Good morning. My name is Kelsey, and I'll be hosting the third quarter fiscal year 2022 financial results conference call. At this time, all participants are in listen-only mode. I will now turn the call over to Mr. Tyler Burns, Director, Investor Relations. Mr. Burns, you may begin your conference call.
Good morning, and thank you, operator. Thank you for joining us today. On our call today, we have Canopy Growth CEO, David Klein, and Interim CFO, Judy Hong. Before financial markets open today, Canopy issued a news release announcing our financial results for our third quarter fiscal year ended December 31, 2021. 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 all discussions 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 Growth reports that are filed with the SEC and on 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 prepared remarks by David and Judy, we will conduct a question-and-answer session during which questions will be taken from analysts. To ensure that we get to questions from as many analysts as possible, we ask the analysts limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.
Thank you, Tyler, and good morning, everyone. I'll begin today's call by offering perspectives on our business in the third quarter, including key achievements along with short and long-term priorities. Judy will discuss our quarterly performance in more detail, the actions we have underway to accelerate our path to profitability and our near-term outlook.
The third quarter was one of action for the Canopy Growth team, with our efforts based on four key areas. One, driving our Canadian business to profitability. Two, strengthening our premium brand portfolio and product offering in Canada. Three, increasing our CPG distribution in the U.S. And four, making significant strides in furthering our U.S. THC strategy.
These actions tie back to our strategic priorities and have generated highly encouraging wins in the quarter, resulting in net revenue in Q3 growing 7% sequentially, led by strong growth from both BioSteel in Storz & Bickel .
Now, I'd like to provide an overview of the actions that we've taken to improve our performance, which will enable Canopy to achieve profitability in the Canadian recreational market. To start, we're continuing to premiumize our flower portfolio through enhanced cultivation tactics and a new genetic strategy. We're on track to insource 100% of our premium and mainstream flower supply by the beginning of Q1 fiscal 2023. I'm pleased to share that Supreme's industry-leading cultivation and post-harvest operations have been implemented throughout our existing Canopy operations.
As a result, the strains we're harvesting in our Smiths Falls and Mirabel facilities are seeing higher THC levels, enhanced aroma, and improved terpene profiles. In addition to the focus on improving our flower quality, we're taking steps to better adapt to the fast-evolving preferences of Canadian consumers, including developing a robust genetic pipeline. This will ensure we can deliver a consistent supply of new genetics at commercial scale to support more frequent rotation of new and unique flower strains. Notably, we're accelerating new product launches by implementing a smaller cross-functional team to improve the efficiency of new product development, which is leading to faster product delivery to the market. In order to drive improved performance in market, our Canadian sales team has been executing focused drives to increase distribution and velocity.
Early results are showing increased distribution in Alberta, Ontario, and Quebec through the end of January for Doja flower and Deep Space beverages and gummies. The team has also revamped the retailer engagement program, hosting several education sessions with store managers and budtenders to showcase the enhancements in our product quality. In Canada, we've maintained number one market share in premium flower with the launch of 10 new strains, including Doja 91K, 7ACRES Wappa 49, and 7ACRES Craft Collective Jet Fuel Cookies. We expanded our premium product offerings across the Deep Space brand with the introduction of Deep Space XPRESS Gummies.
Our first gummy with the maximum allowable 10 milligrams THC and a line extension in beverages with the launch of Deep Space Limon Splashdown. We also began shipping Deep Space Orange Orbit flavor this past month and anticipate bringing three new nostalgia-inspired flavors to market over the coming months. In Q3, we rebranded Tweed and launched Powdered Donuts in Chemdawg flower under the redesigned brand banner. These new higher THC strains have drawn very positive consumer feedback, noting high moisture content, aroma, and bag appeal, which is due to the improved grow techniques, including hang-drying all flower to produce higher quality bud with increased moisture. Tweed flower is now packaged in a heat-sealed bag to preserve freshness, with 90% less material by weight than the original tin packaging, and new color profiles by strain type that make it easier for consumers to find what they're looking for.
Strong consumer demands for these new strains has helped improve our share of the mainstream flower market over the past few months. In our edibles and extracts business, we launched our new Twd. Max THC Indica oral spray, a product that delivers the maximum THC potency allowed by regulations in a value-priced format. This was followed by the launch of Twd. Max THC Sativa and Twd. Max CBD oral sprays in January. These innovations have kicked off the rollout of a revamped edibles and extracts portfolio that we believe will offer greater value to consumers and significantly strengthen our competitive positioning in the category. On the back of our new product introductions and continued focus on premium and high THC, we see signs of stabilization and are starting to turn the tide in our Canadian market position.
Looking to the U.S. in the areas of greatest opportunity for long-term growth, I'd like to now highlight the momentum of our CBD business, as well as review the advancement of our THC ecosystem. The U.S. is our area of greatest potential, and we've been highly encouraged by both Storz & Bickel and BioSteel performance. Storz & Bickel posted record quarterly revenue of $25 million in Q3, driven by strong demand for the VOLCANO ONYX and MIGHTY+ vaporizers. Storz & Bickel is clearly already an annualized $100 million revenue business. The Storz & Bickel brand continues to be the gold standard for cannabis vaporizers, with the Volcano Hybrid included in a list of the best weed accessories in Esquire Magazine and the MIGHTY+ included in the Forbes Holiday Gift Guide. We expect continued growth from this marquee brand.
Canopy's hydration beverage brand, BioSteel, also delivered a record revenue quarter, driven by gains in distribution of BioSteel ready to drink. We're seeing continued momentum with the recent signing of retail authorizations by Albertsons, Rite Aid, Food Lion, Stop & Shop, and Sheetz, and over 20 additional authorizations across grocery, convenience, and drug chains. Combined, these authorizations add nearly 15,000 stores across the U.S. Working closely with Constellation Brands, we've initiated a program to onboard new distributors to help drive the distribution of our CBD brand portfolio into additional U.S. states. As a result, Canopy's CBD business has grown 250% year to date, with our product portfolio now available in brick-and-mortar and e-commerce sites covering a combined 33 states in the U.S., including Martha Stewart CBD, which is the fastest-growing CBD gummy brand in the U.S.
whisl, our CBD vape that we launched in October with retail partner Circle K, is already the number one CBD-only vape brand in IRI measured channels. We're in active discussions with a number of additional convenience store chains and expect additional whisl retail partners to be on board in early fiscal 2023. The footprint for our Quatreau beverage increased within brick-and-mortar stores, with the door count increasing sequentially 225%. Now I'm excited to speak on how we're executing our THC strategy in the U.S. In Q3, we established a cross-functional team of senior leaders across Canopy and Constellation Brands to oversee the advancement of our U.S. THC portfolio. This team developed a robust strategy to achieve our future ambitions in the U.S. THC market.
Canada and Canopy's agreement to acquire Acreage and Wana, along with our investment in TerrAscend upon federal permissibility of THC in the U.S., are at the foundation of this plan. We continue to be impressed by Wana's performance on both sides of the border and see this as an example of how Canopy might further leverage brands and products from our U.S. ecosystem into the Canadian market. With an exciting product pipeline, Wana has strengthened its U.S. footprint in Q3 with the signing of a license agreement in Nevada, which brings their total number of states to 13. In Canada, Wana remains the number one edibles brand with 38% share of gummies in tracked channels.
Similarly, Acreage continues to execute on their strategic plan, resulting in a third consecutive quarter of positive adjusted EBITDA. In fact, analyst estimates point to calendar year 2022 adjusted EBITDA of $65 million. Acreage also strengthened its balance sheet with the recent signing of a $150 million credit facility, which will help build depth in core markets. In addition, Acreage closed an acquisition in Ohio, establishing a market leadership position in the state. Canopy has clearly established paths into the U.S. THC market with the acquisitions of Acreage and Wana, as well as our conditional ownership stake in TerrAscend, all upon federal permissibility of U.S. THC. I want to be clear. There is strategic intent behind the U.S. ecosystem that we're creating. We're not just a Canadian LP. We're not building an MSO, and we aren't building an alcohol company.
We're developing a robust US THC ecosystem that's focused on acquiring beloved premium brands like Storz & Bickel and Wana and backing them with unmatched innovation and operational capabilities while leveraging unparalleled distribution to rapidly scale across North America. We'll have more to say about the strategy over time as appropriate, but I believe there's never been a better time to invest in Canopy and that no one is better positioned than Canopy to be the long-term leader in North American cannabis. With that, I'll turn it over to Judy.
Thank you very much, David, and good morning, everyone. I plan to focus my comments on a review of our third quarter results, actions we're taking to achieve profitability, and perspectives on the near-term outlook. Let's start with a review of our third quarter results. Our Q3 results point to a start of revenue stabilization with 7% sequential revenue growth led by strong growth of our U.S. businesses, which is offset by softness in our Canadian recreational business. During Q3, we generated net revenue of CAD 141 million, representing an 8% decline over the prior year. Excluding acquisitions, our net revenue declined 17% versus the prior year. Our reported gross margin in Q3 was 7%, and our adjusted gross margin was 13%. Adjusted EBITDA in Q3 amounted to a loss of CAD 67 million, which improved by 1% versus last year.
Free cash flow in Q3 was an outflow of CAD 168 million, representing a 24% greater outflow versus the prior year, partly due to the timing of working capital. Now let's dive deeper into revenue performance in the third quarter, starting with the global cannabis segment. Global cannabis sales decreased 20% year-over-year, and excluding the impact of acquisition, was down 34%. Our total Canadian recreational business declined 25% year-over-year, driven by the following. B2B revenue declined 23% due mainly to declines in our flower sales. Our flower sales continued to be impacted by ongoing price compression in the value priced flower category, as well as the limited supply of single-strain, high-potency flower products.
Now, the good news is we're starting to see new single-strain flower products hitting the market with strong reception, and we expect additional supply to come into market in the coming months. Our recreational B2C cannabis sales in Q3 decreased 28% versus the prior year, which was largely driven by increased competition. Our Canadian medical cannabis sales were down 7% as higher average order size was offset by a lower number of orders. Our international and other cannabis business had a few puts and takes during the quarter. We grew our U.S. CBD business by 25% versus the prior year. We also benefited from a bulk sale of flower into Israel medical market that generated approximately CAD 4 million in revenue. This was more than offset by declines in our C³ and German flower business, resulting from increased competition.
Turning to other consumer products, Q3 net revenue increased 19% versus the prior year. BioSteel had its record quarterly revenue increasing 130% year-over-year due to strong distribution gains of ready-to-drink beverages in the U.S., as well as higher international sales of its ready-to-drink and powder beverage mixes. Storz & Bickel also posted a record quarterly revenue, increasing 5% year-over-year, which was driven by strong consumer demand for the new limited edition VOLCANO ONYX, as well as the MIGHTY+ vaporizers. Whisl declines 2% year-over-year due to lapping of strong prior year sales. Now let's move to gross margins. Reported gross margin in Q3 was 7%.
Our adjusted gross margin was 13%, which excludes the impact of CAD 3 million of inventory step-up charge from the Supreme acquisition, as well as the CAD 5 million charge related to inventory write-downs resulting from strategic changes to our business. Gross margin in Q3 was further impacted by the following. First, we continued to see pressure on gross margins from lower production output and price compression in the Canadian rec business, notably in the value priced flower category. Second, as we scale up our U.S. businesses, including our CBD products as well as BioSteel, we are still experiencing under absorption of fixed cost. We're also facing higher supply chain costs, such as freight, that many in the industry are currently facing. Third, decreased contribution of higher margin C³ revenue also negatively impacted our overall gross margin.
These factors were partially offset by payroll subsidies in the amount of CAD 7 million that was received from the Canadian government pursuant to COVID-19 relief program. Now turning to operating expenses, demonstrating continued discipline, our overall SG&A expenses in Q3 decreased 19% versus the prior year. G&A expenses declined 47%, primarily due to reductions in staffing and professional fees, as well as the benefit of payroll subsidies. Excluding the payroll subsidy benefit, G&A expenses declined 27% versus last year. R&D expenses in Q3 declined 53% versus the prior year, principally due to a more focused and disciplined approach to R&D investments. Sales and marketing expenses increased 20% year-over-year, primarily due to higher marketing investments behind BioSteel and our U.S. CBD brands. The Supreme acquisition also increased our sales and marketing expenses when compared to the prior year.
Now turning to free cash flow. Our free cash flow in Q3 was an outflow of CAD 168 million, which represents a 24% increase over the prior year. CapEx declined to just 1 million, which was down 98% from the prior year. The increase in cash used in operations during Q3 compared to a year ago reflects increased interest paid, as well as the timing of working capital. I'd like to now take this opportunity to speak to the efforts underway to improve our profitability. Taking a step back, as an organization, we built the structure and operations that can support a significantly higher revenue base than we're currently generating. While we remain optimistic about the long-term prospects of this industry, as well as Canopy's position to succeed, we recognize that we need to adapt to the realities of our business today.
We've already made significant progress rightsizing our footprint and realizing cost savings from our previously announced cost savings program. Through the end of third quarter of fiscal 2022, we've generated approximately CAD 85 million of cost savings across both COGS and SG&A. Our combined sales and marketing, G&A, and R&D expenses are down 17% or CAD 63 million lower year to date in fiscal 2022 when compared to a year ago. Even excluding the payroll subsidy benefit, our SG&A expenses have decreased by 8% year to date, and this is inclusive of additional expenses that came with the Supreme acquisition. Now that being said, as consumer preferences continue to shift and the Canadian market structure remains challenged by low barriers to entry and onerous regulations, these cost savings are not enough for us to achieve profitability in Canada.
A key component of our path to profitability is further simplifying our businesses and optimizing our expenses, and work is well underway to finalize our near-term revenue, operational, and expense plans necessary to achieve profitability in Canada as soon as possible. Let me offer a bit more details on our SG&A expense structure. Our sales and marketing expenses comprise of around 40% in advertising and promotional spending and 60% in sales and marketing overhead. We've made deliberate decisions to continue making strategic investments in these areas in our core markets. With a sizable portion of these investments currently being spent against emerging growth brands in the U.S., including BioSteel, Martha Stewart CBD, Quatreau, and whisl. These strategic investments account for approximately a third of our total selling and marketing expenses.
We also have our corporate-owned retail stores that carry a significant portion of our selling and marketing expenses. These expenses account for nearly 40% of our total selling and marketing overhead spending in Canada. Now we plan to continue to make strategic investments where we see high potential for payoff, but in a more targeted way. In a market like Canada, where advertising is severely restricted, we're focusing more on the ground game to win with retailers. Now when you turn to R&D, we've already shifted our R&D focus away from long-term clinical trials to areas where we see near-term commercial benefit, and we plan to further tighten our focus and invest in R&D that is core to our strategy and has a tangible payoff in the near term.
Now digging into our G&A expenses, the biggest areas of spending are public company costs, finance, IT, legal, and regulations. We've built some of these functions with an expectation that our revenues would scale quickly and require a sophisticated level of support. However, until our growth catches up with our aspirations, we need to reclaim a more entrepreneurial mindset, which means being more nimble and scrappier with our resources, while also identifying opportunities to further simplify our processes or structure to generate additional G&A savings. As you can see, recognizing that our overall expense structure is built for a larger revenue base than our near-term projections, we are taking measurable steps to ensure that we can be profitable in Canada while investing for growth in key strategic areas such as our U.S. THC strategy. Now I would like to provide some perspective on our near-term outlook.
From a top-line perspective, in Canada, we note that retail store closures caused by elevated COVID-related staff absences has likely had a modestly negative impact on retail sell-through as well as inventory replenishment orders. This could potentially present a headwind to our Canadian recreational B2B and B2C business in the current quarter. We do expect sales declines to begin to moderate in Canada as we focus on stabilizing and growing our share of premium and mainstream segments of the Canadian recreational market. In Europe, we expect our medical sales to be down on a year-over-year basis due to increased competition in our German flower business, as well as the divestiture of the C³ business which closed on January 31st. As a reminder, C³ generated net revenue of nearly CAD 16 million in Q4 of last year.
Our U.S. CBD business in the current quarter is expected to be up modestly year-over-year as we lap last year's sales that were boosted by the sell-in of Quatreau beverages. We expect BioSteel revenue to continue to benefit from additional retail authorizations and resulting product load-in. For Storz & Bickel, we expect sales growth on a year-over-year basis as the brand continues to benefit from strong consumer demand for recent innovations while we're closely monitoring our global supply chain. From a margin standpoint, the divestiture of high-margin C³ business during the current quarter can be expected to present a modest gross margin headwind. We expect increased volume throughput and positive mix shift in Canada to contribute to a gradual gross margin improvement, though price compression remains a key watch out.
Headwinds from startup costs in the U.S. should begin to abate as we scale up our CBD and CPG businesses. That this could be offset by continued increase in supply chain related costs in the near term that we're closely watching. Finally, we now expect our full-year FY 2022 CapEx to be in the range of CAD 45 million-CAD 60 million, which is down from the prior range of CAD 100 million-CAD 150 million. The decline in CapEx is primarily due to the deferral of certain projects and the elimination of CapEx related to the planning and construction of a new facility for C³. With the sale of C³ now complete, it's been removed from our budget.
In conclusion, we expect actions we're taking will drive improved execution, accelerate top line growth, and allow Canopy to achieve profitability in Canada while also continuing to make strategic investments in key growth areas. We plan to share additional details around our path to profitability once we complete our annual planning that we have underway. This concludes my prepared comments. Kelsey, David, and I would be happy to take questions from analysts.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by one on your touch tone phone. You will then hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. To ensure an efficient call that gets to the questions of as many analysts as possible, analysts are requested to limit themselves to one question. One moment, please, for your first question. Your first question does come from Vivien Azer from Cowen. Please go ahead.
Hi. Good morning.
Morning, Vivien.
Morning.
Very encouraging to hear about the distribution gains in the U.S. I think, you know, we've all been waiting for that and nice to see that come through. David, I don't know if it's premature, but can you comment at all on the velocity that you're seeing? I know there's a number of new product offerings that hit the market, so any one you would wanna comment on that gain distribution would be helpful. Thanks.
Yeah, Vivien. A lot of the distribution is fairly new distribution, right? It is a bit early. What we see is, you know, velocity levels that are kinda consistent with our planning algorithm, but there's a lot of variability. In some areas, we see really strong velocities that would be consistent with any competitive products on the shelf. In other areas, we see that the velocity is not so strong. Working with our distribution team, supported by, you know, our friends at Constellation, we're working our way through to try to understand lessons learned in terms of where velocity is exactly where we need it to be and where maybe it isn't.
That means maybe we need to do some more in-store activation, or we need to do some more work with brand development in a given region or in a given format. You know, I would say we're where we would wanna be or where we would expect to be at this point. I think there's a lot of work to do that, you know, should flow through our results over time.
Your next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.
Hi, good morning. Thanks for the question. Could you give some more specific examples on the progress you're seeing in your Canadian flower business? For example, what level of THC you're seeing, terpene content on the new strains, how the consistency is. I'm also wondering if I look at the current point of sale data, on Doja, for example, it's been gradually increasing the sell-through, you know, month-over-month, but the absolute dollar amount is still not enough to move the needle. I'm just curious, what really needs to happen to accelerate that? Is it just you need to get up the learning curve and grow more of it? Or when you talk to provinces, do you find they're saying there's many LPs, and they can't make more room to take on additional Doja products? Thanks.
Yeah. First of all, on the flower question. Yeah, for the premium brands in our portfolio that we're most excited about, I would say that we're seeing consumer demand in the mid-20s THC range. And that's up from where we would've been talking about, you know, even six months ago or nine months ago. I think that highlights the fact that the flower business in Canada is fast-moving, and we need to stay on top of evolution of strains and so forth.
I think, you know, we're seeing that mid-twenties, you know, we're starting to do a lot of work around terpene profiling so that we can find a good way to speak to our consumers around terpene profiles related to some of our specific strains. Look, to get to the question around once you start to produce that kind of flower, which we now are. You need to be able to then produce it consistently at scale. As we said in our prepared remarks, we feel pretty comfortable that we're gonna be in that position by the beginning of our Q1 for fiscal 2023. You are right to call out Doja. Doja in particular, the 91K strain has done really well for us.
I would say what's held back Doja, if anything, has been our ability to keep 91K, the 91K strain supplied with, you know, at the right level of THC. I think it's less about provincial boards and more about you have to offer the right products. As Judy called out in her script, Tamy, we're upping our ground game a little bit. We're spending more time with budtenders. We're spending more time at retail because I think that's how we, you know, we can make sure that our value proposition is consistently put in front of those consumers. Yeah, really excited, by the way, about the growth of Doja and where it can go.
Tammy, I would just add a couple of things to David's response. One is, you know, when you look at our premium brand portfolio and the broader portfolio strategy is continuing to really focus and tighten our portfolio even more. There are, you know, couple of premium brands in our portfolio, frankly, like Houseplant, that we're not necessarily focused on.
I think that is going to show up from the market data standpoint, some of that share dynamics that you're seeing. The other thing is just the timing of when those products actually get onto the shelves too, right? We talked about the distribution drive that we're seeing and Doja flower making traction in some of the provinces, and I think you will continue to see that, you know, flow through.
If you just look at our sales in Q3, our premium and mainstream mix is now 50%. You know, this was 30% plus a year ago. We're really making good strides in terms of improving mix, how quickly that really flows to retail, and how quickly that shows up in the retail data. I think that's gonna take a little bit of time.
Your next question comes from Gaurav Jain from Barclays. Please go ahead.
Hi. Good morning. Thank you for taking my question. I have a question on gross margin for the quarter. If I you know, you disclose that you have a 14% adjusted gross margin and a CAD 7 million payroll subsidy from the government. If I assume that your consumer products revenue is coming at, say, a 30% gross margin, that would figure that your global cannabis revenue has a negative gross margin. Can you just help us understand why that is the case, and what will it take for that to become a 20% gross margin kind of business?
Yeah, I'll take that question, Gaurav. You know what? For us, clearly gross margin and improving gross margin remains a very key focus area for Canopy. As I said in the prepared comments, when you look at our gross margin, we continue to be challenged by lower production output, as well as the price compression that we're seeing in the marketplace. When you look at our Canadian operations, driven by the lower production output, we have the under absorption of fixed and indirect costs that are flowing through our gross margin performance. We've also talked about some of the higher supply chain costs that we're incurring that many of the companies are facing in the industry as well.
I would say in addition, we do have a sizable non-cash expenses in our cost of goods sold in Canada that flows through the numbers. In Canada alone, we've got around CAD 36 million of D&A expenses that are part of cost of goods sold. Certainly that impacts our gross margin. We also have some accounting-driven amortization of our standard cost revaluation that we're still, you know, flowing through as part of our flower strategy that we've been implemented. A lot of noise in the gross margins, but I think our focus is really looking to improve our gross margins and looking for a few areas.
Number one, it's as we really look at our premium mix, so really focusing on premiumizing our portfolio, we do think that focused premium product portfolio will drive improvement in our mix and drive gross margin expansion. The other thing is we've identified additional opportunities, frankly, to really increase our cultivation productivity, streamline processes, as well as additional productivity initiatives, which would be looking at distribution, indirect and variable spend buckets. A lot of work is underway to make sure that we're tackling all of the areas of opportunities, and we do expect over time, we'll see gross margin expansion in the Canadian market.
Your next question comes from Chris Carey from Wells Fargo. Please go ahead.
Hi. Good morning.
Morning, Chris. Welcome back.
Thank you very much. Good to be back. I just wanted to follow up on that line of questioning around, you know, profitability in Canada. It sounds like there's some good initiatives around expanded distribution, you know, more focus at retail, you know, speaking with bud tenders, really trying to understand the consumer and that all makes sense. I suppose there's a concept here where our sales leverage with some of these initiatives over the next 3 to 6 months is expected to help quite a bit. I guess, you know, the other side of that is what if, you know, some of these initiatives take a little bit longer? Obviously, this is a very challenging and competitive market.
David, I'm curious your thoughts here as well in the context of, you know, some pretty significant capacity reductions that you made as you came into the organization, specifically on the West Coast. I wonder your appetite for maybe making more significant changes to the asset base here in the context of what looks like a pretty successful non-cannabis portfolio and a lot of the things that you're doing in the U.S. as well. Appreciate any perspective there.
Yeah. I would say, Chris, you know, I think as I said in my prepared comments, we recognize that our revenue base is lower than I think what we projected to be to really support the expense structure that we currently have. Really looking at tackling across various buckets where we can streamline the processes as well as additional G&A savings and SG&A savings, that will allow us to be profitable in Canada, recognizing that the realities of where we are today is different than what we had anticipated. I think what you will hear more from us in the next call is just a lot of those initiatives in place to make sure that we're streamlining processes, we're looking to optimize expenses to get us to that profitability as quickly as possible.
Yeah. Chris, what I would add to that is kind of like set the tone, which is we're only growing for premium flower in our facilities, right? We're creating focus there. We're streamlining our portfolio of brands, so that we're really focused on Doja, 7ACRES, DNA, Tweed, you know, on the flower side, to create more of a simplified operating environment. When you get through all that, you get to we have three facilities, Kincardine, Smiths Falls, and Mirabel. We think that each of those facilities, with this strategy, can improve on the performance, from a cost perspective that they've delivered on in the past.
I might throw out one caveat, and this would apply to some of our advanced manufacturing activities in Smith's Falls, and that is the facilities are built out, and so they're admittedly overbuilt. They create that depreciation and amortization drag that Judy talked about in her last comment.
We've really been focused on as much as possible getting the right throughput, the right brand set, the right SKU set so that we can actually optimize our margins with a lot of attention on kind of cash margins or EBITDA kind of margins so that we're really, there are some things that we can't easily change, like again, the size and scale and scope of our drinks facility, and so we're operating it as efficiently as we can, knowing that it's a long-term drag on our margins.
Your next question comes from Pablo Zuanic from Cantor Fitzgerald. Please go ahead.
Good morning. Thank you. David, just talking about the export markets, right? I know that we talk about Canada and a lot of focus on the U.S. You know, Germany could legalize. Just talk about how prepared are you there. Does the CLOC three hurt you in any way there? We see, you know, numbers that show Aurora and Tilray with more market share. Just remind us of your strength and how ready would you be if markets start to liberalize there, thank you, in Europe.
Yeah, thanks for the question, Pablo. You know, we have a robust organization in Germany that we continue to perform well in that market. But you know, as I called out in our comments, our sales in that market were down in the quarter. C³ doesn't really affect it. In fact, I think C³, Pablo, is a bit of a simplification strategy for us because it allows us to focus in particular on flower in Germany, which we think ultimately is beneficial for us. In terms of when Germany gets to permissibility, our ability to address the market, supply product into the market is super strong. We think we're reasonably well positioned.
That said, most of our activity, most of our attention, most of our mind share is against getting our Canadian business premium and mainstream profitable. Focused on premium and mainstream and profitable, and building out that U.S. THC ecosystem. We're gonna continue to focus in those two areas, you know, while we wait and see what happens elsewhere in the world.
Your next question comes from Owen Bennett from Jefferies. Please go ahead.
Morning, guys. Hope all well. I just wanted to come back on the Canadian market share. Lots of focus on flower trends, what's gone wrong there, and how you're addressing with premium. If we go back to an investor meeting you guys had with us back in June 2020, you called out 2.0 products as a big area of focus where you wanted to be the leader and win. Delivery obviously not being great. Gross sales down 40% in 2.0 versus a year ago. I just want to get your thoughts on what you think has gone wrong in 2.0, and why should we believe the trends there can also improve like you're hoping to see flower trends improve. Thank you.
Yeah, if I split out 2.0 products, I'll chop it into three areas, right? I'll start with drinks. I think. Look, the thing with drinks, even as I talked about scaling our drinks facility, the key unlock is if we get movement on equivalency in Canada. Because we just can't sell the volumes across the market that would be necessary to get the kind of returns that we want. You know, we're hopeful that that comes in the not too distant future. I think that would be good for the industry in general, and certainly would be really good for Canopy. Switching to edibles. You know, our edibles portfolio has performed reasonably well with the introduction of Tweed and Twd. gummies into the market this year.
On top of that, you know, I think when we talk about our U.S. THC ecosystem, you know, our acquisition of Wana makes us ultimately the brand owner of Wana in the Canadian market, which has a 38% share of the gummy trade in Canada. We believe that Wana plus Tweed plus Twd. plus our Deep Space line of gummies in the market will allow us to be really competitive and, you know, we think we can have good margins from that segment of business over time. The area that we haven't performed to the level that we would like to has been in the area of vapes.
As a company, admittedly, we focus a little bit more on flower vaporizers like Storz & Bickel. You know, that's maybe taken a preponderance of our attention. You know, distillate-based vapes, we've lagged the market and, you know, we're continuing to work in that area to see how we can ultimately improve over time.
Owen, I would just add, just when, you know, again, going back to kind of what we wanna really achieve from a product portfolio standpoint, we really wanna focus on growing and profitable categories, right? So I think when you kind of identify which categories in the market are profitable and are growing, you know, premium segment of the flower category, pre-roll categories are really seeing good growth and good margins there. You know, in vapes, I think what you're seeing is the growth in some of the premium side of that category too, like resin concentrates where, you know, the margins are much better than distillate-based categories. So that's gonna be the area of focus for us. You look at beverages and edibles, I think that's really about category expansion.
You know, I think it's a combination of getting the regulatory unlocks, but how can we offer products in beverages and edibles that really provide unique attributes and some excitement that can really expand the category. I think that it's both market share, but certainly focused on category expansion as well.
Your next question comes from Adam Buckham from Scotiabank. Please go ahead.
Hi, David and Judy. Thanks for taking my question. More of a strategic cue from me, but I wanted to talk a bit more about the U.S. THC ecosystem and what the team is trying to do there. Now obviously, you know, the regulatory backdrop is what it is, and certainly a gray area that becomes hard to comment on. You know, in a scenario where it remains unchanged for a longer period of time, you know, how does the team think about creating value for, you know, the investments and carry costs that Canopy has made there?
Yeah. So great question, because I actually think this is maybe one of the more underappreciated components of our story, right? So we have this U.S. THC ecosystem that's really right now made up of an investment in TerrAscend and you know a 70% stake in Acreage and ownership of Wana. It's actually a bit of an interesting I guess financial markets conundrum because take Wana as an example. We've paid for Wana, so the cash has left our balance sheet. You don't see the consolidated results coming through our earnings, and you won't see them until we have a federal permissibility event. It's just an interesting scenario where we have if you combine these businesses as a group, our U.S.
THC ecosystem is good size, it has really strong growth, and it's all profitable, right? We just don't get to consolidate that into our numbers. It's hard to see what's happening in that market. However, continuing to use Wana as an example, and I could use Acreage and TerrAscend as well, in the quarter, Wana opened up the market in Nevada, so they continue to expand their business, continue to grow their business, continue to drive increased profitability, which will consolidate into our P&L upon permissibility. I could, again, make the same case for Acreage, which has its third consecutive quarter of profitability. They've opened up Ohio in a big way, and they just continue to do all the right things to position their business well.
Each of these businesses continue to drive value creation in their businesses, which ultimately accrue to us upon permissibility. Look, who knows when we're going to hit a permissibility event. I think we continue to see a lot of positive momentum, and it's certainly, in my view, a question of when, not if. We're just not waiting. With this THC U.S. THC infrastructure that we put in place, you know, we're continuing to create value. Those companies are continuing to create value that accrue to us when we get to the permissibility event.
Your next question comes from Doug Miehm from RBC Capital Markets. Please go ahead.
Thanks very much. Yeah, I just wanted to follow on some of the conversation as it relates to the premium market in Canada. Maybe what you could delineate for us is, could you talk about the size of that market on a market share basis right now, and where you might think that could go to over the next year or two, you know, taking into account more mature markets in the US? I'd really like you to spend a little time, if it's possible, just walking through what's going on on the craft side of the market, because, you know, they originally took 20% of the market, and it appears they've even taken more when most people believed that they would start to reverse at some point.
that may still occur, but I just wanna get your thoughts on, you know, what you see happening in the market over the next year or two. Thank you.
Yes. Hey, Doug. Thanks for the question. I'll provide some color on market share, and I'll turn it over to David just to give a bit more color on our strategy. You know, when you look at the flower category, I think certainly, as we've talked a lot about the value flower segment in the past, premium is a sizable category in the market, right? When you kind of look at the total flower market, the value is still around 50%, but when you look at the premium mainstream, again, it's a 50% of that remaining market. Our expectation is that premium flower segment is going to be the growth driver of the flower category growth going forward.
You know, we're looking at premium really to drive that growth in the segment of the market. I think that is going to be a function of a lot of these new genetics and new strains coming into market and frankly drive that excitement from the consumers. I think the consumers are still trying to find their you know their footing where a lot of that sort of churn is happening in the marketplace. I think as we focus really on the premium strains and the new genetics that we're bringing to market, that is going to really allow us to win in that part of the market. Dave, you wanna add?
Yeah. Yeah. You know, just a couple of just maybe concepts that we think about a lot. You know, I believe over time, the cannabis market will look a lot like other CPG categories, where there's a sizable and growing premium segment and, you know, a sizable and potentially shrinking value segment over time once you get to, you know, total market build-out. You know, we like what we can do at the premium end of the market. We get to be more innovative. We get to create better offerings for our consumers. We get to charge more for them. You know, so it's just an area that we want to focus instead of chasing things all over the market.
You know, your craft comment is fascinating because I probably sit in a seat where I think that it. You know, craft probably ends up being, and you see this in other markets like, say, beer, craft will end up being a sizable share of the market, 15%-20% of the market over time. But what I love about what's going on with craft right now is some of the genetics activity that's happening in the marketplace, and we're looking to partner with craft players through our 7ACRES Craft Collective and a couple of other initiatives that we have going on. We just think it's good for the market, and I think it's, you know, ultimately gonna be good for Canopy.
You know, again, it's gonna be fascinating to watch this unfold, but I think premiumization is a trend that, you know, we clearly wanna participate in a big way.
Your next question comes from Andrew Carter from Stifel. Please go ahead.
Hey, thanks. Good morning. I was a little confused about the kind of this quarter showing kind of improving revenue growth. You were down 3%. I think you mentioned an acceleration last quarter. You were down 8% this quarter. Kinda confused on that. Then second point, could you give us any guardrails around where the fourth quarter is gonna shake out on an absolute basis? I know the C³ headwind. Will the decline accelerate before improving? Will it improve? Just anything to help us out. Thanks.
Yeah. I'll start with my comment, Andrew. I'd say the comment around improvement is, you know, obviously when you take a step back in kind of where we've been in our business and a lot of actions that we've taken in Q3 to really drive distribution gains in our U.S. CBD and CPG businesses, really premiumizing our portfolio in the flower side in Canada and getting new products to market from a you know, Canadian recreational market standpoint. All of those actions we feel are starting to stabilize our revenue performance, you know, for the overall company. Admittedly, I think the Canada market is still trying to find its footing, and we do expect more improvement as we get more supply into the market.
I think a lot of the actions that we were taking certainly showing up in the record quarterly performance for BioSteel, record quarterly performance for S&B. I do think that the actions we're taking are driving the intended performance on an overall basis. As it relates to Q4, I think I gave a lot of the colors in my prepared comments. I think for Canada, it's a combination of when can we get all the supply of our premium flower in market, and as we said earlier, that's going to be phased over the next couple of quarters. I think you have to just recognize that some of the headwinds in the marketplace as it relates to COVID-19, right? You've got retail stores. This is not just restrictions from the government.
It's really around staffing shortages because of the Omicron issues and so forth. You're seeing some of that intermittent closures. You also have some of the restrictions on, you know, consumers entering, some of the stores in certain provinces. We just wanna make sure that there is a recognition for some of the headwinds. For C³, as I called out earlier, they generated about CAD 16 million in Q4 of last year. Over the course of this year, C³ contribution has become less and less as we face some of that competition in the marketplace. Again, we have to lap that sale from that perspective.
I think for the bright spots in the quarter will continue to be scaling up BioSteel and getting distribution, and then obviously, Storz & Bickel continuing to see good momentum with the new products that they've rolled out.
Your next question comes from Michael Lavery from Piper Sandler. Please go ahead.
Good morning. Thank you.
Hey, Michael.
It sounds like it's the right move to reset some of the thinking around your revenue targets and, you know, at least walk before you run and adjust the cost accordingly. It sounds like a lot of that planning. That reset to have a new plan is still in the works. Can you give us a sense of either when profitability might be in sight? You talked about it for the Canadian business. Would that also translate to the total company, or is it really just focused on Canada in isolation? And if you're not ready to give timing for that yet, should we at least expect to hear that, like, next quarter or maybe, you know, timing for the timing?
Yeah, Michael. Look, as I said, earlier, we are currently going through our annual planning cycle, right? We've got this planning cycle that's underway. As we complete the annual planning cycle, we will share more details, likely in our next quarterly earnings call, around some of the key milestones that we're really focused on in providing some of that details. You know, if you just take a step back, as we said earlier, we do really focus on Canada becoming profitable. There are strategic growth areas that we really are excited about, and you see that in the performance of BioSteel. We do wanna continue to invest behind BioSteel.
Obviously, U.S. THC strategy, where to David's point, we don't get credit for any revenue or profit contribution, but we think this is really the potentially great long-term opportunity for Canopy shareholders. Investing in that THC strategy right now, we think is the appropriate course of action. All of those are kind of, you know, how we think about from a high-level standpoint, but we'll share more details in the next quarterly call.
There are no further questions at this time. You may please proceed, Mr. Klein, for final remarks.
Yeah. Thanks again for joining us today and appreciate the thoughtful questions. In summary, we've developed a clear strategy that will deliver a path to profitability for Canada by focusing on areas where we have a right to win with premium brands backed by operational excellence and scaled through unparalleled distribution. There's never been a better opportunity to invest in Canopy. We're building something unique in the cannabis industry, and our true value has yet to be realized. I look forward to updating you at the end of Q4 on our progress against these ambitious plans and our path ahead for FY 2023. Our investor relations team will be available to answer any additional questions. Thanks again, and have a great day.
This concludes Canopy Growth's third quarter fiscal 2022 financial results conference call. A replay of this conference call will be available until May 10, 2022 and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you very much for attending today's call, and enjoy the rest of your day. Goodbye.