Canopy Growth Corporation (WEED) Earnings Call Transcript & Summary

Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's First Quarter Fiscal 2027 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to John Vincic, Investor Relations. John, you may begin the conference call.

Thank you, operator, and good morning, and thank you to everyone for joining us. On our call today, we have Canopy Growth Chief Executive Officer; Luc Mongeau; and Chief Financial Officer, Tom Stewart. Prior to the opening of financial markets today, Canopy Growth issued a news release announcing the financial results for the first quarter ended June 30, 2026. The news release and financial statements have been filed on EDGAR and SEDAR and and will be available on the website under the Investors tab. Before we begin, I would like to remind you that our discussion during the 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 the news release issued today. Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in penny and dollars unless otherwise stated. Following the remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts. And with that, I would like to turn the call over to Luc.

Thank you. Good morning, everyone, and thank you for joining us today. Fiscal 2027 is off to a strong start, and it's built on real momentum from fiscal 2026. The I'm confident to say that our first quarter results have us well positioned to build on that momentum all year long. Fiscal 2026 was all about sharpening our focus lightening execution and positioning us for growth, including the strategic acquisition of MTL cannabis. That work is truly paying off. Since I joined as Canopy's CEO in January of 2025, this is the first quarter we've reported year-over-year growth in every single business. Fiscal 2027 is about growth and moving our focus to cultivation, to improve yields and accelerate growth, especially in Europe, -- and it's as well about increasing our manufacturing efforts to improve margin and accelerate our journey to positive adjusted EBITDA. In the quarter, Net revenue was $81.2 million, an increase of 13% from Q1 of last year, with our cannabis segment growing at 14% and stores in Bicol growing at 6%. And importantly, adjusted gross margin was up 600 basis points over last year, reflecting the efforts we've made across our supply chain to reduce our cost structure and improve execution. This gives us confidence our strategy is working. Our cannabis growth was led by our Canadian medical business, which reported net revenue of $25.8 million, up 22% from Q1 2026. Strong year-over-year growth in Medical was driven by a steady increase in patient count over the past year. Our medical business was recently strengthened by the addition of MTL cannabis with its Canada House clinics and Ababedix online distribution platform. As a combined company, we continue to drive patients and increase the number of orders we filled during the first quarter, helping to cement our position as the #1 Canadian medical cannabis provider. Our Apollo cannabis clinics, we recently voted best medical cannabis clinic in the Turo2-Star Reader's Choice Awards. This recognition reflects our commitment to positive patient outcomes and to making medical cannabis care accessible. We are trusted by patients and will strive to continue to earn that trust. Even with these successes, even have a significant focus on bettering care, we have felt the impact of the reduced reimbursement rates for our products on Veteran Affairs Canada. We have done our up most mitigating the impacts of these changes on our patients and patrons and continue to work to broaden our patient base to build on our leadership position. Despite this headwind, we remain strongly committed to our medical patients in Canada. We continue to offer the best product assortment, consistent availability and a best-in-class service experience for veterans and all patients alike. We strongly believe staying through to our core values will enable us to continue to add new patients and ensure the ongoing expansion of the business. Our Canadian adult-use net revenue of $29.7 million was up 10% from Q1 of last year. Building on the impressive 20% growth rate we delivered in fiscal 2026. Our recreational business has benefited from ongoing straightening of our product portfolio including the addition of the popular MTL Cannabis brand. We plan to leverage Canopy's distribution capabilities to further expand the reach of the MTL brands across the country. The most recent market share data shows that Canopy is now ranked at #6 overall are from #8. We also moved into the top 2 position in premium flower and infused pre-rolls and #1 is subcos. We are confident this growth will continue. The other progress we are making cultivation and the additional flow we plan to bring to market as well as planned innovation around the Claybourne and Tweed brands. In international cannabis net revenue rose 10% year-over-year as we reset our operations and continue to lay out the end-to-end supply chain to grow in the European market. Europe remains a major catalyst for our growth, driven by particularly robust sales performance in Poland during Q1, where we are now a top 3 supplier. This was our fourth consecutive quarter of sequential growth in international, driven by solid execution, in particular, our ability to consistently supply high-quality flower. We also plan to begin shipments of flower to the U.K. imminently with revenue contributions expected to start in the second half of the fiscal year or energized by the tremendous opportunities in Europe. And by our strengthening ability to supply the market with quality products that meet growing needs of European cannabis patients. Stores at Nickel returned to year-over-year growth in Q1, reporting a 6% net revenue increase to $16.1 million as well as a very strong gross margin of 48% compared to 29% in Q1 of 2026. Q1 was stores a Mako first full quarter under the new leadership team, which has been implementing a focused go-to-market strategy. We're pleased to see increased sales in markets outside the traditional strongholds of the U.S. and Germany. Clearly demonstrating that stores in Beko is diversifying its revenue stream and building on its position as the #1 global provider of medical vaporizers. While these results are encouraging, our strategy remains anchored on building upon our capabilities in 3 key areas: we class alteration optimizing our supply chain network and fueling international supply. Elevating our cultivation capabilities is now a company-wide priority. It has contributed to our recent success and more importantly, establishes a foundation for accelerated long-term growth. The addition of the MTL Cannabis team kicked off a sharing of best practices and expertise across the organization. We're implementing a wide range of improvements, ranging from growing techniques to lighting upgrades and environmental controls. The early results are positive. With promising improvements to yield THC levels and cost per gram. We have begun growing popular MTL strain at Kincardine due to the leadership of the MTL master growers as well as cultivating new strains to enhance our genetic portfolio. These initiatives promised to increase our supply of high-quality flower. Our business has already benefited from more consistent supply. And I'm excited to see there is significant room for further gains. As throughput increases throughout the year, we expect to see a direct positive impact on revenue. Post quarter end, we kicked off a comprehensive end-to-end supply chain initiative to streamline our processes, rightsize our distribution footprint and optimize labor. As we grew revenue, we're targeting significant improvements in gross margin beyond what we have already seen. Turning to international supply. Canopy has a complete EU GMP flower supply chain starting with our EU GMP certifying carton facility and extending our distribution facility in Germany. We have also already completed our EU GMP inspection for finished products and cannabis 2.0 products manufacturing in our Smiths Falls facility, for which we expect to receive certification during this fiscal year. That certification will make Canopy 1 of the only domestic companies with end-to-end EU GMP cultivation, manufacturing, and finished product processing and packaging of products intended for the international market. This capability will be a core differentiator for Canopy and we see it as a competitive edge that can spare growth. As yields and manufacture capacity increased throughout the year, we expect to see improved gross margin. and we will be better positioned to compete and win in a competitive Canadian medical and recreational space as well as winning in global market. This is what truly excites me most about the future of our company. I will now ask Tom to provide more details on our first quarter financial results.

Thank you, Luke, and good morning, everyone. Canopy reported a solid first quarter, showing good progress on both the top line and key profitability measures. We reported $81.2 million of net revenue in Q1 fiscal 2027, up 13% from the same period last year. Net revenue increased in our cannabis segment with growth across all channels as well as in the stores and big segment. Despite the Veteran Affairs reimbursement changes, Canada Medical cannabis reported strong growth with net revenue increasing 22% year-over-year to $25.8 million. We are also taking steps to further mitigate the impact of the veteran affairs changes on margins to the EBITDA. These include saving costs by integrating functions like customer care with the MTL organization, renegotiating pricing with third-party suppliers and partners to share the impact and adding more large formats, which deliver greater value to patients by allowed them to buy more product upfront while reducing costs for the company. We have consistently demonstrated our ability to grow patients and gain traction in Canada Medical despite broader market pressures. As we navigate the impact of the veteran affairs reimbursement changes, we remain focused on executing the same proven strategy that has driven our success today, growing our patient base, increasing engagement with our patients and operating the business to deliver a best-in-class customer service experience. Overall, our Q1 results are on track with the commentary we provided on our most recent investor call in June. At that time, we said that we expect to report year-over-year revenue growth throughout fiscal 2027. We also described a transition period in the first half of the year as we integrate the MTL Cannabis operations and focus on our key priorities. On that basis, we continue to expect to report consistent improvement in our operations throughout the fiscal year. Consolidated gross margin was 31% in Q1, 2027 on an adjusted basis, up from 25% a year ago and outpacing our full year adjusted gross margin performance in fiscal 2026. We delivered an adjusted gross margin of 26% in the cannabis segment in Q1, 2027 demonstrating meaningful year-over-year margin expansion and continued progress against our profitability objectives. Reported gross margin was 22%, reflecting a $2.6 million noncash inventory flow-through charge associated with the MTL acquisition. We expect cannabis margins to continue strengthening as we capture the benefits of the MTL integration and execute on our key priorities. Increased production from our existing cultivation facilities, combined with ongoing efficiency gains, should further reduce our cost per unit and support meaningful margin expansion over time. Storz & Bickel delivered an exceptional gross margin of 48% in Q1, up from 29% a year ago, demonstrating the significant progress the business has made in improving profitability. The improvement was driven primarily by operational and cost efficiency initiatives executed over the past year with an additional benefit from tariff refunds recognized during the quarter. Even excluding the tariff impact, margins were substantially ahead of the prior year. This performance demonstrates the success of the new Storz & Bickel's leadership team in optimizing their business, we would expect to see continued improvements across the remainder of fiscal 2027. Turning to operating expenses increased by $2.1 million as compared to Q1 fiscal 2026 despite operating in a significantly larger business following the MTL acquisition. Absorbing those operations while keeping costs subtly controlled is a direct result of our ongoing cost reduction efforts and the immediate synergies we are capturing from the MTL integration. As a reminder. Our stated target is to reach a run rate of $10 million of synergies within 18 months of the March closing of the MTL transaction. We are now actively executing against $8 million of those synergies, up from the $6 million we reported last quarter. On that basis, we believe there is upside potential to our initial target, both in terms of timing as well as in the total dollar amount. Improved margins and discipline on OpEx led to an adjusted EBITDA loss of $3.2 million in Q1, 2027 represented a 59% improvement from the prior year. With the additional revenue growth opportunities Luc described and further integration efficiencies still to be realized, we remain on track to report positive adjusted EBITDA during fiscal 2027. Turning to our financial position. We had $337 million of cash at June 30, 2026. I will note that the $25 million of cash used in operating activities in the first quarter is higher than the run rate we expect to see over the course of fiscal 2027. As an increase in working capital is expected to balance out during the remainder of the year, and we would expect onetime transaction and restructuring costs to decline throughout the year. We remain confident in the strength of our balance sheet on the recapitalization completed during fiscal 2026. Our strong cash position underpins our financial capacity to support strategic growth opportunities that may arise. Before handing the call back to Luc, I will remind shareholders we are holding our Annual General and Special Meeting on September 25. We are filing proxy materials today with information on hydro boat, and we urge all shareholders to cast a vote. I will now turn the call back to Luc for closing remarks.

Thank you very much, Bob. Starting fiscal 2027 with broad-based growth across all our business line and improved margins such a strong tone for the year. We're confident we're energized and everyone is pulling in the same direction with pace and with common purpose to build a global cannabis company. Don't get me wrong. Well, first quarter results are definitely a step in the right direction. We're not satisfied yet. We're taking tangible action towards increasing yield and cultivation, accelerating supply chain efficiencies and strengthening our global supply chain to drive growth and improve margins for quarters to come. We're becoming focused and disciplined operators, relentless and execution, strategic prioritization and financial performance. Today, we unveiled a new corporate visual identity to match our growing ambition and reinvigorated organization. This identity reflects, who we are and what we're building, a company that believes in the power of cannabis as a catalyst for elevating human potential. We believe cannabis is a global economic force 1 that will rival the largest consumer categories in the world, and we intend to be among the companies that's needed, building a global consumer-centric company, with a clear and compromising ambition, lead the world in bettering lives through cannabis. As a company behind the results we've just shared with you. It is the company you'll see reflected in our new identity. Other progress outlined on today's call happens without our people. Thank you to our entire team for their relentless hard work and passion. We're just getting started. Operator, we will now take questions.

[Operator Instructions] First question comes from Aaron Grey with Alliance Global Partners.

Just want to talk a bit about international and some of your initiatives with added GMP certifications. Just can you talk about the broader landscape of international, we're hearing about countries getting tighter in terms of companies need to adhere to GMP compliance. How does this potentially set up for you to be in a more advanced position that you referred to in your prepared remarks? And do you feel like you'll now have enough cultivation as well as processing through the GMP supply chain to ramp up those international sales through the rest of fiscal year '27 and beyond.

Thank you for your question. Listen, we're taking all the right actions and to really set up an extremely robust end-to-end supply chain to win for quarters to come in Europe. I mean 1 thing I can say about Canopy is that we take cannabis extremely seriously. We've got the internal capabilities to really build integrity, reliability and trust in the supply chain, we've been working for quarters and really building the supply chain that meets and qualifies for EU GMP. So as I said in my remarks, we're now end-to-end when it comes to flower our growing and importing and distributing in Germany and across Europe. We take an additional step to make sure that our Smith Falls facility qualifies as well and we should get -- we should receive qualification approval during this fiscal year, which will allow us to have a complete range of product end-to-end to meet the market. So we're really building something that meets all the demands. And if there was even more stringent lack of a better word enforcement of the EU GMP we're extremely well positioned to meet this. And that's what gives us confidence that we will grow this -- continue to grow this business for quarters to come.

Kenric Tyghe with Canaccord Genuity.

Tom, 1 of the key themes to of the prepared remarks was the discussion around margin and margin expansion, I think, specifically material expected margin expansion on some of the initiatives. Could you speak to what is the baseline you're working from? Obviously, we saw some 20-odd bps year-on-year in this quarter. When you speak to when I'm thinking about your margin profile going forward, are we talking something bracketing that 30%, 30% plus level? Anything you could provide there to help us trying get it would be appreciated.

I mean, obviously, long term, we're trying to get that margin up closer to some of our competitive set, like plus the 50% margin. We know that's going to be a boney in the future. I would say for kind of baseline, we're looking at it this quarter on an adjusted basis, we were at 31%. So I would say kind of in the near term, we're targeting to get up to the mid-30s. And hopefully on the higher end as we're exiting this year. But as Luc laid out, a lot of the initiatives we're talking about improving the amount of output that we have from a yield standpoint, priminuality, all of that will fuel our margin improvement. As well as the integration activities with MTAs. We really become 1 organization with 1 set of assets that we're leveraging for the full port. So definitely, I would say, in the near term, we're targeting mid-30s hopefully accident at a bit higher rate as we go into this year. Luc, anything?

Yes. For me, listen, those are not pie in the sky dream. As you can imagine, we spent a lot of time last year really working on fixing the foundations of the business. We took an approach where we want to measure twice and cut once. So we're -- I mean, we spent a lot of time last year really ensuring that what we were aiming for, we have the plans for. And as I said in my remarks, Post quarter end, we pressed the button the work has started. And as I said, the teams are working in 1 direction with PACE, which gives us really a high level of confidence that we will see that margin continue to inch upwards for quarters to come.

Frederico Gomes with ATB Cormark.

I want to ask about cultivation. It seems like it's cultivation efficiency is a big part of your plan to expand margins and with the MTL integration as well. So -- how far along are you in that journey of getting cultivation where it needs to be I imagine that it's going to take some time to trickle through financials, but how much of that margin expansion just comes from cultivation efficiency? And how far along are you in that?