Canopy Growth Corporation Stock

Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's First Quarter Fiscal 2027 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to John Vincic, Investor Relations. John, you may begin the conference call.

Thank you, operator, and good morning, and thank you to everyone for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart. Prior to the opening of financial markets today, Canopy Growth issued a news release announcing the financial results for its first quarter ended June 30, 2026.

The news release and financial statements have been filed on EDGAR and SEDAR and will be available on the 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 Canadian dollars unless otherwise stated. Following remarks by Luc and Tom, we will conduct a question-and-answer session, where we will take questions from analysts. And with that, I would like to turn the call over to Luc.

Thank you. Good morning, everyone, and thank you for joining us today. Fiscal 2027 is off to a strong start, and it's built on real momentum from fiscal 2026. I'm confident to say that our first quarter results have us well positioned to build on that momentum all year long. Fiscal 2026 was all about sharpening our focus, tightening execution and positioning us for growth, including the strategic acquisition of MTL Cannabis.

That work is truly paying off. Since I joined as Canopy's CEO in January of 2025, this is the first quarter we've reported year-over-year growth in every single business. Fiscal 2027 is about growth and moving our focus to cultivation to improve yields and accelerate growth, especially in Europe. And it's as well about increasing our manufacturing efforts to improve margin and accelerate our journey to positive adjusted EBITDA.

In the quarter, net revenue was $81.2 million, an increase of 13% from Q1 of last year, with our cannabis segment growing at 14% and Storz & Bickel growing at 6%. And importantly, adjusted gross margin was up 600 basis points over last year, reflecting the efforts we've made across our supply chain to reduce our cost structure and improve execution. This gives us confidence our strategy is working.

Our cannabis growth was led by our Canadian medical business, which reported net revenue of $25.8 million, up 22% from Q1 2026. Strong year-over-year growth in medical was driven by a steady increase in patient count over the past year. Our medical business was recently strengthened by the addition of MTL Cannabis with its Canada House Clinics and Abba Medix online distribution platform.

As a combined company, we continue to add patients and increase the number of orders we filled during the first quarter, helping to cement our position as the #1 Canadian medical cannabis provider. Our Apollo Cannabis Clinics were recently voted best medical cannabis clinic in the Toronto Star Readers' Choice Award. This recognition reflects our commitment to positive patient outcomes and to making medical cannabis care accessible.

We are trusted by patients, and we'll strive to continue to earn that trust. Even with these successes, given our significant focus on veteran care, we have felt the impact of the reduced reimbursement rates for our products from Veterans Affairs Canada. We have done our utmost to mitigate the impacts of these changes on our patients and veterans and continue to work to broaden our patient base to build on our leadership position.

Despite this headwind, we remain strongly committed to our medical patients in Canada. We continue to offer the best product assortment, consistent availability and a best-in-class service experience for veterans and all patients alike. We strongly believe staying true to our core values will enable us to continue to add new patients and ensure the ongoing expansion of the business.

Our Canadian adult-use net revenue of $29.7 million was up 10% from Q1 of last year, building on the impressive 20% growth rate we delivered in fiscal 2026. Our recreational business has benefited from ongoing strengthening of our product portfolio, including the addition of the popular MTL cannabis brand. We plan to leverage Canopy's distribution capabilities to further expand the reach of the MTL brands across the country.

The most recent market share data shows that Canopy is now ranked at #6 overall, up from #8. We also moved into the top 2 position in premium flower and infused pre-rolls and #1 in softgels. We are confident this growth will continue the other progress we are making in cultivation and the additional flower we plan to bring to market as well as planned innovation around the Claybourne and Tweed brands.

In international cannabis, net revenue rose 10% year-over-year as we reset our operations and continue to lay out the end-to-end supply chain to grow in the European market. Europe remains a major catalyst for our growth, driven by particularly robust sales performance in Poland during Q1, where we are now a top 3 supplier. This was our third consecutive quarter of sequential growth in international, driven by solid execution, in particular, our ability to consistently supply high-quality flower.

We also plan to begin shipments of flower to the U.K. imminently, with revenue contributions expected to start in the second half of the fiscal year. We're energized by the tremendous opportunities in Europe and by our strengthening ability to supply the market with quality products that meet growing needs of European cannabis patients.

Storz & Bickel returned to year-over-year growth in Q1, reporting a 6% net revenue increase to $16.1 million as well as a very strong gross margin of 48% compared to 29% in Q1 of 2026. Q1 was Storz & Bickel's first full quarter under the new leadership team, which has been implementing a focused go-to-market strategy. We're pleased to see increased sales in markets outside the traditional strongholds of the U.S. and Germany, clearly demonstrating that Storz & Bickel is diversifying its revenue stream and building on its position as the #1 global provider of medical vaporizers.

While these results are encouraging, our strategy remains anchored on building upon our capabilities in 3 key areas: world-class cultivation, optimizing our supply chain network and fueling international supply. Elevating our cultivation capabilities is now a company-wide priority. It has contributed to our recent success and more importantly, establishes a foundation for accelerated long-term growth.

The addition of the MTL Cannabis team kicked off the sharing of best practices and expertise across the organization. We're implementing a wide range of improvements ranging from growing techniques to lighting upgrades and environmental controls. The early results are positive with promising improvements to yield, THC levels and cost per gram.

We have begun growing popular MTL strain at Kincardine, due to the leadership of the MTL master growers as well as cultivating new strains to enhance our genetic portfolio. These initiatives promise to increase our supply of high-quality flower. Our business has already benefited from more consistent supply, and I'm excited to see there is significant room for further gains.

As throughput increases throughout the year, we expect to see a direct positive impact on revenue. Post quarter end, we kicked off a comprehensive end-to-end supply chain initiative to streamline our processes, rightsize our distribution footprint and optimize labor. As we grow revenue, we're targeting significant improvements in gross margin beyond what we have already seen.

Turning to international supply. Canopy has a complete EU GMP flower supply chain, starting with our EU GMP certified Kincardine facility and extending our distribution facility in Germany. We have also already completed our EU GMP inspection for finished products and cannabis 2.0 products manufacturing in our Smiths Falls facility for which we expect to receive certification during this fiscal year.

That certification will make Canopy one of the only domestic companies with end-to-end EU GMP cultivation, manufacturing and finished product processing and packaging of products intended for the international market. This capability will be a core differentiator for Canopy, and we see it as a competitive edge that can spur growth.

As yields and manufacturing capacity increase throughout the year, we expect to see improved gross margin and we will be better positioned to compete and win in the competitive Canadian medical and recreational space as well as winning in global market. This is what truly excites me most about the future of our company.

I will now ask Tom to provide more details on our first quarter financial results.

Thank you, Luc, and good morning, everyone. Canopy reported a solid first quarter, showing good progress on both the top line and key profitability measures. We recorded $81.2 million of net revenue in Q1 fiscal 2027, up 13% from the same period last year.

Net revenue increased in our cannabis segment with growth across all channels as well as in the Storz & Bickel segment. Despite the Veterans Affairs reimbursement changes, Canada medical cannabis reported strong growth with net revenue increasing 22% year-over-year to $25.8 million. We are also taking steps to further mitigate the impact of the Veterans Affairs changes on margins and EBITDA.

These include saving costs by integrating functions like customer care with the MTL organization, renegotiating pricing with third-party suppliers and partners to share the impact and adding more large product formats, which deliver greater value to patients by letting them to buy more product upfront, while reducing costs for the company.

We have consistently demonstrated our ability to grow patients and gain traction in Canada Medical despite broader market pressures. As we navigate the impact of the Veterans Affairs reimbursement changes, we remain focused on executing the same proven strategy that has driven our success to date, growing our patient base, increasing engagement with our patients and operating the business to deliver a best-in-class customer service experience.

Overall, our Q1 results are on track with the commentary we provided on our most recent investor call in June. At that time, we said we expect to report year-over-year revenue growth throughout fiscal 2027. We also described a transition period in the first half of the year as we integrate the MTL Cannabis operations and focus on our key priorities.

On that basis, we continue to expect to report consistent improvement in our operations throughout the fiscal year. Consolidated gross margin was 31% in Q1 2027 on an adjusted basis, up from 25% a year ago and outpacing our full year adjusted gross margin performance in fiscal 2026. We delivered adjusted gross margin of 26% in the Cannabis segment in Q1 2027, demonstrating meaningful year-over-year margin expansion and continued progress against our profitability objectives.

Reported gross margin was 22%, reflecting a $2.6 million noncash inventory flow-through charge associated with the MTL acquisition. We expect cannabis margins to continue strengthening as we capture the benefits of the MTL integration and execute on our key priorities. Increased production from our existing cultivation facilities, combined with ongoing efficiency gains should further reduce our cost per unit and support meaningful margin expansion over time.

Storz & Bickel delivered an exceptional gross margin of 48% in Q1, up from 29% a year ago, demonstrating the significant progress the business has made in improving profitability. The improvement was driven primarily by operational and cost efficiency initiatives executed over the past year with an additional benefit from tariff refunds recognized during the quarter. Even excluding the tariff impact, margins were substantially ahead of the prior year.

This performance demonstrates the success of the new Storz & Bickel leadership team in optimizing their business. We would expect to see continued improvements across the remainder of fiscal 2027. Turning to operating expenses. SG&A increased by $2.1 million as compared to Q1 fiscal 2026 despite operating a significantly larger business following the MTL acquisition.

Absorbing those operations while keeping costs tightly controlled is a direct result of our ongoing cost reduction efforts and the immediate synergies we are capturing from the MTL integration. As a reminder, our stated target is to reach a run rate of $10 million of synergies within 18 months of the March closing of the MTL transaction. We are now actively executing against $8 million of those synergies, up from the $6 million we reported last quarter.

On that basis, we believe there is upside potential to our initial target, both in terms of timing as well as in the total dollar amount. Improved margins and discipline on OpEx led to an adjusted EBITDA loss of $3.2 million in Q1 2027, representing a 59% improvement from the prior year. With the additional revenue growth opportunities Luc described and further integration efficiencies still to be realized, we remain on track to report positive adjusted EBITDA during fiscal 2027.

Turning to our financial position. We had $337 million of cash at June 30, 2026. I will note that the $25 million of cash used in operating activities in the first quarter is higher than the run rate we expect to see over the course of fiscal 2027 as the increase in working capital is expected to balance out during the remainder of the year, and we would expect onetime transaction and restructuring costs to decline throughout the year. We remain confident in the strength of our balance sheet following the recapitalization completed during fiscal 2026.

Our strong cash position underpins our financial capacity to support strategic growth opportunities that may arise. Before handing the call back to Luc, I will remind shareholders we are holding our Annual General and Special Meeting on September 25. We are filing proxy materials today with information on how to vote, and we urge all shareholders to cast a vote.

I will now turn the call back to Luc for closing remarks.

Thank you very much, Tom. Starting fiscal 2027 with broad-based growth across all our business line and improved margins sets a strong tone for the year. We're confident, we're energized and everyone is pulling in the same direction with pace and with common purpose to build a global cannabis company.

Don't get me wrong. While first quarter results are definitely a step in the right direction, we're not satisfied yet. We're taking tangible action towards increasing yield and cultivation, accelerating supply chain efficiencies and strengthening our global supply chain to drive growth and improve margins for quarters to come. We're becoming focused and disciplined operators, relentless on execution, strategic prioritization and financial performance.

Today, we unveiled a new corporate visual identity to match our growing ambition and reinvigorated organization. This identity reflects who we are and what we're building, a company that believes in the power of cannabis as a catalyst for elevating human potential. We believe cannabis is a global economic force, one that will rival the largest consumer categories in the world, and we intend to be among the companies that lead it, building a global consumer-centric company with a clear and uncompromising ambition to lead the world in bettering lives through cannabis.

That's the company behind the results we've just shared with you, and it is the company you'll see reflected in our new identity. None of the progress outlined on today's call happens without our people. Thank you to our entire team for their relentless hard work and passion. We're just getting started. Operator, we will now take questions.

[Operator Instructions] First question comes from Aaron Grey with Alliance Global Partners.

Just want to talk a bit about international and some of your initiatives with added GMP certifications. Just can you talk about the broader landscape of international? We're hearing about countries getting tighter in terms of companies need to adhere to GMP compliance. How does this potentially set up for you to be in a more advanced position that you referred to in your prepared remarks?

And do you feel like you'll now have enough cultivation as well as processing through the GMP supply chain to ramp-up those international sales through the rest of fiscal year '27 and beyond?

Thank you for your question. Listen, we're taking all the right actions and to really set up an extremely robust end-to-end supply chain to win for quarters to come in Europe. I mean one thing I can say about Canopy is that we take cannabis extremely seriously. We've got the internal capabilities to really build integrity, reliability and trust in the supply chain.

We've been working for quarters in really building the supply chain that meets and qualifies for EU GMP. So as I said in my remarks, we're now end-to-end when it comes to flower, growing and importing and distributing in Germany and across Europe. We take an additional step to make sure that our Smiths Falls facility qualifies as well, and we should get -- we should receive qualification approval during this fiscal year, which will allow us to have a complete range of product end-to-end to meet the market.

So we're really building something that meets all the demands. And if there was even more stringent for lack of a better word, enforcement of the EU GMP, we're extremely well positioned to meet this. And that's what gives us confidence that we will grow this -- continue to grow this business for quarters to come.

Kenric Tyghe with Canaccord Genuity.

Tom, one of the key themes throughout the prepared remarks was the discussion around margin and margin expansion, I think specifically material expected margin expansion on some of the initiatives. Could you speak to what is the baseline you're working from?

Obviously, we saw some 230-odd bps year-on-year in this quarter. When you speak to and I'm thinking about your margin profile going forward, are we talking something bracketing that 30%, 30% plus level? Anything you could provide there to help us to triangulate would be appreciated.

Kenric, I mean, obviously, long term, we're trying to get that margin up closer to some of our competitive set, like closer to the 30% margin. We know that's going to be a long way in the future. I would say for kind of baseline, we're looking at this quarter on an adjusted basis, we were at 31%. So I would say kind of in the near term, we're targeting to get up to the mid-30s and hopefully on the higher end as we're exiting this year.

But as Luc laid out, a lot of the initiatives we're talking about improving the amount of output that we have from a yield standpoint, improving quality, all of that will fuel our margin improvement as well as the integration activities of MTL as we really become one organization with one set of assets that we're leveraging for the full portfolio. So definitely, I would say in the near term, we're targeting mid-30s, hopefully exiting at a bit higher rate as we go into this year. Luc, anything?

Yes. For me, listen, those are not pie in the sky dream. As you can imagine, we spent a lot of time last year really working on fixing the foundations of the business. We took an approach where we want to measure twice and cut once. So we're -- I mean, we spent a lot of time last year really ensuring that what we were aiming for, we have the plans for.

And as I said in my remarks, post quarter end, we press a button, the work has started. And as I said, the teams are working in one direction with pace, which gives us really a high level of confidence that we will see that margin continue to inch upwards for quarters to come.

Frederico Gomes with ATB Cormark.

I want to ask about cultivation. It seems like it's -- cultivation efficiency is a big part of your plan to expand margins and with the MTL integration as well. So how far along are you in that journey of getting cultivation where it needs to be? I imagine that's going to take some time to trickle through financials, but how much of that margin expansion just comes from cultivation efficiency? And how far along are you in that?

Yes. Thank you for your question. Listen, we're passionate about flower, and we have intentions to be a trusted global leader. So for us, to start with flower. It started with the acquisition of MTL. We've been very vocal about that. We brought in the expertise, the passion, the know-how to grow great flower to achieve great level of THC yield and decent cost per gram.

As you can imagine, that was one of the priorities as soon as we started integrating the business. As I said earlier, we've been measuring twice and hoping to cut once. So the last few quarters have really been spent working with the master growers of MTL to ensure that we understand our strain. We understand the capabilities of our facilities. We've been working on defining the CapEx program, making sure the new processes are really well defined.

As you can understand with cultivation, it takes an amount of time while you put seeds in the ground and you can harvest, we should really start seeing impact at the end of Q2, beginning of Q3 when we start realizing -- gradually realizing the benefits of improved yield and improved quality.

Bill Kirk with ROTH Capital.

So my question is on capital spending. Your capital spending amounts are below some of your peers. And so are those areas where you're trying to make some progress on gross margin and international growth. So I guess my question is, do you need to increase capital spending in any meaningful way to improve those yields that will unlock gross margin or need to increase capital spend to develop those international assets to unlock more growth there?

Great question. So I think from our standpoint, there will be some modest CapEx. Right now, we do think the operational assets we have in place are sufficient. So we're not talking greenfield type facility builds. But in terms of investing in the facilities, that is something we will be doing. But I would [ preface ] it with just a modest amount of capital.

But yes, we are probably underspending historically on the CapEx side, and this is an area where we see kind of the investment and the kind of the near-term return there as we get improved kind of cultivation and really helping with the yield. But overall, I think we have the right assets in place. Now it's using those assets to their full potential. That might include a little bit of CapEx to get it going.

Okay. And if I could sneak a housekeeping in. On the Canadian medical, I didn't see it in the Q, but maybe I missed it. What was the MTL contribution to that segment in the quarter? And I'm basically asking to try to get a sense for how large the reimbursement change headwind was in the period?

Yes. So we don't disclose MTL Medical separate, because we kept manage it all as one business, both across kind of the cannabis segment and then within our revenue channel. So that's not disclosed separately. But obviously, the headline reimbursement reduction was 29% that we had. And I would say we weathered that storm better than probably some of our competitors in the quarter.

If I can just add color. I mean, the -- building on what Tom said, we -- I think we weathered the storm with this change. And we now have a new basis upon which we really need to grow. So even though these changes happen, as in our remarks, we were able to continue to improve patient count. An order -- number of orders, which is really are the main drivers of your revenues. And we were able as well, as Tom mentioned, to take the right action to mitigate the impact on our margins.

So for us, it is a business that we strongly believe in. We believe in providing the right care for patients and veterans, and we will continue to deploy efforts to expand this business going forward.

[Operator Instructions] Pablo Zuanic at Zuanic & Associates.

Just following up on the domestic medical question. Look, I mean, the industry has done a great job in terms of increasing penetration with veterans. I think it was 4% back in '21, 8% now. Where do you see that going? I mean, is the 15% penetration level 3, 4 years down the road reasonable? How do you think about that?

And then related to that, any further commentary you can make about how these patients, the reimbursed patients have any changes in consumer behavior, if we can use that term here? Or it's all been pretty much absorbed by the companies in terms of the pricing?

Yes. So I'll start. Pablo. So in terms of penetration, I think 15% is probably fairly high. I mean we do see continued growth in the Canadian cannabis market with veterans. We've demonstrated that we can grow in a declining market in the medical space as well over the past few years.

In terms of buying patterns, I would say we are seeing -- we are adding new patients. Obviously, order values are going down as a result of the reimbursement. But our focus is really new patient acquisition, new veteran acquisitions. It's still one of the most profitable markets in the globe. So Canadian medical clearly is continuing to be a point of focus for us.

But I think it will be -- 15% is probably a bit high from a market penetration standpoint. But for us, it's really Q1, as Luc said, was a bit of a reset in terms of our baseline. And I would expect that we continue to have steady growth over the past as we've demonstrated in prior years on the medical side. I don't know, Luc, do you want to...

Look, I mean, can I ask just a follow-up? And obviously, congratulations on all the progress the company is making on domestic rec, domestic medical, international, the MTL deal. So if I, maybe -- it's not fair for us analysts to ask you about the U.S., right? But there's so much focus on the U.S. from the investor side, given all the changes that are taking place there.

And historically, we thought of Canopy Growth as having the best beachhead, if I can use that term, with Acreage, Wana and Jetty there. But how should we think about that now going forward? Obviously, it doesn't seem as big a priority as it was in the past for Canopy growth. Any color would help.

Yes. Thank you for the question. Listen, we continue to monitor the position, the situation of the market in the U.S. very, very closely. You heard me, we've been consistent about fixing the foundation. It's ensuring that we build a core Canopy Growth organization, Canadian and internationally that is positive -- that provides positive EBITDA. That's why we continue to focus the bulk of our efforts, and it is paying out.

As I said, we continue to monitor our position in the U.S. We're happy with what Jetty is -- the performance of Jetty in the U.S. We have a position with TerrAscend. You saw the release of results earlier this morning or yesterday. They're doing really well. But the focus remains on really accelerating our growth internationally and domestically in Canada.

Thank you. This concludes Canopy Growth's First Quarter 2027 Financial Results Conference Call. A replay of this conference call will be available until November 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.

Good morning. My name is Joanna, and I will be your conference operator today. I would like to welcome you to Canopy Growth's Fourth Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions]

I will now turn the call over to [ John Vinsek ], Investor Relations. John, you may begin the conference call.

Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart.

Prior to the opening of financial markets today, Canopy Growth issued a news release announcing the financial results for its fourth quarter and fiscal year ended March 31, 2026. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on the 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 penny and dollars, unless otherwise stated.

Following remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts.

And with that, I would like to turn the call over to Luc.

Thank you. Good morning, everyone, and thank you for joining us today. Fiscal 2026 was a defining year for Canopy Growth. We made the hard calls early, streamlining the business, sharpening our focus and reallocating resources to where we see the greatest long-term opportunity. We also invested in people needed to execute at a higher level. These actions are now beginning to show up in the business.

On that, I want to take this opportunity to thank our teams and say how proud I am of how they responded throughout the year. The focus, collaboration and execution across the organization was critical to the progress we achieved.

Our full year performance reflected continued momentum with net revenue increasing 20% in Canada adult-use cannabis and 18% in Canada medical, alongside operational execution across the platform. Over the past year, we also optimized our structure and [ restructured ] the cost base to a more sustainable level, removing significant expenses from the business. These changes drove stronger financial performance in fiscal 2026, and we expect the benefits to be even more meaningful in the current year.

In parallel, we recapitalized the business to strengthen our balance sheet, stabilize our cash balance and extend debt maturities to 2031. This improved financial position expands our strategic flexibility while reducing risk and uncertainty.

The defining milestone of the year was the acquisition of MTL Cannabis, establishing Canopy as the leading Canadian medical cannabis business by revenue. With increased scale, broader capabilities and greater market reach, we are now operating from a significantly stronger position. While MTL has only been part of Canopy for 2 months, integration efforts have advanced quickly. We are already executing on $6 million of our targeted $10 million of annualized cost synergies. And the benefits extend way beyond cost savings. We are leveraging Canopy's robust distribution platform to extend the reach of the MTL products, including the recently announced launch of MTL strains in Germany.

Just as importantly, the MTL team brought a strong track record of producing best-in-class products and executing high operational standards. These capabilities are now being embedded more broadly across the organization with team actively sharing best practices to improve productivity and execution across our cultivation network.

As integration continues, we're also building more disciplined and repeatable processes across the organization, strengthening our framework for producing high-quality cannabis consistently and at scale. We have recently seen the results of these efforts in Europe where we have delivered strong sequential growth in the past 2 quarters. We believe strengthened capabilities will become increasingly important as industry continues to evolve globally, particularly in the European market.

With that, let me turn to our financial results for the year. Net revenue increased 6% to $285 million, driven by growth in our Canadian medical and adult-use businesses. Canadian medical delivered the most consistent performance with an 18% increase in net revenue for the full year and positive year-over-year growth in all 4 quarters. These impressive results were driven by a larger product assortment and increased order size as we expand our base of insured customers.

What is even more encouraging, as I mentioned earlier, is that we entered fiscal 2027 in an even stronger position after joining forces with MTL Cannabis to become the market leader in Canada.

Our Canada adult-use business returned to growth in the year, with net revenue increasing by 20%. That represents a significant turnaround in a category where Canopy been stagnating. The growth was driven by product innovation focused on the fastest-growing adult-use categories, including infused pre-rolls, vape and ITHC flower. We believe there is room for Canopy to significantly increase our share of the recreational market in Canada on the strength of our leading brands. The most recent market share data from May 2026 shows that Canopy has improved from the #8 overall ranking to #6. We have taken a consumer-led approach across our medical and adult-use portfolios, focusing our efforts behind the brands, products and category where we believe we can build enduring market leadership.

In the international business, we have reset our European operations to better unlock the flower supply chain. That involves streamlining processes, strengthening execution and making sure we got the right product into the market. These efforts have helped us overcome challenges we experienced early in the year. As a result, the international business had a very strong finish to the year, delivering 68% year-over-year net revenue growth in the fourth quarter. That momentum has continued into the first quarter of fiscal 2027, driven by a broader portfolio of products. Europe will remain an important area of focus for us this year.

Storz & Bickel net revenue was down in the year due to challenges in its 2 largest markets, in U.S. and Germany. The successful launch of the VEAZY vaporizer during the year helped boost sales in a new category focus on affordability and portability. Post quarter-end, S&B team, inspired by new leadership, has been focused on cost optimization and a reset of our commercial approach in the U.S.

Overall, we exit fiscal 2026 as a stronger, better positioned organization with improved scale, stronger financial flexibility, and the team that knows how to execute. I believe these changes make us stronger and demonstrate how Canopy is becoming a different company. We're energized, we're encouraged, we're confident and we're just getting started. Without a doubt, there is much work still to be done, and I'm very confident in the strategy we have in place to deliver meaningful growth.

More on this in a few minutes. First, I will ask Tom to review our fourth quarter results.

Thank you, Luc, and good morning, everyone. We reported $71.2 million of net revenue in the fourth quarter of fiscal 2026, which was 10% higher than Q4 of the previous year. Growth in the quarter was driven by the cannabis segment, and in particular, Canada medical and international cannabis.

Cannabis net revenue for the fourth quarter was $54.5 million, up 20% compared to a year ago. This growth was led by Canada medical cannabis with revenue increasing 27% to $25.3 million, marking another record quarter. Key drivers include continued expansion in insured patient registrations as well as our medical team's ongoing focus on providing a best-in-class service experience to our medical consumers.

In addition and in response to changes to Veterans Affairs Canada reimbursement, we moved quickly in fiscal 2027 to implement targeted actions designed to mitigate the impact on both veterans and the business. These initiatives included strategic pricing actions, refinements to the product mix, and patient retention efforts focused on maintaining accessibility and long-term engagement with our medical platform.

International cannabis net revenue was $8.6 million, up 68% compared to a year ago. The increase was largely driven by year-over-year growth in Poland and Germany as our focus on supply chain improvement [indiscernible] for the European business have delivered another quarter of growth for international cannabis.

Cannabis gross margin in Q4 was $3.7 million or 7% of net revenue, which was below our typical gross margin range, primarily due to inventory-related charges of $10.7 million as a result of the MTL acquisition.

As part of integrating our 2 businesses, we conducted a comprehensive review of the combined inventory and product portfolio with a focus on simplifying our combined offerings and prioritizing our highest-quality, best-performing products. As a result, we made deliberate decisions to reduce redundant and overlapping inventory to ensure our stock levels are well positioned for fiscal 2027.

We also recognized costs associated with the flow-through of [indiscernible] accounting step-up on acquired inventory [indiscernible]. Importantly, excluding the impact of these acquisition-related charges, adjusted gross margin for the cannabis segment was 26% in Q4 fiscal 2026, as compared to 12% in Q4 fiscal 2025. We are moving through our transition period as these 2 organizations integrate operations, align teams, share best practices and optimize the product portfolio. As a result, we may see slower growth in the first half of fiscal 2027, including near-term pressure on our revenue as we continue to adjust our product offerings and make improvements at our cultivation facilities to position the business for long-term success. We would fully expect to see gross margin improvements in fiscal 2027 within the cannabis segment on integrating the MTL business.

At the same time, the $6 million of MTL transaction synergies we are executing will increasingly take effect. To give more color on that figure, it includes items such as the elimination of MTL's public company costs, head count reductions and rationalization of redundant facilities. As part of our new footprint assessment, we made the decision to close our cultivation facility in Kelowna, BC given our focus on scaling our cultivation capacity at our GMP certified [ King Cardin ] facility and MTL facilities in Quebec. We expect to continue to execute against our projected cost synergies to reach our target of $10 million of run rate savings within 18 months of the MTL transaction closing.

More broadly, the cost reductions we implemented at Canopy over the past year will become increasingly apparent in fiscal 2027.

General and administrative operating expenses were down approximately $9.5 million in fiscal 2026, a 15% reduction, which was largely driven by the rationalization of approximately 130 positions across the organization prior to the acquisition of the MTL team. The adjusted EBITDA loss of $6 million in Q4 fiscal 2026 represented a $3 million year-over-year improvement, but was higher than the $3 million loss in Q3 fiscal 2026. Absent the inventory charges in Q4, we would have shown sequential improvement and [indiscernible] closer to our adjusted EBITDA breakeven.

On that basis and with our expectation of continued revenue growth and decrease in costs, we remain confident in achieving our target of reaching positive adjusted EBITDA during fiscal 2027.

Turning to our financial position. As Luc mentioned, we significantly strengthened our balance sheet in fiscal 2026, having completed a strategic recapitalization transaction at the start of the fourth quarter. We ended the year with $365 million of cash after completing the MTL acquisition. With total debt of $234 million, our net cash position was $131 million. As compared to the end of fiscal 2025, we have delivered an improvement of $304 million going from a net debt position of $173 million to a net cash position of our $131 million.

Importantly, as we move towards an accelerated growth stage, we have much greater financial capacity to support our growth and, where appropriate, inorganic opportunities. I want to note that while we did not have any sales under the ATM program during the fourth quarter, we will continue to look to use the program opportunistically during fiscal 2027 to support strategic priorities and initiatives if and when they arise.

In closing, I would like to acknowledge the continued positive momentum in the U.S. regulatory landscape. We are proud to see the framework we pioneer for Canopy USA to become increasingly relevant with our U.S. peers leveraging this structure to benefit from the positive momentum in the U.S. market.

Luc will now close through a brief discussion of our priorities for the coming year.

Thank you very much, Tom. We enter fiscal 2027 with confidence. Since becoming CEO, we have prioritized capital allocation toward higher return opportunities, robust cost management and executing with excellence. This disciplined approach positions us well to achieve profitability and create long-term shareholder value. Markets outside of Canada, including the U.S., present both immediate and long-term growth opportunities.

In Europe, our strengthened cannabis platform and expanded portfolio of products have helped us build momentum. Our operations in Germany provide important advantages in supplying European markets efficiently and reliably, and we are targeting expansion into the U.K. during this fiscal year.

In Canada medical, we plan to leverage Canopy's leadership position and nationwide network of clinics to continue supporting patient growth. We remain committed to supporting our veteran community by delivering compelling value relative to other medical cannabis providers while continuing to uphold the quality, consistency and reliability patients expect from our portfolio.

For the Canada adult-use market, improved quality of our flower combined with continuing product innovation will be the levers that enable us to grow our brands and our business.

Early fiscal 2027 trends remain encouraging, including continued market share momentum across key product categories. As of 5 weeks into fiscal 2027, we hold top 3 market positions across a number of key categories on a trailing 13-week basis, including #2 in premium flower, #2 in infused pre-rolls, up from #4 on a trailing 13-week basis and #3 in [ oils and sub-channels ].

Storz & Bickel is executing on refreshed strategy, strategic plan focused on strengthening sales and marketing efforts in the U.S. and improving operational efficiency throughout the supply chain.

To conclude, we strengthened our platform, improved execution, expanded our scale and positioned the business for its next phase of growth. We enter fiscal 2027 with momentum and a clear focus on accelerating our growth. I'm energized by the momentum building across Canopy.

Operator, we will now take questions.

[Operator Instructions] First question comes from Kenric Tyghe with Canaccord Genuity.

Tom, I heard your comments with respect to mitigating the impact on your medical business and on veterans from the change in reimbursable. But I wonder whether you could help us just better handicap the potential impact or trajectory of your Canadian business given how material that headwind is in year and some recent competitive commentary with respect to that headwind?

Yes. So a couple of points, Kenric, and thanks for the question. Part of our mitigation plan includes ongoing optimization [indiscernible] reimbursement practices to ensure that we're really [indiscernible] for the cost of serving kind of the high-quality service that we provide to our veterans. Ultimately, when you think about our medical portfolio in and of itself, it's skewed more towards 2.0 products such as oil, soft gels, more so than flower. So I think you're not going to see the straight -- while there would be a top line effect, it's not going to be as drastic as you might see in our competitive set.

My kind of actions are also looking to mitigate the impact on adjusted EBITDA, not just net revenue. So while we would expect to see net revenue come down versus sequentially, we're doing everything we can to mitigate the impact on EBITDA and gross margin. So looking to kind of optimize cost structures where we can and really make sure we're priced competitively without interrupting the high quality of service that we provide to the veteran customers.

Great. And if I could just [indiscernible] into international markets briefly. Obviously, international increasing in focus, specifically Germany. We're also aware though that's an increasingly competitive market. So when you look to and when we think about your marketing spend in the year to support growth and market share gains, I saw you -- I think fiscal '26 you had a mid-single-digit increase in sales and marketing. How should we think of the evolution of that line item? I realize there are offsets on the G&A side. But just trying to handicap the potential spend to drive share and growth in Germany through '27.

Yes. I would say on the sales and marketing piece of the SG&A, Kenric, a lot of the spend, it's tied more to Canada than in Germany. I think where we see the biggest unlock in Germany would be in getting some of the MTL flower. And Luc, I don't know if you want to...

Yes, absolutely. We still see tremendous growth potential in Europe. Our challenge in fiscal 2026 were driven by supply chain issues where we weren't able to consistently supply flower. And we're in a much better place now as demonstrated in the last 2 quarters where we've seen sequential growth. And you have to remember that the market -- the European market as a whole still have a lot of potential for growth penetration, is still extremely low, and we're very encouraged by our progress in the last 2 quarters.

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

So first one for me, just on the MTL acquisition, you gave hard numbers in terms of cost synergies, $6 million, expected to be $10 million when complete. But maybe on some top line synergies, you alluded to maybe some sharing best practices, [indiscernible]. So maybe can you go into more detail in terms of some of the benefits that maybe might have been better than you expected in terms of central top line synergies from the MTL, and then how we can think about that flowing through to the P&L for Canopy Growth as you start to get some of those best practices that you're learning?

It's a bit early to tell there. But what we're seeing, one of the key reasons on the acquisition of MTL was the greater ability to grow great flowers consistently and at scale. The work has started a couple of months ago where we're really bringing the teams together to unlock full potential of our growth facilities. What we're seeing behind the scene is extremely encouraging right now. And you can imagine that this great flower will really accelerate our growth in both the Canadian market and, as importantly, across the European markets.

So we're really confident. We're pleased with the results that have been done behind the scenes so far. And we will start seeing the benefits of this in the quarters to come.

Okay. Great. Second question for me, so I can understand Canada and international seems to be a priority today, but a lot of things are starting to move now here. In the U.S., you had Phase I rescheduling with FDA and state medical anticipation for a Phase II whole plant rescheduling to come potentially later this summer. So as we think about Canopy Growth, historically, you've been one of the more aggressive in terms of looking to capitalize on those U.S. opportunities. So now in 2026, FY 2027, how do we think about your view in terms of what it will take you to want to reengage in terms of getting aggressive in the U.S. market, if there's any type of key things such as being able to maintain uplifting and consolidated adult-use or otherwise? And then what do you think are the best opportunities in the U.S. market today having historically done both MSOs and brands?

Yes. We've been pretty consistent there. Our near term focus and priorities or Canada, international, where we can realize value creation like instantly. So our focus there is not changing.

That being said, we're very encouraged by the regulatory changes that are happening across the U.S. So we know what's happened recently is focus on medical cannabis. Our investment in U.S. have been more in mixed use, call it recreational. So we're not seeing any immediate benefits there. But that being said, the strategy, the Canopy strategy has been to lay out investment across the U.S. to ensure that as the market -- the regulatory changes happen in the market, that we will benefit from there.

So we're very happy with our investment in the [ Jenny ] brand in California, our affiliation with the Claybourne infused pre-roll brand. We've got a sizable investment in Terrascend. So we're well positioned to take advantage of the market as regulatory changes [indiscernible].

The next question comes from Bill Kirk with ROTH Capital Partners.

I'd like to keep going on Aaron's question there. When we think about the U.S., why isn't now the time to get more aggressive in the U.S.? Like I understand the Canadian and international opportunities might be more immediate, but what else would you need to see in the U.S. to start getting more aggressive? And then if you could, could you remind us maybe some of the run rate metrics for the assets you do have exposure to? In the past, I think you've given trailing 12-month revenue and a rough EBITDA kind of range for the U.S. assets. Could you update us on those?

Yes, Bill, this is Tom. So I guess, building on kind of what would change again, the Canopy USA business is not skewed as much as the medical side as kind of some of our -- some of the U.S. MSOs. So for us, until there's full kind of uplift in potential for fully plant-touching businesses, there's not as much in the way of benefits to us as you might see with peers.

I would say in terms of the run rates, we do disclose in the 10-K, Bill, some of our financial information, so I would direct you to those disclosures. But again, that would be kind of a cumulative across all of our assets. So as we think through -- building on what Luc said, that includes retail operations, that would include kind of brand revenues for the Wana assets as well as in Jenny business in California and in certain states. So really the unlock for us -- yes.

Go ahead, the unlock?

No, I was going to say that really the unlock for us is until we're at a point where we can -- U.S. plant-touching businesses, irrespective of medical versus nonmedical can list and further regulations open up, we're really kind of in the same boat as we were before.

Okay. In the cash flow statement, there was like a cash outflow for, I think, it said deconsolidating or 2 subsidiaries. What was that in the period? What was that deconsolidating cash outflow?

That might have been related to prior year -- Bill, I have to go and go back and look at it. Certainly, we can follow up in a separate session if you'd like.

The next question comes from Brenna Cunnington with ATB Cormark.

Just looking at the balance sheet, we do have quite the cash balance here with $365 million exiting the quarter. From what I recall, some of this will be used with transitional costs related to the integration of MTL. And so I do understand that the cash reserves won't be at this level indefinitely. And I'm all for squireling away resources for a rainy day, but it does seem like we have a decent amount of excess cash on hand here above and beyond what's needed for near to medium-term operations. So could you just walk us through some of your strategic goals for putting this excess cash to work? You mentioned potentially expanding into the U.K., and we know maybe the U.S. is a potential for investment on the [indiscernible]. Could you just provide us more details and color on that? .

Yes, I'll start and I'll ask Tom to jump in. So our priority remains clear. It's to achieve positive EBITDA and generate positive cash flows. On this, we're focusing our efforts in accelerating growth in Canadian rec and across Europe as well.

What's really good with all the hard work that we did during fiscal 2026, we're at a place where the balance sheet is way more solid than it was a year ago and we're positioned to better take advantage of strategic opportunities that will present themselves to us. Tom, anything to add?

No, I think that's right. You're right, Brenna, we're not looking to [ squirrel away ] cash indefinitely, but we want to be able to be well positioned to capitalize on opportunities if and when they arise.

Okay. Understood. And then just looking internationally, we have heard commentary from various peers regarding the standard for Germany flower getting stricter, specifically with respect to the flower that's moving through Portugal to be EU GMP-certified. Could you just provide us a little more color on like what you're seeing on this front? And is there potentially an opportunity to gain EU GMP certification at some point in the future?

Yes, we're seeing very similar things. I think we're extremely well positioned to function in that type of environment. We've been functioning on the EU GMP regulation code for many years. Now we have resources, capabilities in the ground in Germany to allow us to bring the right products to market.

I was over in Europe last week and I come back very confident and energized by the quality of the work our teams are doing across Germany and Poland. Very bullish on these 2 markets and expanding, and newly opening market across Europe. So we look forward to improving our performance in fiscal 2027 across Europe.

Operator, for Bill Kirk's question. Bill, that related to the deconsolidation of Canopy USA in the prior fiscal year. So that was a onetime event which didn't recur this year.

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

Luc, just to follow up on the medical side of things regarding the impact on veterans. We are now in the middle of June. Can you give some color in terms of how are veteran users of medical cannabis reacting? Are they cutting back on sales? Or are they absorbing the effect of the reduced quarter? Can you maybe expand also in terms of how much are you absorbing? It's not clear in the comments you made before. More color in that regard would help. And to be clear, you are guiding for full year sales growth in '27, but that's for international and rec. Domestic medical, you are guiding for the decline, right? So if you can just confirm that.

Yes. So a few different parts within that, Pablo. So for us, we're continuing to go after new veterans to sign up new customers. We still see that as a very attractive and profitable market for our business. I would say through the first few weeks of fiscal 2027, we are seeing positive momentum year-over-year, but we're likely not going to maintain the same level of growth that we saw throughout fiscal 2026. So we are doing everything we can to kind of maintain a flat medical business year-over-year in terms of EBITDA margin. But overall, it will be a headwind for us on the Canadian side. And the overall growth that we're talking about, you're right, it is including a bigger uplift from the international business as well as growth in Storz & Bickel that will drive us up.

So again, we're -- the veteran changes presents quite a headwind to us as well as any other medical player in Canada. We're doing everything we can to limit the impact on EBITDA, but it is going to be challenging just to get back to, call it, flat year-over-year on the Canadian medical side.

If I may add to this. I mean this business, this Canadian medical business is the core of who Canopy is, and we're positioning a company based on trust, on excellence, a company that is focused on bettering life through cannabis. And so as a result, that medical business is really the core of who we are. We love it. We're putting tremendous effort to make sure that through these changes, the quality of the service, the products, the supplies we provide to veterans and other insured patients and noninsured patients remains at the highest integrity. Yes, we're seeing veterans adapting, adjusting how they purchase, but they're extremely loyal to the quality of service and products we've been providing. We provide some of the best service, fastest delivery, consistency of [indiscernible] products of any competitors in Canada. And you can see these consumers, these patients being extremely loyal to our platform. And we continue to strive to provide the best service in the industry.

And then just a follow-up in terms of rec sales in Canada. Obviously, you've done very well with IPRs. Now the [ high-fire ] data shows very good growth in vape. Can you talk about any gaps or rooms, areas where you're still under-indexed where you see room to expand the portfolio, whether it's flower or different segments within the other formats?

Yes, absolutely. And thank you for the congrats on the progress. So we're now -- latest data shows us as #6. I won't be shy to say that our long-term aspiration is to be a top 3 player. We believe we can get there. It's not going to be easy. It's going to take time. But think of the big categories out there, let's start products, we'll talk about [indiscernible] later. So the Canadian market where the growth is, where the volume is, it's flower, it's pre-rolled infused or not, and it's -- we have opportunities across these 3 large segments. In flower, we've been saying it, the acquisition of MTL was driven in one part -- in one large part by their talent, their ability to grow consistently great flower at scale and in an efficient manner. And now we're partnering, we're together with some really great growers. So look out in the quarters to come for the quality of our flower improving. As a result, we know share will follow.

In [ PRGs ], we're doing really well. The Claybourne with infused pre-rolls is really driving our growth there. But we still have a lot of opportunities in regular pre-rolls driven by our brands, whether it's MTL brands. premium pre-rolls or it's Tweed with mainstream pre-rolls, we still have a lot of opportunities there.

And finally, we launched all-in-one vape during fiscal '26. We're very encouraged by the results. But again there, we're only scratching the surface. We're almost absent of the 510 category, which is still very large. So as you can see, there's tons of runway -- there's significant runway for us to grow Canadian rec there. And we're confident that with our brands. combined with our capabilities and the reset of our supply chain, that we will be able to win in fiscal 2027 and for the years to come.

Thank you. [Operator Instructions]

We have no further questions. This concludes Canopy Growth's Fourth Quarter Fiscal 2026 Financial Results.

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

Tyler, you may begin the conference call.

Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart. Before financial markets open today, Canopy Growth issued a news release announcing the financial results for our third quarter fiscal 2026 ended December 31, 2025. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on the 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 Canadian dollars unless otherwise stated. Following remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts.

With that, I will turn the call over to Luc.

Thank you, Tyler. Good morning, everyone, and thank you for joining us today. Q3 was a quarter where Canopy Growth delivered significant progress on multiple levels, and it reinforced my confidence that we're building stronger business. For me, the fundamentals of the business are both about how the business is performing and our financial strength, which allows us to execute with discipline.

Across the organization, our teams are focused on the right things, and that focus is starting to pay dividends. We're building a company that can consistently deliver superior experiences for consumers and patients, grow and manufacture high-quality products and create consistent value over time.

On the balance sheet, we ended the quarter with $371 million in cash and cash equivalents and a net cash position of $146 million, putting us on solid footing as we move into the next phase of execution.

Post quarter end, we completed a USD 150 million recapitalization that improved our liquidity and extended all debt maturities to 2031. This gives us more flexibility around near-term financing, including how and when we use tools like the ATM and more room to make the right long-term decisions.

This financial strength matters because it allows us to act intentionally. A good example is the proposed acquisition of MTL Cannabis, which we announced during Q3. MTL brings an accretive profile, a strong entrepreneurial leadership team and high-quality cultivation capabilities to our platform. They've built a profitable, cash-generating business that we expect to be accretive to the combined organization.

High-quality flower, cost efficiency and operational discipline are the foundation of any scale cannabis company, and MTL strengthen our ability to achieve all three.

Following closing, MTL will strengthen our leadership position in Canadian medical cannabis, enhance our presence in Quebec adult use, and importantly, provide high-quality flower supply that we can leverage to drive growth domestically and in international markets.

Turning to our Q3 business results. The focus on fundamentals is really paying off. In Q3, we delivered our slimmest adjusted EBITDA loss to date, driven by continued cost discipline and improving execution across our Canadian medical and adult-use channels. In Canada medical, net revenue grew 15% year-over-year, our sixth consecutive quarter of growth, supported by a high-quality, best-in-class patient experience, strong service levels and increasing engagement with insured patients.

We've also taken deliberate actions to preemptively mitigate the financial impact of the proposed changes to the veterans reimbursement program while continuing to support veterans with best-in-class care and innovative high-quality products. We expect to continue strengthening this platform, maintain our leadership position in Canadian medical cannabis and use our scale to elevate service and drive margin improvement over time.

In Canadian adult-use, we're seeing continued momentum as well, with net revenue up 8% year-over-year. Growth this quarter was driven by strength in pre-rolls and vapes supported by focused innovation and improved execution at retail.

What really gives me confidence here is not just the growth we're seeing today, but where we're directing our attention. We're shifting our focus towards elevating the quality of our brands, strengthening product innovation and improving the quality, potency and cost of our flower to delight consumers and patients alike.

Looking ahead, our focus now turns to unlocking the next phase of growth, particularly in Europe, where we are spending significant time and attention. In Q3, we started stabilizing the international business, improving execution and laying the groundwork for growth with net revenue up 22% sequentially.

Progress on EU GMP certification at our Smiths Falls facility, combined with our continued focus on elevating flower quality across our sites, is expected to position us to better serve international medical markets as demand continues to develop and regulations continue to evolve. Additionally, access to MTL's high-quality supply will fuel our strategy. There's more work to do, but I see a meaningful opportunity ahead.

At Storz & Bickel, net revenue grew 45% sequentially, with the new VEAZY vaporizer reinforcing our strategy around affordability and portability. Our focus remains on accelerating product development and strengthening sales and market execution, especially in North America, where we believe cannabis consumers should experience the joy and fullness of flavor that an S&B device offers.

In the U.S., through Canopy USA, we remain indirectly invested in one of the world's largest THC market, providing us with long-term strategic optionality as the regulatory environment continues to evolve.

So overall, this was a quarter of real progress. Our balance sheet is stronger, Canadian cannabis sales are growing, and the confidence of our team continues to build. Looking ahead, the business is well positioned to unlock additional value through elevated cultivation, innovative brands and disciplined execution.

I'll now turn it over to Tom to walk through the financial results in more details.

Thanks, Luc. I echo your sentiments and remain confident in the direction our business is heading. The third quarter reflects our continued focus on disciplined execution across the business, while sustaining cost savings and significantly improving our balance sheet.

With our aggressive cost-saving actions taken to date, we have been able to identify and capture $29 million of annualized savings, far exceeding our initial expectations. This, coupled with the growth we are witnessing in the Canadian business, gives us the confidence that we can achieve our goal of positive adjusted EBITDA during fiscal 2027.

Turning quickly to the balance sheet. We ended the quarter with our strongest net cash position since fiscal 2022 with $371 million of cash and short-term investments and a net cash position of $146 million. We further strengthened our balance sheet subsequent to quarter end with the previously announced recapitalization, which enhanced our near-term available cash while extending our debt maturities to 2031.

These actions reinforce our financial foundation as we continue to execute against our operating and strategic priorities while expanding our near-term financing flexibility, including greater discretion over the timing and use of our remaining ATM capacity. With this level of balance sheet strength and expected sustained improvements to our operations, I'm extremely encouraged as we close out the fiscal year.

I will now review our detailed segment results, starting with global cannabis. Q3 cannabis net revenue was $52 million, up 4% compared to a year ago. This growth was led by Canada medical cannabis with revenue increasing 15% year-over-year to $23 million, marking another record quarter.

This growth was driven by continued expansion in insured patient registrations and larger order sizes. Our medical teams' focus on improving service levels, including faster fulfillment and reduced shipping times, continues to generate positive results.

Canada adult-use cannabis revenue increased 8% year-over-year to $23 million, supported by growth in infused pre-roll joints and our new All-In-One vapes from Tweed and Claybourne. In addition, disrupted retail operations in British Columbia reduced purchases by the province during the quarter, which created revenue headwinds not expected to recur in the fourth quarter.

Turning to international cannabis. Sales increased 22% quarter-over-quarter, reflecting stabilization and a return to growth. As we retooled our supply chain, we saw encouraging signs of operational improvements as we exited the quarter.

Cannabis gross margin was 25% in Q3 as compared to 28% in Q3 last year. The year-over-year decrease in gross margin percentage was primarily attributable to lower sales in international markets and a change in sales mix within the Canadian adult-use market.

Turning to the performance of Storz & Bickel. Storz & Bickel net revenue was $23 million in Q3, an increase of 45% sequentially, driven by traditionally strong seasonal sales with Black Friday online sales increasing 16% year-over-year and the first full quarter of sales for the new VEAZY device, offset by softer demand in certain markets and tariff-related pressures. Storz & Bickel gross margins decreased to 37% in Q3 from 40% last year with tariff impacts and lower volumes providing gross margin headwinds.

Moving to operating expenses. Excluding the impact of acquisition, divestiture and other costs, which includes litigation costs and recoveries from previously divested businesses, SG&A expense decreased 12% year-over-year. This improvement is the direct result of our ongoing cost savings initiatives, which remained a central focus for Canopy. These savings, combined with the performance of our Canadian cannabis business led to our narrowest adjusted EBITDA loss to date of $3 million.

We remain focused on balancing cost discipline with maintaining the capabilities required to execute in our core markets. Free cash flow was an outflow of $19 million in Q3 fiscal 2026, down from an outflow of $28 million in the same period last year. The year-over-year decrease primarily reflects a reduction in the cash interest payments due to a reduction in our debt balances and decrease in working capital movements.

As we move forward, our focus remains on delivering positive adjusted EBITDA in fiscal 2027, improving inventory turns and tighter capital allocation, all of which support sustainable free cash flow improvements.

Looking ahead, in Canada cannabis, we expect continued strength in adult use driven by innovation, expanding distribution with key accounts and elevating our flower capabilities. In Canada medical, we remain focused on patient growth and service excellence which we expect to continue to drive growth in the medical channel.

In international cannabis, our priority is operational stability and execution with sequential improvements expected in Q4 and into fiscal 2027, driven primarily by performance in our European markets.

With this momentum, we expect to see improvements in our cannabis gross margins in Q4 and into fiscal 2027. At Storz & Bickel, VEAZY momentum and cost discipline remain key drivers as we navigate near-term macro and tariff headwinds.

With Storz & Bickel's strongest quarter being Q3 traditionally, we can expect the sequential top line comparison in Q4 to be challenged. With the expected growth in top line revenue on improved gross margins as well as the cost saving initiatives executed today, we would expect Canopy to achieve positive adjusted EBITDA during fiscal year 2027.

Furthermore, upon the expected closing of the MTL transaction, Canopy expects to consolidate MTL's results from the closing date onwards, which will contribute to net revenue, gross margin and adjusted EBITDA improvements.

While integration planning is already underway, our immediate focus post close will be on ensuring operational continuity and beginning to capture the strategic and cost synergies we have previously outlined, while also maintaining our disciplined approach to financial management.

In closing, I want to underscore that our priorities across the business remain clear and unchanged, rigorous operational execution, disciplined capital allocation and achieving positive adjusted EBITDA. With these three elements, we are positioning Canopy for sustainable long-term success.

I will now turn it back over to Luc for his closing remarks.

Thank you, Tom. For me, the takeaway from this quarter is clear. The focus we've placed on fundamentals is working, and it's strengthening the foundation of our business. We have made real progress on the balance sheet, build momentum across our Canadian cannabis businesses, and took an important step forward with the proposed acquisition of MTL Cannabis.

With that foundation in place, our focus now shifts to accelerate in Europe, expanding the reach of Storz & Bickel and elevating cultivation, quality and efficiency at scale across our platform.

From my very first day, I believe that Canopy Growth has the potential to transform, refine its focus, improve its structure and deliver on its promise of a sustainable and profitable cannabis company. With each quarter, we're demonstrating sustainable improvement, and I'm confident we're positioned to gain further momentum as we move into fiscal 2027.

Thank you. Operator, we'll now take questions.

[Operator Instructions] First question comes from Aaron Grey from Alliance Global Partners.

First for me, I just wanted to dig a bit more in terms of the international business and what to expect maybe for the next 12 to 18 months for growth opportunities. MTL had a small international business today, but it does seem their production capabilities could help you improve your international supply chain.

So maybe any color in terms of how to think about the timing of that flowing through? And is there any additional capacity needs to ensure MTL's legacy domestic business continues to be serviced? And then additionally, in terms of the EU GMP at Smith Falls, how should we think about potential timing of that and that improving your international supply chain capabilities?

I hope you're well. Thank you for the question. Okay, there's a lot to unpack here. Let's start with flower. So we've demonstrated in the past, when we have flower in Europe, our capabilities out there, whether it's sales, distribution, I mean, deliver results. And so the focus is really in ensuring that we have the right supply of flower going to Europe.

So we've been -- the team have been doing quite a bit of work in recent weeks and months to ensure that our demand signals that we're seeing in Europe are well integrated with our growth capabilities in North America. And this has been pretty much fully resolved. So we're in a good place where we can really meet the demand better than we did in the past.

Let me give you a bit of a -- maybe a bit of a data point. So during Q3, our sales team in Europe had about two strains -- for a long period of time, two strains to sell. We forecast that in early fiscal '27, they'll have over a dozen different strains up to sell. So we're confident that we're unlocking supply of flower there.

This will build on the unique capabilities that Canopy has established over the years. So Smith Falls is already EU GMP qualified. We're going for a, let's call it, a second level of certification. All the docs are in a road to get this approved. So we feel confident there.

As well, we have the facility in Europe, and we have a facility in Germany in SLR that can receive, clear and distribute flower in Europe. And we're continually doing operational improvements there. So we feel really good there.

As for MTL expanding capacity, we've met with the extremely qualified team there. They have amazing growers. Plans are in place to ensure capacity improves. As well, we're working on our facilities at Canopy to improve yield out of our facilities and the work streams are there. We're seeing great progress. So our level of confidence to build step change performance in Europe next year is building every week.

Appreciate the color and data points there. That was really helpful and thorough. Second question for me is maybe just touching on the expectations for the gross margin, both on the legacy business, on how you expect those to trend, particularly for cannabis, which has been volatile over the past few quarters, both on the up and downside? And then how best to think about layering on MTL, which has had a higher legacy gross margin profile?

Yes. Thanks, Aaron. I'll take that one. So as Luc said, we're excited about the acquisition of MTL and believe it really complements and enhances the existing business in Canada as well as abroad. With MTL's historical margin performance, which you're right, does exceed ours, we're targeting in the near term here, we blended gross margin of, say, mid- to high 30s.

But I think there's still a lot of runway after that as we see the European business stabilizing and grow just given the high price points in the European market. So definitely, we expect the MTL transaction to be accretive to gross margin and as well as to our adjusted EBITDA.

The next question comes from Bill Kirk from ROTH Capital Partners.

Tom, when you said a positive adjusted EBITDA during 2027, does that mean for the full year? Or does that mean one of the quarters in the fiscal '27 will be positive? And do you expect positive numbers if you were to exclude the contribution from MTL?

Yes. So a couple of parts there. So as I said on the call, Bill, I am encouraged by the progress we continue to make to grow the business and course correct our cost structure. We continue to work towards achieving adjusted EBITDA positivity as soon as possible. We will benefit -- or we will see headwinds with the veteran changes, and that's a lot of the reason why you're seeing us take more aggressive cost-saving actions now. So I'll say we're trying to get there as quickly as we can, Bill, and we would expect to be there at some point during fiscal 2027.

Okay. And then for my second question, the indebtedness maturities are out to 2031. You're sitting on net cash. So would you expect the period, the last 5 quarters or so, that period of large equity issuance and dilution, would you expect that to be over?

Yes. So yes, we're pleased with the current balance sheet position we're in after completing the January recap with a lot of the cash we have on hand now, I would fully expect that does reduce our utilization at the ATM in the coming quarters, but we will preserve capacity for future strategic opportunities as and if they arise.

[Operator Instructions] The next question comes from Pablo Zuanic at Zuanic & Associates.

Luc, can you comment in terms of the domestic medical business, there's this proposal in the budget to reduce the cap for veterans from $8 per gram to $6 per gram that could become effective by April 1? Where are we that? Is there room do you think that, that will be delayed or scratched?

Pablo, thank you for the question. This is a very important subject, and we want to make it clear that Canopy is really not in support of this reduction because it can potentially impact the level of care that veterans receive. So as you can imagine, we've channeled a lot of efforts to work with the authorities to see if this could be either delayed or the reduction may be minimized. So far, we have not been successful.

So we're taking all the actions to maintain both the integrity of the quality of the care and service the veterans are receiving. And at the same time, we're taking all the actions to maintain the integrity of our margins. So as Tom said, we were -- we took additional actions to be even more stringent on our efficiencies on cost savings. We're able to find more cost savings. So we're doing everything we can to maintain the integrity of our margins.

Tom, anything to add?

No, I think it definitely presents a headwind for us, but we're taking the actions now prior to the changes coming to effect to make sure we could preserve adjusted EBITDA performance to the full extent possible.

Right. And before I ask my follow-up, I mean, according to my math, the veteran part of the domestic medical business, it's almost about 2/3 of the market. Or am I wrong in that calculation?

You mean the total cannabis market on the medical side in Canada, Pablo?

Right. Yes. Would the veteran piece be about 2/3 of the total market roughly?

2/3 of the total medical?

Yes, of the market in Canada.

Yes, no, that's -- we can follow up with you. For me, I look at the market in a couple of ways. The adult-use market in Canada is close to $5 billion, growing at 4% to 6% every year. The medical market is about somewhere between $300 million to $400 million. We can get back to you with the exact numbers.

The veterans are a good portion of the medical market, but there are other large group of insured and noninsured medical patients in Canada as well. So what's important there, Pablo, is that, look at it, in the last quarter, we grew at 50% in this highly profitable market. MTL is growing at double digits as what was their last reported results. Combined together, we're going to be the #1 player there.

We care about the veterans. We care about all cannabis patients in Canada. And we're doing everything, as I mentioned, to maintain the integrity of our service and our care and the integrity of our margin. So as we come together with MTL, we'll look at every single synergies possible there. We'll have the benefit of greater scale to maintain margin integrity and more to follow.

Next question comes from Brenna Cunnington at ATB Capital Markets.

So just looking back to the balance sheet here. So cash balance of roughly $376 million ending the quarter and roughly $425 million following the recapitalization, so quite the war chest that you're building up here. We know that some of the cash will be going towards the consideration for MTL.

So kind of a two-pronged question here. So could you shed some light on roughly how much cash you're wanting to keep on hand and the top priorities for the excess cash? And then also, could you remind us of roughly how much spend will be needed right off the bat for MTL integration?

Brenna, so I would say from a cash standpoint, we want to make sure we have sufficient flexibility, and we want to maintain sufficient cash if we -- as and if we find opportunities in the market. So I'm not going to pinpoint that to a number, but I would say this is a healthier position than probably you would expect in terms of cash level.

For the MTL acquisition, and again, this is math we could do here. But it will be probably between $40 million and $50 million of costs is what we're expecting the cash outlay to be, Canadian dollars, for the MTL acquisition.

Okay. Perfect. And then just looking at Storz & Bickel, so good to see some of the improvements here. Looking ahead, and apologies if I missed this in the prepared remarks, but given the dynamics at play here, what can be done to help improve sales and make it sort of more stable going forward?

Yes. Thank you for the question. Storz & Bickel, amazing brand, amazing products, amazing company. I strongly suggest to anybody who has never used the device to try it. It's still a brand that has very low brand awareness, very low trial and everything, especially in the U.S.

And so it's -- the strategy to drive growth and value creation is two-pronged. Real expansion of market penetration, usage in the U.S. and well acceleration of the innovation, this -- an innovation we see in a couple of ways, price point expansion. As we expand into affordability, we see the brand really exploding. We're seeing it with the VEAZY right now, which is the entry-level device, and it's doing extremely well, and we will continue to expand that way.

And right now, we're only offering devices that are suited to flower, and we can expand the brand into devices that use concentrates and distillates, which is a very large segment of the market that we're not playing in. So multiple avenues for growth and value creation expansion for the brand.

Thank you. This concludes Canopy Growth's Third Quarter Fiscal 2026 Financial Results Conference Call. A replay of this conference call will be available until May 7, 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.

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.

[Operator Instructions]

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

Good morning, and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, Luc Mongeau; and Chief Financial Officer, Tom Stewart.

Before financial markets opened today, Canopy Growth issued a news release announcing the financial results for our second quarter fiscal 2026 ended September 30, 2025. The news release and financial statements have been filed on EDGAR and SEDAR and will be available on our website under the Investors tab.

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

Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported and GAAP measures are included in our earnings release.

Please note that all financial information is provided in Canadian dollars unless otherwise stated. Following remarks by Luc and Tom, we will conduct a question-and-answer session where we will take questions from analysts.

With that, I'll turn the call over to Luc.

Good morning, everyone, and thank you for joining us today. It's great to be with you again to share the continued progress we're making in building a competitive, profitable and trusted leader in the global cannabis market. The second quarter was one of our strongest to date, reflecting real measurable progress driven by our continued disciplined focus on fundamentals.

Q2 highlights included continued momentum in our Canadian adult-use cannabis business, consistent growth in our Canadian medical cannabis business and a stronger and significantly healthier balance sheet. Together, these actions give me confidence in our ability to sustain progress and deliver results for quarters to come.

Turning to our Canadian adult-use cannabis business. Net revenue increased 30% year-over-year in Q2, driven by demand for our Claybourne infused pre-rolls and our new All-In-One vapes from Tweed and 7ACRES. Stronger relationships with Canadian boards, large accounts and independent retailers drove continued distribution gains, including a 20% year-over-year distribution increase amongst Alberta independent retailers.

We also improved our service levels with on-time, in-full rates across key accounts, reinforcing our reliability with retail partners. For the 6 months period ending September 30, 2025, revenue is up 37% compared to the same period last year. This growth reflects the renewed momentum of our adult-use cannabis business following the actions taken earlier this year to tighten our product portfolio, streamline execution with boards and retailers and refine our sales model.

Looking ahead, we're building on this momentum with additional Claybourne innovation, new genetics across our core flower portfolio and PRJ brands and plans to reach a broader group of consumers later this year. We're also elevating our cultivation standards, including manual and refined post-ARBT processes to deliver superior flower, ensuring consumers experience the very best of what Canopy has to offer.

In our Canadian medical cannabis business, net revenue grew 17% year-over-year, marking another consecutive quarter of growth. We're staying true to our medical strategy, offering the right products at the right price, consistently in stock and for the right patient segments. During the quarter, our BC Georgia site became an exclusive medical cultivation facility, producing craft and small batch cannabis dedicated to Spectrum patients.

DOJA is also exclusively end bucking and hand trimming all product, which is a deliberate investment to drive quality and consistency in the Spectrum patient experience. We're also seeing continued growth among insured patients with registration up 20% year-over-year and almost tripling since 2021. This continued growth speaks to the reliability and care within our medical business.

Looking ahead, delivering a superior patient experience remains central to how we will continue growing this business despite proposed government changes to medical reimbursement. In international markets, frankly, I'm disappointed with our performance during the quarter, where net revenues declined $3 million.

Performance in Europe was primarily the result of supply constraint and internal process challenges. Flower sourced from sales in Europe did not meet required quality standards and internal process gaps limited our ability to deliver supply to Germany from our Canadian GMP facilities. I want to be clear, Canopy Growth is fully committed to the European market. We have already mobilized a dedicated effort to improve supply chain execution, which includes daily management oversight of logistics, product road maps and licensing.

We expect operations to stabilize and begin improving as we exit the fiscal year with international markets remaining a key part of our path to profitability. At Storz & Bickel, the launch of the new VEAZY Vaporizer was received with great enthusiasm by consumers globally and generated early sales momentum, helping contribute to sequential quarter-over-quarter revenue growth.

While the VEAZY only contributed to 3 weeks of performance during the quarter, we're seeing positive signals into Q3 and together with holiday seasonality, expect continued growth through the remainder of the year.

Looking ahead, I'm encouraged by the momentum at Storz & Bickel. The team's commitment to precision engineering, medical grade quality and design excellence continues to set the brand apart, and that's what will drive performance in the long run. On operating expenses, our SG&A savings program launched earlier this fiscal has delivered over $21 million in annualized savings, surpassing our $20 million target ahead of schedule. As we build a culture of fiscal responsibility, the team continues to identify additional savings opportunities while delivering top line growth.

On profitability, we made strong progress this quarter with margin expansion and disciplined cost management that's moving us closer to positive adjusted EBITDA. We're also taking further steps to meaningfully lower our cost of goods sold through streamlining processes, smart 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 and expanded product lineup at Storz & Bickel and a clear action plan underway to improve execution in our international markets to drive future success. As we further sharpen our focus on quality, patient and consumer experiences and disciplined execution, I'm confident we have the right strategy, focus and team to become a trusted global provider of elevated cannabis experiences.

Thank you. I will now turn the call over to Tom to walk through the financial results in more detail.

Thank you, Luc, and good morning, everyone. I am proud of our disciplined execution, including stronger financial performance, rigorous cost-saving initiatives, a significantly deleveraged balance sheet and sustained cash flow improvements. Our adjusted EBITDA loss narrowed significantly year-over-year, driven by growth in the Canadian cannabis business, along with lower SG&A expenses and efficiency gains. As a result of the progress made, we have eliminated the conditions that once raised substantial doubt about the company's ability to continue as a going concern. This is a significant accomplishment for Canopy Growth.

We had $298 million of cash and cash equivalents as of September 30, 2025, which exceeded debt balances by $70 million. During Q2, we prepaid USD 50 million on our senior secured term loan, capturing roughly USD 6.5 million in annualized interest savings. As a reminder, the company has no significant debt maturities prior to September 2027.

Moving to our detailed segment results and starting with cannabis. Q2 cannabis net revenue was $51 million, up 12% compared to a year ago. This growth was led by the Canadian adult-use business, up 30% year-over-year, primarily driven by strong consumer demand for our Claybourne infused pre-rolls and our new Tweed All-In-One vape offerings.

Canada Medical also continued to perform well, up 17% from the prior year, supported by growth in patient registrations, larger order volumes and a broader assortment of products on our Spectrum Therapeutics store. International cannabis sales underperformed during Q2, decreasing 39% from the prior year, which was driven by supply challenges. While we expect this decline in sales to improve in the back half of the year, we are proactively identifying opportunities to mitigate the near-term impact on revenue and preserve our focus on consolidated profitability.

Cannabis gross margin in Q2 was 31%, down year-over-year, but up sequentially from 24% in Q1. The sequential improvement in cannabis gross margin primarily reflects the impact of price increases on select Canadian products, improved sales mix within Canada and improvements to flower and fulfillment costs. These improvements were partially offset by the previously discussed European underperformance and inventory provisions.

I will now speak about the performance of our Storz & Bickel segment. Storz & Bickel net revenue in Q2 was $16 million, up 5% sequentially, driven by strong consumer demand for the new VEAZY vaporizer. Year-over-year, revenue declined 10% as the prior year period benefited from strong Venty and Mighty sales as well as strong performance on the back of favorable German regulatory reforms.

Storz & Bickel gross margins increased to 38% in Q2 compared to 32% in the prior year period. Gross margins in the prior year were adversely impacted by discounts provided to clear out the remaining Mighty stock, which was retired in favor of the Mighty+ device.

Moving on to operating expenses. SG&A expenses in Q2 declined 13% year-over-year, reflecting disciplined cost management and the benefits of our ongoing restructuring program. The decline in SG&A expenses year-over-year was primarily driven by reductions in headcount and professional fees, partially offset by higher investments in advertising and promotions made in support of new product launches that occurred during the quarter.

Since launching our cost-saving initiatives in March, we have achieved $21 million in annualized savings, exceeding our initial $20 million target. We are continuing to identify and implement additional cost reductions to further improve our structure while ensuring no disruption to our core capabilities and ability to execute in key markets.

Turning to adjusted EBITDA. Our Q2 loss was $3 million compared to a loss of $6 million a year ago. The year-over-year improvement was driven in part by the positive impact of our lower cost base and improved margins, partially offset by the negative impact of lower international cannabis revenues and inventory provisions.

I'd like to now review our cash flow. Free cash flow was an outflow of $19 million in Q2 fiscal '26, down from an outflow of $56 million in the same period last year. The year-over-year decrease in free cash flow is primarily driven by a reduction in cash interest payments as a result of our debt paydowns as well as year-over-year improvements in working capital.

For fiscal '26, we expect to achieve significant improvement in free cash flow, driven primarily by a reduction in cash interest costs due to lower debt balances, tighter management of working capital and improved financial performance.

I'd like to now provide our outlook and priorities for the remainder of fiscal '26. In our cannabis business, we expect improved performance in our Canada adult-use channel over the remainder of fiscal '26, driven by a robust innovation pipeline of focused product formats and tight alignment with cannabis boards and retailers.

We will continue to monitor developments around the Canadian federal government's proposed changes to the medical cannabis reimbursement program for veteran and RCMP patients. As more information becomes available and should the budget pass, we will assess its impact on our business and what our next steps may be. Excluding any impact of these potential changes, we would expect Canada medical cannabis top line to continue to grow in the back half of fiscal '26.

In international markets cannabis, we are focused on stabilizing and realigning operations in Europe. For the remainder of fiscal '26, we expect revenue in the region to remain generally consistent with the second quarter levels with growth expected as we exit the fiscal year. In Australia, we anticipate that our recently launched flower products, along with upcoming new format introductions will support continued sequential growth in the second half of the fiscal year.

For Storz & Bickel, we expect stronger performance over the remainder of fiscal '26, driven by the successful launch of the VEAZY at the end of our second quarter as well as strength coming from the holiday selling season. However, the year-over-year comparison comparisons are likely to be challenged due to the ongoing economic uncertainty that exists, particularly in the U.S. and the negative impact this is having on consumer sentiment. While U.S. tariffs have created pressure on Storz & Bickel's profitability, we remain focused on mitigating their impact through disciplined cost management and operational efficiencies.

Turning to cannabis gross margins. Excluding the potential impact to Canadian medical reimbursement levels, we expect sequential improvement in cannabis gross margins over the remainder of fiscal '26, driven by top line growth and additional production efficiencies and cost savings.

In our outlook for Storz & Bickel gross margins, we expect sequential improvement over the remainder of fiscal '26, driven primarily by top line growth and cost-saving initiatives.

As we move into the second half of the year, our priorities remain firmly grounded in execution, efficiency and disciplined financial stewardship. The deliberate actions we have taken to improve our operations, launch exciting new products in core categories, strengthen the balance sheet and reduce costs have materially reinforced Canopy's foundation for long-term stability and growth. This concludes my prepared remarks. We will now take questions.

[Operator Instructions]

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

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

Thank you for the question. Let me just give you a bit more context on this. So I've been in the business with 9 months. We pretty much started the transformation on the organization on day 1. I'm thrilled overwhelmingly with everything that's happening in the business, and we see it in the results today. So we're driving growth in Canadian medical and adult-use business. Margin is improving sequentially. Cost control, we're well ahead of objective, of targets and chasing for more of supply chain, is improving.

As I said, Europe, sadly, I'm disappointed, and I thought we would be ahead in the transformation. That being said, we're on it. We've moved to, as I mentioned, a daily management oversight of the situation. We're retooling the route to market end-to-end, and we're making significant progress.

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

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

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

And then, Tom, the ATM was used pretty aggressively in 2Q. Can you talk about the decision to use it now and in that size? And then given the magnitude in the quarter, how should we think about issuance going forward? Is it done?

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

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

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

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

Okay. Great. Second, you made some nice progress on the profitability. And you mentioned continued progress towards positive EBITDA. Any updates in terms of some of the key levers and timing of when you might expect to get to profitability? I know it's something that you guys have stopped doing in terms of specific time lines, 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 '27.

I would say, Aaron, we're controlling what we can control. And 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, while albeit a loss, it's our narrowest loss that we've had to date in my recent memory. So I think your -- 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.

Yes. 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 Instructions]

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

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

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

Yes. Thanks for the question, Fred. Yes, we believe our footprint, primarily with our cultivation in Kickern 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. So I think it's -- again, it's executing with the assets that we have and improving utilization across the board.

And then just a second question, just on the -- I guess, related to that, balance sheet now in a net cash position. You obviously have access to capital and you're a good position here. But I guess if you could talk about the capital allocation priorities that you have now that you have no significantly reduced debt.

Yes. So from my view, Fred, the $300 million of cash with no near-term debt obligations, it really provides further optionality for us when it comes to evaluating our capital structure and evaluating potential investment opportunities to grow and strengthen our business. The cash also provides us with flexibility to capitalize on these potential opportunities, but also mitigate risks as market conditions fluctuate. As we all know, cannabis is a highly volatile space.

So I think for right now, we're evaluating potential accretive options that are out there. But ultimately, we want to make sure we remain resilient and stabilize this company and focus on the business that we have today.

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

Luc, I 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? Or 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's been a bit of a race to the bottom, it seems on All-In-Ones. That's in terms of vape.

In terms of -- my second question is more in terms of the U.S. business. I know that you've said, look, the U.S. 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 had to give to Acreage in terms of balance sheet or guarantees. I think in the past, the company bought debt from AFC Gamma. I don't know what happened recently in the June quarter or September quarter in terms of help Acreage operate, especially from a balance sheet and cash flow perspective.

Hope you are doing well. Let's start with the vapes and Tom will jump in for the U.S. So we're thrilled with the early results we're getting with our All-In-One. So 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 launching -- 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. So we're putting out there product of superior quality. So we're pricing them appropriately. And they've been margin 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 to -- that will come there. We're committed to being a leader in All-In-One vapes. It is a key market, key growing market. So more news to come there and 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, do you want to give some insights about the U.S.?

Yes, sure. So Pablo, a couple of points in your U.S. question there. So there are no guarantees between Canopy Growth and Canopy USA. So Canopy USA is an independently run and managed enterprise. They did have new financing over the summer from their lender, and the team has been working diligently to deploy that capital in the areas where they see the highest return. Overall, their focus now is on execution and really bringing the 3 companies together and executing well in the U.S. space. But to be clear, there's no funding new or otherwise with Canopy USA and Canopy Growth.

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