Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Canopy Growth Corp (CGC, Financial) achieved a key profitability milestone with all business units delivering profitable quarterly adjusted EBITDA for the first time.
- Significant reduction in overall cost of goods sold by 31% and SG&A expenses by 24% year-over-year.
- Canadian medical business delivered its sixth consecutive quarter of growth and record top line.
- Gross margins improved significantly, with consolidated gross margins up to 35% in Q1 from 18% last year.
- Storz & Bickel posted revenue growth of over 100% in Germany, offsetting declines in other regions.
Negative Points
- Consolidated net revenue decreased by 13% year-over-year, or 3% excluding the impact of divested businesses.
- Adult-use business in Canada saw a 22% decline in revenue due to supply constraints and lower fulfillment by CMO partners.
- Free cash flow was an outflow of $56 million, although this was an improvement compared to the previous year.
- International markets cannabis net revenue was down 1% compared to the previous year, with declines in Australia and US CBD sales.
- Acreage's revenue and EBITDA declined in the first half of calendar 2024 due to credit challenges.
Q & A Highlights
Canopy Growth Corp (CGC) Q1 2025 Earnings Call Highlights
Q: Can you provide more details on the timing and process for the Acreage acquisition and when we can expect full financial disclosure for Canopy USA?
A: (Judy Hong, CFO) Canopy USA has closed the acquisition of Jetty and two of the three Wana entities, with the full acquisition of Wana expected by the end of summer. The Acreage acquisition is pending state-by-state regulatory approvals, expected by spring 2025. Full financial disclosure for Canopy USA will be provided after these acquisitions are completed. (David Klein, CEO) The regulatory approvals are the gating items, and once obtained, we will provide detailed financial statements.
Q: What is driving the impressive growth in the Canadian Medical Cannabis segment, and how much more upside is there?
A: (David Klein, CEO) The growth is driven by strong execution by our medical team, offering a marketplace with hand-selected products and best-in-class service. (Judy Hong, CFO) Despite the overall market being stagnant to declining, we are gaining market share by providing high-quality products and a broad assortment of offerings.
Q: Can you explain the supply dynamics and the strategy behind sourcing more EU-origin products?
A: (David Klein, CEO) In Canada, we faced supply constraints due to third-party supplier performance, but we are making our supply chain more robust. In Europe, there is product available from both Canada and end-market producers. The strategy is to optimize margins by freeing up Canadian supply for domestic use while leveraging EU-based suppliers for European markets.
Q: How do you determine where to allocate your available supply given the different margins in each market?
A: (David Klein, CEO) We prioritize higher-margin channels within Canada and ensure supply continuity in Europe. The allocation is mostly related to Canada, where we optimize for profitability among provinces and channels. (Judy Hong, CFO) We have a hybrid model for flower supply in Canada, combining internal production with strategic sourcing from third parties to capture favorable costs and maintain good margins.
Q: What are the key drivers behind the significant improvement in gross margins and adjusted EBITDA?
A: (Judy Hong, CFO) The improvement is due to cost-reduction programs, growth in the high-margin medical business, and improved utilization in manufacturing operations. We continue to target mid-to-high 30% cash gross margins in Canada and are focused on further improvements through increased cultivation yields, strategic sourcing, and enhanced production efficiency.
Q: Can you provide more details on the financial performance and outlook for Canopy USA entities like Acreage, Wana, and Jetty?
A: (Judy Hong, CFO) Acreage has seen revenue and EBITDA decline due to credit challenges but is focused on improving performance in core markets like Ohio. Wana is expanding into new states and launching new products, with expected improvement later this year. Jetty is seeing good momentum for its Solventless vape products and is optimizing its distribution in California. Canopy USA has the potential to generate annual revenue of upwards of USD 300 million once all acquisitions are completed.
Q: What are the key priorities and outlook for the balance of fiscal 2025?
A: (Judy Hong, CFO) In Canada, we aim to drive growth and profitably gain market share in both adult-use and medical channels. We expect stronger growth in the second half of fiscal 2025, driven by expanded distribution, new product launches, and improved supply chain. In international markets, we focus on accelerating growth in Europe and expanding Storz & Bickel's distribution. We remain on a path to achieve positive adjusted EBITDA at the consolidated level.
Q: How is Canopy Growth managing its balance sheet and cash flow?
A: (Judy Hong, CFO) We have improved free cash flow and reduced our principal debt balance. We announced an amendment to our credit agreement, extending maturity and providing cash interest savings. We also launched an at-the-market equity offering program for strategic growth investments. We expect free cash outflow to narrow significantly in the second half of fiscal 2025.
Q: What are the recent advancements and growth opportunities for Canopy USA?
A: (David Klein, CEO) Canopy USA has closed acquisitions of Jetty and two Wana entities, with the full acquisition of Wana expected soon. Jetty and Wana are leveraging a joint salesforce in New York, and Acreage is focused on high-potential states like Ohio. We remain optimistic about Canopy USA's growth and its unique exposure to the US cannabis market.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
