Good morning. My name is Nicole, and I will be your conference operator today. I would like to welcome you to Canopy Group's Second Quarter Fiscal 2025 Financial Results Conference Call. Currently, all participants are in a listen-only. I will now turn the call over to Tyler Burns, Director of Investor Relations. Tyler, you may begin the conference call.

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 markets open today, Canopy Growth issued a news release announcing the financial results for our second quarter fiscal year 2025 ended September 30, 2024. This news release and financial statements have been filed on EDGAR and 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 today. 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 stated. Following remarks by David and Judy, we will conduct a question-and-answer session, where we will take questions from analysts. With that, I turn the call over to David.

Thanks, Tyler. Good morning and thank you for joining us to discuss Canopy Growth's results for the second quarter of fiscal 2025. We've had a busy and productive quarter led by outstanding performance from stores as well as solid progress across our Canadian and medical and European medical cannabis businesses. In addition, we've taken substantial steps forward in our Canadian adult use cannabis business, which we feel is well set up for growth in the second half of the year. Overall, Canopy's performance in each of these areas supports our strategy to drive sustainable profitability as well as to build a competitive foundation for long-term success across North America and key global markets, especially when we combine the growing momentum within Canopy USA, which we feel continues to set us apart from our competition as this strategy was specifically designed to succeed independent of the need for U.S. federal legalization. During the call today, I'll cover three main topics: first, the exceptional performance of Storz & Bickel device business as well as out of our medical cannabis businesses. Second. I'll address our continued focus on profitability in Canada and the actions we're implementing to drive growth in our Canadian adult use cannabis business in the second half of fiscal 2025. And third, I'll update you on the developments happening within Canopy USA, which we believe is well positioned to capture significant growth in the U.S. cannabis and hemp-derived markets. Following my remarks, Judy will provide a detailed overview of our results, market conditions and the actions we've taken to further strengthen our financial standing. So let's start with Storz & Bickel in our medical cannabis business, which performed very well in Q2. These segments are critical drivers for Canopy, particularly as they are high margin and align with our focus…

Again, ladies and gentlemen, please stand by. Thank you.

Sorry about that technical difficulty here. I'm going to back up a little bit to make because I'm not entirely sure when we were dropped. So I'm going to address our flower offering. So in our core portfolio, the quality variety of Tweed and 7ACRES product offerings within the flower as well as pre-roll joint segments is driving consumer demand. And by further honing our production platform and its ability to cultivate high quality strains with elevated and consistent THC levels, we've strengthened the competitive positioning of these brands in the market. We're seeing this pay off through the reinvigorated performance of Tweed Cushmans and a significant uptake of Tweed Cherry Acai Mint, which is now carried in all markets nationally. In addition, as a sign of things to come, our team was thrilled to bring 7ACRES Ultrajack to the market. Ultrajack for those that haven't yet had a chance to sample it is a homegrown 7ACRES creation. The brand will also be bringing a number of historically high-performing strains back to consumers over the coming months. In parallel, we're investing in efforts to increase distribution of our flower and PRJ offerings and have been very encouraged to see distribution of our Tweed flower products increased by over 10% this quarter. Finally to improve the performance of our adult-use business, we're investing in a robust NPD pipeline with a particular focus on the growth categories of pre-rolled joints, vapes and concentrates. One such example coming to market is an innovative brand of infused pre-rolled joints, that's a top seller in California and will be available to consumers in the next month. Early feedback from provincial cannabis sports and retail partners has been overwhelmingly positive. We're confident that this new product lineup in the high-margin pre-roll category will resonate well with…

Thank you very much, David, and good morning, everyone. I'll start by reviewing our second quarter fiscal 2025 results, including performance by key business units. I'll then discuss continued progress we've made on our balance sheet and cash flow, followed by a discussion on our priorities and outlook for the balance of fiscal 2025. Let's begin with our second quarter results. Q2 FY2025 was a solid quarter overall with strong revenue growth in Storz & Bickel and our medical cannabis businesses driving year-over-year improvement in gross margins, adjusted EBITDA and free cash flow. Canopy delivered consolidated net revenue of $63 million in Q2, a decrease of 9% or increase of 3%, excluding the impact of divested businesses compared to Q2 of last year. Consolidated gross margin in Q2 was 35%, a 100 basis point improvement compared to last year. I'm pleased to see consistent gross margin performance in our overall business as we've now delivered gross margins in the mid-30% for four out of the past five quarters. Q2 adjusted EBITDA was a loss of $6 million, an improvement of 54% versus last year. And free cash flow was an outflow of $56 million, an improvement of 16% compared to Q of last year. As I noted during our Q1 earnings call, we typically incurred negative working capital in the first half of fiscal year due to the timing of certain payments but we expect significant improvement in the second half. I'd like to now review the results of our key businesses in more detail, starting with Canada. Q2 net revenue was $37 million, a decline of 8% compared to a year ago. Canada Medical continued its momentum with revenue growth of 16% compared to last year as our medical customer mix continues to shift towards a greater number of…

[Operator Instructions] Our first question will be coming from Aaron Grey from Alliance Global Partners.

So question I want to ask is regarding the hemp initiative that you have here in the U.S. Just looking at the Wonderous website by Wana, you guys have both edibles and beverages. So do you want to give some greater color in terms of planned distribution initiatives? Are you able to leverage any relationships with Constellation on the beverage side? I know that's been a big push for a lot of companies out there with the growth in hemp beverages. So any color you could offer on that? And then how you're seeing potential for regulatory reform through THC cannabinoids via hemp versus cannabis and how that could impact your decision there?

I believe that the opportunity for hemp derived offerings in the U.S. is massive. And I'll start with the last part of your question first. I think our view is, for the most parts, it will be left up to the states to determine the path forward. And we're prepared to work in that environment. Our first step in this and when I'm saying our, I mean, Wana's step in this activity was to get themselves set up from a direct-to-consumer standpoint. And as part of the QC infrastructure, they brought over the Martha Stewart CBD offerings as well as putting their own offerings in, and quite frankly, working with partners to go direct to consumer. So that was step one. There is a lot of engagement going on right now from a B2B standpoint to get on the shelf at retail. And that pathway is heavily influenced or being addressed anyway by beverage alcohol distributors. And of course, the connections that Canopy has in that industry are very valuable in trying to establish that B2B marketplace for ourselves. So, we're really excited about hemp. We're really early in that process. The entire industry is, but we think it could be huge.

Next question will be coming from Frederico Gomes from ATB Capital Markets.

Just on the comment on Australia, the competitive dynamics in that market. I'm just curious, how do you plan to, I guess, become more competitive there on the pricing side? I mean what initiatives are you going to be implementing to achieve that?

So in Australia, we've actually had pretty good growth over the last few years as we've been able to really supply that market out of Canada. I think as you've seen other players really leverage some of the Canadian supply to service the Australian market, you've seen increased competition, the number of players have gone up and then you've started to see more price competition taking place similar to, frankly, what you've seen in the Canadian market. We are really looking to take advantage of our supply opportunities in Canada with our lower cost structure, obviously, working with partners and making sure we've got an ample supply in place to service that market with the better cost structure. And we are also focused on just making sure we're going to the market with a broader assortment of product in the marketplace.

Next in mind, we'll be coming from Bill Kirk from ROTH Capital Partners.

I'd one on the adjusted EBITDA turning positive outlook. The language, I think, you used was in the coming quarters, whereas prior language was for the second half. So I'm curious if that is a change or not? And if it is a change, what is causing the kind of the -- maybe possibly the push out a little bit?

So look, I mean, we're very pleased with the continued progress that we're making on our consolidated adjusted EBITDA. I think we're seeing good performance out of all of our businesses. And as I said on the call, all of our business units have delivered positive adjusted EBITDA. We are also making progress on reducing our corporate G&A costs, and we've already reduced on a year-to-date basis, $10 million and we think we'll see additional cost opportunities in the back half of the year. Our, I think, expectation around second half positive adjusted EBITDA was partly predicated on more growth coming from our Canada adult use businesses. We're confident that we will see improved growth in the back half. It's just the time line of getting the growth in the second half from a pace and timing perspective is really what we're thinking about as we think about when we can achieve that positive adjusted EBITDA. The other thing I would just want to point out is that we are really building a business that is able to achieve positive adjusted EBITDA kind of quarter in and quarter out. So we also want to make sure that all of our businesses are getting to the physician where consistently, they're delivering an adjusted EBITDA positive basis, and we'll -- we're confident that we're nearing that point.

And then on Storz & Bickel, Judy, you mentioned higher rebates on Mighty in the quarter. Why the rebating program, what's kind of behind offering a larger rebates?

Yes. So Bill, it was really just we have -- it's portfolio management, right? So we have Venti in the market. We've upgraded Mighty, actually, several times over the past few years and so there were a couple of specific SKUs within the portfolio that we were just clearing through in the portfolio that drove some of the growth. But I don't want you to walk away thinking that, that's where -- that's the reason we had such a strong quarter. I do believe it was growth in Germany of really household penetration for Storz & Bickel. We're ramping back up in the U.S. to the trajectory we had before. There were some distributor financial problems over the last couple of years and we're really leaning into the strength of the innovation that the Venti represents. So I think Judy had made the caveat that we do have to lap kind of like the Venti launch last year, but we're confident that Storz & Bickel is going to continue to grow. It wasn't an aberration just caused by the portfolio management component related to the Mighty.

[Operator Instructions] Our next question will be coming from Michael Lavery from Piper Sandler.

Just wanted to touch on international. You called out a pretty big growth rates in Europe and specifically mentioned Germany and Poland. But overall, obviously, it was still more subdued. And so maybe just how intense was the price competition in Australia? How big of a headwind was that? And is there any way to get a sense in so many cases, we've seen some version of it's just pretty much a matter of time before price competition creates some of these headwinds in markets over the last few years. Is there structural differences in Poland and Germany that help mitigate or mute that? And what should we expect looking ahead a little bit?

I think -- so a couple of points that I'll make here. First of all, we have purposefully continued to focus our supply on the markets that are high margin like Germany, Poland, like our Canadian Medical business and then driving Storz & Bickel, right? And the areas of our business that have been more challenged like Australia and Canadian adult use, we've actually -- while we're working to improve our positioning in those markets, we're purposefully focused the business on the high margin components of the business. So then specifically to address Australia, I think that there are things that we have done in the quarter, meaning expand our offerings, change our pack sizes and so forth that will allow us to be more competitive. But as you point out, every market ultimately gets to the place where there's price compression. I would say the thing I feel good about at Canopy is that maybe the most difficult market to compete in, in the world might be in Canada. And we've build-to-cost infrastructure from a growth standpoint and a back office standpoint where we now feel that we have attractive gross margins. So, we think we're prepared to compete in these markets as they price compress. Now specifically address Germany and Poland. Poland is a bit of a different market than any of the other markets we're in because you have to -- you sell through effectively the government and so that probably provides a little bit of near-term protection. Germany, I think, over time, is going to go the route of every other developed market. I think it will be a while from now but Germany will go the route of every other developed market in that we'll see capacity increase in that market, and it will drive down cost. And we're actually -- we spent a lot of time planning around that Michael, so that we're actually prepared to be an aggressive leader in that market instead of getting whipsawed by the market. So we've built our infrastructure in Germany to be super asset light because we've seen that work elsewhere. And so I think you're right, I think every market goes through a good price environment and then a compressed price environment and then it normalizes. And we're -- we think it will be a while in Germany, but we're prepared to ride it out and to win when that happens.

Next in line will be coming from Matt Bottomley from Canaccord Genuity.

I just wanted to get a bit more clarification potentially, Judy, on some of your comments on the cash flows and the balance sheet. So we look at kind of the first six months of the fiscal year and we're a little over $100 million in free cash flow burn. And I know a lot of that is working capital fluctuations or at least I assume that a chunk of it is. When you say it will narrow significantly, I'm just trying to get an idea of maybe on a relative basis, the quantum. And then further, just the ATM that's being used in the interim, just given some of the price action we saw on the back of the U.S. election, if there's any changes to the cadence we're seeing of that being utilized?

Yes. So on the cash flow side, so as you point out and as I mentioned on the call, the first run rate is typically much higher and a lot of that is because of the timing of payments that includes insurance premiums. We also have prior year bonus payments, the time line and then the Health Canada fees. So all of those are -- have hit first half of the year and those are amounts that won't be repeated in the second half. So our expectation is in the second half, when you look at the cash outflow, I do estimate that to be -- close to be half of what we saw in the first half of the year. The interest payments also would be lower as we paid down the $100 million of additional term loan, we would see a reduction in the interest payment. We would expect to very tightly manage the working capital and just the -- some of the timing of the payments now working more in favor in the back half versus the first half. And then finally, the CapEx is also likely to be more modest in the second half versus the first half, just given some of the timing of the investment. So that would be my expectation for the back half of the cash flow.

Next will be coming from Pablo Zuanic from Zuanic & Associates.

David, my question is one around Canopy USA. Can you talk about room there for expansion in the way of acquiring more brands beyond Wana and Jetty? And also maybe remind us of how you're going to accelerate the expansion or the room for growth for both Wana and Jetty in the case of Wana going to go deeper in the state? Is there room to license in other states? Can you even go vertically in some cases, given and follow more of the Jetty model? And in the case of Jetty, you said New York, Colorado, California, is there room to add more states? So that's the first part of your question regarding kind of USA growth opportunities. And then the second part is that back in the day, you used to mention the term federal permissibility. We are waiting for the Acreage deal to close June next year. But in practical terms, pretty much you can do almost most of the things you want to do around Canopy USA at the moment, right? And correct me if I'm wrong, even though we don't have permissibility and the deal on Acreage hasn't closed or at least just explain what else could you do once those things happen compared to what you're going to do now around Canopy USA?

And yes, if I'm being honest, I don't even know what federal permissibility means anymore. It just seems like we're going to get -- the path is more likely to be a series of regulatory reforms that basically looks like federal legal legalization. And so, I'm going to start with that part of your question first. I would say that our structure where our investors have exposure to the U.S. THC market, but we can still continue to trade on the U.S. exchange was really built for this long process of getting to that federal permissibility. And so, we remain optimistic and very interested in things like 280E reform and safe banking, which, by the way, the President elect has agreed to support. And that would help our business in the U.S. from a financial perspective, but it's not necessary for our structure to work. And I think that's one of the things that is unique about the structure that we have set up. And then that even plays into our ability to expand Canopy USA. It really is the team at Canopy USA is focused on execution at Acreage. And I would say that looks like a deeper, not wider strategy, just get better in the markets that we're in and use the production assets that we have at Acreage to bolster the other parts of the portfolio, meaning Wana and Jetty. I think expansion for Jetty will be to build its business around the core of its innovation, which is solventless capabilities. And we want to bring that to every market we're in because we think that's a massive differentiator for the Jetty brands, but also -- yes, there are opportunities for Jetty to be produced in markets by Acreage. And clearly, Jetty and Wana have already started distributing together, so that they're getting the benefit of calling on retail accounts as a unified portfolio. And then I would say with Wana, it's probably a bit -- expansion is probably a bit two-fold because I think it's -- it is also kind of a deeper, not wider, let's get stronger in the states we're in. Let's get on more shelves in the states that we're in. And then we're also putting some efforts behind the portfolio, which we talked about earlier. So, I think there's a lot of reasons to believe that the differentiated kind of brand led approach that we have between the companies in the U.S. ecosystem are pretty attractive. And then, we'll continue to look both for Canopy and the Canopy USA Board of Managers will continue to look for opportunities to partner with other players in the industry. And in particular, if it's a long drawn out federal legalization time period, we think there will be some really great opportunities for CUSA to continue to build its business.

There are no questions in the queue, I will now turn the call over to Mr. Klein for final remarks.

Great. Thanks for attending today's conference call. For those in Canada, as you enjoy the fall and prepare for the holidays, be on the lookout for the PRJ innovation that we talked about, which should be arriving in stores over the next few weeks. And for those of you in the U.S., yes, please visit shopwonderous.com to take a look at the great hemp-derived product offering that's currently available for shipment to your home. Our Investor Relations team will be available to answer additional questions throughout the day. Thanks, everyone.

This concludes Canopy Group's second quarter fiscal 2025 financial results conference call. A replay of this conference call will be available until February 6, 2025 and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today for today's call. Have a good day, everyone.