Good morning. My name is Michelle, and I will be your conference operator today. I would like to welcome you to Canopy Growth Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin your conference call.
Good morning. Thank you all for joining us. On our call today, we have Canopy's Chief Executive Officer, David Klein, and Chief Financial Officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing our financial results for our second quarter ended September 30th, 2022. 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 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 news release.
Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following remarks by David and Judy, we will conduct a question- and- answer session. We will first address questions upvoted by verified shareholders. Following that, we will take questions from analysts. To ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.
Good morning, and thank you for joining our call. Before I get underway, I'd like to acknowledge the results from the midterm election yesterday. With two additional states voting to legalize cannabis last night, we're seeing continued momentum for reform. While the overall results of last night are not yet fully clear, what is abundantly clear is that Americans continue to demand access to legalized cannabis. The bipartisan appeal of cannabis cannot be overstated, and I hope the results of these midterms will further push the Senate to act swiftly on cannabis reform during the lame duck period and fully unlock this once in a generation opportunity across the nation. Moving back to our earnings, today, I'll speak to Canopy's progress against our strategic priorities and discuss the transformational strategy we recently announced to fast-track entry into the U.S. cannabis market through Canopy USA.
Following my remarks, Judy will review our Q2 results, provide an update on our path to profitability, and comment on our short-term outlook. Our second quarter marked an inflection point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the U.S. cannabis market as we seek to seize the generational opportunity ahead of us. Q2 highlights included in Canada, we stabilized business revenues, improved cash margins, and continued to make progress on our path to profitability. This has been achieved amidst persistent industry-wide challenges, as well as an increasingly difficult macroeconomic backdrop. In our CPG business, BioSteel delivered another record quarter with very strong sequential growth. We continue to pursue cost savings while driving focus in our business, as evidenced by the announcement that we are divesting our Canadian retail operations. Now to provide more detail.
In Canada, our efforts to premiumize our portfolio delivered a positive mix shift despite continued market fragmentation. During the second quarter, our Canadian adult-use B2B premium and mainstream sales accounted for a combined 58% of sales, up from 56% last year. This showcases our resiliency in a market challenged by labor and supply chain disruptions in three of the largest provinces, Quebec, Ontario, and British Columbia. I'd like to take a moment to highlight our performance in the very competitive premium flower and pre-roll joint or PRJ segment. Supported by the recent launch of Doja OG Deluxe Flower in PRJs, our Doja brand increased market share by 2 basis points versus Q1 FY 2023 to 2.4%. We're also encouraged by the demand for our new 7ACRES flower in infused PRJs that have recently entered the market.
Next, in the mainstream flower in PRJ segment, our Tweed brand increased share during the quarter, helped by strong demand for new Tweed-branded Kush Mints and Wedding Cake flower. We're looking forward to introducing additional exciting new products in the second half of our fiscal year. We continue to focus on operational changes in our cultivation as well as post-harvest processes and genetics that are driving higher THC percentages and improved quality. We're selling products into the market that allow for additional consumer choice, like enhanced colors and distinct terpene profiles. This is a result of listening to our consumer feedback.
Prime examples are the recently launched Tweed Lemon Kush, which is garnering positive comments for its flavor, and the vibrant purple color of our new 7ACRES Purple Pancakes that has received high praise. In the current quarter, we pushed the envelope with the launch of our Ace Valley sex gummies, Lust and Thrust. We're encouraged by the initial market response to these gummies, which represent the capabilities of Canopy's insights, product development, and marketing functions. There was a clear gap in the market and a natural fit for our focus on cannabis products tailored to specific need states. As proof, these new gummies sold out at OCS.ca in the first week of sales, leading to an immediate reorder with expedited delivery as the OCS anticipates high demand. We also continue to support our quality products with investments in our commercial ground game in Canada.
I've previously highlighted the investments we're making in our budtender engagement program, High'er Education, which in its first year has facilitated over 10,000 interactions focused on education and product knowledge. Additionally, our commercial team continues to engage with retailers across the country, which led to strong distribution gains for our top new flower, PRJ, vape, and edible products hitting the market in the current quarter. As a result of the divestiture of our retail operations, we've reduced channel conflict, which has created an opportunity to work with over 100 additional stores. It's our expectation that our Canadian adult- use B2B cannabis business will continue to show improvement in the second half of fiscal 2023 due to ongoing innovation and distribution drives. Closing out our Canadian cannabis business, in Q2, our Canadian medical revenue grew 8% year-over-year, driven by expanded product offerings.
Next, I'll speak to progress in our CPG portfolio. First, BioSteel delivered another record quarter in Q2, helped by strategic investments that have driven distribution and velocity gains. This resulted in nearly CAD 30 million in revenue in the quarter, which represents sequential, quarterly and year-over-year growth of 67% and 299% respectively. In the first half of fiscal 2023, BioSteel secured distribution with major retailers including Walmart, Rite Aid, and Winn-Dixie. This has helped increase ACV to 34% in the US, which represents a sequential increase of 520 basis points according to IRI data for the 13 weeks ended on October 2nd. Now moving to Canada, BioSteel is seeing strong market share growth.
According to Nielsen data covering the convenience and gas channel for the four-week period ended October 8th, BioSteel share of isotonic beverage sales in Ontario reached 11.2%, representing an increase of 630 basis points versus the prior year. BioSteel's share nationally was 7.4%, which is 450 basis points higher than the prior year period. A homegrown Canadian brand, BioSteel was born in an NHL locker room and resonates with athletes from across the country. This is a blueprint for the growth that we're starting to see in the United States with a multi-year partnership that names BioSteel as the official hydration partner of the National Hockey League and the National Hockey League Players Association. The partnership provides BioSteel with rinkside marketing, product supply, and retail activation rights, as well as community engagement platforms.
If you watch hockey, the brand is highly visible on and off the ice, and we've secured several distribution agreements in the U.S. as a result. We anticipate additional growth for the brand as the hockey season continues and athletes, both professional and aspiring, enjoy the benefits of clean, healthy hydration, courtesy of BioSteel. Earlier this morning, BioSteel completed the acquisition of a manufacturing facility in Verona, Virginia. The acquisition of the facility from the brand's existing contract manufacturer will support the rapid growth strategy and expansion of U.S. footprint for BioSteel. This is a natural next step for the brand and creates additional business value as BioSteel continues its ascent to the top of the sports hydration category. Looking to Storz & Bickel, sales were flat when excluding foreign exchange effects, which is an improvement versus the trend established in the first quarter of fiscal 2023.
With this said, we are steadfast in our view that S&B has a strong platform for growth, given the brand's global reputation and highly premium positioning. As recreational and medical consumers continue to look for the highest quality vaporizers available, we look forward to bringing additional Storz & Bickel innovation to market in the future. As you can see, the momentum is building in our Canadian cannabis and CPG businesses, and I believe we're at an inflection point as we look toward our next phase with Canopy USA. Firstly or frankly, I think Canopy USA represents a pivotal moment in the history of Canopy Growth as we expect to fast-track our entry into the US cannabis market by bringing together Acreage Holdings, Jetty Extracts, and Wana Brands under the umbrella that is Canopy USA.
We expect the closing of the acquisitions by Canopy USA will meaningfully enhance Canopy's growth and profitability over time once Canopy USA closes the announced acquisitions of Acreage, Jetty, and Wana. In terms of next steps, we are appreciative that the CEO of TMX Group, the owner of the TSX has publicly indicated support for our plans, and we remain committed to continuing dialogue with our partners at Nasdaq. Additionally, we anticipate receiving comments from the SEC on our preliminary proxy statement. However, we expect to be on track to hold our shareholder vote in early calendar 2023. In summary, Canopy USA is expected to accelerate growth and market expansion through the creation of a leading house of brands, capitalizing on a once-in-a-generation opportunity as we fast-track our entry into the U.S. cannabis market.
Q2 marked a key inflection point for Canopy as we continue to drive innovation, distribution, focus, and efficiency in our Canadian business. As BioSteel blazes a path forward in the sports hydration category, and as our Canopy USA strategy progresses, we've taken destiny into our own hands to rapidly achieve profitable growth. With that, I'll turn it over to Judy.
Thank you very much, David, and good morning, everyone. My comments will focus on one, a brief summary of our second quarter results. Two, a review of new segmented reporting that we have introduced this quarter and the performance of those segments. Three, an update on our path to achieve profitability. Four, some perspectives on the balance of our fiscal 2023 outlook. Let's start with a review of our second quarter fiscal 2023 financial results. In Q2, we generated net revenue of CAD 118 million, representing a 10% decline over the prior year period. When adjusting for both the impacts of C3 and the impacts of our Canadian retail business, which we're divesting, revenues increased 2%. Sequentially, net revenues increased 7% compared to Q1. Revenue highlights include BioSteel delivering another record quarter, nearly quadrupling its revenue versus the prior year period.
Our Australian cannabis business having its sixth quarter in a row of record revenues, and our Canadian cannabis business delivered a second consecutive quarter of stable revenue despite the impacts of labor disruptions in Quebec and British Columbia, as well as the supply chain disruptions at the OCS in Ontario. Gross margins and adjusted EBITDA have improved significantly year-over-year, driven by lower inventory charges in the current period as compared to the prior year, as well as the impact of our cost savings initiative announced in April. Our SG&A expenses, excluding acquisition costs, declined by 10% year-over-year, even as we significantly increased our investments in BioSteel with new initiatives like the NHL partnership. Free cash flow improved modestly on a sequential basis as compared to Q1.
Now, following the completion of certain restructuring actions tied to our cost savings initiatives announced in April, which were aligned with our strategic review of our business, we have changed the structure of our internal management reporting. Accordingly, in the second quarter, we're reporting our financial results for the following five reportable segments. One, Canada Cannabis. Two, Rest- of- World Cannabis, which includes U.S. CBD business. Three, Storz & Bickel. Four, BioSteel. And five, This Works. These segments reflect how our operations are managed with the performance of these segments evaluated with a focus on segment net revenue and segment gross margin. Accordingly, we're now including these metrics in our financial reporting for the first time this quarter. Canada Cannabis revenues declined 27% compared to the prior year period, yet were stable sequentially compared to Q1 and Q4.
We grew our Canadian medical revenue by 8% versus Q2 of last year. Our adult-use B2B revenue declined 40% year-over-year and declined 5% compared to the prior quarter. We estimate that the labor strikes in British Columbia and Quebec, as well as the cyberattack impacting the OCS, negatively impacted our Canadian adult-use revenue by approximately CAD 2 million during Q2. Canada Cannabis' adjusted gross margin was a -15% in Q2 as margins continued to be negatively impacted by under-absorption of fixed costs and price compression, offsetting improved product mix and cost- savings initiatives. Excluding depreciation and certain non-cash inventory charges and the impact of Canada Employment Wage Subsidy Program, which was zero during Q2 of this year, normalized cash gross margin for Canada Cannabis improved to 16% from 7% in the prior period.
In our Rest- of-W orld Cannabis segment, revenues excluding C³ experienced a modest decline year-over-year as strong growth in Australia was offset by a decline in the U.S. CBD business and the impact of shipments to Israel. We have previously referred to bulk sales to Israel as opportunistic, and the current quarter did not have any shipments to Israel. Adjusted gross margin, adjusting for inventory charges related to U.S. CBD, was 23% in the current period, down from 46%, in part driven by the C³ divestiture.
BioSteel delivered its second quarter in a row of record revenues, increasing 299% as compared to the prior year period and 67% compared to Q1. Gross margins for BioSteel improved from -5% in the prior year period to 15% in the current period, with the improvements due to higher revenue, increasing operating leverage and improvements to supply chain operations. Adjusted gross margin was 26% after adjusting for certain non-recurring contract manufacturing costs. Storz & Bickel revenues decreased 7% as compared to the prior year period, due in part to the impact of the weakening euro in relation to the Canadian dollar. On a constant currency basis, Storz & Bickel's revenue would have been approximately CAD 1 million higher or stable versus the prior year period.
We are seeing cautious consumer spending in an uncertain inflationary environment in select European markets, and we also continue to see headwinds from distributor and ongoing supply chain challenges. That being said, we are seeing strong growth in markets like Australia and our direct-to-consumer sales in the U.S. remains resilient. Gross margins for Storz & Bickel also increased to 44% from 37% in the prior year period. This Works' revenue decreased 24% in the current period compared to the prior year, due to foreign exchange headwinds, with the pound weakening significantly relative to the Canadian dollar and slower consumer spending impacting demand for discretionary items. On a constant currency basis, This Works' revenue declined 12% versus the prior year. Adjusted gross margin in the current period is 49%, an improvement over the prior year due to product mix and less discounting activity.
Adjusted EBITDA in Q2 on a consolidated basis amounted to a loss of CAD 78 million. This was a CAD 85 million improvement in adjusted EBITDA loss versus Q2 of fiscal 2022, primarily driven by the improvement in gross margin. We note that last year's adjusted EBITDA included CAD 87 million in inventory write-offs. Now normalizing for the disposition of C³, the impact of the Canada Employment Wage Subsidy Program and the inventory write-offs, adjusted EBITDA in Q2 FY 2023 would have improved by CAD 20 million on a year-over-year basis. Relative to Q1, adjusted EBITDA loss widened by CAD 3 million, which was entirely driven by increased marketing investments behind BioSteel. I'd like to now provide an update on the efforts underway to improve our profitability.
On a consolidated basis, gross margin improved in Q2 versus the prior year and sequentially versus Q1 as we continue to improve our product mix in Canada Cannabis segment and execute on our cost savings programs where we have committed to delivering savings of CAD 30 million-CAD 50 million in cost of goods sold. While the majority of these savings are expected to be recognized in the second half of fiscal 2023 and into first half fiscal 2024, we did achieve CAD 8 million of savings in Q2, primarily relating to headcount reductions, more efficient procurement activities and supply chain improvements. To date, the cost savings programs have realized over CAD 11 million of the expected CAD 30 million-CAD 50 million in COGS savings. In addition, as David mentioned, BioSteel acquired a manufacturing facility in Verona, Virginia, which will enable BioSteel to bring production of its ready-to-drink beverages in-house.
This is expected to improve BioSteel's gross margins closer to that of similar premium beverages over time. The other key initiative is that reducing our SG&A expenses, where in April, we announced that we have undertaken actions that we expect will reduce our SG&A expenses by CAD 70 million-CAD 100 million over the next 12-18 months. Our selling, general and administrative expenses in the second quarter were flat versus prior year, which includes CAD 12 million a year-over-year increase in acquisition costs.
Adjusting for the impact of the acquisition costs, the disposition of C³, which contributed CAD 3 million to SG&A in Q2 of fiscal 2022, and the impact of the payroll subsidy benefit, which positively impacted SG&A by CAD 11 million in Q2 fiscal 2022 and zero in Q2 of fiscal 2023, SG&A expenses in the second quarter decreased by 15% or CAD 20 million year-over-year. This CAD 20 million savings is a net of the impact of wage inflation as well as incremental sales and marketing investments in BioSteel, including the activation of the NHL partnerships which took effect in Q2 fiscal 2023. To date, the cost savings program has reduced SG&A expenses by approximately CAD 36 million, even as we have increased our investments in key growth initiatives. At the end of Q2 of fiscal 2023, we announced the divestiture of our retail operations in Canada.
The operational savings from this step are expected to result in projected SG&A cost savings being closer to the high- end of the annualized CAD 70 million-CAD 100 million target range. Pressing forward on our path to profitability, we continue to evaluate opportunities to bring additional focus to our Canadian cannabis operations, including portfolio optimization with a focus on streamlining our SKU count as we continue to premiumize our portfolio and further tighten our focus. Capturing additional efficiencies across our operations and reducing costs, and applying focus and discipline to our overall SG&A costs with an eye towards variabilizing spends where feasible to match spend with business levels. Let me now spend a few minutes on our cash flow and balance sheet. Our free cash flow in Q2 was an outflow of CAD 135 million.
This comprised cash outflow from operations of CAD 133 million, which includes CAD 41 million in interest payments in the quarter. Q2 CapEx came in at CAD 2 million, significantly lower compared to the prior year period. For the full year 2023, we now estimate CapEx to be in the range of CAD 10 million-CAD 20 million. In conjunction with our Canopy USA announcement, we announced two major steps we're taking to improve our balance sheet and reduce our cash interest expenses. First, we have entered into an agreement with certain of our lenders under which Canopy will tender approximately $187.5 million of the outstanding term loans at a discounted price of $930 per thousand. The first half of the pay down will occur during this quarter.
In addition, no earlier than following the creation of the Canopy Growth exchangeable shares, we intend to negotiate an exchange agreement with affiliates of Constellation Brands to purchase for cancellation up to $100 million principal amount of our unsecured senior notes due July 2023, in exchange for additional Canopy shares. These actions, plus the partial exchange transaction of our unsecured senior notes that took place in July, are expected to reduce our overall debt position by nearly $600 million. We remain committed to further enhancing the strength and financial flexibility of our balance sheet and improve our cash burn while continuing to pursue growth investments and other strategic initiatives. Our balance sheet remains strong with $1.1 billion of cash at hand at the end of Q2 and $2 billion of base shelf available.
Let me now provide some perspective on our balance of fiscal 2023 outlook. First, we expect continued year-over-year growth from BioSteel in the second half as the team builds on the growth in the first half with increased marketing investments, driving gains in sales velocity and new distribution. On a sequential basis, we expect Q3 to be slightly down versus Q2, with a stronger Q4 based on the timing of shipments. Our Canadian adult B2B business is expected to show continued improvement as it benefits from our premiumization strategy and new product launches. However, we expect some choppiness in the near- term as we work through our portfolio optimization strategy. Our Rest- of- the-W orld Cannabis segment is expected to show year-over-year growth in medical sales in Germany, Australia and other international markets, while sales to Israel are expected to be minimal in the back half of the year.
While the distributor challenges and economic conditions in the first half created some headwinds for Storz & Bickel , we are seeing improved U.S. distribution in the third quarter, which we expect will drive sequential growth in the second half of the year, though prior year comparisons will be challenging to repeat. I'd also note that with the disposition of the Canada retail operation has already seen 10 locations close, which will begin to impact the Canada retail revenues starting in Q3. Second, we expect the balance of fiscal 2023 to show continued progress in our profitability, with expectation of this year being a transition year as we work towards profitability, building on the cost structure improvement as we've seen in the first half, while also making strategic investments in key growth areas of our business.
Lastly, assuming a successful shareholder vote in favor of the upcoming proposal, Canopy USA is expected to exercise the rights to acquire Acreage, Jetty, and Wana. Once these transactions close, we expect to consolidate Canopy USA's financial performance into Canopy's financial statements. As we continue to improve our focus in our Canadian business, and once Canopy USA closes the acquisition of Acreage, Jetty, and Wana, we expect Canopy's global cannabis business to be profitable on a consolidated adjusted EBITDA basis. In conclusion, we are focused on executing our path to profitability in Canada. We continue to invest in high potential opportunities, particularly in BioSteel business, which is seeing strong results, and we expect Canopy USA to meaningfully improve Canopy's growth and profitability over time. This concludes my prepared comments. We'll now take questions. Sorry, go ahead, operator.
I'm sorry.
Operator, this is Tyler Burns. We'll take a couple of questions first that we have in the queue from our Say Technologies platform.
Okay. Thank you.
Okay, that first question is: What is the plan for entering the U.S. market, and what is the projected timeframe for this happening?
There are a number of steps related to entering the U.S. market under the Canopy USA structure that we announced a few weeks ago.
So the steps are, first, Canopy shareholders will vote to approve the creation of exchangeable shares. We expect that to happen in early calendar 2023. Then, Canopy will create that exchangeable share class immediately upon a successful vote. We then would expect Constellation Brands to elect to convert their common shares into those exchangeable shares. Acreage shareholders also have to have a vote to approve the acquisition of the floating shares, and we expect that to happen in early calendar 2023 as well. Canopy USA will exercise the options to acquire Acreage, Jetty and Wana. We expect Jetty and Wana to close in the first half of calendar 2023, and we expect that the Acreage closing will take longer.
It could take as long as nine to 12 months in order to get all the necessary regulatory approvals. As we said, once we get through all of that work, as well as driving continued focus on our Canadian business, we expect that our business will be growing and profitable.
The second question is: What is your plan if Nasdaq denies the pending acquisition?
I'll take that question. Just taking a step back, first of all, Canopy shares are listed on TSX, which is obviously a major exchange. As David mentioned, we are pleased that the TSX is supportive our structure and strategy of Canopy USA. In terms of Nasdaq, they have objected to the financial consolidation of Canopy USA into the financial results of Canopy Growth. It's not the structure or the strategy or the plan that they have really objected to, at this point. It's also helpful to understand that Nasdaq is not a regulator, and we don't require their approval of the transaction, per se.
It's also important to understand that there is no imminent risk to our listing on Nasdaq, and we're continuing to engage in constructive dialogues with Nasdaq to really ensure that we are in compliance with their rules and regulations and general policies. Now, even in the event that Nasdaq continues with its objection to the consolidation, there are a number of potential paths, and that really includes, you know, Nasdaq may accept a heightened level of disclosure for the USA assets. We could also appeal a decision by Nasdaq to delist our shares if we get to that point. I just wanna remind people that there's a lot of things that have to happen in the next few months.
Certainly we'll share more details with people as we get more updates.
Operator, Judy and David will now be happy to take questions from the analysts.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the 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. The first question comes from Vivien Azer of Cowen and Company. Please go ahead.
Hi. Good morning. This is Victor Ma on for Vivien Azer, and thank you for taking the question. I just wanna touch on BioSteel. Sales in 2Q were helped by the higher Walmart load-in versus 1Q 2023 and by continued strong velocities we've seen in scanner data. As you look to move some of that RTD manufacturing in-house, what is your strategy on in-house versus contract manufacturing? And is there a target mix and a target gross margin you have in mind? Thank you.
Yeah. Hey, Victor. I'll take that question. The acquisition that we announced on the Verona facility is really about two things. One is it really ensures the supply of Tetra Pak packaging in the U.S. and even in Canada, because as you may know, there is limited supply and capacity of Tetra Pak packaging just across the industry. It really ensures that we have supply that we can leverage internally and really ensure that we can continue to capitalize on the rapid growth that we're seeing for BioSteel across both the U.S. and the Canadian market. Secondly, this is really also about margin improvement.
As you probably saw in our segmented margin disclosure, BioSteel's margin this quarter was around 26%. We think as we bring production in-house through this acquisition, its gross margin certainly will see significant improvement as we reduce or obviously eliminate all the co-packing costs. There's additional savings that we would garner from owning the production facility. Over time, we would expect BioSteel's gross margin to mirror what you would typically see from other premium beverage players' standpoint. All in all, it ensures supply and obviously it's margin improvement efforts as well.
Thank you. The next question comes from Chris Carey of Wells Fargo. Please go ahead.
Hi. Good morning.
Morning, Chris.
I think your prior expectation, correct me if I'm wrong, was for the Canopy USA vote to happen perhaps in January, and now it sounds like early calendar 2023. Can you just help us understand your expectation for what appears to be a bit deeper of a SEC review here, and maybe explain to the extent you can, where you think they're taking a deeper look. You know, clearly other cannabis companies based in the U.S. have filings with the SEC. I'm wondering why your case would be different. I'd love any perspective there on how you think this impacts your timeline. Thank you.
I would say, Chris, that our expectation on timeline really hasn't changed all that much. We filed our proxy on October 25th. There is a period in which the SEC can provide comments. Maybe just the change in tone into the first half of the calendar year is just more being conservative than anything else because our internal expectations really haven't changed.
Thank you. The next question comes from Tamy Chen of BMO Capital Markets. Please go ahead.
Hi. Good morning. Thanks for the question. I wanted to ask about your Canadian Cannabis business, specifically just the production side, the costs so far. I recall a couple of quarters ago, there were some stumbles as you were working to improve the quality of your mainstream and premium flower production. Could you just give an update on that progress? Are you through all of the challenges that you've previously experienced? Is your Canadian footprint still in a position that essentially you need a lot more volume of mainstream and premium flower sales in order to get that segment into positive gross profit territory? Thank you.
Good questions, Tamy. As it relates to performance from our production facilities in Canada, we've made, I think, tremendous progress in terms of our ability to deliver high quality flower in particular to our consumer base, and we see that with some market share growth and distribution growth and new products that we've launched. It's been a combination of things that have gotten us there. We've continued to improve our grow processes. We've continued to look for ways to improve our post-harvest processing. We've introduced new genetics, and we now have a very robust pipeline of genetics that we can bring into the market.
We're feeling really good about our ability to supply that super high quality flower into the Canadian market, right? I think I wouldn't say we're over all of the hurdles because we're growing a plant. You know, at the end of the day, the agricultural cycle can create its own issues from individual lots of grow to the next lot. I would say that we're really pleased with where we are and feel pretty confident in our path forward. From a footprint standpoint, we need a footprint that is capable of delivering our aspiration to be a leader in the premium and mainstream categories.
You know, we'll continue to do, you know, take actions necessary as we always have to improve our ability to grow and grow profitable. Again, I would say that we're on track with where we'd like to be from a production standpoint.
The only thing I would add, Tammy, is, you know, obviously we are seeing sequential improvement from a gross margin standpoint, and this is happening amidst rising costs as you know across the industry. Unlike other industries, cannabis CPI is actually still down, right? We're facing rising costs, but pricing compression is not helpful in the industry. There's still a lot of evolving dynamics happening in the Canadian market too, right?
Just to give you know, one of the examples of what we're facing with, and I think the market really needs a more equitable distribution of profit pool. We can adjust the footprint, we can adjust a lot of the cost structures, but the market really needs to move forward to having a more equitable distribution of the profit pool.
What I mean by that is, as you probably have seen, many of the producers are basically getting 30% of sales of revenue, and that's, you know, that split in terms of the value chain split is just not sustainable, I think for the industry and are not healthy for the industry as a whole too.
Thank you. The next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.
Good morning. Judy, I guess, and David, it's a two-part question. Judy, maybe you can explain by what you mean by heightened level of disclosure that Nasdaq would perhaps accept.
David, for you, I guess the question is, here we are trying to balance what the auditors want and maybe the SEC and what Nasdaq wants, right? There could be a scenario that we would come to August, right, nine months from now, Acreage transaction is closed. You would remain listed in Nasdaq and I guess persuade your auditors not to consolidate because Nasdaq is still pending and just provide pro forma numbers, right? We can all see what the company would look like on a quasi-consolidated basis pro forma with the U.S. assets. That could be a plausible scenario, and please tell me if I'm wrong. I guess the last one, David, as part to the same subject. You know, Acreage yesterday said that the vote is taking place January 23rd.
If I'm a floating shareholder of Acreage and I get my shares, if I vote yes on the 23rd, in theory, I would get, you know, my CGC shares in August, nine months after the transaction closes. Then, you know, maybe you're still listed in Nasdaq, because there's still this paradigm that I just spoke about. I would be, you know, voting yes, but getting CGC shares that are listed in Nasdaq potentially besides the TSX. If you can just touch on that first. Maybe if you can start, Judy, on the heightened level of disclosure and what I said about, you know, pro forma not consolidating, and pleasing Nasdaq that way, and I guess convincing your auditors that can be done.
Yeah. Thanks for the question, Pablo. You know, I'll say that in general, there's been just a lot of discussion around the structure of the transaction. We're gonna continue to work with Nasdaq. We'll work with our auditors. We work with the TSX. We'll work with all of our partners so that we create the most value for the totality of our shareholders. I remain optimistic that we get an answer that everyone can be comfortable with. We just have to go through the process and, you know, unfortunately or fortunately, you know, we're innovators in this space and that means there's some messiness in how we describe it.
As I said, I remain confident that we're gonna end up in a place that is good for all of our investors. I don't want to lose the point that what we're doing here is we're taking Acreage and Wana and Jetty with the outstanding brands that they have and the core capabilities that each of the businesses have in distinct markets, and we're putting them together under one umbrella so that they can create value and generate profitable growth and generate cash flow for our shareholders. Again, I get there's a lot of discussion around structure, and it's important because we need the structure to execute on our business model.
I wanna make sure that we keep coming back to these are really good businesses that we're putting together that's going to make them even better businesses. As I said, I remain confident that we'll work through all of the issues related to listings and disclosures and audit and so forth.
Thank you. The next question comes from Andrew Carter of Stifel. Please go ahead.
Hey, thank you very much. Good morning. I wanted to ask, thinking through Canada, we're multiple years in. As you said, Judy, the profit pool is still under pressure and the category is decelerating. I guess I'd ask, with CAD 200 million of costs supporting that business I backed into with the retail, why continue down that road, especially when Canopy USA is probably gonna be your top use of capital? I guess I wanna add to that, you know, if you were to take some more significant steps, what flexibility do you have under your term debt agreement to do that? I guess the final thing is when you close Canopy USA, will your lenders have any recourse on the Canopy USA assets? Thanks.
I'll take that. First, Andrew, I do think we are making progress on our Canada path to profitability efforts. Make no mistake, we are continuing to assess all of our operations beyond what we have announced, just to really get to the point where we are profitable in Canada. You know, I think David mentioned really the focus is we have a footprint that can support our premium and mainstream businesses that we're really focused on. Additional efforts that we are reviewing, including really optimizing our portfolio, looking at variabilizing our costs as much as we can, continuing to look at all of our operating costs, both direct and indirect costs.
You know, I think we really do think it's important to have a self-sustaining Canadian business while we really scale growth in the U.S. In terms of the term loan and to address your questions about any limitations on the term loan as we think about the Canadian footprint, really no limitations to really call out. From a Canopy USA standpoint, it's essentially the way that it works is before they did not have any collateral of, say, an Acreage as part of their package, the lender package.
Now, just the Canopy Growth's exchangeable shares ownership. Through that ownership, they essentially have an asset that they can really think about that's credit enhancing from their point of view, just given the ownership structure of Canopy Growth, say, through Canopy USA.
Thank you. The next question comes from John Zamparo of CIBC. Please go ahead.
Thank you. Good morning. I wanted to ask about your path to achieving positive EBITDA in FY 2024. Two parts to this. First, just to clarify, that guide now includes your U.S. assets? Second, if so, given the remaining cost cuts you're planning seem to only get you about 40% of the way there to positive EBITDA just on the existing business. Should we interpret that as you do not expect the existing business as is to achieve positive EBITDA in FY 2024? Thanks.
Yeah. I'll take that. First, the comment we made about adjusted EBITDA positive in FY 2024 was for all of our businesses excluding the investments we're making in BioSteel, right? Just to level- set everyone, if you look at our adjusted EBITDA losses to date, really the main drags are Canada and BioSteel. For BioSteel, we are making a strategic choice to invest, and you're seeing that really driving the top line results that we're seeing in our performance, and we continue to expect very strong performance out of BioSteel, leveraging the investments that we're making in years to come. From a Canada standpoint, I think I've addressed in my prior comments that we are really committed to having a Canada business in a profitable shape.
As we deliver on the cost savings, as we look at premiumizing our mix and continuing to look for additional opportunities, we expect we should be in position to have a positive profitability in Canada on a go-forward basis. If you layer in then potentially the positive adjusted EBITDA that the Canopy USA could bring, you're really looking at a business that we think is pretty attractive from both a growth and profitability standpoint. All of that will likely to occur once Canopy USA closes on the transactions of Acreage, Wana and Jetty, which as David alluded to, could take some number of months before we get there.
You know, John, I'd use your question maybe to build on some comments that both Judy and I made during our scripts, right? If you think about our business and it aligns to our new segments that we're reporting in, we have our Canadian business that we're gonna continue to drive innovation, we're gonna drive distribution, and we're gonna really work toward the focus and efficiency in our Canadian business that gets us the results that we want. A proof point in that is the divestiture that we've announced of our retail assets. We then talk about BioSteel, which is a brand that we're investing in, but showed almost 300% year-over-year growth.
You know, we really love the trajectory we're seeing in markets like Ontario, where the brand is maybe a little more well-known and established, but is really starting to hit an inflection point. That gives us, you know, reasons to be excited about that. We've talked a lot about our Canopy USA strategy, but that's really about growing our businesses that are profitable in really strong markets in the U.S. so that we can take a share of the $50 billion total market. I also wanna layer in our Storz & Bickel business, which is coming off of 20 years of consecutive growth.
We are continuing to look at driving distribution in that business, and working through some exciting innovation in that business as well, and that's a business that is standalone, profitable, and again resonates well with our consumers. Then lastly, we really have our Rest- of-W orld businesses, which includes our U.S. CBD. We're gonna continue to function in those markets in an asset-light fashion and be opportunistic as the regulatory environment evolves. I think putting our business kind of in that perspective, using our new reporting segments, I think is a helpful way to think about it because then you can get under the components of profitability that, as Judy described, where we have some work to do in Canada and we're investing in BioSteel.
Thank you. The next question comes from Nadine Sarwat of Bernstein. Please go ahead.
Hi. Thank you for taking my question. I appreciate you saying that including Canopy USA will get Canopy Growth to globally profitable on a consolidated basis. My understanding is you actually won't get access to any of those cash flows. Beyond the cost synergies which those U.S. assets would enjoy by being under the same umbrella, could you explain the benefits to Canopy Growth shareholders today from the creation of Canopy USA? Thanks.
Yeah. I'll take that, Nadine. I'd say from a Canopy Growth shareholder standpoint, you know, obviously having some visibility to the performance of the Canopy USA business, that Canopy Growth has already paid for in owning majority of those assets and not showing up on their P&L, just having that visibility we think is beneficial to Canopy Growth. The second benefit would be when you think about some of the resources, both management's time and cash uses that we are making at Canopy Growth level to really advance our U.S. THC strategy, and we've talked about this before, that there is not insignificant amount of money and time that's being spent by Canopy Growth to really advance our U.S. THC strategy.
By having this Canopy USA structure, we can really streamline the management, and the resources that the Canopy Growth has also been spending on Canopy USA, while Canopy USA also then takes advantage of the consolidation of their businesses, and really generate revenue and cost synergies, over time. Ultimately, you know, we do expect regulatory progress to happen at some point, right? Maybe not in the next year, but we do think that that will happen. All of the benefit that Canopy USA would be generating, both from a, you know, profitability standpoint and a cash generation standpoint, all of that at that point will accrue to Canopy Growth shareholders.
It gives us a head start into that market so that we don't wait until we have a permissibility event and then put the assets together. I think the head start is important, and it is a legitimate economic asset that's available to our shareholders, and clearly cash flow is available to our shareholders upon permissibility.
Thank you. The next question comes from Douglas Miehm of RBC Capital Markets. Please go ahead.
Thank you. My question just relates to BioSteel. Given the growth and it looks like the opportunity for this product relative to the Canadian cannabis business. Number one, within the next year to 18 months, do you expect BioSteel to be a larger business than the Canadian cannabis business? Number two, as you think about other opportunities and what's gone on on the Canadian cannabis side, when you think about M&A, are other products that are similar, let's say, to BioSteel, would they come to the top of the list on a return on invested capital basis now, seeing what you've seen over the last while?
Yeah, look, Doug, we're gonna continue to drive BioSteel because we think that we have something really special in the brand proposition and the way it resonates with professional athletes and aspiring athletes and then you know the common consumer. We're gonna continue to drive BioSteel as hard as we can. From an M&A standpoint, as a company, we're gonna remain focused on delivering against the business opportunities that we have in front of us.
As we talked about, incremental focus and efficiency in our Canadian cannabis business, and you know, really stay focused on what we have, with the potential on a very small scale to be opportunistic in building our portfolio so that we can go to market ultimately in the U.S.
Okay, thanks.
Thank you. The next question comes from Bill Kirk, MKM Partners. Please go ahead.
Thank you for the question. I think as part of the deal with Flow, you'll be co-packing for them at the Virginia facility for a bit. I guess how much revenue would that co-packing arrangement generate, and what is the duration of that agreement? On Storz & Bickel, Judy, I think you said you expected it to sequentially grow. Is that just normal holiday seasonality, or is there something improving sequentially with discretionary purchases? Thank you.
Yeah. I'll take the S&B and then go back to Flow. From an S&B standpoint, I think the encouraging thing is when you look at Q2 performance, we were down 7%, but when you exclude currency, we're flat, right? Sequentially, it is an improvement relative to what we saw in Q1. Really the challenges that we've had with some of the distributors in the U.S., a lot of that has now been worked through and we're you know, getting reorders now from the distributors that had some challenges, and we had to pause some shipments there. We are seeing some of that improvement coming through.
You know, I think a lot of that is sort of the challenges that we had on the distribution side. You know, we're behind on a lot of that. We've had some supply chain challenges in Q2 as well, and that's also improving. Understand that certainly in the European markets where the inflationary pressure and the war in Ukraine is really posing additional challenges in those markets. You know, I think we are seeing improved trends just from working through some of the internal challenges that S&B had. In terms of Flow, yeah, you're correct in that there will be a period of time that we will be or BioSteel will be contract manufacturing for Flow's production.
This is really to ensure that we are utilizing the capacity as best as we can, so that also helps margin. It's really less about the revenue, but really efficiently utilizing the capacity of that facility as best as we can.
Thank you. Our last question comes from Michael Lavery of Piper Sandler. Please go ahead.
Thank you. Good morning.
Morning.
I just wanna come back to the Nasdaq listing. I appreciate there's quite some time before there may be better clarity on where that lands. Obviously, you mentioned the appeal potential as well. If they push the delist and then deny an appeal, can you just clarify if your decision is to close the Canopy USA deal and delist or to give that up and stay on the Nasdaq listing, how would you pick?
Michael, I would just go back to what David said. The decision to announce Canopy USA is to optimize the value of our U.S. THC investments, right? When you think about what we wanted to do and what our priority is, really the structure allows us to optimize the value of our investments in the U.S. and really generate revenue and cost synergies for that entity over time. We will continue to work with Nasdaq. We'll continue to have dialogues with them to make sure that we can come to a constructive decision. If you think about our primary motivation for Canopy USA, it is really about value creation. That's really where we have our eyes set on.
Thank you. That concludes the Q&A portion of the call. I will turn the call back to Mr. Klein for closing remarks.
Thank you again for joining us today. I mentioned that we feel that we're at an inflection point at Canopy, and we're really excited about where we sit today in the future in front of us. If you're in Canada, I encourage you to try one of our new premium flower and PRJ innovations, or a great- tasting Tweed Iced Tea Guava or Deep Space Ginger Galaxy. If you're in the U.S., I encourage you to hydrate with BioSteel RTD beverages or try a Wana gummy or a Jetty vape. Investor relations will be available to answer additional questions. Have a great day.
This concludes the Canopy Growth Second Quarter Fiscal 2023 Financial Results Conference Call. A replay of this conference will be available until February 7th, 2023, and can be accessed following the instructions provided in the company's press release issued earlier today.