Canopy Growth Corp. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Strategic Streamlining: Implemented an asset light model, divested non-cannabis businesses, and focused on core cannabis strengths.
• Fiscal 2024 Achievements: Improved gross margins, lean organization, strengthened balance sheet with over $700M debt reduction in 2024.
• Canada: High-quality flower from Kincardine and DOJA sites strengthened competitive position; over 2,300 points of distribution added in Q4. Medical sales grew 16% year-over-year.
• International: Australia had record revenue in 2024; Poland, Czech Republic, and Germany saw growth.
• Storz & Bickel: Exceptional demand for Venty vaporizer led to best Q4 ever with 43% revenue growth.
• Balance Sheet: Reduced debt by over $700M in 2024, no material debt due until March 2026, and cash balance over $200M.

Segment Performance

• Canada: Q4 net revenue was $37 million, up 4% year-over-year. Canada medical sales increased 16% year-over-year, marking the fifth consecutive quarter of revenue growth. Adult-use B2B was down 4% due to supply constraints on certain Twd SKUs. Full year 2024 Canada cash gross margin was 31%.
• International Markets Cannabis: Q4 sales increased 32% year-over-year. Poland and Germany saw growth, while Australia had declines in Storz & Bickel device sales. Q4 gross margin was 40%.
• Storz & Bickel vaporizer: Q4 revenue was $22 million, up 43% year-over-year. Gross margin was 41% year-over-year, driven by strong demand for the Venty portable vaporizer and other devices.

Guidance

• Fiscal 2025 Outlook: Canada expected growth in the back half, driven by upgraded production platform and expanded distribution. International markets (Germany, Poland, Czech Republic) expected to grow. Storz & Bickel to continue growth with Venty and other products.
• Canada: Upgrades at Kincardine facility, LED lighting installation to improve cultivation yields.
• US: Canopy USA moving rapidly with Wana expansion into new states, Jetty products launched, and Acreage with upside in key markets.

Risks

• Canada Gross Margin: Temporary factors in Q4 (lower cultivation yields, under absorption of indirect costs, higher cost inventory) impacted gross margin.
• Divested Businesses: Impact on reported sales growth from divested businesses like This Works and KeyLeaf.
• Regulatory Uncertainties: Uncertainties around US rescheduling and its impact on Canopy USA's growth and cash flow.

Question and Answer

Q: Regarding your comments on the gross margin, thanks for the color in terms of how it's transitory in nature somewhat. Just if you could provide some commentary in terms of the cadence of the improvements from the greater utilization and some of the other initiatives you have by the lighting and extended grow rooms. How should we think about the timing of that improvement?

A: So if you take a step back, we did deliver a significant improvement on a year-over-year basis in our Canadian business with full year gross margin of 16% and cash gross margin of 31%. And I think on a full year basis, that's within our expectation of achieving close to mid 30% cash gross margin post all the restructuring actions that we've taken in Q1. I think if you think about the Q4 margin, as I said on the call, really a few transient factors that negatively impacted margins. I estimate those margins -- those factors would have impacted the gross margins by the magnitude of several million dollars. So if you adjust for those, I think we're kind of back to low to mid 30% gross margin in Canada. If you look at Q1 and beyond, so just really looking at the rest of fiscal '25, we see further improvement, I said on the call, with all of the improved actions that we're taking in Kincardine. Some of that is going to be a bit more back half loaded. So the increased capacity on the flower side from expanded grow rooms will come in a little bit earlier. But I think the Kincardine, the lighting, the LED installation that's happening as we -- in the coming months and that will really help the winter months as we go into the back half of the year. So all in all, we think the Canada cash gross margin should be in the mid to high 30% for the full year basis, probably stronger in the back half versus first half, but we're pleased to really show continued progress on the Canada front. And I do think that this will be a positive driver in achieving positive adjusted EBITDA at the consolidated level, particularly as you think about the back half of the year.

Q: My question is on the balance sheet, and I'm trying to better understand the comments about being able to invest for growth. And I wonder how we should interpret that given the level of debt remaining, and what is the plan to repay that debt?

A: So as I said on the call, I think the big change in terms of our financial position is that we don't have any near term debt maturity of any substantial amount. The really the next tranche of the debt maturity is in March of 2026. We think that our underlying businesses are also showing improvement that we're reducing cash burn in a significant way and we've been able to also reduce our interest expenses in a meaningful way as we've reduced our debt. So really the investing for growth is just given our cash position that we have today as well as the ability to really deal with the maturity of debt in a prolonged time frame. I think it really gives us the flexibility to look for opportunities to invest in the greatest potential markets that we operate in as we speak, that doesn't mean that we are going to be investing in asset heavyweight. I think we've really transitioned to really being asset light and opportunistic in finding partners. But I think it just gives us a lot more flexibility to look for those opportunities with the improved balance sheet position.

Q: This is Yewon Kang on behalf of Matt Bottomley. My question is just on the international segment. Obviously, you guys saw a [100%] growth quarter-over-quarter on the top line on the segment. And you guys called out continued strength in Germany and Poland alongside some nonrecurring US CBD business opportunity there that overall helped the top line sequential growth there. Can you provide more color behind this US CBD business opportunity? And if you have any plans to kind of expand on this going forward, because it seems like it also has kind of a positive impact on the margin under that segment as well?

A: I think, I can take that. I mean, I think if you look at our international markets, you really should think about our key priority markets, that’s Germany, Poland, Australia and Czech Republic. The US CBD business, as you may recall, have evolved within the Canopy organization. We've really been looking at very, very targeted approach with that business as the regulatory unlock frankly hasn't happened the way that we thought we would. We have also decided that the best place for the US CBD business to reside is actually Canopy USA. And so we are in the process of winding down the business, at least from a Canopy perspective, and then transitioning that business over to Canopy USA that we expect to happen sometime in Q2 of our fiscal 2025.

Q: David, just regarding Canopy USA. Can you remind us about what's left or has everything been done in terms of shareholder approvals and also approval in terms of Acreage and Wana? And related to that, if you can remind us, assuming that rescheduling doesn't meet your standard of federal permissibility, what actually changes for those US assets, right? I'm thinking Acreage, they need to fund the expansion in Ohio. But if you don't have federal permissibility yet, how can you help them? And how has the Canopy USA structure, if in any way, help them to achieve that type of funding and potential to fund growth?

A: So Pablo, in terms of approvals, we don't need any shareholder approval or anything of that nature. We do need to go through the approval process in each state where we have a license. And so what we've done is we've exercised our option -- exercised their option to purchase Wana and Jetty, that's going through the regulatory approval process. Right now, we don't expect there to be any problems with those approvals. Canopy has the obligation to exercise its right to purchase Acreage and then move it into Canopy USA, that hasn't happened yet, but we expect that'll happen in the near term. We don't see any major regulatory hurdles. But as you know, it'll take some time to get through each individual state's process. In terms of the ability like what will happen with the businesses and how they improve their capital situation across CUSA. I really think it is a function of putting those CUSA businesses together. Not included in our cash balance is a significant cash balance sitting at Wana and Jetty, which the CUSA assets would all have access to. And so we expect actually that Acreage's challenges related to capital structure will be able to be resolved through kind of amalgamation with CUSA. And also keep in mind, when we put those businesses together, there will be top line synergies available to all of the CUSA entities but there will also be some significant bottom line synergies available as well when you eliminate the public company costs that are currently associated with Acreage.