Good morning. My name is Kelsey, and I will be your conference operator today. I would like to welcome you to the Canopy Growth Third Quarter Fiscal Year 2022 Financial Results Conference Call. I will now turn the call over to Mr. Tyler Burns, Director of Investor Relations. Mr. Burns, you may begin your conference call.

Good morning, and thank you, operator. Thank you for joining us today. On our call today, we have Canopy Growth's CEO, David Klein; and Interim CFO, Judy Hong. Before financial markets open today, Canopy issued a news release announcing our financial results for our third quarter fiscal year ended December 31, 2021. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR. We have also posted a supplemental earnings presentation on our website. Before we begin, I would like to remind you that all 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 that are filed with the SEC and on SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remarks by David and Judy, we will conduct a question-and-answer session during which analysts will be taking questions. To ensure that we get to questions from as many analysts as possible, we ask the analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.

Thank you, Tyler, and good morning, everyone. I'll begin today's call by offering perspectives on our business in the third quarter, including key achievements along with short- and long-term priorities. Judy will discuss our quarterly performance in more detail, the actions we have underway to accelerate our path to profitability and our near-term outlook. The third quarter was one of action for the Canopy Growth team with our efforts based on four key areas: one, driving our Canadian business to profitability; two, strengthening our premium brand portfolio and product offering in Canada; three, increasing our CPG distribution in the U.S.; and four, making significant strides in furthering our U.S. THC strategy. These actions tie back to our strategic priorities and have generated highly encouraging wins in the quarter, resulting in net revenue in Q3 growing 7% sequentially led by strong growth from both BioSteel and Storz & Bickel. Now I'd like to provide an overview of the actions that we've taken to improve our performance, which will enable Canopy to achieve profitability in the Canadian recreational market. To start, we're continuing to premiumize our flower portfolio through enhanced cultivation tactics and a new genetic strategy. We're on track to insource 100% of our premium and mainstream flower supply by the beginning of Q1 fiscal '23. I'm pleased to share that Supreme's industry-leading cultivation and post-harvest operations have been implemented throughout our existing Canopy operations. As a result, the strains we're harvesting in our Smiths Falls and Mirabel facilities are seeing higher THC levels, enhanced aroma, and improved terpene profiles. In addition to the focus on improving our flower quality, we're taking steps to better adapt to the fast-evolving preferences of Canadian consumers, including developing a robust genetic pipeline. This will ensure we can deliver a consistent supply of new genetics at commercial scale to support more frequent rotation of new and unique flower strains. Notably, we're accelerating new product launches by implementing a smaller, cross-functional team to improve the efficiency of new product development, which is leading to faster product delivery to the market. To drive improved performance in the market, our Canadian sales team has been executing focused drives to increase distribution and velocity. Early results are showing increased distribution in Alberta, Ontario, and Quebec through the end of January for DOJA Flower and Deep Space beverages and gummies. The team has also revamped the retailer engagement program, hosting several education sessions with store managers and bud tenders to showcase the enhancements in our product quality. In Canada, we've maintained the number one market share in premium flower with the launch of ten new strains, including DOJA 91K, 7Acres WAPA 49, and 7Acres Craft Collective Jet Fuel Cookies. We expanded our premium product offerings across the Deep Space brand with the introduction of Deep Space XPRESS gummies, our first gummy with the maximum allowable 10 milligrams THC, and the line extension in beverages with the launch of Deep Space Limon Splashdown. We also began shipping Deep Space Orange Orbit flavor this past month and anticipate bringing three new nostalgia-inspired flavors to market over the coming months. In Q3, we rebranded Tweed and launched Powdered Donuts and Chemdawg flower under the redesigned brand banner. These new higher THC strains have drawn very positive consumer feedback, noting high moisture content, aroma, and bag appeal, which is due to the improved growth techniques, including hang drying all flower to produce higher-quality bud with increased moisture. Tweed flower is now packaged in a heat-seal bag to preserve freshness with 90% less material by weight than the original tin packaging and new color profiles by strain type that make it easier for consumers to find what they're looking for. Strong consumer demand for these new strains has helped improve our share of the mainstream flower market over the past few months. In our edibles extract business, we launched our new TWD Max THC Indica Oral Spray, a product that delivers the maximum THC potency allowed by regulations in a value-priced format. This was followed by the launch of TWD Max THC Sativa and TWD Max CBD Oral Sprays in January. These innovations have kicked off the roll-out of a revamped edibles extracts portfolio that we believe will offer greater value to consumers and significantly strengthen our competitive positioning in the category. On the back of our new product introductions and continued focus on premium and high THC, we see signs of stabilization and are starting to turn the tide in our Canadian market position. Looking to the U.S., in the areas of greatest opportunity for long-term growth, I'd like to now highlight the momentum of our CBD business as well as review the advancement of our THC ecosystem. The U.S. is our area of greatest potential, and we've been highly encouraged by both Storz & Bickel and BioSteel performance. Storz & Bickel posted record quarterly revenue of CAD25 million in Q3, driven by strong demand for the VOLCANO ONYX and MIGHTY+ vaporizers. Storz & Bickel is clearly already an annualized CAD100 million revenue business. The Storz & Bickel brand continues to be the gold standard for cannabis vaporizers with the Volcano Hybrid included in a list of the best weed accessories in Esquire magazine and the MIGHTY+ included in the Forbes holiday gift guide. We expect continued growth from this marquee brand. Canopy's hydration beverage brand BioSteel also delivered a record revenue quarter, driven by gains in distribution of BioSteel ready-to-drink. We're seeing continued momentum with the recent signing of retail authorizations by Albertsons, Rite Aid, Food Lion, Stop & Shop, and Sheetz, and over 20 additional authorizations across grocery, convenience, and drug chains. Combined, these authorizations add nearly 15,000 stores across the U.S. Working closely with Constellation Brands, we've initiated a program to onboard new distributors to help drive the distribution of our CBD brand portfolio into additional U.S. states. As a result, Canopy's CBD business has grown 250% year-to-date with our product portfolio now available in brick-and-mortar and e-commerce sites covering a combined 33 states in the U.S., including Martha Stewart CBD, which is the fastest-growing CBD gummy brand in the U.S. Whisl, our CBD vape that we launched in October with retail partner Circle-K, is already the number one CBD-only vape brand in IRI-measured channels. We're in active discussions with a number of additional convenience store chains and expect additional Whisl retail partners to be on board in early fiscal '23. The footprint for our Quatreau beverage increased within brick-and-mortar stores with the door count increasing sequentially 225%. Now I'm excited to speak on how we're executing our THC strategy in the U.S. In Q3, we established a cross-functional team of senior leaders across Canopy and Constellation Brands to oversee the advancement of our U.S. THC portfolio. This team developed a robust strategy to achieve our future ambitions in the U.S. THC market. And Canopy's agreement to acquire Acreage and Wana, along with our investment in TerrAscend upon permissibility of THC in the U.S., are at the foundation of this plan. We continue to be impressed by Wana's performance on both sides of the border and see this as an example of how Canopy might further leverage brands and products from our U.S. ecosystem into the Canadian market. With an exciting product pipeline, Wana has strengthened its U.S. footprint in Q3, with the signing of a license agreement in Nevada, which brings the total number of states to 13. In Canada, Wana remains the number one edibles brand with 38% share of gummies in tracked channels. Similarly, Acreage continues to execute on their strategic plan, resulting in a third consecutive quarter of positive adjusted EBITDA. In fact, analyst estimates point to calendar year 2022 adjusted EBITDA of USD65 million. Acreage also strengthened its balance sheet with the recent signing of a CAD150 million credit facility, which will help build depth in core markets. Canopy has clearly established paths into the U.S. THC market with the acquisitions of Acreage and Wana, as well as our conditional ownership stake in TerrAscend, all upon federal permissibility of U.S. THC. I want to be clear, there is strategic intent behind the U.S. ecosystem that we're creating. We're not just a Canadian LP. We're not building an MSO, and we aren't building an alcohol company. We're developing a robust U.S. THC ecosystem that's focused on acquiring beloved premium brands like Storz & Bickel and Wana and backing them with unmatched innovation and operational capabilities while leveraging unparalleled distribution to rapidly scale across North America. We'll have more to say about the strategy over time as appropriate, but I believe there's never been a better time to invest in Canopy and that no one is better positioned than Canopy to be the long-term leader in North American cannabis. With that, I'll turn it over to Judy.

Thank you very much, David, and good morning, everyone. I plan to focus my comments on a review of our third quarter results, actions we're taking to achieve profitability and perspectives on the near-term outlook. So let's start with a review of our third quarter results. Our Q3 results point to a start of revenue stabilization with 7% sequential revenue growth, led by strong growth of our U.S. businesses, which is offset by softness in our Canadian recreational business. During Q3, we generated net revenue of CAD141 million, representing an 8% decline over the prior year. Excluding acquisitions, our net revenue declined 17% versus the prior year. Our reported gross margin in Q3 was 7%, and our adjusted gross margin was 13%. Adjusted EBITDA in Q3 amounted to a loss of CAD67 million, which improved by 1% versus last year. Free cash flow in Q3 was an outflow of CAD168 million, representing a 24% greater outflow versus the prior year, partly due to the timing of working capital. Now let's dive deeper into revenue performance in the third quarter, starting with the global cannabis segment. Global cannabis sales decreased 20% year-over-year, and excluding the impact of acquisitions, was down 34%. Our total Canadian recreational business declined 25% year-over-year driven by the following: B2B revenue declined 23% due mainly to declines in our flower sales. Our flower sales continued to be impacted by ongoing price compression in the value-priced flower category as well as the limited supply of single-strain high-potency flower products. The good news is we're starting to see new single-strain flower products hitting the market with strong reception, and we expect additional supply to come into the market in the coming months. Our recreational B2C cannabis sales in Q3 decreased 28% versus the prior year, which was largely driven by increased competition. Our Canadian medical cannabis sales were down 7% as higher average order size was offset by a lower number of orders. Our international and other cannabis business had a few ups and downs during the quarter. We grew our U.S. CBD business by 25% versus the prior year. We also benefited from a bulk sale of flower into the Israel medical market that generated approximately CAD4 million in revenue. This was more than offset by declines in our C3 and German flower business resulting from increased competition. Turning to other consumer products. Q3 net revenue increased 19% versus the prior year. BioSteel had its record quarterly revenue, increasing 130% year-over-year due to strong distribution gains of ready-to-drink beverages in the U.S. as well as higher international sales of its ready-to-drink and powdered beverage mixes. Storz & Bickel also posted a record quarterly revenue increasing 5% year-over-year, which was driven by strong consumer demand for the new limited-edition product VOLCANO as well as the MIGHTY+ vaporizers. And this was declined 2% year-over-year due to lapping of strong prior year sales. Now let's move to gross margins. Reported gross margin in Q3 was 7%. Our adjusted gross margin was 13%, which excludes the impact of CAD3 million of inventory step-up charge from the Supreme acquisition as well as the CAD5 million charge related to inventory write-downs resulting from strategic changes to our business. Gross margin in Q3 was further impacted by the following: First, we continue to see pressure on gross margin from lower production output and price compression in the Canadian recreational business, notably in the value-priced flower category. Second, as we scale up our U.S. businesses, including our CBD products as well as BioSteel, we are still experiencing under-absorption of fixed costs. We're also facing higher supply chain costs, such as freight that many in the industry are currently facing. And third, decreased contribution of higher-margin C3 revenue also negatively impacted our overall gross margin. These factors were partially offset by payroll subsidies in the amount of CAD7 million that were received from the Canadian government pursuant to the COVID-19 relief program. Now turning to operating expenses, demonstrating continued discipline, our overall SG&A expenses in Q3 decreased 19% versus the prior year. G&A expenses declined 47%, primarily due to reductions in staffing and professional fees as well as the benefit of payroll subsidies. Excluding the payroll subsidy benefit, G&A expenses declined 27% versus last year. R&D expenses in Q3 declined 53% versus the prior year, principally due to a more focused and disciplined approach to R&D investments. Sales and marketing expenses increased 20% year-over-year, primarily due to higher marketing investments behind BioSteel and our U.S. CBD brand. The Supreme acquisition also increased our sales and marketing expenses when compared to the prior year. Now turning to free cash flow. Our free cash flow in Q3 was an outflow of CAD168 million, which represents a 24% increase over the prior year. CapEx declined to just CAD1 million, which was down 98% from the prior year. The increase in cash used in operation during Q3 compared to a year ago reflects increased interest paid as well as the timing of working capital. I'd like to now take this opportunity to speak to the efforts underway to improve our profitability. Taking a step back, as an organization, we've built the structure and operations that can support a significantly higher revenue base than we're currently generating. While we remain optimistic about the long-term prospects of this industry, as well as Canopy's position to succeed, we recognize that we need to adapt to the realities of our business today. We've already made significant progress rightsizing our footprint and realizing cost savings from our previously announced cost savings program. Through the end of the third quarter of fiscal '22, we've generated approximately CAD85 million of cost savings across both COGS and SG&A. Our combined sales and marketing, G&A and R&D expenses are down 17% or CAD63 million lower year-to-date in fiscal '22 when compared to a year ago. Even excluding the payroll subsidy benefit, our SG&A expenses have decreased by 8% year-to-date, and this is inclusive of additional expenses that came with the Supreme acquisition. That being said, as consumer preferences continue to shift and the Canadian market structure remains challenged by low barriers to entry and onerous regulations, these cost savings are not enough for us to achieve profitability in Canada. A key component of our path to profitability is further simplifying our businesses and optimizing our expenses, and work is underway to finalize our near-term revenue, operational, and expense plans necessary to achieve profitability in Canada as soon as possible. Let me offer a bit more details on our SG&A expense structure. Our sales and marketing expenses comprise around 40% in advertising and promotional spending, and 60% in sales and marketing overhead. We've made deliberate decisions to continue making strategic investments in these areas in our core markets. With a sizable portion of these investments currently being spent against emerging growth brands in the U.S., including BioSteel, Martha Stewart CBD, Quatreau, and Whisl. These strategic investments account for approximately a third of our total selling and marketing expenses. We also have our corporate-owned retail stores that carry a significant portion of our selling and marketing expenses. These expenses account for nearly 40% of our total selling and marketing overhead spending in Canada. We plan to continue to make strategic investments where we see high potential for payoff, but in a more targeted way. In a market like Canada, where advertising is severely restricted, we're focusing more on the ground game to win with retailers. Now when you turn to R&D, we've already shifted our R&D focus away from long-term clinical trials to areas where we see near-term commercial benefit. We plan to further tighten our focus and invest in R&D that is core to our strategy and has a tangible payoff in the near term. Now digging into our G&A expenses, the biggest areas of spending are public company costs, finance, IT, legal, and regulations. We've built some of these functions with an expectation that our revenues would scale quickly and require a sophisticated level of support. However, until our growth catches up with our aspirations, we need to reclaim a more entrepreneurial mindset, which means being more nimble and scrappy with our resources, while also identifying opportunities to further simplify our processes or structure to generate additional G&A savings. As you can see, recognizing that our overall expense structure is built for a larger revenue base than our near-term projections, we are taking measurable steps to ensure that we can be profitable in Canada while investing for growth in key strategic areas such as our U.S. THC strategy. Now I would like to provide some perspectives on our near-term outlook. From a top-line perspective, in Canada, we note that retail store closures caused by elevated COVID-related staff absences have likely had a modestly negative impact on retail sell-through as well as inventory replenishment orders. This could potentially present a headwind to our Canadian recreational B2B and B2C business in the current quarter. We expect sales declines to begin to moderate in Canada as we focus on stabilizing and growing our share of premium and mainstream segments of the Canadian recreational market. In Europe, we expect our medical sales to be down on a year-over-year basis due to increased competition in our German flower business as well as divestiture of the C3 business, which closed on January 31. As a reminder, C3 generated net revenue of nearly CAD16 million in Q4 of last year. Our U.S. CBD business in the current quarter is expected to be up modestly year-over-year as we lapped last year's sales that were boosted by the sell-in of Quatreau beverages. We expect BioSteel revenue to continue to benefit from additional retail authorizations and resulting product load-in. For Storz & Bickel, we expect sales growth on a year-over-year basis as the brand continues to benefit from strong consumer demand for recent innovation while we're closely monitoring our global supply chain. From a margin standpoint, the divestiture of high-margin C3 business during the current quarter can be expected to present a modest gross margin headwind. We expect increased volume throughput and positive mix shift in Canada to contribute to a gradual gross margin improvement, though price compression remains a key watch out. Headwinds from start-up costs in the U.S. should begin to abate as we scale up our CBD and CPG businesses. This could be offset by continued increases in supply chain-related costs in the near term that we're closely watching. Finally, we now expect our full-year fiscal '22 CapEx to be in the range of CAD45 million to CAD60 million, which is down from the prior range of CAD100 million to CAD150 million. The decline in CapEx is primarily due to the deferral of certain projects and the elimination of CapEx related to the planning and construction of a new facility for C3. With the sale of C3 now complete, it's been removed from our budget. In conclusion, we expect actions we're taking will drive improved execution, accelerate top-line growth, and allow Canopy to achieve profitability in Canada while also continuing to make strategic investments in key growth areas. We plan to share additional details around our path to profitability once we complete our annual planning that we have underway. This concludes my prepared comments. Kelsey, David, and I will be happy to take questions from analysts.

Your first question comes from Vivien Azer from Cowen.

So very encouraging to hear about the distribution gains in the U.S. I think we've all been waiting for that and nice to see that come through. David, I don't know if it's premature, but can you comment on the velocity that you're seeing? I know there's a number of new product offerings that hit the market. So anyone you would want to comment on that game distribution would be helpful.

Yes, Vivien, a lot of the distribution is fairly new distribution, right? So it is a bit early. What we see is velocity levels that are kind of consistent with our planning algorithm, but there's a lot of variability. In some areas, we see really strong velocities that would be consistent with any competitive products on the shelf. In other areas, we see that the velocity is not so strong. Working with our distribution team, supported by our friends at Constellation, we're working our way through trying to understand lessons learned in terms of where velocity is exactly where we need it to be and where maybe it isn't. I would say we're where we would want to be or where we would expect to be at this point, but I think there's a lot of work to do that should flow through our results over time.

And your next question comes from Tamy Chen from BMO Capital Markets.

Could you give some more specific examples on the progress you're seeing in your Canadian sale business? So for example, what level of THC you're seeing terpene content on the new strength, how the consistency is? And I'm also wondering, if I look at the current point-of-sale data on DOJA, for example, it's been gradually increasing the sell-through month-over-month, but the absolute dollar amount is still not enough to move the needle. So I'm just curious what really needs to happen to accelerate that? Is it just you need to get off the learning curve and grow more of it? Or when you talk to provinces, do you find they're saying there are many LTs and they can't make more room to take on additional DOJA products?

Yes. First of all, on the flower question, for the premium brands in our portfolio that we're most excited about, I would say that we're seeing consumer demand in the mid-20s THC range, and that's up from where we would have been talking about six or nine months ago. That highlights the fact that the flower business in Canada is fast-moving, and we need to stay on top of the evolution of strains and so forth. We're starting to do a lot of work around terpene profiling to find a good way to speak to our consumers around terpene profiles related to some of our specific strains. Regarding DOJA, the 91K strain has done really well for us. We need to be able to produce it consistently at scale. So we feel, as mentioned in our prepared remarks, we will be in that position by the beginning of our next Q1 for fiscal '23. You're right to call out DOJA, especially the 91K strain. It has been held back if anything by our ability to keep it supplied at the right level of THC. It's less about provincial boards and more about offering the right products, and we're spending more time with bud tenders and at retail to ensure our value proposition is put in front of consumers. I'm really excited about the growth of DOJA and where it can go.

And Tamy, I would just add a couple of things to David's response. The premium brand portfolio and the broader portfolio strategy is continuing to really focus and tighten our portfolio even more. There are a couple of premium brands in our portfolio, frankly, like house plants that we're not necessarily focused on. That is going to show up in the market data, some of that share dynamics that you're seeing. The timing of when those products actually get on the shelves is also crucial. When we talked about the distribution drive we're seeing and DOJA making traction in some of the provinces, you will continue to see that flow through. If you just look at our sales in Q3, our premium and mainstream mix is now 50%. This was 30% plus a year ago, so we're making good strides in terms of improving mix, but how quickly that flows to retail and shows up in the retail data is going to take a little bit of time.

Your next question comes from Gaurav Jain from Barclays.

So I have a question on gross margin for the quarter. You disclosed that you have a 14% adjusted gross margin and a CAD7 million payroll subsidy from the government. If I assume that your consumer products revenue is coming at, say, a 30% gross margin, that would suggest that your global cannabis revenue has a negative gross margin. Can you just help us understand why that is the case? And what will it take for that to become a 20% gross margin kind of business?

Yes, Gaurav. For us, clearly, gross margin and improving gross margin remain a very key focus area for Canopy. When you look at our gross margin, we continue to be challenged by lower production output and some of the price compression we're seeing in the marketplace. Our Canadian operations are driven by lower production output, resulting in the under-absorption of fixed and indirect costs that are affecting our gross margin performance. We also have a sizable non-cash expense in our cost of goods sold in Canada that flows through the numbers. We have around CAD36 million of D&A expenses that are part of the cost of goods sold. A lot of noise in the gross margins, but we're looking to improve our gross margins and focus on a few areas: 1) premiumizing our portfolio to drive improvement in mix and gross margin; 2) increasing cultivation productivity, streamlining processes, and looking at additional productivity initiatives; and 3) exploring distribution in direct and variable spend to drive improvements. A lot of work is underway to ensure we're tackling all areas of opportunity. We do expect, over time, to see gross margin expansion in the Canadian market.

Your next question comes from Chris Carey from Wells Fargo.

I just wanted to follow up on that line of questioning around profitability in Canada. It sounds like there are good initiatives around expanded distribution, more focus at retail, and really trying to understand the consumer, and that all makes sense. It seems that sales leverage with some of these initiatives over the next three to six months is expected to help quite a bit. But what if some of these initiatives take a little bit longer? Obviously, this is a very challenging and competitive market. David, I'm curious your thoughts here, particularly on the significant capacity reductions you made as you joined the organization, specifically on the West Coast. What is your appetite for making more significant changes to the asset base in the context of what appears to be a successful non-cannabis portfolio and everything you're doing in the U.S.?

Yes, Chris. We recognize that our revenue base is lower than we projected to support the expense structure that we currently have. We're looking at streamlining processes and additional G&A savings that will enable us to be profitable in Canada, recognizing that the realities of our current position are different than what we had anticipated. In the next call, you'll hear more from us about initiatives in place to streamline processes and optimize expenses to reach profitability as quickly as possible.

And Chris, I’d add that we’re growing focus on premium flower in our facilities. We’re simplifying our portfolio of brands to focus on DOJA, 7Acres, DNA, and Tweed on the flower side to create a more simplified operating environment. Our three facilities—Kincardine, Smiths Falls, and Mirabel—each have the potential to improve performance from a cost perspective. However, it’s worth noting that some facilities are overbuilt and that drives depreciation and amortization, which is a drag on our margins. Improving throughput with the right brand and SKU sets is critical to optimizing margins, focusing on cash margins or EBITDA margins.

Your next question comes from Pablo Zuanic from Canto Fitzgerald.

David, regarding the export markets, we have successfully established ourselves in Canada and are concentrating on the U.S. However, if Germany moves towards legalization, how prepared are we for that? Will the sale of C3 influence our position? We’ve observed your market share growth, so please remind us of your strengths and your readiness to enter if these European markets start to open up.

Thank you for the question, Pablo. We have a robust organization in Germany, and we continue to perform well in that market. As I mentioned, sales in that market were down in the quarter. The C3 sale doesn't really affect it; it's a bit of a simplification strategy that allows us to focus on flower in Germany, which we think will ultimately benefit us. Our ability to address the market and supply product into the market is strong. While all our attention is on making our Canadian business profitable and building the U.S. THC ecosystem, we think we are reasonably well positioned.

Your next question comes from Owen Bennett from Jefferies.

I wanted to come back on the Canadian market share. There’s a lot of focus on flower trends, what’s going wrong there and how you're addressing the premium. But if we go back to an investor meeting you guys held back in June 2020, you called out 2.0 products as a big area of focus where you wanted to be the leader and win. Delivery has clearly not been great, with gross sales down 40% in 2.0 versus a year ago. What do you think has gone wrong in 2.0? Why should we believe that trends there can also improve like you're hoping to see flower trends improve?

If I split out 2.0 products into three areas: first, drinks. The key unlock is movement on equivalency in Canada, as we can't sell the volumes necessary to get the kind of returns we want. We hope that comes in the not-too-distant future, which would be good for the industry and for Canopy. Second, our edibles portfolio has performed reasonably well with the introduction of Tweed and TWD gummies this year, and our acquisition of Wana makes us the brand owner of Wana in the Canadian market, which has a 38% share of the gummy trade. We believe that Wana plus Tweed and TWD plus our Deep Space gummies will allow us to be competitive. The area we haven't performed at the level we want has been in vapes. As a company, we focus more on flower vaporizers like Storz & Bickel, which has affected our attention. We’re working to improve in this area over time.

Owen, to add to that, we want to achieve growth in profitable categories. If you identify profitable and growing categories, notably the premium segment of flower and pre-rolls are seeing good growth and margins. In vapes, premium concentrates are growing while distillate-based categories are lagging. We focus on category expansion and the unique attributes of our offerings. So it's both about market share and category expansion.

Your next question comes from Adam Buckham from Scotiabank.

This is more of a strategic question for me. I wanted to talk a bit more about the U.S. THC ecosystem and what the team is trying to do there. The regulatory backdrop is complicated and difficult to comment on. But if the regulatory backdrop remains unchanged for a longer period, how does the team plan to create value from the investments in carried costs made in this area?

Great question. This component is often underappreciated in our story. We have a U.S. THC ecosystem that's made up of investments in TerrAscend, a 70% stake in Acreage, and ownership of Wana. It’s an interesting financial scenario because, for example, we paid for Wana already, so the cash has left our balance sheet, but we don't yet consolidate the results. These businesses are continuing to drive value, which will accrue upon federal permissibility. Wana opened up the market in Nevada, continue to grow and profit, and Acreage has had three consecutive quarters of profitability while opening up in Ohio. Each of these businesses is creating value that will ultimately benefit us upon permissibility. Who knows when that event will happen, but I think it is a question of when, not if. Our THC infrastructure is focused on value creation while we wait.

Your next question comes from Doug Miehm from RBC Capital Markets.

I wanted to follow up on the premium market in Canada. Could you talk about the size of that market on a market share basis right now? Where do you think that could go over the next year or two, taking into account more mature markets in the U.S.? I also want to spend some time on what's going on in the craft side of the market. They originally took 20% of the market and have taken more, when most believe they would start to reverse at some point. What do you see happening in the market over the next year or two?

Thanks for the question, Doug. The flower category has around 50% in the value segment, while the premium and mainstream segment is also around 50% of that remaining market. Our expectation is that the premium power segment will be the growth driver of the flower category going forward. We're focusing on premium to drive growth with new genetics and strains coming to market that excite consumers. The dynamics of consumer behavior can add to the churn in the marketplace, but focusing on premium strains and new genetics will help us win.

Over time, I believe the cannabis market will resemble other CPG categories, with a sizable and growing premium segment and a sizable and potentially shrinking value segment as the total market matures. We like focusing on the premium end, allowing for more innovation and better offerings. Craft players may represent 15% to 20% of the market long-term, which we see as beneficial and are eager to partner with them through opportunities like the 7Acres Craft Collective. Craft and premiumization will be key trends that we will participate in.

Your next question comes from Andrew Carter from Stifel.

I was a little confused about the quarter showing improving revenue growth. You were down 3% this quarter compared to an 8% decline last quarter. Could you give us any guidance on where you think Q4 is headed on an absolute basis? I know C3 is a headwind, but will the decline accelerate before improving?

Yes, Andrew. The comment around improvement is regarding the steps we've taken in Q3 to drive distribution gains in our U.S. CBD and CPG businesses, premiumizing our flower portfolio, and getting new products to market. All these actions are stabilizing our revenue performance. The Canadian market is still challenging, but we're starting to see improvements in supply, and actions taken should drive growth. For Q4, we expect retail store closures from COVID-related staffing shortages to impact sell-through and inventory replenishment. Sales declines in Canada should start to moderate as we focus on stabilizing our market share. C3 generated about CAD16 million in revenue last year, and we expect that to affect our numbers moving forward.

Your next question comes from Michael Lavery from Piper Sandler.

It sounds like it's the right move to reset some of the thinking around your revenue targets. It seems like a lot of that planning is still in the works, but can you provide a sense of when profitability might be in sight? Would that translate to the total company, or is it really just focused on Canada? If timing is unclear, can we expect to hear about that next quarter?

Yes, Michael. We're currently going through our annual planning cycle, and we'll share more details likely in our next quarterly earnings call about key milestones focused on profitability. While our emphasis is on Canadian profitability, we also see strategic growth areas like BioSteel, which performed well. We focus on long-term opportunities in the U.S. THC strategy, which provides a great opportunity for Canopy shareholders. We'll provide comprehensive details in the next quarterly call.

Thanks again for joining us today. In summary, we've developed a clear strategy that will deliver a path to profitability for Canada by focusing on areas where we have a right to win with premium brands backed by operational excellence and scale through unparalleled distribution. There's never been a better opportunity to invest in Canopy. We're building something unique in the cannabis industry, and our true value is yet to be realized. I look forward to updating you at the end of Q4 on our progress against these ambitious plans and our path ahead for FY '23. Our Investor Relations team will be available to answer any additional questions. Thanks again, and have a great day.

This concludes Canopy Growth's Third Quarter Fiscal 2022 Financial Results Conference Call. A replay of this conference call will be available until May 10, 2022, and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you very much for attending today's call, and enjoy the rest of your day. Goodbye.