Canopy Growth Corp Q2 FY2026 Earnings Call

Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Second Quarter Fiscal 2026 Financial Results Conference Call. I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin the conference call.

Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart. Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our second quarter fiscal 2026 ended September 30, 2025. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on our website under the Investors tab. Before we begin, I would like to remind you that our discussion during the 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 the news release issued today. Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported and GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts. With that, I'll turn the call over to Luc.

Good morning, everyone, and thank you for joining us today. It's great to be with you again to share the continued progress we're making in building a competitive, profitable and trusted leader in the global cannabis market. The second quarter was one of our strongest to date, reflecting real measurable progress driven by our continued disciplined focus on fundamentals. Q2 highlights included continued momentum in our Canadian adult-use cannabis business, consistent growth in our Canadian medical cannabis business and a stronger and significantly healthier balance sheet. Together, these actions give me confidence in our ability to sustain progress and deliver results for quarters to come. Turning to our Canadian adult-use cannabis business. Net revenue increased 30% year-over-year in Q2, driven by demand for our Claybourne infused pre-rolls and our new All-In-One vapes from Tweed and 7ACRES. Stronger relationships with Canadian boards, large accounts and independent retailers drove continued distribution gains, including a 20% year-over-year distribution increase amongst Alberta independent retailers. We also improved our service levels with on-time, in-full rates across key accounts, reinforcing our reliability with retail partners. For the six months period ending September 30, 2025, revenue is up 37% compared to the same period last year. This growth reflects the renewed momentum of our adult-use cannabis business following the actions taken earlier this year to tighten our product portfolio, streamline execution with boards and retailers and refine our sales model. Looking ahead, we're building on this momentum with additional Claybourne innovation, new genetics across our core flower portfolio and PRJ brands and plans to reach a broader group of consumers later this year. We're also elevating our cultivation standards, including manual and refined post-ARBT processes to deliver superior flower, ensuring consumers experience the very best of what Canopy has to offer. In our Canadian medical cannabis business, net revenue grew 17% year-over-year, marking another consecutive quarter of growth. We're staying true to our medical strategy, offering the right products at the right price, consistently in stock and for the right patient segments. During the quarter, our BC Georgia site became an exclusive medical cultivation facility, producing craft and small batch cannabis dedicated to Spectrum patients. DOJA is also exclusively end bucking and hand trimming all product, which is a deliberate investment to drive quality and consistency in the Spectrum patient experience. We're also seeing continued growth among insured patients with registration up 20% year-over-year and almost tripling since 2021. This continued growth speaks to the reliability and care within our medical business. Looking ahead, delivering a superior patient experience remains central to how we will continue growing this business despite proposed government changes to medical reimbursement. In international markets, frankly, I'm disappointed with our performance during the quarter, where net revenues declined $3 million. Performance in Europe was primarily the result of supply constraints and internal process challenges. Flower sourced from sales in Europe did not meet required quality standards and internal process gaps limited our ability to deliver supply to Germany from our Canadian GMP facilities. I want to be clear, Canopy Growth is fully committed to the European market. We have already mobilized a dedicated effort to improve supply chain execution, which includes daily management oversight of logistics, product roadmaps and licensing. We expect operations to stabilize and begin improving as we exit the fiscal year with international markets remaining a key part of our path to profitability. At Storz & Bickel, the launch of the new VEAZY Vaporizer was received with great enthusiasm by consumers globally and generated early sales momentum, helping contribute to sequential quarter-over-quarter revenue growth. While the VEAZY only contributed to three weeks of performance during the quarter, we're seeing positive signals into Q3 and together with holiday seasonality, expect continued growth through the remainder of the year. Looking ahead, I'm encouraged by the momentum at Storz & Bickel. The team's commitment to precision engineering, medical-grade quality and design excellence continues to set the brand apart, and that's what will drive performance in the long run. On operating expenses, our SG&A savings program launched earlier this fiscal has delivered over $21 million in annualized savings, surpassing our $20 million target ahead of schedule. As we build a culture of fiscal responsibility, the team continues to identify additional savings opportunities while delivering top line growth. On profitability, we made strong progress this quarter with margin expansion and disciplined cost management that's moving us closer to positive adjusted EBITDA. We're also taking further steps to meaningfully lower our cost of goods sold through streamlining processes, smart investments to deliver improved yield and quality as well as tighter supplier management. Before I close, I'd like to touch on the Canadian federal government's recent proposal to reduce reimbursement for veterans who use prescribed medical cannabis. These proposed changes have the potential to seriously impact access and quality of the care and services that veterans have come to rely on. As one of Canada's leading medical cannabis providers, we believe consistency and fairness in access to care is critical. We're continuing to assess the proposed changes and are engaging across the country to ensure the needs of patients remain front and center. In closing, Q2 demonstrated continued progress across our core businesses, including positive momentum in our Canadian medical and adult-use businesses and expanded product lineup at Storz & Bickel and a clear action plan underway to improve execution in our international markets to drive future success. As we further sharpen our focus on quality, patient and consumer experiences and disciplined execution, I'm confident we have the right strategy, focus and team to become a trusted global provider of elevated cannabis experiences. Thank you. I will now turn the call over to Tom to walk through the financial results in more detail.

Thank you, Luc, and good morning, everyone. I am proud of our disciplined execution, including stronger financial performance, rigorous cost-saving initiatives, a significantly deleveraged balance sheet, and sustained cash flow improvements. Our adjusted EBITDA loss narrowed significantly year-over-year, driven by growth in the Canadian cannabis business, along with lower SG&A expenses and efficiency gains. As a result of the progress made, we have eliminated the conditions that once raised substantial doubt about the company's ability to continue as a going concern. This is a significant accomplishment for Canopy Growth. We had $298 million of cash and cash equivalents as of September 30, 2025, which exceeded debt balances by $70 million. During Q2, we prepaid USD 50 million on our senior secured term loan, capturing roughly USD 6.5 million in annualized interest savings. As a reminder, the company has no significant debt maturities prior to September 2027. Moving to our detailed segment results and starting with cannabis. Q2 cannabis net revenue was $51 million, up 12% compared to a year ago. This growth was led by the Canadian adult-use business, up 30% year-over-year, primarily driven by strong consumer demand for our Claybourne infused pre-rolls and our new Tweed All-In-One vape offerings. Canada Medical also continued to perform well, up 17% from the prior year, supported by growth in patient registrations, larger order volumes and a broader assortment of products on our Spectrum Therapeutics store. International cannabis sales underperformed during Q2, decreasing 39% from the prior year, which was driven by supply challenges. While we expect this decline in sales to improve in the back half of the year, we are proactively identifying opportunities to mitigate the near-term impact on revenue and preserve our focus on consolidated profitability. Cannabis gross margin in Q2 was 31%, down year-over-year, but up sequentially from 24% in Q1. The sequential improvement in cannabis gross margin primarily reflects the impact of price increases on select Canadian products, improved sales mix within Canada and improvements to flower and fulfillment costs. These improvements were partially offset by the previously discussed European underperformance and inventory provisions. I will now speak about the performance of our Storz & Bickel segment. Storz & Bickel net revenue in Q2 was $16 million, up 5% sequentially, driven by strong consumer demand for the new VEAZY vaporizer. Year-over-year, revenue declined 10% as the prior year period benefited from strong Venty and Mighty sales as well as strong performance on the back of favorable German regulatory reforms. Storz & Bickel gross margins increased to 38% in Q2 compared to 32% in the prior year period. Gross margins in the prior year were adversely impacted by discounts provided to clear out the remaining Mighty stock, which was retired in favor of the Mighty+ device. Moving on to operating expenses. SG&A expenses in Q2 declined 13% year-over-year, reflecting disciplined cost management and the benefits of our ongoing restructuring program. The decline in SG&A expenses year-over-year was primarily driven by reductions in headcount and professional fees, partially offset by higher investments in advertising and promotions made in support of new product launches that occurred during the quarter. Since launching our cost-saving initiatives in March, we have achieved $21 million in annualized savings, exceeding our initial $20 million target. We are continuing to identify and implement additional cost reductions to further improve our structure while ensuring no disruption to our core capabilities and ability to execute in key markets. Turning to adjusted EBITDA. Our Q2 loss was $3 million compared to a loss of $6 million a year ago. The year-over-year improvement was driven in part by the positive impact of our lower cost base and improved margins, partially offset by the negative impact of lower international cannabis revenues and inventory provisions. I'd like to now review our cash flow. Free cash flow was an outflow of $19 million in Q2 fiscal '26, down from an outflow of $56 million in the same period last year. The year-over-year decrease in free cash flow is primarily driven by a reduction in cash interest payments as a result of our debt paydowns as well as year-over-year improvements in working capital. For fiscal '26, we expect to achieve significant improvement in free cash flow, driven primarily by a reduction in cash interest costs due to lower debt balances, tighter management of working capital and improved financial performance. I'd like to now provide our outlook and priorities for the remainder of fiscal '26. In our cannabis business, we expect improved performance in our Canada adult-use channel over the remainder of fiscal '26, driven by a robust innovation pipeline of focused product formats and tight alignment with cannabis boards and retailers. We will continue to monitor developments around the Canadian federal government's proposed changes to the medical cannabis reimbursement program for veteran and RCMP patients. As more information becomes available and should the budget pass, we will assess its impact on our business and what our next steps may be. Excluding any impact of these potential changes, we would expect Canada medical cannabis top line to continue to grow in the back half of fiscal '26. In international markets cannabis, we are focused on stabilizing and realigning operations in Europe. For the remainder of fiscal '26, we expect revenue in the region to remain generally consistent with the second quarter levels with growth expected as we exit the fiscal year. In Australia, we anticipate that our recently launched flower products, along with upcoming new format introductions will support continued sequential growth in the second half of the fiscal year. For Storz & Bickel, we expect stronger performance over the remainder of fiscal '26, driven by the successful launch of the VEAZY at the end of our second quarter as well as strength coming from the holiday selling season. However, the year-over-year comparison comparisons are likely to be challenged due to the ongoing economic uncertainty that exists, particularly in the U.S. and the negative impact this is having on consumer sentiment. While U.S. tariffs have created pressure on Storz & Bickel's profitability, we remain focused on mitigating their impact through disciplined cost management and operational efficiencies. Turning to cannabis gross margins. Excluding the potential impact to Canadian medical reimbursement levels, we expect sequential improvement in cannabis gross margins over the remainder of fiscal '26, driven by top line growth and additional production efficiencies and cost savings. In our outlook for Storz & Bickel gross margins, we expect sequential improvement over the remainder of fiscal '26, driven primarily by top line growth and cost-saving initiatives. As we move into the second half of the year, our priorities remain firmly grounded in execution, efficiency and disciplined financial stewardship. The deliberate actions we have taken to improve our operations, launch exciting new products in core categories, strengthen the balance sheet and reduce costs have materially reinforced Canopy's foundation for long-term stability and growth. This concludes my prepared remarks. We will now take questions.

The first question comes from Bill Kirk at ROTH Capital Partners.

Luc, you talked about the supply chain challenges impacting international. I know you mentioned quality standards. But what specifically do you have to change to reopen that pipeline? And is the solution going to be more costly than the prior product passed into the German market?

Thank you for the question. Let me provide some additional context. I have been with the company for nine months, and we started transforming the organization from day one. I'm very pleased with the progress we're making, which is reflected in our current results. We're seeing growth in both the Canadian medical and adult-use sectors. Margins are improving, we are ahead of our cost control objectives, and our supply chain is getting better. However, I am disappointed with our progress in Europe; I expected more during the transformation. Nevertheless, we are actively addressing the situation and have implemented daily management oversight. We are revamping our entire route to market and are making significant strides. To address your question more specifically, we are restructuring in a way that will allow us to meet European demand for the foreseeable future from our Canadian GMP facilities. I do not anticipate any increases in the cost of the flower we will provide to Europe, so we should be able to achieve better margins in the upcoming quarters. I believe we are moving towards a much stronger position as we finish the fiscal year. Tom, do you have anything to add?

No, I think the only other thing I would say, Bill, is there's not a lot of additional investment. This is about execution with the assets that we have today. So we also need to make sure we have a proper supply coming out of Kickern. But overall, this is a story of execution, and Luc and I are managing this quite closely.

Absolutely. And if I may add, as you can see by the amount of time we're spending on this, this is extremely important to us, and we're extremely close to the situation. We're expanding the number of strains we are growing for Europe, which allows us to broaden our portfolio of products significantly. At the same time, we are broadening our distribution retail offering in Europe, which as well will open up the market for us quite significantly.

And then, Tom, the ATM was used pretty aggressively in Q2. Can you talk about the decision to use it now and in that size? And then given the magnitude in the quarter, how should we think about issuance going forward? Is it done?

Yes. So I would say, Bill, we're continuously evaluating our capital requirements and funding strategies to ensure we have an optimal capital structure and that balances cost efficiency with financial flexibility. You're aware, we launched the new program at the end of August. Ultimately, for us, we want to make sure we have that optionality in the market. But I think it wouldn't be appropriate to speculate on how it would be used. We have the program in place to the extent we need to draw on it, but we're active prudently with those proceeds.

The next question comes from Aaron Grey at Alliance Global Partners.

First question for me. I just wanted to double back a bit on international. I know we've talked about it in the past. I just want to bring it up again in terms of your current supply chain. Are they still happy with some reliance on third-party products? Obviously, you guys have some of your own product, you can also export internationally. Do you feel like there's any need to increase the verticality that you have to supply the international markets because of some of the supply chain issues? Or do you feel like there's still a lot of opportunity to find quality products to sufficiently meet the potential demand in international markets?

Thank you for the question, Aaron. Some of the challenges came from flower sourced out of Portugal, but we are currently out of that situation. As I mentioned earlier, we have sufficient capacity within our GMP Canadian facilities. Therefore, we are confident that we can supply from our own source-grown flower. We are not dismissing the possibility of using third-party flower in the future, but at the moment, we are focused on retooling our entire route to market with our own grown flower, for which we have enough capacity for the foreseeable future.

Okay. Great. Second, you made some nice progress on profitability. And you mentioned continued progress towards positive EBITDA. Any updates in terms of some of the key levers and timing of when you might expect to get to profitability? I know it's something that you guys have stopped doing in terms of specific timelines, but fair to say you'd be disappointed if you didn't achieve it in some time of calendar 2026, or your fiscal year either back half or front half of '27.

I would say, Aaron, we're focusing on what we can manage. Currently, the cost-saving measures we are implementing will enable us to achieve better adjusted EBITDA performance. It’s too early to predict when that will happen. However, as you can see from the results, this has been our strongest quarter; even though we posted a loss, it is the smallest loss we've experienced in recent memory. I believe the changes we’re making within the organization will fully support this, and we will continue to push as much as we can.

Yes. If I may add on top of this, positive adjusted EBITDA is our main priority. That's why we're over-indexing and really retooling Europe to make sure we fire on all cylinders.

The next question comes from Frederico Gomes at ATB Capital Markets.

First question, just given the growth that you're seeing in your cannabis platform, the outlook for adult-use, Canadian medical, international medical as well, how are you looking at your capacity right now? Do you foresee any need to invest an additional capacity, I guess, in the near future, like meaningful investments if the business keeps growing?

Thank you for the question. As I mentioned, we're doing smart investment to really unlock yield and quality of the flower that we're growing in our own facilities. We've looked at this large and wide. We're confident with limited investment that we can meet the demand and meet the growth targets that we have. Tom?

Yes, thank you for the question, Fred. We believe our operation, especially with our cultivation in Kickern, is sufficient to meet our needs. Much of our focus and investment is aimed at enhancing our yield and the quality of the flower produced at that facility, and we do not anticipate needing significant additional capital investment to satisfy demand. Our emphasis is on executing with our existing assets and improving utilization across the board.

And then just a second question regarding the balance sheet now being in a net cash position. You clearly have access to capital and are in a strong position. Can you discuss your capital allocation priorities now that you have significantly reduced your debt?

Yes. So from my view, Fred, the $300 million of cash with no near-term debt obligations, it really provides further optionality for us when it comes to evaluating our capital structure and evaluating potential investment opportunities to grow and strengthen our business. The cash also provides us with flexibility to capitalize on these potential opportunities, but also mitigate risks as market conditions fluctuate. As we all know, cannabis is a highly volatile space. So I think for right now, we're evaluating potential accretive options that are out there. But ultimately, we want to make sure we remain resilient and stabilize this company and focus on the business that we have today.

The next question comes from Pablo Zuanic at Zuanic & Associates.

Luc, I have two questions. First, regarding the vape launch. The Claybourne's pre-rolls have clearly been successful. Can you provide more details about the vape launch? Are you only releasing All-In-One products, or will there be 510 cartridges as well? Will the All-In-Ones be limited to distillates, or will they include live resin, live rosin, and liquid diamonds? I would appreciate more insight into how you view this category, particularly concerning the potential for innovation and the current price competition, as it seems like there's been a downward trend in prices for All-In-Ones. For my second question, I'd like an update on the U.S. business. I understand that you see the U.S. as a long-term opportunity, but can you share where things currently stand with Canopy USA? Specifically, how have you supported Acreage in terms of balance sheet assistance or guarantees? I know there were past transactions involving purchasing debt from AFC Gamma. What has transpired recently in the June or September quarters regarding support for Acreage's operations, especially concerning their balance sheet and cash flow?

Hope you are doing well. Let's start with the vapes, and Tom will join in for the U.S. We are excited about the early results from our All-In-One vapes. As I mentioned, we launched Tweed and 7acres, and they performed exceptionally well, to the point where we ran out of stock and had to speed up the replenishment of our initial supply. We are about to launch Claybourne in All-In-One vapes as our first entry, and we are very pleased with the gross margins we are achieving with these products. We are offering products of superior quality, priced accordingly, and they have been beneficial to our margins. As for the full range of live resin, distillate, liquid diamonds, and more, we have further developments coming. We are dedicated to leading in the All-In-One vape market, which is a key and growing segment, so expect more updates soon. Be sure to try the new Claybourne All-In-Ones when they are available; I had the chance to sample them this week, and they truly represent what we stand for—providing superior elevated experiences with quality products. Tom, would you like to share some insights about the U.S.?

Yes, sure. So Pablo, a couple of points in your U.S. question there. So there are no guarantees between Canopy Growth and Canopy USA. So Canopy USA is an independently run and managed enterprise. They did have new financing over the summer from their lender, and the team has been working diligently to deploy that capital in the areas where they see the highest return. Overall, their focus now is on execution and really bringing the three companies together and executing well in the U.S. space. But to be clear, there's no funding new or otherwise with Canopy USA and Canopy Growth.

This concludes Canopy Growth's Second Quarter Fiscal 2026 Financial Results Conference Call. A replay of this conference call will be available until February 5, 2026, and can be accessed following the instructions provided in the company's press release issued earlier today. Canopy Growth's Investor Relations team will be available to answer additional questions. Thank you for attending today's call.