Canopy Growth Corp

TSX:WEED

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Michele and I will be your conference operator today. I would like to welcome you to the Canopy Growth Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode.

I will now turn the call over to Tyler Burns, Director, Investor Relations. Tyler, you may begin your conference call.

[Tyler Burns, Director, IR]

Thank you, operator. Good morning. Thank you all for joining us. On our call today, we have Canopy’s Chief Executive Officer, David Klein; and Chief Financial Officer, Judy Hong.

Before financial markets opened today, Canopy issued a news release announcing our financial results for our third quarter ended December 31st, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR.

Before we begin, I would like to remind you that our discussion during this call will include forward-looking statements that are based on management’s current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning’s news release.

Please review today’s earnings release and Canopy’s reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections.

In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars, unless otherwise noted.

Following remarks by David and Judy, we will conduct a question-and-answer session, we will first address questions uploaded by verified shareholders using the Say Technologies platform. Following that, we will take questions from analysts and to ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question.

With that, I will turn the call over to David. David, please go ahead.

[David Klein, CEO]

Thank you, Tyler. And good morning everyone. During our Q2 earnings call, I clearly outlined Canopy's top priorities in becoming a North American Cannabis leader, which included actions to drive Canadian profitability, and empowering Canopy USA to progress the US THC strategy.

On today's call, I'll provide comprehensive updates on both priorities, which are imperative to achieving our ambition of long-term North American cannabis market leadership.

Following my remarks, Judy will review our Q3 results, provide an update on our path to profitability, and outline the cost savings anticipated from the business changes announced today, as well as discuss our balance sheet.

The transformative plan introduced today addresses the actions needed to drive profitability, but also to secure the future of our business. The intent of establishing a legal cannabis industry in Canada was to combat the illicit market. At the outset, the legal sector was poised to be a source of immediate economic development, with significant job creation and tax revenue.

As a global first mover, the legal Canadian cannabis industry was originally projected to grow into a CAD7 billion market over time, however, that market aspiration has not come to fruition.

Today, there are two very different cannabis markets in Canada; one that's legal, highly taxed and regulated, and one that's thriving in illicit. The unregulated illicit market is generating billions of dollars of revenue with a 40% market share, and faces virtually no risk of enforcement.

The legal sector out of necessity, is forced to be price-competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer.

The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come and as a result, the sustainability of this legal sector is in question.

Make no mistake building an industry from the ground up is not linear and the knowledge gained has been significant. We stand ready to work with regulators, politicians, and provincial boards to improve the punitive regulatory environment based on experiences from the front lines.

However, despite these market realities, Canada remains a large market in which canopy is well-positioned with strong brand recognition, a diversified portfolio of products in the adult use segment, and a growing share of the medical market.

The backdrop I just outlined formed the catalyst for the actions announced today, which are intended to position our Canadian business to be profitable and self-sustaining.

The Canadian Business Transformation Plan includes consolidating our production and operational footprint shifting to a brand-led asset-light model and completing an organizational restructuring that better aligns our resources with market realities.

Specifically, we intend to exit our 1 Hershey Drive Smiths Falls, Ontario facility as we consolidate cultivation at existing facilities in Kincardine, Ontario, and Kelowna, British Columbia and where necessary, enhance our offering with a flexible flower sourcing strategy.

Similarly, similarly, we will be outsourcing non-flower formats such as beverages, edibles, vapes, and extracts as we implement a nimble asset-light model that allows us to be dynamic and actively respond to market demands.

In Quebec, we will see sourcing of flower from the Mirabel facility. As the Mirabel facility is operated through a joint venture structure, we're engaging with our JV partners on the long-term future of that site. We recognize our core competency is brand development with strong routes to market.

The Canadian transformation is intended to closely mirror the plan structure of Canopy USA, which we believe to be a winning model. The changes announced today are in addition to the following cost savings initiatives that were completed in Q3, including the divestiture of national retail operations, closure of our Scarborough, Ontario research facility, and outsourcing of our genetics program to Quebec-based EXKA.

The restructuring of our Canadian cannabis business into a standalone business unit and the reduction of our SKU count by approximately 50% as we focus on the highest performing segments within the Canadian adult use cannabis market.

The changes announced today will result in approximately 800 employees exiting the business over the coming months, with 40% of that reduction occurring immediately. We expect these further adjustments to reduce annual SG&A and COGS by an additional combined CAD140 million to CAD160 million over the next 12 months. Judy will speak to the financial aspects of our restructuring in greater detail during her prepared remarks.

Now, let me spend a few minutes discussing business outside of Canadian cannabis, starting with our international markets. Where Australia is worth highlighting as our sales in this market have increased nearly 200% year-over-year and demonstrated steady growth.

Storz & Bickel or S&B continues to demonstrate its capabilities and appeal with core and limited time premium vape offerings like the Peace Volcano. In the third quarter S&B delivered its best quarterly revenue since Q4 FY 2022. This growth was driven by traditionally strong seasonal demand for premium cannabis vaporizers. Overall, S&B continues to be a key profit contributor in the Canopy brand portfolio, and is poised for innovation and growth.

Turning to BioSteel, we're very pleased with the strong momentum at retail despite quarter over quarter volatility in reported revenue due to the timing of distributor loadings.

According to Nielsen data, BioSteel share of isotonic beverage sales in the Canadian National convenience and gas channel reached 10.4% in the third quarter and 13.8% in Ontario.

In the US, the brand has also made impressive distribution gains over the past year with IRI data showing BioSteel's ACV at 34% for the quarter. This was matched by notable sales gains, with scan sales in the US region increasing 157% from the prior year.

With expected distribution gains and velocity growth driven by our investment and brand activation, we expect to see revenues increased significantly over coming quarters.

Finally, I'd like to speak to Canopy USA, which continues to progress the US [Indiscernible] strategy. With a lack of developments in Washington, I strongly believe that through Canopy USA, we've taken control of our destiny to capitalize on the once in a generation opportunity in the largest cannabis market in the world.

Our primary objective for Canopy USA is to optimize the value of our entire US cannabis ecosystem, Acreage, Wana, Jetty and TerrAscend. By leveraging their brands portfolios, routes to market, and operations, we're pleased to see the ecosystem exploring opportunities to collaborate and grow with examples including Wana and TerrAscend bringing Wana Edibles to New Jersey, and the expanded availability of Wana in the State of Maryland.

Wana launching in New Mexico and Missouri in addition to releasing a suite of new sleep product offerings. And Jetty Extracts announcing upcoming product availability in the state of New York.

After closing, Canopy USA expects to reduce its annual operating expenditures, including eliminating redundancies and the public company reporting cost of Acreage, all of which are expected to be realized shortly after closing these transaction.

This is a novel and groundbreaking strategy. We're resolute in remaining dual listed as the Canopy USA strategy progresses and as we continue to finalize our proxy, we anticipate holding our shareholder vote as early as April 2023.

With that, I'll turn it over to you.

[Judy Hong, CFO]

Thank you very much, David and good morning, everyone. I'll focus my remarks on one a brief summary of our third quarter results; two, an overview of the financial details of our transformation plan for Canadian cannabis business; and three, discussion of our cash flow and balance sheet.

Beginning with a review of our third quarter fiscal 2023 financial results. In Q3, we generated net revenue of CAD101 million, representing a 28% decline over the prior year period. When adjusting for the impact of divestitures of C3 and the Canadian retail business, revenues decreased 23%.

Revenue highlights include Canadian medical cannabis increasing 9% versus the prior year period; Storz & Bickel increasing 50% sequentially compared to Q2; and our Australian cannabis business having its seventh quarter in a row of record revenue.

Gross margin declined year-over-year, with the decline due to a shift in the business mix from the divestiture of C3, the impact of last year's COVID-19 Relief Program, and a decline in BioSteel's gross margins.

Adjusted EBITDA loss increased by CAD21 million to CAD88 million compared to a year ago. Approximately CAD8 million of the adjusted EBITDA loss during Q3 resulted from a few discrete items including costs associated with returns in our US CBD business following our strategic change; the write-down of aging inventory of BioSteel; and accredit to a distributor which is related to the previous sales made to Israel. Free cash flow improved 13% year-over-year due in part to lower capital expenditures.

Now, let's take a look at the results from each area of our business. Canada cannabis revenue declined 23% compared to the prior year period, and declined 11% sequentially compared to Q2, with the decrease due to lower adult use B2B revenues, partially offset by a 9% growth in our medical cannabis revenue.

The impact of the retail divestiture during Q3 was approximately CAD1 million. Canada cannabis adjusted gross margin was negative 8%, but cash gross margins improve to 29% when normalizing for the impact of depreciation and certain non-cash inventory charges.

The year-over-year improvement in cash gross margin is driven by mix improvement and the cost reduction actions announced in April of 2022. And today's announcement is expected to further improve cash gross margins and address the gross profit dollar headwinds that have stemmed from lower revenue.

In the rest of the world cannabis segment, revenues excluding C3 experienced the 54% decline year-over-year due to a decline in the US CBD business and the impact of shipments to Israel. The current quarter did not have any shipments to Israel, which negatively impacted by sales by CAD4.7 million compared to the prior year period. This was offset by strong performance in Australia, nearly tripling revenue compared to Q3 of last year.

Year-to-date, our international cannabis sales, excluding US CBD business are up 43%, despite the decline in sales to Israel. Adjusted gross margins for this segment with negative 33% in the current period compared to positive 32% a year ago, which reflects the discrete factors that impacted sales that I discussed earlier in the call.

We expect gross margins in this business to revert back to the historical level going forward. BioSteel revenues were relatively flat to the prior year period and lower than Q2 mostly due to the impact of timing of distribution loadings.

The timing boosted Q2 sales, while Q3 revenues were also impacted by shipment timing shift into Q4. Year-to-date, BioSteel revenues have more than doubled, and we expect to see strong growth resuming in Q4.

Adjusted gross margins for BioSteel were negative 37% in the period, which was impacted by inventory write-downs and higher third-party shipping, distribution, and warehousing costs across North America.

The inventory write-downs relate to an aging inventory of ready-to-drink product, which is primarily due to the previous inventory build ahead of distribution gains that progress slower than anticipated in the U.S.

The acquisition of a manufacturing facility in Verona, Virginia during Q3 is expected to improve BioSteel's gross margins by reducing contract manufacturing costs and the BioSteel team has several initiatives in place to further reduce its cost of goods sold in the coming quarters. We expect BioSteel's gross margins to approach industry standards as sales scale over time.

Storz & Bickel revenues decreased 20% as compared to the prior year period, yet increased 50% sequentially compared to Q2. While cautious consumer spending in an uncertain inflationary environment is impacting demand and higher priced items, we did begin to see resumption of sales to key distributors in the US market. Note that this also represents Storz & Bickel best revenue quarters since Q4 of FY 2022.

Gross margin for Storz & Bickel remained healthy at 45% in the current period. This first revenue decreased 22% of the current period compared to the prior year due to challenging UK retail dynamics. Gross margins declined slightly to 49% from 51% in the prior period.

I'd like to now provide an update on our actions to achieve profitability. Our previously announced cost reduction initiatives are already driving improvement in cash gross margins in the Canadian cannabis segment. However, our adjusted EBITDA losses have not improved meaningfully due to the decline in our Canadian cannabis revenue, as well as investments behind BioSteel.

As David mentioned, this morning, we announced a plan to transform our Canadian business to an asset-light brand-driven model, significantly reducing our operational footprint as well as headcount across our organization.

As a result of these actions, we expect to reduce our overall costs by an additional CAD140 million to CAD160 million comprised of a CAD90 million to CAD100 million reduction in cost of goods sold, and CAD50 million to CAD60 million reductions in SG&A expenses. The reduction is incremental to the CAD100 million to CAD150 million of cost reduction plan that we announced in April of 2022.

The additional cost reductions are expected to come from several areas. One, reduction of our Canadian cannabis operational footprint. Our plan to exit cannabis flower cultivation in our Smiths Falls, Ontario facility and seizing the sourcing of cannabis flower from the Mirabel, Quebec facility is expected to result in a much smaller cultivation footprint.

In addition, we plan to close the 1 Hershey Drive facility in Smiths Falls and move manufacturing for smaller footprint, while moving production of all Cannabis 2.0 formats to third-party partners. And we've already closed the Scarborough, Ontario research facility.

These operational footprint adjustments are estimated to deliver CAD35 million to CAD40 million in annualized cost savings and reduce their distribution costs as well as other supply chain related costs by an additional CAD100 million -- CAD10 million in annualized cost of goods sold. We anticipate these operational changes will be completed in Q2 of FY 2024.

Two, reduction in headcount across our operations. Headcount reductions across cultivation, manufacturing, and other areas of operations are expected to generate CAD45 million to CAD50 million in annualized cost of goods sold savings.

Three, reorganization of our sales and marketing organizations. We have streamlined the sales and marketing functions under the creation of a standalone Canadian business unit with focus on key accounts, high margin customers, and our medical sales. This is expected to result in a leaner selling organization and reduction in certain marketing expenses, with an estimated cost reduction of CAD10 million to CAD15 million in annualized sales and marketing costs.

And four, reduction in R&D and G&A spending. We've eliminated our central R&D resources, outsource our genetics program, and embedded innovation functions within the Canadian business unit. This is expected to deliver CAD10 million to CAD15 million in annualized cost savings. And right-sizing of our essential support teams from both a headcount and operational spend perspective to the size of the current business and market realities, is expected to generate an additional CAD30 million in annualized G&A expense savings.

Overall, we expect to reduce our total costs by CAD240 million to CAD310 million upon completion of the April 2022 cost reduction initiatives, as well as the actions that we've outlined this morning.

We expect the combined cost savings program will position Canopy to be profitable in our Canadian operation, even with no improvement in revenue from the current run rate. And as such, we reaffirm our previous expectation of achieving positive adjusted EBITDA in FY 2024 with the exception of investments in BioSteel.

Let me now spend a few minutes on our cash flow and balance sheet. Our cash balance declined by CAD354 million during Q3 compared to Q2, which is higher than the recent quarterly cash outflow. So, let me walk through the various drivers.

First, we paid off CAD117.5 million of our term loan, which was the first of the two payments as part of our agreement to tender $187.5 million of the outstanding term loan.

Second, cash used for acquisitions and investments during Q3 included CAD24 million in acquisition of a manufacturing facility for BioSteel, which should provide an attractive return on investment, and a CAD38 million related to an option premium payment to purchase Acreage's debt.

Third, our free cash flow in Q3 with an outflow of CAD146 million. This included cash interest payments of CAD28 million in Q3. Cash outlays also included approximately CAD20 million that are not part of our adjusted EBITDA, which includes acquisition-related costs, primarily related to the reorganization of Canopy USA and divestiture of our retail business, as well as certain cash restructuring costs.

Q3 CapEx came in at CAD2 million, significantly lower compared to the prior year period and for the full year 2023, we continue to estimate CapEx to be in the range of CAD10 million to CAD20 million.

Our cash and cash equivalents remained strong at CAD789 million and our overall debt position has been reduced to CAD1.2 billion as of Q3 quarter end, down from CAD1.5 billion at the end of Q4 of fiscal 2022.

We also have many liquidity options available to us and are laser-focused on improving our cash position and further reducing our debt over the next few months. First, of the remaining senior notes due in July 2023, Constellation has already indicated its intention to purchase for cancellation up to CAD100 million principal amount.

Second, we have a very constructive relationship with all our debt holders and we continue to consider ways to reduce debt in a accretive manner, balancing our focus on remaining -- maintaining our financial flexibility and cost of capital.

Third, we are in active discussions around monetizing numerous non-core assets that we have, which includes facilities that we've already closed. Fourth, $2 billion base shelf remains fully available to us. And importantly, we expect the cost reduction initiatives to reduce our operating cash outflow by more than half with significant quarter-over-quarter improvement starting in Q1 of our fiscal 2024.

Let me now provide some perspective on the balance of fiscal 2023 revenue outlook. First, we expect strong growth from BioSteel in Q4 with increased marketing investments, driving gains and sales velocity as well as new distribution.

Our Canadian cannabis business is expected to show stabilization in net revenue as we undergo our Business Transformation Plan. Note that with the disposition of our Canada retail being completed at the end of Q3, the Canadian adult use business to consumer revenues will now be eliminated from our go-forward results, which will negatively impact both year-over-year and quarter-over-quarter comparison.

Our Europe and west of the world's business is expected to show year-over-year decline in Q4 as we no longer expect to see sales to Israel going forward.

For Storz & Bickel, we're encouraged by improved us distribution in the third quarter. But note that Q3 results benefited from Black Friday and the holiday season, so we expect seasonality to contribute to a modest decline in Q4 versus Q3.

In conclusion, achieving profitability is critical for us and with the decisive actions we announced today, we're focused on executing this transformation in Canada and significantly reducing our cash burn over the coming quarters.

This concludes my prepared comments. We will now move into the question-and-answer session. To begin with our Q&A session, we'll first address an investor question that was uploaded through the question-and-answer platform developed by Say Technologies. Tyler, can you please state the first question.

[Tyler Burns, Director, IR]

What do you feel the effects of legalization in the United States will have on the company and the industry as a whole?

[David Klein, CEO]

So, -- thanks, Tyler. Look with the lack of developments in Washington on federal legalization, we've decided not to wait for regulatory reform to happen in order to reap some benefits through our ecosystem in Canada, USA. And you know that just to reiterate what that is that's really putting together our Wana brand, our Jetty brand, Acreage, together so that they can operate in a collaborative fashion, grow their business faster than they might do if they were to continue to operate as separate companies, and realize cost synergies.

And so we continue to work on our Canopy USA strategy, which we commented on, both in the earnings release as well as in our prepared remarks. So, yes, I think that we're all hopeful that at some point, we have full federal legalization in the US, but we see that happening -- continuing to happen very slowly. So, we've taken matters into our own hands.

With that, operator, Judy, and I will now take questions from our analysts.

[Operator]

Thank you, sir. [Operator Instructions]

Your first question will come from Tamy Chen at BMO Capital Markets. Please go ahead.

[Tamy Chen, BMO Capital Markets]

Thank you. Good morning. Judy, I just wanted to ask in terms of the EBITDA, could you comment a bit on what the EBITDA loss looks like between the particularly the Canadian cannabis segment and then your consumer segment? I'm just looking at based on your total cost analysis to-date and you're reaffirming EBITDA guidance, that it seems the majority if not possibly all of the currently reported consolidated EBITDA loss is due to the Canadian cannabis segment and that possibly the consumer segment EBITDA, maybe already in the positive. Are able to comment on that?

And can you just give a little bit more detail on the cadence of all these cost savings as we progress through the quarters and fiscal 2024? Thank you.

[Judy Hong, CFO]

Sure Tamy. So, I would say when you look at our total adjusted EBITDA losses, the way I would think about it is sort of break into a few different segments, right? So, number one, to your point, right now, the two main drags in terms of our adjusted EBITDA losses are One Canada, and second, the investments that we're making in BioSteel.

So, with all the actions that we've announced in terms of our Canadian Business Transformation Plan, our expectation is that once we're complete with the plan, that all of our operations across our businesses will be profitable, with the exception of the investments that we're making in BioSteel.

So that's the outline of my comment around FY2024. So when you look at the businesses that we have stores and big goal is a profitable business, you can see that in the gross margins. And obviously the highest price points that that brand Garner's it is a profitable business.

The International Cannabis, there's some noise in that business, just given some of the actions that we've taken with US CBD business. And, the opportunistic sales that we had previously benefited from Israel, but all in all International Cannabis is achieving gross margin profitability and if you look at, if you get this worse than others, we think we're pretty close to profitability and all those segments.

So it's really about making sure that all the cost savings are driving Canada to be self-sustaining and profitable. And for BioSteel, we do think the investments will eventually pay off for Canopy shareholders one way or the other in terms of really the sales growth that we're benefiting from that business. And I think that that does create value for Canopy Growth shareholders.

In terms of the cadence of the savings that are expected to flow through, I would say, we obviously did announced the changes this morning and there is a big portion of the savings that will begin to flow through starting in Q1. But as we complete those actions in Q2, we think the bigger chunk of those savings and the progression from a quarter-over-quarter basis we really begin to start to see in Q1 and Q2 of fiscal 2024.

[Operator]

Your next question comes from Vivien Azer of Cowen & Company. Please go ahead.

[Victor Ma, Cowen & Company]

Hi, good morning. This is actually Victor Ma on for Vivien Azer. And thank you for taking the question. So broad based inflation headwinds are persisting in North America, Wildflower downgrading has been evident Canada, have you seen that accelerate at all, as consumers absorb higher energy prices this winter?

[David Klein, CEO]

I think we've seen across Canada, and I would argue in the US, we've just seen growth in the value segment, which we don't play heavily in. But that's really that's, I think what we're seeing, I think it's less about overall price compression and more about this growth of the of the low end of the market.

[Judy Hong, CFO]

And just in terms of our business in Canada, we are looking at now the impacts from some of that price compression moderating in our business, if you look at our product mix, as we're pre minimizing our portfolio, the decline in terms of our average pricing is beginning to moderate. So you see that in terms of the product mix shift.

[Operator]

Your next question comes from Chris Carey of Wells Fargo. Please go ahead.

[Chris Carey, Wells Fargo]

Hi, good morning.

[Judy Hong, CFO]

Good morning.

[Chris Carey, Wells Fargo]

David, you think you noted that the shareholder vote on Canopy USA was still planned for April of 2023? Or is planned for April 2023? Please correct me, if I heard that wrong, you know that there's a lot of details in the press release this morning about, potential remedies that would make the NASDAQ and I presume the SEC more comfortable with this transaction. I'm still struggling a little bit just to understand the practical considerations here. You talk about, a smaller percentage ownership, among other things. So, just in plain terms, what would need to change to get this deal through?

And then, perhaps comment on how this changes the -- I suppose the reporting relationship with constellation, my read here is, you know, probably under the change instead, they'd still be reporting Canopy and equity income but I'm not sure. So, anyway, so you could tell just trying to maybe, just dumb this down a bit and understand kind of sense of what's actually being contemplated here. Thanks so much.

[David Klein, CEO]

Yeah, Chris. So -- like, it's a taken, yeah, we're still we're still targeting in April 2023, shareholder meeting, I don't think it changes, any changes that we might make in the structure of our Canopy USA, business won't affect how constellation ultimately treats their investment in canopy.

And so to simplify, where we are really, again, the value of Canopy USA is in putting these businesses together, letting them generate revenue synergies, because they can effectively open markets, maybe faster, generate cost synergies by working together to drive routes to market and route to market activation within individual marketplaces, and then look at other more G&A sorts of synergies across their businesses.

So we think putting the businesses together is the value unlock. How we go about doing it is the complicated set of activities that we're working through with SEC, as well as our -- the exchanges that we trade on. And so, simplistically put, we would have to ensure that our economic ownership is in more than 90% which was a likely or potential outcome anyway, as we as we put this business together.

We need to make sure that we would only have three members on the board so we would have one fewer seat on the board and that seat would come from a canopy nomination to the board we don't think that affects the performance of the business whatsoever, and then we'd have to -- in our earnings release, eliminate certain negative covenants such as that's just adjusting some things that Canopy would have ordinarily or originally hadn't had say over.

So what we're really doing is we're just positioning the company to function like every other company would gather synergies across their portfolio, drive their business in the marketplace. And these kinds of technical things are just required for us to have an appropriate level of distance from specific control of that enterprise as we go forward.

[Operator]

Your next question will come from John Zamparo of CIBC. Please go ahead.

[John Zamparo, CIBC]

Thank you. Good morning. My question is on the profitability goals, and even at the high end of the combined savings plan that doesn't get you particularly close to break even on EBITDA at least compared to the current quarter. So how do you square that with the outlook for F2024 being positive?

And presumably you're spending on BioSteel? Isn't that material? So is it that you're including results from your US businesses, even though those won't be consolidated? There's also the comment about revenue not needing revenue growth. So just trying to better understand the profitability you’ve got? Thank you.

[Judy Hong, CFO]

Sure, I'll start and, David, you can add, as well. So just in terms of the overall profitability goal and how that ties to the cost reduction? Look, again, I do think when you combine the announcement we made in April, and will were announced today, it is a pretty sizable cost reduction that we currently are underway. So there are some remaining cost savings as part of the April program. And then we obviously have additional cost savings that we announced.

I would say the investments we're making in BioSteel are not insignificant. And I think that's a decision that we made, particularly in the current fiscal year as we really were standing up the investments behind the NHL sponsorship, really with the anticipation that that will drive strong velocity and strong distribution across both the Canadian market and the US market.

And as you see in the retail data, we're very pleased with the performance of BioSteel, you see that at least in the retail data, despite some of the lumpiness that you see on a quarter-over-quarter basis. So we do think that that investments that we're making, will pay off in the coming quarters?

So again, I think as I said to Tamy, if you think about the cost actions that we announced in Canada, and the other businesses that are you know, approved already profitable that we think we can get to a profitable business for Total Canopy with the exception of the investments and BioSteel. And I think the adjusted EBITDA losses as it relates to BioSteel really depends on how quickly the sales scale up in the coming quarters.

[Operator]

Your next question comes from Nadine Sarwat of Bernstein. Please go ahead.

[Nadine Sarwat, Bernstein]

[Technical Difficulty] taking for question for me. So the first, many of your initiatives focus on improving profitability that you announced today, which is really great to hear. However, the weaker top line growth for Canopy and to be honest, more broadly for Canadian cannabis industry remains a fundamental challenge.

So, could you just walk us through what you're planning as part of your initiatives that in particular address improving top line given the challenges you've got highlighted at the start of the call?

And then my second part of the question is, many investors have expressed concern that Canopy USA is adding to your costs or taking management's attention away from the core business without contributing positive cash flows until federal legalization occurs, which appears increasingly unlikely for the moment. So what would you say to those investors who are concerned about that? Thank you.

[David Klein, CEO]

So, I'll take a shot at these, Judy and then you can fill in the blanks. But in terms of top line as Judy pointed out. We aren't anticipating or we don't require a top line to meet the profitability objectives that Judy outlined, as a result of these changes that we've announced today.

What gives us confidence in being able to sustain the current level of performance in Canada is really the continuous improvement we've made over the last several quarters in terms of the offerings that we have in the marketplace, the general consumer acceptance and appreciation of those offerings and the strength of our commercial team on the ground in Canada, which we believe is second to none.

And so we think that those have us in a good position to at least retain the current level of revenue that we're generating in the business. And so we've sized our business accordingly, which yields the profit objectives we talked about.

As it relates to Canopy USA, look, the purpose of Canopy USA is to create value by putting Jetty, Wana and Acreage together in a way that they can work together in a collaborative fashion to extract value. And that is something that those businesses need to do by working together. And it's really less about resources being assigned from Canopy Growth. And so we don't see it as a major distraction from running the rest of our business, which includes Canada, includes Storz & Bickel, and includes BioSteel as well as of our international businesses.

[Judy Hong, CFO]

And I would just add, from a revenue standpoint, Nadine, so when you look at our Canadian total cannabis revenue over the last few quarters, it's been stabilizing in the range of CAD35 million to CAD40 million. And that is, there is some declines in the adult-use cannabis side, but we've actually seen medical revenue growth, as we pointed out on the call.

So importantly, when you think about our profitability target for Canada, we're not expecting any changes to our current run rate. So we think that we've got an opportunity to continue to grow our medical business, and we've got increased product offerings, and that's driving some of that improvement, we expect that to continue. And really, from an adult-use cannabis business standpoint, we're not expecting an improvement to the current run rate. And I think that is still enough for us to get to profitability in Canada.

And then from a Canopy USA standpoint, look, I think once we get Canada to be profitable, we think the cash flow generation or the contribution from Canopy USA is really not something that's required to support the Canopy Growth, cash needs. And so from that perspective, it's really about optimizing the value of Canopy USA through advancing the USP fee strategy. And then for Canada to be profitable and for the rest of the business to continue to be profitable.

[David Klein, CEO]

I want to actually come back to a point as it relates to the top line as well. So we made a decision a year and a half ago or so to not chase the value segment. And it doesn't mean we won't participate in parts of the value segment when we have products that we can waterfall down into that segment. But we deliberately chose not to chase the value segment, which has had a dampening effect on our top line, because of the growth of that segment, which we've not participated in.

We did that because we didn't believe that we could build a profitable sustainable business at the value level in the Canadian market. And so we focused on mainstream and premium offerings in the marketplace.

However, our footprint was too large to support that segment of the market that we really want to go after and so the actions today are all about getting our footprint right to address the market that we want to address within Canada. And as Judy said, that's been running in that CAD35 million to CAD40 million range quarter. We think that we can stabilize at that and then begin to build from that as a base.

[Operator]

Your next question comes from Andrew Carter of Stifel. Please go ahead.

[Andrew Carter, Stifel]

Morning. Thank you. So within results there's a big revenue miss mostly on BioSteel and your commentary in November was a modest sequential climb. I'm not sure if you had visibility into that the distribution issues. Today's commentary outlines steps you can take if NASDAQ objects to the consolidation, which I don't know correct me if I'm wrong, you could I could have been hit head on in the release last call back in October.

My biggest question is like what's going to change from here? Given the cash needs, I think viability requires successfully navigating the capital markets, which requires properly setting expectations and credibility. And back to the cash needs, I guess in this business with the assets in hand, including Canopy USA and the changes you've made today. achieve positive free cash flow with the full run rate of interest expense on the remaining term debt? Thanks.

[Judy Hong, CFO]

I'll start from a from a cash needs standpoint, Andrew, and then David can add additional comments. So from a cash needs standpoint, as I outlined on my prepared comments, we think we already have a strong balance sheet with just under CAD800 million that we have on our cash, as well as several options that we have available to us to increase liquidity and reduce debt.

You've already seen our actions that we've taken to reduce our debt, including equitizing the portion of the converts last year, we've obviously also paid off some of the term loans, and that is going to drive the interest savings and reduce our cash burn going forward.

We've also talked about the remaining convert notes with Constellation interchange the 100 million into exchangeable shares, we also have very constructive relationship with the debt holders, and we're in communications to address our desire to pay off some of the debt in a very accreted manner.

So we are looking at all those options. We have availability of $2 billion of cash available to us through the base shelf that we file. So we actually think we've got several options. We've already also are in active discussions with monetizing several assets that we have, and you'll hear more about those as we go forward. But from a liquidity needs standpoint, I think we've got a really a several options that's available to us.

But to answer your point, the entire point of what we're doing today, and what we've announced this morning needs to generate a sustainable business that will have positive cash flow over time, we get that. And so all the actions that we're taking to significantly reduce our operating free cash flow in our Canadian business, as well as interest savings that we would get from our debt reduction plan, and all the things that we're doing to monetize the assets, we think we've got a very laser-focused and strong plan in place to get to that place as quickly as possible.

[David Klein, CEO]

And I would just say, look, protecting revenue in nascent industry and nascent businesses is difficult at best, that's which is why we don't provide guidance. I would point out that BioSteel has seen volatility, but BioSteel on a year-to-date basis is up 100% year-over-year.

And so we think that that kind of performance over time will continue with that brand. But as we said, we're going to see volatility from quarter-over-quarter, and you could make the same case with other components of our business as well. And so, I think that what we've laid out here today represents a strong path to getting profitable to achieving cash flow favorability at a point in the future, and some very strong businesses that have a lot of economic value potential for our shareholders.

[Operator]

Your next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

[Matthew Baker, Cantor Fitzgerald]

This is Matthew Baker on for Pablo. Thank you for taking our questions. Firstly, I just wanted to congratulate the company on ringing the opening bell at NASDAQ on December 12. Can you update us on how those conversations with NASDAQ are going? Yes, you are committed to the dual listing but NASDAQ has made it clear that they'll delist you have to consolidate US assets. So what has changed? And then secondly, when do you expect that regulatory approval for the consolidation of acreage? Thank you.

[David Klein, CEO]

Yeah. So the first of all, let me start with the regulatory approval that that starts as soon as Canopy USA triggers the ownership interest in acreage, which hasn't happened yet. And then, that takes as long as 9 months to 12 months afterward, in order to complete that regulatory approval.

As it relates to NASDAQ, you've outlined the issues appropriately. We've already been really clear that we do not control Canopy USA and that's important here. We had an accounting pronouncement that suggested that we would have to consolidate which was in which created an issue for NASDAQ, and we're now working on alternatives which would solve the concerns meaning we wouldn't have to consolidate Canopy USA into our results.

And we need to -- we need to continue to do that work. But there's a lot of activity going on around that. And, we expect that, that we'll be able to get through all of the open matters and ultimately proceed to a vote, as we said, our targeted date for that shareholder vote, which means we will have cleared all of these hurdles is in April of 2023.

[Operator]

Your next question will come from Doug Miehm of RBC Capital Markets. Please go ahead.

[Doug Miehm, RBC Capital Markets]

Good morning. Two part question. Number one, David, you did really call out today, what you see as the sector challenges in Canada, and it appears the inability to make any significant changes with respect to those unless the government makes some changes. So my first -- the first part of my question is, are there ongoing discussions that you think will be fruitful? And I'm even saying in the near term, but let's say in the midterm, that's the first part.

And then the second one was, can you comment on the medical growth, which was positive this quarter? And if this is a function of taking share from other groups, or this is a function of the medical business overall, growing perhaps a little bit faster than everyone believes?

[David Klein, CEO]

Yeah. So starting with the Canadian regulatory situation looked at the legal industry was built on the back of a call for harm reduction. That's kind of different from maybe building the industry around economic development and generating tax from this industry, which has an underlying rate of consumer participation, right.

And so I do are there are there any things that would or there anything's going, anything going on that would affect that the industry in the near term? I don't think so. Which is why we made the changes we made today so that we would have a business that's right size for the industry as it sits today. I do believe however, over time, the Canadian government will continue to try to understand how they need to adapt the regulatory regime.

So that cannabis can be the economic development engine that we all started to experience, immediately post legalization in Canada. So I think it'll take a long time, as I said, in my script, which is why we made the changes to adapt our business for the realities of the market that we sit in today versus where the market could go in the future.

[Operator]

Your next question will come from Aaron Grey of Alliance Global Partners. Please go ahead.

[Aaron Grey, Alliance Global Partners]

Hi, good morning, and thank you for the question. So for me, it's wanted to talk a little bit about BioSteel. So you talked about expected growth to come back next quarter, but look for grow quarter-over-quarter wanted some more color their 34% ACV. I believe that matches last quarter.

So if you could provide some line of sight into the magnitude of timing, timing of additional distribution and maybe some ACB targets over the next 12 months to 18 months? That'd be helpful. Thank you.

[David Klein, CEO]

Yeah, I think the thing that's exciting about BioSteel is you see it, particularly anybody that lives in Ontario, you can really see the gains that are taking place at retail, and just the general availability of the brand in the marketplace. And so when we work with retailers, but in particular, when we work with distributors between us and retailers, there can be lumpiness in terms of reported revenue.

But what I think is interesting is are the stats that I called out on my prepared remarks where we're just under 14% market share and convenience and gas channel in Ontario, where scan sales in the US up by 157%. I think it's that kind of consumer takeaway activity that ultimately drives revenue growth. And in overtime that cuts through the lumpiness that you get in forecasting reported revenue based upon shipments to distributor.

So I think -- I think you have to, so instead of putting targets out there, I think you have to just keep looking at the consumer takeaway data because that's going to determine, obviously, where the brand ends up in the medium term.

[Operator]

Your next question will come from Matt Bottomley of Canaccord. Please go ahead.

[Matt Bottomley, Canaccord]

Yeah. Good morning, just a follow-up for me, with respect to the BioSteel commentary you just made, with the margin profile of the overall company on an unadjusted basis dipping back into negative territory, there's a few things called out in the press release. And one of them was some write downs with respect to age, inventory and BioSteel. So I don't expect that's a material element of it. But if you could just maybe give us some idea of the magnitude?

And then just the dynamic given that, you know, outside of the timing of shipments, when you look at this business on a six months smooth basis, or just sort of year-over-year, growth is certainly continuing to -- to be a theme for that brand. So just the sort of rationale behind why there's aged inventory requiring right down at this point.

[David Klein, CEO]

Yeah, I'll have Judy handle that. But I first want to actually build a little bit of a bridge where Judy called out in her script that we expect that this brand achieves industry, kind of standard margins for the brand, which would, which would really put that into the high 30s, low 40s kind of percent over time.

And that was the driver behind our purchase of the Verona facility, which allows us to control more of the supply chain for BioSteel, I think there are some cost savings to be had as we get scale from distribution costs, which on a per unit basis are quite high in a nascent brand, but shrink very quickly as you start to get scale.

We think that we can do some more work. This is a good price point -- high price point really in the category. So there's a lot of margin available to us, we have to make sure we continue to do a good job of managing that kind of gross to net margin erosion that happens when we go into retail. And in there's the team at BioSteel, especially post-closing on the Verona facility are laser focused on showing consistent improvements in that margin on its way to those industry standard margins.

And yeah, there's some noise in the near term that Judy can comment too, but we think we have a very well defined path to industry margins that go along with the top line growth we've seen in the brand.

[Judy Hong, CFO]

Yeah. So just in terms of the gross margin suppliers steel Matt, so in Q3, we think roughly about a 5 million impact as relates to some of the inventory situation and that has impacted the negative gross margins of BioSteel. And to be clear, this is really related to the inventory bill that we had previously built.

And, I think in when you go back a year ago, we talked a lot about the lumpiness, again, in terms of the sales and distribution loading is happening slower than we had anticipated, particularly in the US market.

So this is really a result of that historical inventory build that we had in the BioSteel. And if you kind of look at Q2 BioSteel margins or year-to-date, gross margins for BioSteel, that's probably more reflective of the margin profile on today's faces.

And to David's point, as we bring production and house with the Verona facility acquisition and all the other initiatives to drive gross margin improvement and as sales scale up we expect BioSteel gross margins to mirror sort of that industry standard margins for a beverage company.

[Operator]

Ladies and gentlemen, unfortunately, that is all the time we have today for questions. So I will turn the conference back to David Klein, for any closing remarks.

[David Klein, CEO]

Yeah, thanks again for joining us today. The changes we announced today well difficult they're necessary not only for us to reach profitability, but to sustain our business over the long term. We continue to believe Canopy has significant opportunity ahead both in Canada and the United States.

And today's actions coupled with our strategy for US entry will ensure we're able to realize this. Investor Relations we'll be available to answer any questions that you have over the rest of the day. And again, thanks for joining us and have a good day everyone.

[Operator]

Ladies and gentlemen, this concludes Canopy Growth third quarter fiscal 2023 financial results conference call. A replay of this conference call will be available until May, 8th 2023, and can be accessed following the instructions provided in the company's press release is issued earlier today. Thank you all for attending today's call and enjoy the rest of your day. You may now disconnect your lines.