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

Great. Thank you, Carol, and good morning, everyone. Thank you all for joining us today. On our call today, we have Canopy Growth’s CEO, David Klein; and our CFO, Mike Lee. Before financial markets opened today, Canopy issued a news release announcing our financial results for our first quarter ended June 30, 2020. This news release is available on Canopy Growth’s website under the Investors tab and will be filed on our EDGAR and SEDAR profiles. Before we begin, I would like to remind you that our discussion 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 that’s included at the end of this morning’s news release. Please review today’s earnings release and Canopy Growth’s reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from the projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release furnished to the SEC and Canadian securities regulators. Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remarks by David and Mike, we will conduct a Q&A session, during which questions will be taken from analysts. To ensure that we get to questions from as many as possible, we ask the analysts to limit themselves to one question. With that, I’ll turn the call over to David. David, please go ahead.

Thank you, Judy, and good morning everyone. I hope that you and your families are keeping safe and well. Although we’re still navigating through a global pandemic, I’m proud of how Canopy has responded to the challenges during this period. Since the last time we spoke, we’ve seen our nation’s rally behind social justice and racial equality, which has placed the spotlight on the challenges we face as a society as these deep racial divisions are exposed. Our thoughts and prayers go out to all of those who have been impacted by racial injustice and associated acts of violence. Canopy recognizes our responsibility to do more to increase the representation of black, indigenous and people of color employees at every level in our organization, while investing in social justice initiatives such as providing access to legal services for communities disproportionately impacted by the cannabis prohibition. Our purpose at Canopy is improving lives, ending prohibition and strengthening communities. Recently, I signed the BlackNorth CEO Pledge to ensure that progress on this issue continues to be a top priority for our company. The goal of the BlackNorth CEO Pledge is to address systemic racism in the boardroom, and includes having at least 3.5% of executive in board roles in Canada held by black leaders by 2025. I see this as a vital initiative for Canopy, given the disproportionate impact cannabis prohibition has had on people of color globally. In fact, as political pressure begins to build for cannabis permissibility in the US, I’d like to reiterate the case for an updated federal stance on cannabis. At a time when millions are marching to dismantle systemic racism, federal cannabis legalization would represent an important departure from the decades old war on drugs, which caused unfair rates of incarceration among minorities. We’re also facing a recession caused by COVID-19. It’s estimated that the illegal sale of recreational cannabis in the US, if legalized in all 50 states today, would generate more than CAD 175 billion by 2025 in federal sales, business and payroll taxes, and add nearly 1.6 million jobs by 2026. There is no question that our industry can be a key driver of the United States economic recovery when we gain control of the pandemic and begin to restart the economy. Congress seems to have recognized the same potential that we see in cannabis with bills like the MORE Act, and with momentum growing across both sides of the aisle. It’s our vision to unleash these enjoyable and remarkably safe products for adults to consume in a responsible manner. As we expand our presence in the US, we’ll continue to contribute our knowledge in partnership with the appropriate regulatory bodies in order to ensure safe and effective standards are implemented. Now, let’s discuss the progress we’re making at Canopy in our quest to create a cannabis-focused leading CPG company. There are four key themes that Mike and I would like to focus on this morning. First, Canopy is improving execution and nimbleness in Canada. We’ve quickly completed a rollout of our value flower strategy. We’ve significantly improved our customer order fill rates. Our Cannabis 2.0 portfolio continues to gain momentum. And we’re adapting quickly to the changes in the marketplace and competitive dynamics. Second, we’re improving our quality. We’ve enhanced the moisture content of our flower products, and we’ve launched a number of research initiatives to further improve our flower quality. Our commercial team continues to engage with bud tenders and staff at retail stores to drive increased awareness of our quality initiatives. And consumer feedback on the quality of our cannabis beverages continues to be very positive. Third, we’ve got a number of exciting developments happening in the US market. We launched our new ecommerce site shopcanopy.com in the US. Our First & Free brand has expanded into topicals and creams. And BioSteel ready-to-drink beverages in Tetrapaks are now available, just to name a few. And finally, we continue to focus on financial discipline while also investing for future growth opportunities. Let me tie these themes and provide details on the progress we’re making to the key strategic priorities I laid out during our Q4 investor call and reinforced during our virtual Investor Meeting. We said we’re building a world-class consumer-centric and innovation-driven company. So, let me give you a few examples of the progress we’re making here. We’ve completed a nationwide repositioning of our Twd. flower, including changes to price pack architecture with higher and more consistent THC ranges. We’re seeing improved sales velocity and market share performance with our dollar share increasing nearly 5 points in value flower in the Province of Ontario during the latest four weeks ended July 19. I know some are concerned about the growth of the value segment and potential for further price compression in the industry. So, let me share my perspective on this. First, I think the value segment plays an important role in converting illicit sales into legal sales, which should be positive for the broader category. Second, we intend to use our consumer insights to create differentiated quality flower products, so that we can also trade up our value consumers to our mainstream and premium products. And third, our ability to compete in all price segments will help build scale, which will enhance our margins. In addition to value flower, we’re seeing the process of repositioning select mainstream and premium flower brands in the market, implementing higher and more consistent THC ranges while actively engaging with bud tenders to bring awareness of our product quality. We’ve initiated a consumer research initiative to better understand the flower consumer, including how they define overall product satisfaction and the critical elements that drive those perceptions. This will also serve as a foundation for our design-to-value initiatives. We’re implementing pricing adjustments on select vape offerings, and we’ll be refining our line-up of 510 cartridges with a more focused approach. We’re unleashing our innovation pipeline with our differentiated product portfolio as we now have four beverages in market and have achieved a number one dollar share in beverages, accounting for 74% of all ready-to-drink cannabis beverages sold year-to-date in Canada. In fact, we’ve shipped over 1.2 million units of our beverages since the end of March compared to 4.2 million units sold across all brands throughout the entire US in all of 2019. We’re on track to expand our market leadership in beverages with shipments of Houseplant Lemon and Quatreau CBD beverages in the coming months. In the US, we now have over 25 US hemp-derived CBD SKUs across our First & Free, This Works and BioSteel brands with more to come. Storz & Bickel is seeing strong consumer pull in both Europe and expanded distribution in North America behind our differentiated Volcano Classic and Hybrid vaporizers and portable vaporizers, Mighty and Crafty Plus lines. In fact, Volcano Classic is celebrating its 20-year anniversary this year, with a limited edition of gold-plated Volcano Classics in 24-carat gold. And our This Works team launched a timely innovation, Stress Check hand sanitizers. That was very well received in the UK market, which we are now bringing to the US market. The second area of our strategic focus is to win in our focused markets of Canada, US, and Germany. Here, I’d like to take this opportunity to outline a number of exciting developments in the US market, the biggest cannabis market in the world. First, we recently launched shopcanopy.com, the new ecommerce website, dedicated to a growing portfolio of US hemp-derived CBD product lines. We believe this website offers our consumers a convenient one-stop destination to explore and purchase over 25 product SKUs from brands including First & Free, This Works and BioSteel. The site will continue to feature Canopy’s new brands, including the highly anticipated launch of Martha Stewart branded CBD products, which will take place within the next month. Second, we’re very excited about the traction BioSteel is getting in the US market. BioSteel’s ready-to-drink non-CBD hydration sports drinks have been launched in environmentally-friendly Tetrapak packaging and are currently available for sale online in the US. In addition, we’re actively engaging with major retailers as we look to expand distribution of BioSteel products across the US. And finally, last week, BioSteel signed a multi-year partnership with Patrick Mahomes, a Super Bowl MVP. Patrick joins the BioSteel roster of elite athletes as a partner, and we’re thrilled to have such an influential sports thought leader on the BioSteel team. Turning to Acreage, we announced in June an amended plan of arrangement with Acreage that solidifies our path forward. We believe the updated arrangement, which must be approved by Acreage shareholders, provides cash for Acreage to develop and grow its federally legal hemp-derived CBD business, while reducing Canopy’s purchase obligation and conserving 65 million shares of Canopy Growth stock. Acreage will continue to target delivering profits and growth by narrowing its focus on key profitable operations. Canopy has already licensed Acreage with rights to certain Canopy IP, including IP related to our beverages and vapes as well as our brands as part of the original agreement. Acreage has, in fact, launched our Tweed-branded flower in Illinois, Maine, Massachusetts and Oregon. Acreage has rights to launch Canopy’s best-in-class products and brands into the US market, including our cannabis-infused beverages and we expect to hear more about this from Acreage shortly. In addition to Acreage, TerrAscend provides us with additional optionality in the US THC market upon federal permissibility. TerrAscend also owns Arise Bioscience in the US, a leader in the production and distribution of hemp-derived health and wellness products, with access to over 10,000 retail locations nationwide. The third strategic priority for us is quality execution. And we’re making progress here as we improve our execution and increase our agility throughout the organization. We’ve got a number of flower quality improvement programs underway based upon consumer insights. To name just a couple, we’re optimizing our drying processes to raise the moisture content of our flower products. And we’re also looking at maximizing aroma and terpene profiles throughout our drying and curing processes and working with sensory panels to ensure that our products align with consumer preferences. The new organizational structure is largely complete, with our product teams now organized by global product lines of flower, vapes, edibles and beverages and skincare and topicals, supported by our insights and innovation teams. The new commercial team will work closely with the product and insight teams to keep our pipeline of amazing products flowing through all of our sales and distribution channels. Our new operating model is already driving quicker decision-making and increased agility as an organization. We’ve made strides in our supply chain, ensuring that we can better fulfill our customer orders with the right products at the right time. Just to highlight a couple of examples, for our Canadian medical business, confidence in supply of Spectrum Yellow Oil is at a level where we’ve decided to reduce the cost of this medical product by 25% for patients in need. And our beverage production has increased significantly, more than doubling from June to July and is expected to nearly double again in August to ensure we keep our beverages fully stocked at retail. Finally, we’re improving our cost structure and financial discipline. Mike will provide more details in this area, but just to highlight a few examples, our head count is down more than 18% since the beginning of the year. Our total OpEx declined by 23% compared to a year ago. And we’ve reduced our cash burn by more than 50% from the prior-year period. During our virtual Investor Day in June, we provided you with key metrics to gauge our progress and I’m going to update you now on how we’re doing against those metrics. First, are we winning with the consumer is measured by market share in our core markets and net sales growth year-over-year. In Q1, we’ve maintained number two market share in Canada medical and number one market share in the German flower market. In Canada recreational, we remain top three in most provinces, however, we’re not satisfied with our current positioning. To that end, you will see continued improvement in flower quality and performance, continued optimization of our SKU offerings and product portfolio, improved sales and operational execution to ensure that we’re continuously on shelf at retail, and consumer promotional activity, which builds on the strength of our Tweed, Tokyo Smoke and Houseplant brand names. Second, are we improving our execution is measured by increases in our customer order fill rates and reducing out-of-stocks at retail. We made progress during Q1 with our supply attainment rates averaging 87% in Q1 versus 56% in Q4. In recent weeks, our supply attainment rates have risen above 90%. And our internal checks suggest we’ve reduced out-of-stock issues at retail, and we’re looking for further improvement in this area to help us gain share, as I just outlined. Mike will address the key financial metrics in his remarks. We know there’s more work ahead of us, and we continue to expect FY 2021 to be a transition year for us. But I’m confident that our renewed focus in new operating model, along with a talented team and a strong balance sheet will power our transformation into a world-class consumer-centric organization and deliver on our commitment for strong top line growth while improving profitability. And now Mike will review our Q1 financial results.

Thank you, David, and good morning, everyone. Against a volatile macro backdrop and a continued dynamic market, Canopy delivered resilient financial performance in Q1, driven by diversified revenue sources and stronger cost discipline. In Q1, our net revenue increased 22% versus prior year. And total OpEx declined over 23% year-on-year, and CapEx continued to moderate both on a year-on-year basis and quarter-on-quarter basis. Our free cash flow was an outflow of CAD 181 million, which is over 50% improvement versus prior year. And we also maintained a strong balance sheet, with CAD 2 billion in cash and short-term investments at year-end. Now, let me review Q1 performance in more detail, starting with net revenue. We generated CAD 110 million of revenue or 22% growth versus prior year. Our global medical revenue increased 54% over the prior-year period, and we’re continuing to see strong growth in both our international flower business, with year-on-year growth of 181%, and C3 with year-on-year growth of 75%, in part due to the recognition of a full quarter of revenue in Q1 of this year versus a partial quarter last year due to acquisition timing. Adjusting for the timing of acquisition, our international medical sales grew 43% on an organic basis versus year ago. Our Canadian medical business grew 19% year-over-year as we lapped last year’s supply challenges, but enjoyed higher average basket sizes in Q1 of this year, in part due to pantry loading as a result of COVID-19. But we are pleased with our continuing ability to attract and retain veteran patients. And over the past year, the number of veterans that have registered with Spectrum has increased by 77%. Revenues generated by our strategic businesses increased by 70%, driven primarily by Storz & Bickel, which grew 76% year-over-year, and the increase was driven by strong consumer pull as well as expanded distribution in the US. This Works and BioSteel performed in line with expectations in the restricted COVID-19 environment. For BioSteel, an increase in sales from our ecommerce channel was offset by a significant decline in traditional retail sales caused by the closure of many brick-and-mortar retailers in Canada due to COVID-19. But we expect improved performance from BioSteel, driven by the easing of COVID-19 retail restrictions in Canada as well as expanded distribution in the US in coming months. Our Canadian rec net revenue decreased 11% year-on-year, due in part to the restricted cannabis retail operating environment in response to the COVID-19 pandemic as well as increased competition. Our B2B net revenue decreased 10% over the comparison period last year, with sales of new Rec 2.0 products being more than offset by declines in flower and pre-rolls, driven by increased competition and decreased market share. However, our rec B2B business saw sequential improvement through the quarter, driven by four factors. First, adjustments to our cultivation planning and supply chain drove short-term improvements in our ability to fulfill customer POs, with supply attainment increasing from 56% in Q4 to 87% in Q1. And in recent weeks, our supply attainment performance has exceeded 90%. Second, the continued rollout of our 2.0 product portfolio drove 13% of our B2B net revenue in Q1, up from 2% in Q4. Third, and as David highlighted earlier, our nimbleness to react quickly to the growing value segment drove improved performance for our value brand, Twd., starting in June with further improvement throughout the current quarter. And lastly, we believe the continued pace of retail store licensing and openings in key provincial markets, especially Ontario, contributed to increased sell-in during the quarter. And total active store count nationwide grew by 130 stores in Q1 versus Q4, with Ontario seeing 61 additional stores to now over 100 stores operating. Looking ahead, we expect the pace of store openings in Ontario over the next number of months to continue to have a positive impact on the sector sell-in into that province. And the province is delivering on its commitment to license 20 stores per month, meaning we can expect an additional 100 stores to be licensed by the end of this calendar year. Moving on, we are no longer providing our kilogram sold and average selling prices as our business shifts to a more diversified product line from flower. So, let me offer you some color on price and mix impacts during Q1. Our flower B2B business saw sales decline 20% in Q1 compared to Q4, driven by a volume decline of 5% and an average selling price decline of 15%. The decline in the ASP is mainly driven by geographic mix, as product sales in Alberta were lower and product sales in Ontario were higher, as well as a migration toward higher-sized package offerings. In Q1, Twd. accounted for 40% of our flower sales, up from 26% in Q4. And we expect continued declines in ASP in the current quarter as we’ve completed our value flower price pack architecture and now are in the process of resetting prices in certain mainstream flower products. In addition, with the expectation of a large number of stores opening in Ontario over the coming quarters, we would expect this to be reflected in geographic mix shift toward Ontario that will put further downward pressure on ASPs. We plan to provide volume price/mix changes by key format beginning with our Q2 financial results. Our B2C sales decreased by 12% over the prior quarter, primarily as a result of the continuation of store closures in response to COVID-19 pandemic through mid-May. It is worth noting that since our 22 corporate stores reopened in the latter half of Q1, B2C sales have returned to pre-COVID levels. With this, let’s now move on to a full analysis of gross margin for the quarter. Gross margins at 7% was below target. The biggest driver was an estimated CAD 18 million impact related to under-absorption of fixed costs resulting from lower production output, stemming from reduced demand and our SKU rationalization activities. Our Canadian cost structure relies heavily on throughput as we have built a large-scale infrastructure. And to put this in context, we believe the current infrastructure in Canada can support growth for us to become a CAD 2.5 billion to CAD 3 billion business without much additional capital spending. We’ve already proven that we can deliver 40%-plus gross margins and are confident that we will return to that level as we work toward higher capacity utilization across our facilities. Taking beverages as an example, with the robust demand we’re seeing for our beverages, we are ramping up production and the throughput of our beverage facility has doubled in July from June, and we plan to double again in August. And based on the continuing strong consumer pull we are seeing, our beverage facility could reach capacity much sooner than expected. In addition, overall cannabis legal sales are continuing to grow as more retail stores open up and new value offerings are helping to convert the illicit market. And as we capture our fair share of this industry growth, we expect further improvement in utilization of our facilities. In the meantime, we have a number of initiatives underway, both in the short term and the medium term that we believe will further bolster our margin performance. In the short term, we’re looking at ways to reduce our variable costs, including labor. In the medium term, we are focused on further optimizing production through a full end-to-end strategy that looks at people and process, technology and infrastructure that we believe will lead to best-in-class margins over time. And we plan to share details of this project at our next earnings call. Q1 margins were also negatively impacted by an estimated CAD 11 million charge related to manufacturing variances, which included out-of-spec production that did not meet new targeted THC ranges. In the quarter, we also recognized an inventory provision of CAD 5 million based on revised forecasts relative to our inventory holding policies. Now, let me briefly cover our operating expenses. Overall, SG&A decreased by 7% over the comparison period last year. Sales and marketing expenses decreased 25% year-on-year and 44% quarter-on-quarter, driven by a couple of factors. First, marketing and promo expense declined by over CAD 10 million versus the prior year due to delayed or canceled activities as a result of COVID-19 as well as elevated spending from last year to capture retail space. Second, compensation expenses increased year-over-year due to higher US investment, but Canada compensation expenses decreased due to head count reductions. And relative to Q4, compensation expenses declined by CAD 4 million, following our corporate restructuring actions and the temporary furlough of corporate retail staff due to the closure of our corporate stores. G&A costs increased by 2% year-over-year but decreased 18% quarter-over-quarter, due in part to a decline in professional fees, lower facility expenses and lower travel costs. R&D expenses increased 61% year-over-year, mainly driven by research studies that did not begin until Q2 of last year and increased activities to support Cannabis 2.0 product development. R&D expenses decreased by 34% quarter-on-quarter as we are now reallocating our R&D efforts to focus on projects that have high commercial return potential, with less emphasis on pharmaceutical-driven clinical trials. Stock-based compensation expense in Q1 decreased 63% versus prior year to CAD 28.6 million, in part due to the forfeiture of options resulting from staff reductions that occurred during the quarter. Stock-based compensation is expected to increase to approximately CAD 45 million in Q2 as forfeitures are not expected to occur at the same level. Next, I would like to discuss free cash flow. Our free cash flow in the first quarter of fiscal 2021 was an outflow of CAD 181 million, which is over 50% improvement compared to the prior year. Our working capital declined year-over-year due to lower inventory levels. And importantly, we ended the quarter with inventory of CAD 389 million, slightly down from the prior quarter. And while we have more work to do, we believe this demonstrates our effort over the past few quarters to better align our supply and demand. CapEx declined to CAD 62 million, down both on a year-on-year basis and a quarter-on-quarter basis. As you can see in our quarterly results, we are making progress against our key financial metrics that we presented at our June Investor Meeting. On profitability, we delivered a reduction in SG&A load as a percentage of sales, while we are working to get back to our 40% gross margin target. And on cash flow, we achieved a decline in both working capital and capital expenditures. Before I close, I would like to offer a few key factors to consider on Q2. First, from a net revenue standpoint, we expect gradual improvement in our Canadian rec business as store openings in Ontario should provide continued tailwind. Our strategic businesses should continue to see solid growth from a new product launch and expanded distribution, while we expect Storz & Bickel to see more normalized growth in the second quarter. Secondly, we expect our gross margins to continue to be pressured by under absorption of fixed costs in the near term and believe Q2 margins are likely to come in below 20%. Third, while we expect a sequential pick-up in marketing expenditures and trade promotion activities as COVID-related restrictions are lifted, we expect to see additional benefit from reduced head count as we complete our organizational review in coming months. So, to summarize, we are progressing against our strategic priorities, we remain focused on strengthening our commercial and operational execution, while maintaining our financial discipline. This now concludes my review of Canopy Growth’s financials for the first quarter of fiscal 2021. Operator, David and I would be happy to take questions from analysts.

Thank you. [Operator Instructions] Your first question comes from Vivien Azer from Cowen. Please go ahead.

Hi. Thank you. Good morning. I wanted to focus on your outlook for pricing. David, you noted some price realignments on vapes and then layered on top of that, obviously, the value launch. So, as we think about kind of the evolution of pricing, we’ve got a couple of negative mix drivers. Just trying to think about kind of order of magnitude, where you think you’re going to see the most pressure on the top line from the price [ph] deflation (00:33:29) that you discussed? Thanks.

- : - : - :

Thanks. And if you could just comment on the vape price adjustments that you mentioned?

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That’s helpful. Thank you.

Your next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.

Yeah. Thanks. Good morning. Thanks for the question. I wanted to touch on the new high THC hurdles that you set on your product quality for flowers. So, when I think about your current [ph] grow (00:36:13) assets many are quite large and some are quite labor-intensive. And I think the focus for the company previously had been using cannabis as an ingredient for 2.0. So my question is, I mean how can these facilities, I guess, meet the new high THC hurdles that you’ve set for flower consistently at scale and do it at better margins than you’re doing now, particularly if pricing pressure continues to intensify?

- : - : - : I asked them to increase quality so that we can improve consumer pull over time and that includes the THC component, and the team has responded well. But it takes a while for that to pull-through at retail. So, you’re not even necessarily seeing the results of the work that we’ve done on shelf at retail yet. And then I asked them to give us a strategy to get us to best-in-class margins. That work is still underway. And as Mike mentioned, we hope to have some things to talk about on our next earnings call. - : - :

Yeah. I think really looking at the 7% gross margin reported in that quarter, I think it’s easy to bifurcate out between volume impacts on lower production volume versus extraordinary activities that come back to execution. And the 7% is really a reflection of around CAD 18 million of fixed cost absorption tied to lower volume than originally planned for the year. And when you adjust for that and look purely at what should have happened for the quarter just based on those impacts, that brought us to around 17% or 18% margin for the quarter. And we think that’s a good proxy of what to expect over the next quarter or so. As volume starts to ramp back up, we see a clear path to getting back to the high 30s that we demonstrated for Canada back in Q4. The other thing that dragged our margin down is really just executional items. So, getting our pack dates right, so that we can ship product with enough shelf life before it goes to the province. There were some production challenges in terms of getting the phasing of production lined up in such a way that allowed us to provide for adequate shelf life. So, it gets back to what David’s talked about countless times, which is we’ve got to have the right quality and quality is the function of just not THC level and terpenes, but it’s also going about to have the right shelf life remaining. And that’s where the complexity of our operation comes into play, and this is where the SKU rationalization is really providing us with a much simpler framework to run our supply chain off of. So, my view is when you look at the supply chain in Smiths Falls, we clearly have a large scale facility and as this business matures, as the industry matures, the fixed cost leverage that we’re expected to see here, provides us not just runway to 40%, but we see going north of that over time.

Thank you. Very helpful.

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

Good morning. I just wanted to ask and kind of pursuing the amendment with Acreage, I appreciate the potential reduction in dilution for Canopy and the downside protection here. But the disclosed business plan from Acreage suggests just 1% of the US market below your kind of 10% to 15%. I guess given the interest by Canopy in pursuing other options along not much work done to-date by Acreage, could you help us understand the incremental commitment here of at least CAD 87.5 million versus kind of letting this agreement run its course and potentially having full flexibility to pursue other options? Thanks.

Look, we think that Acreage, by their own admission, isn’t where they want to be. They have a really strong plan to correct those shortcomings, and we feel pretty good about that plan. I’d also say, Andrew, that the original transaction left very little wiggle room in terms of outs. And so, it wasn’t as simple as letting it play out and walking away. - : - :

Thanks. I’ll pass it on.

Your next question comes from Bryan Spillane from Bank of America. Please go ahead.

Hey, good morning, everyone.

Hey, Bryan.

I wanted to follow-up on Vivien’s question earlier just about value and pricing. And I guess what I was thinking about was just you think about the value offering getting into the market, how do we think about just how much of that will lift in market share, right? So, taking share from the illicit market. And then how much of that might be offset from a trade down from the more value-added product into the value segment? So, I’m just trying to get an understanding of just what that trade-off might be between gaining share but also potentially it cannibalizing your existing business?

- : I also think that we’re in our infancy as an industry, Bryan, in terms of trading consumers up and talking to them about the differences in experiences and quality that happens at different price points, and then demonstrating that with the products that we have in the marketplace. - : - : - : - : - :

All right. Thanks, David. I’ll pass it on.

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

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Yeah, Pablo, good question because there are something like 2,700 brands of CBD in the US, right? So, there are a lot of products out there. I think what we have the ability to do by using brands like Martha Stewart, by using brands like even BioSteel as it begins to gain traction and This Works as it gains traction in the US and First & Free, we have the ability to make sure that we get in front of the consumer to talk about our brands. - : So, we think there’s an opportunity for the leaders in the space that have high-quality products and have the ability to kind of penetrate the consumer consciousness with names like Martha Stewart, we believe that there’s a way to build a bit of a moat around ourselves and to create differentiation against the 2,700 brands that are in the space. And the other point that I would add to that is as we look to engage with major retailers, as the FDA works its way through its process and opens the door so that the major retailers come into the space, we’re getting a lot of mindshare from them because of who Canopy is and our connection with Constellation Brands. And then we bring in things like the Martha Stewart brand name and the This Works brand name, we believe that we’ll be able to get a leg up on the competition that at this point is just throwing those 2,700 brands kind of against the digital wall, if you will. - : So, we think there’s an opportunity for the leaders in the space that have high-quality products and have the ability to kind of penetrate the consumer consciousness with names like Martha Stewart, we believe that there’s a way to build a bit of a moat around ourselves and to create differentiation against the 2,700 brands that are in the space. And the other point that I would add to that is as we look to engage with major retailers, as the FDA works its way through its process and opens the door so that the major retailers come into the space, we’re getting a lot of mindshare from them because of who Canopy is and our connection with Constellation Brands. And then we bring in things like the Martha Stewart brand name and the This Works brand name, we believe that we’ll be able to get a leg up on the competition that at this point is just throwing those 2,700 brands kind of against the digital wall, if you will.

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Yeah. We’re encouraged by what we’re seeing in Q2. The consumers are coming back to the stores. The number of trips are going up when we look at our own corporate retail. Dollars per transaction is up, partially due to continued stock-up activity, but as consumers are trying Cannabis 2.0 products, they’re actually spending more at retail. So, a lot of the fundamentals are strengthening across all of our corporate stores. And then more broadly, we think a lot of those trends are extending to the broader market. Just more trips and consumers are continuing to spend more per transaction. When we look at our own performance, a lot of it comes back to our fill rates that we talked about earlier. We are approaching our 95% fill rate, and that was a lost opportunity for us that we spoke about at our last call. And this is just a testament to the work that we’ve done operationally to really build in that muscle tissue to allow us to react to purchase orders as they come through on a much faster cycle time. So, look, there’s still lots to be done in terms of getting our fill rates up, getting in-stock rates up, a lot more stores need to be added to really mature this market, but we think Q2 is off to a good start.

Your next question comes from Matt Bottomley from Canaccord Genuity. Please go ahead.

Good morning. Thanks for taking the questions. Just curious if you could comment a little more on where you see the beverage market going, particularly in the Canadian market for THC-infused. Given what we’ve seen in the US, it’s a very small percentage of the market share for these sort of 2.0 type products, but it’s not really formulated product down there. So, I guess, two parts to the question. One, where is the market right now with respect to the percentage of the overall retail dollars that we’re seeing? I imagine, it’s still pretty nascent, but just curious if you have a range of what percentage beverages are. And where do you see that going relative in the US, given that you’ve started on a pretty good foot year-on-year rollout?

Yeah, so, Matt, I’ll take part of it and Mike can fill in maybe where I miss because as a recovering beer guy, I love the trends that we’re seeing in the drinks market in Canada. We’re still sourcing a majority of our consumers from existing cannabis users, which makes a lot of sense, right? Because you have to make a decision to go into a dispensary and buy the product and take it home. We’re getting all kinds of anecdotal evidence of people bringing it home and finding that that typically ends up being the mother-in-law, but like the mother-in-law is trying the product hasn’t been a cannabis user, decides that it makes them feel great and maybe they’re sleeping better than they ever have in the last 10 years, right? And so, they’re starting to order from some of the web delivery platforms like an OCS. We’re hearing all kinds of stories like that. - : - : - : - :

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And by the way, we’re not done, right? So, we have more drinks coming to market, and our innovation team is working like around the clock to understand what is the next version, what is the next iteration of our drinks product so that we continue to stay ahead?

That’s all very helpful. Thank you. And has the government come back at all with [indiscernible] that are in these beverages? Because I would guess that you can’t really start selling [indiscernible] things until that gets amended?

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We’re working on it. Yeah.

Thanks.

Your next question comes from John Chu from Desjardins Capital Markets. Please go ahead.

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Yeah, John. So, look, what we’ve been pleasantly surprised by is stores continuing to open even during a pandemic. And our latest estimate is that by the end of calendar year, we could be in excess of 1,200 stores across Canada. So, we’re continuing to ramp up for that. As we dial in our supply chain and continue to perform in terms of PO fulfillment, as we continue to perform in terms of Cannabis 2.0 execution, more beverages, more chocolates, more vape out in the market, as we continue to round out our value offerings and as we continue to improve quality across the board, we see a lot of tailwind heading into the next six to nine months. What we don’t know is what the outcome of the pandemic is going to be. And we know that there’s potentially some solutions coming over the next six to nine months but in the meantime, this has been a pretty good defensive play. Consumers are still spending on cannabis. And with more stores coming, we think that’s going to continue to open up the market. And I know that there’s lots of questions around the future of pricing and value and all of that, but we believe that it’s growing the market, and we believe that we’ve got the production capability that’s going to demonstrate real strong potential as we build toward that market. So, all signs are good for Q2. And balance of the year is really just going to be a function of those stores continuing to open.

Your next question comes from Doug Miehm from RBC Capital Markets. Please go ahead.

- : And then related to that, what I’m curious about is, is it more important for the company to fill its cultivation sites in terms of absorption, that CAD 18 million? Or is it more important to fill the drinks distribution and manufacturing site?

Yeah. Look, I’ll take a stab at this, and David, you can jump in. So, two things, on market share, we are seeing improvements in market share. Quite generally, I would say, we hit a trough in the April, May timeframe. And as we look at recent trends on share across the provinces that we can actually calculate market share for, we do see an uptick across Canada in terms of Ontario, Quebec, Alberta, BC. And we’re confident that that uptick is going to continue for all the reasons I cited at the last question. In terms of utilization of facilities, it’s an interesting situation in Canada today because so many LPs have such a surplus across their system. We’ve taken the steps of getting our supply chain in balance. And we know that in the short run, that might impair our gross margin performance as we experience lower utilization levels. And we also know some of our competitors are taking a different path, which is still continuing to operate at high utilization levels, but producing perhaps three or four times their sales each quarter in their harvest, which puts all that on their balance sheet, and that’s going to come back at some point in terms of surpluses. So, we feel good and that we’re balanced from a supply and demand perspective, we know that we’ve got continued opportunity to continue to improve our margins, and we think the priority right now is to maintain a balanced supply chain versus just filling up facilities to keep our economies of scale going. So, that’s the path that we’re taking. And again, we continue to believe that the next six to nine months for this industry are going to be very positive in terms of store counts. Cannabis 2.0 continues to build interest in this space, and we think that we are well positioned to take advantage of that over the next six to nine months.

This concludes the question-and-answer portion of the call. And I would now like to turn it back to Mr. Klein for final remarks.

Yeah. Thank you again for joining us. We look forward to sharing further progress in the coming months. In the meantime, I hope all of you will try our amazing products, visit our Tokyo Smoke and Tweed stores, explore our shopcanopy.com website. From there, you can go to our BioSteel and This Works website. There are just some truly amazing products out there, and we hope that they will help you understand the future of Canopy and the future of cannabis. So, I encourage you to do that. Our Investor Relations team will be available to answer any additional questions. Have a great day, everyone.

This concludes Canopy Growth’s first quarter fiscal 2021 financial results conference call. A replay of this conference call will be available until November 8, 2020, and can be accessed following the instructions provided in the company’s press release issued earlier today. Thank you for attending today’s call, and enjoy the rest of your day. Good-bye.