Canopy Growth Corporation (CGC) Earnings

Management highlights

- Cannabis business showed momentum with Canada Medical growing 13% (3 consecutive quarters of growth), international net revenues returning to growth (4%) with Germany triple-digit growth, and Canada adult-use up 43%. - Canada Medical ensured consistent supply, delivered high-quality patient care, and had superior gross margin performance. Spectrum Therapeutics expanded core offerings. - In international markets, Europe saw double-digit revenue growth in Q1 (with Poland affected by regs and supply), and they advanced operational improvements to increase cannabis supply into Europe, expecting completion in Q3. Appointed Miles Worne as Managing Director of European Markets. - Canada adult-use revenue grew 43% due to a tighter product portfolio, expanded national reach adding nearly 4,800 new points of distribution, and strong consumer demand for core offerings. - Storz & Bickel had soft Q1 revenue due to lapping strong prior year sales and weaker demand in key markets, but preparing to launch a new device in coming weeks. - Cost discipline: Already delivered $17 million in annualized savings against a $20 million target (85% of goal), continuing to look for additional efficiencies. - Addressing compressed margins: Acting decisively to improve them, with margin accountability embedded across the business. - Canopy USA: Acreage reduced operating expenses and completed divestiture of noncore retail assets, secured $20 million in funding; Wana maintained business continuity and expanded distribution of hemp-derived CBD beverages; Jetty outperformed top-line and profitability expectations.

Guidance

- Expect continued top-line growth in Canada Medical and Europe with new product registrations in Germany and Poland in the second half of fiscal '26. - Canada adult-use expected to deliver sustained top-line performance due to increased distribution, improved commercial execution, and strong consumer demand. - Expect improvement in free cash flow for fiscal '26 driven by reduction in cash interest costs, improvement in working capital, lower restructuring and nonrecurring cash expenses, and lower capital expenditures. - Storz & Bickel expected to see top-line growth over the remainder of fiscal '26 with the new device launch supporting performance.

Segment performance

The reportable segments are Cannabis and Storz & Bickel. Cannabis segment: Q1 net revenue was $57 million, up 24% year-over-year. Canada Medical net revenue grew 13%, international net revenues returned to growth at 4% (Germany had triple-digit growth, Poland was affected by regulatory changes and supply challenges). Canada adult-use net revenue increased 43%. Storz & Bickel segment: Revenue was $15 million in Q1, down 25% year-over-year due to lapping strong prior year sales and weaker consumer demand in key markets like the U.S.

Risks & headwinds

- Regulatory changes in markets like Poland can impact sales (e.g., regulatory changes limiting online prescriptions in Poland affected sales). - Market challenges such as weaker consumer demand and spending in key markets (e.g., U.S. impacting Storz & Bickel) can affect segment performance.

Analyst Q&A

• Q: So I wanted to touch more on gross margin. It sounds like that's a key initiative for you guys. Gross margin, right, so it was down year-over-year, and a lot of the reasoning there was similar to what we heard prior quarter. But sequentially, we did see a meaningful improvement, particularly in cannabis, which you now combined. So can you speak to some of the drivers there? Was it fixed cost leverage with Claybourne, as we saw an increase in Canadian sales?

  A: Thanks, Eric, for the question. As we said, we are very pleased with the top-line performance, and gross margin will be an area of focus in the coming quarters. We expect -- ideally, we're exiting this year with a margin in the low to mid-30s. And a lot of the efficiency improvements we discussed on the call, so expanding our production capacity, being able to reduce temporary labor costs on our key categories, are going to meaningfully improve the gross margin in the cannabis segment. And a lot of that, you're seeing the continuation from actions that we've started to take today. Ultimately, we're also ensuring we're prioritizing our supply to kind of the most profitable markets. So ultimately, the improvements coming through in Q1 were a bit expected, and we expect continued improvement going into the second part of the year.

• Q: Just on Poland, obviously, you mentioned the regulatory changes there, but also some supply challenges. Can you speak to those supply challenges and whether the situation has already normalized or not?

  A: Yes. We're really focusing on the fundamentals and boringly focusing on the fundamentals. And for us, it's making sure we've got the right flower allocation process internally. And that, frankly, stood in the way of us having success in the Polish market. So these processes are well implemented, and we look forward to returning to growth in Poland very soon.

• Q: Look, I know that we are all very focused on Europe in the case of Germany and Poland. But from a Canopy Growth perspective, what are the 2 or 3 other European markets taking a 2-, 3-year view that you're excited about based on the reform changes that you're seeing there? We hear a lot of news flow back and forth, but it would be helpful if you can give some color in that regard. And the second part to the question is, can you confirm that everything you sell in Europe is Canopy Growth product? Or are you also sourcing that from -- a part of that from outside vendors?

  A: Thank you for the questions. I mean the task at end right now is to set up the right infrastructure, the right processes, the right team to win in Germany and Poland. Near term, we've got a significant opportunity for growth in these 2 markets. As I indicated, we recently hired a Managing Director for Europe. He starts Monday, this coming Monday. And one of his primary responsibilities will really be to develop the strategy for us to really put in place the right infrastructures to win across Europe as the market develops. But as I said at the beginning of my answer, boringly, we're focusing our efforts where the near-term opportunities are right now, and we see great potential for growth for Canopy in Germany and Poland. So more to come on your question in the coming quarters. And the bulk of what we sell in Europe is grown here in Canada in Kitgarten.

• Q: Luc, you mentioned that while rescheduling in the U.S. obviously hasn't happened, that momentum is building. So I guess what's the momentum you see out there? And why are the prospects for rescheduling better today maybe than they have been?

  A: Yes. I'm not going to comment on the rescheduling prospect. But for us, we see select geographies in the U.S. where demand increases, where the infrastructure is being put in place allow for profitable operation ahead of rescheduling. So we're very thrilled with the -- we're very energized by the work that Brooks, the CEO of CUSA, and his team are putting in place to position CUSA well for potential rescheduling.