Canopy Growth Corp. Q2 FY2025 earnings call

• Storz & Bickel and Medical Cannabis: Storz & Bickel's 32% YOY net revenue growth was driven by premium device sales like Volcano and Venti, and medical cannabis in Canada and Europe performed well with Canada Medical up 16% YOY and international medical seeing robust growth in Poland and Germany.
• Canada Adult Use: Focus on profitability with resumption of Wana edibles production, expansion of flower and pre-roll offerings (e.g., Tweed flower distribution up over 10% Q2, 7ACRES Ultrajack launched), and investment in NPD pipeline including high-margin pre-rolls and health-conscious innovation from Wana.
• Canopy USA: Acquisition of Wana on track for completion by first half of 2025, Wonderous hemp marketplace launched, Jetty gearing up to launch solventless all-in-one vapes in California, Colorado, and New York, and Acreage working on cost streamlining and growth in priority states like Ohio.

Storz & Bickel: German-based Storz & Bickel business had overall net revenue growth of 32% year-over-year, with net revenue of $16 million in Q2. This is a high-margin segment aligning with focus on existing markets. Canada Medical: Delivered revenues up 16% year-over-year. The medical customer mix shifted towards more insured patients, and it's a high-margin business. It accounted for more than half of Canada revenue in Q2. International Medical: Cannabis net revenue was $10 million in Q2, up 12% year-over-year. Strong growth in Poland (200% YOY) and Germany (47% Q2 vs Q1), but Australia medical cannabis saw decline due to price competition. Canada Adult Use: Down 24% year-over-year in Q2 due to a supply interruption of Wana edibles, estimated to have driven approximately $3 million of negative revenue impact. Canada gross margin in Q2 was 32%, and cash gross margin was 43%. Consolidated: Consolidated net revenue was $63 million in Q2, a decrease of 9% year-over-year but an increase of 3% excluding divested businesses. Consolidated gross margin was 35%, adjusted EBITDA loss was $6 million, and free cash flow outflow was $56 million.

• Canada: Expect continued strength in medical business and improved performance in adult use in the second half of fiscal 2025, driven by restored Wana supply, expanded distribution, new product launches.
• International: Focus on ensuring consistent supply of high-quality products, launching new products in Poland and Germany, and strengthening competitive positioning in Australia.
• Storz & Bickel: Growth to continue in the second half, with Q3 benefiting from higher contribution from Venti compared to last year, while Q4 growth likely more muted due to exceptionally strong sales in prior quarter.
• Consolidated: Anticipate positive adjusted EBITDA in the coming quarters with continued cost discipline and expected improvement in top line growth in the second half.

• Price Competition: Markets like Australia and potentially Germany face price competition. In Australia, increased competition led to sales decline. In Germany, price compression is expected over time but the company is prepared with asset-light infrastructure.
• Supply Chain Issues: Canada adult use business was impacted by a supply interruption of Wana edibles due to financial challenges of the contract manufacturer.
• Dependence on Federal Legalization: Canopy USA's strategy is designed to succeed independent of U.S. federal legalization, but potential delays or uncertainties in federal reform could impact long-term growth, though the current strategy is independent in the near term.

Q: Regarding the hemp initiative and regulatory reform in the U.S.

A: David Klein stated that Wana has a direct-to-consumer setup, is engaged in B2B activities with beverage alcohol distributors leveraging Canopy's industry connections, and sees hemp as a huge potential opportunity though early in the process.

Q: Competitive dynamics in Australia and how to become more competitive on pricing.

A: Judy Hong mentioned leveraging lower cost structure in Canada to service the Australian market, expanding product assortment, and ensuring ample supply.

Q: Change in adjusted EBITDA outlook from second half to coming quarters.

A: Judy Hong explained that while progress is being made in all business units with positive adjusted EBITDA, the timeline for consolidated positive adjusted EBITDA is influenced by growth in Canada adult use, cost reductions, and nearing positive adjusted EBITDA across businesses.

Q: Rebates on Mighty in Storz & Bickel and reason for them.

A: David Klein said it was part of portfolio management to clear certain SKUs, but growth in Germany and U.S. and innovation with Venti were key drivers of the strong quarter, not just rebates.

Q: International markets price competition and structural differences.

A: David Klein noted focusing on high margin markets, asset-light infrastructure in Germany to be prepared for price compression, and Poland having some near-term protection due to selling through the government while Germany will eventually face price compression but the company is positioned to compete.

Q: Cash flows and balance sheet details.

A: Judy Hong explained first half cash burn due to timing of payments like insurance premiums, prior year bonuses, and Health Canada fees, expecting lower outflow in the second half due to reduced interest payments from term loan prepayment, tighter working capital management, and more modest CapEx.

Q: Canopy USA expansion and federal permissibility.

A: David Klein said the strategy is independent of immediate federal legalization, Canopy USA's structure is built for the long process, Jetty and Wana are focused on deeper expansion in existing states, and the company will look for partnership opportunities to build the business even with prolonged federal legalization