Canopy Growth Corp. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Business Transformation: Divested Canadian retail operations, consolidated cultivation to 2 sites (Kincardine and Kelowna), moved to third-party sourcing for cannabis products, and ceased funding BioSteel to reduce cash burn.
• Canadian Business: Focus on improving cannabis flower quality, with Canadian medical sales growing, adult-use B2B stable, and cost reductions driving margin improvements.
• Global Medical: Australia achieved 10th consecutive record revenue. Shipping new flower SKUs to international markets from EU GMP certified Kincardine facility.
• Storz & Bickel: Launched Venty portable vaporizer, preparing for broader commercial availability and holiday promotions.
• Canopy USA Strategy: Asset-light, wholesale-focused strategy with Wana, Jetty, and Acreage showing growth. Ohio's adult-use cannabis legalization boosts Acreage's position.

Segment Performance

• Canada: Q2 net revenue was $40 million, a third consecutive quarter of sequential revenue increase. Canadian medical sales grew 6% year-over-year while adult-use B2B was down 6% year-over-year. Adjusted gross margin in Q2 was 34% and cash gross margin (adding back non-cash depreciation) was 47%. Cost reduction initiatives in Canada achieved approximately $80 million of COGS reduction.
• Rest of the World: Cannabis sales were down 15% year-over-year. Australia had its 10th consecutive record revenue quarter, growing over 20% year-over-year. Rest of world gross margin was 30%.
• Storz & Bickel: Q2 revenue was $12 million, down 11% year-over-year. Year-to-date revenue was up 3%, and gross margin was close to 40% year-to-date.
• This Works: Sales grew 3% year-over-year with a healthy gross margin of 48%.

Guidance

• Canadian business targets mid-30% cash gross margin in the back half.
• Rest of world margins expected to improve in the back half as efforts in key markets drive better sales.
• Storz & Bickel gross margin expected to improve in the back half post Venty launch.
• Expect cash from operations to improve driven by cost reductions and working capital management.

Risks

• Factors causing actual results to differ materially from projections as per forward-looking statements.
• Supply chain challenges in beverages due to longer-than-expected transition to third-party contract manufacturers.
• Potential impact of regulatory changes in U.S. markets affecting Canopy USA strategy.

Question and Answer

Q: Aaron Grey asked about gross margin expectations.

A: Judy Hong stated the Canadian business targets mid-30% cash gross margin, explained non-recurring favorable factors in Q2, and expected margins in the back half.

Q: John Zamparo inquired about the balance sheet and debt.

A: Judy Hong mentioned debt matures in September 2025, strong cash position, plans to reduce debt through monetization and investor dialogue.

Q: Michael Lavery asked about TerrAscend.

A: David Klein said TerrAscend is part of the U.S. strategy, interacts with other U.S. businesses like Wana, and is seen as one piece of the U.S. market puzzle.