Tilray Brands, Inc. (TLRY) Q1 2023 Earnings Call Transcript

Good morning, everyone. Thank you for joining us to discuss Tilray Brands, Inc. Financial Results for the Fiscal Year 2023 First Quarter ended August 31, 2022. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session for analysts and investment firms conducted via audio and participating retail shareholders conducted through the Say Technologies platform. Question submission and uploading through the Say Technologies platform has already been concluded, and the Company will read aloud and answer the top questions. Ms. Noorata, you may now begin the conference.

Thank you and good morning. By now, everyone should have access to the earnings release which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. On today's call, please note that we will be referring to various non-GAAP financial measures which can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Today's earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties which may prove to be incorrect. Actual results could differ materially from those described in these forward-looking statements. The text in our earnings press release issued today includes many of the risks and uncertainties associated with such forward-looking statements. Today, you'll hear from key members of our senior leadership team. Irwin Simon, Chairman and Chief Executive Officer Tilray Brands Inc.; Denise Faltischek, Chief Strategy Officer and Head of our International business, who will update us on global market development including the increasingly optimistic outlook of legalization across Europe; Blair MacNeil, President of our Canadian business, who will update us on the focused, impactful investments we are making to grow our leadership position in the Canadian market; and Carl Merton, Chief Financial Officer, who will provide a financial review, including details on our strong balance sheet. And now, I'd like to turn the call over to Tilray Brands Chairman and CEO, Irwin Simon.

Thank you, Berrin, and hello, everyone, and good morning. Thank you all for joining this morning for our fiscal year 2023 first quarter results. Our first quarter results reflect early tangible returns on what we discussed at length during our fiscal 2022 report, namely realigning the business around three priorities: pursuing our most profitable core business across Canada, Europe, and the U.S.; optimizing our global operations, while taking out over $100 million in cash cost savings; and strengthening our industry-leading balance sheet that affords us the opportunities for growth and expansion amid market challenges. These are foundational steps for profitable and sustainable growth of our worldwide cannabis CPG platform across medical, adult-use, wellness, and beverage alcohol. And while we certainly made great strides for the 2022 fiscal year, including growing distribution across our core businesses in Canada, the U.S., and internationally, our Q1 2023 results validate the approach and our overall execution. Our success is most evident in our significant work in reducing operational costs and strengthening our balance sheet, which has been our focus given the challenging macro environment. We know that an efficient and agile foundation will pay dividends as the cannabis industry matures. It's instructive to think about our efforts in these categories always complement and build upon the other. The first and most impactful are the cost synergies from the Aphria-Tilray business combination. As announced during our fiscal year 2022, we've revised target of $100 million in annualized cash cost synergies, and through Q1, we've realized $95 million in cash costs toward that $100 million goal. The remaining $5 million will be delivered by the end of fiscal 2023. It's important to contextualize this achievement. $95 million in achieved cash cost synergies represents approximately 14% of the combined pro forma revenue of $682 million at the time of the Aphria and Tilray transaction. With these specific synergies, I want to spotlight the G&A costs, which fell by nearly $9 million in Q1 compared to last year. Highlights here include significant savings on office and general expenses. Our work is far from done in this respect, and we continue to target specific line items in our G&A that can improve margin and maximize efficient operations. Alongside the Aphria and Tilray synergies, we launched an additional $30 million cost optimization plan for our existing cannabis business in Q4 of last year, further solidifying our status as the industry's leading low-cost producer. This involves identifying opportunities to leverage technology, supply chain procurement, and packaging efficiencies while driving operational efficiencies and significant savings. As of the end of the first quarter, we've achieved $13 million in savings on an annualized run rate basis related to this next-level cost reduction plan. When complete, these aggressive yet purposeful measures will have removed approximately $130 million in costs without compromising our ability to deliver growth and capture opportunities. Second, the Tilray-HEXO strategic alliance that closed in July is expected to deliver $40 million to Tilray, including $31 million in revenue and $9 million in interest over the fiscal year. Finally, with the strength of our balance sheet with approximately $500 million in cash, $638 million in working capital, and over 70% of our debt set with fixed interest rates, Tilray Brands is now in the best position to capture leading market share across the global cannabis industry where opportunity abounds. The totality of this work is that we anticipate delivering significant growth in our adjusted EBITDA to between $70 million and $80 million in fiscal 2023, which, at the high end of the range, would amount to a 67% growth compared to fiscal 2022. And as previously stated, we also forecast generating positive free cash flow across all our operating segments this year. Our cost structure initiatives and the strength of our balance sheet provide our key differentiators, to be sure, but the promise and potential of Tilray Brands is also predicated on top-line opportunities and the specific purpose of our strategic plan, which we set in place in fiscal 2022. This involves seizing opportunities across both geographies and business lines specifically. In Europe, where I recently just spent some time with the team in Portugal and Germany, our opportunity is based upon an unrivaled platform, smart, disciplined strategic planning, and execution and pan-European momentum towards adult-use legalization. The European market, which is estimated to be worth as much as $37 billion by 2027, has already embraced a medical cannabis business and is nearing broad-scale adult-use legalization. Germany, in particular, is taking concrete steps towards adult-use legalization, with German lawmakers recently touring Canadian and Californian cannabis businesses to learn from provincial leaders, state officials, experts, and advocates about lessons learned from cannabis legalization. With two EU GMP certified operations positioned ideally in Portugal and Germany, Tilray is poised for significant advantages as legalization spreads. In Canada, with difficult trading conditions in a high-tax environment putting pressure on many licensed producers, Tilray is uniquely positioned to thrive as the industry consolidates. And in the U.S., we've set the stage for a broad set of cannabis-focused CPG and craft beverage brands and additional revenue in adult-use cannabis, pending federal legalization. While it seems elusive, we continue to see signs of progress. Just this week, of course, President Biden said he would pardon federal offenders for simple cannabis possession and asked for a review on marijuana's current status as a Schedule 1 controlled substance under U.S. law. It is important to recognize these initiatives for what they are, relatively modest, but any sign of progress is significant at this time. In the current environment, if legalization was to occur, we believe we are best positioned given our strong balance sheet, our cultivation know-how, our CPG experience, our global footprint, and our existing investment in MedMen. On that note, the biggest component of our craft beverage business, SweetWater, is available in 42 states across the U.S., including most recently in California, which is the number one beer market in the U.S. The brand also operates a 32,000 square foot production facility and taproom in Fort Collins, Colorado, and a taproom at the Denver International Airport. Stop by on your way through Denver. SweetWater's West Coast presence and brand awareness remains nascent, but we are confident that our work with the nation's largest beer distributor, Reyes, will yield tangible results. Their network marketing acumen and deep relationships throughout the region will ensure broad availability at restaurants, bars, supermarket chains, liquor stores, and other retail outlets. Our go-forward plan for SweetWater includes launching innovative products, new spirit bases ready-to-drink beverages, expanding our presence in Canada and other international markets, improving product utilization, and evaluating strategic acquisitions. In the meantime, we're also pleased with what we're seeing with our iconic West Coast brands, Green Flash and Alpine, which have also gained new distribution across the U.S. Ahead of football season, Breckenridge Distillery, one of the most highly awarded craft bourbons in the U.S., launched two new limited editions, Mile High Bourbon Blends, as the official bourbon of the Denver Broncos. These blends pay homage to the Broncos' Mile High era and include the team's classic 1962 logo on their label. This collaboration is now in its second year and is one that bourbon consumers love. Last month, we renewed and expanded our distribution agreement with Republic National Distributing Company, which provides Breckenridge with direct access to our expansive distribution network of on- and off-premise retailers and customers across the U.S. in 38 states and the District of Columbia. This opens new doors for Breckenridge and gives us full access to their premier distribution network, setting a new stage for accelerated brand growth. Finally, turning to our wellness business, Manitoba Harvest is the world's leader in hemp-based foods with production distribution across 17,000 North American supermarkets, a 50% share in hemp seeds, and a presence in 15 established international markets. Our go-forward strategy aligns with plant-based, low-carbon, keto diets, as consumer interest in hemp production increases. In the near term, we are launching culinary oils, plant-based protein blends with hemp and pea protein, along with a snack bar and other product extensions featuring super seeds. We further plan to enter new international markets later this year with Manitoba Harvest. We also recently signed a distribution agreement with Southern Glazer, the leading distributor of beverage alcohol and CBD beverages in the U.S. to serve as the exclusive distribution partner for Tilray Wellness’s CBD beverage portfolio across 13 states in the U.S. with additional opportunities to scale nationwide. This strategic agreement allows Tilray brands to launch a sought-after U.S. CBD beverage portfolio within familiar retail channels such as independent national grocery chains, convenience stores, local bars, restaurants, and gas stations. Beyond CBD beverages, we intend to grow our U.S. Tilray Wellness business into CBD personal care products within related adjacencies. Upon federal legalization in the U.S., we will have a clear advantage to lead the U.S. market with strategic infrastructure and operations in place to expand into THC-based products as well. With that, we'll now hear from Denise what's happening in Europe.

Thank you, Irwin, and good morning, everyone. Internationally, and particularly in Europe, we are seeing more progressive cannabis legislation being introduced across the continent and around the world, reflecting a positive shift in attitude and acceptance of medical cannabis as treatment for numerous conditions as well as the legalization of cannabis for adult-use. We are well-positioned and well-resourced to capture this wave of change that will yield considerable economic growth for our industry and for Tilray Brands. Despite the current economic environment in Europe today, the war in Ukraine and its impact on inflation and rising energy prices, our medical cannabis business performed well in the quarter. Our international medical cannabis business was up 2% versus the prior year period and was up 16% after removing the impact of foreign exchange. Consistent with our approach across our other businesses, we are relentlessly focused on our cost structure. At the same time, we have been focused on continuously improving the quality and consistency of our medical cannabis products in order to fulfill our commitment to supply our patients with high-quality, safe, and consistent products. As Irwin noted, Germany remains the largest medical cannabis market in Europe and emerges as one of the largest adult-use markets upon legalization. We are already the market leader in medical cannabis, leading both the whole flower and extract product categories in Germany. Based on Insight Health sales data, we have approximately a 20% market share across our flower, extracts, and Dronabinol products. In Germany, our revenue was up 22% versus the prior year period. Today, we have the leading and broadest portfolio of medical cannabis whole flower with one of the most recognized brands in the German market. Further, we have maintained our premium pricing position as we sell approximately 85% of our whole flower medical cannabis products directly to pharmacies. This, combined with our end-to-end EU GMP supply chain, uniquely positions Tilray Brands for the recreational market, where we believe we can seize a sizable portion by exponentially ramping up capacity with two state-of-the-art EU GMP facilities in Portugal and Germany. A draft bill on German adult-use cannabis is slated to be published in late fall, with the first commercial sales likely to commence at the beginning of calendar 2024. In Portugal, we continue to have the only registered medical cannabis product with our T18 whole flower. In the quarter, our revenue in Portugal was up 89% versus the prior year period. In the UK, the market remains a relatively small private payer market, but patient numbers continue to grow. We remain focused on reaching as many patient segments as possible with a broad portfolio of high-quality whole flower products. In Italy, we were approved by the Italian Ministry of Health to import and distribute certain medical cannabis extracts aimed at compounding use in the country. In Ireland, we have recently reinstated a commercial presence and are pleased to have made our medical cannabis products available to patients there. We have one of only a handful of products that have been approved by the Irish government as part of the medical cannabis access program and are pleased to have received reimbursement approval, which ensures our products are made even more accessible to Irish patients. In Poland, we were approved for pharmaceutical distribution of both Tilray branded and unbranded medical cannabis products, and we concluded our first shipment to Poland after the quarter end. In Switzerland, the government lifted a ban on cannabis for medical use in August, facilitating access for use by patients who no longer have to seek exceptional permission from the health ministry, and the first sales pursuant to an experiment for adult-use are imminent. In Israel, we continue to remain less than optimistic due to the large oversupply caused by Canadian LPs. We are seeing patient numbers stagnate, sales decline, and significant price discounting with special deals. We are, therefore, continuing our pause in determining what the right strategy for that market should be. Finally, in Australia, our medical cannabis business continues to perform well. Net revenues in Q1 increased 28% over the previous quarter. In addition, our business is well-positioned in Australia as we are already compliant with the EU GMP regulations that take effect next June and are viewed as a trusted cannabis partner with a complete range of medical cannabis whole flower and extracts to meet consumer needs. We also recently received approval and verification from the Natural Health Science Foundation for our flagship product, Tilray Purified Oral Solution CBD100, to be used in clinical trials in Australia and New Zealand. The sum total here is that across Europe and around the world, we have tremendous opportunity and the strategy, assets, and resources to seize it. It's an exciting time. With that, I'll now turn the call over to Blair MacNeil, President of our Canadian business.

Thank you, Denise, and hello, everyone. The first quarter of FY23 represented a significant momentum change for Tilray Brands Canada. We grew our number one market share position nationally by 8 basis points to 8.5% for the quarter. This leads number two HEXO by 54 basis points and number three Organigram by 196 basis points. A reminder, this is using Hifyre for all markets except for Quebec, where we utilize Weedcrawler for a more accurate reflection of the market. We also grew our revenue 23% versus Q4 FY22 and 4% if you exclude HEXO revenue. Although positive, our revenue was muted by approximately $2.5 million in USD due to the cyberattack in Ontario and strikes in BC and Quebec. Canadian cannabis revenue would have been 6% higher when accounting for these events. Finally, we achieved 53% of our full-year cost savings, targeting Q1, lowering our labor cost per gram by an incredible 43%. You will recall that we established our beta program midway through FY22 with a pipeline of 46 new genetics. In Q1, strains from this program allowed us to grow our flower category 2.7% faster than the market. Good supply in Monkey Butter and Sweet Berry Kush hit limited markets with great success, delivering 5% of our net sales and almost 2 times the sales of Jean Guy, our most popular strain. Additionally, our genetics delivered 3.5 times the average market dried flower innovation sales volume. We have four additional genetics entering the medical market in Q2 and the recreational market in Q3. This helped good supply become the number one brand nationally in September for the first time since July of 2021. Over the past year, we have allocated significant resources into being a consumer-first commercial organization. This includes our structure, data intelligence, and market research investments. Although early, our investments are starting to pay off. In Q1, 7.5% of our sales came from innovation, which is considerably better than Q4 FY22, and we expect it will continue to grow in future quarters. Long term, we expect this to lead to more compelling innovation that resonates with consumers. Market-leading coverage has been a hallmark of Tilray in Canada. As store count continues to grow beyond 3,200 stores, we believe this competitive advantage also grows. Through Q1, we conducted 8,247 sales calls and 2,027 product knowledge sessions with budtenders. This resulted in a market-leading 14,132 new points of distribution. It also means innovation gets the consumer trial needed for repeat sales. Recently, we had our entire Great North team together with our sales and marketing leaders from Tilray for two days. This allowed us to show the Consumer First innovation plan and ensure they are ready to execute. We have also invested in data for our medical channel, both in consumer insights and in consumer feedback mechanisms to improve our product portfolio. For our patient community, we launched CannaPoints, a new program designed to support patients through their medical cannabis journey. As a complement to physician advice, Tilray and medical patients use CannaPoints to explore new offerings, learn more about strains, and record the effectiveness of their products. This app makes it easier for them to curate optimal, personal consumption schedules and tailor their experiences. As a result, we have broadened our offerings under the Tilray and Aphria brands to include a comprehensive range of THC and CBD products, which, in aggregate, have demonstrated effectiveness against a variety of medical conditions. Tilray checks all the boxes to become a leading, sustainable, and agile licensed producer. Our low-cost cultivation in Leamington, premium cultivation of Broken Coast, state-of-the-art manufacturing facilities, partnership with HEXO, and our Avanti facility allowed Tilray to thrive and shape the future of the cannabis industry. Recently, the Health Canada Advisory Board recommended CBD products be permitted outside of cannabis dispensaries, creating an estimated $300 million opportunity. Avanti, owned by Tilray and located in Brampton, has the facilities, licenses, people, and equipment in place now to fulfill GMP CBD products when they become available outside of dispensaries. It also allows us to produce cannabis health products as the markets transition. Additionally, Avanti fulfills 80% of our testing needs within our current portfolio, contributing to our low-cost mindset. Finally, we have seen revenue growth, improvement in market share, and cost reductions continue through September. I will now turn the call over to Carl Merton, our Chief Financial Officer, to discuss financials in greater detail.

Thank you, Blair. We place great emphasis on Tilray's Brands and are relentlessly focused on managing operational expenses, proving we have the right strategy in place. This is especially important as we contend with changing market dynamics and more recent inflationary challenges. Before I begin my review, let me remind everyone that we follow U.S. GAAP. Our financials are presented in U.S. dollars, and throughout our call today, we will reference results in accordance with GAAP as well as non-GAAP adjusted results. Our earnings press release contains a reconciliation of our reported results under GAAP to the non-GAAP measures identified during our remarks. Let's begin with our top line. Net revenue in Q1 was $153.2 million, which is roughly equivalent when compared to the prior quarter in Q4 fiscal 2022, but a 9% decline compared to the prior year quarter of $168 million, which was largely due to brand and SKU rationalization as well as foreign currency rates. Our revenue, income, and adjusted EBITDA continued to be impacted by the ongoing strength of the U.S. dollar, particularly given our largest revenue sources are the euro and the Canadian dollar. On a constant currency basis, our net revenue remained relatively flat at $166.5 million, with all of our distribution, international cannabis, and beverage alcohol businesses being up in their base currencies compared to the prior year quarter. Reported gross profit was $48.6 million in Q1, a 5% decrease from $51 million in the prior year quarter. Adjusted gross margin, however, increased 200 basis points to 32% from 30%. The higher margin was made possible by our success in implementing numerous cost-saving programs and the revenue associated with our HEXO transaction. While our net loss was $65.8 million in Q1 compared to a net loss of $34.6 million in the prior year quarter, we are reporting our second highest-ever adjusted EBITDA at $13.5 million and our 14th consecutive quarter of positive adjusted EBITDA, an unprecedented achievement in our industry. This is up 7% from the prior year quarter of $12.7 million. It is worth calling out the significant headway we made in reducing operating expenses which decreased 42% or over $50 million from the same quarter in fiscal 2022. While the reduction in transaction costs year-over-year accounted for $37.2 million of the variance, general and administrative expenses decreased 18% to $40.5 million. This was made possible by the synergies previously discussed. In addition to the $100 million target in cost savings from the Aphria and Tilray transaction, we achieved $13 million on an annualized run-rate basis from our $30 million cost optimization plan. Of this, $2 million was recorded in cannabis cost of goods sold as well as our operating expenses during the period. We reported $7.8 million of revenue and $1.2 million of interest income from our strategic alliance with HEXO. Noteworthy to our quarter, we recorded an $18.3 million gain in transaction costs on the purchase of the HEXO notes from HTI. As part of our issuance of 33.3 million shares to satisfy the purchase price of the notes, both upside and downside protection existed, and based on our stock price during the contract period, we received a cash payment from HTI subsequent to quarter-end of this amount. Turning now to our business segments, which I will review in greater detail. Revenue in our cannabis segment was $58.6 million, but on a constant currency basis, would have been $61.6 million. Gross cannabis revenue consisted of $6.5 million in Canadian medical cannabis revenue, $58.4 million in Canadian adult-use revenue, $10.4 million in international cannabis revenue, which is a 2% growth from the prior year quarter of $10.2 million, and $17.1 million of excise tax, resulting in a net cannabis revenue of $58.6 million. However, in comparison to the preceding quarter, net revenue increased 10% from $53.3 million. Canadian adult-use cannabis revenue was impacted by a number of factors, including price compression, challenges with provincial boards, including strikes in BC and Quebec, as well as cyber attacks in Ontario. Both the BC and Ontario incidents caused provincial boards to close deliveries for approximately 10 business days. During that period, we were denied multiple delivery spots, impacting our revenue by approximately $2.5 million in the quarter. While the provincial boards did not open up additional delivery windows to make up for the shortfall, they did increase order sizes shortly thereafter to satisfy demand. As a result of our quarter-end being so close to these incidences, we were unable to make up for the lost revenue this quarter but anticipate recovering it next quarter. Over the last year, shifting consumer demand impacted our flower products, particularly as it related to potencies and our strain rationalization that negatively impacted us in Q1 compared to the year-ago period. Despite the changes in consumer demand over the longer period of the last year, our recent launch of numerous beta flower strains during the current period yielded an 11% increase in flower sales compared to our fiscal Q4 2022 period, according to adjusted Hifyre data. International cannabis revenue increased 2% to $10.4 million from $10.2 million for the prior year same period but would have increased 16% to $11.9 million on a constant currency basis, despite ongoing global conflicts as well as the overall economy in Europe. International cannabis continues gaining traction, and we are uniquely suited to capitalize on these opportunities given our infrastructure, which includes two EU GMP cultivation facilities within Europe, our distribution network, and our commitment to product consistency, quality, and safety. In terms of profitability and margins, cannabis gross profit decreased 2% and to $29.7 million in Q1 from $30.3 million in the prior year quarter, while the gross margin percentage increased 8% to 51% for the quarter. When normalized to remove the $7.8 million of HEXO revenue, gross margin was flat at 43%, despite the significant price compression experienced over the last year, showcasing our status as a low-cost producer, alongside our synergistic initiatives and focus on higher-margin sales. Q1 revenue for our distribution business, predominantly CC Pharma, was $60.6 million, a 10% decline from the $67.2 million in the prior year quarter, impacted by the strengthening of the U.S. dollar relative to the euro compared to the same period last year. In fact, revenue would have increased 5% to $70.6 million on a constant currency basis for an additional $10 million of revenue. Adjusted distribution gross profit decreased to $5.6 million in Q1 from $7.9 million in the prior year quarter, while distribution gross margin declined to 9% from 12%. The decline was driven by product mix, where a change in consumer demand trended towards lower-margin products over the last year. Turning to our beverage alcohol segment, we generated $20.7 million in net revenue in Q1, which was 34% higher than the prior year quarter of $15.5 million. This was primarily due to our acquisition of Breckenridge last December. We remain optimistic about expanding this segment over time as we leverage our increased distribution, particularly in California, regaining brand acceptance with Green Flash and Alpine while building brand recognition for SweetWater and developing an extensive innovation pipeline and potentially pursuing additional acquisitions. Adjusted beverage alcohol gross profit increased 24% to $10.9 million in Q1 from $8.8 million in the prior year quarter. As a result of the SweetWater Colorado expansion in the quarter, which is still in the early stages of operation and yet to be fully utilized, beverage alcohol gross margin decreased to 53% from 57% during this period. Finally, our wellness segment's revenue contribution decreased 10% to $13.4 million from $14.9 million in Q1 last year. On a constant currency basis, wellness revenue decreased only 8%. This decrease is a result of a one-off private label sale in the prior year that did not recur in the current quarter, as well as a higher volume of distressed retailer sales which resulted in a greater volume of lower margin sales in the prior year quarter compared to the current period. Adjusted wellness gross profit decreased 13% to $3.5 million in Q1 from $4 million in the prior year quarter, while gross margin decreased slightly to 26% from 27%, but decreased from 31% in the previous quarter. The primary driver of the reduced gross margin in the quarter was seed costs, with prices rising almost 30% for organic hemp seed and 50% for conventional hemp seed in Q1 2023, while our negotiated price increases did not take effect until Q2. As a result, we will see the benefits of those pricing actions in the next quarter. Together, this demonstrates that we are effectively managing our costs. Turning to free cash flow and liquidity. Free cash flow improved to negative $47.8 million in Q1, an improvement from negative $101.8 million in Q1 last year. Traditionally, Q1 is a period where we experience a greater than normal amount of annual payments than the rest of our year, negatively impacting our free cash flow in this period. Despite the negative free cash flow in the current period, we are reiterating our previous guidance of being free cash flow positive across all our business segments for fiscal 2023. Our cash and cash equivalent balance as of August 31st was a healthy $490.6 million, a nearly $75 million increase from our fiscal year-end. Our working capital balance, which allows us to meet our operational and capital requirements, more than doubled to $637.6 million over that same time horizon. During the quarter, we completed our outstanding ATM program, issuing 32.5 million shares and raising net proceeds of $129.6 million. After quarter-end, we utilized some of our cash on hand to purchase $50 million of our Tilray 23 convertible notes for cancellation at a discount of $1 million and will save over $2.5 million in interest costs between now and their maturity date. The outstanding principal balance on these notes has now been paid down by $138 million since the transaction with Aphria and is now below $140 million. For fiscal 2023, we are reiterating our expectations of generating $70 million to $80 million of adjusted EBITDA, and as I just mentioned, to be free cash flow positive across all business segments for the year. This adjusted EBITDA range will be generated through the following means. First, we are strengthening our position from current levels as the Canadian market continues consolidating and less agile competitors contract. This will be accomplished by maintaining our leadership as a low-cost producer while offering high-quality strains and formats across our medical and adult-use portfolios, which are continuously being optimized for their respective markets. The investments we make at the retail level, such as our budtender outreach and physician relationships, leveraging our scaled low-cost production facilities and our strategic alliance with HEXO. Second, internationally, we have a vast medical opportunity beginning with Germany in addition to other surrounding and emerging legal markets. We are already utilizing our expertise from Canada to support responsible regulations that will enable us to enter and establish a presence in these medical markets when feasible. These regulations should also pave the way for eventual adult-use legalization. Third, in the U.S., our foothold in beverage alcohol and wellness brands are already strong, high-margin businesses contributing meaningfully to our overall revenue and adjusted EBITDA while diversifying our CPG portfolio. We look forward to U.S. federal legalization. And when that happens, these brands can be properly leveraged for cannabis. As we build our multibillion-dollar portfolio of best-in-class medical, adult-use, wellness, and craft beverage brands, we will pursue opportunities that provide us with the highest possible return and enable us to gain efficiencies through scale, integration, and partnerships. This is our road map to building sustainable shareholder value. And with that, I will conclude our prepared remarks and open the lines for questions from our covering analysts. Afterwards, we will take a few questions from our retail shareholders through the Say platform.

Thank you. Our first question comes from Vivien Azer with Cowen and Company.

So, Irwin, I'd love to just start off by addressing the U.S. regulatory landscape. I really appreciated your prepared remarks, which were awfully clear that legalization remains elusive. I think we're very much aligned on that. The Biden administration’s announcement yesterday was symbolic, no relief, no capital markets access. And while that might be disappointing to anyone who's involved in the U.S. cannabis industry, certainly, retail investors and some other industry watchers read this announcement, it actually could be good news for you. So it's realistically a narrow version of SAFE is the only viable catalyst; how do you guys continue to take advantage of this period of uncertainty where there is no interstate commerce? Do you just continue to build that route-to-market infrastructure and wait patiently, or are there other opportunities to establish the business for readiness when that eventually happens?

That’s a great question. The significant point is that this marks the Biden administration's initial steps toward cannabis reform. Pardoning those convicted is a positive indication that it’s on the agenda, and the focus on health is encouraging. Since the Biden administration started, there hasn’t been much progress, which is good news, Vivien. Our strategy involves having nearly $0.5 billion in cash, allowing us to pursue acquisitions. We have a solid business with ample growth prospects in Canada and robust infrastructure in Portugal and Germany. In the U.S., we’ve expanded into the beer and spirits sectors, along with a wellness division. Our ongoing objective is to explore acquisitions in the consumer cannabis area. Regarding the SAFE Bank Act, it will determine our options. We are among the largest cannabis growers globally, with numerous brands in Canada, Europe, and the U.S. As opportunities arise, whether through purchasing or merging, we’re well-positioned. Our strong balance sheet, reputable brands, and industry expertise provide us with various avenues for growth. While there are many uncertainties, we want our shareholders to trust in our vision to establish a profitable Tilray-branded consumer packaged goods business. When cannabis is legalized in the U.S., we will be ready to seize various opportunities and make informed strategic decisions.

Yes, absolutely, lots of optionality for you guys. That's very helpful. Thank you, Irwin. And then just to pivot to beverages, since you mentioned it, as my follow-up question, please. I think that asset is incredibly important. Obviously, we cover alcoholic beverages, and we know how good the growth is in that segment and bourbon in particular. We haven't seen any signs of down-trading yet, though it is a question that I get consistently from institutional investors, in particular, given that we're starting to see more regular pricing emerge in the distilled spirits segment against a very inflationary backdrop. So, two-part follow-up, please. Number one, have you guys seen any signs of down-trading in your alcohol assets? And then number two, how do you feel about the pricing backdrop? Because it does seem like most of your peers are really leaning into it. Thank you.

We have not yet seen signs of down-trading. With that, we just started with a new distributor, RNDC, and we've got great plans as we come into the holiday season. If anything, what we are seeing is vodka, which is a cheaper product, we are seeing good pickup in that volume. But listen, we're monitoring it. We're ensuring in terms of consumer preferences, whether it's vodka or other types of products. But so far, we have not seen any downturn. We've seen good consumption within the beer business. We like that. We see lots of opportunities in the beer business regarding infused beers. A lot is happening today with tequilas and rums. So the big thing is, within that industry, we have the distribution network set up, and we see additional opportunities through acquisitions in that area. Additionally, the FDA has stepped away and will allow CBD products. We’re introducing a product called Happy Flower, which we'll start rolling out. So, there’s a lot of expansion within the category that we see.

Our next question comes from the line of Andrew Carter with Stifel.

Hey. Thanks. Good morning. I think I want to take just a bit of a different angle towards yesterday's news. I think, number one, you've built this platform to be low-cost, but the issue of fragmentation in Canada remains through rational activity. So, while we don’t know what we’ll ultimately get from the U.S., we did see a surge in the sector yesterday. Does that change your view at all of Canada and maybe the necessary rationalization and how that may be prolonged? And I guess I want to add to that is what you do know is you're trading higher. Does it change your view that you would want to double down on the investment in CPG versus cannabis, especially as cannabis MSO assets are rerating? Thanks.

So, Andrew, good morning. How are you? Listen, Canada is the only legal market for recreational cannabis worldwide today. We have incredible facilities and brands, and it's about a $5 billion market at retail, projected to grow to $10 billion. So, if anything, we’re going to do more in Canada. We're going to grow share, innovate products, and focus on Cannabis 2.0, whether it's edibles or drinks. We have a big focus on Canada. There’s a lot we will continue to learn in the Canadian market. The other thing is that we have over 3 million square feet of grow space, and we produce some of the best and cheapest cannabis up there with high potency. Who knows, we can't export to the U.S. one day, and that opportunity will emerge too. Overall, we see potential for our product lines and brands. We believe there's an $800 million business with also $200 million in the consumer area to grow there. Regarding your other question, do we want to become a CPG company? My background in consumer packaged goods gives us the opportunity to build correctly. We won't just sit back and wait; we seek growth. We’re focused on being EBITDA positive and cash flow positive; we have a strong balance sheet.

Thank you. Our next question comes from the line of Andrew Bond with Jefferies.

Good morning. This is Andrew Bond on the line for Owen Bennett. Thanks for taking our question. Maybe shifting gears to recreational legalization in Germany. There seems to be a view that the United Nations INCB regulations and prior rulings in EU courts might need to be addressed and could preclude Germany from legalizing. What's your most recent sense in Germany on the prospects for legalization? What are you hearing? Is this a material legal hurdle to overcome in your view? And then more broadly, until we ultimately see legalization, recognizing you already have a favorable position in the German medical market, are there additional actions you can take or are strategically taking to be better positioned for when rec sales do ultimately launch? Thank you.

So number one, I'm going to let Denise answer that. But I think the big thing is this: medical cannabis is legal in Germany right now. In regards to the German government, they're spending a lot of time. They visited California; they visited Canada in regards to how to do this. So, yes, there are hurdles, but we're comfortable. We feel optimistic that they will legalize it. Denise, do you want to add anything to that?

Yes, sure. Thanks, Irwin. In terms of legalization in Germany, we also see a movement across Europe. In September, there was a health regulators meeting for the EU 27 countries with discussions about cannabis regulation. The German regulators are very focused on how to overcome the UN convention. There's been a lot of different legal analysis, including how to address cannabis, whether it's classified as food or some other way in terms of the regulations. The German regulators seem very focused on this, and they are taking significant steps to understand how to build a framework that addresses both health and safety as well as a commercialized market. We believe we are very well-positioned.

I think the most important thing, whether it’s the U.S., Germany, or Europe, voters want this. In Germany today, about 70% of voters want cannabis legalized. In the U.S., over 60% want it legalized and 90% want medical. What the voters want is significant. The tax dollars and benefits from legalization are substantial. So, that’s what we see for both Germany and the U.S.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

So, I want to go back toward your prepared remarks on Canada, specifically around strengthening your position. I believe you said that some of the smaller competitors might drop out. Just want to get some color on where you believe that stands today per some of the Hifyre data; September was the first month over the past 12 or more months where the top 5 cumulatively gained share, having lost share over the previous months. Do you feel like that was a clear step change and that will continue? Do you think there are still more share losses, and that competitive nature will continue, or do you think we're at a point where the bigger players might start to gain share more consistently?

So number one, I think for the first time, we're really getting a clear look at Canada post-COVID, with store closures only being able to walk up and order having vaccines to go in stores. So now we're really gaining visibility. Number two, with all the price compression and consumers going to the illicit market, Canada was in a major disarray. I genuinely see we’ve made tremendous headway in Canada in regards to the importance of potency and strains. We at Tilray eliminated some brands and strains that impacted our share. The Canadian market will consolidate. I think there will be about 800 licensed producers (LPs) left as many LPs disappear. The consumer today is more educated on what they want. They are beginning to understand brands and pricing. The same with the retail market. There’s been a fallout of many retailers. The market’s starting to mature; it’s just four years old. Now, we're beginning to gain some wind at our back. Blair, do you want to add anything?

No, I just think the one thing that Irwin said that's important for people to recognize is how early we are in this journey. The industry just went through significant chaos, as Irwin mentioned. The big thing I would reiterate is our investment into data and consumer insights, which we're using to make decisions moving forward. We’re very bullish about our future as an LP.

And the thing is, we're investing in research. We're investing from a medical standpoint. We're seeing shifts in flower versus pre-rolls versus edibles versus drinks. The Canadian market is projected to be at $10 billion at retail; that’s nothing small to overlook. We want to learn and grow market share in Canada.

Thank you. Our next question comes from the line of Tamy Chen with BMO Capital Markets.

Just a quick question. Just a follow-up on a previous one, talking about the U.S. and the SAFE Banking Act specifically. Irwin, it sounds like from your previous answer that at this point you are also unsure what SAFE passage might mean for your ability to enter the U.S. Could you clarify if you think SAFE passage might trigger or allow you to enter the U.S., or really is it contingent on the stance of the stock exchanges?

So, number one, I think as I've said before that selling just cannabis companies, SAFE Bank is not going to do much for us. What I do believe is interesting is that investors and institutional investors are starting to look at this industry now and how they invest. You may see other cannabis companies with NASDAQ and NYSE listings now that could raise more capital. From the standpoint for Tilray today is that having institutional investors as part of our ownership was crucial. However, we also want to grow in other countries to prepare for the U.S. We’ll continue to focus on our model.

Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.

Irwin, I want to ask regarding a potential CPG partner. Constellation Brands and Canopy Growth, Cronos, Altria— as the industry begins to scale and more markets legalize, do you think that could give a strategic disadvantage for you not having a substantial CPG partner? How do you think about that?

So I think, Pablo, it’s here. Altria, yes, and that’s part of Cronos. You can make your own decision on what they've done and what they haven't. Listen, I've been in consumer packaged goods for over 30 years. It allows us to build appropriately and do the right things. We have optionality, and that's what's important out there. We're not forced into decisions by tobacco or other alcohol companies. We ensure our business, growth, and consumer interests align with making a difference, and ultimately making money for our shareholders is the right thing for us to do.

Just a quick follow-up: I know you've stated that there are many unknowns in the U.S.; you don’t want to do contingent deals, understood. But you did MedMen. Why was that different? And could there be other deals similar to MedMen that would also make sense?

As I said before, I thought MedMen had a great brand and presence in states within the U.S. There's a lot we're learning regarding consumer trends that we're taking back. We did the MedMen deal, but I won't pursue another until we know what we can do. There was a lot of learning and intelligence, and we believe MedMen has many opportunities upon legalization, which is why we pursued it.

Our next question comes from the line of Michael Lavery with Piper Sandler.

I wanted to follow up on market share. You've seen some stabilization; I'd love to understand your outlook for that going forward. Specifically, what assumptions have you made regarding market share growth in Canadian rec in connection with your $70 million to $80 million EBITDA guidance?

From a standpoint, market share in Canada, I’ve said we want to be back in the double-digit area. Our focus is on the consumer, brands, and innovation. The consumer has become educated on their preferences and what they buy, including pre-rolls, flower, infused, etc. Therefore, we are ensuring we cater to those preferences to ultimately entrench our position in the market. This is a growing area for us. Our share assumption in our guidance is basically in the high single digits to low double digits.

That’s helpful. And just a follow-up on the cash flow guidance. I know you say it will be across all businesses, which I assume is meant to clarify that not one will be carrying another, and that it’s broad. But just to make sure I understand, is there a corporate piece or something that might prevent overall positive free cash flow at the total company level?

Yes, there is a corporate piece, including public company costs, insurance costs, capital expenditures, etc. It's a combined company, not just the operating units. Total company cash flow reflects the entire picture.

Our next question comes from the line of Shaan Mir with Canaccord Genuity.

Congrats on the quarter. Just one for me here. Sticking on guidance here. Looking at your adjusted EBITDA guidance, at the low end, that would suggest over a 30% increase from the Q1 run-rate adjusted EBITDA. I wanted to get a sense for the cadence of that adjusted EBITDA growth through the year. Is it more back-half weighted, or should we expect more step function growth through the quarters? Any commentary on which segments will drive that improvement?

I will let Carl jump in. There is seasonality here. We'll see growth in our spirits business and bourbon business, especially in the back half of the year. In Q4, those three months are key shipping months for beer during the year. So, yes, you’ll see smaller step-ups in the next couple of quarters and a bigger jump in Q4.

Particularly in Q4 for the beverage alcohol business. The second and third quarters are significant quarters for Canadian cannabis. That’s when our product lines and launches are indicated. We have over 100 SKUs that will roll out over the next six months, and September-related incidents that delayed shipments will recover in this quarter and next.

Thank you. Our next question comes from the line of Glenn Matson with Ladenburg Thalmann.

In light of the news in the U.S. yesterday, it's perhaps only symbolic for now. I also want to touch on MedMen. I’m curious how central that is to the U.S. strategy, your involvement in decision-making there and your general sentiment about that business moving forward.

We’re not involved in running MedMen as we can’t be. Denise and I are observers on the board and receive a lot of data from MedMen. There are challenges, but I visited MedMen stores this weekend and saw some positive progress. They’re making headway by selling Florida off to bring in some funds. We must resolve things in New York, but we think it’ll be a big market once legalization happens.

Our next question comes from the line of Frederico Gomes with ATB Capital Markets.

A quick question on the CMOS consolidation in Canada. You mentioned your alliance with HEXO along with strong asset specs. Are there specific capabilities or assets you deem attractive for acquisition or that would make sense strategically?

Thank you very much for your question. We’re well-positioned in Canada today, with our growth facilities in Leamington and Broken Coast. Some assets remain from the Tilray acquisition, but in regards to processing and partnerships, we're in a good place. Our partnership with HEXO allows us to produce new consumer formats, and we have numerous brands. The focus is on educating consumers regarding products and managing expectations efficiently. We believe that Blair and his team have done a wonderful job at that.

Our next question comes from the line of Scott Fortune with Roth Capital.

This is Nick on for Scott. I'm looking for color on Germany, perhaps for Denise. I appreciate the road map you've provided. Can you touch on the competitive environment and what you've seen regarding supply and demand economics there? It appears more suppliers are entering the German market. Your thoughts on the current state and pricing?

Yes, sure. In terms of the market in Germany, as you can imagine, it’s the largest market outside of Canada. There have been new entrants into that market. We believe, as mentioned in our press release, that we are leading the market with approximately a 20% market share. We're pleased that we've maintained high prices in medical cannabis. We sell primarily to pharmacies, which has helped retain our margins.

Our next question comes from the line of John Zamparo with CIBC World Markets.

I wanted to follow up on free cash flow guidance. The guidance for this year indicates positive, but you're currently at nearly minus $50 million. Can you elaborate on how you achieve that? Were there elements of cost or payments that fell into Q1? What kind of sales growth do you need to achieve to get to free cash flow positive for the year?

John, we've always indicated that cash flow is back-end loaded this year. We mentioned this earlier, Q1 historically has a greater share of our annual payments, impacting free cash flow. The cash flow number shows that $26 million of that is working capital changes, which we believe will reverse. We also noted the HTI receivable will come in next quarter and impact results positively. We anticipated Q1 would be negative; we expect recovery later this year.

Thank you. Ladies and gentlemen, there are no other phone questions at this time. I'll turn the floor back to Ms. Noorata. Please go ahead.

Thank you, operator. Now I will read questions from the Say Technologies platform. The first question from our retail shareholders is, "During the last earnings call, you stated that Tilray was exploring ways to enter the U.S. market. What is the plan?"

Thank you, Berrin. The plan is straightforward. We have a strong spirits business, a strong beer business, and we have a good foothold in wellness with Manitoba Harvest. We will continuously explore opportunities for acquisitions within the spirits and wellness businesses adjacent to cannabis. We aim to be opportunistic as legalization unfolds in the U.S., and when it does happen, we will be ready to acquire or merge with MSOs. As I emphasized, we’re mindful of our debt levels and continue to generate free cash; our focus is on consumer opportunities.

Thank you. The second and last question is, "What are you doing to reassure stockholders that Tilray is worth investing in?"

Number one, I will commit to this here. We do have a team worldwide that is working hard for our shareholders and consumers. We have a solid strategic plan to achieve a $4 billion range. Much depends on legalization. We're focused on our brands, on cost savings, on removing $100 million from cash costs. Our balance sheet with our cash on hand is strong, and we remain focused on profitability and shareholder value. I know no one is happy with stock performance, but the market, the cannabis industry, is challenging. We are focused on brands, category diversification, free cash, ultimately leading to long-term success. Thank you for your patience and support, especially with our Canadian friends celebrating Thanksgiving. I look forward to speaking with you soon.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.