Earnings Call: Q1 2022

Aug 6, 2021

Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome you to Canopy Growth's First Quarter Fiscal Year 2022 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 Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call. Great. Thank you, Michelle, and good morning, everyone. Thank you all for joining us this morning. On our call today, we have Canopy's CEO, David Klein and CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for our Q1 fiscal year ended June 30, 2021. This news release is available on our website under the Investors tab and will be found on our EDGAR and SEDAR profile. We have also posted a supplemental earnings presentation on our website. Before we begin, I would like to remind you that our discussion during this call will include forward looking statements that are based on management's current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward looking statements included at the end of this morning's release. Please review today's earnings release and candidate reports filed with the SEC and CEHAR for various factors that could cause actual results to differ materially from projection. In addition, reconciliations between any non GAAP measures to their closest 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 on David and Mike, we will conduct a question and answer session during which questions will be taken from analysts. Ensure that we get to as many questions as possible, we have channels to limit themselves to one question. With that, I will now turn the call over to David. David, please go ahead. Thank you, Judy, and good morning, everyone. I'd like to begin today's call by providing some thoughts on the Q1 and the continued progress that Canopy is making in our business transformation during fiscal 'twenty two to date. Mike will then discuss our quarterly in more detail and offer additional perspectives on our outlook. During Q1, our Canopy team continued to establish itself as a consumer led, innovation driven organization with an efficient supply chain and a disciplined cost structure. Key highlights that resulted include achieving another quarter of strong double digit revenue growth for both cannabis and consumer product businesses, Closing on our acquisitions of Base Valley and Supreme, continued emphasis on developing a robust pipeline of new products that are rooted in consumer insight and innovation with over 50 new SKUs introduced in the last two quarters and over 100 on the way. Our adjusted EBITDA loss narrowed significantly in comparison to last year and last quarter. And we remain dedicated to furthering the opportunity that lies before us with increasing cannabis efforts in U. S. THC. We're delighted by the momentum within the U. S. To end cannabis prohibition and remain optimistic on the legislation that has been introduced to do so. However, the Q1 of fiscal 'twenty two was not without challenges. The Canadian recreational market continued to be impacted by COVID related lockdowns for much of quarter. Competition increased with single strain offerings at higher THC levels and lower prices and we faced internal supply and execution challenges. As a result, our market share softened and we're not where we want to be from a margin standpoint. It's also important to keep in mind the magnitude of the transformation that Canopy has gone through over the past 18 months. As with any organization undergoing a big transformation, there are growing pains and adjusting to new ways of working takes time. We're actively taking steps to improve our performance and specifically looking at how we can scale our new operating model to mitigate structural challenges in the industry, including a long production cycle and onerous regulations. Now, I'll take a few minutes to review highlights from the latest quarter. Despite continued COVID lockdowns, we are pleased to share that our Canadian recreational cannabis business grew 35% year over year. I'm in a very competitive environment. We maintain market share leadership with 15.2% share of the track provinces in Q1 2021. This market share now includes ACE Valley and Supreme Cannabis, which we welcomed into the Canopy family this past quarter. Integration is progressing smoothly and we see these businesses making positive contributions to our top and bottom lines over the coming quarters. Following the Ace Valley acquisition, our sales team has become fluent in the beloved Ace Valley brand and ready to enjoy products, securing listings in several provinces and are driving incremental distribution of ACE Valley products that are already in market. Since integration, we've launched a number of new products under the ACE Valley brand, including ACE Valley Dream CBN Gummies and ACE Valley Pinners. We've also begun integrating the commercial and production operations of Supreme Cannabis. Our sales team is in market with robust product portfolio and is actively working to increase listings and distribution across Canada. On the production side, We're leveraging Supreme's expertise and industry leading knowledge of cultivating premium flower and we plan to integrate Supreme's facility into our operational footprint. Our U. S. CBD business continues to build momentum driven by Martha Stewart CBD, which is now the number 3 CBD brand nationally across food, drug, mass and convenience channels per IRI. Quattro has launched in 7 states and has been sold into over 1,000 stores. Our consumer products brands delivered strong growth driven by stores and Bickel, which saw sales increase by 41% year over year. In addition, BioSteel's new RTEs drove triple digit year over year sales growth. Since I became CEO of Canopy, I've spoken to the importance of investing in consumer insights and new product development to bring products to market that delight consumers. I'm very pleased to see this investment beginning to pay off as our robust innovation pipeline has started to bring new differentiated products to market and we expect the pace of new product launches to accelerate over the coming quarters. This is also being done alongside our portfolio optimization strategy where we've already eliminated a significant number of underperforming SKUs And we're prioritizing high performing SKUs, as we are adding new SKUs to our portfolio. Many of our innovations are focused on addressing consumer needs states, whether it's sleep, relaxation, socializing with friends and delivering desired effects in mood management. We're also launching premium quality products with new genetics, terpenes, flavors and packaging aimed at enhancing the consumer experience. Let me now highlight some of these innovations that hit the market as well as provide a view into our exciting pipeline. Flower and pre rolled joints. To meet demand for a Quebec exclusive brand, we launched Berry, which is on its way to becoming one of the top selling flower brands in Quebec. Our new single strain TWD-twenty 8 Blue Dream In apple pie flower offerings, we're number 5 and number 6 single strain offering products by volume nationally in the Q1. In a rapidly growing pre roll category, we recently launched Tweed Quickies and Ace Valley Pinners small size pre roll joints to address consumer preference for sharing cannabis in a group setting without having to pass a single joint around. Following an sensitive flower quality initiative aimed at enhancing flower satisfaction, we're introducing Canadian Seedoja, our premium flower brand, including recently introduced Doja legendary Larry flower in Ontario, and as well as the national rollout of twee lineage strains. Our flower team is excited about additional flower and pre roll innovation that we expect to bring to market over the coming months, including new packaging, the new higher TAC single strain genetics. In vapes, strong consumer demand for the 0.5 ml and the 1 ml510 cartridges launched over the past two quarters has strengthened our Canadian business. In the Q1 of 2022, we launched our Tweed Citrus Sealand all in one vape pens, which have been positively received by consumers. These new 510 All in one vape pens are driving a significant uptick in consumer pull. And we have additional vape innovations that are scheduled to the market over the coming quarters, including the introduction of live resin cartridges to the Canadian market. Turning to beverages, we're seeing consumer purchasing trends currently pointing to a strong demand for beverages with higher THC. In response, we started to bring a range of higher THC beverages to market, Beginning with our new Tweed iced tea beverages with 5 milligrams of THC, which are available in refreshing lemon and raspberry flavors. The feedback on these beverages from consumers and bud tenders has been nothing short of fantastic. We've also begun shipping Our new tweet is seltzers in the current quarter. Elegance to hard seltzer in the beverage alcohol world, they have 5 milligrams of THC and come in 2 refreshing flavors, watermelon and mango. I'm very excited about the range of new that we will bring to consumers over the coming months, including an expansion of our best selling deep space beverage brand. We're on pace to more than double our assortment of beverages in market during fiscal 2022. In edibles, Our portfolio of gummies in Canada has expanded rapidly over the past quarter, thanks to the Ace Valley and TWD brand banners. Building on the successful launch of TWD Strawberry Gummies, which now have the number 2 market share of all gummies in Canada, We are launching the TWD Mixed Dairy Dummies in the current quarter. We also launched 8th Valley Dessert Flavor Dummies, Key Lime Pie and Peaches and Honey and have begun shipping our 8th Valley Dream CDN Gummies, Available in a tasty blackberry lemon flavor and containing CPN, the minor cannabinoid that lends itself well to restful sleep, Ace Kelly Dreams CPN Gummy addresses the consumer need state of sleep, which is in high demand. We're scheduled to bring a robust portfolio of new gummy innovations to market over the coming months featuring gourmand flavors, better effects in preferred THC levels. I'm very pleased at the new products that have been launched in the past quarter and look forward to the consumer response to the exciting innovation pipeline that we have planned in the months ahead. Turning now to the U. S, we're focused on advancing our U. S. Ecosystem and continue to believe that cannabis reform will happen during this Congress. Cannabis Reform took an important step forward with release of the draft Cannabis Administration and Opportunity Act that was introduced by Senators Schumer, Booker and Wyden on July 14. This bill takes an impressive approach in crafting a regulatory structure that is specific to cannabis. We enthusiastically support the sweeping social justice and social equity provisions within this package. These measures will benefit those who have been disproportionately impacted by the criminalization of cannabis. Social equity can only truly be achieved through full legalization and I firmly believe that cannabis should and will be legalized at the federal level. It's what Americans have overwhelmingly been asking for. Two other pieces of legislation that together to pass could be a positive unlock for our CBD business in the U. S. Include HRA41, which would require the FDA to regulate CBD as a dietary supplement and S1698, which would mandate the FDA to regulate CBD as a dietary supplement as well as food and beverage. We believe the passage of these bills would establish a national regulatory framework for various CBD products, in which retailers, including national mass retailers, the regulatory framework they've been seeking to participate in the CBD market. We believe this would be a material unlock for our CBD business in the U. S. Against this backdrop, we continue to advance our U. S. Ecosystem, positioning Canopy for success in the U. S. Under various scenarios. We've already established multiple routes to markets in federally permissible THC markets. Our plan of arrangement with Acreage Holdings and our additional investment in Tericin provides an immediate turnkey path to enter the U. S. THC market. We anticipate that Acreage's performance will continue to improve and are excited about their plans to launch cannabis beverages in select U. S. States in the coming months under the TWE brand center. In addition, we're actively seeking opportunities to make additional Legally permitted investments in advance of U. S. Federal permissibility of THC that increase our exposure to that THC market. Finally, achieving profitability and improving free cash flow remain our top priority. We are on track deliver $150,000,000 to $200,000,000 of cost savings across our COGS in SG and A. And we remain committed to accelerating top line growth in the second half of fiscal 'twenty two and achieving positive adjusted EBITDA by the end of our fiscal 'twenty two. In summary, with a robust pipeline of product innovations hitting the market, the integration of ACE Valley and Supreme well underway and ongoing improvements to our supply chain, I believe we'll strengthen our competitive position in our core markets and drive significant top line growth over the coming quarters. With that, I'll now turn it over to Mike for a review of the financial results in more detail. All right. Thank you, David, and good morning, everyone. Our Q1 results demonstrate our continued focus on financial discipline with adjusted EBITDA improving both year over year and relative to Q4, despite softer than expected revenue and gross margin performance. In the Q1 of fiscal 'twenty two, we generated net revenue of $136,000,000 representing a year over year increase of 23% with strong double digit growth seen across both campus and consumer products businesses. Our reported gross margin in the quarter was 20%. Our adjusted EBITDA loss during the quarter was $64,000,000 with an improvement of 31% year over year. And our free cash flow in the Q1 of fiscal 'twenty two was an outflow of 186,000,000 Now let's dive further in Q1 starting with the Global Canada segment, which grew 17% year on year to 93,000,000 Our Canadian Rec business grew 35% year over year to $60,000,000 driven by 22% growth in our B2B channel and 84% growth in our B2C channel. Canadian medical cannabis declined 3% to 13,500,000 Our international medical and other cannabis business declined 8% year on year to $19,400,000 as growth in our U. S. CBD business was more than offset by sales declines in C3 and Germany due to ongoing COVID restrictions and increased competition. Looking into our Canadian rec business in a bit more detail, our B2B revenue growth benefited increased store openings, particularly in Ontario and growth from our flower value products as well as contribution from our 2.0 products and acquisitions. Our B2C revenue growth was driven by increased store count, up from 22 last year to 34 this year, and a 65% increase in same store sales when normalized for days closed due to COVID during Q1 of last year. Now given the importance of our Canadian rec B2B business, let me provide some additional details, including some challenges that we faced during the quarter. While we grew cannabis year over year, Performance came in below our expectations, driven by continued price mix headwinds as well as some internal execution challenges resulting in lost market share during the quarter. I would like to dive into both points so that I can highlight the actions we're taking to address these issues. First, price mix continued to be a sizable headwind on our flower business with product mix continuing to shift toward larger value price offerings including newer and lower price points. Valued flower across the industry accounted for nearly 52% of total flower sales in Q1, up from 44% a year ago. Simultaneously, our value flower sales increased to 59% of our flower mix in Q1 compared to 34% a year ago. So we've gone from being under indexed relative and Value Flower last year to now being over indexed. And our increased focus on Value Flower made sense of the time as consumers were increasingly seeking value offerings during the COVID pandemic. And this volume has provided Canopy with some increased volume leverage, which has generated some productivity gains in our supply chain. During the past year, we've also witnessed the value category itself moving lower in price, further amplifying our mix headwinds and leading to real price erosion. And considering the regressive nature of the cannabis excise taxes, It is extremely difficult to achieve our long term financial objectives by being overdeveloped in the value category. Hence, we've been shifting our focus and have already taken steps to premiumize our product portfolio, building a robust pipeline of innovation in premium flower, pre rolls and 2.0 products that David addressed earlier with more to come. Additionally, we're encouraged by signs of premiumization emerging in the industry and we expect price mix headwinds to abate in the coming quarters. 2nd, our market share decline in Q1 was in part driven by missed opportunities stemming from internal execution challenges. While Canopy maintained number 1 share of the total tracked market in Q1, Our market share declined by 2 90 basis points sequentially to 15.2%. In Flower, Canopy again maintained number 1 market share, but our market share declined 350 basis points sequentially to 17.9%. And as we've highlighted in past calls, we've made good progress on execution during the past year, including raising our average fill rates from 55% in Q4 of fiscal 2020 to above 90% throughout most of last fiscal year. However, in Q1 of this fiscal, we did not have enough supply of single strain and high THC premium flower. We faced some growing pains of adjusting to our new operating model and we had some challenges associated with the increased complexity tied to our innovation and premiumization efforts. And we've taken several steps to ensure increased supply of single strain and high THC offerings to better meet market demand. 1st, the acquisition of Supreme brings Canopy the top premium flower brand in Canada, which immediately improves our capacity to produce high quality I THC flower. 2nd, the cultivation of new genetics is underway and new products are beginning to hit the market with more on the way. 3rd, we secured additional third party supply to help us cover demand during the second half of the year, And we have a sourcing strategy in place to move toward in sourcing most of our premium flower while outsourcing most of our value flower from third parties over time. And lastly, we are beginning to leverage Supreme's expertise in producing premium flower in tandem With our other ongoing efforts to improve cultivation and post harvest processes across Canopy, including our new hang drying program in Smiths Falls, which increases our capacity to produce high quality, high pHd flour. Now we also recognize that premiumization leads to increased complexity with long lead times and challenging regulations. But we view premiumization and innovation as a critical driver of Canopy's success and we believe there is a path forward as we scale our leaner footprint to improve execution. Moving on to other consumer products, which grew 39% versus Primadere to $43,000,000 in net revenue. Key Stores and Pickles grew 41% year over year, benefiting from increased distribution in the U. S. And strong consumer pool notably for the Volcano Classic and Hybrid, Mighty and Crafty Plus vaporizers. This works grew 7% year over year due to continued strong sales through Amazon and other third party e commerce channels. BioSteel grew 179% year over year, primarily due to the launch of BioSteel ready to drink beverages in the US. Let's now move on to gross margin for the quarter. Gross margin for the quarter was 20%. Adjusted gross margin excluding $1,400,000 of charges related to inventory step up on business combinations was 21%. Gross margin in Q1 benefited from payroll subsidies of approximately $7,000,000 received from the Canadian government pursuant to the COVID-nineteen relief program and excluding this benefit, adjusted gross margin would have been 16% during the quarter. Adjusted gross margin in Q1 was negatively impacted by lower than planned production output given flower supply shortages and unfavorable tax size and geo mix in our Canadian business as well as some start up costs in the U. S. We expect gross margin to gradually improve over the course of fiscal 2022 as we accelerate sales growth, premiumize our portfolio and improve execution. Turning to operating expenses. Our overall SG and A in the 4th quarter decreased 17% versus prior year. Unpacking this further, G and A expenses declined 48% year over year, primarily due to reductions in staffing and professional fees as well as the payroll subsidy. Excluding payroll subsidies, G and A expenses were down 28% year over year. R and D expenses declined 39% year over year driven by product timing and lower finished product development expenses. Sales and marketing expenses increased 34% due to increased advertising in support of our U. S. CBD and consumer products businesses. Moving on to our cost savings program. Through the end of Q1, we've generated approximately $38,000,000 of cost savings across both costs and SG and A, including $32,000,000 in Q1. And with the savings that we've recognized to date, Coupled with our expectation of future savings, we are confident that we will recognize the $150,000,000 to $200,000,000 in savings by the end of the first half of next fiscal year. Our net income during the quarter was 390,000,000 inclusive of other income of $581,000,000 most of which is tied to non cash fair value adjustments related to our various financial instruments, driven mainly by the decline in Canopy share price during the quarter. Turning to free cash flow. Free cash flow in the Q1 of fiscal 'twenty two was an outflow of $186,000,000 which is a 3% greater outflow versus the prior year. The free cash flow during the quarter was impacted by the timing of certain payments totaling over 19,000,000 interest payments of $24,000,000 and inventory increases of $23,000,000 primarily driven by the Supreme acquisition and the ramp up of BioSteel RTD sales in the U. S. Canada inventory excluding the impacts from Supreme was flat. CapEx declined to $20,000,000 during the quarter, down significantly from $62,000,000 in Q1 of last year. Now taking a step back, our top priority remains achieving profitability and improving cash flow. So let me spend a few minutes providing some perspective on the outlook for the balance of this year and the key drivers to our path to profitability. I'll cover this in 3 parts, looking at the building blocks behind our revenue outlook, what it means in terms of gross margin expectations, and then finally, what we're expecting from an SG and A perspective as we scale. On revenue, we're expecting strong top line growth, particularly in the second half of our fiscal year with the key drivers as follows. In Canada, we expect a benefit from robust industry growth, market share gains and improved price mix. The Canada rec market is on pace 40% growth in fiscal 'twenty two driven by increased store count. And at the end of Q1, there were 2,178 stores in operation and we expect store count to reach 2,600 stores by the end of fiscal 'twenty 2. We are also focused on improving our market share with gains expected through improved supply of high THC strains, distribution increases on existing products and new product launches expected to hit the market later this year. In Europe, we expect our German flower business and C3 to benefit from industry growth as the COVID recovery leads to more selling opportunities and improved supply. In the U. S, we're truly in the beginning stage of what we expect to be a strong sales ramp, driven by distribution expansion of current products in the market as well as new product introductions in fiscal 2022. For Martha and Quattro, we are just under 4,000 doors in Q1 with more distribution on the way. For BioSteel, we're working closely with Constellation's gold network to ramp up distribution with the next big wave of chain authorizations beginning this fall. And for stores in Petco, we expect to see continued broad based growth across Volcano Classic and Hybrid, Mighty and Craft Plus as well as an exciting slate of innovation in the back half. Moving on to gross margin, we expect the price mix impact in Canada to moderate and we're already seeing some green shoots and the shift toward premiumization. And here are a few examples. The mainstream flower segment, for example, grew in line with value in Q1 versus Q4. We're seeing increased premiumization with store reopenings driven by greater up selling opportunities as odd tenders reengage with consumers in the And finally, TRJs are growing 4 to 5 times faster than flower which leads to margin increase. And with our innovation skewed to premium and mainstream flower, PRJs and 2.0 products, all of which carry higher margins. We expect to see improved gross margins as we head through the fiscal year. As for the U. S, we expect our start up costs to moderate as we scale up our CBD and our CPG businesses. And we expect to grow into scale much more quickly in the U. S. Than in Canada as we rely more on third party producers for some of our products and our internal production facilities are much smaller in scale than our Canadian facilities. Lastly, with respect to SG and A, We expect most of our G and A costs to remain fixed as we scale, with E and P expected to flex as revenue ramps. Currency expenses will largely remain fixed as we scale with certain costs being tied to stage gate activities, all of which are budgeted and reflected in our outlook. As a reminder, our full year SG and A inclusive of the above is expected to be down $40,000,000 to $50,000,000 year over year. From a phasing standpoint, note that the expected acceleration in both revenue growth and profitability is likely to be much more pronounced during the second half of our fiscal 'twenty two given the timing of our new product launches and the timing of our expected distribution ramp. In conclusion, we expect revenue acceleration in the back half driven by industry growth, market share gains and improved execution, which allows us to significantly improve our profitability in the back half this year. This concludes my prepared comments. Operator, David and I would be happy to take questions from analysts. Thank you. Your first question comes from Vivien Azer of Cowen. Please go ahead. Operator, we can't hear Vivien's question. Your next question comes from Heather Balsky, Bank of America. Please go ahead. Hi. Can you hear me? Just want to make sure. Yes. Okay, great. Yes. Thanks for taking my question. You talked about some of the execution challenges you had in the quarter and some of the strategies you have in place to make sure you have the right supply. Can you just dig in a little bit more in terms of what's behind you in terms of execution, what you're still working on and So, when you expect to see the improvement? So, I'll start And then Mike can come in afterward. I think the issue is, just generally as you're ramping a business, if you look at our Canadian business, our rec business being up 35% year over year. And we've added these consumer preferred fused into the mix. So, we've created a business in Canada across, I believe, all of the LTs that heavily complex and highly regulated, right? And so and it's an agricultural business. And so, you can't turn on a dime as a result of the growth cycle that you have to adhere to. So, we've, I think, done a good job of improving our planning processes, improving our ability to move product through the facilities, improved our ability to forecast demand across the industry, even working with the provincial boards like the OCS, which is in Ontario, to help us jointly plan the business on a go forward basis. We've cleaned up a lot of the complexity that had existed in our supply chain previously. So, it's a complicated business, but I think We've covered some really good ground to vastly improve the execution over time. I think that's right, David. And I think just to provide some perspective over the last 18 months, we've made tremendous changes to our footprint, shuttering facilities across Canada and across the world, while also rightsizing our labor force and also globalizing our org structure. And we've put a lot of best in class CPG business processes in place that are now being refined and optimized and we're making great progress. But we're not all the way there yet and We're confident that we're doing the right work and it's just, call it, bit of growing pains as we normalize into this new model. So more thing, more progress to come, but we're confident that we're on the right path. Great. Thank you. And I have Your next question comes from Doug May, RBC Capital Markets. Please go ahead. Thank you. I just wanted to speak a little bit about the EBITDA improvements that you're expecting through this fiscal year, I think the language has changed slightly as it relates to when you expect that to occur such that Now we're looking towards the end of the fiscal year. I'm curious to know what type of market gains do you need to see the positive EBITDA by the end of the year? Yes. Thanks, Todd. So as we've talked about previously, so much of our path to profitability comes down to revenue growth getting economies of scale. We've previously indicated that our North Star is bidding to $250,000,000 of revenue on a quarterly basis becomes that run rate whereby profitability starts to become within the crosshairs. And When you look at the building blocks behind our math, a lot of that's going to come on the back of Canada, which is growing 40% year on year. And as we indicated earlier, we're not happy with the share performance that we've seen over the last 12 weeks. But we're confident that the innovation that we're bringing to market over the next 3 to 6 months is going to strengthen our market share and put us back on that trajectory to getting to that $250,000,000 run rate. The other critical component in our trajectory is activated in the U. S. And between all of the CPG brands that we highlighted and our CPG brands, we've got a lot of momentum. And we believe that over the next 3 to 4 months as these distributors start to activate locally as the national chains start to open up, we're going to see a significant ramp in our U. S. Revenue. So we've got line of sight to getting to that $250,000,000 but it is going to come down execution. It's going to come down to activation across the distributor network in the U. S. And it's going to come down to new product development, but we're confident on all fronts that we're going to get there. Thank you. Your next question comes from Tamy Chen, BMO Capital Markets. Please go ahead. Thanks. Good morning. I just wanted to ask with respect to the missed revenue opportunities because of execution Wondering if it's possible if you could quantify that. And then just because you've talked so much about product launches critical in the back half of this year. I'm wondering specifically, OCS recently made some sort of change with to I think delaying when they'll take on new products and pushing back that window. So, do you mind just talking about that? Does that impact Your client at all? So, Tammy, maybe I'll take the first part and David can address the OCS question. In Q1, we know we had missed revenue opportunities on fill rates. We know that we had missed revenue opportunities on high THC or strain specific supply. And we know that we had missed revenue opportunities on timing of activation in the U. S. On certain products. It all comes back to execution. And although I don't have Specifics on they will quantify that for you. That is the largest driver behind our share loss in Canada, basic execution and inventory supply. So you can do the math on your own to figure that out. But we're confident that we're taking the right steps to improve execution on all those David, do you want to take that OCS? Yes, Tammy, as it relates to the provincial boards in general, first of all, each of the boards are getting more and more sophisticated as we go forward and we try to be really strong partners with them. And so we've been a party to all of the discussions around listing windows and so forth. And our NPD expectations for the rest of the year takes us lifting windows into account. And look, we just think it's good for the industry to have that level of sophistication for all of the players to have to adhere to. It's what I'm used to in my experience when you're dealing with your customers and particularly your retailers. We're comfortable that the projections, when we're talking about them, take those listing windows into account. And Again, I think that increasing sophistication at the provincial board level is really good for the industry. Your next question comes from Andrew Carter, Stifel, please go ahead. Thank you. Good morning. I wanted to focus specifically on the commentary around the THC investment. It seems like you're a little less bullish on the Sumer bill, I'm not sure. But I did want to ask if you're kind of signaling that you might be a little bit more aggressive. First off, Would those investments be outside Acreage and kind of where does that relationship stand as using Acreage as a vehicle, because I believe there are some license fees that you have to pay for them? And then finally, given your relationship with Constellation, do you have the flexibility to move a little bit aggressively and potentially them do an exchangeable share position like you have with Terasim? Thanks. Yes. So, Good question, Andrew. The thing that I want to be really clear about is, when we're talking about US THC Permincibility, we're not waiting, right? So I just want to remind everybody of how we're approaching this. So first thing we're doing is we're building our U. S. Business where we can today, meaning CBD, where we're we have the Martha Stewart brand, which is the number 3 brand. We have BioSteel. We have our consumer product businesses like Storz and Pickle, which as Mike pointed out was up 41% year over year. I think those routes to market built in the U. S. Help us build that infrastructure that we can leverage upon permissibility. So that's the first thing. The second thing is you point out acreage. So we own 70% of acreage and 20% of Terasen. That gives us a turnkey entry to the U. S. Post permissibility, but it also allows those businesses to grow as they can leading up to permissibility. So to the extent that the MSOs are allowed to continue to drive their growth plans, we have some guys are doing it and I think doing it well today. Then your I guess to go further to your points. And so then when we talk about Constellation, Constellation is already providing us capabilities around brand building. Think about the company that has literally built the Modelo brand into one of the strongest beer brands in the U. S. We have access to that capability set at Canopy. Constellation has a very strong distribution network. We are using that network today. Constellation has really good operational capabilities as evidenced by what might be best in class EBITDA margins across CPG. And then we have the $2,000,000,000 in cash on our balance sheet, right? So, all of those things together, I think, we're just saying that I remain really bullish on U. S. THC Permissibility. But even without Permissibility, we're doing things today that allow us to be real significant players in the US THC market post permissibility. Now in terms of what we would be willing to do today, I would argue that We've actually led the industry in terms of defining how we can enter the U. S. Through transactions like Acreage and Tericin, And we're not finished. So we're going to continue to do that sort of activity between now and the time we get to permissibility and we're pretty excited about what some of the opportunities bring. And as it relates to Our relationship with Acreage and Terasend and our agreements that we have between them, I think that the businesses as much as we can as much as we are allowed to under the current regulations and laws. The businesses I think are really clear on what we're mutually trying to which is to build the strongest U. S. Cannabis ecosystem that we possibly can. And I think CBI has been a huge positive in this regard. And so I think We've not been in any way limited by Constellation. In fact, our ability to address the U. S. Market has actually been bolstered by the Constellation presence. Your next question comes from Bill Kirk, MKM Partners. Please go ahead. Thank you and good morning. That was a pretty perfect segue for where I wanted to go. I wanted to spend a little time on the relationship with Southern Wine and Spirits. The Martha Stewart gummies, the Cointreau products, different from a lot of their portfolio. And I would think in many states would likely come to 8 different retail accounts than Southern would normally call on. So I guess the is how willing is Southern to adjust the routes to help your products hit all the potential accounts, not just existing Southern accounts. And does that ability for them to do so, how does that differ maybe between states? Yes. So, Bill, good question. And I will tell you to begin with that we have a lot of support for our CBD business at the highest levels within Southern. They view this as an unlock for them over time as cannabis and cannabinoids become mainstream in the U. S. And so They're putting resources on this to make sure that they build out that capability set. I would also say on that same thing, we're having the same discussions with the members of Constellation's beer distribution network, the gold network. And so, I think that we have very willing partners and we want to be useful to them as they're These alcohol distributors are trying to build out their capabilities in this regard. And as it relates to market coverage, But our agreement with Southern as it relates to CBD Brands is really focused on the states, first of all, where they can comfortably and legally take our CBD products into those states. And it also Our agreement with them calls for Southern to have access to those states where the routes to market line up with the the kinds of routes to market, the actual retailers that we think our brands are a good fit with. And so I don't think there'll be a conflict from that perspective. And the one other comment I might make about this is that our sales teams and Southern sales teams and BioSteel sales teams and the beer network sales teams are just in the beginning stages of learning to work together. And that's the sort of thing that I'm really gives me a lot of optimism in our U. S. Businesses because as those partnerships grow and as we get better as managing the relationships right down to retail and through that distribution channel, we're going to be really well with the brands we have in the market today and the brands we'd like to bring to the market in the future. So, I would say it's going well and we have supported the highest levels in those organizations. And Bill, I know you know all those folks. So you should ask them that question as well because I think they would give you the same response. Your next question comes from John Zamparo, CIPC, please go ahead. Thank you. Good morning. I also wanted to follow-up on the commentary on the U. S. Side as well. Is it fair to say the preferred structure that mimics the TeraCents deal rather than your acreage deal? And David, what do you think is missing from your current U. S. Optionality investments, whether it's brands or geography or different parts of that ecosystem you referenced? Yes. So, John, I think from a structure standpoint, when we're looking at the U. S, we're prepared To be flexible enough to meet the legal requirements and to be able to drive that agenda forward. So, I would say there's not a predefined path. And I think that all of our partners have been really understanding of that and willing to flex. When I think about what's missing, Let me tell you what I let me maybe first say what I have or what we have, right? So we have, I think, really strong positioning in the highly populated East Coast markets. And I see that as being a real tailwind for our partners because those markets are just beginning to open now. And so, we're going to see the power of the capability set behind acreage and Terresen, I think, as those markets open more. When you look at the rest of the country, I think that my when I think about maybe how I would want to build out the framework. I think I'm less concerned about Some of the having a multi state operator, for example, that's has a large business in California because I think the California business looks a lot like the liquor industry already with a bit of a liquor store distribution model. So, for me, it would be more about having other capabilities other than just kind of feed to sale capabilities that you have within the MSO. So, I would say, John, maybe I'm not being Really specific here on what we're looking for, but you should know that we are out there looking to build out our capability set. Your next question comes from Michael Lavery, Hey, Michael. Just want to come back to the EBITDA profitability aspiration and to make sure I understand it really and how achievable you feel like it is because I guess, I want to make sure first, am I hearing you right that it Depends on hitting at least close to a $260,000,000 sales run rate. And if so, obviously 4Q, for example, that'd be up about 70%. You're talking about the Canadian market running up around 40%. Would my math there correct to imply that you'd really to his it all depends on U. S. CBD really gaining a lot of speed and also some outsized contributions from Some place like Germany? Yes. I think that's generally accurate that our path to profitability isn't based on Canada growth alone, but it's the success in the U. S. And ramping up our new businesses that we spoke about earlier. And Joe, one of the biggest ones is on BioSteel and we've talked about that at length in prior calls. But This is a multi $1,000,000,000 sports nutrition category that we're going after. And we're building ACV as we speak. We're in, I think it's over 16,000 doors as we speak. The Gold Network at Constellation is being activated as we speak And we've got a lot of wins under our belt already in terms of understanding the response and velocity from some of the local markets that we're doing. So that's one that I would argue is our largest most meaningful upside opportunity in the back half. But I would not dismiss The contribution from Martha and Quattro, David spoke about how Martha is performing in market in terms of brand performance and velocity. Quattro is still early days, but all signs are positive that we've got the right product with the right branding with the right flavor profile. And we also have new products that are coming to market that we haven't announced yet, but we will be announcing those soon that are really entering markets that are very large TAM that virtually have no meaningful competitors in our way with, we think, differentiated attributes that will be very competitive. So all of these things are assumed in our second half of the fiscal. So we have to execute, Michael. But you're right that the U. S. Is as large contributor to our path to profitability. Your next question comes from Adam Bhutto, Scotiabank. Please go ahead. Hey, good morning guys. Thanks for taking my questions. I don't know if you've already touched on it. I apologize I I'm kind of late here, but I wanted to get a view on the dynamics in the Canadian market currently, particularly in the province such as Ontario. We've been out of sort of lockdown calls for December 2 months now. And I was just wondering if you've seen any changes in buying patterns from potential distributors on the back of that. There's been a backlog of stores that have opened over the past 6 months. And so you would think at some point, they to start stocking inventory again to offset those sort of new stores, right? Just any color on that front would be helpful. Thanks. Yes. So let me take first stab and David you can jump in. But look, We do think we're on a road to recovery. In Canada, it's been a tough slog here for the last 4 or 5 months, I'd say. When you look at what's been different over the last few months, store traffic abated quite a lot over the last quarter and that has multiple implications because as consumers revert back to online or click and collect where the engagement with the odd tenders is non existent, then consumers quite traditionally are reverting back to what they know or just simply seeking large quantity at low price and it's not a surprise to us that we've seen this migration to value and consumers not exploring new products as much as they would be if they were face to face with a bud tender being sold on product attributes or being able to talk about what occasions they're shopping for. So that's been non existent and we're starting to see some green shoots on that, which I about in my remarks that as we look at our store engagement with consumers, as we get out in the market and talk with other bartenders, those interactions are really encouraging because consumers do want to discover some of the new products out in the market and those interactions with the fund centers are just key due to some of the, as you guys know, pretty challenging marketing rules in Canada in terms of being on advertised products. In terms of provincial behavior on inventory, it's mixed. Clearly, in the Jan, Feb, March timeframe, we felt a pullback of inventories across the board pretty consistently. It's starting to come back. I know that Ontario has rebuilt much of their inventory over the last couple of months. We're seeing some of that in Alberta. But it's been a little hit and miss across the provinces. But generally speaking, we think that the provinces are back in the mode of replenishing their inventory to support the ongoing growth in store count and consumers coming back to the stores. And the only thing I would add to that, Adam, and it's to build on my earlier comment, the provincial board, so ultimately our customers are becoming very efficient and they're very well run. And I think that continued evolution In that regard, it's going to help us and others in the industry to be able to meet consumer needs on a consistent basis. And again, I think That just bodes well for those of us that know how to work well with our customers. Your next question comes from rupesh Parikh, Oppenheimer. Please go ahead. Good morning and thanks for taking my question. So I have really 2 related questions on the revenue line. First, Do you guys still feel comfortable by CAGR 40% to 50% in the next few years? And then secondly, is there any granularity you can provide in terms how you think about the revenue contribution related to Supreme and ACE for this year? So short answer is yes. We're maintaining our guidance on 40% to 50% CAGR annually for the next several years, not changing that. In terms of Case Valley and Supreme. But we're very excited about these two brands and we think we're just getting started. The integration plans with Supreme are well underway. It's been fairly seamless so far. We announced that With Supreme, we would capture $30,000,000 of synergies over the next year. We're very confident that that will be delivered. We've got innovation plans behind Supreme that are in progress. We have our Canadian sales force very excited on continuing build out points of distribution on Supreme. So it's a sizable contributor in FY 'twenty two. And one of the things that we spoke about earlier, but just to reinforce is arguably one of the biggest intangibles on is going to be the knowledge transfer that we're getting on growing premium, high THC, flower and transferring some of those practices into some of our other growth facilities and it's been quite productive. In terms of ACE Valley, Again, ACE Valley, when we acquired it, it was a very Ontario centric brand and we're continuing to build out distribution across Canada on that. We're very happy with the performance that we've seen so far. And behind Ace Valley, we have additional NPD plans as you would expect will be coming to market over the next 3 to 6 months. So again, these are highly synergistic brands that we believe fit white space in our portfolio and all signs of positive. Maybe anything you want to add on those acquisitions? No, I just think that the ability to take a brand like ACE Valley and innovate around it is just really fun. The products that are coming out are totally dialed into consumer expectations. And as I said in my comments, Rupesh, I'm really excited about ACE Valley Dream CPN, that means a real strong foray into the mood management vision that we have here at Canopy. So, exciting stuff from both Supreme and Acelity. This concludes the Q and A portion of the call. I will now turn the call over to Mr. Klein for final comments. Thank you again for joining us today. This is a really exciting time to be in the cannabis space. And as I mentioned in my comments and in some of the questions that I answered, We're not waiting around for U. S. Permissibility. While we remain very optimistic in terms of timing on permissibility, we're executing against our strategy today. It's our strategy today. It's very exciting and I'm glad you're along for the ride. I hope that you and your families remain safe and healthy and have had an opportunity to enjoy this summer season. And I also encourage you to try our fantastic cannabis brands as well as our non cannabis brands for those of you that aren't in legal markets. I look forward to updating you on further progress that Canopy makes the year progresses. Our Investor Relations team will be available to answer any additional questions. Have a great day. This concludes Canopy Growth's 1st Quarter Fiscal 2022 Financial Results Conference Call. A replay of this conference call will be available until November 4, 2021 and can be accessed following the instructions provided in the company's press release issued earlier today.