Canopy Growth Corporation (CGC) Q1 2026 Earnings Report, Transcript and 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 2026 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 call.

Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Interim Chief Financial Officer, Tom Stewart. Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our first quarter fiscal 2026, ended June 30, 2025. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on our website under the Investors tab. 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 view 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 press news release issued today. As of the 3 months ended June 30, 2025, Canopy began reporting financial results for the following 2 reportable segments. Our Cannabis segment includes the global production, distribution, and sale of a diverse range of cannabis and cannabis-related products. Our Storz & Bickel segment includes the production, distribution, and sale of vaporizers and vaporizer accessories. It is important to highlight that information regarding segment net revenue and gross margin for the comparative periods has been recast to reflect the reportable segment changes. 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 remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts. With that, I will turn the call over to Luc.

Thank you, Tyler. Good morning, everyone, and thank you for joining us today. It's great to be with you again to share the momentum building across our business and how it's translating into top-line growth. To begin, I'm very encouraged by the performance that our cannabis business delivered in the first quarter. Cannabis net revenue grew 24% year-over-year, while our team managed its way through significant structural changes while making meaningful progress on our cost reduction initiatives. In the first quarter, Canada medical net revenue grew 13%, marking 3 consecutive quarters of growth and continuing to outpace the market. International net revenues returned to growth of 4% with Germany delivering triple-digit growth. In Canada adult-use, net revenue increased 43%, our largest improvement in recent years. This performance reflects improved fundamentals across the business from better supply planning and a more focused portfolio to stronger retail execution and patient engagement. Everyone at Canopy has stepped up and delivered. Let's unpack this growth, starting with Canada Medical. The team's ability to ensure consistent supply market and deliver high-quality, best-in-class patient care delivered another quarter of double-digit growth and cemented Canopy as one of the top medical businesses in Canada. This was achieved while delivering superior gross margin performance in this segment, which highlights the operational strength of this business. In Q1, Spectrum Therapeutics expanded several of its core offering to further enhance value and the patient experience. Canada Medical has quietly become one of our most consistent performers. And I see it as a blueprint for how we can scale success in international markets. Turning to international markets. We're continuing to strengthen execution while positioning ourselves for future growth. In Europe, beyond improved product availability, we delivered double-digit revenue growth in Q1, including triple-digit growth in Germany. Bulk sales into the U.K. supported our performance across the region, while supply challenges temporarily impacted results in Poland. During the quarter, we advanced a series of operational improvements to increase our cannabis supply into Europe. This work is expected to conclude in Q3 and support top-line acceleration and margin accretion in the back half of the year. We recently appointed Miles Worne as Managing Director of European Markets to lead our commercial strategy across the region. Miles will be focused on strengthening our routes to market, ensuring consistent supply, and building the infrastructure needed to drive long-term leadership in Europe. As we see it today, I'm energized by the progress we're seeing in Canada international markets. Our fundamentals are getting better, and the team is focused on delivering sustainable growth. In Canada adult-use, Q1 revenue grew 43% year-over-year. This performance was driven by a tighter, more targeted product portfolio aligned to high-velocity, high-demand SKUs, which strengthen our shelf presence. Our refined sales models that expanded national reach added nearly 4,800 new points of distribution in Q1 and contributed to larger order volume. We saw strong consumer demand for our core offerings, including Claybourne infused pre-rolls, with sales up 58% in the 13 weeks ended June 29. Additionally, our Tweed and 7ACRES branded CCELL all-in-one vapes, Tweed Blood Orange Cush Flower, and Tweed Quickies PRJ large packs also contributed to top-line gains. This momentum is further showing up in several key operational metrics, including reduced growth costs, improved inventory management, and increased fill rates. Looking ahead, I am confident our retail ground game will keep driving distribution gains with new innovations to come supporting our continued momentum. At Storz & Bickel, revenue was soft in Q1. This was due in large part to lapping strong sales from a year ago and weaker consumer demand and spending in key markets like the U.S. However, we remain confident in the long-term potential of this category-leading business. We're preparing to launch a new device in the coming weeks, which we expect will broaden the consumer appeal for Storz & Bickel, premium vaporizers, and support performance in the second half of the year. Now I'll turn to cost discipline. Since launching our expense reduction initiative earlier this year, we've already delivered $17 million in annualized savings against our original $20 million target, reaching 85% of our goal to date, well ahead of plan. Our team is continuing to look for additional efficiencies this year to ensure we're operating as effectively as possible. Finally, I'd like to address our compressed margins. We understand where the pressure is coming from and are acting decisively to improve them, which Tom will unpack during his remarks. For me, improving gross margin is fundamental to strengthening our balance sheet, achieving positive EBITDA, and unlocking future growth. This is a company-wide priority, and we're embedding margin accountability into how we plan, execute, and measure performance across every part of the business. Before I close, I want to briefly touch on Canopy USA. We continue to see the U.S. as one of the most promising long-term opportunities in global cannabis. While rescheduling and legalization hasn't happened yet, momentum continues to build. In Q1, Acreage focused on reducing operating expenses and completed the divestiture of noncore retail assets, allowing them to focus on vertically integrated markets. In addition, following the quarter end, Acreage secured USD 20 million in funding to support its operation. Wana maintained business continuity while streamlining costs and expanding the distribution of its new hemp-derived CBD beverages. And Jetty continues to outperform both top-line and profitability expectations. In closing, I'm excited by our top-line growth, the meaningful progress we've made on cost reductions and improvement to key operational fundamentals in Q1. The priority now is to sustain this momentum, improve our margins, and achieve positive adjusted EBITDA. I'm confident we have the right focus, strategy, structure, and team in place to keep building momentum for the quarters ahead. I'll now turn it over to Tom to walk through our financials.

Thank you, Luc, and good morning, everyone. I'd first like to take a moment to say how proud and excited I am to take on the interim Chief Financial Officer role here at Canopy Growth. I bring to this role 20 years of experience with public companies, including leadership roles in accounting, reporting, FP&A, and operations finance. I've been with Canopy since 2019 when I joined as the Chief Accounting Officer. During my time here, I've been exposed to every aspect of the business, and I believe my background brings a strong balance of financial rigor and operational insight to support our goals around efficiency, profitability, and long-term value creation. Let's now review our first quarter fiscal 2026 results, which will be followed by a review of our balance sheet and cash flow, and I'll close with our priorities and fiscal 2026 outlook. Q1 fiscal '26 top line performance exceeded expectations, driven primarily by strength in the Canada adult-use and Canada medical channels, but partially offset by softness in our Storz & Bickel business. While we were pleased with the higher top-line performance in Q1, our adjusted EBITDA loss was higher as compared to the prior year, driven by challenged gross margin performance in both segments partially offset by lower SG&A expenses. Moving on to our detailed segment results and starting with cannabis. Q1 cannabis net revenue was $57 million, up 24% compared to a year ago. This improvement was driven by strong growth in Canada Medical, which increased 13%, driven by an increase in the number of insured patients, larger order sizes, and a broader assortment of product choices on our Spectrum Therapeutics store. In addition, international market sales increased 4% compared to last year. This top-line performance was driven by triple-digit percentage growth year-over-year in Germany, driven by improved supply consistency as well as margin-accretive bulk cannabis sales in Europe. These improvements were partially offset by 2 items: one, softer sales in Poland due to regulatory changes limiting online prescriptions as well as supply challenges; and two, lower sales in Australia, resulting from increasing supply in market, resulting in price compression. Moving to Canada adult-use. Net revenue increased 43% compared to a year ago, driven primarily by increased distribution and strong consumer demand for our infused pre-rolled joints, flower, and vapes. In our cannabis segment, we expect continued top-line growth in Canada Medical and growth in Europe with new product registrations aimed at increasing strain availability and supply in Germany and Poland in the second half of fiscal '26. We also expect Canada adult-use to deliver sustained top-line performance over the remaining quarters of fiscal '26, driven by increased distribution, improved commercial execution within the retail channel, and continued strong consumer demand for new products, including infused pre-rolls, all-in-one vapes, and new flower offerings. Cannabis gross margin in Q1 fiscal '26 was 24%, which was down from the prior year. This decline was the result of a number of factors. First, similar to Q4 last year, we experienced higher near-term costs to produce Claybourne infused pre-rolled joints due to the need for additional labor and third-party partners to meet stronger-than-anticipated demand. Second, softer sales in the high-margin Polish market contributed to reduced cannabis gross margins. Importantly, we have a number of actions underway to drive margin improvement, including taking price on select cannabis products in certain markets, implementing new automation and pre-roll capacity to improve production efficiency, which we expect to be in place before the end of Q3, pursuing margin-accretive bulk cannabis sales in Canada as well as in Europe. And finally, we are expecting new European product registrations to be completed in the current quarter, which we expect to drive increased supply into priority markets in the second half of fiscal '26. I will now speak about the performance of our Storz & Bickel segment in Q1 fiscal '26. Storz & Bickel had a soft quarter with revenue of $15 million, down 25% year-over-year. Last year's first quarter benefited from strong sales of the Venty and Muddy vaporizers as well as strong growth in Germany, driven by regulatory reform. As we communicated during our last conference call, Storz & Bickel is operating against a challenging macroeconomic backdrop, particularly in the United States that has weighed on consumer sentiment reflected in softer demand for our premium devices. However, in the current quarter, we are starting to see improvement in sales velocity. Also, as Luc mentioned earlier, Storz & Bickel is preparing to launch a new device over the coming weeks, which we expect to support improved performance in the second half of the year. As a result, we are cautiously optimistic that Storz & Bickel will see top-line growth over the remainder of fiscal '26. Storz & Bickel gross margin in the first quarter of fiscal '26 was 29% compared to 39% last year, driven primarily by lower sales. Actions underway to improve Storz & Bickel's gross margins include bringing more manufacturing processes in-house to lower costs as well as launching the new device in the coming weeks, which we expect will generate renewed consumer excitement while supporting improved performance in the second half of the year. With the segment's expected top-line growth and cost reductions, we expect Storz & Bickel's gross margins to increase over the course of fiscal '26. Moving on to our discussion of operating expenses. SG&A expenses in the first quarter declined 21% as compared to last year, primarily due to ongoing cost reduction initiatives. These savings reflect permanent structural changes across multiple functions and markets, and aligning our cost base with the size and priorities of our business. These actions include a 15% year-over-year reduction in SG&A headcount, elimination of multiple layers of management, reducing professional fees, and streamlining back-office functions and nonessential programs. Importantly, these changes have been implemented with limited disruption to the business, which has allowed us to reallocate resources to the areas that matter most. I have high confidence in our team's ability to maintain the discipline while continuing to execute against our strategy. Turning to adjusted EBITDA. Our first quarter fiscal '26 loss was $8 million compared to a loss of $5 million a year ago. Adjusted EBITDA in the first quarter of this year was primarily impacted by the lower cannabis gross margins discussed earlier, as well as lower Storz & Bickel sales. I'd like to now review our cash flow and balance sheet. Free cash flow was an outflow of $12 million in Q1 compared to an outflow of $56 million in the same period last year. Cash used from operating activities was $10 million, which is down from $52 million last year. Cash interest payments in the first quarter of fiscal '26 totaled $6 million, which is down from $18 million in the first quarter of last year. This reduction in cash interest payments is a result of the prepayments to our senior secured term loan made during fiscal '25, as well as the timing of interest payments. Working capital in the first quarter of fiscal '26 decreased sequentially by $8 million, driven primarily by lower inventory. For fiscal '26, we expect to achieve significant improvement in free cash flow, driven by a reduction in cash interest costs due to lower debt balances as well as an improvement in working capital driven by tighter inventory management as well as initiatives to improve the timeliness of receivable collections, particularly in the medical cannabis, Canadian medical business. We also expect lower restructuring and nonrecurring cash expenses and lower capital expenditures as compared to fiscal '25. Turning now to the balance sheet. As of June 30, 2025, we had $144 million in cash and short-term investments and a debt balance of $295 million. Subsequent to the end of Q1, we announced that we have entered into an agreement with certain of our lenders to make 3 prepayments that are expected to reduce our senior secured term loan by USD 50 million by March 31, 2026. When completed, the prepayments are expected to reduce the company's interest expense under the term loan by approximately USD 6.5 million on an annualized basis, which is expected to improve our free cash flow. In connection with this agreement, Canopy USA obtained our consent to secure additional financing for Acreage. And as a result, Acreage is no longer in default under their senior secured credit facility. Finally, we have generated total gross proceeds of USD 94 million through today under the USD 200 million ATM program launched earlier this year. In my role, I am zeroed in on driving the rapid and disciplined execution of the focused actions discussed on today's call. We are committed to ensuring that our focus on key operational fundamentals not only fuels top-line revenue growth, but also delivers meaningful improvement to our gross margin in the second half of the fiscal year. The decisive and at times difficult adjustments we have made to our cost structure are both deliberate and essential. These measures are designed to reposition Canopy for long-term competitiveness and operational efficiency, placing us firmly on a defined and achievable trajectory toward generating positive free cash flow and adjusted EBITDA. This concludes my prepared remarks. We will now take questions.

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

So I wanted to touch more on gross margin. It sounds like that's a key initiative for you guys. Gross margin, right, so it was down year-over-year, and a lot of the reasoning there was similar to what we heard prior quarter. But sequentially, we did see a meaningful improvement, particularly in cannabis, which you now combined. So can you speak to some of the drivers there? Was it fixed cost leverage with Claybourne, as we saw an increase in Canadian sales? So maybe some of the drivers to that and how that might have been some qualitatively was broken out between international and Canadian.

Thanks, Eric, for the question. As we said, we are very pleased with the top-line performance, and gross margin will be an area of focus in the coming quarters. We expect -- ideally, we're exiting this year with a margin in the low to mid-30s. And a lot of the efficiency improvements we discussed on the call, so expanding our production capacity, being able to reduce temporary labor costs on our key categories, are going to meaningfully improve the gross margin in the cannabis segment. And a lot of that, you're seeing the continuation from actions that we've started to take today. Ultimately, we're also ensuring we're prioritizing our supply to kind of the most profitable markets. So ultimately, the improvements coming through in Q1 were a bit expected, and we expect continued improvement going into the second part of the year.

Next question comes from Frederico Gomes at ATB Capital Markets.

Just on Poland, obviously, you mentioned the regulatory changes there, but also some supply challenges. Can you speak to those supply challenges and whether the situation has already normalized or not?

Yes. We're really focusing on the fundamentals and boringly focusing on the fundamentals. And for us, it's making sure we've got the right flower allocation process internally. And that, frankly, stood in the way of us having success in the Polish market. So these processes are well implemented, and we look forward to returning to growth in Poland very soon.

Next question comes from Pablo Zuanic at Zuanic & Associates.

Look, I know that we are all very focused on Europe in the case of Germany and Poland. But from a Canopy Growth perspective, what are the 2 or 3 other European markets taking a 2-, 3-year view that you're excited about based on the reform changes that you're seeing there? We hear a lot of news flow back and forth, but it would be helpful if you can give some color in that regard. And the second part to the question is, can you confirm that everything you sell in Europe is Canopy Growth product? Or are you also sourcing that from -- a part of that from outside vendors?

Thank you for the questions. I mean the task at end right now is to set up the right infrastructure, the right processes, the right team to win in Germany and Poland. Near term, we've got a significant opportunity for growth in these 2 markets. As I indicated, we recently hired a Managing Director for Europe. He starts Monday, this coming Monday. And one of his primary responsibilities will really be to develop the strategy for us to really put in place the right infrastructures to win across Europe as the market develops. But as I said at the beginning of my answer, boringly, we're focusing our efforts where the near-term opportunities are right now, and we see great potential for growth for Canopy in Germany and Poland. So more to come on your question in the coming quarters. And the bulk of what we sell in Europe is grown here in Canada in Kitgarten.

Last question comes from Bill Kirk at ROTH Capital Partners.

Luc, you mentioned that while rescheduling in the U.S. obviously hasn't happened, that momentum is building. So I guess what's the momentum you see out there? And why are the prospects for rescheduling better today maybe than they have been?

Yes. I'm not going to comment on the rescheduling prospect. But for us, we see select geographies in the U.S. where demand increases, where the infrastructure is being put in place allow for profitable operation ahead of rescheduling. So we're very thrilled with the -- we're very energized by the work that Brooks, the CEO of CUSA, and his team are putting in place to position CUSA well for potential rescheduling.

This concludes Canopy Growth's First Quarter Fiscal 2026 Financial Results Conference Call. A replay of this conference call will be available until November 6, 2025, and can be accessed following the instructions provided in the company's press release issued earlier today. Canopy Growth's Investor Relations team will be available to answer additional questions. Thank you for attending today's call.