Canopy Growth Corporation (WEED) Earnings Call Transcript

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

Thank you, Joanna, and good morning, and thank you, everyone, for joining us. On our call today, we have Canopy Growth's 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 its second quarter ended September 30, 2026. The news release and financial statements have been filed on EDGAR and SEDAR 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 Canadian 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, John. Good morning, everyone, and thank you for joining us today. Our second quarter of fiscal 2027 results show continued momentum with another quarter of strong year-over-year top-line growth across most of the business. Consolidated net revenue increased 22% year-over-year to $81.4 million. Cannabis revenue increased by 30% to $66.2 million, reflecting our ability to produce and supply high-quality flower to meet the demands of the Canadian and European markets. The biggest driver of growth was our international business, where net revenue increased by a tremendous 141% over Q2 of last year and by 28% sequentially from the first quarter to $12.3 million. International growth was enabled by strong availability of flower and a strengthened routes to market that increased our reach to patients in our core European markets. Canada medical net revenue grew by 18% year-over-year to $25.8 million. Similar to last quarter, we benefited from ongoing increases in patient counts, including through the addition of the MTL Medical business. Our team is building from the new baseline following the VAC reimbursement cap implemented at the beginning of April, continuing to add patients and providing best-in-class service experience for our patients. We believe our position as the #1 medical cannabis provider with Canadian-owned and Canadian-grown supply will remain an important differentiator. Canada adult-use net revenue increased 17% to $21.8 million. We are seeing the benefits of a strengthened product portfolio as well as the addition of MTL brands, which performed well in Quebec and are building momentum in the rest of Canada. We're confident in our ability to continue to grow in this market and recently made the decision to build out an internal sales force fully dedicated to growing our brands in Canada. Our growth in cannabis revenue has been made possible by our ability to provide a more consistent supply of the right flower to consumers. Elevating cultivation has been a core focus for Canopy with efforts accelerating since we acquired MTL Cannabis at the end of fiscal '26. We're applying the expertise of MTL's master growers to improve cultivation practices and drive increased yield and flower quality at our EU GMP facility in Kincardine. Our team has been busy implementing new growth methods and adding new strains. Early results are encouraging. We're taking steps to further increase yield and continue building on these results. We expect to see a noticeable increase in yield and flower quality as we exit the third quarter of fiscal '27 with the full impact felt in the start of fiscal '28. We believe there is a potential to increase flower production at Kincardine by at least 25% to 30% within the same physical footprint. We expect increased yield and quality to drive both revenue growth and per-unit cost improvements. Improved cultivation is a key foundational element of our global supply chain. In addition, we're as well focusing our efforts on strengthening our global distribution and manufacturing network and improving our access to patients across Europe. On that subject, we recently received EU GMP certification at our Smiths Falls facility as well as the renewal of the EU GMP certification at Kincardine. This makes Canopy the only Canadian company with end-to-end EU GMP certification covering its entire supply chain from cultivation to the manufacturing and primary packaging of softgels, orals and dry cannabis flower. Our European sales have historically been limited to flower. The Smiths Falls certification creates a path to expand into additional categories of high-quality patient-ready products, broadening our addressable market and creating new growth opportunities. Our team is actively working with existing and new channel partners to prioritize these avenues for growth, and we expect to provide updates on this in future quarters. These capabilities are increasingly important -- increasingly important to European customers and regulators. They enable us to maintain the highest quality standards with fewer third parties handling our products. It is clearly part of our promise of product integrity in action. Other steps we have taken to strengthen our international capabilities include relaunching the Tweed brand in Germany with MTL Cannabis genetics, strengthening our commercial and operational leadership team in Germany to accelerate growth, broadening our product offering in Australia, and entering the U.K. medical cannabis market. We see international markets as a key driver of growth, and we're very excited about our prospects. Turning to Storz & Bickel. We reported revenue of $50.1 million, down 4% from the second quarter of last year. Storz & Bickel is managing through waves of variability in consumer spending in the face of economic uncertainties in various markets as well as evolving trends in the space. We continue to refine our product portfolio and go-to-market strategies to maintain our leadership position. Storz & Bickel is known for innovation as demonstrated by the recent recognition by Safe Access Now for recent product advancement with the Whole Flower Vaporization Innovation Award. Consistent with prior years, we expect a seasonally strong quarter in Q3, driven by the holiday season. Overall, our financial results are showing what better execution across Canopy Growth can deliver. There's still a lot of work to be done, but we're sustaining our momentum in the right direction. We continue to strengthen our foundation, our capabilities, which gives me increasing confidence in our ability to accelerate growth into profitability in the coming quarters. I will now ask Tom to provide more details on our second quarter financial results.

Thank you, Luc, and good morning, everyone. Canopy delivered strong second quarter performance driven by accelerating top-line growth and disciplined bottom-line execution. Consolidated net revenue climbed 22% year-over-year to $81.4 million, anchored by a 30% increase in our Cannabis segment, reflecting broad-based momentum across every channel. While MTL continues to be an engine for our fiscal 2027 performance, organic growth in international cannabis was equally important, offsetting headwinds faced in Canada medical. Sequentially, the business is demonstrating stronger underlying earnings. We held consolidated gross margin firm at 31% for the quarter despite not having the U.S. tariff refunds that supported Q1. At the same time, we drove meaningful reductions to SG&A and narrowed our adjusted EBITDA loss. This strong execution reinforces our confidence as we remain on track to deliver positive adjusted EBITDA in the second half of this fiscal year. Let me take a moment to elaborate on each of these points. A key growth driver for our business has been international cannabis, which typically delivers favorable pricing on average relative to the domestic market in Canada. This makes continued growth in our international markets an increasingly important contributor to our overall performance and our strategy to drive improved shareholder returns. We expect the ongoing growth of the international business, along with the improvements to our cultivation operations Luc described, to contribute to margin expansion going forward for the Cannabis segment. Adjusted gross margin was 31% in Q2 2027 compared to 33% a year earlier. The decrease is primarily due to the reduction in the Veterans Affairs Canada reimbursement rate, which has had a major impact on our Cannabis segment gross margins compared to the prior year. The Storz & Bickel segment reported a modest increase in gross margin from 38% in Q2 of last year to 39% this year despite a decrease in revenue over the same time frame. This result was due to cost efficiencies realized under the new management team. We are pleased that S&B margins in the first half of fiscal 2027 have been well above the 33% we reported in that segment for the full fiscal 2026 year. As previously mentioned, S&B benefited from a one-time tariff refund in Q1, which positively affected our consolidated gross margin by approximately 2%. Turning to operating expenses. We continue to see progress. SG&A expense increased $3.4 million from Q2 2026, even as we absorbed the full MTL business, which typically incurred SG&A expense of approximately $6 million. The combined company is operating more efficiently, reflecting not only a lower cost base and integration synergies, but also improved execution across the business. We remain on track to reach our target run rate of $10 million of annualized synergies within 18 months of the March 2026 closing of the MTL transaction. On a sequential basis, SG&A expense in Q2 was approximately $0.5 million lower than in Q1, reflecting our ongoing financial discipline and cost-saving actions taken to date. Adjusted EBITDA loss was $2.9 million in Q2 2027. That represented an improvement of $0.4 million from Q1 2027. Again, we achieved a sequential improvement despite the absence of the S&B tariff refund recorded in Q1. Turning to our financial position. We had $320 million of cash and short-term investments at September 30, 2026. In addition, free cash outflow for Q2 improved by $3.7 million from Q2 2026 to $15.6 million despite an increase in capital expenditures of $1.8 million to invest in our cultivation facilities. Last month, we held a successful annual meeting where shareholders approved all resolutions, including authorization for our Board to complete a share consolidation, also known as a reverse split. As a reminder, it continues to be our intention to only complete the consolidation if it is necessary to maintain compliance with NASDAQ listing requirements. In terms of our ATM Program, we have not sold any shares since December 2025, given our strong cash position. We would look to the ATM selectively in support of strategic opportunities, including M&A, where we see a compelling path to shareholder value creation. In summary, Canopy has the liquidity, the discipline, and the strategic runway to fund both organic growth and potential M&A opportunities. With $320 million in cash and investments, we have the flexibility to pursue accretive, high-impact growth opportunities in a disciplined manner. The track record we established with MTL demonstrates that we have the capability to integrate acquisitions efficiently and realize meaningful synergies. We entered the second half of fiscal 2027 with strong momentum, stringent cost controls, and line of sight to positive adjusted EBITDA. I will now turn the call back to Luc for his closing remarks.

Thank you very much, Tom. The results we reported today represent another important step forward in Canopy's growth journey to build a profitable, leading global cannabis company. Financial momentum, such as the accelerating growth of our international business, is certainly a big part of that and is reflected in our top-line results. Perhaps even more importantly, our teams, our employees understand the power of the strength and capabilities we're establishing as a company. Our international business now has a unique competitive advantage for our end-to-end EU GMP supply chain for both flower and manufactured products. Canada adult-use has clear sight lines to improve market rankings on the strength of our best brands. Canada medical is solidifying its leadership position and becoming a much stronger business as they work to overcome significant external challenges. Cultivation yields at Kincardine are steadily improving, and the end result is within our grasp. Storz & Bickel continues to innovate and sharpen its focus on improved competitiveness. As I look across the business, I see that all cylinders are starting to fire in unison. This is turning our foundational discipline into sustained and compounding velocity. It is the driving force uniting the entire team around a shared strategic purpose, and it is beginning to deliver tangible results. I would like to thank our team for their continued hard work and commitment to achieving our goals. Operator, we will now take questions.

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

Just want to dive a bit more into path to profitability. Looking, Tom, obviously, it's been a big focus since you guys came into your respective seats. So first, you talked about it being within reach. You've got some seasonally strong quarters coming in and some of those cost savings are starting to flow through as well. So just more color in terms of the timing of EBITDA profitability? And then maybe bigger picture, what type of profitability or margin profile we could start looking at come FY 2028 and beyond?

Thanks, Aaron. So for our path to profitability, a lot of that, as you're saying, we do expect to have a stronger back half of the year. Some of that driven by seasonality in the S&B business, which does carry favorable margins relative to our Canadian or our Cannabis segment. I would say, for us, a lot of the cultivation enhancements that we're talking about on the call that we've mentioned, we've yet to see those kind of benefit the P&L. The changes are being made, like we're seeing positive kind of indications early on, but it likely won't materialize in the P&L until -- as we're exiting FY '27. So I think we still see a pathway to get to positive adjusted EBITDA in the back half of the year. A lot of the cost savings synergies and whatnot, that work is ongoing, and the cultivation enhancements you wouldn't see yet in the P&L and on the Canopy.

Yes. For me, listen, we've been attacking the P&L since we started. So we started with addressing the SG&A. We overdelivered on our targets there. Second, we said we would address cultivation. We did the acquisition of MTL. We did the integration as swiftly as possible, brought in the MTL master growers. We're proceeding with the transformation of our main cultivation facility, Kincardine. Think about it, we've got 24 rooms there. We transitioned 1 room at a time to new cultivation practices and new strains. We're 10 rooms in of 24. We do 1 a week. So by the end of -- middle of Q4, we'll probably be fully transitioned. Takes 12 weeks to harvest a new batch of flower. So these things take time. And you'll start seeing the full impact at the beginning of fiscal '28 as well, and we didn't really talk a lot about this on the call. We are starting as well the streamlining of our manufacturing and distribution efforts squarely around our Smiths Falls facilities. We just kicked off the project. We have line of sight. We have a series of initiatives that are going to be implemented in the back half of fiscal '27, and these will reap benefits on the margin lines. And we'll start seeing these happening in the later part of this fiscal with full benefits in fiscal '28. So there is quite a bit of fuel in the tank here ahead of us, and we have line of sight on all these initiatives, and they are well managed, and we're building confidence.

Next question from William Kirk with ROTH Capital Partners.

Luc, I was hoping you could keep going on some of the new products and new markets commentary of what you can do out of Smiths Falls and in particular, maybe like what types of products in which markets and what the timing is for some of that?