Canopy Growth Q1 2025 Earnings Call Transcript

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Provided by Quartr
August 9, 2024

Key Takeaways

  • All business units delivered profitable quarterly adjusted EBITDA for the first time in Q1 fiscal 2025, reflecting improved operational efficiency and cost management.
  • Consolidated gross margin rose to 35% from 18% a year ago thanks to a 31% reduction in cost of goods sold and a 24% cut in SG&A expenses.
  • Canada adult-use revenue fell 22% due to supply constraints from third-party manufacturing partners, with management taking action to strengthen supply and focus on higher-margin channels.
  • Canada medical cannabis sales grew 20% year over year, marking six consecutive quarters of growth and a record top line in the high-margin medical segment.
  • Free cash flow improved by $52 million to a $56 million outflow, and the company extended its term-loan maturities and amended its credit facility to enhance balance sheet flexibility.
AI Generated. May Contain Errors.
Earnings Conference Call
Canopy Growth Q1 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning. My name is Joelle. I will be your conference operator today. I would like to welcome you to Canopy Growth First Quarter Fiscal 2025 Financial Results Conference Call. Currently, all participants are in a listen only mode.

Operator

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

Speaker 1

Good morning and thank you for joining us. On our call today, we have Canopy Growth's Chief Executive Officer, David Klein and Chief Financial Officer, Judy Hong. Before financial markets open today, Canopy Growth issued a news release announcing the financial results for our Q1 fiscal year 2025 ended June 30, 2024. 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.

Speaker 1

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 David and Judy, we will conduct a question and answer session where we will take questions from analysts. With that, I will turn the call over to David.

Speaker 1

David, please begin.

Speaker 2

Thanks, Tyler, and good morning, everyone. Thank you for joining us today to discuss Canopy Growth's results for the Q1 of fiscal 2025. I'm excited to review the continued progress we've made as an organization reinforcing our path towards sustained profitability and leadership in the global cannabis market. This quarter demonstrates that our strategic focus is paying off, which is evident in the sustaining improvement of our key financial metrics and profitable revenue generation across all of our business units. During our call, I'll cover 3 topics.

Speaker 2

1st, our drive to profitability through focus on efficiency in our operations, as well as profitable revenue generation over chasing market share at all costs. 2nd, the well advanced actions within our commercial businesses that set the stage for growth in the second half of fiscal twenty twenty five and third, I'll provide an update on the rapid advancement of Canopy USA. Following my remarks, Judy will review our financial results, including some of the market dynamics we're seeing and the actions we've taken to further strengthen our financial position. Let's begin with our drive to profitability. In Q1, fiscal 2025 Canopy achieved the key profitability milestone.

Speaker 2

For the first time, thanks to the hard work of all of our teams. All of our business units delivered profitable quarterly adjusted EBITDA. We achieved this through continued work to enhance operational efficiency paired with strong cost management and above all a resolute focus on driving profitable revenue. Against this backdrop, we've generated notable improvements across a range of key financial metrics, including a significant reduction in our overall cost of goods sold, down 31%, as well as a 24% reduction in SG and A expenses, both of those are year over year. On the revenue side, our focus on profitable revenue over market share is driving us to direct certain products into the higher margin channels of Canadian medical and international markets.

Speaker 2

In part, this contributed to our Canadian medical business delivering its 6th consecutive quarter of growth and record top line within which is arguably the most attractive cannabis segment in Canada. Additionally, this prioritization paired with supply challenges led to a softer top line for our adult use business for Q1. We've already taken action to address these supply challenges, which we believe lays a strengthened foundation for growth over the coming quarters. Looking to gross margin, we're pleased with the quarter including the material improvement in our Canada cannabis gross margins, which increased year over year to 32% despite paying close to $9,600,000 in excise taxes during the quarter. This improvement drove Canopy's consolidated gross margins up year over year to 35% in Q1.

Speaker 2

Having demonstrated that Canopy can deliver consistent healthy gross margins across all our businesses, our sights are firmly set on driving top line growth. In Canada, we've made prudent investments to increase both our internal flower and pre roll joint production capacity. We've also secured additional partnerships across a range of segments to fortify our supply chain. Overall, we expect the higher flower yields from upgrades at our King Carden facility, our investment in pre roll joint production capacity, additional supply agreements and price actions already implemented to help drive stronger top line performance in the coming quarters. Our team is also encouraged by the performance of the broad range of new products that we've delivered to the Canadian adult use market in the latter half of the first quarter.

Speaker 2

This includes 17 new and exciting SKUs. To highlight a few, we've launched 2 Quebec exclusive flower streams from Tweed and Matri and views pre rolls from Tweed and 7 Acres, beverages including the Tweed Sugar Free Cola and 7 Acres Cafe Vanilla and unique all in one vapes from Tweed and 7 Acres with outstanding flavor profiles. We believe the innovation we're bringing to market in addition to the pipeline of NPD landing later this year will contribute to growth in our Canadian adult use top line over the coming quarters. Moving to distribution, our Canadian cannabis business implemented a new hybrid sales model during the Q1 with a mission to enhance distribution for key brands within our portfolio. This complements our in house sales capabilities in a cost efficient manner and has already delivered positive results with distribution increasing 7% sequentially to 61,000 points nationally.

Speaker 2

We expect these new points of distribution to support stronger brand and top line performance in the second half of fiscal twenty twenty five. In our international markets as well as stores and Bickel, we continue to feel Canopy is well placed offset a decline in Australia, due to the which offset a decline in Australia due to the implementation of a regulatory change. Paired with expanding distribution, we forecast sustained growth for Storz and Bickel in the coming quarters. Our international markets in addition to an especially strong quarter in the Polish market, we are highly focused on seizing the opportunity for rapid growth in Germany. In line with our asset light strategy and to meet the increasing demand for medical cannabis across Europe, actions are underway to augment our Canadian grown flower with EU based supply.

Speaker 2

This preserves Canopy's flexibility, limits the upfront investments required to serve these growing markets and will enable our international markets business to continue delivering robust gross margins. This work is already well advanced and we've signed multiple agreements with EU based flower suppliers to deliver new and exclusive high pH strains to the market. As EU source flower comes into our supply chain, we expect strengthened performance in our German medical cannabis business in the latter half of fiscal twenty twenty five. We also envision that over time, our use of EU based third party supply will free up more of our Canadian based supply for use domestically to the benefit of our Canadian business. Next, I'd like to speak about the rapid advancements that Canopy USA is making and the resulting growth opportunities.

Speaker 2

Since our last discussion in May, Canopy USA has closed the acquisitions of Jetty and 2 of 3 Wanna entities, with the full acquisition of Wanna expected by the end of summer. In fact, Jetty and Wanna are already leveraging a joint sales force to engage retail in New York as the brands of Canopy USA begin to realize opportunities and synergies together. Focusing further on the performance of each of the Canopy USA A. Entities, Wanna has entered Connecticut and New York State, while also launching 3 new hemp derived edibles, which opens up a new national customer base. Shifting to the West Coast, Jetty has expanded its solventless vape product offering in California with the launch of a new all in one and hybrid vapes.

Speaker 2

And as an indication of the strength of this brand, TETI continues to occupy the number one position in solventless vapes nationally. Additionally, following its credit challenges, acreage is focused on execution across the highest potential states in the U. S. Including in the Northeast and Midwest where they hold an incumbent position. As I mentioned on the last call, Acreage's operations are well positioned in Ohio, likely the most exciting U.

Speaker 2

S. State right now for adult use cannabis. The botanist dispensary is located in the largest population centers in the state and a Tier 1 cultivation and processing facility with significant expansion potential. This is critical as despite a slow start to this year due to large due in large part to their credit challenges, we feel that acreage is capable of returning to their previous run rate, which saw them generate significant adjusted EBITDA. I'd like to quickly congratulate the Acreage team on their preparation for the launch of non medical sales in Ohio, which commenced on Tuesday of this week.

Speaker 2

And we look forward to seeing their growth in the state. We remain upbeat about Canopy USA and look forward to sharing future updates on this platform as we provide Canopy shareholders with this unique exposure to the U. S. Cannabis market. As we close the quarter, Canopy stands on a firm foundation and we're showing progress in every corner of our operations.

Speaker 2

We have robust core businesses, significantly strengthened financials and a unique strategy for seizing the opportunity of growth in the U. S. Via Canopy USA. Our focus remains on leveraging this foundation to achieve multi market cannabis leadership and we are more prepared than ever to navigate complexities of the global cannabis market while delivering substantial value to our shareholders and customers. I'll now turn the call over to Judy who will discuss our financials in greater detail.

Speaker 3

Thank you very much, David, and good morning, everyone. I'll start by reviewing our Q1 fiscal 2025 results. I'll then discuss continued progress we've made on our balance sheet and cash flow, followed by a discussion on our priorities and outlook for the balance of fiscal 2025. Let's begin with our Q1 results. Q1 FY 2025 demonstrated continued progress in our financial performance as evidenced by significant year over year improvement in gross profit dollar, adjusted EBITDA and free cash flow.

Speaker 3

Canopy delivered consolidated net revenue of $66,000,000 in Q1, a decrease of 13% was down 3% excluding the impact of divested businesses compared to Q1 of last year, but consolidated gross profit dollars grew 67% year over year. Consolidated gross margin in Q1 was 35%, again a significant improvement compared to 18% last year. Following a dip in gross margin in Q4, I'm pleased to report a return to solid gross margin performance in Q1, which I'll provide additional details later on the call. Q1 adjusted EBITDA was a loss of $5,000,000 an improvement of 77% versus last year. Free cash flow was an outflow of $56,000,000 an improvement of $52,000,000 compared to Q1 of last year.

Speaker 3

Note that we typically incurred negative working capital in the first half of the fiscal year with improvement in the back half due to the timing of certain payments. I'd like to now review the results of our key businesses in more detail, including progress against our path to profitability. Starting with Canada. Q1 net revenue was $38,000,000 a decline of 6% compared to a year ago. Canada Medical had another record revenue quarter increasing 20% compared to last year continuing to benefit from customer mix towards a greater number of insured patients and larger product assortment in the Spectrum Online store.

Speaker 3

We're pleased with the outperformance of our Canada Medical, which is also a high margin business for us. Our adult use business was down 22%, which was softer than planned. We continue to be disciplined in the highly competitive adult segment in Canada by not chasing market share at all costs. In Q1, revenue was impacted by supply constraints in certain products due in part to lower fulfillment by our CMO partners who are facing financial difficulties. We're working to expand our pool of CMO partners, but given the evolving market dynamics and landscape, it is taking some time to ensure we have redundancies in place.

Speaker 3

With an improved cost structure, we've also taken targeted pricing actions and increased promotions in select categories where we still expect to see good margins. We also launched a number of new products towards the latter part of Q1 with additional new products launching in the fall. All in all, we do expect modest improvement in revenue in Q2 with stronger year over year growth in Q3 and Q4 for our Canada cannabis business. Despite a decline in revenue, Canada gross profit dollars increased to $12,000,000 in Q1 of fiscal 2025 versus under $1,000,000 in Q1 of last year. Canada gross margin in Q1 was 32% and cash gross margin adding back non cash depreciation costs and costs was 45%.

Speaker 3

Let me provide key drivers of Canada gross margin performance in Q1. First, we continue to see the benefits from cost reduction programs that was completed during fiscal 2024 with significant year over year reduction in COGS. 2nd, the growth in our medical business, which carries higher margin than our adult use business also contributed to stronger gross margin performance. During Q1, our Medical business accounted for approximately half of revenue in Canada. 3rd, Q1 saw improved utilization in our manufacturing operations, which also positively impacted gross margin.

Speaker 3

We continue to target Canada cash gross margins to be in the mid to high 30% based on the historical channel mix and are focused on further improving Canada gross margins driven by increase in our cultivation yields in the winter months following installation of new LED lighting at King Carden in the first half of fiscal twenty twenty five, strategic sourcing of flower supply at favorable cost and increased throughput in pre roll production and reduction in labor costs with a new and flexible pre roll machine now up and running. International Markets Cannabis net revenue of $10,000,000 in Q1 was down 1% compared to Q1 of last year. We saw strong double digit growth in Europe, notably in Poland, which was partially offset by the decline in sales in Australia and U. S. CBD, which would have been winding down ahead of transitioning the business over to Canopy USA.

Speaker 3

International Markets Cannabis gross margin was 36% in Q1 fiscal 2025, up from 30 4% in Q1 of fiscal

Speaker 4

20 24, driven by a favorable

Speaker 3

shift in country mix with higher margin Poland contributing to a greater portion of sales this year as compared to the prior year period. Tourism Bickel revenue of $18,000,000 in Q1 was up 2% compared to last year. We saw continued healthy consumer demand for new venti portable vaporizer that was launched in Q3 of last fiscal year as well as strong sales from its mighty vaporizer this quarter. Sales increased in many of its key markets, including over 100% growth through the combined B2B and B2C channels in Germany. This was partially offset by a significant decline in shipments to Australia following are the only whole cannabis vaporizers on the market in Australia.

Speaker 3

And we believe that this positions SOURCE and PICO devices very well in the medical channel of that market. Source Embecco gross margin was 40% compared to 43%, driven primarily by higher rebates on certain product lines. Looking at our SG and A expenses for Q1 of fiscal 2025, sales and marketing and G and A expenses declined 24% year over year, primarily due to cost reduction program undertaken during fiscal 2024. In Q1 fiscal 2025 adjusted EBITDA was a loss of $5,000,000 an improvement of $18,000,000 compared to a loss of $23,000,000 a year ago. We estimate that our 3 business units achieved positive adjusted EBITDA with all of the Q1 adjusted EBITDA losses driven by unallocated corporate overhead costs including public company costs.

Speaker 3

And as we indicated during our Q4 call, we've identified an additional $10,000,000 to $15,000,000 of cost reduction opportunities, mostly in corporate G and A, including savings in professional fees, legal and other public company costs that we expect to realize by the end of fiscal 2025. I'd like to now review our cash flow and balance sheet. Free cash flow was an outflow of $56,000,000 in Q1, an improvement of 49% compared to the prior year. Cash used from continuing operation was 52,000,000 dollars This included cash interest payments in the quarter of $18,000,000 down from $30,000,000 in Q1 of last year. And as expected, we had negative working capital in Q1 driven by timing of certain payments as well as the buildup of bulk flower inventory to ensure supply continuity in Canada.

Speaker 3

CapEx of $4,000,000 in Q1 was also an increase versus the prior year due to LED lighting investment in King Carden that will drive improved cultivation yield and lower costs over time. All in all, we expect free cash outflow to narrow significantly in the second half of fiscal year versus Q1 run rate to reflect the timing of payments and phasing of working capital. Cash flow from investments was an outflow of $33,000,000 in Q1. This included net cash use of $67,000,000 to fund the acquisition of Acreage Debt during Q1 and an inflow of $10,000,000 of additional distribution from BioSteel's restructuring process. Turning to the balance sheet.

Speaker 3

As of June 30, 2024, we had $195,000,000 in cash and short term investments and total principal debt balance of $585,000,000 The principal debt balance declined $40,000,000 in Q1 versus Q4 and the major drivers include reduction of USD 8,000,000 of term loan principal balance resulting from pay down from asset sale proceeds, elimination of CAD 100,000,000 of the promissory note held by Constellation and net addition of USD 50,000,000 from the convertible note transaction in May. This morning, we announced an amendment to our credit agreement with a senior secured term loan that extends maturity out to December of 2026 with an option to further extend maturity out to September of 2027. Excluding to this agreement, we will be making an initial cash payment of $97,500,000 to reduce the principal by $1,000,000 by December 31, 2024 with an option to pay down additional $97,500,000 to reduce the principal by a $100,000,000 by March 31, 2025. We are pleased to come to this agreement with our lenders that will provide us with cash interest savings and improved balance sheet flexibility. In early June, we also launched an at the market equity offering program of up to USD 250,000,000 During Q1, we issued 4,700,000 shares for total proceeds of CAD 46,000,000 Subsequent to Q1, we have issued an additional 3,700,000 shares for total proceeds of CAD 33,000,000 dollars Following a significantly reduced debt balance and extended maturity of the term loan, the ATM program provides us with flexibility to invest in strategic growth initiatives.

Speaker 3

I'd like to now briefly discuss Canopy USA. This is the Q1 financials have been deconsolidated from Canopy Growth results. And as a result, Canopy's non controlling investments in Canopy USA is now presented as equity method investments and in other financial assets on our balance sheet. As David mentioned, Canopy USA is advancing with its acquisition of Vana, Jetty and Acreage. Canopy Growth currently does not have audited financials for the consolidated Canopy USA entities and is not disclosing the financials of each entity at Canopy USA at this time.

Speaker 3

Let me provide some commentary on financial performance of each entity. In the first half of calendar twenty twenty four, Acreage has seen revenue and EBITDA decline compared to last year due to its credit challenges. Acreage Management is now focused on improving performance in its core markets, including Ohio, where acreage projects revenue to double by end of calendar 2025 versus current run rate. WANNA is also focused on expanding into new states while maintaining an attractive margin in a highly competitive edibles category. There have been delays in New York and Ohio due to market dynamics and Wana's performance has also been impacted by price compression, retail inventory destocking and SKU rationalization in Colorado.

Speaker 3

However, trends are expected to improve later this year on the back of New York and Ohio launching. And in addition, as David mentioned, Wana has introduced its hemp derived offering with its own marketplace website set to launch this month. JETI is seeing good underlying momentum for its solvenless vape products with expanded offering. Jetty is currently in the process of also changing distributors in California, which will improve routes to market and lower costs over time. This change is expected to create some noise to its shipments in the near term.

Speaker 3

Once Canopy USA closes on its acquisition of Wanna and Acreage and with expected revenue contribution from Ohio's non medical sales for Acreage, we expect that Canopy USA has the potential to generate annual revenue of upwards of USD300 1,000,000 I'd like to now provide our key priorities and outlook for the balance of fiscal 2025. In Canada cannabis, we remain focused on driving growth and profitably gaining market share in both the adult use and medical channels. We expect Q2 to be impacted by continued supply challenges with certain third party produced products with stronger growth in the back half of this fiscal year, driven by expanded distribution, improved sales velocity and new product launches. In International Markets Cannabis, we're focused on accelerating growth in Europe, including in our key markets of Germany and Poland, and we're focused on ensuring consistent supply of high quality products as well as launch new products into these markets in the near term. For Sewers and Bickel, we're focused on accelerating growth in the U.

Speaker 3

S. And other key markets as well as opportunistically expand distribution into new markets. Note that for SMB, Q2 is historically the lowest revenue quarter of the year. And finally, the impact on divested businesses will continue to negatively impact reported sales growth throughout FY 2025. Q2 FY 2024 revenue of $69,600,000 included approximately $8,300,000 of revenue from divested businesses.

Speaker 3

From a phasing standpoint, we continue to expect stronger year over year growth in the second half of our fiscal twenty twenty five driven by increased supply and ramp up of new products as well as lessening impact from divested businesses. We believe we remain firmly on a path to achieve positive adjusted EBITDA at the consolidated level inclusive of corporate costs driven by sales growth, improvement in gross margins and additional G and A savings. In closing, we intend to build on the improved financial performance in Q1 and drive profitable growth while continuing to strengthen our financial position over time. This concludes my prepared comments. We'll now take questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Aaron Grey with Alliance Global Partners. Your line is now open.

Speaker 4

Hi, good morning and thank you very much for the questions.

Speaker 5

Good morning, everyone. So first one for me. Good morning. Morning. You guys have

Speaker 4

done a lot in terms of cleaning up and simplifying the story in terms of divestitures and with Canopy USA. So as we look forward, Canopy USA, you're waiting for some, I think, audits to be finished before you can consolidate and also for acreage to close. So just if you can give us some more in terms of the timing. Acreage, I think you said first half of calendar twenty twenty five. So just more color in terms of what you're waiting on for that to be able to close in terms of I think it might some state approvals or otherwise.

Speaker 4

And then how we should think about everything be able to come in terms of additional disclosure in terms of the financial performance there and when you'll be able to disclose that fully?

Speaker 3

Okay. I'll start, Erin. So from a timing standpoint, as David mentioned, during Q1, Jetty is fully closed. So Canopy, you'll say, owns approximately 75% of Jetty at this point. 2 of the 3 entities under Wana have already been closed and we expect to complete Wana acquisition or Canopy of Say expect to complete the Wana acquisition by end of this summer.

Speaker 3

And then Canopy SA is in the process of acquiring Acreage. So that is really a regulatory process. It's a state by state regulatory approval. Our expectation is sometime in the spring of next calendar year, we'll get all of the state approvals required for Canopy USA to complete its acquisition. In terms of financial disclosure, as we sit here today, Canopy USA, obviously has not fully closed all of its entities under Canopy USA.

Speaker 3

So once we do have Canopy USA fully closing on Wana and Acreage, and we would intend to share audited financials and also provide some supplemental financial metrics of cannabis say that will likely to be sometime after the acreage acquisition closes.

Speaker 2

Yes. And Aaron, just to add to that. So all of the so the gating item really on closing the final component of Wana as well as acreage is in fact the regulatory approvals at the state level, all of which have been applied for. So now we're just working our way through each state's process and we'll close as soon as we get all of those approvals in place. In terms of financial disclosure, Judy outlined in her script, just a rough view of what CUSA believes they'll be able to achieve from a top line standpoint.

Speaker 2

And we believe that you can look at other MSOs to understand EBITDA margins, also keeping in mind that as we're as Acreage is operating as a standalone public company today, we'll be able to realize a fair amount of public company synergies when that business becomes part of the CUSA platform. So yes, we'll provide detailed financial statements through CUSA as soon as we can. But I think that just provides a good kind of outline as to where that business sits today.

Operator

Your next question comes from Federico Gomez with ATB Capital Markets. Your line is now open.

Speaker 6

Hi, good morning. Thanks for taking my question. Just on the Canadian Medical Cannabis segment, quite impressive growth there and sequentially 6 quarters of sequential growth. So can you give a bit more clarity on what's driving that growth and how much more upside do you think there is to that segment? Just given that I think we've seen that the overall market is sort of flat on the medical side in Canada.

Speaker 6

So how much more growth do you think can come from that segment? Thanks.

Speaker 2

Yes. So we've had several quarters in a row of growth in that market. We expect that to continue and it's really coming as a result of strong execution by our medical team. We it is a marketplace, so it's not just Canopy products. It's a market with products hand elected by our team.

Speaker 2

And we give what we believe is best in class service to the participants in that channel. And yes, it's just day in and day out execution on the medical side that's really driven much of our growth.

Speaker 3

Yes. And to your point, Federico, the market is stagnant to declining just because of the shift into the adult use channel, but we're gaining market share as you can see in the numbers and we think we're well positioned to continue to gain market share with continuation of really offering high quality products to patients, not just our products, but even 3rd party products that really provide patients with a very broad assortment of offerings.

Operator

Your next question comes from Michael Lavery with Piper Sandler. Your line is now open.

Speaker 2

Thank you. Good morning.

Speaker 3

Good morning.

Speaker 7

Just wanted to understand the supply dynamics a little better. You said you want to source more EU origin products from 3rd parties. I guess, can you just maybe help us understand if that if Germany or the broader market there is growing and so attractive, who has excess product and I guess really at what cost? And it seems like that's kind of the place where project is a little bit more scarce. Is that maybe a misunderstanding?

Speaker 7

And then when you talk about freeing up some supply back in Canada, certainly oversupply has long been the problem there. Or did you over correct? Do you need more supply in Canada?

Speaker 1

How do

Speaker 7

we just think about both sides of the ocean there?

Speaker 2

No. So Michael, so I'll kind of take it in 2 points and I'll start with Canada first. I think in Canada, we have some supply constraints during the quarter that were driven by performance with some of our 3rd party suppliers, right. And so we're making our supply chain more robust in Canada. And you're right, there is product available.

Speaker 2

However, we just remain focused on when we do have product in the market, we're simply putting it into the higher margin channels. As it relates to Europe, there is product available. That's really not the issue in the European channel. And that's available from Canada, but it's also available from end market producers. And so the point of the comments in the script is that over time as we bring on the European producers, we would then free up product out of our Canadian supply chain, which would allow us to optimize margin across our total business.

Speaker 2

And the thing I think that the way we're thinking about this is that every single market that is opened up broadly in every geography we've seen, it starts out supply constrained, then goes long in supply, then prices compress and then people have assets that they don't know how to deal with. We're actually managing our supply chain in Canada to be an asset light supply chain. And admittedly, we have some things that we need to do to optimize that Asset Light supply chain, but we're all over that. We're thinking about Europe the same way. And so instead of going in heavily with investments, which will potentially compress our margins going forward, we're deploying our strategy into Europe.

Speaker 2

And based on what we're seeing at the moment, we're quite happy with that approach.

Operator

Your next question comes from Bill Quirk with ROTH Capital Partners. Your line is now open.

Speaker 8

Hey, good morning. Thank you for taking the questions. Mine's related to the last topic, because margins seem to differ a lot by market, very different margins in each market. So how do you determine where your available supply goes? Like how do you balance that maybe immediate margin potential for some of the sales with the longer term potential that some markets may have that aren't profitable just yet?

Speaker 2

Yes. I would say, Bill, that's a good question because we haven't interrupted supply into the European markets from Canada, right? So when we say that we're going to allocate to the highest margin areas, we're not doing anything that's choking off supply into Europe and don't intend to do that in the near term, meaning supply coming from Canada. It's within Canada when we're if we have any sort of supply constraints, we allocate amongst the provinces effectively or the channels, meaning medical versus rec in Canada in a way that optimizes for profitability. So and I also want to make sure that the comments that we made in our script too around the NPD that's coming to market is really it's not it's really just launches of new strains and a few new offerings that we think will be really attractive that we're already getting listings for that will drive revenue growth in Canada later in the year.

Speaker 2

So I think it's the supply allocation is really mostly related to Canada. And then we as I said, we have activities underway to improve the supply chain in Canada and make it more robust. And we also have new products coming down the pipeline.

Speaker 3

The only add I would have would be just when you look at the flower supply in Canada, we have a bit of a hybrid model, right? So we've got our internally sourced King Carden facility in Doja and then we are looking at partners. So whether it's strategic sourcing of flower or at this point, I think we're doing a bit more spot buying and the market is a little bit finicky to be honest. And I think over time, we do think there will be more of the strategic sourcing opportunities that will come online. And really we're focused on capturing favorable costs so that we can have good margins even from 3rd party sourced flower across our Canadian adult use business.

Operator

There are no further questions. I will now turn the call over to Mr. Klein for closing remarks.

Speaker 2

Great. Thank you for attending today's conference call. And as you enjoy the rest of the summer, I'd encourage you to try some of our outstanding products from our innovative brands, including beverages like Tweed Sugar Free Cola as well as our new all in one vapes from Tweed and 7 Acres. Our Investor Relations team will be available to answer additional questions. Thank you.

Operator

This concludes Canopy Growth's Q1 fiscal 2025 financial results conference call. A replay of this conference call will be available until November 7, 2024, and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call. Operator?

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