with monetizing several assets that we have, and you'll hear more about those as we go forward. But from a liquidity needs standpoint, I think we've got a really a several options that's available to us. But to answer your point, the entire point of what we're doing today, and what we've announced this morning needs to generate a sustainable business that will have positive cash flow over time, we get that. And so all the actions that we're taking to significantly reduce our operating free cash flow in our Canadian business, as well as interest savings that we would get from our debt reduction plan, and all the things that we're doing to monetize the assets, we think we've got a very laser-focused and strong plan in place to get to that place as quickly as possible.

David Klein

Management

And I would just say, look, protecting revenue in nascent industry and nascent businesses is difficult at best, that's which is why we don't provide guidance. I would point out that BioSteel has seen volatility, but BioSteel on a year-to-date basis is up 100% year-over-year. And so we think that that kind of performance over time will continue with that brand. But as we said, we're going to see volatility from quarter-over-quarter, and you could make the same case with other components of our business as well. And so, I think that what we've laid out here today represents a strong path to getting profitable to achieving cash flow favorability at a point in the future, and some very strong businesses that have a lot of economic value potential for our shareholders.

Operator

Operator

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

Matthew Baker

Analyst

This is Matthew Baker on for Pablo. Thank you for taking our questions. Firstly, I just wanted to congratulate the company on ringing the opening bell at NASDAQ on December 12. Can you update us on how those conversations with NASDAQ are going? Yes, you are committed to the dual listing but NASDAQ has made it clear that they'll delist you have to consolidate US assets. So what has changed? And then secondly, when do you expect that regulatory approval for the consolidation of acreage? Thank you.

David Klein

Management

Yeah. So the first of all, let me start with the regulatory approval that that starts as soon as Canopy USA triggers the ownership interest in acreage, which hasn't happened yet. And then, that takes as long as 9 months to 12 months afterward, in order to complete that regulatory approval. As it relates to NASDAQ, you've outlined the issues appropriately. We've already been really clear that we do not control Canopy USA and that's important here. We had an accounting pronouncement that suggested that we would have to consolidate which was in which created an issue for NASDAQ, and we're now working on alternatives which would solve the concerns meaning we wouldn't have to consolidate Canopy USA into our results. And we need to -- we need to continue to do that work. But there's a lot of activity going on around that. And, we expect that, that we'll be able to get through all of the open matters and ultimately proceed to a vote, as we said, our targeted date for that shareholder vote, which means we will have cleared all of these hurdles is in April of 2023.

Operator

Operator

Your next question will come from Doug Miehm of RBC Capital Markets. Please go ahead.

Doug Miehm

Analyst

Good morning. Two part question. Number one, David, you did really call out today, what you see as the sector challenges in Canada, and it appears the inability to make any significant changes with respect to those unless the government makes some changes. So my first -- the first part of my question is, are there ongoing discussions that you think will be fruitful? And I'm even saying in the near term, but let's say in the midterm, that's the first part. And then the second one was, can you comment on the medical growth, which was positive this quarter? And if this is a function of taking share from other groups, or this is a function of the medical business overall, growing perhaps a little bit faster than everyone believes?

David Klein

Management

Yeah. So starting with the Canadian regulatory situation looked at the legal industry was built on the back of a call for harm reduction. That's kind of different from maybe building the industry around economic development and generating tax from this industry, which has an underlying rate of consumer participation, right. And so I do are there are there any things that would or there anything's going, anything going on that would affect that the industry in the near term? I don't think so. Which is why we made the changes we made today so that we would have a business that's right size for the industry as it sits today. I do believe however, over time, the Canadian government will continue to try to understand how they need to adapt the regulatory regime. So that cannabis can be the economic development engine that we all started to experience, immediately post legalization in Canada. So I think it'll take a long time, as I said, in my script, which is why we made the changes to adapt our business for the realities of the market that we sit in today versus where the market could go in the future.

Operator

Operator

Your next question will come from Aaron Grey of Alliance Global Partners. Please go ahead.

Aaron Grey

Analyst

Hi, good morning, and thank you for the question. So for me, it's wanted to talk a little bit about BioSteel. So you talked about expected growth to come back next quarter, but look for grow quarter-over-quarter wanted some more color their 34% ACV. I believe that matches last quarter. So if you could provide some line of sight into the magnitude of timing, timing of additional distribution and maybe some ACB targets over the next 12 months to 18 months? That'd be helpful. Thank you.

David Klein

Management

Yeah, I think the thing that's exciting about BioSteel is you see it, particularly anybody that lives in Ontario, you can really see the gains that are taking place at retail, and just the general availability of the brand in the marketplace. And so when we work with retailers, but in particular, when we work with distributors between us and retailers, there can be lumpiness in terms of reported revenue. But what I think is interesting is are the stats that I called out on my prepared remarks where we're just under 14% market share and convenience and gas channel in Ontario, where scan sales in the US up by 157%. I think it's that kind of consumer takeaway activity that ultimately drives revenue growth. And in overtime that cuts through the lumpiness that you get in forecasting reported revenue based upon shipments to distributor. So I think -- I think you have to, so instead of putting targets out there, I think you have to just keep looking at the consumer takeaway data because that's going to determine, obviously, where the brand ends up in the medium term.

Operator

Operator

Your next question will come from Matt Bottomley of Canaccord. Please go ahead.

Matt Bottomley

Analyst

Yeah. Good morning, just a follow-up for me, with respect to the BioSteel commentary you just made, with the margin profile of the overall company on an unadjusted basis dipping back into negative territory, there's a few things called out in the press release. And one of them was some write downs with respect to age, inventory and BioSteel. So I don't expect that's a material element of it. But if you could just maybe give us some idea of the magnitude? And then just the dynamic given that, you know, outside of the timing of shipments, when you look at this business on a six months smooth basis, or just sort of year-over-year, growth is certainly continuing to -- to be a theme for that brand. So just the sort of rationale behind why there's aged inventory requiring right down at this point.

David Klein

Management

Yeah, I'll have Judy handle that. But I first want to actually build a little bit of a bridge where Judy called out in her script that we expect that this brand achieves industry, kind of standard margins for the brand, which would, which would really put that into the high 30s, low 40s kind of percent over time. And that was the driver behind our purchase of the Verona facility, which allows us to control more of the supply chain for BioSteel, I think there are some cost savings to be had as we get scale from distribution costs, which on a per unit basis are quite high in a nascent brand, but shrink very quickly as you start to get scale. We think that we can do some more work. This is a good price point -- high price point really in the category. So there's a lot of margin available to us, we have to make sure we continue to do a good job of managing that kind of gross to net margin erosion that happens when we go into retail. And in there's the team at BioSteel, especially post-closing on the Verona facility are laser focused on showing consistent improvements in that margin on its way to those industry standard margins. And yeah, there's some noise in the near term that Judy can comment too, but we think we have a very well defined path to industry margins that go along with the top line growth we've seen in the brand.

Judy Hong

Management

Yeah. So just in terms of the gross margin suppliers steel Matt, so in Q3, we think roughly about a 5 million impact as relates to some of the inventory situation and that has impacted the negative gross margins of BioSteel. And to be clear, this is really related to the inventory bill that we had previously built. And, I think in when you go back a year ago, we talked a lot about the lumpiness, again, in terms of the sales and distribution loading is happening slower than we had anticipated, particularly in the US market. So this is really a result of that historical inventory build that we had in the BioSteel. And if you kind of look at Q2 BioSteel margins or year-to-date, gross margins for BioSteel, that's probably more reflective of the margin profile on today's faces. And to David's point, as we bring production and house with the Verona facility acquisition and all the other initiatives to drive gross margin improvement and as sales scale up we expect BioSteel gross margins to mirror sort of that industry standard margins for a beverage company.

Operator

Operator

Ladies and gentlemen, unfortunately, that is all the time we have today for questions. So I will turn the conference back to David Klein, for any closing remarks.

David Klein

Management

Yeah, thanks again for joining us today. The changes we announced today well difficult they're necessary not only for us to reach profitability, but to sustain our business over the long term. We continue to believe Canopy has significant opportunity ahead both in Canada and the United States. And today's actions coupled with our strategy for US entry will ensure we're able to realize this. Investor Relations we'll be available to answer any questions that you have over the rest of the day. And again, thanks for joining us and have a good day everyone.

Operator

Operator

Ladies and gentlemen, this concludes Canopy Growth third quarter fiscal 2023 financial results conference call. A replay of this conference call will be available until May, 8th 2023, and can be accessed following the instructions provided in the company's press release is issued earlier today. Thank you all for attending today's call and enjoy the rest of your day. You may now disconnect your lines.