Stock Market

Canopy Growth (CGC) Q3 2023 Earnings Call Transcript


Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Canopy Growth (CGC -17.15%)
Q3 2023 Earnings Call
Feb 09, 2023, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome you to Canopy Growth’s third quarter fiscal 2023 financial results conference call. [Operator instructions] I will now turn the call over to Tyler Burns, director, investor relations.

Tyler, you may begin the conference.

Tyler BurnsDirector, Investor Relations

Thank you, operator. Good morning and thank you all for joining us. On our call today, we have Canopy’s chief executive officer, David Klein; and chief financial officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing the financial results for our third quarter ended December 31, 2022.

This news release is available on our website under the investors tab and will be filed on EDGAR and SEDAR. Before we begin, I would like to remind you that our discussion during this call will include forward-looking statements that are based on management’s current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning’s news release. Please review today’s earnings release and Canopy’s reports filed with the SEC and SEDAR for various factors that could cause our actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures through their closest reported GAAP measures are included in our earnings release.

10 stocks we like better than Canopy Growth
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now… and Canopy Growth wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of February 8, 2023

Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following prepared remarks by David and Judy, we will conduct a question-and-answer session. We will first address the questions uploaded by verified shareholders using the Say Technologies platform. Following that, we will take questions from analysts.

And to ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.

David KleinChief Executive Officer

Thank you, Tyler, and good morning, everyone. During our Q2 earnings call, I clearly outlined Canopy’s top priorities in becoming a North American cannabis leader, which included actions to drive Canadian profitability and empowering Canopy USA to progress the U.S. THC strategy. On today’s call, I’ll provide comprehensive updates on both priorities, which are imperative to achieving our ambition of long-term North American cannabis market leadership.

Following my remarks, Judy will review our Q3 results, provide an update on our path to profitability, and outline the cost savings anticipated from the business changes announced today, as well as discuss our balance sheet. The transformative plan introduced today addresses the actions needed to drive profitability, but also to secure the future of our business. The intent of establishing a legal cannabis industry in Canada was to combat the illicit market. At the outset, the legal sector was poised to be a source of immediate economic development, with significant job creation and tax revenue.

As a global first mover, the legal Canadian cannabis industry was originally projected to grow into a $7 billion market over time. However, that market aspiration has not come to fruition. Today, there are two very different cannabis markets in Canada: one that’s legal, highly taxed, and regulated; and one that’s thriving and illicit. The unregulated illicit market is generating billions of dollars of revenue, with a 40% market share, and faces virtually no risk of enforcement.

The legal sector, out of necessity, is forced to be price competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer. The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come. And as a result, the sustainability of this legal sector is in question.

Make no mistake, building an industry from the ground up is not linear, and the knowledge gained has been significant. We stand ready to work with regulators, politicians, and provincial boards to improve the punitive regulatory environment based on experiences from the front lines. However, despite these market realities, Canada remains a large market, in which Canopy is well-positioned, with strong brand recognition, a diversified portfolio of products in the adult-use segment, and a growing share of the medical market. The backdrop I just outlined formed the catalyst for the actions announced today, which are intended to position our Canadian business to be profitable and self-sustaining.

The Canadian business transformation plan includes consolidating our production and operational footprint, shifting to a brand-led asset-light model, and completing an organizational restructuring that better aligns our resources with market realities. Specifically, we intend to exit our 1 Hershey Drive Smiths Falls, Ontario facility as we consolidate cultivation at existing facilities in Kincardine, Ontario and Kelowna, British Columbia, and, where necessary, enhance our offering with a flexible flower-sourcing strategy. Similarly, we will be outsourcing nonflower formats such as beverages, edibles, vapes, and extracts as we implement a nimble asset-light model that allows us to be dynamic and actively respond to market demands. In Quebec, we will cease sourcing of flower from the Mirabel facility.

As the Mirabel facility has operated through a joint venture structure, we’re engaging with our JV partners on the long-term future of that site. We recognize our core competency is brand development, with strong routes to market. The Canadian transformation is intended to closely mirror the plan structure of Canopy USA, which we believe to be a winning model. The changes announced today are in addition to the following cost-savings initiatives that were completed in Q3, including the divestiture of national retail operations, closure of our Scarborough, Ontario research facility and outsourcing of our genetics program to Quebec-based EXKA, the restructuring of our Canadian cannabis business into a stand-alone business unit, and the reduction of our SKU count by approximately 50% as we focus on the highest-performing segments within the Canadian adult-use cannabis market.

The changes announced today will result in approximately 800 employees exiting the business over the coming months, with 40% of that reduction occurring immediately. We expect these further adjustments to reduce annual SG&A and COGS by an additional combined $140 million to $160 million over the next 12 months. Judy will speak to the financial aspects of our restructuring in greater detail during her prepared remarks. Now, let me spend a few minutes discussing business outside of Canadian cannabis, starting with our international markets, where Australia is worth highlighting as our sales in this market have increased nearly 200% year over year and demonstrated steady growth.

Storz & Bickel, or S&B, continues to demonstrate its capabilities and appeal with core and limited-time premium vape offerings like the PEACE VOLCANO. In the third quarter, S&B delivered its best quarterly revenue since Q4 FY ’22. This growth was driven by traditionally strong seasonal demand for premium cannabis vaporizers. Overall, S&B continues to be a key profit contributor in the Canopy brand portfolio and is poised for innovation and growth.

Turning to BioSteel, we’re very pleased with the strong momentum at retail despite quarter-over-quarter volatility in reported revenue due to the timing of distributor loadings. According to Nielsen data, BioSteel’s share of isotonic beverage sales in the Canadian national convenience and gas channel reached 10.4% in the third quarter and 13.8% in Ontario. In the U.S., the brand has also made impressive distribution gains over the past year, with IRI data showing BioSteel’s ACV at 34% for the quarter. This was matched by notable sales gains, with scanned sales in the U.S.

region increasing 150% — 157% from the prior year. With expected distribution gains and velocity growth, driven by our investment in brand activation, we expect to see revenues increase significantly over coming quarters. Finally, I’d like to speak to Canopy USA, which continues to progress the U.S. THC strategy.

With the lack of developments in Washington, I strongly believe that through Canopy USA, we’ve taken control of our destiny to capitalize on the once-in-a-generation opportunity in the largest cannabis market in the world. Our primary objective for Canopy USA is to optimize the value of our entire U.S. cannabis ecosystem, Acreage, Wana, Jetty, and TerrAscend, by leveraging their brand portfolios, routes to market, and operations. We’re pleased to see the ecosystem exploring opportunities to collaborate and grow, with examples including Wana and TerrAscend bringing Wana edibles to New Jersey and the expanded availability of Wana in the state of Maryland; Wana launching in New Mexico and Missouri, in addition to releasing a suite of new sleep product offerings; and Jetty extracts announcing upcoming product availability in the state of New York.

After closing, Canopy USA expects to reduce its annual operating expenditures, including eliminating redundancies and the public company reporting cost of Acreage, all of which are expected to be realized shortly after closing this transaction. This is a novel and groundbreaking strategy. We’re resolute in remaining dual-listed as the Canopy USA strategy progresses. And as we continue to finalize our proxy, we anticipate holding our shareholder vote as early as April 2023.

With that, I’ll turn it over to Judy.

Judy HongChief Financial Officer

Thank you very much, David, and good morning, everyone. I’ll focus my remarks on, one, a brief summary of our third quarter results; two, an overview of the financial details of our transformation plan for Canadian cannabis business; and three, discussion of our cash flow and balance sheet. Beginning with the review of our third quarter fiscal ’23 financial results, in Q3, we generated net revenue of 101 million, representing a 28% decline over the prior-year period. When adjusting for the impact of divestitures of C3 and the Canadian retail business, revenues decreased 23%.

Revenue highlights include Canadian medical cannabis increasing 9% versus the prior-year period, Storz & Bickel increasing 50% sequentially compared to Q2, and our Australian cannabis business having its seventh quarter in a row of record revenue. Gross margin declined year over year, with the decline due to a shift in the business mix from the divestiture of C3, the impact of last year’s COVID-19 relief program, and a decline in BioSteel’s gross margin. Adjusted EBITDA loss increased by 21 million to 88 million compared to a year ago. Approximately 8 million of the adjusted EBITDA loss during Q3 resulted from a few discrete items, including costs associated with returns in our U.S.

CBD business following our strategic change, the write-down of aging inventory of BioSteel, and a credit to a distributor, which is related to the previous sales made to Israel. Free cash flow improved 13% year over year, due, in part, to lower capital expenditures. Now, let’s take a look at the results from each area of our business. Canada cannabis revenue declined 23% compared to the prior-year period and declined 11% sequentially compared to Q2, with the decrease due to lower adult-use B2B revenue, partially offset by a 9% growth in our medical cannabis revenue.

The impact of the retail divestiture during Q3 was approximately 1 million. Canada cannabis adjusted gross margin was negative 8%, but cash gross margins improved to 29% when normalizing for the impact of depreciation in certain noncash inventory charges. The year-over-year improvement in cash gross margins is driven by mix improvement and the cost reduction actions announced in April of 2022. And today’s announcement is expected to further improve cash gross margins and address the gross profit dollar headwinds that have stemmed from lower revenue.

In our rest of the world cannabis segment, revenues, excluding C3, experienced a 54% decline year over year due to a decline in the U.S. CBD business and the impact of shipments to Israel. The current quarter did not have any shipments to Israel, which negatively impacted by sales by 4.7 million compared to the prior-year period. This was offset by strong performance in Australia, nearly tripling revenue compared to Q3 of last year.

Year to date, our international cannabis sales, excluding U.S. CBD business, are up 43% despite the decline in sales to Israel. Adjusted gross margins for this segment was negative 33% in the current period, compared to positive 32% a year ago, which reflects the discrete factors that impacted sales that I discussed earlier in the call. We expect gross margins in this business to revert back to the historical level going forward.

BioSteel revenues were relatively flat to the prior-year period and lower than Q2, mostly due to the impact of timing of distribution load-in. The timing boosted Q2 sales, while Q3 revenues were also impacted by shipment timing shift into Q4. Year to date, BioSteel revenues have more than doubled, and we expect to see strong growth resuming in Q4. Adjusted gross margins for BioSteel were negative 37% in the period, which was impacted by inventory write-downs and higher third-party shipping, distribution, and warehousing costs across North America.

The inventory write-downs relate to an aging inventory of ready-to-drink product, which is primarily due to the previous inventory build ahead of distribution gains that progressed slower than anticipated in the U.S. The acquisition of a manufacturing facility in Verona, Virginia during Q3 is expected to improve BioSteel’s gross margins by reducing contract manufacturing costs. And the BioSteel team has several initiatives in place to further reduce its cost of goods sold in the coming quarters. We expect BioSteel’s gross margins to approach industry standards as sales scale over time.

Storz & Bickel revenues decreased 20% as compared to the prior-year period, yet increased 50% sequentially compared to Q2. While cautious consumer spending in an uncertain inflationary environment is impacting demand on higher-priced items, we did begin to see resumption of sales to key distributors in the U.S. market. Note that this also represents Storz & Bickel’s best revenue quarters since Q4 of FY ’22.

Gross margins for Storz & Bickel remained healthy at 45% in the current period. This Works revenue decreased 22% in the current period compared to the prior year due to challenging U.K. retail dynamics. Gross margins declined slightly to 49%, from 51% in the prior period.

I’d like to now provide an update on our actions to achieve profitability. Our previously announced cost reduction initiatives are already driving improvement in cash gross margins in the Canadian cannabis segment. However, our adjusted EBITDA losses have not improved meaningfully due to the decline in our Canadian cannabis revenue, as well as investments behind BioSteel. As David mentioned, this morning, we announced a plan to transform our Canadian business to an asset-light, brand-driven model, significantly reducing our operational footprint, as well as head count across our organization.

As a result of these actions, we expect to reduce our overall cost by an additional 140 million to 160 million, comprised of a 90 million to 100 million reduction in cost of goods sold and 50 million to 60 million reduction in SG&A expenses. The reduction is incremental to the 100 million to 150 million of cost reduction plan that we announced in April of 2022. The additional cost reductions are expected to come from several areas. One, reduction of our Canadian cannabis operational footprint.

Our plan to exit cannabis flower cultivation in our Smiths Falls, Ontario facility and seizing the sourcing of cannabis flower from the Mirabel, Quebec facility is expected to result in a much smaller cultivation footprint. In addition, we plan to close the 1 Hershey Drive facility in Smiths Falls and move manufacturing to a smaller footprint while moving production of all cannabis 2.0 formats to third-party partners. And we’ve already closed the Scarborough, Ontario research facility. These operational footprint adjustments are estimated to deliver 35 million to 40 million in annualized cost savings and reduce our distribution costs, as well as other supply chain-related costs by an additional 100 million — sorry, 10 million in annualized cost of goods sold.

We anticipate these operational changes will be completed in Q2 of FY ’24. Two, reduction in head count across our operations. Head count reductions across cultivation, manufacturing, and other areas of operations are expected to generate 45 million to 50 million in annualized cost of goods sold savings. Three, reorganization of our sales and marketing organizations.

We have streamlined the sales and marketing functions under the creation of a stand-alone Canadian business unit, with focus on key accounts, high-margin customers, and our medical sales. This is expected to result in a leaner selling organization and reduction in certain marketing expenses, with an estimated cost reduction of 10 million to 15 million in annualized sales and marketing costs. And four, reduction in R&D and G&A spending. We’ve eliminated our essential R&D resources, outsource our genetics program, and embedded innovation functions within the Canadian business unit.

This is expected to deliver 10 million to 15 million in annualized cost savings. And right-sizing of our central support teams from both the head count and operational spend perspective to size of the current business and market realities is expected to generate an additional 30 million in annualized G&A expense savings. Overall, we expect to reduce our total cost by 240 million to 310 million upon completion of the April ’22 cost reduction initiatives, as well as the actions that we’ve outlined this morning. We expect the combined cost-savings program will position Canopy to be profitable in our Canadian operation, even with no improvement in revenue from the current run rate.

And as such, we reaffirm our previous expectation of achieving positive adjusted EBITDA in FY ’24, with the exception of investments in BioSteel. Let me now spend a few minutes on our cash flow and balance sheet. Our cash balance declined by 354 million during Q3 compared to Q2, which is higher than the recent quarterly cash outflow. So, let me walk through the various drivers.

First, we paid off 117.5 million of our term loan, which was the first of the two payments as part of our agreement to tender USD 187.5 million of the outstanding term loan. Second, cash used for acquisitions and investments during Q3 included 24 million in acquisition of a manufacturing facility for BioSteel, which should provide an attractive return on investment; and a 38 million related to an option premium payment to purchase Acreage’s debt. Third, our free cash flow in Q3 was an outflow of 146 million. This included cash interest payments of 28 million in Q3.

Cash outlays also included approximately 20 million that are not part of our adjusted EBITDA, which includes acquisition-related costs, primarily related to the reorganization of Canopy USA and divestiture of our retail business, as well as certain cash restructuring costs. Q3 capex came in at 2 million, significantly lower compared to the prior-year period. And for the full year 2023, we continue to estimate capex to be in the range of 10 million to 20 million. Our cash and cash equivalents remain strong at 789 million, and our overall debt position has been reduced to 1.2 billion as of Q3 quarter end, down from 1.5 billion at the end of Q4 of fiscal ’22.

We also have many liquidity options available to us and are laser-focused on improving our cash position and further reducing our debt over the next few months. First, of the remaining senior notes due in July ’23, Constellation has already indicated its intention to purchase for cancellation up to 100 million principal amount. Second, we have a very constructive relationship with all our debt holders, and we continue to consider ways to reduce debt in an accretive manner, balancing our focus on remaining — on maintaining our financial flexibility and cost of capital. Third, we are in active discussions around monetizing numerous noncore assets that we have, which include facilities that we’ve already closed.

Fourth, our USD 2 billion base shelf remains fully available to us. And importantly, we expect the cost reduction initiative to reduce our operating cash outflow by more than half, with significant quarter-over-quarter improvements starting in Q1 of our fiscal ’24. Let me now provide some perspective on the balance of fiscal ’23 revenue outlook. First, we expect strong growth from BioSteel in Q4, with increased marketing investments driving gains and sales velocity, as well as new distribution.

Our Canadian cannabis business is expected to show stabilization in net revenue as we undergo our business transformation plan. Note that with the disposition of our Canada retail being completed at the end of Q3, the Canadian adult-use business-to-consumer revenues will now be eliminated from our go-forward results, which will negatively impact both year-over-year and quarter-over-quarter comparisons. Our Europe and rest of the world business is expected to show year-over-year decline in Q4 as we no longer expect to see sales to Israel going forward. For Storz & Bickel, we’re encouraged by improved U.S.

distribution in the third quarter, but note that Q3 results benefited from Black Friday and the holiday season, so we expect seasonality to contribute to a modest decline in Q4 versus Q3. In conclusion, achieving profitability is critical for us, and with the decisive actions we announced today, we’re focused on executing this transformation in Canada and significantly reducing our cash burn over the coming quarters. This concludes my prepared comments. We will now move into the question-and-answer session.

So, to begin with our Q&A session, we’ll first address an investor question that was uploaded through the question-and-answer platform developed by Say Technologies. Tyler, can you please state the first question?

Tyler BurnsDirector, Investor Relations

What do you feel the effects of legalization in the United States will have on the company and the industry as a whole?

David KleinChief Executive Officer

Yeah. So, thanks, Tyler. Look, with the lack of developments in Washington on federal legalization, we — we’ve decided not to wait for regulatory reform to happen in order to reap some benefits through our ecosystem in Canopy USA. And, you know, that — just to reiterate what that is, that’s really putting together our Wana brand, our Jetty brand, Acreage together so that they can operate in a collaborative fashion, grow their business faster than they might do if they were to continue to operate as separate companies, and realize cost synergies.

And so, you know, we continue to work on our Canopy USA strategy, which we commented on both in the earnings release, as well as in our prepared remarks. So, yeah, I think that we’re all hopeful that, at some point, we have full federal legalization in the U.S., but we see that happening — continuing to happen very slowly. So, we’ve taken matters into our own hands. With that, operator, Judy and I will now take questions from our analysts.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] Your first question will come from Tamy Chen at BMO Capital Markets. Please go ahead.

Tamy ChenBMO Capital Markets — Analyst

Thank you. Good morning. Judy, I just wanted to ask, in terms of the EBITDA, could you comment a bit on what the EBITDA loss looks like between the — particularly the Canadian cannabis segment and then your consumer segment? I’m just looking at, based on your total cost announcement today and your reaffirming EBITDA guidance, that it seems the majority, if not possibly all of the currently reported consolidated EBITDA loss is due to the Canadian cannabis segment and that possibly the consumer segment EBITDA maybe already in the positive. Are you able to comment on that? And can you just give a little bit more detail on the cadence of all these cost savings as we progress through the quarters in fiscal 2024? Thank you.

Judy HongChief Financial Officer

Sure, Tamy. So, I would say, when you look at our total adjusted EBITDA losses, the way I would think about it is sort of break into a few different segments, right? So, number one, to your point, right now, the two main drags in terms of adjusted EBITDA losses are, one, Canada; and second, the investments that we’re making in BioSteel. So, with all the actions that we’ve announced in terms of our Canadian business transformation plan, our expectation is that once we’re complete with the plan, that all of our operations across our businesses will be profitable, with the exception of the investments that we’re making in BioSteel. So, that’s the outline of my comment around FY ’24.

So, when you look at the businesses that we have, Storz & Bickel is a profitable business. You can see that in the gross margins. And obviously, the high price point that that brand garners, it is a profitable business. The international cannabis, there’s some noise in that business just given some of the actions that we’ve taken with U.S.

CBD business and the opportunistic sales that we had previously benefited from Israel. But all in all, international cannabis is achieving, you know, gross margin profitability. And if you look at — and if you get This Works and others, you know, we think we’re pretty close to profitability in all those segments. So, it’s really about making sure that all the cost savings are driving Canada to be self-sustaining and profitable.

And for BioSteel, we do think the investments will eventually pay off for Canopy shareholders one way or the other in terms of really the sales growth that we’re benefiting from from that business. And I think that that does create value for Canopy Growth shareholders. In terms of the cadence of the savings that are expected to flow through, I would say, you know, we obviously did announce the changes this morning, and there is a big portion of the savings that will begin to flow through starting in Q1. But as we complete those actions in Q2, we think the bigger chunk of those savings and the progression from a quarter-over-quarter basis will really begin to start to see in Q1 and Q2 of fiscal ’24.

Operator

Your next question comes from Vivien Azer of Cowen and Company. Please go ahead.

Victor MaCowen and Company — Analyst

Hi. Good morning. This is actually Victor Ma on for Vivien Azer. And thank you for taking the question.

So, broad-based inflation headwinds are persisting in North America, while flower downtrading has been evident in Canada. Have you seen that accelerate at all as consumers absorb higher energy prices this winter?

David KleinChief Executive Officer

I think we’ve seen across Canada, and I would argue in the U.S., you know, we’ve just seen growth in the value segment, which we don’t play heavily in. But that’s really — that’s, I think, where we’re seeing — I think it’s less about overall price compression and more about this growth out of the low end of the market.

Judy HongChief Financial Officer

And just in terms of our business in Canada, we are looking at now the impact from some of the price compression moderating in our business. If you look at our product mix, as we’re premiumization our portfolio, the decline in terms of our average pricing is beginning to moderate. So, you see that in terms of our product mix shift.

Operator

Your next question comes from Chris Carey of Wells Fargo. Please go ahead.

Chris CareyWells Fargo Securities — Analyst

Hi. Good morning.

Judy HongChief Financial Officer

Good morning.

Chris CareyWells Fargo Securities — Analyst

David, you — I think you noted that the shareholder vote on Canopy USA was still planned for April of 2023 or is planned for April 2023. Please correct me if I heard that wrong. You know, there’s a lot of details in the press release this morning about, you know, potential remedies that would make the Nasdaq and I presume the SEC more comfortable with this transaction. I’m still struggling a little bit just to understand the practical considerations here.

You talked about, you know, a smaller percentage ownership, among other things. So, you know, just in plain terms, what would need to change to get this deal through and then, you know, perhaps comment on how this changes the — I suppose the reporting relationship with Constellation. My read here is, you know, probably under the changes that they’d still be reporting Canopy and equity income, you know, but I’m not sure. So, anyway, so you could tell, just trying to maybe — you know, just dumb this down a bit and understand kind of the practical considerations of what’s actually being contemplated here.

Thanks so much.

David KleinChief Executive Officer

Yeah, Chris. So, look, it’s a complicated transaction, and that’s partly why it’s taking maybe longer than we would like it to take. And yet, we’re still targeting an April 2023 shareholder meeting. I don’t think it changes — any changes that we might make in the structure of our Canopy USA business won’t affect how Constellation ultimately treats their investment in Canopy.

And so, to simplify where we are really, again, the value of Canopy USA is in putting these businesses together, letting them generate revenue synergies because they can effectively open markets maybe faster, generate cost synergies by working together to drive routes to market and route-to-market activation within individual marketplaces and then look at other more G&A sorts of synergies across their business. So, we think putting the businesses together is the value unlock. How we go about doing it is the complicated set of activities that we’re working through with SEC, as well as our — the exchanges that we trade on. And so, you know, simplistically put, we would have to ensure that our economic ownership isn’t more than 90%, which was a likely or potential outcome, anyway, as we put this business together.

We need to make sure that we would only have three members on the board. So, we would have one fewer seat on the board, and that seat would come from a Canopy nomination to the board. We don’t think that affects the performance of the business whatsoever. And then we’d have to, it says in our earnings release, eliminate certain negative covenants.

That’s just adjusting some things that Canopy would have ordinarily or originally had say over. So, what we’re really doing is we’re just positioning the company to function like every other company would, gather synergies across their portfolio, drive their business in the marketplace, and these kinds of technical things are just required for us to have an appropriate level of distance from specific control of that enterprise as we go forward.

Operator

Your next question will come from John Zamparo of CIBC. Please go ahead.

John ZamparoCIBC World Markets — Analyst

Thank you. Good morning. My question is on the profitability goals and even at the high end of the combined savings plan, that doesn’t get you particularly close to breakeven on EBITDA, at least compared to the current quarter. So, how do you square that with the outlook for FY ’24 as being positive? And presumably, your spending on BioSteel isn’t that material.

So, is it that you’re including results from the U.S. businesses, even though those won’t be consolidated? There’s also the comment about revenue not needing revenue growth, so just trying to better understand the profitability guide. Thank you.

Judy HongChief Financial Officer

Sure. I’ll start. And, David, you can add as well. So, just in terms of the overall profitability goal and how that ties to the cost reduction, look, again, I do think when you combine the announcement we made in April and what we announced today, it is a pretty sizable cost reduction that we currently are underway.

So, there are some remaining cost savings as part of the April program. And then we obviously have additional cost savings that we announced. I would say the investments we’re making in BioSteel are not insignificant, and I think that’s a decision that we made, particularly in the current fiscal year as we really were standing up the investments behind the NHL sponsorship, really with the anticipation that that will drive strong velocity and strong distribution across both the Canadian market and the U.S. market.

And as you see in the retail data, we’re very pleased with the performance of BioSteel. You see that at least in the retail data despite some of the lumpiness that you see on a quarter-over-quarter basis. So, we do think that that investment that we’re making will pay off in the coming quarters. So, again, I think, as I said to Tamy, if you think about the cost actions that we announced in Canada and the other businesses that are already profitable, that we think we can get to a profitable business for total Canopy, with the exception of the investments in BioSteel.

And I think the adjusted EBITDA losses as it relates to BioSteel really depends on how quickly the sales scale up in the coming quarters.

Operator

Your next question comes from Nadine Sarwat of Bernstein. Please go ahead.

Nadine SarwatAllianceBernstein — Analyst

[Technical difficulty] a deeper question for me. So, the first, many of your initiatives focused on improving profitability that you announced today, which is really great to hear. However, the weaker top-line growth for Canopy and, to be honest, more broadly, for Canadian cannabis industry remains a fundamental challenge. So, could you just walk us through what you’re planning as part of your initiatives that, in particular, address improving top line given the challenges you guys highlighted at the start of the call? And then my second part of the question is, you know, many investors have expressed concern that Canopy USA is adding to your costs or taking management’s attention away from the core business without contributing positive cash flows until federal legalization occurs, which appears increasingly unlikely for the moment.

So, what would you say to those investors who are concerned about that? Thank you.

David KleinChief Executive Officer

So, I’ll take a shot at this, Judy, and then you can fill in the blanks. But in terms of top line, as Judy pointed out, we aren’t anticipating — or we don’t require top line to meet the profitability objectives that Judy outlined as a result of these — the changes that we’ve announced today. What gives us confidence in being able to sustain the current level of performance in Canada is really the continuous improvement we’ve made over the last several quarters in terms of the offerings that we have in the marketplace, the general consumer acceptance and appreciation of those offerings, and the strength of our commercial team on the ground in Canada, which we believe is second to none. And so, we think that those have us in a good position to at least retain the current level of revenue that we’re generating in the business.

And so, we’ve sized our business accordingly, which yields the profit objectives we talked about. As it relates to Canopy USA, look, the purpose of Canopy USA is to create value by putting Jetty, Wana, and Acreage together in a way that they can work together in a collaborative fashion to extract value. And that is something that those businesses need to do by working together and it’s really less about resources being assigned from Canopy Growth. And so, we don’t see it as a major distraction from running the rest of our business, which includes Canada, includes Storz & Bickel, and it includes BioSteel, as well as of our international businesses.

Judy HongChief Financial Officer

And I would just add, from a revenue standpoint, Nadine, so when you look at our Canadian total cannabis revenue over the last few quarters, it’s been stabilizing in the range of 35 million to 40 million. And that is — you know, there is some declines in the adult-use cannabis side, but we’ve actually seen medical revenue grow, as we pointed out on the call. So, importantly, when you think about our profitability target for Canada, we’re not expecting any changes to our current run rates. So, we think that we’ve got an opportunity to continue to grow our medical business, and we’ve got increased product offerings then, and that’s driving some of that improvement.

We expect that to continue. And really from an adult-use cannabis business standpoint, we’re not expecting an improvement to the current run rate. And I think that is still enough for us to get to profitability in Canada. And then from a Canopy USA standpoint, look, I think once we get Canada to be profitable, we think the cash flow generation or the contribution from Canopy USA is really not something that’s required to support the Canopy Growth cash needs.

And so, from that perspective, it’s really about optimizing the value of Canopy USA through advancing the U.S. THC strategy and then for Canada to be profitable and for the rest of the business to continue to be profitable.

David KleinChief Executive Officer

You know, I want to actually come back to a point as it relates to top line as well. So, we made a decision a year and a half ago or so to not chase the value segment. And it doesn’t mean we won’t participate in parts of the value segment when we have product that we can waterfall down into that segment. But we deliberately chose not to chase the value segment, which has — had a dampening effect on our top line because of the growth of that segment, which we’ve not participated in.

We did that because we didn’t believe that we could build a profitable, sustainable business at the value level in the Canadian market. And so, we focused on mainstream and premium offerings in the marketplace. However, our footprint was too large to support the — that segment of the market that we really want to go after. And so, the actions today are all about getting our footprint right to address the market that we want to address within Canada.

And that’s — as Judy said, that’s been running in that $35 million to $40 million range quarter. We think that we can stabilize at that and then begin to build from that as the base.

Operator

Your next question comes from Andrew Carter of Stifel. Please go ahead.

Andrew CarterStifel Financial Corp. — Analyst

Morning. Thank you. So, within results, there’s a big revenue miss, mostly on BioSteel. And your commentary in November was a modest sequential climb [Inaudible] if you had visibility into that distribution issue.

Today’s commentary outlines steps you can take if Nasdaq objects to the consolidation, which I don’t know, correct me if I’m wrong. You could — could have been hit head-on in the release last call back in October. My biggest question is like, what’s going to change from here? You know, given the cash needs, I think viability requires successfully navigating the capital markets, which requires properly setting expectations and credibility. And back to the cash needs, I guess, can this business with the assets in hand, including Canopy USA and the changes you’ve made today, achieve positive free cash flow with the full run rate of interest expense on the remaining term debt? Thanks.

Judy HongChief Financial Officer

I’ll start from cash needs standpoint, Andrew, and then David can add additional comments. So, from a cash needs standpoint, as I outlined in my prepared comments, we think we already have a strong balance sheet with just under 800 million that we have on our cash, as well as several options that we have available to us to increase liquidity and reduce debt. You’ve already seen our actions that we’ve taken to reduce our debt, including equitizing the portion of the converts last year. We’ve obviously also paid off some of the term loans, and that is going to drive the interest savings and reduce our cash burn going forward.

We’ve also talked about the remaining convert notes, with Constellation intending to exchange the 100 million into exchangeable shares. We also have a very constructive relationship with the debt holders, and we’re in communications to address our desire to pay off some of the debt and in a very accretive manner. So, we are looking at all those options. We have availability of USD 2 billion of cash available to us through the base shelf that we’ve filed.

So, we actually think we’ve got several options. We’ve already also — or in active discussions with monetizing several assets that we have, and you’ll hear more about those as we go forward. But from a liquidity needs standpoint, I think we’ve got a really a — several options that’s available to us. But, Andrew, to your point, the entire point of what we’re doing today and what we’ve announced this morning is to generate a sustainable business that will have positive cash flow over time.

We get that. And so, all the actions that we’re taking to significantly reduce our operating free cash flow in our Canadian business, as well as interest savings that we would get from our debt reduction plan and all the things that we’re doing to monetize the assets, we think we’ve got a very laser-focused and strong plan in place to get to that place as quickly as possible.

David KleinChief Executive Officer

Yeah. And I would just say, look, projecting revenue in a nascent industry and nascent businesses is difficult at best, which is why we don’t provide guidance. I would point out that BioSteel has seen volatility, but BioSteel, on a year-to-date basis, is up 100% year over year. And so, you know, we think that that kind of performance over time will continue with that brand.

But as we said, we’re going to see volatility from quarter over quarter. And you could make the same case with other components of our business as well. And so, you know, I think that what we’ve laid out here today represents a strong path to getting profitable, to achieving cash flow favorability at a point in the future, and some very strong businesses that have a lot of economic value potential for our shareholders.

Operator

Your next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

Matthew BakerCantor Fitzgerald — Analyst

This is Matthew Baker on for Pablo. Thank you for taking our questions. Firstly, I just wanted to congratulate the company on ringing the opening bell at Nasdaq on December 12. Can you update us on how those conversations with Nasdaq are going? Yes, you are committed to the dual listing, but Nasdaq has made it clear that they’ll delist you if you consolidate U.S.

assets. So, what has changed? And then secondly, when do you expect the regulatory approval for the consolidation of Acreage? Thank you.

David KleinChief Executive Officer

Yeah. So, the — first of all, let me start with the regulatory approval, that starts as soon as Canopy USA triggers the ownership interest in Acreage, which hasn’t happened yet. And then, you know, that takes as long as nine to 12 months afterward in order to complete that regulatory approval. As it relates to Nasdaq, you’ve outlined the issues appropriately.

You know, we’ve already been really clear that we do not control Canopy USA, and that’s important here. We had an accounting pronouncement that suggested that we would have to consolidate, which was in — which created an issue for Nasdaq. And we’re now working on alternatives which would solve the consolidation, meaning we wouldn’t have to consolidate Canopy USA into our results. And we need to continue to do that work.

But there’s a lot of activity going on around that. And, you know, we expect that we’ll be able to get through all of the open matters and ultimately proceed to a vote, as we said. You know, our targeted date for that shareholder vote, which means we will have cleared all of these hurdles, is in April of ’23.

Operator

Your next question will come from Doug Miehm of RBC Capital Markets. Please go ahead.

Douglas MiehmRBC Capital Markets — Analyst

Good morning. Two-part question. Number one, David, you did really call out today what you see as the sector challenges in Canada. And it appears the inability to make any significant changes with respect to those unless the government makes some changes.

So, my first — the first part of my question is, are there ongoing discussions that you think would be fruitful? I’m not even saying in the near term, but let’s see in the midterm. That’s the first part. And then the second one was can you comment on the medical growth, which, you know, was positive this quarter, and if this is a function of taking share from other groups or this is a function of the medical business overall growing perhaps a little bit faster than everyone believes?

David KleinChief Executive Officer

Yeah. So, starting with the Canadian regulatory situation, look, the legal industry was built on the back of a call for harm reduction. That’s kind of different from maybe building the industry around economic development and generating tax from this industry, which has an underlying rate of consumer participation, right? And so, you know, are there any things that would — are there anything things going — anything going on that would affect the industry in the near term? I don’t think so, which is why we made the changes we made today so that we would have a business that’s right-sized for the industry as it sits today. I do believe, however, over time, the Canadian government will continue to try to understand how they need to adapt the regulatory regime so that cannabis can be the economic development engine that we all started to experience immediately post-legalization in Canada.

So, I think it will take a long time, as I said in my script, which is why we made the changes to adapt our business for the realities of the market that we sit in today versus where the market could go in the future.

Operator

Your next question will come from Aaron Grey of Alliance Global Partners. Please go ahead.

Aaron GreyAlliance Global Partners — Analyst

Hi, good morning, and thank you for the question. So, for me, just wanted to talk a little bit about BioSteel. So, you talked about expected growth to come back next quarter but look for — and growth quarter over quarter. Just wanted some more color there.

Thirty-four percent ACV, I believe that matches last quarter. So, if you could provide some line of sight to the magnitude of timing of additional distribution and maybe some ACV targets over the next 12 to 18 months, that’d be helpful. Thank you.

David KleinChief Executive Officer

Yeah, I think the thing that’s exciting about BioSteel is, you know, you see it — particularly anybody that lives in Ontario, you can really see the gains that are taking place at retail and just the general availability of the brand in the marketplace. And so, when we work with retailers, but, in particular, when we work with distributors, between us and retailers, there can be lumpiness in terms of our reported revenue. But what I think is interesting is — are the stats that I called out in my prepared remarks where we’re just under 14% market share in convenience and gas channel in Ontario, where, you know, scanned sales in the U.S. up by 157%.

I think it’s that kind of consumer takeaway activity that ultimately drives revenue growth and, over time, that cuts through the lumpiness that you get in forecasting reported revenue based upon shipments to distributors. So, I think you have to — so instead of putting targets out there, I think you have to just keep looking at the consumer takeaway data because that’s going to determine, obviously, where the brand ends up in the medium term.

Operator

Your next question will come from Matt Bottomley of Canaccord. Please go ahead.

Matt BottomleyCanaccord Genuity — Analyst

Yeah, good morning. Just a follow-up for me with respect to the BioSteel commentary you just made. You know, with the margin profile of the overall company on an adjusted basis dipping back into negative territory, there’s a few things called out in the press release, and one of them was some write-downs with respect to aged inventory in BioSteel. So, I don’t expect that’s a material element of it.

But if you could just maybe give us some idea of the magnitude. And then just the dynamic given that, you know, outside of the timing of shipments, when you look at this business on a six-month smoothed basis or just sort of year over year, you know, growth is certainly continuing to be a theme for that brand. So, just the sort of rationale behind why there’s aged inventory requiring a write-down at this point.

David KleinChief Executive Officer

Yeah. I’ll have Judy handle that. But I first want to actually build a little bit of a bridge where Judy called out in her script that we expect that this brand achieves industry-standard kind of margins for the brand, which would really put that into the, you know, in the high 30%, low 40% over time. And that was the driver behind our purchase of the Verona facility, which allows us to control more of the supply chain for BioSteel.

I think there are some cost savings to be had as we get scale from distribution costs, which, on a per-unit basis, are quite high in a nascent brand but shrink very quickly as you start to get scale. We think that we can do some more work. This is a good price point — a high price point, really, in the category. So, there’s a lot of margin available to us.

We have to make sure we continue to do a good job of managing that kind of gross-to-net margin erosion that happens when we go into retail. And I — and there’s — the team at BioSteel, especially post-closing on the Verona facility, are laser-focused on showing consistent improvements in that margin on its way to those industry-standard margins. And yeah, there are some noise in the near term that Judy can comment to, but we think we have a very well-defined path to industry margins that go along with the top-line growth we see in the brand.

Judy HongChief Financial Officer

Yeah. So, just in terms of the gross margins at BioSteel, Matt. So, in Q3, we think roughly about a 5 million impact as relates to some of the inventory situation. And that has impacted the negative — the gross margins at BioSteel.

And to be clear, this is really related to the inventory build that we had previously built. And, you know, I think in — when you go back a year ago, we talked a lot about the lumpiness, again, in terms of the sales and distribution load-ins happening slower than we had anticipated, particularly in the U.S. market. So, this was really a result of that historical inventory build that we had in the BioSteel.

And if you kind of look at, you know, Q2 BioSteel margins or year-to-date gross margins for BioSteel, that’s probably more reflective of the margin profile. On today’s basis and to David’s point, as we bring production and health with the Verona facility acquisition and all the other initiatives to drive gross margin improvement and as sales scale up, we expect BioSteel gross margins to mirror sort of that industry-standard margins for a beverage company.

Operator

Ladies and gentlemen, unfortunately, that is all the time we have today for questions. So, I will turn the conference back to David Klein for any closing remarks.

David KleinChief Executive Officer

Yeah. Thanks again for joining us today. The changes we announced today, while difficult, are necessary not only for us to reach profitability but to sustain our business over the long term. We continue to believe Canopy has significant opportunity ahead, both in Canada and the United States.

And today’s actions, coupled with our strategy for U.S. entry, will ensure we’re able to realize this. Investor relations will be available to answer any questions that you have over the rest of the day. And again, thanks for joining us, and have a good day, everyone.

Operator

Ladies and gentlemen, this concludes Canopy Growth’s third quarter fiscal 2023 financial results conference call. A replay of this conference call will be available until May 8, 2023, and can be accessed following the instructions provided in the company’s press release issued earlier today. [Operator signoff]

Duration: 0 minutes

Call participants:

Tyler BurnsDirector, Investor Relations

David KleinChief Executive Officer

Judy HongChief Financial Officer

Tamy ChenBMO Capital Markets — Analyst

Victor MaCowen and Company — Analyst

Chris CareyWells Fargo Securities — Analyst

John ZamparoCIBC World Markets — Analyst

Nadine SarwatAllianceBernstein — Analyst

Andrew CarterStifel Financial Corp. — Analyst

Matthew BakerCantor Fitzgerald — Analyst

Douglas MiehmRBC Capital Markets — Analyst

Aaron GreyAlliance Global Partners — Analyst

Matt BottomleyCanaccord Genuity — Analyst

More CGC analysis

All earnings call transcripts



Source link

Leave a Response