Canopy Growth - Earnings Call - Q2 2026

Executive Summary

• Q2 FY2026 delivered net revenue of $66.7MM CAD (+6% YoY), consolidated gross margin 33% (+800 bps QoQ), and adjusted EBITDA loss of $3.0MM CAD, reflecting disciplined cost control and sequential margin expansion.
• Canada adult-use and medical cannabis segments were strong (+30% and +17% YoY, respectively), while international declined (-39% YoY) due to European supply chain challenges; Storz & Bickel revenue decreased 10% YoY but margins improved to 38%.
• Balance sheet strengthened: cash and equivalents of $298.1MM CAD exceed total debt by ~$70MM, and US$50MM of term loan prepayments in Q2; management stated going-concern doubts have been resolved.
• Against S&P Global consensus, Q2 FY2026 EPS beat (actual ~$0.00 USD vs est -$0.13 USD) while revenue missed (actual ~$47.9MM USD vs est ~$51.6MM USD); expect estimate revisions focused on margins and Canada momentum rather than international [Values retrieved from S&P Global]*.
• Near-term stock catalysts: resolution of going-concern, positive EPS surprise, ongoing Canada mix/innovation, and clarity on Canada veteran medical reimbursement proposals; watch international stabilization and tariff impacts on Storz & Bickel.

What Went Well and What Went Wrong

What Went Well

• Canada adult-use net revenue rose 30% YoY to $23.94MM CAD, driven by Claybourne-infused pre-rolls and new Tweed/7ACRES all‑in‑one vapes; CEO: “continued momentum in Canada adult‑use cannabis... and a disciplined approach to strengthening our balance sheet”.
• Canada medical net revenue grew 17% YoY to $21.82MM CAD, supported by insured patient growth and expanded assortments; DOJA facility dedicated to medical craft supply under Spectrum reinforces strategy.
• Gross margin expanded QoQ to 33% consolidated (from 25% in Q1), with cannabis margin up to 31% (from 24%); CFO cited price increases, mix, and cost improvements as drivers.

What Went Wrong

• International cannabis net revenue fell 39% YoY to $5.09MM CAD due to European supply issues and internal process gaps; management expressed disappointment and outlined a daily-oversight plan to fix GMP supply and logistics.
• Consolidated gross margin decreased 200 bps YoY to 33%, pressured by lower-margin international sales and inventory provisions despite Canada strength.
• Storz & Bickel revenue decreased 10% YoY to $15.83MM CAD as prior-year device momentum faded and macro uncertainty persisted; tariffs continue to pressure profitability despite cost actions.

Transcript

Operator (participant)

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. Currently, all participants are in a listen-only mode. I will now turn the call over to Tyler Burns, Director of Investor Relations. Tyler, you may begin the conference call.

Tyler Burns (Director of Investor Relations)

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 GAAP measures are included in our earnings release. Please note that all financial information is provided in CAD 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.

Luc Mongeau (CEO)

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. Key highlights include a 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 eye-on-time, eye-in-full-fill rates across key accounts, reinforcing our reliability with retail partners. For a six-month 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-harvest 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 British Columbia Georgia site became an exclusive medical cultivation facility, producing craft and small-batch cannabis dedicated to Spectrum patients. Georgia is also exclusively 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 reimbursements. In international markets, frankly, I'm disappointed with our performance during the quarter, where net revenues declined CAD 3 million. Performance in Europe was primarily the result of supply constraints and internal process challenges. Flower stores 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 VZ Vaporizer was received with great enthusiasm by consumers globally and generated early sales momentum, helping contribute to sequential quarter-to-quarter revenue growth. While the VZ only contributed to three weeks of performance during the quarter, we're seeing positive signals into Q3, and together with holiday seasonality, I 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 CAD 21 million in annualized savings, surpassing our CAD 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 investment 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, an expanded product lineup at Storz & Bickel, and a clear action plan on the way 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.

Tom Stewart (CFO)

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 CAD 298 million of cash and cash equivalents as of September 30, 2025, which exceeded debt balances by CAD 70 million. During Q2, we prepaid $50 million on our senior secured term loan, capturing roughly $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 CAD 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 therapeutic 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, 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 CAD 16 million, up 5% sequentially, driven by strong consumer demand for the new VZ Vaporizer. Year-over-year, revenue declined 10% as the prior year period benefited from strong Venti 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 Plus 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 CAD 21 million in annualized savings, exceeding our initial CAD 20 million target. We are continuing to identify and implement additional cost reductions to further improve our structure, 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 CAD 19 million in Q2 fiscal 2026, down from an outflow of CAD 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 2026, 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 2026. In our cannabis business, we expect improved performance in our Canada adult-use channel over the remainder of fiscal 2026, driven by a robust innovation pipeline, a 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 2026. In international markets cannabis, we are focused on stabilizing and realigning operations in Europe. For the remainder of fiscal 2026, 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 2026, driven by the successful launch of the VZ at the end of our second quarter, as well as strength coming from the holiday selling season.

However, the year-over-year 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 2026, 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 2026, 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.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. We do ask that you please limit yourself to two questions. Should you have additional questions, you may press star one again to rejoin the question queue. The first question comes from Bill Kirk at Roth Capital Partners. Please go ahead.

Bill Kirk (Managing Director and Senior Research Analyst)

Good morning, everybody. 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? Is the solution going to be more costly than the prior product path into the German market?

Luc Mongeau (CEO)

Good morning. Thank you for the question. Let me just give you a bit more context, Andy. I have been in the business for nine months. We pretty much started the transformation on the organization on day one. I am thrilled overwhelmingly with everything that is happening in the business, and we see it in the results today. We are driving growth in the Canadian medical and adult-use business. Margin is improving sequentially. Cost control, we are well ahead of targets and chasing for more. Our supply chain is improving. As I said, Europe, sadly, I am disappointed, and I thought we would be ahead in the transformation. That being said, we are on it. We have moved to, as I mentioned, a daily management oversight of the situation. We are retooling the route to market end-to-end, and we are making significant progress. Let me get now to the specifics of your question.

We're retooling to a place where we will be able to satisfy European demand for the foreseeable future from our Canadian GMP facilities. Tom, please feel free to jump in when I'm done, but I do not see any increases in the cost of the flower that we will be providing to Europe. We should be able to achieve superior margin there in the quarters to come. As I see us, the outlook for me is a much stronger position as we exit the fiscal year. Tom, anything to add?

Tom Stewart (CFO)

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. We also need to make sure we have a proper supply coming out of Leamington, but overall, this is a story of execution, and Luc and I are managing this quite closely.

Luc Mongeau (CEO)

Absolutely. 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.

Bill Kirk (Managing Director and Senior Research Analyst)

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

Tom Stewart (CFO)

Yeah. 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 acting prudently with those proceeds.

Operator (participant)

The next question comes from Aaron Gray at Alliance Global Partners. Please go ahead.

Aaron Grey (Managing Director and Head of Consumer Research)

Hi. Thank you for the questions. First question for me, just wanted to double back a bit on international. I know we've talked about it in the past. I just wanted to bring it up again in terms of your current supply chain. Are they still happy with some reliance on third-party products? So 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 product to sufficiently meet the potential demand in international markets? Thanks.

Luc Mongeau (CEO)

Yeah. Some of our—thank you for the question, Aaron, and good morning. Some of the challenges came from flower source out of Portugal. We are out of this right now. As I said earlier, we have plenty of capacity within our own Canadian GMP facilities. We are confident that we will be able to supply from our own source-grown flower. We are not writing off having third-party flower in the future, but right now, we are really retooling the entire route to market with our own grown flower, which we have enough capacity for the foreseeable future.

Aaron Grey (Managing Director and Head of Consumer Research)

Okay. Great. Thanks for that, Luc. Second, you made some nice progress on the profitability. 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, your fiscal year either back half or front half of 2027? Thanks.

Tom Stewart (CFO)

I would say, Aaron, we're controlling what we can control. Right now, the cost savings measures we're taking we know will empower us to get to an improved adjusted EBITDA performance. I think it's too early to speculate at this point in terms of when that would be, but I think, as you can see from the results, this has been our strongest quarter, albeit a loss. It's our narrowest loss that we've had to date in my recent memory. I think the changes we're making in the organization is going to fully support that, and we'll keep pushing as much as we can here.

Luc Mongeau (CEO)

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

Operator (participant)

Ladies and gentlemen, as a reminder, if you have any questions, please press star one. The next question comes from Federico Gomez at ATB Capital Markets. Please go ahead.

Frederico Gomes (Director of Institutional Research and Life Sciences)

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

Luc Mongeau (CEO)

Good morning. 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?

Tom Stewart (CFO)

Yeah. Thanks for the question, Fred. Yeah. We believe our footprint, primarily with our cultivation in Kincardine, is sufficient to meet our needs. A lot of the focus and investment that we're making is really to improve our yield and the quality of our flower coming out of that facility, but we wouldn't expect a significant amount of additional capital investment needed to meet the demand. I think, again, it's executing with the assets that we have and improving utilization across the board.

Frederico Gomes (Director of Institutional Research and Life Sciences)

Thank you. Just a second question, just on the, I guess, related to that balance sheet now in that cash position. Obviously, you have access to capital, and you're in a good position here, but I guess if you could talk about the capital allocation priorities that you have now that you have no significant leverage to that. Thanks.

Tom Stewart (CFO)

Yeah. From my view, Fred, the CAD 300 million of cash with no near-term debt obligations 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 the market conditions fluctuate. As we all know, cannabis is a highly volatile space. I think for right now, we're evaluating potential creative 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.

Operator (participant)

Thank you. The next question comes from Pablo Zuanic at Zuanic & Associates. Please go ahead.

Pablo Zuanic (Managing Partner)

Thank you. Good morning, everyone. Luc, I will ask my two questions upfront. One, on the vape launch. I mean, obviously, the Claybourne launching pre-rolls has been very successful. Can you give more color in terms of the vape launch? Is it just in all-in-one? Are you also planning in 510 cartridges? Are we talking all-in-ones just in distillates or also live resin or live rosin, liquid diamonds? If you can just give more color on how you think about the category, especially in terms of room for innovation and also the price competition there, there has been a bit of a race to the bottom, it seems, on all-in-ones. That is in terms of vape. My second question is more in terms of the US business.

I know that you've said, Luc, the US is more of a long-term opportunity, and I understand that, but it would help if you can give an update in terms of where things stand with Canopy USA, especially in terms of any help you've had to give to Acreage in terms of a balance sheet or guarantees. I think in the past, the company bought debt from AFC Gamma. I don't know what's happened recently, the June quarter or September quarter, in terms of helping Acreage operate, especially from a balance sheet and cash flow perspective. Thank you.

Luc Mongeau (CEO)

Hey, good morning. Hope you're doing well. Let's start with the vapes, and Tom will jump in for the US. We're thrilled with the early results we're getting with our all-in-one. As I mentioned, we launched Tweed, 7ACRES. We did really well. We actually ran out of stock, so we had to accelerate replenishment of first wave. As I mentioned, we're about to launch Claybourne in all-in-one vapes as a first entry. We're very encouraged by the gross margins that we're able to achieve with these products. We're putting out their product of superior quality. We're pricing them appropriately. They've been marginally accretive for us. As it comes to the full spectrum of live resin and so on, distillate and liquid diamonds and everything, there's more developments that will come there. We're committed to being a leader in all-in-one vapes.

It is a key market, key growing market. More news to come there. Make sure to try the new Claybourne all-in-ones as they come out. I was able to sample them this week, and it's what we stand for: superior, elevated experiences with quality products, and those deliver on all of that. Tom, you want to give some insights about the US?

Tom Stewart (CFO)

Yeah, sure. Pablo, a couple of points within your US question there. There are no guarantees between Canopy Growth and Canopy USA. 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 US space. To be clear, there is no funding, new or otherwise, with Canopy USA and Canopy Growth.

Operator (participant)

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.