Canopy Growth Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 22, 2023

There are 12 speakers on the call.

Operator

Afternoon, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. I would like to welcome everyone to Canopy Growth's 4th Quarter and Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. I would now like to turn the call over to Tyler Burns, Director, Investor Relations.

Operator

Tyler, you may begin the conference.

Speaker 1

Thank you, Michelle. Good afternoon, and thank all of you for joining us today. On our call, we have Canopy Growth's Chief Executive Officer, David Klein and Chief Financial Officer, Judy Hong. After financial markets closed today, Canopy Growth issued a news release announcing the financial results for our Q4 fiscal year ended March 31, to 2023. In addition, we filed our comprehensive annual report on Form 10 ks for the fiscal years ended March 31, to 2023 2022, which contains our audited financial statements for the fiscal year ended March 31, to 2023 as well as restatements of the following previously filed periods.

Speaker 1

Audited to the consolidated financial statements for the fiscal year ended March 31, 2022 originally included in our annual report on Form 10 ks for the fiscal year ended March 31, 2022 and unaudited consolidated financial statements to quarterly periods ended June 30, 2022, September 30, 2022 December 31, to 2022, originally included in our quarterly reports on Form 10 Q for such quarterly periods. The news release and financial statements are available on our website and under the Investor tabs and have been filed on EDGAR and SEDAR. 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 on SEDAR for various factors that could cause to the 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.

Speaker 1

Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following prepared remarks by David and Judy, we will conduct a question and answer session where 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.

Speaker 2

Thanks, Tyler. Good afternoon and thank you for joining us. I'd like to acknowledge that today's call is taking place later than originally planned, and I'm appreciative of the collective patience and flexibility of all the attendees on this call this afternoon. During the call today, I'll cover 4 key topics. First, the progress of our transformation plan and the performance of our Canadian cannabis business in fiscal 2023.

Speaker 2

2nd, addressing the BioSteel review and our strategy to accelerate the BioSteel business. 3rd, an update on Canopy USA and the progress on entering the U. S. Cannabis market and finally, the path forward for fiscal 2024. Following my remarks, Judy will provide a brief review of our Q4 fiscal 2023 results and share an update on our path to profitability.

Speaker 2

She'll also discuss our balance sheet and the actions we are taking to strengthen our financial position and improve liquidity. Fiscal 2023 was a challenging yet transformative year marked by substantive change. The Canadian cannabis industry continues to be challenged by to the extent of the regulatory issues, a continued battle with the illicit market and delays in government action on both sides of the border. And internally at Canopy, we faced executional challenges as we transitioned our genetic strategy and cultivation practices, which led to delays in achieving commercial scale. I'm proud to say that we're now delivering consistent quality as evidenced by consumer demand for the iconic Swede brand.

Speaker 2

And we've taken the necessary actions to simplify our business by undertaking a complete to transformation through the following initiatives. The full divestiture of our national retail operations, exiting cultivation in Mirabel and Smiths Falls, Moving post harvest manufacturing to our former beverage building in Smiths Falls, adopting a flexible third party sourcing model for cannabis beverages, to Edibles, Vates and Extracts and reducing headcount across the business with approximately 1200 positions eliminated. Our team has worked diligently over the past fiscal year to complete the majority of these initiatives on or ahead of schedule. A transformation of this magnitude takes time to demonstrate its full results, but we're already seeing effects of our actions with SG and A expenses and COGS already delivering a combined $125,000,000 through the end of fiscal 2023. We expect to reduce overall costs by $240,000,000 to $310,000,000 in total by the end of fiscal 2024.

Speaker 2

Through continued discipline and stable commercial performance in Canada, along with further simplification of our business, We're on a path to realizing profitability. I'll now address the BioSteel review. As we disclosed earlier this spring, during the preparation of our financial statements for our 2023 Form 10 ks, We identified certain trends in the booking of our sales for our BioSteel business unit. With the oversight from the audit committee, We launched an internal review together with independent external counsel and forensic accountants. Based on the results of the review, we'll be implementing several remedial actions to strengthen our controls for the BioSteel business, which are outlined in the 10 ks.

Speaker 2

We felt it was important to act swiftly to provide stability to the business at this pivotal time. To this effect, we have exited several members of the BioSteel leadership team and are considering all legal remedies available to us, including litigation to recover damages and costs associated with and resulting from the findings of the BioSteel review. Despite this, we have great confidence in the BioSteel brand, which saw a 101% revenue increase in fiscal 2023. According to Nielsen, BioSteel's share of isotonic beverage sales in the Canadian national convenience and gas channel Reached 11% in the Q4 of fiscal 2023, up from 3% in the year prior. We're continuing to drive momentum in the Canadian market by doubling down on the food, drug and mass market channels as well as club accounts with prominent BioSteel Displays at Costco this summer.

Speaker 2

In the U. S, IRI data shows BioSteel's ACV at 38% in the Q4 of fiscal 2023, up from 19% in the prior year. Growth drivers include the BioSteel NHL partnership, which delivered incredible visibility for the brand during the Stanley Cup playoffs. As we look ahead to the strategy to sustain brand growth, We'll be tightening the geographical focus in the U. S.

Speaker 2

To prioritize key regional markets and place a sharper emphasis on the specialty retail channel such as Jim's to build loyalty with athletically inspired consumers. At the same time, we also must address to BioSteel's drag on our profitability, which Judy will speak to further in her remarks. As we focus on our core cannabis business, We'll continue to evaluate all options for BioSteel. With a groundswell of momentum behind the brand in North America, we anticipate to strong top line growth leading to profitability in the years ahead. Next, I'd like to spend a few minutes discussing the performance of our Canadian cannabis business in fiscal to 20 3.

Speaker 2

Overall, our adult use cannabis B2B revenue in the Q4 of fiscal 2023 And it's slightly higher sequentially compared to the Q3 of fiscal 2023. We view this as a positive given the challenging dynamics in the Canadian market and the scale of internal change that our team managed during the quarter. One of the most important achievements driving this performance was Strong resurgence of the iconic Tweed brand in the flower and pre roll categories, which continue to dominate the Canadian adult use market. The primary driver of this comeback has been a marked improvement in flower quality, fueling strong consumer demand, Propelling Tweed's rise to the number 9 brand spot in the Canadian adult use market in the Q4 of fiscal 2023, up from number 16 in the year prior. As we look to the year ahead, we're excited to have taken another significant to step forward to unify our North American house of brands.

Speaker 2

In late May, we announced that Canopy now controls all distribution, marketing and sales to WANA branded products in Canada. Our sales team is eager to represent WANA, which has held the top spot for edibles in Canada for the past 3 years. We've planned an ambitious brand growth strategy in Canada and are working with Wanna the Wanna team to deliver industry leading innovation like the Passion Fruit Pineapple CBG Gummies. With the addition of Wana, we expect incremental gains to our adjusted EBITDA as we cement Canopy as Canada's leading edibles company. Now I'd like to speak briefly to our progress on our entry into the U.

Speaker 2

S. Cannabis market through Canopy USA, which I firmly believe is the best approach to gain exposure to the rapidly growing U. S. Market. To advance this strategy, We filed a revised proxy statement with the SEC in the current quarter, which outlines revisions to the structure of our interest in Canopy USA in order to ensure continued compliance with Nasdaq's listing rules.

Speaker 2

Following regulatory review, We plan to subsequently file a definitive proxy statement that will pave the way for a special meeting during which shareholders will be asked to approve the creation of a new class of non voting to the company's shareholder approval and the conversion of Constellation shares from common to exchangeable, Canopy USA is expected to exercise its rights to acquire Acreage, Wanna and Jetty. Our primary objective for Canopy USA is to optimize the value of our entire U. S. Ecosystem by leveraging their brand portfolios, to market and operations. Overall, we continue to believe the Canopy USA platform positions us favorably for the continued evolution of the U.

Speaker 2

S. Market. Finally, I'd like to outline our business priorities for fiscal 2024. Our priorities are designed to deliver sustained revenue and adjusted EBITDA growth for all key business units. For our Canadian cannabis business, That means prudently managing expenses to deliver a stable to growing top line.

Speaker 2

We see this being driven by continued gains across to the Tweed brand, including flower in pre rolled joints. We'll apply the same enhanced cultivation processes that have improved our flower quality across the Tweed brand to strengthen the competitive positioning of Doja in 7 Acres. On the medical side of our Canadian cannabis business, we expect that Canopy will continue our momentum by focusing on driving insured patient registrations. For our International Medical Cannabis Business, we're focused on the continued growth of our Australian and European sales by improving the consistency of supply of high THC flower strains and the sales of new products, including to the increased distribution of our medically certified Storz and Bickel vaporizers. And speaking of Storz and Bickel, We anticipate growth in the North American market with dedicated sales resources in place in the U.

Speaker 2

S. Along with new product innovation coming to market in fiscal 2024. And for BioSteel, FY 2024 is expected to mark a year of growth as the brand focuses on expanding its North American market position. These priorities In addition to monitoring continued value creation through Canopy USA, we'll lay the foundation necessary for Canopy to achieve positive adjusted EBITDA and position us for long term North American brand driven leadership that is our primary objective. With that, I'll now turn it over to Judy.

Speaker 3

Thank you very much, David, and good evening, everyone. I'll start by discussing our balance sheet. I'll then briefly recap our Q4 and full year 2023 results, including additional details around these statements related to BioSteel. I'll then review our fiscal 2024 priorities and outlook. Let's start with the balance sheet.

Speaker 3

As of March 31, 2023, we had CAD783 1,000,000 in cash and short term investments and total debt of $1,300,000,000 of which $557,000,000 was classified as current portion of the long term debt. Subsequent to March 31, 2023, we've taken a number of additional actions to strengthen our balance sheet. In April 2023, we paid down USD 93,750,000 of our term loan at a 7% discount as part of the second pay down related to the October 2022 agreement. Also in April, we refinanced the $100,000,000 of the 4.2 to 5% unsecured July 2023 notes held by a subsidiary of Constellation, which we intend to negotiate converting into shares. In addition, the USD100 million related to the February 2023 convertible debentures has now mostly been settled through equity.

Speaker 3

Adjusting for the payments made in April, the Constellation note and the February 2023 convertible debentures, Our cash and short term investments would be $666,000,000 and current portion of the long term debt would be $237,000,000 to the Q and A session. With that in mind, I'd like to address the going concern disclosure in our 10 ks. We ended fiscal 2023 with $783,000,000 in cash and short term investments, and we believe that we have a number of options that are over the next several months that will ensure we have sufficient capital to fund our ongoing operations and meet our financial covenants. For 1, we've already taken meaningful actions to reduce the operating cash burn in the businesses. These include to the Business Transformation Program announced during FY 2023, which is expected to reduce total operating expenses by CAD240,000,000 to €310,000,000 by the end of fiscal 2024, inclusive of the €125,000,000 realized during fiscal 2023.

Speaker 3

To the next question. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you.

Speaker 4

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 4

Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of Additionally, we're also working on other options to improve our liquidity.

Speaker 3

These include facility disposition, several of which have already closed and additional agreements have been signed that are expected to generate up to $150,000,000 in proceeds by the end of September 2023. So far during Q1 of fiscal 2024, we received proceeds of 56,000,000 We're also exploring additional options to monetize our non core assets and businesses. And we're also in discussions with our lenders on various options to reduce their debt in an accretive manner. I'll now review our 4th to the Q4 and full year fiscal 2023 financial results. In Q4, we generated consolidated net revenue of 87,500,000 and full year fiscal 2023 revenue of $403,000,000 Full year revenue declined 21% over the restated prior year period.

Speaker 3

When adjusting for the impact of divestitures of C3 and the Canadian Retail Business, revenues declined 11% and the declines moderated in the second half of the year. Reported gross margins during Q4 were negatively impacted by restructuring charges and sizable inventory write offs, most of which relate to our strategic shifts in Canada and BioSteel. Adjusted gross margins of negative 18% were impacted by additional inventory write off at BioSteel. Adjusted gross margin excluding BioSteel was 11% in Q4. Adjusted EBITDA loss of $96,000,000 during Q4 FY to the Q1 of 2019.

Speaker 3

In the Q1 of 2019, we recorded approximately $12,000,000 of inventory write off at BioSteel and $1,500,000 of that to the next question. Excluding increased investments at BioSteel, adjusted EBITDA On a full year basis, our adjusted EBITDA loss was $350,000,000 driven by negative gross margins in Canada and BioSteel as well as significant investments at BioSteel. Included in the full year adjusted EBITDA losses are approximately $50,000,000 of costs that are one time in nature were not expected to recur given the significant changes that we have made to our businesses in fiscal 2023. SG and A expenses excluding acquisition costs and depreciation and amortization expenses saw a decline of 3% on a full year basis, inclusive of the significant increase in this year's marketing investments at BioSteel. Excluding BioSteel and adjusting for the Canadian wage program benefit received last year as well as the impact of dispositions, SG and A expenses would have declined by 21% for approximately $94,000,000 year over year.

Speaker 3

Free cash flow of a negative $143,000,000 was a 13% And our first question comes from the line

Speaker 4

of Chris.

Speaker 3

Thank you, Steve. Thank you, Steve. And costs related to the formation of Canada USA. Now let's take a look at the results from each area of our business for Q4. Canada Canada's revenues declined 8%, excluding the retail business we divested during Q3 of fiscal 2023.

Speaker 3

Importantly, our adult use B2B sales increased slightly compared to Q3 and medical sales increased 8% compared to a year ago period and was stable relative to Q3. Canada Canada's adjusted gross margin was negative 1%, that adjusted cash gross margins improved to 33% when normalizing for the impact of depreciation and inventory write down. Canada Canada's gross margins have now improved for 4 consecutive quarters and we expect additional improvements in fiscal 2024 as we execute on our cost reduction program. Rest of the World Cannabis segment excluding C3 divestiture was down 19% year over year. We saw another record quarter of revenue in Australia, which was offset by the impact of shipments to Israel in Q4 FY 2022 and a decline in our U.

Speaker 3

S. CBD business on a year over year basis. Within our consumer products businesses, Stores and vehicle revenues declined by 28% in Q4 fiscal 2023 versus Q4 fiscal 2022, with last year's Q4 benefiting from sales of new products. We did see sales improve during the second half of the fiscal twenty twenty three versus the first half and full year gross margins in this business remained resilient at 40%. This works revenues decreased 10% in the current period compared to the prior year due to continued challenging U.

Speaker 3

K. Retail dynamics. We are seeing signs of stabilization in this business and adjusted gross margins improved to 44% from 40% in the prior year period. I'd like to now spend a few minutes discussing BioSteel's performance. After a thorough review that David alluded to, We have restated the historical financials with the overall correction of the revenue misstatement resulting in a decrease of approximately CAD10 1,000,000 in net revenue for fiscal year ended March 2022 or 2% of consolidated net revenue and $14,000,000 in net revenue for 9 months ended December 2022 or 4% of consolidated net revenue.

Speaker 3

To the restatements. A majority of the restatements relate to international sales, which we have exited already. Our consolidated adjusted EBITDA has also been re stated by a similar amount for fiscal 2022 9 months through fiscal 2023. To the restated financials for fiscal 2022 as well as quarterly financials for Q1 through Q3 of fiscal 2023 are included in our 10 ks. During Q4 of fiscal 2023, Biofuel generated net revenue of $19,300,000 and full year fiscal 2023 revenue of $69,600,000 Q4 gross margins were significantly impacted by lower than forecasted to sales during fiscal 2023 as well as our decision to exit international businesses and refine our U.

Speaker 3

S. Commercial strategy. We also faced increases in sales and marketing costs related to endorsements, sampling and trade marketing programs. With BioSteel being a significant drag to our overall profitability, addressing its cost structure is an important part of Canopy's overall profitability to the to the Q3 of fiscal 2023. 1st, we have a number of gross margin improvement initiatives that are well underway, including exiting unprofitable customer programs and reducing the depth and frequency of certain promotions, transitioning to a new warehouse model that will eliminate significant fixed cost obligations and reduce shipping costs to the Q1 of 2019.

Speaker 3

Reduction in inventory to lower our storage costs and new contracts with more favorable product costs across our powder and ready to Drink Products. These initiatives are expected to generate significant year over year improvement in gross margins in fiscal 2024 and put the business on a firm path to achieve gross margins comparable to other premium beverage businesses over time. 2nd, following stepped up investments in sales and marketing during fiscal 2023, work is well underway to significantly right size our marketing spend. We have already exited or have not renewed a number of 3rd party marketing contracts. We're reviewing our endorsements to ensure we have a focused to the next stage of our strategy and we're additional options available to us to ensure that we can further minimize cash burn at BioSteel.

Speaker 3

I'd like to now discuss our fiscal 2024 priorities and outlook and our actions to achieve profitability across our businesses. In Canada Canada, we believe we have right sized our operations to achieve positive adjusted EBITDA at current run rate revenue of $35,000,000 to $40,000,000 per quarter. Our cost reduction program is well underway with majority of the savings expected to be driven by reduced headcount, which we've already implemented and elimination of the facility costs that we've closed. In Rest of the World Cannabis, we expect continued growth in Australia and Poland as well as improved performance in Germany driven by new

Speaker 4

to the supply of high tea, sea flower.

Speaker 3

We also expect improvement in profitability as we further streamline the business by shifting to a distributor model in the U. K. And we do not anticipate bad debt expense of over $3,000,000 to recur during fiscal 2024. Tourism Bickel is focused on returning to growth in fiscal 2024 driven by new product launch later this year and renewed focus in the U. S.

Speaker 3

With additional resources expected to drive enhanced presence in that important market. We expect stores and vehicles to maintain healthy margins in fiscal 2024. For Biofuels, The focus in fiscal 2024 is further building on its strong momentum in Canada, refining its U. S. Strategy in improving gross margins while rightsizing its marketing spend.

Speaker 3

This work is expected to stabilize top line while improving profitability in fiscal to 24. So taken together, we expect to approach positive adjusted EBITDA across all of our businesses except for BioSteel as we exit fiscal 2024. We also expect BioSteel to show meaningful reduction in its adjusted EBITDA losses in fiscal to 2024 as we execute on our growth plan and cost reduction initiatives. Liquidity preservation and strengthening our financial Position is also a key priority in fiscal 2024. To this end, we're focused on executing against announced cost savings program, to the operator to discuss this in an accretive manner.

Speaker 3

We believe the combination of these actions along with our existing cash balance and expected proceeds from facility divestitures should provide us with flexibility to drive our businesses forward, while meeting all of our debt obligations. In conclusion, with significant transformation underway, We believe we now have elements in place to achieve profitability in Canada and significantly reduce our cash burn for the total company, while we work towards strengthening our balance sheet and driving continued focus on our core cannabis business. This concludes my prepared comments. We will now take questions. Operator, David and I are now happy to take questions from the analysts.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session for analysts. To the questions of as many analysts as possible. Your first question will come from Tammy Chen at BMO Capital Markets. Please go ahead.

Speaker 5

Hi. Thanks for the question. I wanted to go to your target for EBITDA by the end of fiscal 2024. I mean, you don't break out the EBITDA by So it's a bit hard to assess your path to achieve the targets you've set out here today. So I'm just wondering, Is there anything more you can share with us about how the cannabis segment, at least maybe the Canadian business P and L starts to look now that you're complete your asset light transition.

Speaker 5

For example, like I'm not sure what the margin can look like now that you've outsourced a lot of your manufacturing for extract products and closing the challenging growth facilities you have as well. It's hard to kind of assess what your SG and A is, How much of that is the Canadian business and all the asset heavy infrastructure that was there before? So anything additional you can share about How the P and L of that business starts to look going forward would be helpful? Thank you.

Speaker 3

Sure. Thanks, Pammi. I'll start with with just a comment that I agree just when you look at our P and L, it's very difficult to clearly and what's happening with all the moving parts and us not being able to really provide clear details around the segment profitability. We are working at ways to address that going forward and we'll hopefully be able to give you more clarity on that on a go forward basis at some point in the future. But to come back to your question about Canada, I think I would say a few things.

Speaker 3

Number 1, what we have done from a Business change standpoint is really right sized all of our operations and SG and A to our cost structure to be able to be profitable at $35,000,000 to $40,000,000 per quarter revenue run rate. I think you've seen us now do that for a couple of quarters and we think with the revenue of that level, We are now right sized to really deliver the adjusted EBITDA that would be breakeven to positive on that basis. And I think there are really a few elements to that. Number 1, obviously, we have taken significant cost out of our cost of goods sold. We had Headcount reductions that we have implemented already, we've closed the facility, both in a number of locations that save us not just the cost like insurance and taxes And just the non people costs that really are costly when you have significant footprint just from an operational standpoint.

Speaker 3

So A number of those closures that we've already made are going to start to flow through our P and L. We are, I think, Actually a little bit earlier than expected in terms of exiting cultivation and Smiths fall. So once that happens by the end of this quarter, we should also see additional cost savings flow through from a Canada standpoint. So I think that's going to drive really a Cash gross margin, in our view closer to that high 30% that we've always talked about in the past. And then from an SG and A standpoint, we've made a number of changes on the sales and marketing side and working and even on the G and A side to ensure that we are again profitable with the revenue at $35,000,000 to $40,000,000 on a quarterly basis.

Operator

Your next question comes from Vivien Azer at TD Cowen. Please go

Speaker 6

ahead. Hi, thank you. I wanted to follow-up on that question a little bit, but with a focus on BioSteel. Recognizing that there is appetite to absorb continued losses in FY 2024 as you continue to grow to the top line. Certainly, it sounds like with some of the marketing realignment, the non productive sampling, revisiting some of the sponsorship agreements that certainly you're at least looking to narrow the magnitude of those losses.

Speaker 6

So Judy, I was wondering, 1, if you could kind of And then, 2 as a follow-up, David, maybe you could just comment on to the realignment in terms of the priority retail channels in the U. S. Because it seems like The reorientation of the brand kind of moves away from the channels with which you're most familiar and have the deepest relationships. So just wondering whether that and create some dislocation in the top line that might impede some of the profit improvements that you guys have planned for FY 2024 on BioSteel. Thanks.

Speaker 6

So

Speaker 3

I'll start, Vivien. Thanks for the question. So to be clear, we are not accepting the level of operating losses that we are seeing at BioSteel today. We understand that BioSteel currently is a sizable drag to our overall profitability And we are very focused on significantly reducing our cash burn in that business as well as exploring other options to minimize cash burn that is impacting the overall cash at the Canopy level. In terms of I think the year over year change as it relates to Biofuel profitability, There have been a few discrete items in fiscal 2023 that did drag the profitability more than I think in normal years.

Speaker 3

We did have to sizable inventory write downs in FY 2023 as well as certain contract manufacturing costs that are not expected to occur in FY 20 20 for just given that we now own our manufacturing facility in Verona. And we think the rightsizing of the inventory and to reducing the current inventory levels will also allow us not to see the level of inventory write downs that we saw in FY 2023. In addition, there's as I said earlier, we have a number of initiatives to really right size our marketing spend and make sure that we can generate a path to being a profitable business for this company because I think the brand is doing really well. It's just really making sure that we've got the right cost structure to support the brand in a way that is more focused and disciplined. And I think that, that will also go a long way from from our overall profitability standpoint and getting to a significant reduction in our overall cash Burn and adjusted EBITDA improvement in addition to the business transformation that we have announced is really to Canada and the rest of the businesses.

Speaker 2

Yes. And Vivien, in terms of channel strategy, I think when you look at BioSteel, first of all, The issues that we outlined related to the brand are really unfortunate because it's overshadowing the fact that the brand continues to be accepted by consumers and taken off the shelf as evidenced by being up 101% year over year. We think though that the playbook in Canada is the right playbook to use ultimately in the U. S. And so in Canada, It was a brand that started out in the on the soccer fields and in hockey rinks and in the gyms, kind of building that kind of authentic to Affinity with its consumer base and now you can see BioSteel on the shelf with all of the major retailers in prominent We think we need to deploy the same strategy, if you will, by starting to build the base of the brand maybe a little more slowly then we would have liked, allowing consumers to really connect with it because it's an authentic hydration product.

Speaker 2

And then ultimately, we end up in those big retailers where we're already positioned today using the distribution channels that we're all familiar with. But I think Going direct into those retailers without working on building up the base and trying to do it maybe across the entirety of the U. S. Was a bit of an overreach for to our size. And so, we're we've just decided to retrench the business a little bit in the U.

Speaker 2

S.

Operator

Your next question comes from Aaron Grey at Alliance Global Partners. Please go ahead.

Speaker 7

Hi, good evening and thank you for the question. So for me, I just want to touch on Canopy USA, disclosed the updated So really just want to talk about the ability to finance the U. S. Operations once this closes. Obviously, won't be consolidating, so you can comply with NASDAQ, but just future funding the ability to do that.

Speaker 7

Will you be able to have any benefit from public listing on NASDAQ? Would you have to go through to the Mother Venture with just Canopy USA, just any help in that? And then just also, I guess, plans overall in terms of further funding that Canopy USA business once this is closed? Thanks.

Speaker 2

Yes. So a couple of things. The first is that I just want to reiterate that the businesses are already trying to do things together to elevate their individual brands, individual operations and routes to market, right? So a lot of that work is taking place even while we wait approval to file our definitive proxy. In terms of funding, on the day that the business closes, the business will have more than sufficient cash on hand to fund its growth aspirations for the foreseeable future.

Speaker 2

And then Really the question then is, if there is other like inorganic initiatives that we want to take on with Canopy USA structure. We do have ways to fund that using the already developed Canopy USA structure. So Again, that's not what I would where I would expect we go right out of the gate, but we have the ability to do that under the structure as it exists. And the business will be well funded on day 1.

Speaker 3

And I would just add, Aaron, just the benefit of having to a brand led asset light model in the U. S. Really to minimize the capital requirement to really build out the business and scale. So we're obviously deploying similar strategy in Canada, and I think it's important for people to And sort of the reasons why we took this strategy in Canada as well is really about ensuring that there is minimal capital to the strong presence at scale.

Speaker 2

And we've seen it work at Wanna, where they've always been asset light and continue to grow their brand and have a very attractive P and L as a result of that. We're seeing that same Sort of mindset at Jetty, and then acreage ends up being a little more capital intensive. But Again, I think over time, we would look to be as asset light as possible in the U. S. Just as we are in Canada's duty

Speaker 4

call back.

Operator

Your next question comes from John Zamparo at CIBC Capital Markets. Please go ahead.

Speaker 4

Thanks. Good evening. I wanted to touch on the going concern language and just solvency generally. And given the state of the balance sheet and The magnitude of the gap to get to positive EBITDA, I wonder if you're considering selling any of the business units outright. And then secondly, assuming you get the outcome you want on Canopy USA and you're then able to issue more equity, I wonder how you'd go about that?

Speaker 4

What's your willingness to do it and just given the state of the cannabis space generally, what would be your plans on issuing more equity in the future? Thank you.

Speaker 3

Yes, John. Thanks for the question. So on the on our balance sheet, I think the starting point is that we do still have a on cash position. We ended the quarter of the year with $783,000,000 as I said earlier. All the facility dispositions that we have either closed or currently working on will bring in additional up to $150,000,000 in proceeds by September of 2023, and we expect Significant reduction in operating expenses in fiscal 2024 as we execute on our cost savings program.

Speaker 3

So We think those actions are actually sufficient to allow us to have a flexibility in our balance sheet and and continue to maintain the funding requirements for all of the businesses. Plus, we think that there are additional options that are available to us, including looking at all of our non core assets and businesses. I think we're really trying to position ourselves as a candidate focused to the company. And I think historically, we've had a number of businesses that were not core that we divested and we're continuing to for options to simplify our businesses and generate some cash as we to look for opportunities to divest some of these non core assets and businesses. I also recognize we also recognize that we want to make Sure that we reduce our debt over time in an accretive manner.

Speaker 3

We think that, that will also help our cash Flo, just given the interest cost reduction that would be expected. And to be clear, some of the Proceeds from the facility divestitures won't go towards paying off our term loan, so that would also help us with lower reducing our debt and also reducing our interest expenses over time.

Operator

Your next question comes from Michael Lavery at Piper Sandler. Please go ahead.

Speaker 8

Thank you. Good evening.

Speaker 4

I just was wondering if

Speaker 8

you could elaborate a little bit on If you hit your plan as you have it now with EBITDA positive or breakeven by the end of the year, What does that look like on a cash flow basis? And what are some of your assumptions? You mentioned the divestitures that you're trying to make or the facility sales, some of that's in hand, but can you give us a sense of how you're valuing those and what the certainty is of That coming through and how important is it in terms of just your liquidity management and just paint a little bit of a picture for how you're thinking about how the year unfolds that way?

Speaker 3

Sure. I'll take that question. So obviously, to your point, achieving our plan and reducing our Cost to improve our adjusted EBITDA is kind of the starting point. In addition, we are Obviously, working to reduce our debt and save on interest expenses and even some of the actions that we've outlined already and have implemented already in reducing our costs. We should see on a year over year basis, dollars 20 plus 1,000,000 of lower interest to the expenses even taking into consideration the rising rate environment that we're seeing across the board.

Speaker 3

We also expect to see working capital improvement in a significant manner just given how we're managing our inventory and the reduced footprint, frankly, So we think all those initiatives should allow us to get to significantly reducing our operating to cash outflows. I would expect to see close to 50% reduction in our operating cash flow on a year over year basis. Our CapEx requirement is really just about executing on our cost savings. So we think In FY 2024, our CapEx should be somewhere in the €10,000,000 to €15,000,000 in terms of the cost that's inclusive of the cash cost to really execute on our cost savings program. And then as I said, we've got $150,000,000 of of the proceeds that we've already closed and are expected to close in the coming months that will bring in additional cash.

Speaker 3

And then I think the other options are on the table that we've outlined are these additional proceeds potentially. We are exploring various options, so we'll provide more details as we have more color. But those are all, I think, available to us as really liquidity options that we will consider.

Operator

Your next question comes from Matt Bottomley at Canaccord Genuity. Please go ahead.

Speaker 9

Good evening, everyone. Thanks for taking all the questions. I just wanted to go back to BioSteel and just given a lot of the commentary that that's been given with some of the positive trends with respect to the uptake of the products, whether it's in the convenience stores, gas stations, where kind of your market share is. Just That's sort of paired against the overall magnitude of some of the financial statement Restatements, it looks like about on a gross basis before restatement, about 20% of the revenues were reduced. So I would imagine There's some big ticket items in there potentially.

Speaker 9

So I'm just wondering if you could give a little more granularity on the nature of what the issues were with those restatements. And if it has anything to do with products in the channel that ultimately couldn't sell or shelf life or anything like that, it's just something that I get a lot of questions on given The magnitude of what was reported today.

Speaker 3

Sure. I'll start and David can add more color. But so What I said in my prepared comments was the majority of the restatements really came from international sales. So when you look at all of the market share information in Canada, the U. S.

Speaker 3

That we speak about, Those are real, right? I mean, those are consumer takeaway numbers. They're all really sales that are have gone through Distributors and retailers are being sold to the consumers. So we do think that, that really demonstrates the strength of the brand in North America. When you look at the international sales, frankly, this was more of an opportunistic, I would say, outlet where BioSteel management team has decided to expand distribution in certain markets with some of the products that they had in inventory.

Speaker 3

And I think when you think about The practices or the sales recognition issues that we have seen, that's where really the misstatements or the Financial misstatements came through. So I do think that that is very distinct from what we're seeing in the marketplace to your point about all the market share improvement that we're seeing in that part of the business. We think it's just unfortunate that the sort of that positive momentum, It has been a bit masked by some of these unfortunate events that have occurred, but we still believe that's really a metric that people should Looking at engaging the health of the client, we continue to be confident about the trajectory of that business.

Speaker 2

Yes. I think that captures it, Judy. What I would say is that the restatements for the most part had nothing to do with product that was returned because It was bad or anything like that. It had everything to do with sales practices within the BioSteel team, which as we

Operator

Your next question comes from Pablo Zwanek at Zwanek and Associates. Please go ahead.

Speaker 10

Thank you. David, I want to talk about Canopy USA and here maybe a simple question asked would be remind us of the benefits of Canopy USA for the company. And the reason I ask that, if I wanted to play devil's advocate, right, I could say, you were supposed to some of the benefits in terms of alignment Between JT 1 and acreage, in my opinion that could have been done without this transaction, right? The benefits From investors giving you credit for these U. S.

Speaker 10

Assets are lost now because you cannot consolidate them, right? We don't know how you're going to disclose them in the future. On the other hand, this has been somewhat of a distraction. I could make the argument, right? You are main competitor in Canada to control of Redican, right?

Speaker 10

Maybe you've dropped the ball in Europe, I mean, correct me if I'm wrong. And it's been disruptive, right, in case of acreage, the CEO and the CFO are gone. So I'm just trying to I'm struggling to really get the benefits of Canada USA after all is said and done. Thanks.

Speaker 2

Yes. Thanks, Pablo. So a couple of points that I would make. We believe that The U. S.

Speaker 2

Market is a market that we want to win in, which is why we right sized Canada so that we have a business where we can to be profitable kind of at its current run rate. We do believe that the profit pool in the U. S. Is the one that we want to attack and we actually I think that our brand led approach is a strong approach in that market. Jetty, Wanna and Acreage are already beginning to work together As you call out, so they didn't necessarily need the structure to do that, but it certainly makes it easier when that business is put Yes, they're all by itself.

Speaker 2

So those businesses are merged together. There are significant synergies to be extracted from an operating standpoint, from a from a company standpoint that we think are important. Now we will be able to disclose what that business looks like. We won't be consolidating it through our results, but we will be in a position to talk about what our consolidated Well, with our Canopy USA as its own consolidated entity will look like post the transaction once those businesses have been merged. And then Pablo, again, it's like the good thing about strategy is a good strategy usually is one that You could do the opposite of and still find it a fair strategy, right?

Speaker 2

So we believe that focus on the U. S. It's better than trying to expand into other markets or into other categories. Judy mentioned how we want to simplify our business to be a very cannabis focused business and very focused on North America. We think that's a good that provides a great path for us to create a lot of value in the medium term.

Speaker 2

And That's the I guess that's the position that we've taken and we think We still believe that it's the right approach for us.

Operator

Your next question comes from Doug Ng at RBC Capital Markets. Please go ahead.

Speaker 11

Yes. Good evening and Thank you. My question really has to do with the checks and balances that the company might have in place as it relates to oversight functions given the material changes that we're seeing right now and really in place to ensure that you don't have any unforeseen potholes or Pumping in the sharp objects. David, maybe you could talk about, what you're doing to implement those types of checks and balances to ensure that we don't run into other issues.

Speaker 2

Yes, that's a really good question, Doug. And What I would say is that we're so we have a complete remediation plan, which is called out in the K for the issues we experienced with BioSteel. We did do additional testing around the rest of our business to make sure that the BioSteel issues weren't being replicated elsewhere and That testing proved that it wasn't happening elsewhere. Again, this was a very involved process that included forensic accountants, outside legal experts, our own to finance team, the dedication of our audit committee, which includes 2 former public companies, CFOs. So We did a ton of work to make sure that we got completely to the bottom of the issues that required the restatement.

Speaker 2

And as I said in the K, we call out our remediation plans and our audit committee has asked for check ins on a biweekly basis with our progress for those remediation plans, which we will in fact do. And I would say that then beyond that, Several years ago, I think that the Canopy Finance function was maybe in a difficult spot to take on the complexity of the business that we have. I would say that over the last few years, we've built what is generally a strong talented team that's clearly committed to ensuring that we have a robust that we have to do a restatement. And as I said, we've taken the actions to to remediate that the items that caused every statement and I do not expect us to have that kind of issue in any area of our control environment going

Operator

There are no further questions at this time. So I will turn the conference back to Mr. Klein for any final remarks.

Speaker 2

Yes. Thank you, and thanks all for joining us today. So to highlight the key takeaways from today's call, we've made substantial progress in transforming our Canadian cannabis business during fiscal 2023 and we've entered fiscal 2024 focused on strengthening the business moving forward. We've completed the BioSteel review and expect the fiscal 2024 strategy to drive growth of the brand in North America, while reducing our cash burn. And in fiscal 'twenty three, we introduced our Canopy USA strategy to optimize the value of our entire U.

Speaker 2

S. Ecosystem, and we look forward to successfully concluding the regulatory review and progressing to a shareholder vote in the coming months. And finally, we continue to believe Canopy has significant opportunity ahead both in Canada and the United States. Investor Relations will be available to answer additional questions. Have a good evening.

Operator

Ladies and gentlemen, this concludes Canopy Growth's 4th quarter to 2023 Financial Results Conference Call. A replay of this conference call will be available until September 20, to 2023 and 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. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Canopy Growth Q4 2023
00:00 / 00:00