Canopy Growth Corporation (CGC) CEO David Klein on Q4 2020 Results - Earnings Call Transcript
by SA Transcripts, https://seekingalpha.com/author/sa-transcriptsCanopy Growth Corporation (NYSE:CGC) Q4 2020 Results Conference Call May 29, 2020 10:00 AM ET
Company Participants
Judy Hong - VP, IR
David Klein - CEO
Mike Lee - CFO
Conference Call Participants
Doug Miehm - RBC Capital Markets
Bryan Spillane - Bank of America
Vivien Azer - Cowen
John Zamparo - CIBC
Andrew Carter - Stifel
Adam Buckham - Scotiabank
Rupesh Parikh - Oppenheimer
Graeme Kreindler - Eight Capital
Aaron Grey - Alliance Global Partners
Michael Lavery - Piper Sandler
Glenn Mattson - Ladenburg Thalmann
Operator
Good morning. My name is Denise, and I will be your conference operator today. I would like to welcome everyone to Canopy Growth Fourth Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
I will now turn the call over to Judy Hong, Vice President, Investor Relations. Judy, you may begin the conference call.
Judy Hong
Thank you, Denise, and good morning, everyone. Thank you all for joining us today.
So, on our call today, we have Canopy Growth’s CEO, David Klein; and CFO, Mike Lee.
Before financial market opened today, Canopy issued a new release announcing our financial results for fourth quarter and fiscal year 2020 ended March 31, 2020. This new release is available on Canopy Growth’s website under the Investors tab and has been filed on EDGAR and SEDAR profile.
Please note that our fourth quarter and fiscal year 2020 financial results presented in the press release issued earlier today, and to be discussed during our conference call today has been prepared in accordance with U.S. GAAP. I would like to note that certain matters we discuss in today’s conference call could constitute forward-looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of the factors described in the cautionary statements and Risk Factors included in the Company’s earnings release and regulatory filings by which any forward-looking statements may during the call are qualified in their entirety.
Risk factors that could affect results are detailed in the Company’s most recent annual information form and other public filings on the Company’s EDGAR and SEDAR profiles, and will be described further in our annual report on Form 10-K for the fiscal year ended March 31, 2020.
Further, during this call, we’ll refer to supplemental non-U.S. GAAP measures, which are not recognized under U.S. GAAP that are defined in the press release issued this morning and will be described further in our annual report on Form 10-K for the fiscal year ended March 31, 2020. We believe that these non-GAAP measures assist management in planning, forecasting and evaluating business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the SEC.
Please note that all financial information is provided in Canadian dollars unless otherwise noted. Following prepared remark by David and Mike we will conduct a question-and-answer session during which questions will be taken from analysts. To ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question.
Now, with that, I’ll turn the call over to David. David?
David Klein
Thank you, Judy, and good morning, everyone. We have a lot to cover this morning. So, we’ve provided a supplemental earnings presentation to help you follow along with our call.
We’re operating in unprecedented circumstances due to COVID-19. On behalf of our entire Company, our thoughts go out to all who’ve been impacted by this global pandemic. We sincerely thank those who’ve been working to keep all of us safe. And we also want to recognize the work of all of our employees, suppliers, customers and retail partners during this difficult time.
From Canopy’s standpoint, from day one, our number one priority has been to keep our employees and customers safe and healthy to ensure business continuity and to support the communities in which we work.
A majority of our non-production related staff continue to work remotely. And we had a COVID response team handling the day to day issues closely coordinating with myself and my senior management team.
In our retail operations, we temporarily closed down our 22 corporate-owned retail stores in mid-March. But, as of today, 20 of those stores have reopened and the final 2 will reopen this coming Monday. We successfully rolled out click-and-collect to all of our Tokyo Smoke and Tweed stores as well as added home delivery for nine of our Tokyo Smoke and Tweed partner stores in Ontario.
For our production facilities, we implemented a daily screening process in the beginning of March. And we’ve added additional safety and social distancing measures at all of our facilities. Luckily, we’ve seen only minor disruptions to-date, mostly related to staff scheduling. Our supply chain is in good shape, having had ample inventory of consumables on hand pre-COVID and ensuring continuity of production thus far.
A key pillar of Canopy’s culture is giving back. We’ve donated over 75,000 pieces of personal protective equipment to be used by frontline workers in various provinces and local organizations across Canada. And I’m proud that BioSteel has pledged up to $2 million worth of its Hydration Mix products to frontline workers, hospitals and patients, while This Works is providing hand sanitizers to homeless shelters. The U.S. team has also supported nurses and various hospitals by donating First & Free CBD products.
Turning to our business. Our Q4 performance was mixed. Our top-line performance didn’t meet our expectations and we lost market share in the Canadian recreational market. On the positive side, we finished the full year with 76% year-over-year growth and reduced our cash burn. Mike will walk through our financial results in more details.
Over the past couple of months, we moved our business forward with the launch of a number of new products globally with more to come. First, we have three ready-to-drink cannabis beverages in the market in Canada, Tweed Houndstooth and Soda; Tweed Bakerstreet and Ginger and Houseplant Grapefruit. And as the latest update, we began shipping Deep Space this week.
Early response from consumers for all of our beverages has been very positive. In fact, Tweed Houndstooth and Soda was the number one selling cannabis beverage in Ontario in April. And let me share with you some quotes from a recent online review of Tweed Houndstooth and Soda. “I love the taste, minimalistic but complex, similar in taste to Hendrick’s Gin and Soda. Really nice effervescence and botanicals.” And a second quote, “It was like drinking one beer, same kind of mild buzz.”
In addition, we now have a number of vape products in the market. In Q4 JUJU Power 510 battery was our top selling accessory SKU in our own stores. We also launched 510 vape cartridges under the Tweed in Twd brands. And our Tokyo Smoke Luma pod-based vape devices, Luma Go pods and Pause pods are also available in the Canadian recreational market.
We’ve expanded our chocolate offerings and now have four SKUs in the market, and we doubled chocolate production capacity last quarter. In the U.S., we broadened our First & Free portfolio introducing a new line of hemp derived CBD creams. And This Works launched a line of CBD Booster skincare which are currently available through direct-to-consumer channels in the UK and the U.S. And just late last month, This Works also launched its stress free hand sanitizers, which led to the best e-commerce selling day on the This Works site on the day it was launched.
Since our last earnings call, we’ve made several changes to our operations aimed at improving our focus and rightsizing our cost structure. We’ve reduced our production capacity in Canada by 40% by closing down our two greenhouses in British Columbia as well as an indoor facility in Saskatchewan. We shuttered a hemp farming operation in New York. We transferred all of our operations in Africa to a local partner and are moving to an asset light model in Colombia. And we’ve significantly reduced our headcount. Finally, our strategic review of the business is a 100% on track and our change agenda is already underway.
I’m going to stop here and turn it over to Mike to review our financial results. And then, I’ll come back with more details around our revised strategy.
Mike Lee
Thank you very much, David, and good morning, everyone.
I will begin my remarks with a brief summary of our financial results for the fiscal year ending 2020. And as part of this discussion, I will review the details of our restructuring program that was announced in March. I will then provide a brief overview of the COVID-19 impacts to our business and what this means for Q1 of our new fiscal year. So, with this, let’s jump into the financial results for fiscal 2020.
Let me first cover net revenue. With our first full year of recreational cannabis behind us, I’m happy to report that we generated $399 million or revenue or 76% growth versus prior year. And despite year-over-year growth, we know we miss opportunities along the way as our supply chain grappled with some complex products and production systems and work to gear itself against a very dynamic market with shifting demand and evolving consumer preferences and quite honestly volatile ordering patterns.
And these challenges continued into Q4 as we generated $108 million of net revenue, which was not only below our internal projections, but it was well below demonstrated demand. Simply put, we missed opportunities. But, the good news is, we are making changes to our operations and supply chain, some of which has already been announced and some of which will be discussed later today when we get into the strategy portion of our remarks. But for now, let me reassure you, we are focused on improving our agility and cost structure, so that we can improve execution across our supply chain and deliver on the margin commitments to our shareholders.
Notwithstanding the above, we are making progress on gross margins. And I’m pleased to announce that our adjusted gross margin in Q4 was 42%, after excluding onetime restructuring costs and inventory step up costs. And we are seeing margin accretion as our diversified portfolio strategic of business units continues to grow. And this is clear demonstrated progress against previous communications around achieving a 40% margin by year-end.
Adjusted EBITDA in the fourth quarter was a loss of $102 million versus a loss of $97 million last quarter. And free cash flow in the fourth quarter of fiscal ‘20 was an outflow of $305 million, which is a 15% improvement over the third quarter of fiscal ‘20.
Let me briefly cover our main channels of business. Our global medical revenue increased 6% versus Q3, driven by strong international growth of 11%. And we’re continuing to see strong growth in both, our international flower business with sequential growth of 14% and C3, with sequential growth of 10%. Our Canadian medical business was flat, even though more consumers are purchasing cannabis in the rec channels.
Our other strategic businesses collectively performed in line with expectations, lapping the seasonal benefits of Q3, which included the November and December holidays. Conversely, our rec business experienced sequential decreases in both B2B and B2C channels.
Our B2B gross sales decreased 31% as growth in soft gels and oils was more than offset by declines in flower and pre-rolls as we witnessed a number of changes in the marketplace. And we estimate that our market share decreased from the low-20s to the high-teens. And given the importance of this category, let me make four points.
Number one, the low-end flower category came on strong in Q4, taking greater share of the overall flower category, and we did not move quickly enough to the changes in the market. And this will be addressed in coming weeks, as we expect to be competitive in the value category.
Number two, despite our progress in shifting more of our cultivation to high THC strains, we continued to miss purchase orders as a result of high THC product availability. And we’re working to address this, but we’re simply bound by the lead times of our harvest cycles.
Number three, following an exhaustive review of our portfolio we’ve recently rationalized our SKUs by approximately one-third. And this is going to improve our agility as a supply chain, increasing our ability to meet demand while also reducing costs and complexity.
Lastly, number four, our phased rollout of 2.0 products hindered our Q4 sales performance as 2.0 items collectively represented less than 2% of our sales. And although we recognize this significant headwind to our performance, we are committed to phasing these products into the market to ensure that we maintain the quality that our consumers demand while being able to produce enough product to fill the pipeline. And we are making progress, as illustrated by our quarter-to-date sales in Q1 were 2.0 products are now greater than 9% of our sales. So, in summary, we are taking actions to improve our B2B performance.
Our B2C sale decreased 14% versus Q3, primarily as a result of COVID-19 store closures in mid-March. And we estimate same store sales would have been up 4% after adjusting for store closures.
Before I move to restructuring charges, let me briefly cover our operating expenses. Overall SG&A increased 17% over the prior quarter as we continue to ramp up our U.S. CBD business while also launching our new 2.0 products. But, as we recently announced, we’ve taken actions to right size our cost structure to match the expected market opportunity over the next 12 to 24 months. And you’ll start to see the benefits of these actions in our Q1 results.
Next, let me provide some details around our restructuring charge. In total, we recorded a $743 million charge, which is in line with the range of $700 million to $800 million that we announced in March. And of this total, $715 million was non-cash. And this charge was primarily driven by fixed asset impairments of $563 million, of which $335 million was for property, plant and equipment, mostly tied to the cultivation assets, and $193 million was for impairment of intangible assets, mostly tied to our exit from various international markets.
We also recorded $132 million for inventory write-offs related to obsolete packaging, flower and biomass inventory across our North American market. And finally, we recorded share-based compensation expenses related to acquisition milestones of $33 million.
As David mentioned in his first month, it’s critically important that we align supply and demand. And this restructuring program addresses that. But I should also highlight that we have many options to increase our supply, including outdoor growth, offtake agreements and continuous improvement initiatives within our own facilities to further optimize supply. And we are adequately positioned to take advantage of forecast growth in demand over the next several years.
Next, I’d like to share how COVID-19 is impacting our Q1 performance, starting with Canada. So, our Canadian B2B rec business has been impacted by reduced traffic to physical retail stores due to social distancing. And in the case of Ontario, cannabis was temporarily moved from essential services to non-essential services, which resulted in physical store closures from the beginning of April through May 19th. We’ve also seen key provinces including BC, Alberta and Ontario undertake rebalancing actions of their inventory levels as they look to hold only six weeks of supply versus 12 to 15 weeks prior to COVID-19. And this has resulted in lower purchase orders and replenishment to their warehouses.
Quarter-to-date, our B2B Business is seeing a 15% reduction versus a rolling 13-week average during the six months ended March 2020.
Our Canada B2C business is more heavily impacted as the majority of our corporate-owned retail stores are now open, but currently operate on a click-and-collect model and with reduced hours. And through the first eight weeks of Q1, our B2C business is seeing approximately a 50% reduction versus the same 13-week rolling average relative to the six months ending March 2020.
Conversely, our Canadian business is benefiting from a proven e-commerce channel, and sales have reverted to pre-COVID levels and have been quite stable in recent weeks. Further, our international medical business also operates on a pharmacy model. And thus far, the negative impact of COVID-19 has been modest.
Our other strategic businesses are seeing a 20% to 40% reduction versus their average sales during the six months ended March 2020.
And looking broadly, given the challenges that we’re facing to our top line, we are taking measures to limit our spending, flex down our staffing and defer or cancel nonbinding commitments where possible. But considering that around 50% of our production costs are fixed, we do expect margin pressure in coming quarters as we lose some of our economies of scale.
But, in stress testing our business, let me remind investors that we have a very-strong balance sheet with nearly $2 billion in cash at the end of the fourth quarter, and we have an additional $245 million of cash inflow on May 1st from Constellation Brands exercise of its November 2017 warrants. So, with these actions, we believe our Company will weather COVID-19 and emerge stronger on the other side.
Before I close, I would like to provide a brief update on a few priorities that I previously highlighted during our quarterly earnings call.
On SAP, I’m happy to report that we launched SAP in the U.S. under budget and ahead of schedule. In fact, this was the first go-live our third party implementer ever completed in a virtual setting as a result of COVID-19. And our experience with SAP was so positive that we’ve elected to re-sequence our global rollout, so that we can focus on Canada next. And this will provide Canopy with a single North American ERP solution that will allow us to drive down costs and increase agility as an organization.
On our control environment, we have made tremendous progress in our internal controls over financial reporting. And we recently remediated our longstanding material weakness on end-user computing while also reducing the number of significant deficiencies in our financial reporting processes. So, simply put, our control environment continues to improve.
On financial reporting, we recently completed our conversion to U.S. GAAP and will meet our timelines as a large accelerated filer with our first ever 10-K filing on Monday. And we have provided an adjusted EBITDA under U.S. GAAP for prior quarters in our press release.
This now concludes my remarks. And I would now like to turn the call back to David for a review of our recently completed organizational and strategic review of the business.
David Klein
So, I’d like to spend some time talking about our refocused strategic plan. I know, we won’t be able to cover it all here today. So, we’ve also scheduled a virtual investor meeting for June 22nd to provide more details.
Last quarter, I announced my intention to rapidly complete a strategic review of our business. Since that announcement, the Canopy team has worked hard to clearly define a path forward that enables us to deliver on our objective of being the world’s best cannabis company. I’m pleased to report the analysis is largely complete and has the full support of our Board of Directors and our largest investor, Constellation Brands.
We are building the best cannabis company in the world where we will use world-class consumer insights to inform our already existing best-in-class R&D and science capabilities to produce high-quality products for each need state and each price point, and to deliver them to consumers as efficiently as possible.
Over the past four months, I’ve done a deep dive into Canopy’s operations and organization. As we all know, Canopy grew quickly to achieve a leading position in a rapidly expanding industry. And through that time period, being first was clearly rewarded. But being first isn’t a sustainable strategy or a point of differentiation, nor is it necessarily tied to creating value. This is especially true in a sector where markets have taken longer to develop than was originally and perhaps optimistically expected. The strategy of being first in all areas is no longer relevant.
Second, in line with the former strategy, the organization’s size and scope increased dramatically. Canopy went from 400 employees in Canada to more than 4,000 employees in 15 global markets in just a few years. While this was a great talking point that came with great consequences, the Company became less agile, siloed and was burning too much cash. We’ve already taken decisive actions to bring some much needed focus. We designed a new operating model that will focus on the consumer and will increase our speed and agility as an organization.
We’ve adjusted our organization structure to deliver that strategy and are working to ensure we have the best talent in the industry. We’ll focus on three core markets and are taking meaningful steps to redeploy our resources to these geographies. And they are Canada, the U.S. and Germany.
We’ve made substantive reductions to headcount, divested redundant production assets, and exited some markets in order to reduce our cash burn and increase our focus. This is not a quick transition, but the beginning of a journey that will put us firmly in the ranks with the top consumer product companies in the world. The cannabis industry is still in its infancy, and we intend to lead the growth in evolution of this industry.
I believe we need to continue to invest in R&D, consumer insights and route to market capability, while we become as efficient as we can in all other areas of the business. These changes can’t be implemented overnight. Coupled with a five-month grow and production cycle, it’ll take time for our results to become apparent.
Over the past few quarters, we’ve been slow to react to changing market dynamics and consumer preference shifts in the developing markets in which we participate. It’s my intent to ensure that we don’t repeat those mistakes going forward.
We think there’s a huge demand with existing legal customers. We intend to know what we need to do to win their business away from our competitors. We know there is a large number of consumers who prefer to purchase from the illicit market. We intend to know what we need to do to win their business. We believe there’s a massive set of consumers who don’t currently use hemp for cannabis products. And we intend to know what we need to do to win their business as a substitute for alcohol or as a replacement for over-the-counter medicines that address pain, anxiety and sleep.
To do all of this, we’re building world-class consumer insights and analytics capabilities. To lead this function, we’ve created the role of Chief Insights Officer, a new C-suite position that will report directly to me and ensure we’re leveraging data as a core differentiator. Chris Edwards, a proven executive from Constellation Brands, who led the analysis that drove Constellation into the cannabis space, has accepted the role and will start next week.
Today, we have what I believe is the best science and R&D capability in the industry. This talent has been diffused across too many initiatives. We want to focus that capability using the insights I just described, to developing solutions that amaze our consumers.
To lead this newly combined science, innovation and R&D function, we’ve created a C-suite role of Chief Innovation Officer. And I’m pleased to announce that we brought on Julian Cohen in this role.
Although Julian is in his first week at Canopy, he’s not a stranger to us, as he worked closely with the team that developed our Deep Space and Quatreau beverages.
Turning to our focus markets. The three markets that have the largest and most tangible profit opportunities in the near term are Canada, the U.S. and Germany. Our resources will be focused against these three markets, while we operate with asset-light models in places like APAC, or Latin America. This means we will not be seeking geographic expansion.
In the medical segment of our business, our focus will be on meeting the needs of our existing medical patients, generally addressing the wellness category and creating substitutes for medications for pain, anxiety and sleep. This means we will not focus on developing pharmaceutical products.
Given the relative maturity of the medical markets around the world, we believe Canopy is already well-positioned to lead in this segment, and we generate significant growth in the near- term in the medical segment.
We need to build highly effective routes to market in each of our core markets. We therefore initiated a search for Chief Commercial Officer who will work with me in driving sales across the Canopy portfolio and ensuring we have the right products in the right place at the right time.
We’re transforming our supply chain to be more agile and responsive to changing consumer preferences. I believe there’s an opportunity to unlock significant cost savings in our supply chain. We also recognize the need to consistently deliver higher quality experiences for our consumers. And quality in this context means quality as measured by the consumer, attributes such as the right amount of THC in a product, optimal moisture levels in our flower products, how our pre-roll joint burns, how our edibles taste, or how our consumers experience our drinks in terms of onset time and effect. The work is well underway, and we’ve initiated the search for a new Chief Operations Officer who will lead us to greater agility and expanded margins.
To drive this product-led approach to the market, I’ve asked Rade Kovacevic to assume the role of Chief Product Officer. Rade has held several important roles at Canopy over the past five years. Rade is a well-known proven leader in the industry, with an unmatched understanding of all aspects of the cannabis industry. I’m looking forward to see the results of his leadership in this function.
Those of you who attend our virtual investor meeting will have access to the talented exec team, so that you can hear from them how we plan to bring the strategy to life. These are ambitious goals, and our work has just begun. For that reason, expect fiscal ‘21 to be a transition year as we rapidly evolve.
Additionally, given the COVID-19-related uncertainties, we’re withdrawing our previously communicated milestones for achieving positive EBITDA and net income. It’s our intention to provide new financial targets during the second half of fiscal ‘21. We also plan to report on our progress against our key strategic priorities in upcoming quarters.
In the interim, let me offer a perspective on how our strategy will connect with our financial aspirations.
Our objective is to be number one or number two in value share within our core markets, Canada, the U.S. and Germany, and in our focus product categories of flower, vapes, edibles and beverages and topicals.
Now, Canada and the U.S. are already massive markets. Canada’s legal recreational market is already at about $2.1 billion and growing month over month, and this was with just 60 stores in Ontario, which is Canada’s largest province. Behind Tweed and Tokyo Smoke retail banners, our production scale, and our best-in-class 2.0 products, Canopy’s Canadian revenue will grow substantially.
The U.S. CBD market is already a large industry and leading projections see it becoming a $10 billion industry over the next few years. We plan to win in this space. With our collaboration with Martha Stewart or with brands like This Works and BioSteel, we expect to deliver on the promise of advanced CBD products in this lucrative U.S. market. So, between the U.S. and Canada, there’s tremendous revenue opportunity for Canopy over the next two to three years.
When added to the continued growth in the German medical market, we see immense near-term opportunity for Canopy. This opportunity will be supplemented upon federal permissibility in the U.S. through our acreage arrangement.
Second, I’m pleased with our gross margin progress. Getting to 40% was the stated objective, and we made good on it. We know we can do even better as we optimize our supply chain. So, we are going to do a deep dive, end to end review of our operations. And we believe there’ll be significant opportunities to unlock efficiencies across that supply chain.
And finally, we have the balance sheet strength to responsibly invest in the right opportunities while maintaining our financial cushion. We remain resolute in our effort to reduce our cash burn and will emerge from this transformation period with a significant amount of cash that can be deployed to further enhance shareholder value. We expect these actions to enable us to deliver significant profits over the medium term. We’re well-positioned to unleash the power of cannabis to the benefit of our consumers and our shareholders.
This concludes our prepared remarks. And now, Mike and I are happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Doug Miehm with RBC Capital Markets. Your line is open.
Doug Miehm
Yes. Good morning. What I was hoping to do is just go over your thoughts on the U.S. market. I know you’re very familiar with that the opportunity is significant. You indicated that over the next little while could grow to $10 billion. But relative to you share in Canada, how would you expect your share in the U.S. to change over the next several years, and why?
David Klein
So, we launched an expanding line of products under our First & Free product CBD brands in the U.S. We have more SKUs and brands coming to market over the next several months. I would say, we expect to be able to take meaningful share in the U.S. CBD market, in the categories in which we participate. And you have to think about CBD is playing across a number of areas. So, there are ingestibles which First & Free is quite likely the best product in the market and that it uses a very specific different formulation which outperforms the competitive set. And that’s a growing segment in the U.S. CBD market.
Second area we participate in CBD is through BioSteel, our sports nutrition company, where we’ve added CBD to help recovery in athletes. We expect to do extremely well in that area.
The largest category, however, in the U.S. market is in skincare and topicals. And we have First & Free topicals, and we have This Works skincare and topicals in the marketplace. But that’s an area that will be a little more challenging for us and take us a little longer in order to really establish a toehold because there are some sizable and well recognized competitors in that space. But I expect us to be able to grow meaningful share in the U.S. We’ve been investing in the U.S. in order to position ourselves for that work. And in fact, we’ve invested in the U.S. ahead of being able to get the sales capability to drive the revenue that we need from the U.S.
And look, that puts a little bit of a drag on our operating margins clearly and it puts a little bit of a drag in terms of SG&A load for the business. But to me, that’s the benefit of having a $2 billion war chest. A lot of people assume that’s to cover M&A sorts of activity. In my mind, that war chest should also be used to position us in the markets where we can see significant amounts of growth over time.
Operator
Your next question comes from Bryan Spillane with Bank of America.
Bryan Spillane
I guess, the question I had David stepping back, looking at ‘21 where there’s a lot of internal work you’re doing now to sort of rewire the organization, make it more efficient. At the same time, I think you talk about the aspirations for market share in the three priority markets? And I guess, so my question is it’s very -- and my experience with these types of things has been that when companies are going through a massive internal sort of change, sometimes will have an effect on the external. So, is it reasonable to expect that you’d be able to sort of meet those markets share aspirations in ‘21, given all the work you’re doing internally, or is that something you’re looking at more as we get past this transition year?
David Klein
So, Bryan, that’s partly why we’ve elected to kind of withdraw view on guidance, because between COVID-19 and some of the work that we’re doing, we need a little more time in order to be able to give well thought out guidance in terms of where we see the financial metrics coming out. But, you use the really good work around rewire because that’s what we’re doing in the organization. It’s not -- it might be simple to come in and cut a whole bunch of costs everywhere and you feel pretty good about it. But I actually am pretty certain that you would see a significant top line effect. We just finished the fiscal year where we grew our top line 76%. And look, I’m sitting here four months in the role, believing that we can continue at that rate for the foreseeable future. What I don’t want to do is to come in and got the organization in order to hit some SG&A target at the expense of our top line. So, we’re trying to do a little bit of balance.
I think what you will see Bryan is you’ll see volatility, but you’ll see progress against the objectives around market share and around profitability. But, you’re just going to see some volatility, which I think has caused any company when you go through the level of change that we’re going through at Canopy.
Operator
Your next question comes from Vivien Azer with Cowen.
Vivien Azer
I appreciated the detailed rundown on the specific drivers of some of the market share weakness in the quarter. What caught my attention was your commentary around addressing the explosive growth in value that happened sooner than you expected. It sounds like you might have a value offering coming. What we see as a competitive step is the wide array of outcomes. Arguably, there’s now a value segment and a deep value segment, clearly has different margin implications. So, a two-part question please. Number one, can you expand on your commentary around your intentions around value? And then number two, how you’re thinking about margin? Thanks.
Mike Lee
Yes. That’s great. Thanks, Vivian. So, look, just taking a step back. We shouldn’t be surprised as an industry that value is taking off. Value was 6% of the category, not more than four or five months ago, and it’s now over 20% of the category. And when you think about what’s going on in the industry, coupled with a pandemic, consumers are seeking value. When you think about how we got to this point from a surplus perspective, the real root cause is that the number of stores in Ontario and just broadly in Canada did not open quickly enough and hence you have a number of LPs that are working to balance their inventories.
And what you see happening in value, even though it’s moved quickly, there’s nothing going on there that can’t be replicated. When you think about the four Ps of marketing, the daily special has hit the market by getting good quality products at a really good price, getting the distribution nationally and being able to replenish it in a timely fashion to keep it in stock. So, clearly, they’re winning in that space just based on basic supply chain management. So, in our view, value is here to stay. And our job is to make sure that we’re competitive in value. Our Twd brand has been our value offering. And in terms of price points, we’ve been at the top-end of the range in value. And the new entrants that have come in recently are really at the bottom end of value. And we think we can get there. But again, it comes back to us being nimble and agile to move quickly as an organization. And that’s become a top priority for us is to get into value in earnest over the next several weeks. So that’s coming. But we also have to deliver on the margins.
And I don’t expect us to deliver at 45 -- 40%-45% margin on value. But, we believe that we can engineer our supply chain leveraging outdoor grow in the future to help achieve those targets for the low-end. But, we’ve got work to do to get there. But that being said, we’re going to go after it, because it’s an important category. And we want to be competitive there. So, more to come.
David Klein
So, if I could just add a bit of a tenant strategy overlay, Vivian. So, the move toward value is and was predictable in terms of the using it as a way to generate cash. We have excess inventory as virtually all of the LPs. And we intend to as Mike said, kind of play in that game. But, I think the more important question is where does it go in the future, right? So, we need to in near term find we can play in the value space and will generate cash. But over the medium term, and I don’t mean very long medium term, we need to get to the place where we can generate margins that are consistent with our total profitability and margin aspirations.
And then, further, we need to think about the low end of value as a place for us at Canopy and the industry in aggregate to compete for share of the illicit market. And to me, that’s the more interesting component of this move to value is being able to create offerings that have the right level of quality, the right level of THC content and the right price point and the right margin so that we can sustainably compete for the illicit market, which I think all of you know is larger than the legal market in Canada.
Operator
Your next question comes from John Zamparo with CIBC. Your line is open.
John Zamparo
Thanks. Good morning. I appreciate all the commentary on value and the pivot in strategy there, but can you talk about your mainstream and in particular your premium products? What do you see in terms of share in that regard? And if value is as crowded as we all think, do you plan to lean on premium flower or pre-roll, or do you look to prioritize 2.0 products instead to perhaps drive share further? Thank you.
David Klein
So, I’ll start and then, Mike, you can fill in. But, my view is, we called out specifically that we’re going to run the business under verticals of flower based edibles, which includes beverages and topicals and skincare. And our intent is to make sure that we’re performing well in each of those verticals. And clearly, that means we need to perform well across the flower segment. So, we just talked about value. Look, where we need to get to as an organization is, we need to be consistently on the shelf because we as along with many of the other LPs kind of bounce back and forth to being on the shelf versus not. We need to fix that. And that’s part of the supply chain work that’s underway. And we’re paying a lot more attention to consumer quality. We’ve always been as good as you could possibly be in terms of meeting Health Canada guidelines and safety guidelines and so forth. But right now I want to switch that focus to really to make sure that we’re creating quality products as measured by the consumer. Because I think if we have a good value strategy, I then think we need to create products that are differentiated at higher ends of the market. I expect that the cannabis market will bifurcate just like most other CPG categories have bifurcated over the past five to seven years, so that you’ll have a high end of the market and you will have a low end of the market. And we expect to participate in both ends.
Mike Lee
David, I’d just build on that and say that we’re very happy with our portfolio in the high end. The high end also is growing. I know that value is taking share overall, but the high end part continues to grow. And our biggest opportunity from a share perspective is stability of supply. And that continues to be our top focus.
Operator
Your next question comes from Andrew Carter with Stifel. Your line is now open.
Andrew Carter
Good morning. And I appreciate you outlining kind of the business challenges, but it’s -- you missed purchase orders on THC, haven’t been competitive on pricing. And I guess one of the keys to near term improvement will be getting your 2.0 products on shelf, and in particular for you all, you’re doing some disruptive things, proprietary pod-based system as well as beverages. Can you kind of help us understand how receptive the retailers are going to be giving you the shelf space to do that and kind of the extent that you’re willing to bear to kind of demonstrate this platform innovation? Thanks.
Mike Lee
Yes. So, there’s about a 100 skews out in the marketplace on Cannabis 2.0 today, based on all of our competitive entail. And as you guys know, we’ve launched a number of SKUs year to date. We’ve got four chocolate SKUs in the market with Tokyo Smoke Go and Tokyo Smoke Pause and Tweed Bakerstreet and Tweed Houndstooth. We’ve got five vape SKUs in the market with the JUJU 510 battery that was launched in Q3. We’ve also launched our Tokyo Luma vape pens, both Go and Pause. And we’ve launched two 510 cartridges as well. And then as David mentioned in his remarks, we’ve launched three beverages thus far.
Coming in Q1, there’ll be five more vape launches and four more beverages coming in Q1, Q2 and Q3. So, they’re going to continue to phase out. And we’re getting distribution. There’s minimal challenges in getting product on shelf. And really, that’s why we’re focused on the phased rollout is that we want to make sure that once we launch that we can keep product on shelf. Nothing hurts brand’s affinity more than out of stocks. So, we are focused on providing that pipeline as we go, but we’re not having any challenges in getting distribution.
Obviously, some of the products aren’t legal everywhere in Canada, Quebec’s got some challenges, but where products are legal, we’re getting the distribution.
David Klein
And Andrew, the thing I would add to that is, when you’re in a shelf space battle at retail, the best thing that you can do is to really do things that drive consumer pull versus supplier push. And that’s why we’re spending time and efforts to build out a real robust insights function so that we can build best-in-class products that the consumers want. Because looking Canada, we can’t do the consumer pull sorts of things that we can do in other markets and in other categories. And so, we think that the 2.0 products that we put out, have to have attributes that deliver the expectations that the consumer will have, so they actually want to go get the product.
We want people walking into the stores, asking for Houndstooth and Soda, as opposed to just finding it on the shelf when they get there. And so, that’s the shift that we’re making around our insights and innovation group.
Operator
Your next question comes from Adam Buckham with Scotiabank.
Adam Buckham
So, I guess, I have more of a high level question about the Canadian market. So, one of the big expected catalysts for the sector in 2020 was the planned storefront expansion in Ontario. Obviously, the timeline has been pushed out, but do you expect to see the same number of stores prior to COVID-19, opening up long-term? There’s clearly been a big increase in approvals. I guess, I’m just wondering if the new economic environment causes retailers to best plan to open stores in the near to mid-term?
David Klein
We’re not hearing it from our retail partners. In fact, some of them are trying to push forward as fast as they can. And you’re seeing an acceleration in Ontario. I think last month, about 18 stores opened. That number looks maybe it’s a little bit higher in May, I might be off a month here. But, that kind of 20 stores a month routine seems to be working. And from our retail partners we’re hearing that they’re full speed ahead on this.
Mike Lee
We’re forecasting store count to go from 950 to 1,200 for the year. And I think David’s remarks around Ontario alone will help to get it there. So, cautiously optimistic. I know that we’ve been surprised before but it’s also worth noting that just with the 60 stores in Ontario, the Ontario province is now the biggest buyer of cannabis in the industry. So, it just goes to show you how important Ontario stores are to the overall industry.
David Klein
There’s some innovation that I don’t think we fully understand the effect of and I believe it will be positive. But, some direct delivery, click and collect as well as we’re looking forward to the time when people can spend time in the stores. But I think, actually the adaptations to the crisis is going to create different ways for consumers to be able to get cannabis products, which will probably pay dividend over the medium term.
Adam Buckham
Thanks.
Operator
Your next question comes from Rupesh Parikh with Oppenheimer. Your line is open.
Rupesh Parikh
Good morning, and thanks for taking my questions. So, I want to drill down a little more on your operating expenses. So, as we look forward, just given some of the actions you’ve already taken to rationalize your business, what’s the right way to think about some of the benefits on the operating expense line? And what other initiatives are underway that could help to reduce the run-rate we saw in Q4?
Mike Lee
Yes, I’m happy to take that one. So, look, it starts with strategy. Right? Strategy always leads to function. And what we’ve been doing over the last several months, since David’s arrival is really thinking about how we’re going to improve our speed and agility as an organization? How we’re going to get our cost structure in line, but also how we’re going to position ourselves to deliver 76% growth year-on-year over the next several years, right? Because we do believe that that growth is attainable.
So, starting with sales and marketing. When we looked at our sales and marketing organization, there’s no question that that was a big area of investment for Canopy over the last couple years. And mind you, if we sat here a year ago, our expectation was that Canopy would be a $1 billion company in year one of the rec market. And given the store count challenges, we found ourselves a bit over our skis in terms of the size of the sales and marketing organization. So, we did a lot of work to take a step back and say what growth do we expect over the next few years? What SG&A load should we have in sales and marketing by the time we get there? And what are the necessary course corrections that we need to make today in order to provide for that glide path to occur? That’s what led to some of the announcements that we made earlier this year. And we now think that we’re positioned in our sales and marketing overhead to achieve the targeted SG&A load by FY23.
When you look more broadly at G&A, G&A has got a little more challenge in that. There’s a lot of -- there’s just a fixed cost of doing business. And we know that we’ve got work to do on G&A. And rather than cut G&A today and try to manage it and grow into it, if you will, we are likely to be a little more cautious on G&A, recognizing that we have certain enablers that are coming over the next year, year and a half, like SAP that are going to allow us to reduce our cost structure in certain areas of business where we’re very manual in a lot of our business processes. So, there’s a number of those types of enablers that are going to help us get there. But, we are keenly focused on, as part of our overall op model design, putting targets in place across every one of our leaders at the EMC, the executive level, so that we know exactly what our SG&A load targets are, not just today, but by FY23, and all the management team’s going to be incented on that accordingly. So, it’s being taken very seriously. We’re just taking a very judicious approach to make sure that we’re making the right balance to allow that growth to occur.
David Klein
And the only things that I would add to that is we’re continuing to invest to open up to U.S. because of the size of that market. We’re going to continue to make sure we have adequate innovation and insights capabilities. And we’re going to require returns on all of those. And then, we’re going to be lean elsewhere. And our org redesign work isn’t finished. We’re still underway with that work. In fact, we just announced the names I listed off today, were announced to our organization just yesterday. We now need to do the work below those levels, to build out the org. So, we’re not finished with the work we need to do from an SG&A standpoint. And as both, Mike and I have mentioned up to this point, there’s also -- and I know this isn’t SG&A, but there are overhead costs in operations that we kick off a project to ensure is appropriately being spent to get the kind of value that we would expect out of it.
Operator
Your next question comes from Graeme Kreindler with Eight Capital. Your line is open.
Graeme Kreindler
Hi. Good morning and thank you for taking my questions. So, just a follow up on the similar line of discussion, taking into account the comments made about the strategic plan, and what’s been done in Canada, Africa, Latin America to-date, moving to a more asset light model. You also mentioned on the call, Canopy’s reached about 15 countries internationally. So, looking at the PP&E, intangibles, goodwill balances that remain on the balance sheet, do you expect that there’s going to be further restructuring as you look for the remainder of the portfolio, moving ahead on a go forward basis? And if possible, could you quantify what the magnitude or the timing of those sorts of decisions might be? Thank you.
Mike Lee
Hi, Graeme. So, yes, we’re very comfortable with where we are from a goodwill perspective. We just having completed our year end, as you know, that’s part of our annual assessment on all of our goodwill. And one of the biggest triggers on goodwill is market cap. So, we’ve got plenty of cushion on all of our goodwill testing as a result of our market cap. But, if for some reason our market cap were to decrease, then we would have -- that would serve as a trigger to take another look at our goodwill for potential impairments. But, as I sit here today, we are very comfortable that the restructuring charges are behind us. We have restructured our cultivation capacity, which was a big step for us to make, to get our balance -- our supply and demand in balance. And we have literally addressed all of our inventory surpluses across North America, which some of it was a result of changes in the marketplace, some of it was a result of just call it infrastructure friction in terms of the market moving toward high THC versus mainstream THC levels. We feel good. We’ve gotten full sign off from our auditors. And our goodwill quite honestly, if you look at our benchmarks versus competition, our goodwill is much more modest than many of our competitors. So, we’re in a very good spot.
David Klein
And you know, I think when you look at our investment in PP&E, there’s no denying that we overbuilt our facilities. However, the facilities we have today are in -- are lined up with the demand that we expect. In fact, they’re a little light versus the demand that we expect going forward, which we’re certain we can cover. And actually we prefer a little bit of that outsourcing model. But, we have the facilities we have. And so, it will be a drag on margins when you look at depreciation over the next several years. But, we like the fact that we have state of the art facilities. And yes, they might’ve been a bit overbuilt, but we are where we are. And so, you’re not going to see an adjustment to our book values for this.
Mike Lee
Yes. And as much as you maybe dislike the infrastructure today, that infrastructure is going to serve us well when this market grows three, four times over the next few years, because that will provide us with tremendous economies of scale.
Operator
Your next question comes from Aaron Grey with Alliance Global Partners.
Aaron Grey
I just want to come back to gross margins quickly. So, first off, so I know it was up Q-over-Q, helped by mix, partially due to flower and gross sales being down. So just, how best to think about that in the near-term, especially if you were to see flower and pre-roll rebound? Even though I know you said 2.0 products have increased in next quarter-to-date? And then kind of a longer term question on gross margins, just as you think about expectations for pricing on 2.0 product category, still in the early days today, and you have one of the more robust product offerings, but, how do you expect to see the pricing and the margins within the 2.0 category in Canada, as you see other peers coming to category and increase their own offerings and potentially trying to gain share through pricing?
Mike Lee
So, let me unpack that. So if you look at our overall Canadian infrastructure, our fixed costs are about 50% of our total costs. And when we think about fixed costs, there’s depreciation, which is clearly a fixed noncash cost, but there’s also fixed cash cost. So, in the short run with the COVID impacts that we’re facing, we are going to be very sensitive to that fixed cost deleveraging in the system. So, I would not expect to see 40% margins in the next couple of quarters as we work through this. But, we are making progress overall on margins and operating costs. The area that we have a lot of work to do in my opinion is in Canada. Canada today operates at a real -- 28% to 30% gross margin, and we’ve been making progress quarter-on-quarter, but the progress has somewhat slowed over the last three to four months. And this is one of the many reasons why we’ve launched this end-to-end review is because we believe, not just based on looking at our own infrastructure, but also looking at some of the benchmarks in Canada, that this business and the composition of products that we’re making and the types of costs incurred in producing these products, we should be well north of 40%. And David’s thrown out even more aggressive targets on the projects that we’re working on, because we think that the opportunity is there.
I think, when it comes to the ability to serve the market across all price categories and flower, some are going to be more challenging than others, but that’s where I think we need to adapt our overall operating footprint, so that for areas of value, which is going to be the most challenging category that we’ve got to have a very, very efficient cost structure that leans more heavily on outdoor growth over time. And we know that that’s going to be important.
When I think about the margin opportunity of Cannabis 2.0, we are still working through, as part of the rollout, dialing in all of our operating expenses from a productivity perspective. So, we know you haven’t quite hit our stride on all of the advanced manufacturing that comes along with these products. But, I can assure you as these products scale up, we’re going to enjoy fixed costs leveraging because of the just the sheer volume going through these facilities. So, we expect Cannabis 2.0 products to be margin accretive over time and should start to look like some of the other CPG products that we’ve benchmarked in this category as well. So, 50% margins would be the goal. And can we beat that in some categories like beverage? I think there’s possibility to do that if we can get the volume up to be 5%, 6%, 7% of the category versus 1% of category.
Operator
Your next question comes from Michael Lavery with Piper Sandler. Your line is open.
Michael Lavery
Thanks. Good morning. I just want to dig into the market bifurcation a little more that you were talking about and maybe see how much we can tie it to the 76 or so percent growth you have indicated you expect to be able to repeat. Specifically, just curious, in kind of the middle of the market, how you see the consumer approaching that and what differentiates it if there’s the downgrading that’s obviously pretty significant in a market for the high THC products. What are you forecasting for the middle -- what drives demand there? How sustainable is that? And how much of a mixed erosion risk is there from consumers trading down whether to someone else’s products or your own?
David Klein
Yes. So, I’ll take a stab at that. But we may need to come back to Michael to get more in depth around individual segment performances in the marketplace. But I think the point is, if we’re going to sit -- to the extent that you have products that aren’t in value -- so value is its own thing in my mind. And again, you see that in a bunch of CPG categories. If you’re going to sit outside of value, you need to have a defensible, consistent value proposition that your consumers are willing to pay for, right? And so, that’s aligned with the quality work that I outlined previously. And it also aligns with the design to value work that Mike discussed, right? So, you have to get your proposition right. I think then, with that every other category settles into a place where you have a value into the business. And then, you have consumer choice where for various attributes people can decide to buy at different -- in different levels of the market.
And we have brands that are capable of addressing those other areas of the marketplace. I just think that the cannabis industry at this point and from a legal standpoint is a bit maybe immature in order to be able to have that -- have those clear bifurcations at retail. And so, it’s still a bit of a discovery industry for a lot of consumers. And we have to help them by differentiating products enough so that people understand the difference between the different price bands and the different brands.
Mike Lee
And we’re still seeing the premium segment as a third of the consumer dollar...
David Klein
And growing.
Mike Lee
And growing. And mainstream is 45%of the business. So, yes, value is here. Every consumer category that I know has a value category. It’s going to play a role. But let’s not forget about the high end; let’s not forget about the mainstream because they are growing as well.
Michael Lavery
Yes, I see the -- the high end momentum. That’s pretty clear. But, I guess I’m curious about the mainstream piece. Do you think this quarter’s results suggest that the consumer may feel like that’s overpriced, then you see even further momentum down, or is there a reason to pay that mainstream price point? You talked about quality, but I guess I’m just curious how -- what really compels the consumer to stick in that mid-tier?
David Klein
Yes. And look, I think you can look at a whole bunch of consumer categories that have the same erosion of mainstream. It’s what happens over time I think or at least this is what’s happened over the last five to seven years. I do think there’s a reason for being in the mainstream. And so, I -- and the whole market continues to grow. But, I think over time, yes, you need to be able to compete aggressively at the high end, you need to compete aggressively at the low end. And then, using my beverage alcohol experience, you can sell an awful lot of beer and wine and spirits in that mainstream category. It’s just -- it doesn’t have maybe the sexiness of the high end or the buzz in turn that you get at the low end. Thanks very much.
Operator
Your next question comes from Glenn Mattson with Ladenburg Thalmann. Your line is open.
Glenn Mattson
Hi. Most of the questions have been touched on already. But, curious, the international medical market did perform well or in line. I suppose it has been doing well for a couple quarters now. Can you just maybe give us a little bit of color on pricing there, competitive landscape, anything changed in the last three or so months? Thanks.
Mike Lee
I think, the big story on Germany is we now have supply continuity. And that’s been a challenge really since I started at Canopy 16 months ago, is that all of its supply was really coming from Canada and the regulatory steps to get product out of Canada into Germany could be quite challenging. We recently commissioned our Denmark grow facility that is now feeding the German market. I think, our first shipment was just recent. And now the German market is adequately positioned to grow. So it’s really that demand has been there, it’s just been unserved. So, we’re quite happy with the performance. And this is really going to be a proving ground year for Germany.
We also have C3 which continues to just grow quarter-on-quarter, month-on-month. Their business has remained relatively unaffected through their pharma channel and margins are holding up well. We know that dronabinol is not a proprietary product, but quality does matter and they continue to get accolades for the quality. So, we’re quite happy with our performance in Germany and we expect it to continue to perform well over the near term.
Operator
This concludes the Q&A portion of the call. I’d now turn the call back over to Mr. David Klein.
David Klein
So, thanks everyone once again for joining us. And as I’ve met investors and I talked to people about Canopy since joining it, as CEO, I’m struck that often people treat our industry and our product offerings as almost abstract products. And so, I’d like to encourage all of our investors in Canada to test out our new drink products. In the U.S., I’d encourage you to check out our First & Free CBD offerings. And literally everyone should be using our BioSteel sports nutrition products and our This Works products. So, I encourage you to do that and I’d love to hear your feedback over time.
Our Investor Relations team will be available to answer any additional questions. And we look forward to having many of you participate in our virtual investor meeting on June 22nd. Have a great day.
Operator
This concludes Canopy Growth fourth quarter and fiscal year 2020 financial results conference call. A replay of this conference call will be available until August 27, 2020 and can be accessed following the instructions provided in the Company’s press release issued earlier today. Thank you for attending today’s call, and enjoy the rest of your day. Goodbye.