Good morning. My name is Michele. And I will be your conference operator today. I would like to welcome you to the Canopy Growth Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I would now turn the call over to Tyler Burns, Director of Investor Relations. Tyler, you may begin your conference call.

Good morning. 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 our financial results for our second quarter ended September 30, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR. We have also posted a supplemental earnings presentation on our website. 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 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 noted. Following remarks by David and Judy, we will conduct a question-and-answer session, we will first address questions uploaded by verified shareholders. Following that, we will take questions from analysts. 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.

Good morning and thank you for joining our call. Before I get underway, I'd like to acknowledge the results from the mid-term election yesterday. With two additional states voting to legalize cannabis last night, we're seeing continued momentum for reform. And while the overall results of last night are not yet fully clear, what is abundantly clear is that Americans continue to demand access to legalize cannabis. The bipartisan appeal of cannabis cannot be overstated. And I hope the results of these mid-terms will further push the Senate to act swiftly on cannabis reform during the lame duck period, and fully unlock this once-in-a-generation opportunity across the nation. Moving back to our earnings. Today, I'll speak to Canopy's progress against our strategic priorities and discuss the transformational strategy we recently announced to fast-track entry into the US cannabis market through Canopy USA. Following my remarks, Judy will review our Q2 results, provide an update on our path to profitability and comment on our short-term outlook. Our second quarter marked an inflection point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the US cannabis market as we seek to seize the generational opportunity ahead of us. Q2 highlights included in Canada, we stabilized business revenues, improved cash margins and continue to make progress on our path to profitability. This has been achieved amidst persistent industry-wide challenges as well as an increasingly difficult macroeconomic backdrop. In our CPG business, BioSteel delivered another record quarter with very strong sequential growth. And we continue to pursue cost savings while driving focus in our business as evidenced by the announcement that we are divesting our Canadian retail operations. Now to provide more detail. In Canada, our efforts to premiumize our portfolio, delivered a positive mix shift despite continued market fragmentation.…

Thank you very much, David, and good morning, everyone. My comments will focus on: one, a brief summary of our second quarter results; two, a review of new segment reporting that we have introduced this quarter and the performance of those segments; three, an update on our path to achieve profitability; and four, some perspectives on the balance of our fiscal 2023 outlook. Let's start with a review of our second quarter fiscal 2023 financial results. In Q2, we generated net revenue of $118 million, representing a 10% decline over the prior year period. When adjusting for both the impact of C3 and the impact of our Canadian retail business, which we're divesting, revenues increased 2%. Sequentially, net revenues increased 7% compared to Q1. Revenue highlights include BioSteel delivering another record quarter, nearly quadrupling its revenue versus the prior year period. Our Australian cannabis business having its sixth quarter in a row of record revenues, and our Canadian cannabis business delivered a second consecutive quarter of stable revenue, despite the impact of labor disruptions in Quebec and British Columbia, as well as the supply chain disruptions at the OCS in Ontario. Gross margins and adjusted EBITDA have improved significantly year-over-year, driven by lower inventory charges in the current period as compared to the prior year, as well as the impact of our cost savings initiatives announced in April. Our SG&A expenses, excluding acquisition costs, declined by 10% year-over-year, even as we significantly increased our investments in BioSteel with new initiatives like the NHL partnership. Free cash flow improved modestly on a sequential basis as compared to Q1. Now following the completion of certain restructuring actions tied to our cost savings initiatives announced in April, which were aligned with our strategic review of our business, we have changed the structure of…

I'm sorry.

Operator, we will take – operator, this is A - Tyler Burns. We'll take a couple of questions first that we have in the queue from our Say Technologies platform.

Okay. Thank you.

Okay. That first question is – what is the plan for entering the US market? And what is the projected time frame for this happening?

So there are a number of steps related to entering the US market under the Canopy USA structure that we announced a few weeks ago. So the steps are; first, where Canopy shareholders will vote to approve the creation of exchangeable shares. We expect that to happen in early calendar 2023. And then Canopy will create those exchangeable – that exchangeable share class immediately upon a successful vote. We then would expect Constellation Brands to elect to convert their common shares into those exchangeable shares. Acreage shareholders also have to have a vote to approve the acquisition of the floating shares, and we expect that to happen in early calendar 2023 as well. And then Canopy USA will exercise the options to acquire Acreage, Jetty and Wana. We expect Jetty and Wana to close in the first half of calendar 2023. And we expect that the Acreage closing will take longer, it could take as long as nine to 12 months in order to get all the necessary regulatory approvals. But as we said, once we get through all of that work as well as driving continued focus on our Canadian business, we expect that our business will be growing and profitable.

Yeah. Second question is, what is your plan if NASDAQ denies the pending acquisition?

So I'll take that question. So just taking a step back, first of all, Canopy shares are listed on TSX, which is obviously a major exchange. And as David mentioned, we are pleased that the TSX is supportive our structure and strategy of Canopy USA. In terms of NASDAQ, they have objected to the financial consolidation of Canopy USA into the financial results of Canopy Growth. So it's not the structure or the strategy or the plan that they have really objected to at this point. It's also helpful to understand that NASDAQ is not a regulator. And so we're not -- we don't require their approval of the transaction per se. It's also important to understand that there is no imminent risk to our listing on NASDAQ and we're continuing to engage in constructive dialogues with NASDAQ to really ensure that we are in compliance with their rules and regulations and general policies. Now even in the event that NASDAQ continues with its objection to the consolidation, there are a number of potential paths and that really includes, NASDAQ may accept the heightened level of disclosure for the USA assets. We could also appeal a decision by NASDAQ to delist our shares as we get to that point. So I just want to remind people that there's a lot of things that have to happen in the next few months. And certainly, we'll share more details with people as we get more updates.

Operator, Judy and David will now be happy to take questions from the analysts.

Thank you. [Operator instructions] First question comes from Vivien Azer of Cowen & Company. Please go ahead.

Hi. Good morning. This is Victor Ma on for Vivien Azer. And thank you for taking the question. So I just want to touch on BioSteel. Sales in 2Q were helped by the higher Walmart load in versus 1Q 2023? And BioSteel continued strong velocities we see in scanner data. As you look to move some of that RTD manufacturing in-house, what is your strategy on in-house versus contract manufacturing? And is there a target mix and a target gross margin you have in mind? Thank you.

Yeah. Hey, Victor, I'll take that question. So from the acquisition that we announced on the Verona facility, this is really about two things. One is it really ensures the supply of Tetra Pak packaging in the US and even in Canada because as you may know, there is limited supply and capacity of Tetra Pak packaging just across the industry. So it really ensures that we have supply that we can leverage internally and really ensure that we can continue to capitalize on the rapid growth that we're seeing for BioSteel across both the US and the Canadian market. Secondly, this is really also about margin improvement. As you probably saw in our segmented margin disclosure BioSteel’s margin this quarter was around 26%. We think as we bring production in-house through this acquisition, gross margin certainly will see significant improvement as we reduce or, obviously, eliminate all the co-packing costs, there's additional savings that we would garner from owning the production facility. So over time, we would expect BioSteel's gross margin to mirror what you would typically see from other premium beverage player’s standpoint. So, all in all, it ensures supply and, obviously, its margin improvement efforts as well.

Thank you. The next question comes from Chris Carey of Wells Fargo. Please, go ahead.

Hi. Good morning.

Good morning, Chris.

I think your prior expectation, correct me if I'm wrong, was for the Canopy USA vote to happen perhaps in January. And now it sounds like early calendar 2023. Can you just help us understand your expectation for what appears to be a bit deeper of an SEC review here? And maybe explain to the extent you can, where you think they're taking a deeper look. Clearly, other cannabis companies based in the US have filings with the SEC. I'm wondering why your case would be different. So I'd love any perspective there. And how you think this impacts your timeline? Thank you.

I would say, Chris, that our expectation on timeline really hasn't changed all that much. We filed our proxy on October 25. There is a period in which the SEC can provide comments. And so, maybe, just the change in tone into first half of the calendar year is just more being conservative than anything else, because our internal expectations really haven't changed.

Thank you. The next question comes from Tamy Chen of BMO Capital Markets. Please, go ahead.

Hi. Good morning. Thanks for the question. I wanted to ask about your Canadian cannabis business, specifically, the -- just the production side, the [COGs] (ph) so far. So I recall a couple of quarters ago, there were some stumbles that you were working to improve the quality of your mainstream and premium flower production. Could you just give an update on that progress? Are you through all of the challenges that you've previously experienced? And is your Canadian footprint still in a position that essentially, you need a lot more volume of mainstream and premium flower sales in order to get that segment into positive gross profit territory. Thank you.

Yes. Good question, Tamy. So, as it relates to performance from our production facilities in Canada, we've made, I think, tremendous progress in terms of our ability to deliver high-quality flower, in particular, to our consumer base. And we see that with some market share growth and distribution growth in new products that we've launched. We -- and it's been a combination of things that have gotten us there. We've continued to improve our grow processes. We've continued to look for ways to improve our postharvest processing. We've introduced new genetics, and we now have a very robust pipeline of genetics that we can bring into the market. So we're feeling really good about our ability to supply that super high-quality flower into the Canadian market, right? So I think I wouldn't say we're over all of the hurdles because we're growing a plant. And at the end of the day, the agricultural – the agricultural cycle can create its own issues from individual lots of grow to the next lot. But I would say that we're really pleased with where we are and feel pretty confident in our path forward. From a footprint standpoint, we need a footprint that is capable of delivering our aspiration to – to be a leader in the premium and mainstream categories, and we'll continue to do take actions necessary as we always have to improve our ability to grow and grow profitable. So again, I would say that, we're on track with where we'd like to be from a production standpoint.

The only thing I would add, Tamy is, obviously, we are seeing sequential improvements from a cash gross margin standpoint. And this is happening amidst rising costs, as you know, across the industry. And unlike other industries, Canada CPI is actually still down, right? So we're facing rising costs, but pricing compression is not helpful in the industry. And there's still a lot of evolving dynamics happening in the Canadian market, too, right? So – and just to give you one of the examples of what we facing with. And I think it's – I can speak for a lot of the producers, I think the market really needs a more equitable distribution of profit pool. So we can adjust the footprint, we can adjust a lot of the cost structures but the market really needs to move forward to being – having a more equitable distribution of the profit pool. What I mean by that is, as you probably have seen, many of the producers are basically getting 30% of sales of revenue and that's support in terms of the value chain is just not sustainable, I think for the industry, and are not healthy for the industry as a whole, too.

Thank you. The next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

Good morning, Judy, I guess, and David, it's a two-part question. But so Judy, maybe you can explain by what you mean by heightened level of disclosure that NASDAQ would perhaps accept? And David, for you, I guess the question is, here we are trying to balance what the auditors want and maybe SEC, and what NASDAQ wants, right? So that could be a scenario that we would come to August, right, nine months from now, Acreage transaction is closed. And you would mainly stay in NASDAQ and I guess, persuade your auditors not to consolidate, because NASDAQ is still pending and just provide pro forma numbers, right? So we can all see what the company would look like on a quasi consolidated basis pro forma with the US assets. So that could be a possible scenario, and please tell me if I'm wrong? And I guess the last one, David, as part of the same subject, Acreage yesterday said that the vote is taking place January 23rd. So if I'm a floating shareholder of Acreage, and I get my shares, if I vote yes on the 23rd, in theory, I would get my CGC shares in August, nine months after the transaction closes. And then maybe you'll still listed in NASDAQ, because there's still this paradigm that I just spoke about. And I would be voting yes, but getting CGC shares that are listed in NASDAQ potentially besides at TSX. If you can just touch on that first. Maybe if you can start Judy on the heightened level of disclosure and what I said about pro forma, not consolidating and pleasing NASDAQ that way. And I guess convincing your auditors that can be done.

Yeah. So thanks for the question, Pablo. Yeah. So, I'll say that in general, there's been just a lot of discussion around the structure of the transaction. We're going to continue to work with NASDAQ. We'll work with our auditors, we work with the TSX. We’ll work with all of our partners, so that we create the most value for the totality of our shareholders. And I remain optimistic that we get an answer that everyone can be comfortable with. We just -- we have to go through the process and fortunately -- unfortunately or fortunately, we're innovators in this space, and that means there's some messiness in how we describe it. And so as I said, I remain confident that we're going to end up in a place that is good for all of our investors. And I don't -- as we talk about the structure. I don't want to lose the point that – what we're doing here is we're taking Acreage and Wana and Jetty with the outstanding brands that they have and the core capabilities that each of the businesses have in distinct markets, and we're putting them together under one umbrella, so that they can create value and generate profitable growth and generate cash flow for our shareholders. And so, again, I think there's a lot of discussion around structure, and it's important because we need the structure to execute on our business model, but I want to make sure that we keep coming back to -- these are really good businesses that we're putting together that's going to make them even better businesses. And as I said, I remain confident that we'll work through all of the issues related to listings and disclosures and audit and so forth.

Thank you. The next question comes from Andrew Carter of Stifel. Please go ahead.

Thank you very much. Good morning. I wanted to ask, thinking through Canada, we're multiple years in, as you said, Judy, the profit pool is still under pressure and the category is decelerating. So I guess I'd ask with CAD200 million of costs supporting that business are backed into the retail, why continue down that road, especially when Canopy USA is probably going to be your top use of capital? I guess I want to add to that, if you were to take some more significant steps, what flexibility do you have under your term debt agreement to do that? And I guess the final thing is when you close Canopy USA, will your lenders have any recourse on the Canopy USA assets? Thanks.

So I'll take that. So first, Andrew, I do think we are making progress on our Canada path to profitability efforts, and make no mistake, we are continuing to address all of our operations beyond what we have announced, just to really get to the point where we are profitable in Canada. And I think David mentioned, really, the focus is we have a footprint that can support our premium and mainstream businesses that we're really focused on, additional efforts that we are reviewing, including really optimizing our portfolio, looking at variabilizing our costs as much as we can, continuing to look at all of our operating costs for both direct and indirect costs. So, I think we really do think it's important to have a self-sustaining Canada business, while we really scale growth in the US. In terms of the terminal, really -- and to address your questions about any limitations on the term loan as we think about the Canadian footprint, really no limitations to there to really call out. And from a Canopy US-based standpoint, it's essentially the -- the way that it works is before, they did not have any collateral of say and abridge as part of their package, the lender package. Now, just the Canopy Growth exchangeable shares ownership. Through that ownership, they essentially have an asset that they can really think about that's credit enhancing from their point of view, just given the ownership structure of Canopy Growth rate to Canopy USA.

Thank you. The next question comes from John Zamparo of CIBC. Please go ahead.

Good morning. I wanted to ask about your path to achieving positive EBITDA in F '24. So two parts to this. First, just to clarify, that guide now includes your US assets? And second, if so, given the remaining cost cuts you're planning, seem to only get you about 40% of the way there to positive EBITDA just on the existing business. Should we interpret that as you do not expect the existing business as is to achieve positive EBITDA in F 24? Thanks.

Yes. So I'll take that. The first -- the comment we made about adjusted EBITDA positive in FY 2024 was for all of our businesses, excluding the investments that we're making in BioSteel, right? So just to level set everyone, if you look at our adjusted EBITDA losses to date, really the main drives are Canada and BioSteel. And for Biofuel, we are making a strategic choice to invest and you're seeing that really driving the top line results that we're seeing in our performance, and we continue to expect very strong performance that of BioSteel, leveraging the investments that we're making in years to come. From a Canada standpoint, I think I've addressed in my prior comments that we are really committed to having a Canada business in a profitable shape. So, as we deliver on the cost savings, as we look at premiumizing our mix and continuing to look for additional opportunities, we expect that we should be in a position to have a positive profitability in Canada on a go-forward basis. And then, if you layer in then potentially, the positive adjusted EBITDA that the Caopy USA could bring, you're really looking at a business that we think is pretty attractive from both growth and profitability standpoint. But all of that will likely to occur once we close on the -- once Canopy USA closes on the transactions of bridge Jana and Jedi [ph], which, as David alluded to, could take a number of months before we get there.

And John, as use your question, maybe to build on some comments that both Judy and I made during our scripts, right? If you think about our business, and it aligns to our new segments that we're reporting in, we have our Canadian business that we're going to continue to drive innovation. We're going to drive distribution, and we're going to really work towards a focus and efficiency in our Canadian business that gets us the results that we want. And a proof-point in that is the divestiture that we've announced of our retail assets. We then talk about BioSteel, which is a brand that we're investing in, but showed almost 300% year-over-year growth. And we really love the trajectory we're seeing in markets like Ontario, where the brand is maybe a little more well known and established, but is really starting to hit an inflection point. So that gives us reasons to be excited about that. We've talked a lot about our Canopy USA strategy, but that's really about growing our businesses that are profitable in really strong markets in the US so that we can take a share of the CAD 50 billion total market. But then I also want to layer in our Storz & Bickel business, which is coming off of 20 years of consecutive growth. We are continuing to look at driving distribution in that business and working through some exciting innovation in that business as well. And that's a business that is a standalone profitable, and again, resonates well with our consumers. And then lastly, we really have our Rest of World businesses, which includes our US CBD. We're going to continue to function in those markets in an asset-light fashion and be opportunistic as the regulatory environment evolves. And so I think putting our business kind of in that perspective using our new reporting segments, I think, is a helpful way to think about it because then you can get under the components of profitability that as Judy described, where we have some work to do in Canada, and we're investing in BioSteel.

Thank you. The next question comes from Nadine Sarwat of Bernstein. Please go ahead.

Hi. Thank you for taking my question. I appreciate you saying that including Canopy USA will get Canopy Growth globally profitable on a consolidated basis, but my understanding is you actually won't get access to any of those cash flows. So beyond the cost synergies, which those US assets would enjoy by being under the same umbrella. Could you explain the benefits to Canopy Growth shareholders today from the creation of Canopy USA? Thanks.

Yes, I'll take that, Nadine. So I'd say from a Canopy Growth shareholder standpoint, obviously, having some visibility to the performance of the Canopy USA business that Canopy Growth has already paid for in owning a majority of those assets are not showing up on their P&L. Just having that visibility, we think is beneficial to Canopy Growth. The second benefit would be when you think about some of the resources, both management time and cash uses that we are making at Canopy Growth level to really advance our US THC Strategy. And we've talked about this before that there is not insignificant amount of money and time that's being spent by Canopy Growth to really advance our US THC Strategy. So by having this Canopy USA structure, we can really streamline the management and the resources that Canopy Growth is also been spending on Canopy USA, while Canopy USA also then takes advantage of the consolidation of their businesses and really generate revenue and cost synergies over time. And ultimately, we do expect regulatory progress to happen at some point, right, maybe not in the next year, but we do think that that will happen. And all of the benefits that Canopy USA would be generating both from a profitability standpoint and the cash generation standpoint, all of that at that point will accrue to Canopy Growth shareholders.

And it gives us a head start into that market so that we don't wait until we have a permissibility event and then put the assets together. So, I think the head start is important, and it is a legitimate economic asset that's available to our shareholders. And clearly, cash flow is available to our shareholders upon permissibility.

Thank you. The next question comes from Doug Miehm of RBC Capital Markets. Please go ahead.

Thank you. My question just relates to BioSteel, given the growth and it looks like the opportunity for this product relative to the Canadian cannabis business, number one, within the next year to 18 months, do you expect BioSteel to be a larger business than the Canadian cannabis business? And then number two, as you think about other opportunities and what's going on the Canadian cannabis side, when you think about M&A, are other products that are similar let's say, the BioSteel, would they come to the top of the list on a return on invested capital basis now seeing what you've seen over the last while?

So look, we're going to continue to drive BioSteel because we think that we have something really special in the brand proposition and the way it resonates with professional athletes and aspiring athletes and then the common consumer. So, we're going to continue to drive BioSteel as hard as we can. From an M&A standpoint, as a company, we're going to remain focused on delivering against the business opportunities that we have in front of us as we talked about incremental focus and efficiency in our Canadian cannabis business and really stay focused on what we have with the potential on a very small scale to be opportunistic in building in building our portfolio so that we can go to market ultimately in the US.

Great. Thanks.

Thank you. The next question comes from Bill Kirk, MKM Partners. Please go ahead.

Thank you for the question. So, I think as part of the deal with Flow, you'll be co-packing for them at the Virginia facility for a bit. So I guess how much revenue would that co-packing arrangement generate? And what is the duration of that agreement? And then on Storz & Bickel, Judy, I think you said you expected it to sequentially grow, is that just normal holiday seasonality, or is there something improving sequentially with discretionary purchases? Thank you.

Yes. So, I'll pick the S&B and then go back to Flow. So, from an S&B standpoint, I think the encouraging thing is when you look at Q2 performance, we were down 7%. But when you exclude currency were flat, right? So sequentially, it is an improvement relative to what we saw in Q1. And really, the challenges that we've had with some of the distributors in the US, a lot of that has now been work through, and we're getting reorders now from the distributors that had some challenges, and we had to pause some shipments there. So we are seeing some of that improvement coming through. And so I think a lot of that is sort of the challenges that we had on the distribution side. We're behind on a lot of that. We've had some supply chain challenges in Q2 as well, and that's also improving. So understand that, certainly in the European market, where the inflationary pressure and the war in Ukraine is really posing additional challenges in those markets. But I think we are seeing improved trends just from working through some of the internal challenges that S&B had. In terms of flow, yes, you're correct that there will be a period of time that we will be -- or biased still will be contract manufacturing for flow production. This is really to ensure that we are utilizing the capacity as best as we can. So that also helps margins. So it's really less about the revenue, but really efficiently utilizing the capacity of that facility as best as we can.

Thank you. Our last question comes from Michael Lavery of Piper Sandler. Please go ahead.

Thank you. Good morning.

Good morning.

I just want to come back to the NASDAQ listing, and I appreciate there's quite some time before there may be better clarity on where that lands. And obviously, you mentioned the appeal potential as well. But if they push the delist and then deny an appeal, can you just clarify if your decision is to close the Canopy USA deal MD list or to give that up and stay on the NASDAQ listing, which -- how would you pick?

So Michael, I would just go back to what David said. The decision to announce Canopy USA is to optimize the value of our US PEC [ph] investments, right? So when you think about what we wanted to do and what our priority is, is really the structure allows us to optimize the value of our investments in the US. And really generate revenue and cost synergies for that entity over time. So we will continue to work with NASDAQ. We'll continue to have dialogues with them – with them to make sure that we can come to a constructive decision, but if you think about our primary motivation for Canopy USA, it is really about value creation. And so that's really where we have our eyes set on.

Thank you. That concludes the Q&A portion of the call. I will turn the call back to Mr. Klein for closing remarks.

Thank you again for joining us today. I mentioned that we feel that we're at an inflection point at Canopy, and we're really excited about where we sit today in the future in front of us. If you're in Canada, I encourage you to try one of our new premium flower and PRJ innovations or a great-tasting Tweed Iced Tea Guava or Deep Space Ginger Ale Galaxy. If you're in the US, I encourage you to hydrate with BioSteel, RTD beverages or try Wana gummy or a Jetty vape. Investor Relations will be available to answer additional questions. Have a great day.

This concludes the Canopy Growth's second quarter fiscal 2023 financial results conference call. A replay of this conference will be available until February 7, 2023. It can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day. Goodbye.