Canopy Growth Corporation Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Restructuring and Focus: Restructured business units to improve synchronization between supply chain and commercial teams. Unified global medical cannabis businesses in Canada, Europe, and Australia. Refocused Canadian adult use business, completing SKU rationalization and shifting focus to higher-margin products. Established a dedicated global operation function to improve supply and demand planning.
• Cost Reduction: Undertook a company-wide cost review, aiming to reduce operating expenses by at least $20 million over 12-18 months. Made a $100 million U.S. early prepayment against senior secure term loan, reducing annual interest expense by approximately $13 million U.S.
• Product Innovation: Introduced advanced [C-cell] based products under 3 and 7 acres brand in Canada and expanded lineup of playboard infused pre-rolls. Focused on high-demand formats like high-potency flour, pre-rolls, and vapes in Canadian adult use.

Segment Performance

• Canada: Q4 net revenue was $40 million, up 4% year-over-year. Canada medical business grew sales by 13% due to a shift in customer mix and a larger product assortment in the Spectrum online store. Adult use business was down 3%, with strong contribution from Claybourne infused pre-roll joints offset by lower sales in flower and non-infused pre-rolls. Canada adjusted gross margin in Q4 was 11%, and adjusted cash gross margin was 23%. For full-year fiscal 2025, Canada adjusted gross margin was 25% and cash gross margin was 36%.
• International markets: Cannabis sales declined 35% in Q4 2025 compared to Q4 2024, excluding U.S. CBD sales which were down 23%. Germany saw double-digit growth, but Poland and Australia declined. International markets' gross margin was 25% in Q4 2025, lower than expected due to softer sales in high-margin Poland.
• Storz & Bickel: Q4 revenue was $17 million, down 23% year-over-year. Gross margin was 37% in Q4 2025 compared to 41% in the prior year, driven primarily by lower sales.

Guidance

• Fiscal 2026 Outlook: Expect to achieve significant improvement in free cash flow driven by lower interest expenses, tighter inventory management, and reduced CapEx. Aim to achieve positive adjusted EBITDA in the near term, though exact timing is uncertain due to macro uncertainty. For Storz & Bickel, expect sales to decline in the first half of 2026 but improve in the second half with a new device launch planned for fall.
• Global Medical: Prioritize supply consistency and deepening engagements with clinics, healthcare providers, and patients in global medical. In Canada adult use, focus on winning in high-demand formats and improving gross margins by lowering cultivation and production costs.

Risks

• Supply Chain Inconsistencies: Inconsistent supply in international medical markets led to underperformance in global medical results. Challenges in maintaining consistent supply of high-quality flower at the right price.
• Macroeconomic Challenges: Softness in vaporizer device demand in general due to increased uncertainty around tariffs and inflation, impacting Storz & Bickel's sales.
• Acreage's Liquidity Challenges: Acreage is in default under its credit agreement, with lenders forbearing remedies until June 2025. Persistent liquidity challenges at Acreage have impaired its ability to invest in its business and negatively impacted performance in core states like Ohio and New Jersey.

Question and Answer

Q: Hi, can you guys hear me okay? Appreciate the color and Luc, that you provided, including kind of the management style that you're looking to take with the business, with streamlining some of the operations. In line with that, it'd be great to get some additional color maybe in terms of what you're seeing as more of the near-term low-hanging fruit opportunities versus actions in place that will benefit you in the long-term? And then if we think about what will be the key levers that you're going to have to ultimately get to that positive adjusted EBITDA. I know you're not giving a timeline now, but we've talked about in the past that it's really going to come down to getting a growth driver on the top line. So where are you seeing the best opportunity for that, maybe via Storz & Bickel International or Canadian?

A: Yes, fantastic. For me, I look at the business, I look at fiscal 2025, we ended up with minus $23 million of EBITDA. We're focusing - we've identified $20 million of cost reductions, that gives you a bit of dimensions there. We're going after the $20 million very aggressively as fast as we can. Most importantly, it's about the growth and the growth we're very bullish on our medical business. We know this business in Canada is doing extremely well for us and it was not getting the full attention that it deserves. So we're talking about a business that grew up double digits in fiscal 2025. We have the engine, we have the right products, we have the right back of the house there. So this business is now reporting directly into me and we're giving it the attention it deserves. At the same time, we combine our medical business in Europe and Australia with the leadership of that Canadian business. So now we're fully integrated. I'll be honest, we're disappointed with our 2025 global medical results. And the key driver of that was inconsistency of supply. We have a great team in Germany. We have a great operation in Germany. When we're in stock, we know we can bring a great quality of flower at the right price. We know how to distribute it. When we're in stock, we do extremely well. Just too many interruptions in supply has led to a bunch of false starts. So we're focusing on really near to us opportunities that we know will pay back and should pay back relatively swiftly. Then we look at Canadian rec. We believe in Canadian rec, it is a big market. It's a $5 billion market. There are significant opportunities for players who are focused. So in the past we used to be -- we played, we tried to play in every single categories and subcategories. So we took decisive action in recent months. As I said, we streamlined the portfolio, but most importantly we're focusing with clear intentionality in the large segments where we know we can compete and we can provide consistent supply. You've probably heard about it. We launched Claybourne, for example, at the end of fiscal 2025. The brand is already number three in some regions. So when Canopy focuses, we know Canopy can be successful. So short answer, we're focusing on the action on the opportunities that are the nearest to us with the highest potentials for return.

Q: Hi, thanks for taking the call or taking the questions. We've heard versions of increased focus or streamlining operations, cost savings programs. We've heard those before. So I guess Luc, what truly makes today's conversation incremental to the programs of the past and the progress of the past?

A: Yes, I cannot really comment that much on what was said in the past, but I can assure you that from my perspective, the actions that we're taking are dramatically streamlining the organization. So from my point of view, I inherited an organization that was set up, for lack of a better word, like a large corporations. I've worked at organizations that were billions of dollars. I've inherited what I would qualify as a large corporation structure. We're transforming the organization, its culture into this fighting business units, focused, streamlined fighting units with just the right amount of centralized core capabilities to really enable these units to win. I'll give you an example. In Canadian rec, we eliminated two layers of management between myself and our sales leadership. As you can imagine, decisions are made much faster. We're pushing decision making down in the organization, and it's allowing us to have the right data, have the right time, make the right decision in a much swifter manner than we did in the past. So it's way more than just a cost reduction exercise. It is really a change in the culture of how we go to market. And I'll tell you honestly, I'm extremely encouraged by the reaction of the organization. These are individuals -- talented individuals who want to win. And now we're giving them the tool, most importantly, the structure, the processes that allow them to go out there and compete and win.

Q: Hi, this is Brenna on for Frederica. Thanks for taking our questions. Regarding Acreage’s underperformance. So in addition to your earlier commentary on Ohio, New Jersey underperforming expectations based on the company's closing stores in New York weekend hopefully slightly soon that's also been a very challenging market for them. So just curious what other factors have really underpinned the underperformance of Acreage and how should we be thinking about Canopy USA more broadly going forward?

A: Sure. So I think we provided a lot of details already in my prepared comments, but really I think we've said in previous calls that Acreage's performance in 2024 was challenged by its liquidity and credit challenges. The company was public until the close of the acquisition in December. Their public filing through September quarter-end that I think shows the performance was challenged. And I think the key driver really was the underperformance in Ohio that I think a lot of the market participants expected to open with a lot of growth potential. And unfortunately, even as we sit here today, it's still not a full adult use market. So there was a sizable underperformance relative to expectations in Ohio. And based on the underperformance of Ohio, the liquidity challenges really continued to persist, which also then impacted their ability to invest and grow in other parts of their core markets, including New Jersey as well as New York. So, that is the situation today. We are still bullish on the long-term potential of the U.S. market, but I think the situation today is that there has been underperformance relative to really Acreage's expectation, primarily because of Ohio.

Q: Thank you. Good morning, everyone. Luc, congratulations on the progress you've made since you started. My question is about, you've talked in the call about inconsistencies in the supply chain, especially for international. Can you talk about how you're thinking about in terms of investing on supply chain, whether you need to have more control over supply, own more supply, whether in Canada or overseas? And by the same token, understood in terms of the reorganization and alignment, but will you need to make more investments downstream in international, in terms of route to market, if you can touch on that. And just a separate one, if I may add a second one. We don't hear many companies talk about Canadian medical, and of course, very good performance there. If you can just give us a reminder of how that market is doing, it seems to be declining, but there's more reimbursement. What's the outlook for that market share gain potential? If you can give more color there, it will help. Thank you.

A: Yes, good morning. There's probably three questions in there. So let me start with the supply. So we don't -- as I said earlier, we're focusing on the opportunities that are very near and right in front of us right now. So, for global medicals, it’s all about consistency of supply. And I'll simplify what the situation was. We had a global organization that was functioning in great parts independently of the rest of the organization. And combined that, that we had a supply chain that was pretty much led by our Canadian rec business. And so, you can imagine the lack of connections, the conflicting priorities and agendas. So with the restructuring we've pretty much eliminated what I call dysfunctionalities to characterize a little bit. And we're in a place now where we're way better equipped to decide what we plant, what we cultivate, what we harvest, and where we distribute this flower, allowing the decisions to be made ultimately by myself to allocate the flower to the best opportunity in the market. So as you can imagine, we're centralized supply chain teams, centralized sales and operations process. We get the demand signals now from across every single business units which wasn't the case before, which allows us to make the right decisions at every single steps of the growing process. As well with centralized resources, we now can get flower materials in the open markets which truly will allow us to take our service levels much higher than they've been in the past. So we don't foresee in the near future having to make any investments to allow us to capture these opportunities. Judy Hong: And I guess I'll touch on the medical -- Canada medical performance. And Pablo, you're right. We have not in the past spoke a lot about our medical business. It's really has been performing in a successful way. From a market perspective, I think you know there's not a lot of data out there, but we think the market was down in the mid-single digit rate. We think we're number two in the market share and I think you have also access to some of the information from some of the leading players in the marketplace. We've outperformed in the market. So we were up 16% in Canada medical. As I said, market was down kind of in the mid-single digit rate. And I think our largest competitor was up sort of in the 4% rate. So we have outperformed and we are gaining market share. The team has really been focused on really growing the patients that provide us with the highest value and really providing that patient as well as the broader patient group the best customer experience. Our Spectrum online store is the highest, I think, quality and the feedback we get from the customer experience on the products and just the broader experience has been really tremendous. And so, the team is continuing to really focus on going after those and making sure that they're continuing to get that experience from a patient journey perspective. And as Luc said, we're trying to leverage also that experience and that knowledge into our international medical market.