Okay, rounding out our presentations for the day, we have Canopy Growth Corporation. There's been tremendous change at Canopy, and more broadly in the global cannabis market over the past year, as many companies have shifted gears to improve profitability and hone in on their key product lines and markets. For Canopy, this pivot has come under the direction and leadership of its new management team, CEO David Klein and EVP and CFO Mike Lee. They're going to do a Q&A with me, so we'll just get right into it. David and Mike, thanks so much for being with us today. I'll start out by saying I hope we get to do it in person next year. David, it's been eight months since you've taken over as CEO of Canopy. Feels like a lifetime ago.
Could you just update us on the progress you've made on your key priorities?
Yeah, so, first of all, thanks for having us here. It's cool to be a cannabis company at the Barclays conference after attending it for a long time as an alcohol person. Anyway, yeah, when I arrived at Canopy, it was a company that had a lot of the core building blocks in place, but it required focus and a bit of strategic direction. My view was we wanted to create a cannabis-focused CPG company, which could then really understand its consumer and deliver products that meet consumer needs, including needs maybe the consumer did not even know that they had.
I wanted to make sure that we could create the focus for the business, and I wanted to improve our overall execution and then clearly deliver on the promise of a path to profitability, which was kind of job one as given to me by the board. If I kind of work my way through those items, I think we've made a lot of progress on building a consumer insights organization, basically from scratch, but we've made a ton of progress in that area. On top of that, we had an R&D organization that was maybe more focused on high-end pharma sorts of applications for cannabis. We've now focused them back onto consumer rec and maybe OTC kinds of medical applications of cannabis products. I feel really good about where we are on that.
From a focus standpoint, we've exited some of our international operations and focused our business on the U.S., Canada, and Germany, because those markets really make up about 90% of what we expect the total addressable market to be over the next several years. From an improving execution standpoint, I think we've made a lot of progress in streamlining our SG&A infrastructure, which Mike can talk about, and even exiting some production facilities. I feel pretty good about how all of those pieces are coming together at this point.
Okay, great. Just as a follow-up, I mean, how has COVID impacted your ability to implement your new strategic plan?
You would not plan to do all of this. Look, you can aspire to be the leader of a company. You would not say, "I want to do it," and then I cannot actually meet any of the people on my team in person on an ongoing basis. You would not plan it that way. However, I would say that because of technologies like Zoom and so forth, we have been pretty effective, I think, in being able to drive the business forward. On a positive side, really, cannabis was very early on in Canada and then subsequently in some states in the U.S. deemed essential by the local governments. We had a short period of time where we closed our retail shops, but they then reopened.
In some ways, we were able to move the needle on online servicing by the provinces and even driving things like click and collect and local delivery. In some instances, it created a bit of a tailwind for us. We had to do a lot of work from an operations and SG&A standpoint in the company. I would say that COVID slowed that down a lot. It's just hard to get through that kind of work when you're doing it via Zoom. We are now maybe coming to the tail end of that sort of activity. In retrospect, it maybe took a little longer, but otherwise, COVID has been kind of a bit of both a positive and a negative for us.
Okay, great. Mike, David mentioned and identified achieving profitability as a key priority. Can you just speak to the efforts that you've collectively undertaken to move the company towards that goal?
Hi, Lauren. Yes, I can absolutely do that. I just want to say hello. Thanks for having me back. Yeah, as much as COVID did impact the timing, I can assure you that we've been extremely busy in really resetting our strategy as a business and getting our operations and supply chain realigned to not just where we are today, but where we see ourselves going over the next two to three years. Almost immediately after David joining, we focused on our footprint. We had a surplus of capability that was really absorbing a lot of our cash and contributing to our cash drain as an organization. We immediately right-sized our cultivation facilities. That resulted in us electing to exit a number of international markets that we felt will help to conserve our capital spending for the foreseeable future.
We did it in a strategic way because we do have an incubator footprint in a number of markets around the world that give us the optionality, that give us the presence in some of these high potential markets that maybe are a few years out, but certainly we want to maintain a presence there so that we do have a pathway to grow in markets in the southern hemisphere, particularly. We have done a lot of work on our footprint. From an OpEx perspective, we have reduced headcount by 18% since the beginning of the year.
Some of this was driven by the reduction in our cultivation assets, but some of this was really driven by restructuring our organization to be in line with where the business is today, but also really designing our organization to be more nimble, more focused, to allow us to move more quickly as an organization in terms of making decisions. We have now completed most of our commercial parts of the organization. We still have some additional work to do on the back end, but we have moved really quickly. As you can see in our results from Q1, our G&A was down 18% sequentially, which highlights the progress that we have made. We are also focusing our R&D resources to be more focused on the consumer and consumer innovation. That has helped to focus our resources even further as an organization.
In a nutshell, I think we're doing a much better job of focusing our resources against the core markets that David laid out, Canada and the U.S. and Germany. I think focusing ourselves on that adult use market and the medical market allows us to focus those resources even further. I would also highlight that our CapEx continues to moderate. Fiscal 2020 was a big investment year as we were building out our Canadian infrastructure. We're also building out some advanced manufacturing capabilities in the U.S., and a lot of that's behind us. We believe that our capital expenditures on our overall free cash flow is going to improve as a result. I think we're making really good progress.
Okay. Priority markets. Let's maybe talk about Canada. David, kind of current state of the industry and what do you see as the key drivers of industry growth going forward?
Yeah, so current state is I think the industry is starting to kind of hit its stride a little bit. You see more and more stores opening. For a while, the store growth was constrained in Ontario. That blockage has effectively been removed. There are roughly 1,000 stores open today. In Ontario alone, there are about 160 stores open, and I think there were about 30 at the beginning of the year. Lots of progress in getting that access to the consumer, which has helped. 2.0 products have helped bring people into the market. The growth of the value segment has helped pull people from the illicit market into the legal market in Canada. We think that the market's kind of trending toward just slightly under $3 billion on a full-year basis, medical and rec. Feeling pretty good about the basic market.
I think the drivers going forward are going to be similar in my mind in that we expect to see continued store growth, in particular in Ontario. In fact, the government has indicated that they will be accelerating their licensing process, which we think will be good for the industry. From a Canopy perspective, we expect to be able to leverage our insights and innovation capability to continue to develop products that pull share from the illicit market, and maybe even over time, more importantly, to develop those 2.0 products that bring non-current cannabis consumers into the market. I often said there, I think in Canada, but across North America, there are just millions of consumers that probably love cannabis but just don't know it. They're unlikely to enter the category through inhalables.
That is why I think there is a path to dramatically expanding the overall market by bringing these consumers in through things like drinks and gummies and so forth.
Yeah, okay. There has been some volatility in market share performance among the Canadian companies. Could you just update us on the actions you've taken to improve your market share position in Canadian rec?
Yeah, so I think my initial observation that I had when I arrived at the business, I think still holds, which is it's all about execution. I think a year ago, a year and a half ago, it was just kind of cool that people could buy cannabis legally. If a product were on the shelf, it would sell through. Companies did not do a good job of continuing to refill the orders from the provinces or from the retail stores. We have done a lot of work to get that order fulfillment rate up to where it should be in a CPG company. That has helped a lot. We have improved the quality of the product that we were bringing to the shelf so that we can start to differentiate our brands on the shelf.
We are seeing some real early wins as we are more aggressively participating in the value segment. We are seeing our share of value grow. We are also, however, seeing our share of mainstream and premium categories growing. I think those make us really bullish on our ability to grow share in Canada. You add on top of it where we think we are going to go with some of the 2.0 products. In particular, you see the effect our drinks are having in the marketplace. I do not believe this is sustainable, but because we were the first in the market with a really strong set of ready-to-drink offerings, we are sitting here today with about a 75% share of the drinks market in Canada.
I do not suspect we hold that 75% share, but I do think that we'll retain a lot of consumers as that market continues to grow.
That's great. I was going to ask about the cannabis beverages. Do you have any insight into kind of consumer uptake, kind of like, I don't know, is it a consumer awareness? What does penetration look like? I think there's just a lot education-wise, frankly, for people to understand that these products exist, what they're about. If you could tell us a little bit about that, it'd be great. Also, just capacity expansion. I just wasn't sure where you sit on that, when you will need it, and do you have the is that easy to do from where you stand today?
Yeah, so I'll hold the capacity question really for Mike. From a consumer uptake perspective, I think when people up to this point have looked at the cannabis beverages versus the cannabis market, they assume there's a small percentage of the current cannabis users' portfolio, share of mouth, whatever you want to call it, is going to go into beverages, right? That's how a lot of folks have been thinking about it. Of course, when we rolled our products out and we put them into cannabis shops in Canada, that's who we were selling to. The interesting thing is that we are starting to see consumers who aren't typical cannabis consumers start to use the products as a result of being exposed to it by current cannabis consumers.
Our early research in the space suggests that when people try our products, 75% of them say that they will buy the product again, and they will recommend it to their friends and family. We're just seeing that kind of slow growth from sort of word of mouth. I do think there is that education, though, that's required, a normal consumer pull activity to try to bring people in. We're a little limited in Canada in terms of how much we can speak about the products, but we certainly can do that in age-gated environments like movie theaters and such, which, again, have been kind of restricted as a result of COVID. We see using that as a tool to bring in non-traditional cannabis users into the space.
The last thing I'll say before I turn it over to Mike, that one of the issues that we've had is even getting high-quality consumer insights data back because we struggled up until about a few weeks ago to keep the product on the shelf and to have that product available consistently for consumer repurchase so that we could then test what's happening, who's consuming our product, and kind of get that multi-use feedback. We've been doing an awful lot to try to kind of keep up with the market demand. Mike, you can touch on kind of where that's headed.
Yeah, and I would just remind everybody, beverage alcohol category in Canada is a $25 billion category. If we could get a 5% share, you're talking about THC beverages being a billion-dollar category to compete in. We think that we've got market-leading quality. It is very exciting. That being said, we have been focused on maximizing production because we are growing distribution across Canada pretty rapidly. We've tripled our beverage production just since June. We've now shipped over 1.6 million cans. We want to make sure that service levels remain high. We are really focused on building distribution at a point where we can ensure replenishment in a real-time fashion. We have 20 million cans of capacity at our facility today just with one shift. We now have the capability to dial up multiple shifts.
We have line of sight to $35 million to $40 million of capacity just with our existing assets. If this category goes beyond that, we can certainly dial up capacity even further with more production assets. We are very happy with where we are.
The fascinating thing that I would add, Lauren, is that we talk about cans, not cases. I come from a beer company where we talked about cases. To put Mike's statement in perspective, in Canada, the beer industry probably sells about, I don't know, somewhere between 5 billion and 5.5 billion cans, right? We are talking about we've shipped 1.6 million cans since the end of March, really. To put it in perspective across the U.S., four million cans were sold in the entire calendar year of 2019. We think we've got some real momentum just in Canada where we're going to start eating into those five billion cans. I'm convinced of it.
Yeah, okay. Mike, I wanted to just ask large-scale infrastructure in Canada for Canopy, and that has negatively impacted gross margin performance in the last quarter. Can you just talk a bit to the gross margin outlook near-term in the path to getting back to 40% to 40% margins?
Yeah, look, our gross margin last quarter was below our target and our expectations, with the biggest driver of that being underutilized facilities. It is part of what we talked about earlier. The secret to high margins in this business is capacity utilization because these facilities are high fixed costs. We also did have some manufacturing variances last quarter that I would consider to be one-offs related to some changes that we are making in the business. I would remind everybody that we made it very clear that our priority in operations was improving our fill rates up from Q4 of last year, where we noted that our fill rates were in the 50%-60% range. We were missing on opportunities to fill demand because of our inability to just forecast and deliver against the purchase orders. We have made a lot of progress there.
We are laser-focused on maintaining those fill rates, continuing to improve quality while also optimizing our supply chain end-to-end. We have brought in outside management consultants to help us do a complete end-to-end review of our supply chain. We recently finished our first phase of that work, and we are very confident that we have a roadmap to not just exceed that 40% margin over the next couple of years, but to go even further, to have a real P&L profile that matches what you would expect of many CPG companies. We are confident we are going to get there. I would say over the short term, we are going to have some muted margins over the next three, four months, but we expect improvement balance of year and heading into the next fiscal.
Okay, great. I'm going to shift gears and talk a little bit about the U.S., one of your three core markets. I guess in the interest of time, I'm actually going to consolidate my questions. David, two pieces. I'm going to do CBD and THC at the same time. Just details around the current strategy to become a leading player in the U.S. CBD market. You have also had the proposed amendment to the Acreage agreement. Just to help us better understand proposed paths to possibly enter the U.S. THC market.
Yeah, and I'll kind of twist those around a little bit too because I view the U.S., our strategy to enter the U.S. is really all around building a cannabis and hemp ecosystem that we can benefit from post-permissibility. It starts with the relationship with Acreage, whereby we take a controlling interest in Acreage upon permissibility. In the meantime, Acreage can bring our intellectual property, meaning our processes and procedures, but also our brands to the U.S. In fact, Acreage has our Tweed brands in the U.S. as we sit here today. More importantly, as we innovate and we can create things like the drinks that we're so excited about, Acreage has the right to bring those drinks to the U.S. as soon as they're ready. They're working on that now, and hopefully we hear from them soon as to where that's going to land.
That just brings up the point that we, as part of our ecosystem, we have Acreage as a way to enter the U.S., both now and then with our brands and in the future as an owner. We have TerrAscend also as part of that ecosystem. TerrAscend is a very successful, actually, MSO that is functioning on the East Coast and on the West Coast. That is the THC entrance strategy. We then have the insights and innovation work that I talked about. We are doing insights across North America, not just in Canada. We then can drive innovation in Canada, test it out, and then be prepared to bring it to the U.S. post-permissibility, or Acreage can bring it to the U.S. pre-permissibility.
Also in the U.S., we're building route-to-market capabilities around our non-cannabis and hemp brands like This Works, which is skincare and beauty products, BioSteel, which is sports nutrition. We extend those businesses into CBD, where we can't enter the U.S. today. I think we bring that all together post-permissibility with a strong route-to-market that's supported by Constellation's route-to-market, a lot of cash on our balance sheet, and the way to bring our products and innovation to the U.S. through the THC businesses. I think it all fits together, and it really kind of lights up, gives us a real bit of a tailwind kind of post-permissibility event in the U.S. CBD is just that entrance category, Lauren.
Okay. What is your latest thinking on timeline for federal legalization? Depending on what one thinks is going to happen with the election, it could be a positive catalyst. I think, David, you previously said you expected federal legalization in 2022. What is your latest thinking there?
I'm going to stick with 2022. Look, here's why. We think that the MORE Act is going to get voted on in the House over the next couple of weeks. We think it's going to have bipartisan support. We also know that the winner of the presidential election, whether it's Trump or Biden, both would likely support whatever came out of Congress in the area of permissibility legalization. On the Biden side, of course, Senator Harris was the lead sponsor for the MORE Act. We think the issue is really going to be in the Senate, though. There are two things that can happen there. Clearly, there could be a different outcome at the election, which would make the Senate more pro-cannabis. The likely answer is more and more states are going to make cannabis, whether legally or recreational or medically legal in their states.
I'm pretty convinced that as a state flips over, their senators will find it hard to not vote in favor of federal legalization. I think we'll see a lot of momentum around cannabis legislation over the next several months.
Okay, great. I'm going to have two more questions on financials for Mike right at you. But Canopy showed significant improvement, right, in OpEx and cash burn last quarter. I just wanted to talk a little bit maybe about how sustainable these improvements are and kind of further opportunities to reduce OpEx.
Sure. Lauren, some of those improvements were COVID-related. We did defer some of our marketing programs given the pandemic. We just did not think that it was the right time to execute given that some of the retail stores in Canada were shut down for a period of time. Our marketing spend will bounce back in the balance of the year as we continue to promote our brands. Some of those savings are real. We are dialing back our capital spending. We are taking a very focused approach on what remaining capital we need to spend in Canada and the U.S. to complete our infrastructure. The OpEx savings that I alluded to earlier will continue to show up in the P&L. We are not done.
We're continuing to evaluate things like shared service centers in the organization and to really integrate all of the acquisitions that we've made over the last couple of years to really get to an end-to-end organization that's focused on really tight cost controls, scalable growth, and making sure that we're keeping as light as a footprint as possible in some of our remote geographies and really have the best-in-class shared service organization across the business. We think that we're making really good progress. We're not all the way done. I would expect us over the next six months to continue to refine the org structure. We think once complete, it's really going to position us well to deliver on a very competitive SG&A load as we scale. That's going to help our bottom line.
It's going to help our free cash flow, and it's going to help us deliver on that CPG P&L profile that we're targeting. We are making good progress, but more work's needed over the next few months before we can consider that work complete.
Okay. Actually, I realized I forgot to ask you specifically, though, when you mentioned the OpEx in the U.S., kind of where are you, Mike, in terms of the investment cycle in the U.S., operationally and CapEx-wise?
Yeah, I would say we're in a holding pattern today. We've built up a sizable CBD org structure. We've got just shy of 200 people on the ground in the U.S., again, using as lean as a footprint as possible to make sure we leverage our center of excellence in Canada. We've built a U.S. team across sales, marketing, operations, finance, HR. We've built advanced manufacturing capabilities in the U.S., and we're not quite complete with that build-out, but most of the cash flow is behind us on that. For the time being, we think we've built an org structure and manufacturing capabilities that will support the next one or two years of growth. When federal permissibility occurs, whether it's 2022 or 2021 or 2023, we don't know, there will be more investment.
That is what we're really saving ourselves for, to be able to move quickly upon federal permissibility with our acquisition of Acreage and to really move as aggressively as we can to expand our footprint in the U.S. using Acreage and TerrAscend really as a base.
Okay. Back to Total Company, some of your Canadian peers are beginning to deliver positive EBITDA. Do you have a rough timeline for when you can expect that to be the case for Canopy?
Yeah, I would remind investors when they're doing their benchmarks that part of Canopy's current loss is a result of us investing in the U.S. We are investing ahead of revenue. That's a strategic choice because the U.S. is going to be a $60 billion market for THC. Within the next few years, it's going to be a $10 billion CBD market. It's going to be a massive, massive growth opportunity. Strategically, we've made the decision to invest ahead of revenue. That being said, we are focused on getting to profitability, and we will be sharing in the second half of this fiscal a detailed roadmap of when and how we're going to get there. More to come.
Okay. That's great. I think it's a perfect place to wrap up. Thank you guys very much for doing this. It was great to see you this way, but better in person. I look forward to catching up again soon.
Thanks, Lauren.
Thanks.