Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Third Quarter Fiscal Year 2024 Financial Results Conference Call. At this time all participants are in a listen-only mode. I will now turn the call over to Sarah Pare, Vice President investor relations. Sarah, you may begin the conference call.

Thank you, Joanna. Good morning. And thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, David Klein; and Chief Financial Officer Judy Hong. Before financial markets open today, Canopy Growth issued a news release announcing the financial results for our third quarter ended December 31, 2023. News release and financial statements have been filed on EDGAR, SEDAR and will be available on our website under the investors tab. 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 the news release issued today. Please review today's earnings release and Canopy's reports filed with the SEC on the Canadian Securities Regulators 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 stated. Following remarks by David and Judy, we will conduct a question answer session where we will take questions from analysts. And with that, I will turn the call over to David.

Good morning, everyone. And thank you for joining us to review Canopy Growth's third quarter fiscal '24 results. Completion of our Q3, marks the dawn of a new era for Canopy, we’re immensely proud of where we are today and feel strongly that Canopy is positioned for lasting leadership. We're 100% cannabis focused for demonstrating consistent growth across each of our business units. And we have a definitive meeting date scheduled for our shareholders to consider an amendment to our articles to create a new class of non-voting non-participating exchangeable shares, which we expect to advance the Canopy USA structure. Let's now review our right sized cannabis focused business. With the divestiture of this works in December 2023, our last non-aligned enterprise Canopy -- Canopy is now 100% cannabis focused and purpose built for the markets of greatest opportunity. By focusing exclusively on cannabis and right sizing our footprint, we strengthen our path to delivering sustainable operating profit, and ensure we are well positioned to capitalize on what we feel is the greatest consumer trend of our lifestyle. And while we're looking to the future with optimism, let's first review the dramatic and measurable improvements in the performance of our business that these actions have produced. To summarize, we've cut Canopy to size and are now delivering on improved gross margins, enhanced commercial execution, and are focused on demonstrating growth across all of our business units. This has enabled us to significantly improve our overall gross margins, with Q3 marking the second quarter in a row of margins in the mid-30s at the total company level. From this strength in base, we're generating growth backed by enhanced execution and consistent high quality products. In Q3, our Canadian cannabis business delivered its fourth straight quarter of revenue growth. And it's up…

Thank you very much, David. And good morning, everyone. I will start by reviewing our third quarter fiscal '24 results, including the significant year-over-year progress we've continued to make across our P&L this year. I'll then discuss additional actions we've taken to improve our balance sheet and cash flow all of our priorities and outlook for the balance of fiscal '24. So let's begin with our third quarter results. Q3, like Q2 before demonstrated a substantial improvement in profitability and cash flow reduction that our right size cannabis focused business can deliver. Canopy delivered consolidated net revenue of $79 million in Q3, which is up 6% compared to Q3 of last year, when excluding Canada retail divestiture. Main drivers of revenue excluding retail divestitures, were, Canadian cannabis revenue increased 10% compared to a year ago, and were up sequentially from Q2. Rest of world cannabis sales grew by 81% year-over-year in Q3, and STORZ & BICKEL grew its revenue by over 50% compared to the last quarter, driven by the launch of VENTY. Consolidated gross margins in Q3 was 36%, a significant improvement compared to 6% last year. The biggest driver of improvement was the business transformation initiatives executed in Canada, which have meaningfully reduced Canada operational cost. Q3 adjusted EBITDA was a loss of $9 million, an improvement of 82% versus last year, and a 25% improvement over the $12 million adjusted EBITDA loss in Q2 of fiscal '24. And free cash flow with an outflow of $34 million, an improvement of $44 million, compared to Q3 of last year, at nearly a 50% improvement versus the last quarter. I'd like to now review the results by our key businesses in more detail, including progress against our path to profitability. First, Canada, Q3 net revenue was $40 million, the…

[Operator Instructions]. First question comes from Michael Lavery from Piper Sandler, please go ahead.

Thank you. Good morning. And congrats on a lot of the progress you just laid out. We'd love to just get a little bit of better market color on the pricing environment in Canada. And just some of the ways you're managing that and how that outlook looks?

Yes. So I think Michael, there's still price compression in some of the categories. And the way we're really managing and I think is making sure that we're thinking about pricing almost from a tiered standpoint. So there are some areas where we need to be price competitive, because the market is taking us there. And then there are some areas where, where we can't produce enough product to meet consumer demand. And so we've actually had some instances where we take price increases. So it really is kind of managing the mix across the portfolio. But, yes, there's still some pressure in the marketplace.

I'd also say despite the price compression. And obviously, we are also seeing that in our P&L to some extent, but we're definitely seeing gross margin improvement, in part because we're shifting our mix. So product categories where it's more profitable, we're really leaning in there with better margins. And also we're looking at ways of continuing to save -- find savings from our costs. So our cultivation costs are down year-over-year, but we're looking to even improve our costs more. So as we're seeing some of that price compression, we can more than offset that and see the variable margins improvements across our portfolio. And then I think, lastly, our medical business, as you know, is that a very high margin business to begin with. And we're also actually seeing margin improvement in that part of the business with some of the product mix improvements that we're seeing in that platform as well.

That's helpful. And where you've been able to take price, can you give a sense of the magnitude? I'd imagine it's relatively modest, but maybe I'm wrong?

It's really just, yes it's really just, Michael, it's aligning kind of the, with the competitive set and with kind of consumer expectations. And so there, I guess I was so hard to come up with a specific example. But if you look at, say our Wana offerings, we're going to be very competitive with our classics from a pricing standpoint. But as we bring innovation to market, like our quick formulation, we make sure that we're pricing that at a premium. So really it's, it’s almost on SKU by SKU basis.

Okay, great. Thanks. I'll pass it on.

Thank you. The next question comes from Tamy Chen at BMO Capital Markets. Please go ahead

Hi, Tamy.

Tamy, are you on mute?

Sorry about that. Hi, good morning. This is Tamy Chen.

Good morning.

Yes, good morning. I hit the wrong button. Thanks for taking my question. So as we know, yesterday, one of your competitors acquired their Australian Medical business. And you pointed out in your prepared remarks that the rest of the world gross margin was really primarily driven by the Australian gross margin there. And we noticed that in Q3 this quarter, the margin really jumped versus the previous two quarters, so it was 30ish percent, and now this quarter was 40%. So we really want to dig into maybe the puts and takes in that gross margin number. And also, what are your plans that you want to share with us about Australia that can talk about the attractiveness of that market for you? Thank you.

Sure, I'll start, Tamy. So if you looked at our rest of the world business, I would point out a few things. One, historically, you're right, that there's a lot of lumpiness in the gross margin performance, and they're mostly driven by non-core markets. Frankly, I think, you know, we include our U.S. CBD business in that line item. And we've really tightened our focus and went through some strategic changes in our U.S. CBD business and the changes there have impacted the gross margins, as well as the revenue in some of the quarters. We also have historically had a bulk shipment to some of the markets outside North America and that also created volatility in the gross margin performance as well. So I think when you look at Q3 performance, I'd say it's relatively a clean order and engaging on gross margin performance. We are looking at Australia on a year-over-year basis being improved margin performance as their product mix is improving. But even in Europe, we are also seeing the margin improvement there as well. The one thing to call out from an Australian business standpoint, in our Australian business, we also have Storz & Bickel sales that go through just from a reported segments standpoint, to the Australia sales as part of the rest of the world sales, and that Storz & Bickel business, frankly, has really grown strongly in Australia. So I think the combination of really strong growth in the flower business in Australia, as well as growing business in Storz & Bickel. But now the improvement we're seeing in markets like Germany, give us confidence that the margins that we're seeing today should be sustainable going forward.

Great, thanks so much.

Thank you. The next question comes from Aaron Grey at Alliance Global Partners. Please go ahead.

Thank you very much for the questions. First question for me, we can certainly appreciate the ongoing situation back and forth between the SEC and the exchanges regarding Canopy USA. So just wanted to clarify just in terms of some of the disclosures in the MD&A, it seems like some of your combos with the OCA from the SEC that you expect with the new agreement that they'll didn't agree with the deconsolidation of Canopy USA. So first, can you just clarify that you believe with the filing in February, you will be able to get more clarity on that before the vote in April? And then second, could you provide any additional color in terms of the level potential supplemental information like to provide in terms of how the company would look with Canopy USA on a pro forma basis, even if it's not going to be consolidated. Thank you.

So, as we indicated in our remarks, we’ll be filing our definitive proxy this week and all of the information that you could want to know will be available in that. And we will be filing financial statements once we close for Canopy USA, even though as you said it won't be consolidated into our financial results. So, our investors will see the entire picture in those financial statements. I also want to make sure that whenever we talk about Canopy USA that we're talking about the benefit of Canopy USA. So, I know there's just a lot of interest in terms of how we will structure that business. But for me, the benefit is really having some really strong brands combined with capabilities in some really big markets to create a real focused brand led sort of business in the U.S. which is an extremely attractive and profitable cannabis market.

The only thing I would also just that is, even though Canada people will not be consolidating the interest in Canopy USA, I think you know that Canopy growth will own a significant financial interest in Canopy USA. So really the benefits of Canopy USA creating value by owning an operating platform once they're able to exercise the options and trigger on owning one Acreage, the value creation at Canopy USA, we think it’s really an attractive proposition for Canopy growth shareholders as well.

Thanks for that color. Appreciate that. And definitely look forward to talking more about the performance of the business versus the optics of how it's disclosed on the financials. Quick second one for me, if I could. Just in terms of the guidance to you know, reach even a profitability as you exit the fiscal year, just if you could help us maybe triangulate some of the drivers to reach an EBITDA profitability as you exit the year. You'd invest into This Works business that had healthy gross margins, but not sure if it was a drag at the EBITDA level. And other notable drivers talked about the cost savings, you've now had $262 million cumulative versus I believe, $227 million last quarter. So, just if you could help us foot, you know, how you're reaching that in terms of potential gross margin, or SG&A savings and start to actually flow through the P&L and help us reset. I think that'd be very helpful there. Thank you.

Sure. So, I'd say there are few levers. One is, I think we do have some remaining cost savings that are left in the program, we remain confident that we'll fully execute and generate those savings in the coming months. The second driver is look, I think our businesses are now really delivering profitable growth. So as top line grows, and gross margin improves, even with our base businesses, even without some of the cost reductions that we've announced previously, we now have a right sized cost structure that those top line revenues should really drive a stronger EBITDA growth going forward. So I say that's, that's the second driver is really the strong base business growth that we continue to expect to be sustained on a go forward basis. And then lastly, we are looking at continued efficiencies across our Austin, particularly looking at some of the G&A on the corporate cost side. So we do think that there's opportunities to continue to streamline our corporate costs to make sure that we are looking at really a positive adjusted EBITDA on a going forward basis for all of our business units. We're still finalizing our fiscal '25 plan. So we'll provide more details on the profitability outlook for fiscal '25, as we report our Q4 results in May.

Okay, great, thanks for the detail. That's really helpful. I'll go and jump back into the queue.

Thank you. The next question comes from John Zamparo from CIBC. Please go ahead.

Good morning. I wanted to ask about STORZ & BICKEL. And I appreciate the sequential improvements. Sounds like you're very excited about this business and new products that are coming out. But the revenue was down 8% year-over-year, presumably that's with some pricing embedded into it. And that included a product launch. So I'm just wondering if you could add some color on that business and provide some framework on what you expect from it in calendar '24.

Yes, so John. Like this just kind of set the stage want to point out that Storz & Bickel has doubled in the past four years, doubled at the top line level. So, we're seeing reasonably consistent growth across the business. I would say that our results in Q3 were held back a little bit, by the late launch of VENTY, which happened late in the quarter. And so there was a fair amount of production activity and programming activity around the VENTY launch. And we exited the quarter with a substantial backlog of units, which we're working our way through right now. So, over its history, we see growth coming from STORZ & BICKEL from new product launches, like the VENTY launch. And we've also seen growth from STORZ & BICKEL as a result of distribution growth. And as you know, the U.S., China distribution tier, it has been under duress for the last couple of years that meaning the tier that takes products into vape shops across the United States. And that's caused us some, some pain over time. But we think that we can get back into distribution growth in the U.S in the near future. And then combined with the launch of the Venty and some potential future innovation, we think the prospects are very bright for that brand. I’ll also point out that when we launch a brand, like Venty, that is margin expanding, because we set up the new launches, so that it improves the overall mix.

Yes, and to add to David's point, just on margins, even though revenue was down year-over-year, gross profit dollars were actually up year-over-year. So, I think that continues to show the evidence that we're really leaning in a profitable growth. And I think even Storz & Bickel, and you're seeing that profitable growth really come through with gross profits dollar up on a year-over-year basis.

All right, that's helpful. Thanks. And then I wanted to follow up on Aaron's question about profitability plans and cost savings. And I guess you answered it, but just to clarify you, it sounds like you expect both sales growth and additional cost cuts. But do you think you can get to positive EBITDA on a consolidated basis? In the event you don't achieve the sales growth you want, do you have confidence you can get to the high end of your cost savings plan? And would that require additional actions? If that was the case? Or are those actions already taken? And you're just waiting for these additional costs through flow to the P&L?

Yes, look, I mean, John, I'd say our businesses have now a strong foundation for profitability. I think there's evidence that from a gross margin standpoint, you're seeing improvement, not just from a cost reduction perspective, but the growth and your mix improvement that's also driving profitability improvements. And that's not just in Canada, but you see that in rest of the world and Storz & Bickel businesses as well. It's a one area is we are a public company costs. So there are costs that are just related to being a public company costs, and we're actively and then we've already identified some of the opportunities and areas of cost savings there. And that will be continued to be an area where we'll focus on as we really drive towards that profitability targets. But as we said, in our prepared comments, we do believe that we will exit fiscal '24 with all of our business units in profitable. So, we're really pleased with the performance so far.

Okay, understood. Thanks very much. I'll pass it on.

[Operator Instructions] Question comes from Bill Kirk from Roth MKM. Please go ahead.

Hey, thanks for the questions. I want to go back to some that you just said, Judy, just for clarification. So all business units adjusted EBITDA profitable. Does that mean consolidated, profitable or their unallocated expenses, maybe at the corporate level that would make consolidated EBITDA negative even if all business units were EBITDA positive?

So, Bill, we don't break out segment information at the adjusted EBITDA level. So all I can say is we are not this year, our goal is to be profitable at the consolidated level. As I said we feel that we are on track to achieve profitability at the business unit level, exiting FY '24. Does that mean the full quarter is profitable? Does that mean, is it consolidated adjusted EBITDA is profitable, there's still some areas that we just need to see how that plays out. I would also point out, there's some lumpiness in some of those corporate costs that sometimes sits on a quarter-over-quarter basis. So those are all the things that they were really focused on mitigating. And I think I would just say, in my view, the performance of the business is very encouraging in terms of the top and bottom line growth. And obviously, we’re focused on generating positive adjusted EBITDA across all of our businesses as we exit fiscal 2024.

And, I mean, I think to your point, that's the best adjusted gross margin since Canadian legalization, I think. And so I guess what was the big surprise when you guided 3Q, or when you talked a couple of months ago, about 3Q, you said you expected gross margins to be -- adjusted gross margins to be in the mid20s. So what was new from when you when you had that expectation? I mean, imagine some of the cost saving stuff was notable a few months ago about 3Q. So what's really new from mid20s to 36?

So, Q2, I think our gross margin in Canadian business was in the mid-30s, this quarter reported gross margins are 28%.

Sorry, when you add 2Q, you guided 3Q gross margins to the mid20s, if I remember correctly, right? So when you were last reported, you said 3Q?

Yes, so the Canada gross margins were 28%. The consolidated gross margin, which was in the mid-30%, is based on Storz & Bickel margin probably did come in a bit better than we expected, partly driven by obviously, the Venty and then some of the benefits from lower material costs as well. And I'd say even Canadian margin probably came in a bit better than we expected. I think I did call that last quarter where we'd say we had some benefits from opportunistic use of lower cost inputs. We had some of that lingering benefit in Q3, so that helped Q3 gross margin performance in the Canadian business, a little bit better than we anticipated at that point in time as well.

I appreciate that. Thank you.

Thank you. The next question comes from Matt Bottomley, from Canaccord, please go ahead.

Good morning, everyone. I just wanted to get a little more commentary, if you can provide your overall outlook on sort of your Canadian domestic operations, clearly, we've seen a bit of softness to end the year, at least at the retail levels in Canada, and the overall medical opportunity seems to be flat to declining. So I know you saw some decent year-over-year growth this year for extend the quarter. But I'm just curious if you can give a 12-month outlook as to how notable if at all the domestic operations will be as a growth driver for the company?

I think we believe that with the gross margins, we're now delivering, our area of focus now is on how to drive growth, right. And so for us, I think it just continuing to build on what we've done to date in terms of the strains we have in the market, in terms of some NPD that we have on the verge of bringing into the market. In particular, as I said in my script building on some of the momentum we've had in pre-rolls, leading into soft gels a little bit and then coming back into the vapes space more aggressively than we've been in the past. We also think that there's a lot of distribution opportunity for our brands across the marketplace. So I think that it's more around the lines of having good margin products that are resonating with consumers and executing in all aspects of our go-to-market strategy. That's how we see ourselves continuing to grow in Canada, in particular, addressing the adult-use sector.

And on the medical side, I'd say the market has been declining, but we've been growing and gaining market share in the medical market. So from that respect, we think that there's continued opportunity to grow our medical business, a lot of the growth is actually coming from increased basket sizes. So we actually are seeing patients order more products on our platform. And I think that's a function of an increased product assortment that we have now in our spectrum store. And so we would continue to see that driving new portion in our medical platform.

Got it. Thanks. And then just one more for me, now switching just on to the international side of things. So there's been a lot of constructive commentary with respect to the outlook in certain markets in the EU, I know Australia has been mentioned and someone referenced the deal that was mentioned yesterday, even one of the U.S., MSOs has been pretty constructive on the international side of things. So just considering that on a trailing 12-month basis, there's been a lot of focus on sort of the balance sheet and there's been some asset dispositions, do you think there's an ability or need to deploy any capital into some of these markets in advance of regular changes? Or do you think the, the runway is long enough, so that might not be a primary focus for Canopy in the near term?

Yes, Matt, I would say that given our experience of kind of being the first one into markets, I think we'll be very careful with any capital that would get deployed into international markets. What we will however do is really lean into the areas where we are operating and operating well like Australia, like Germany, like Poland, like Czech Republic, by bringing really strong product offerings to market with a very focused team. But I think we would will remain asset light most likely in the international markets and make sure we can we can grow in Canada and focus on the U.S.

Okay, thanks. Good luck, guys.

Thank you. There are no further questions. I will now turn the call back over to David Klein for closing comments.

Thanks for attending today's conference call. Appreciate the questions. Ramp up as we started, we're singularly focused on cannabis. Our businesses are growing and demonstrating healthy margins and Canopy USA is moving forward. We're proud of where we are as well as where we're going and I feel confident that Canopy offers a real unique option for exposure to the growth of the world's cannabis markets. Our Investor Relation team will be available to answer additional questions. Everyone have a fantastic day.

This concludes, Canopy Growth's this third quarter fiscal 2024 financial results conference call. A replay of this conference call will be available until May 9, 2024 and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call.