Good morning. My name is Sharon, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Second Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I will now turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.

Thank you, Sharon, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy Growth’s CEO, David Klein; and our CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for the second quarter ended September 30, 2020. This news release is available on Canopy Growth’s website under the Investors tab and will be filed on our EDGAR and SEDAR profiles. Before we begin, I would like to remind you that our discussion during this conference call will include forward-looking statements that are based on management’s current views and assumptions, and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning’s news release. Please review today’s earnings release and Canopy Growth’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 furnished to the SEC and Canadian securities regulators. Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by David and Mike, we will conduct a question-and-answer session with analysts. To ensure that we get to questions from as many as possible, we ask the analysts to limit themselves to one question. With that, I’ll turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning, everyone. I hope you and your families are well as we are seeing a rise in COVID infection rates in our key markets. I also want to express my gratitude to our veterans in Canada and the U.S. as we prepare for Remembrance Day and Veterans Day. I’m pleased with our continued progress, as our focus on winning consumer mindshare and enhancing our agility and execution led to record revenue in the second quarter. Before discussing our performance, I want to take a moment to share our views on the evolving U.S. landscape following last week’s election and update you on our U.S. strategy. We believe the Biden victory is a significant advancement towards federal cannabis permissibility in the U.S. through decriminalization and descheduling. Importantly, the results of the ballot initiatives clearly demonstrate that support for adult-use marijuana legalization crosses geographic and political lines, with a majority of Americans in favor. Legal marijuana is becoming the norm in the U.S., with successful ballot measures in states like Arizona, Mississippi, Montana, New Jersey, and South Dakota. Now, 36 states and Washington D.C. have legalized cannabis for medical or recreational use, likely increasing the pressure on Congress to pass substantial federal marijuana reform soon. With states like New Jersey legalizing adult recreational use, we are working towards destigmatizing and normalizing cannabis use. In 2021, we anticipate a lot of positive activity at the state level, as Governor Cuomo in New York has prioritized legalization. Additionally, many states are facing budget deficits, and cannabis offers a new industry to create jobs and generate tax revenue. States bordering legalized states, such as New York and Pennsylvania, may feel increased pressure to legalize as well. We’re excited about our participation in the U.S. THC market and are preparing through ecosystem deposits and positioning ourselves as a powerhouse in hemp and cannabis when U.S. permissibility occurs. Our U.S. strategy includes building a portfolio of scalable brands in cannabis and consumer packaged goods. We aim to become a cannabis-focused CPG company, introducing our THC brands like Tweed and Houseplant into the U.S. market through relationships with multi-state operators and CBD extensions. We’re also launching new CBD brands, like Martha Stewart, to cater to consumer needs. We are establishing market routes with our CPG brands, including BioSteel, This Works, and Storz & Bickel. These strong brands have their own unique value propositions. Developing these brands now enables us to generate revenue without regulatory obstacles, and we plan to extend these brands into CBD or THC as regulations evolve. We will continue to add more brands over time to enhance our scale and strengthen our collaborations with retailers. We are leveraging our insights and innovation capabilities across North America, using consumer insights from recreational states like Colorado and California to inform our product development and portfolio mix. We can also develop and test new products in Canada based on insights from the U.S. market. Our partnership with Acreage helps us enter the U.S. THC market quickly, with Acreage utilizing Canopy’s intellectual property to build brand recognition for our brands like Tweed. Additionally, our successful relationship with Harrison offers further opportunities to enhance our U.S. business. Our retail banners, including Tokyo Smoke and Tweed stores, will strengthen brand awareness and serve as testing ground for innovation. Finally, our strategic partnership with Constellation Brands not only bolsters our financial position but also allows us to leverage their distribution network and key account relationships. We are sharing best practices across areas like insights, research and development, and operations. Both companies' government relations and legal teams are working together with politicians and regulators to influence policy and regulations in Canada and the U.S. Now, let’s review the tangible progress we’ve made against our strategic plan. Mike and I want to focus on three key themes this morning. First, momentum is building across our key businesses as our new strategy takes shape. We reached record quarterly revenue in Q2 driven by our Canadian recreational business and the strength of strategic businesses like Storz & Bickel, This Works, and BioSteel. Second, we are enhancing our execution and agility. Our fill rates consistently exceed 90%, our flower quality improvement initiative is seeing positive outcomes, and we’ve refined our product development process to bring better products to market more swiftly. Third, we are accelerating towards profitability, especially in our largest market, Canada. I’d like to connect these points further and provide more details on how our priority strategies are driving better performance. We’re winning consumer mindshare through insights and innovation, improving our competitive edge in Canada’s recreational market by gaining market share of 200 basis points to 15.5% in Q2 compared to Q1. Our flower market share grew by 320 basis points to 17.3%, with further increases to 19.4% in the four weeks ending October 25. In Ontario, our value flower share surged by 930 basis points, primarily driven by our Twd brand. We established a leading position in cannabis-infused beverages during Q2, accounting for nearly 54% of the dollar share, featuring five beverages under our Tweed, Houseplant, and DeepSpace brands. In the ready-to-drink category in Ontario, we captured almost 70% market share in Q2. We recently launched Quatreau CBD beverages nationwide and have shipped over 2 million cans to date. I know there will be questions about our market share methodology, and Mike will delve into details about our proprietary tracking tool during his remarks. The key point is that our insights team, which is crucial to our CPG strategy, is already generating value by providing near real-time market performance measurements. In the U.S., we’re driving growth by introducing our unique brands to consumers and rapidly expanding distribution. We launched our Martha Stewart-branded CBD gummies, oil, and softgels in the U.S. in September. This exciting new line combines the renowned flavors of Martha with the scientific backing and distribution capabilities of Canopy. The launch received substantial media attention, resulting in record sales on shopcanopy.com the day after a New York Times feature. The products are now being listed in physical retail locations, and we anticipate seeing Martha Stewart CBD products in thousands of stores as we introduce additional SKUs in the coming weeks. BioSteel continued to gain momentum, securing distribution agreements with major beer distribution companies like Reyes Holdings and Manhattan Beer, along with additional partnerships through Constellation Brands’ Gold Network. We expect to achieve complete U.S. market coverage through direct store delivery by January of next year. The BioSteel team is currently discussing with several large national accounts to have products available across various channels including food, drug, mass, convenience, and gas outlets throughout 2021. Storz & Bickel is also expanding its U.S. distribution, with repeat orders from newly added distributors confirming strong consumer interest. They will celebrate their 20th anniversary on December 5, continuing to lead the vaporizer market. A key milestone in the U.S. is the implementation of our amended agreement with Acreage, which garnered overwhelming support from their shareholders. This agreement is beneficial for both parties; it decreases Canopy's total purchase obligation and conserves 71 million shares for our shareholders. There are also new closing conditions that were not part of the original agreement. We look forward to Acreage launching THC-infused beverages using Canopy formulations and brands in California and Illinois next summer. The renewed focus from Acreage’s board and leadership is very promising as they strive for profitability and growth in their core markets. I am confident that Acreage will emerge as a leading U.S. multi-state operator as the market moves towards permissibility. We are also improving execution throughout our organization. In Canada, our integrated business planning process has enhanced forecasting, leading to better fill rates and increased market share performance. We are boosting our retail presence and executing effectively; nine corporate-owned stores opened in Alberta during Q2, with more openings in October, bringing the total to 33 stores. The number of partner stores has also risen to 16, up from 14 in the previous quarter. We are on track to capture greater market share at our corporate-owned stores, with our share increasing by 6 points to 54% in Q2 and approaching 60% recently. We are making substantial strides in our flower improvement initiatives, having completed the first phase of consumer research to identify key product attributes that matter most to consumers, alongside their willingness to pay for these qualities. We are utilizing these insights to shape our brand and product strategy, ensuring our dried flower products meet consumer expectations regarding aspects like moisture levels, harvest methods, grow locations, and packaging at different price points. Lastly, we are accelerating our path to profitability. Mike will provide additional details soon, but to highlight a few points, we acted swiftly to cut down labor costs in our Canadian operations, holding SG&A stable compared to last quarter even with higher revenue, which improved our SG&A ratio. Our comprehensive supply chain review revealed significant cost-saving opportunities. We plan to announce our medium-term financial targets when we report our Q3 earnings in February, and I’m confident we are on track to achieve positive adjusted EBITDA during the next fiscal year. I will now hand the call over to Mike to discuss our Q2 financial results.

Thank you, David, and good morning everyone. During Q2, Canopy achieved record net revenue, gross margins came in line with our expectations, and we saw another quarter of improvement in our operating expense ratio. Our free cash flow was an outflow of $190 million, which represents an improvement of 57% over the prior year, and we ended the quarter with over $1.7 billion in cash and short-term investments at quarter end. Let me review Q2 performance in more detail, starting with net revenue. We generated $135 million of net revenue or 24% growth year-over-year, after adjusting for a $33 million portfolio restructuring charge incurred in Q2 of last year for returns, return provisions, and pricing allowances related to our recreational soft gel and oil portfolio. Net revenue increased 23% versus the previous quarter. Canadian recreational net revenue increased 12% versus the prior year, excluding the same portfolio restructuring charge and 38% over the prior quarter, benefiting from growth in both the B2C and B2B channels. Recreational B2B sales increased by 21% over the prior quarter, driven by a number of factors. First, the pace of retail store openings accelerated in key provincial markets, especially Ontario, contributing to increased sell-in during the quarter, and total active store count nationwide grew by 185 stores in Q2, with Ontario seeing 46 additional stores open, bringing the total to 147 at quarter-end. And looking ahead, we expect more store openings to continue to have a positive impact on industry sales. And we now expect there will be over 1,250 stores in Canada and over 240 stores in Ontario by the end of this calendar year. We continue to improve our customer order fill rates with our supply team exceeding 90% during the quarter, and we grew market share in the dried flower category following the repositioning of our value flower offerings, as well as flower quality improvements implemented across the range of flower products that we offer. Our 2.0 products drove 80% of our B2B gross revenue in Q1, driven by strong demand for our THC beverages. As David mentioned in his remarks, I’d like to share details on our market share performance, based on our own market share tracker. To help the team better understand the performance of our products in Canada, we’ve developed an internal proprietary market share tracker, utilizing point-of-sales data supplied by third-party data providers, data provided by government agencies, and then our own retail store operations data across the country. And what we’ve compiled here is what we believe to be the most comprehensive view of the Canadian rec market, giving us a real competitive advantage that allows for accurate market share reporting and market insights on a near-real-time basis. Recognizing that many of you utilize other third-party information, I’d like to highlight some distinguishing elements for our internal tool. First, our tracker has broad coverage. We cover nine out of ten provinces, compared to five currently offered by others. Second, our tracker provides deeper covers within the provinces we track. In Alberta, British Columbia, Saskatchewan, Manitoba and Newfoundland, we capture on average 32% of stores point-of-sale data. In New Brunswick, Nova Scotia and Prince Edward Island, we capture 100% of POS data. In Ontario, because we do not have POS data, we use depletions, which are provincial sales to retailers, as well as e-commerce data from the OCS, which provides us with full coverage. We do not have visibility to Quebec, so that is one province missing from our data set. Now, as with any retail sales data, there are limitations as this data does not capture 100% of stores in every province, and the stores we’re including in Saskatchewan, Manitoba and Newfoundland skew to our own retail stores as we have a disproportionately higher market share. That being said, we believe our market visibility is broader, deeper and closer to real-time compared to existing third-party research data used by the LPs as well as the investment community. Let me provide some recent market share metrics, based on our share tracker. Our Canada recreational market share, based on the provinces tracked in the data, increased to 15.5% during Q2, up 200 basis points versus Q1. Notably, our market share grew by 190 basis points in Ontario, and 140 basis points in British Columbia, while it declined by 40 basis points in Alberta, all Q2 performance versus Q1. Our flower market share increased by 320 basis points, quarter-over-quarter to 17.3%. Our market share at the value flower category increased 800 basis points to 16.5%. And in Ontario, our share of value flower more than doubled to 13.7%. More recently, in the four weeks ended October 25th, our share of the value Flower Market increased further to 19.5% and improved to 16.9% in Ontario. Our share of the premium flower segment in Ontario decreased 60 basis points to 15.5% in Q2, as strong gains from Houseplant were offset by softer performance in our other premium brands. Our dollar share of the beverage market was 54% and we remained number one in Ontario with 51% market share in Q2. For clarity, this is against all cannabis-infused beverages, not just ready-to-drink beverages. Our beverage market shares during the last four weeks ending October 25th was 40%, maintaining market leadership position, even as new entrants have come into the market. Now, turning to volume, price and mixed trends in our rec flower business. Our rec flower B2B business saw gross sales increase 50% in Q2 compared to Q1, driven by volume growth of 90%. During this period, our average selling price in rec B2B flower decreased by 40%, of which 38% was negative mix and 2% was through price. The mixed impact within flower this quarter was exceptionally large, as we saw a sizable shift towards larger size value offerings, and these trends are further exacerbated as value flower accounted for 60% of our flower mix in Q2, up from 40% in Q1. We do anticipate that average selling price will decline further in coming quarters, though the rate of decline should moderate. Recreational B2C sales increased 43% over Q2 and more than doubled compared to the previous quarter. Same-store sales increased 44% compared to Q2 of last year. Growth versus Q1 was driven by store operations returning to pre-COVID levels, as well as increased foot traffic from a broader product assortment across both, Cannabis 1.0 and 2.0 products. Additionally, we opened nine new stores in Q2 with 32 corporate-owned stores operating at the end of the quarter. Turning to medical. Our global medical net revenue increased 1% versus Q2 of last year. Our Canadian medical net revenue increased 7% year-over-year, driven primarily by higher average order sizes. Our international and C3 businesses experienced slight declines compared to last year. Dried flower sales in Germany decreased 5% year-over-year due to slower market growth and intensifying flower competition. Our C3 business declined 3% year-over-year due to a packaging supply issue with one distributor, which has since been resolved. To summarize our global cannabis business, Canopy generated total cannabis revenue of $92 million, which represents an increase of 18% over the prior quarter. Revenues generated by our strategic businesses increased by 82% year-over-year and 60% on an organic basis, adjusting for the timing of the BioSteel acquisition. Storz & Bickel vaporizer revenue increased 100% year-over-year, benefiting from expanded distribution in the U.S. and the broader product portfolio and increased consumer pool. This Works revenue increased 34% compared to last year, due to strengthened e-commerce sales, sell-ins to UK brick-and-mortar stores ahead of the holiday season, and the launch of a new Stress Check hand sanitizer in the U.S. BioSteel sales benefited from reopening of big box retailers after the pandemic, as well as expanded retail networks in Canada and increased contributions from the U.S. With this, let’s move on to an analysis of gross margin for the quarter. Gross margin of 19% was up 1,400 basis points versus Q2 of 2020. Gross margin was broadly in line with our expectations and was impacted by the following factors. First, our gross margin continues to be negatively impacted by under absorption of fixed costs with an estimated 21 percentage points or $20 million of impact in Q2. Second, we saw adverse business mix impacts of 12 percentage points relative to Q1, driven primarily by lower sales contribution from our high margin C3 medical business. Third, gross margin benefited from headcount reductions completed during the quarter that saw operations staff headcount lowered by approximately 14%. Lastly, we saw lower inventory adjustments compared to Q1. We remain committed to delivering at least 40% gross margin over time. In support of achieving this target, we are nearing completion of the operations and supply chain review that we began in Q1. We are now moving quickly to implement these initiatives and expect potential savings of $150 million to $200 million across cost of goods sold and operating expenses over the next 24 months. These initiatives include further optimizing our footprint, organizational design that includes further rightsizing of our labor, procurement savings, some of which is tied to our design-to-value program; and finally, supply chain optimization, which includes improved inventory management. Now, let me briefly cover our operating expenses. Overall, SG&A, including acquisition costs, decreased by 19% versus Q2 of last year, driven by year-over-year reductions in sales and marketing, and general and administrative expenses, partially offset by higher research and development expenses. Sales and marketing expenses declined by 30% year-over-year, driven by a number of factors. First, marketing and promo expenses decreased by over $17 million versus the prior year due to the switching of trade marketing from print to lower-cost digital programs, and from small store displays to lower-cost national programs, as well as overlapping elevated spending from last year to capture retail space and build brands ahead of the 2.0 launch. Second, compensation expenses decreased year-over-year due to headcount reductions, partially offset by higher investments in the U.S. Lastly, marketing and promo expenses also declined versus the prior year due to lower travel expenses as a result of the restricted business travel in response to the COVID-19 pandemic. General and administrative expenses decreased 26% year-over-year, due in part to lower compensation expenses resulting from corporate restructuring costs taken earlier in the year, as well as reduced insurance costs and lower travel costs. R&D expenses rose by 19%, mainly driven by ongoing research studies that commenced after Q2 of last year. Stock-based compensation expense in Q2 decreased 76% year-over-year to $20 million. This is lower than the forecast of $45 million that I communicated during our last conference call. The decline from the Q2 forecast was primarily related to higher forfeitures of options, resulting from staff reductions that occurred during the quarter. Stock-based compensation is expected to be in the range of $25 million to $35 million per quarter for the remainder of this fiscal year. Now, moving on to free cash flow. Our free cash flow in the second quarter of fiscal 2021 was an outflow of $190 million, which represents an improvement of 57% versus the prior year. The cash outflow during the quarter includes biannual interest payments of our outstanding convertible debt of $13 million. Excluding these interest payments, our free cash flow was flat to the previous quarter. Our working capital decreased year-over-year due to lower inventory levels that increased versus previous quarter due to the timing of accounts receivable, as well as modest increases in inventory. CapEx declined to $29 million, down 87% from Q2 of last year, and down 50% from the previous quarter. We now expect our full year CapEx to be in the range of $200 to $245 million. As you can see from our results in Q2, we continue to make progress against the key financial metrics that we laid out during our June investor meeting. On our profitability metrics, we delivered a reduction in the SG&A as a percentage of sales, and we are working to get back to our 40% gross margin target. On our cash flow metrics, both working capital and CapEx have declined on a year-over-year basis. Before I close, I would like to offer a few key factors to consider related to our Q3 outlook. First, from a net revenue perspective, we expect our Canadian rec business to continue to improve with additional store openings in Ontario, and our improved flower market share continuing to provide momentum. Additionally, we expect continued contribution from our 2.0 products as we refocus our vape portfolio, and our beverages benefit from the launch of Quatreau. Second, we expect strategic business units to continue benefit from expanded distribution in the United States. BioSteel is expected to see growth accelerate, as its ready-to-drink sports hydration beverages gain access to thousands of retailers through our new direct store delivery network. This Works has a number of new product launches planned across the UK and the U.S. and should benefit from the holiday selling season. Third, we’re continuing to monitor the global COVID-19 pandemic in response to rising case numbers over the past couple of months; various jurisdictions including Germany have re-entered some form of lockdown, and the adoption of new and prolonged lockdown measures within our core markets is worth monitoring. Lastly, we expect gross margins to continue to improve in coming quarters, resuming a path to achieving our 40% gross margin target over time. As we improve execution and address our supply chain efficiencies and return to positive operating leverage, we expect gross margins to be in the low-20s as savings from our initiatives won’t start to kick in until Q4. In conclusion, momentum is building across our key businesses as our new strategy is coming to life. We are seeing strong growth in our Canadian rec cannabis business with our improved market share. Our U.S. business is evolving as we build a diversified ecosystem that has multiple routes to market and many ways to win in the U.S. Finally, we are doing this while also maintaining our financial discipline. This now concludes my prepared remarks and operator, David and I would be happy to take questions from the analysts.

First question comes from Bryan Spillane with Bank of America.

Hey. Good morning, everyone. David, I guess, I wanted to step back and just ask about the cost savings that you announced this morning or described this morning. And I guess, two questions related to that. One is, what does that contemplate in terms of, I guess, the evolution of the U.S. market? And I guess, what’s underneath my question is, is that subject to change if the market opens faster if we get like a full federal legalization? And then, second, I guess, related to it also is in terms of pacing, can you give us any sense of just how quickly you think you can achieve those goals?

Yes. So, Bryan, regarding the cost reductions, they are primarily focused on the Canadian market. One reason for our losses is our continued investment in the U.S. ahead of revenue. However, we expect this to change as we start to see revenue growth in the U.S., as mentioned in our prepared remarks. The U.S. activity won’t necessarily impact the cost reductions. That said, if we experience a permissibility triggering event in the U.S., it would likely take about 60 days for us to gain full control of Acreage, at which point we may want to leverage our balance sheet, expertise, and brands in the U.S. market. I want to emphasize that this potential development will not influence the $150 million to $200 million savings initiative we outlined. Regarding implementation speed, we have already started the process, and the timing of when it affects our profit and loss will mostly depend on how quickly we can execute, which shouldn’t take long, along with the flow-through from inventory.

Thank you. I just want to clarify my questions regarding the flow of savings. It’s possible that the way you handle those savings could be influenced by any decisions or investment opportunities that arise, which might affect how much of the savings you choose to allocate versus reinvest, at least in the near term.

Yes, I understand your question, Bryan. It's a matter of semantics. We will continue to pursue these initiatives. However, if the U.S. market opens, we would want to take control of Acreage as soon as possible and start building that market. Additionally, Acreage has a clear path to profitability, so it's likely that our timeline for profitability would not be delayed even as we invest in the U.S.

Next question comes from Michael Lavery with Piper Sandler.

You’ve discussed the 2.0 opportunities extensively. Now that we’ve passed the anniversary of last year's write-down on oils and softgels, it’s noteworthy that the product splits for Canadian recreational sales appear quite similar. How should we assess the performance of softgels and oil, which are showing significant growth? What is your outlook for the 2.0 opportunities in relation to your expectations and what lies ahead? Is it progressing as you anticipated? Should we anticipate an increase in momentum with launches like Quatreau, or how does this align with where you expected us to be at this stage?

I will begin, Michael, and then I'll let Mike provide additional details. Last year's write-down was primarily due to an inaccurate assessment of how fast market demand would materialize. However, we are currently experiencing strong demand for softgels and oils. We are encountering similar challenges as we launch drinks, as we need to manage channel fill and gauge consumer demand, which requires adjustments in production. For drinks, we needed to ramp up production to meet demand, whereas for oils and softgels, we had to reduce production. These complications stem from entering a new industry and have led to some inconsistencies. Overall, we are pleased with our growth across all categories in 2.0.

Yes, it's a broad question. Regarding softgels and oils, they make up a significant portion of the medical channel and continue to perform well. Since the recreational channel was established two years ago, the number of patients in the medical channel has gradually decreased each month. However, within that medical channel, the retention rate of patients remains high, spending per patient is on the rise, and the business has been stable in terms of price and volume. Looking at the developments in our product line, we've examined our vape portfolio and have noticed ongoing price reductions in that category. Later this year, we will introduce cartridges that increase the fill rate from 0.42 to 0.5 mls, enhancing our competitiveness in the market. We have adjusted prices in the chocolate category and are planning more new product introductions there as well. We are particularly focused on beverages, and we are excited about our results. We also appreciate that competitors are entering the space and releasing new products, as this will help grow the category and increase distribution opportunities over time, which will push provinces to accommodate on-premise consumption. We welcome the competition and believe our beverages will perform well against any competitor, with more offerings to come from us in the beverages category.

Next question comes from Vivien Azer with Cowen.

Hi. Good morning. Just recognizing your desire to consummate the Acreage deal but also acknowledging the Republican control, the Senate is probably a pretty meaningful limiting factor there. It seems like your focus needs to continue to be market share for the adult-use market in Canada. And in that vein then, David and Mike, I’m curious to understand how you guys are thinking about navigating kind of the tension in your operating model relative to retail operators. You guys kind of uniquely have a big retail presence. Some of your retail competitors have not taken kindly to that. So, how do you think about managing your access and shelf space in terms of driving overall market share? Thanks.

Yes. So, look, Vivien, this is an issue that a lot of companies, as you well know, wrestle with. I think that there’s an opportunity for us to bring the learnings that we take from our company-owned stores and pass them on to our retail partners in the marketplace. I think there’s a way that we can really make sure that we’re a value-added partner. We’re not looking to build retail locations across Canada. I think we’re fairly comfortable with the footprint that we have today. Yes, I understand that there’s the risk of channel conflict, but we believe that we’re going to be open and helpful to our retail partners in such a way that makes it a positive experience.

I would just add to that that channel conflict is not new to Canopy. We’ve experienced that over the times in the medical channel, even with some of our craft grow partners, this is something that Canopy has had experience with over a number of years. At the end of the day, we have very strong relationships with many of the key accounts across Canada, and they want our brands. Our brands are growing in terms of popularity, as demonstrated by market share, and these retailers want our brands. Clearly, it’s a fine line to walk, but we rest on the strength of our brands.

Next question comes from Tamy Chen with BMO Capital Markets.

I just wanted to ask a little bit more on the cost savings initiative that you’ve announced. I guess, just two quick parts. First is, can you help us understand in your Canadian business, what you envision sort of the final footprint or asset base to look like coming out of this? And then, just secondly on this, you’ve described this as accelerating profitability in Canada. I think, if we kind of take a step back in some of your previous comments, it sounded as though you were looking to take a bit more of a gradual tackling to cost because you didn’t want to affect your ability to grow. So, I’m just wondering, just with the language of accelerating, has something changed in your outlook of growth in Canada that’s prompted the sort of acceleration? Thanks.

No, not at all, Tammy. What has changed is that I wanted to ensure we didn't come in and start making cuts that could hurt our brand building, consumer connections, and top-line growth. After many months of reorganizing our commercial operations, we now believe we have the right teams in place for commercial, product, and marketing. We're starting to develop our insights and have sharpened our focus on innovation. While it’s still early, these efforts are beginning to yield results. Now, we can examine areas of our business that haven't been running efficiently due to rapid growth. We've conducted a thorough review of our cost structure and now have a clear understanding of our next steps. Mike can provide more details on what those might entail.

It's a great question, Tamy. Referring back to our March announcement regarding the closure of our Vancouver facilities, this decision was an easy one based on the performance of those facilities and the supply and demand situation at that time, which was far from balanced. The industry has evolved quickly, although not as fast as many anticipated, leading to an overhang for several licensed producers. Over the past few months, we've conducted thorough analytics on our operations and supply chain, creating a fact-based, data-driven strategy to achieve our goal of creating a consumer packaged goods profit and loss statement with margins even higher than our target of 40%. We've identified four main areas for improvement within our operations and supply chain in Canada. First, we're dealing with excessive complexity in our business. We have too many finished goods SKUs due to our initial aggressive product introductions without proper consumer insights. With two years of experience, we now have a clearer understanding of which SKUs are valuable. SKU and cultivar rationalization are essential, as cultivars add complexity that affects productivity. Second, we're optimizing our network by reassessing the purpose and strategy behind each facility. We intend to restructure our facilities to align with their strengths while optimizing our extraction capacity, which has evolved significantly since we first entered the market. We believe there are substantial procurement savings to be achieved, both in production-related items and operational expenses. The third area focuses on improving processes and our operating model. Despite achieving a 90% fill rate, we know there's room for improvement. We aim to reach 98% or 99% within the next couple of years through better demand forecasting and inventory management. Increasing productivity is the fourth opportunity. This involves ensuring our organization’s structure is appropriately sized for current needs and enhancing our supply chain efficiency, such as cost-effective backhaul routes and better packaging solutions. These four pillars will be phased in over the next two years, and we plan to move as quickly as possible, demonstrating our commitment to these improvements. Dave, do you have anything you'd like to add?

That’s good.

Next question comes from Aaron Grey with Alliance Global Partners.

So, I want to dive back in terms of the incremental flower sales we saw in the quarter. It was good to see, obviously, a lot of that was driven by Twd and your large-format value segments. Just wanted to get to any color you could provide on the sell-through, especially in terms of retail and some initial consumer adoption? Because, obviously, still a pretty competitive category. It seems like you still saw some market share growth in October from your commentary in the prepared remarks, but just any incremental color you can provide there as there are still a lot of your competitors out there who are also competing in that low-price value segment? Thanks.

Yes. We’re very happy with the progress that we’ve made on all of our flower products, including Twd and Simple Stash. Simple Stash has been a good opportunity for us to help balance our inventory, and Twd has just been a good value proposition. We’re offering that in packages up to 28 grams, and there’s been strong demand. We’ve continued to build out distribution across Canada. I’d say, we’re just about there in terms of the distribution build-out. It’s a valid category. Our market share tells us that it’s around 30% to 33% of overall flower consumption today. When you step back, this category likely would have existed last year at this time, had not every LP been short on supply. Every CPG category that I’m familiar with has a value hierarchy, and we think that the value category is here to stay. The big question will be what’s going to happen with value category pricing over time? I’m of the opinion that it will continue to move around, but over time, it’s going to start to tighten up. Time will tell on that. The key is making sure that we’ve got the right production strategy behind each tier of product, which ties into my earlier remarks, which is making sure that every one of our facilities is purpose-driven to ensure we’re growing the right product for the right category out of the right facility and hitting the right cost. We believe, even at the price points you see in the market, we can hit our margin targets with Twd being a third of our business over time.

The thing I’d like to add to that, Aaron, is that we have a couple of objectives. One is to grow our market share, which means we need to sell consumers what they want at the price point they’re willing to pay, which is why the insights work we’re doing is pretty exciting because we think it positions us to drive a little bit of a trade-up on attributes that are relevant to the consumer. We’re also looking to balance our inventory. We’re not interested in showing good gross margins this quarter only to have to have big write-offs in the future. We’re working toward that balanced inventory. For the most part, we achieved that this quarter. Irrespective of the price points, we’re committed to achieving that at least 40% gross margin number that we put out. We think that the value category is helpful on all of those three points that I just made. We’re actually really pleased with where we were able to get to in the quarter with it.

Next question comes from Andrew Carter with Stifel.

I had to double-click on the beverages for a second because in the Headset data we have, it showed the sales did plateau early and it kind of declined. Some of the numbers you’ve given on shipments would suggest you’re kind of quarter-to-date, I think it’s 300,000 units. I think you did 150,000 units last week of June. That’s what you said in the Investor Day. It doesn’t seem like shipments are picking up. So, could you help us understand kind of what you’re seeing with the traction by the consumer of that platform? Thanks.

Yes. I think what we’re seeing is, we continue to get strong consumer response. I would say that as competitors come into the space, we do know that we’re getting trial across the competitive entrants, but the repurchase rate on our product remains pretty high. As Mike said, the key point here is we have to grow the whole category. The biggest barrier to growing the category is really going to be related to equivalency standards changing over time in Canada, so that people can buy more than a couple of units at a time. We think the entire category gets to grow. Right now, I believe the latest data I saw, we have five of the top seven SKUs in the marketplace. We feel pretty good with our positioning. We are looking forward to being able to grow the entire category, which means we’re going to need to see a bit of a move from a regulatory standpoint.

Some of our consumer insights on beverages are quite compelling. Our data tells us we have a 70% to 80% satisfaction rate, and we have greater than 75% satisfaction with taste across Tweed and Houseplant brands. 60% of customers are recommending our product to other consumers. At the end of the day, it’s a bit of the remarks that I made earlier, which is building this category is a positive thing because the biggest gating item is points of distribution. We’re optimistic that this will start to open up over time. From a production perspective, we’re ready to grow. We’ve done a lot of work within our beverage facility and we can grow this business significantly with no additional CapEx. So, we’re excited about it and look forward to continued growth.

Next question comes from John Zamparo with CIBC.

I wanted to ask about the other revenue line. I know, you don’t disclose exact numbers, but can you give some sense of order of magnitude on the three largest business units in that category? It does seem like it’s growing quite materially. So, it would just be helpful to get a better understanding of those three. Thanks.

Yes. Sorry, we don’t disclose that. Maybe at some point, we will start to disclose it, but for the time being, we’re not.

Next question comes from Glenn Mattson with Ladenburg.

On the medical side, can we discuss that for a moment? First, regarding Canada, you mentioned it was up 7% sequentially due to higher order sizes. I'm curious about what led to that—are people stocking up because of pandemic influences, or is it a temporary trend? Any insights on that? Additionally, I understand that forecasting the international side may be challenging right now due to various countries shutting down. However, could you provide some details on how you believe you compare competitively as the markets have evolved a bit? Thank you.

Yes, regarding the Canadian medical business, it had another strong quarter in Q2, matching Q1 performance with a 7% to 8% increase compared to the prior year. Although Health Canada is reporting declines in the medical market and a decrease in registration counts, we believe there has been an auto-extension of prescriptions for certain patients through December. We are seeing growth across all products in the Canadian medical channel, with vapes starting to show potential, and softgels, oils, and flower also continuing to grow. It has been a lucrative business for us so far. However, over the next five to seven years, we expect the business to moderate as more patients transition to the recreational channel. Currently, it remains a profitable business with strong gross margins. On the international front, we have noticed increased competition in the C3 business. The first new entrant in the dronabinol segment appeared in Q2. In Germany's prescription model, providers are required to offer the lowest-cost alternative, something we have anticipated. Given our gross margins on C3, we are well positioned to compete and are dedicated to maintaining our leading position. In Q2, we experienced a production disruption linked to a one-off situation that has since been resolved. We expect C3 to return to growth. For the flower business in Germany, we faced some challenges due to COVID-19, with limited sales activity over the past few months due to lockdowns and a small supply interruption. Nevertheless, we remain optimistic about the German flower and C3 businesses. About six months ago marked a turning point for our flower business in Germany, and we see substantial growth opportunities ahead, expecting it to be a profitable venture for the future.

And at this time, I will turn the call over to Mr. Klein.

Thank you again, everyone, for joining us today. As we approach the holiday season, I hope that all of you get to experience our amazing products, including Martha Stewart CBD gummies in the U.S. and our newly released Quatreau drinks in Canada. Our Investor Relations team will be available to answer any additional questions throughout the day. Have a great day, everyone.

This concludes Canopy Growth’s second quarter fiscal 2021 financial results conference call. A replay of this conference call will be available until February 7, 2021, and can be accessed following the instructions provided in the Company’s press release, issued earlier today. Thank you for attending today’s call. Enjoy the rest of your day. Goodbye.