Tilray Brands, Inc. Q4 FY2023 Earnings Call

Hello, and thank you for joining today's conference call to discuss Tilray Brands, Inc.’s Financial Results for the Fiscal Year 2023 and Fourth Quarter Ended May 31, 2023. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session for analysts and investment firms conducted via audio and participating retail shareholders conducted via the Say Technologies platform. Questions submitted and uploaded through the Say Technologies platform have already concluded and the company will read aloud and answer to top questions. It is now my pleasure to turn the call over to Ms. Noorata. Please go ahead.

Good morning, everyone. By now, you should have access to our earnings press 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. Please note that during today's call, we will be referring to various non-GAAP financial measures that 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. The 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 includes many of the risks and uncertainties associated with such forward-looking statements. Today, you will hear from key members of our senior leadership team. Irwin Simon, Chairman and Chief Executive Officer, who will begin with opening remarks, and Carl Merton, Chief Financial Officer, who'll provide a financial review and issue our annual guidance for the 2024 fiscal year. Also joining us for the question-and-answer segment are Denise Faltischek, Chief Strategy Officer, and Head of International; Blair MacNeil, President, Tilray Canada; and Ty Gilmore, President of our US Beer business. And now, I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin Simon.

Thank you, Berrin, and good morning, everyone. We appreciate you joining our call today for the presentation of Tilray Brands’ 2023 fiscal year financial results. When I first joined the Aphria team in 2018, Aphria was singularly a Canadian cannabis LP with approximately $50 million in annual revenue and minimal cash, now close to $630 million in revenue and almost $500 million in cash and marketable securities. Boy, have we come a long way. Today, Tilray Brands is one of the most diversified global cannabis lifestyle and CPG companies with four distinct and complementary business segments. Cannabis, including medical and adult use, beverage alcohol, wellness, and medical distribution, not a bad place to be. I'm very proud of what this team has been able to accomplish in just four years. Tilray's diversification is purposeful, a strategic adaptation to current market realities given the continued delays in US Federal cannabis legalization and more recently, delays in adult use legalization in Germany. Tilray is not building its entire business model around the eventual promise of legalization. But rather, unlike others in our sector, we are diversifying beyond cannabis by building a strong balanced portfolio consisting of successful, profitable standalone beverage alcohol and wellness brands in the US, along with a strategic distribution business in Europe, each with high growth opportunities in their own right. Legalization will happen one day, but we're not waiting for it. We're not dependent upon it. If and when Federal cannabis legalization does happen, we are ready to dominate as a leading global CPG company with the resources, infrastructure, and operations, the distribution of brands, and sales and marketing know-how to lead the revolution of cannabis CPG in the mainstream world. Tilray Brands' portfolio today reflects the successful integration of key strategic acquisitions that have enabled us to both grow our top-line and deliver substantial cost savings through these synergies. Today, across our core business segments, Tilray is one of the leading and strongest cannabis LPs with approximately $660 million in annual revenue on a constant-currency basis, the most profitable LP with approximately $61 million in adjusted EBITDA. The cannabis market leader in Canada and the largest federally legal cannabis market in the world with approximately 13% cannabis market share including HEXO brands. The market leader in medical cannabis across Europe with leading market share in Germany, Poland and Luxembourg. A leader in the hemp food industry with a 51% branded market share with Manitoba Harvest. And last but not least, a leader in the craft beverage alcohol industry with a growing leadership position in the US craft beer industry as the ninth largest craft brewer by sales volume. Our vision is to inspire and empower the worldwide community to live their very best lives, enhanced by moments of connection and well-being, and we have not wavered, nor has our overarching objective to deliver sustainable long-term shareholder value and growth. We remain wholly committed to delivering for our shareholders, tangible progress against our key performance goals by focusing on our core business fundamentals which are maximizing revenue growth and profitability, realizing the benefit of optimized asset utilization and cost management to ensure that we maintain a low cost, high efficient cost structure, and number three, of course, continuing to strengthen our industry-leading balance sheet and cash position. Case in point, in quarter four, Tilray reported record financial results and delivered on projections of positive adjusted free cash flow and EBITDA guidance with Q4 net revenue of $184 million, and 93% growth in positive adjusted EBITDA of $22 million. Our total revenue for the year ended May 31, 2023 on a constant-currency basis rose 6% to $668 million in the prior year. Adjusted gross profit grew 11% to $206 million and adjusted gross margin improved to 33% from 30% in the prior year. We generated $61 million in adjusted EBITDA, 28% or $13 million higher than last year and within our annual guided range. On top of these results, we have maintained a strong foundation with almost $500 million in cash and marketable securities today. Turning now to our business segments. Cannabis was our second largest segment by revenue and comprised of 35% of our total mix. In Canada, within our cannabis segment, Tilray remains the market share leader with approximately 13% share in the month of June and July. Revenue from Canadian adult use cannabis increased due to new product innovation and performances, and the favorable impact of the HEXO arrangement which was partially offset by the negative impact of price compression and challenges in the province of Quebec. Tilray has paid approximately CAD120 million in Canadian excise tax and corporate income tax to the Canadian government in fiscal 2023, and we expect this to increase to CAD150 million with the addition of HEXO. The imbalance tax burden is an added challenge we continue to face in the Canadian cannabis industry, with the majority of these taxes coming off top-line sales and of course impacting the bottom line. I have said this before, but it merits repeating roughly 1,000 LPs, 3,700 retail stores are far too many. We need consolidation for the Canadian market to stabilize. We remain confident this consolidation and rightsizing will continue to take hold over the coming quarters. Last month, we set the stage to drive the next evolution of Canadian cannabis closing on our accretive acquisition of HEXO, which has strengthened our position across Canada. In doing so, we brought its leading cannabis brands into our operations and increase Tilray's number one leading cannabis market share to 13%, 577 basis points ahead of their next LP. From a product category perspective, Tilray continues to lead cannabis sales at every market across Canada. Tilray now is number one in flower, oils, concentrates, number two in pre-rolls, and number four in vapes, in the top 10 of all categories. In fiscal '23, Tilray's Canadian cannabis product innovation contributed CAD26.2 million to our adult use sales. In quarter four, new product innovation was 42% of our business, led by our market leading adult use brands, Good Supply. With the launch of Good Supply MONSTERS and CANACA with the launch of CANACA Darts, the first two of their kind of products in the Canadian cannabis market. We've also prioritized the realization of additional operating cost synergies in excess of $22 million on an annualized pretax basis of our $30 million plan in Canada, eliminating duplication in corporate costs, SG&A and realizing substantial synergies in cultivation, packaging, logistics, extraction and quality control. Again, before I joined the company, the legacy Aphria, Tilray, HEXO management teams spent over $1 billion on greenhouse and infrastructure. Today, our management team and I are laser focused on optimizing our operation inefficiencies, utilizing and repurposing these facilities into profitable business and assets, including our new opportunities with fruit and vegetables cultivation, which is needed in Canada and especially in the Quebec market. Moving forward, we'll continue to strengthen our Canadian position with extensive commercialization rigor while capturing substantial value from HEXO's portfolio and our combined scale. We expect our newly expanded portfolio of Canadian cannabis brands to hit approximately $650 million at retail with our biggest brands Good Supply and Redecan leading the charge with approximately $430 million at retail combined. In international cannabis in fiscal 2023, we turned our business around. We changed and upgraded our international management teams across key markets, we improved our profitability and positive cash flow, expanded distribution within established international markets and added countries like Italy, Poland, Czech Republic, which offset our decision not to sell within Israel. As we look to fiscal 2024, our international cannabis business, we're focused on solidifying our leadership position and growing market share in medical cannabis in the countries which we participate in today, as well as achieving early mover advantage in new countries as medical legalization continues to take hold. We are very well positioned to do this based on three core strengths. Our high-quality medical cannabis brands, which are trusted by patients, healthcare professionals and government officials around the world. Our best-in-class cultivation facilities in Portugal and Germany, as well as leveraging our Canadian cannabis facilities. And last but not least, our medical distribution network led by our integrated CC Pharma and medical cannabis teams with a relationship across 13,000 pharmacies in Germany. Based on these trends to date, we've built momentum in Poland and more recently received market authorization from Italy's Ministry of Health to distribute three new medical cannabis compounds through our wholly owned subsidiary FL Group. FL Group is one of the only five companies in Italy that can import and distribute medical cannabis. We also forged a strategic partnership to market and educate over 11,000 pharmacies across Italy on the benefits of medical cannabis and expand our footprint across the Czech Republic through a new export and distribution partnership. Beyond that, the strong platform we’ve built in our medical cannabis coupled with our knowledge stemming from our adult use market leadership in Canada and our deep CPG expertise of our leadership team positions us well to capture the adult use opportunity as it materializes in Germany and elsewhere. And in the event that only in-country cultivation is allowed in Germany, we are one of the three companies that actually have a facility here today. So we're well situated and have the optimal flexibility to pivot in response to any change in pending regulation. From a bottom-line perspective in Europe, we are laser focused on optimizing our platform, working to remove approximately $8 million of cost from our business, of which we've already completed over $6 million. In fiscal year 2023, CC Pharma, which will be rebranded to Tilray Pharma, our medical distribution platform for traditional branded and generic pharmaceuticals, as well as medical cannabis grew 10% in constant currency and generated $285 million in revenue, representing 43% of our top-line and expanded its gross profit margin to 11% from 9% compared to previous years as we prioritize high margin sales. We see this as a major platform to expand into distribution of cannabis and wellness products throughout Europe. Tilray Pharma provides the benefit of an established pharmaceutical relationship and differentiated customer-centric services and drives still higher profit margins through the ongoing positive change in its product assortment. While we're not planning our business around adult use legalization in Germany, we note the proposed legislation to declassify medical cannabis as a narcotic may be prescribed through a medical prescription, thereby opening the pathway to accessibility to a larger patient population. We are using our Tilray Pharma distribution platform and relationships to help expand our medical cannabis business throughout Europe. At the same time, using this medical distribution company to sell traditional medicines in Germany. Now, turning to our beverage alcohol and CPG portfolio. While participation in adult use cannabis markets is integral to our long-term strategy, let me reiterate that we will not engage in businesses that touch the plant if cannabis remains federally illegal in the US. In the meantime, we are optimizing the value of our existing US businesses, which consist of craft beverage alcohol brands and wellness brands, all of which are delivering solid performances today and have the potential for significant growth in the near and long-term future. Tilray's growing US beverage alcohol segment includes strong award-winning brands, SweetWater Brewing Company, Montauk Brewing Company, Alpine Beer Company, Green Flash Brewing Company, Breckenridge Distillery, and the highly awarded spirits brands and world's best blended whiskey. For fiscal year 2023, beverage alcohol grew 33% to $95.1 million for the year. SweetWater saw revenue gains driven by partnerships with key distributors, United Distributors, Eagle Rock Distribution, Reyes Beverage Group, the largest beer distributor in the US. Creativity is a hallmark of our beverage alcohol brands, resulting in a steady stream of product launches that drive ongoing attention and excitement for our brands. In the last few months, SweetWater released a line of ready-to-drink mixed cocktails in a can, a red, white, and blue American Lager, and a Colorado Orange Citrus Ale exclusively in the Colorado market. Since our acquisition of Montauk Brewing, we've expanded Montauk’s distribution by approximately 42% with the brand now available in over 7,500 retail locations across New York, New Jersey, and most recently, Connecticut and Rhode Island. We are confident it can be a national brand by leveraging our national beverage alcohol infrastructure and we're working quickly towards that. Our US Beer business also launched Good Supply Beer, a new light beer and premium lager brewed brand, for easy drinking at a refreshing price. Good Supply Beer is available year-round in a 16-ounce can across Georgia, Connecticut, New York with added distribution rolling out this summer. Finally, our bourbon spirits brand, Breckenridge Distillery, continues to build momentum. It is one of the most awarded craft distilleries in the US and firmly established its position as a category leader. Today, Breckenridge Distillery is distributing to all 50 states and aligned nationally with RNDC, including a distribution contract, guaranteeing nearly 30% sales growth annually. Our beverage alcohol and wellness brands can also be leveraged for cannabis-related opportunities when the time comes through the creation of broad set cannabis-infused CPG brands and products, which can be backed by their existing distribution and marketing networks. Turning now to our wellness segment. Our Manitoba hemp business has greater than 50% market share with a branded hemp seed in the US, including strong presence in the MULO and natural channels and has Canadian market share of nearly 80%. Our Tilray wellness business continues to deliver positive EBITDA, free cash flow with Q4 being our strongest quarter of fiscal '23. Our wellness platform remains an important part of our US strategy with our clear growth drivers in the near and long-term, including a never-increasing consumer interest in hemp products given the key role they can play in plant-based low carb and keto diets. Distribution expansion including Whole Foods Market and Walmart demonstrating the relevance of hemp products across channels and consumer demographics. A strong innovation pipeline, including the recent launch of CBD wellness beverages like Happy Flower that meet the needs of Gen Z and millennial consumers. And with that, we're excited by the opportunities provided by our diversified businesses and we remain steadfast in delivering on our strategic priorities, maximizing revenue growth optimization and maintaining our balance sheet strength. I will now turn the call over to Carl to discuss the financials in greater detail. Carl?

Thank you, Irwin. I am pleased to report that we exceeded both of our financial guidance targets that we laid out for the fiscal year. With respect to adjusted EBITDA, we exceeded the low end of our target range of $60 million to $66 million, reporting $61.5 million. And with respect to adjusted free cash flow, we exceeded our target of positive adjusted free cash flow, reporting $1.3 million for the year. More importantly, we generated over $40 million of adjusted free cash flow in the quarter. And on a fiscal year to fiscal year basis, we improved our adjusted free cash flow by almost $200 million. These accomplishments are a testament to the hard work by our team managing operating expenses and cash flow, along with our determination to control the controllable. At the same time, this strengthens our balance sheet which I will explain shortly. But first, as a reminder, our financial results are presented in accordance with US GAAP and in US dollars and we will reference both GAAP and non-GAAP adjusted results throughout our discussion. And as Berrin mentioned earlier, our earnings press release contains a reconciliation of our reported results under GAAP to the non-GAAP measures identified during our remarks. Before reviewing our annual and quarterly performances, I did want to briefly discuss our favorable refinancing in late May, which further strengthened our balance sheet, extended maturity into 2027, and locked in a lower fixed interest rate of 5.2%. Recall that as of February 28, 2023, we had just under $140 million of Tilray convertible notes due on October 1, 2023, and just under $260 million of Aphria convertible notes due on June 1, 2024. The refinancing extended out those maturities on $125 million of the convertible notes. Rather than using our cash, which we are reserving for investments in strategic acquisitions, we sought to refinance a meaningful portion of our debt. Importantly, we did not do this to raise money for working capital purposes or to pay off previous losses. One of the consistent themes we heard from the institutional investors that purchased the convertible notes was that we were the only company in the world in the cannabis industry that they currently would have invested in because of our history of financial results, the confidence they have in our strategic plan, and the management team leading the company as well as the strength of our balance sheet. Those same institutional investors are now net long in our stock and assuming they convert the notes into common shares, will increase the percentage of institutional investors in our stock. Let me briefly discuss highlights for the full year before reviewing the fourth quarter in greater detail. Net revenue for fiscal 2023 was nearly even at $627.1 million compared to the prior year at $628.4 million. However, in constant currency, net revenue grew 6% to just under $668 million. By segment, cannabis net revenue fell 7% year-over-year or positive 2% on a constant-currency basis, inclusive of over $33 million due to price compression in Canada, of which virtually all of this also represented a reduction in EBITDA. Wellness revenue was down 11% year-over-year, or 9% on a constant-currency basis. However, distribution revenue was flat, but rose 10% on a constant-currency basis and beverage alcohol revenue increased 33%. Gross profit for the year increased 26% to $147 million from $116.8 million in the prior year, and gross margin increased to 23% from 19% in the prior year. Adjusted gross profit increased 11% to just over $206 million from $186 million in the prior year, and adjusted gross margin expanded 300 basis points to 33%. By segment, cannabis adjusted gross margin improved due to the HEXO arrangement, distribution adjusted gross margin improved due to favorable product mix, beverage alcohol adjusted gross margin fell because of margin contributions from the Montauk and Breckenridge acquisitions which operate at lower margin than SweetWater, while wellness adjusted gross margin was basically even. Net loss for fiscal 2023 was $1.4 billion compared to $434 million in the prior year. Net loss for the year is tied to our annual goodwill impairment review as discussed in our previous quarter. From an adjusted net loss perspective, our loss was $0.21 per share compared to $0.38 in the prior year. Adjusted EBITDA for fiscal year 2023 improved to $61.5 million, a record for our company, up 28% from $48 million in the prior year. We have now generated positive adjusted EBITDA in four consecutive years. Turning now to the quarter. Net revenue increased by 20% to a record amount of $184.2 million from the prior year quarter, while on a constant currency basis, net revenue rose 24% to $189.6 million from $153.3 million in the prior year quarter. Gross profit for Q4 was $67.1 million and gross margin was 36% compared to a loss of $67 million and a negative 4% gross margin in the prior year quarter. Adjusted gross profit for Q4 was $68.4 million, up 36% from last year, while adjusted gross margin rose to 37% from 33% in the prior year quarter. Profit and margin gains were a direct result of our implementation of numerous cost-saving programs, including offsetting part of our allocated overhead for intentionally reducing cannabis production and contributions from the HEXO arrangement. Recall that when we reported Q4 2022 last summer, we announced the $30 million cost optimization plan. Through May 31, we have achieved $22 million on an annualized run rate basis, of which $18.5 million represented actual cost savings during the current year. Net loss was just under $120 million compared to a net loss of just under $460 million in the prior year quarter. On an adjusted basis, net loss was $30.4 million or $0.00 per share, an improvement from a net loss of $44.1 million or $0.00 per share in Q4 last year. Adjusted EBITDA almost doubled to a record amount of $22.2 million from $11.5 million in the prior year quarter. Operating cash flow for Q4 improved by $64.1 million to $43.6 million from a loss of $20.5 million in the prior year quarter. This was the result of improved operating efficiencies realized through our synergy programs and management of our working capital requirements. From a free cash flow perspective, in Q4, we reported $33.3 million of free cash flow and $43.2 million of adjusted free cash flow which excludes growth CapEx. This compares to a negative free cash flow of $24.8 million in Q4 a year ago. The improvement is due in part to the reduction of working capital. Of course, cash used in or provided by working capital changes is expected to fluctuate on a quarter-by-quarter basis. Note that for the full fiscal year, adjusted free cash flow was positive $1.3 million, representing an almost $200 million improvement from the fiscal year 2022. These metrics certainly demonstrate the steps we have taken to better balance revenue and costs across all our business units. Turning to our business segments. Gross cannabis revenue was comprised of $214.3 million in Canadian adult use revenue, $43.6 million in international cannabis revenue, $25 million in Canadian medical cannabis revenue and $1.4 million from wholesale. Excise taxes totaled $63.9 million. So they are clearly a significant impact to our gross revenue. For the full year, we paid almost CAD120 million in excise and corporate taxes to the Canadian government. And with the addition of HEXO, expect this to increase to approximately CAD150 million. This substantial tax burden adds to the challenges facing the cannabis industry today. More importantly, Tilray is one of the few licensed producers in Canada that pays taxes when due and is not using the government as a de facto financing arm. Q4 net cannabis revenue was $64.4 million, representing a 21% increase from the year-ago period. The variance was mostly related to the HEXO arrangement. On a constant-currency basis, net cannabis revenue increased by 28.6%. The decline in the Canadian dollar and euro resulted in a $4.1 million decrease to foreign exchange losses. Price compression, while slowing, continued to have a marked impact on our results. Cannabis gross profit was $39.5 million and cannabis gross margin was 61% for the quarter compared to negative $19.1 million and negative 36% in the prior year quarter. Adjusted cannabis gross profit increased to $39.5 million from $28.4 million in the prior year quarter while gross margin increased to 61% from 53% in the prior year quarter. The margin improvement was related to continued cost optimizations offset by the impacts of price compression as well as a decrease in the utilization of our cannabis facilities to manage demand requirements. Distribution revenue, derived predominantly through CC Pharma, increased 18.7% to $72.6 million from $61.2 million in the prior year quarter, despite the strengthening of the US dollar relative to the euro. On a constant-currency basis, revenue would have actually increased 20.1% to $73.4 million for an additional $800,000 of revenue. Distribution gross profit was $6.7 million and distribution gross margin was 9% compared to a loss of $4 million and negative 7% in the prior year quarter. Adjusted distribution gross profit increased 91.5% to $6.7 million from $3.5 million in the prior year quarter, while adjusted distribution gross margin increased to 9% from 6% in the prior period. Similar to Q3, the year-over-year increases were the result of a positive change in product mix and our focus on higher margin sales, including the decision to exit the medical device reprocessing line. We reiterate our expectation that we can still drive higher business profits even without increasing revenue as our facility is nearly fully utilized. Turning to our beverage alcohol segment. We generated $32.4 million in net revenue, up 42.6% from the prior year quarter of $22.7 million. The positive delta was due to contributions from our Montauk brewery acquisition last November, extensive product innovation and increased distribution, renewed traction with our Green Flash and Alpine brands and the building acceptance of SweetWater in California. Beverage alcohol gross profit was $16.6 million and beverage alcohol gross margin was 51% for Q4 compared to $11.4 million and 50% in the prior year quarter. Adjusted beverage alcohol gross profit was $17.8 million compared to $13.6 million in the prior year quarter while adjusted gross margin was 55%, down from 60% in the prior year period. The slight margin decline is a result of the Montauk acquisition that was not completed in the prior year comparison and operates at a slightly lower margin than SweetWater. Finally, wellness segment revenue decreased 8.8% to $14.8 million from $16.2 million in Q4 last year. The decrease in revenue was due to a reduction in customer inventory levels at warehouse locations across North America and a pullback on margin dilutive non-branded sales that led to top-line decreases in the quarter versus the prior year. Wellness gross profit was $4.4 million, down from $5 million in the prior year quarter and gross margin remained relatively consistent at 30% from 31% as we countered the impacts of higher input costs of seed ingredients with higher pricing. Our cash and marketable securities balance as of May 31 was $448.5 million, up from $415.9 million in the year-ago period and today sits at approximately $500 million and working capital was $340.1 million. Let's now discuss our guidance for fiscal year 2024, which ends on May 31, 2024. Adjusted EBITDA is expected to be $68 million to $78 million, representing a growth of approximately 20% year-over-year. We are also projecting positive adjusted free cash flow for the year from operations, excluding our cost to integrate HEXO and the cash income taxes we pay at Aphria Diamond. To conclude, we delivered on our guidance for fiscal year 2023 and have set the bar even higher for fiscal year 2024. In addition to projecting meaningful growth, we will be continuing to optimize our cost structure, minimize CapEx, improve our industry-leading balance sheet and drive additional free cash flow.

Thank you. 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 shareholders through the Say platform. Operator, what's the first question?

Hi, good morning.

Good morning.

So congratulations on the strong print. For us, top-line exceeded expectations across every segment, which is quite nice to see. Maybe we can just start with the adult use cannabis segment, best revenue generation you guys have seen in nearly eight quarters despite the price deflation that you called out. So a two-part question, please. Number one, just from a housekeeping standpoint, would you be able to quantify the impact of the price deflation you guys called that out in the last couple of quarterly earnings calls? One. And then number two, in terms of the overall improvement that you guys are seeing in the business, can you articulate whether there are any kind of positive mix shift variances that contributed to the strong gross margin for the overall segment? Thank you.

Good morning, Vivien. I'll take part of this. We mentioned a price compression of $30 million throughout our fiscal 2023, which impacted our top-line and bottom-line results. The good news is that I believe this issue is behind us, and prices have stabilized. In terms of growth in cannabis, I'm here with Blair MacNeil, who manages our Canadian operations and recreational sector. We’ve launched some excellent new products, focusing on potency and genetics, and consumers are much more knowledgeable about cannabis these days. We've also enhanced our distribution efforts. It's crucial to have our team actively engaging with budtenders and educating them about Tilray Brands. I must commend the team for the innovative solutions we've introduced. Blair, would you like to add something?

Yeah. Let me say, Vivien, the one thing in terms of your mix shift is you'll see that on CANACA and RIFF, we've really grown our mainstream flower presence. With Good Supply, we know we dominate the value segment. CANACA and RIFF growth has come right into mainstream, higher margins for us. So our innovation is really, really driving our P&L right now. In Q4, we had 40% of our sales come from innovation. We had 121 new products launch in fiscal '23, and we've got a tremendous pipeline built for the future. So we're very, very optimistic about the path forward and our shipments early in Q1 indicate that we'll continue to see that strength.

And, Vivien, the other important thing is how much cost we've been able to take out of our business, especially from our cannabis side. And that's done throughout the year. So we don't even have a full year of those costs coming out. And we get to enjoy the next year. And just to be clear, we closed on HEXO in June. So there's no HEXO numbers in here. And, actually, there's a lot Blair and his team has to do to offset some of the declines on HEXO. We think there's some incredible opportunities with Redecan pre-rolls, with flower, with oils and edibles. So we're excited about what we're seeing. Listen, there's still challenges you heard me say. There's still a lot of LPs out there. There is still a lot of retailers. There's still an illicit market we have to deal with. But sitting today with a combined of 13% share, that's almost double what our next competitor is, and Blair is just sitting here and showing me some new share numbers on Tilray, most recent ones just came out and very impressive.

Our next question is coming from Andrew Carter from Stifel. Your line is now live.

Good morning. I wanted to inquire about the adjusted EBITDA, which is $61.5 million. If we exclude the HEXO fees, which won't impact cash flow, the adjusted EBITDA would be around $31 million. I'm projecting next year's growth to be between $38 million and $48 million. Regarding HEXO in year one, will it contribute positively to EBITDA? Are we anticipating a significant increase in profitability in Canada? Can you remind me of the remaining incremental synergies? Additionally, are we counting on improvements in beverage alcohol profits, and is there any expected mergers and acquisitions included in those figures? Thank you.

Good morning, Andrew. To start, there are no anticipated mergers and acquisitions reflected in those figures. Regarding the adjusted EBITDA for HEXO, the current year's statements include the HEXO arrangement, and next year will also incorporate HEXO. We have clearly communicated our goal of achieving around $25 million in synergies from that transaction. I think it's reasonable for everyone to take HEXO's latest quarterly run rate and combine it with those figures to gain a clearer understanding of how we envision its role within the portfolio. As Blair mentioned, we have a considerable amount of innovation that has already produced results in cannabis and will continue to do so, particularly from our beverage alcohol portfolio and the beer division. Additionally, we have approximately $8 million remaining to reach the cost optimization target from last year's Canadian cannabis business, and there is still $12 million expected to impact the income statement in the future.

Andrew, I think the big important thing here, just let me jump in here for a second, is the growth and the opportunities with the HEXO brand. We really think there's a lot we can do with Redecan, as you heard me say on its pre-rolls and flower. Already, we've integrated the sales into our sales organization, our marketing into our marketing organization. Matter of fact, we're sitting in Gatineau, Quebec today, where we're doing our call from. And already, we've eliminated and, Blair has confirmed, in the first 1.5 months of owning this, we've hit or succeeded our synergies and savings in taking costs out of this business. So with that, yes, there's a lot of wood to chop to achieve that EBITDA. But the big thing with HEXO and owning HEXO and operating it, what we're kind of surprised with and what we like what we're seeing is some of the opportunities. HEXO did not have the growth in the Quebec market. HEXO is growing in Quebec. It's a Quebec company. We see tremendous opportunities with HEXO in the second biggest market in Canada, in Quebec market and also what we're seeing.

Thank you. Your next question is coming from Owen Bennett from Jefferies. Your line is now live.

Good morning, guys. Hope you are well. And I just wanted to follow-up on Vivien's question around Canadian adult use. So going very well in flower, oils, concentrates, pre-rolls, where you are number one. I'm assuming the goal will be to be number one across all segments. So I was just wondering what you think you need to do in vape, improve the share there? And also the other categories where you're less strong, I mean, anything you want to call out in terms of investment in specific segments, anything you're doing to try and improve trends in those segments? Thank you.

Yeah, I'll take that. Thanks, Owen. Great question. I think if you looked at our most recent vape numbers, you would see some meaningful change in how we've gone to market. We've had two great innovations there. One is Rocket Bomb and the other one is Watermelon. They've both done very, very well. But overall, we've added hemp mouthpieces to our vapes. We've upgraded our hardware and our potencies across the board have increased tremendously. So big shout out to our extraction team. They worked hard in that category. As you know, that's a category over the last little while where we've lost share. So I'm very confident in our abilities and our innovation pipeline on vape. In terms of your question around being number one in all categories, there are certain categories still, vape, pre-roll, flower, that do between 80% and 90% depending on the market. So beverages, edibles, and some of the other smaller categories. I would say in those categories, we think about margin first and we think about what they add to our business from a margin standpoint and think about how strong we want to be in those categories at that time. And, I do see beverages and edibles long term as being recruitment categories, so we'll always have a presence there. But I think we'll think thoughtfully about when we really scale up in those categories.

Thank you. Next question today is coming from Aaron Grey from Alliance Global Partners. Your line is now live.

Hi, good morning and thank you for the question. Wanted to turn a bit to Germany. You mentioned before your thoughts on the medical market removal of cannabis from the narcotics list, opening up the medical market more in terms of physician adoption and patient growth. So just want to know in terms of your thoughts on that and the potential to offset of the Phase 1 of adult use legalization potentially having an impact on the medical market like we've seen in Canada and other US states with adult use slowing medical growth and then how you're also looking at potentially Phase 2 of Germany legalization opportunities there? Thanks.

Hi Aaron, it's Denise. That’s a great question. When we looked at Germany, we've mentioned in previous calls that we were preparing for adult use. As you've noted, there is currently a delay in adult use legalization. However, the latest draft legislation discusses removing medical cannabis from the narcotics classification, which we see as a significant opportunity for our business. From a medical cannabis standpoint, we are in a strong position with trusted brands among patients, doctors, and regulators in Germany. We are one of only three companies with a facility in the country, giving us solid relationships there. We will continue to grow our medical brands as we have. Additionally, we are concentrating on the patient-driven aspect of the market, where consumers are increasingly interested in flower quality and wellness rather than strictly medical prescriptions tied to specific conditions. We plan to approach this from a wellness perspective, focusing on how we engage with doctors and pharmacies. We also intend to launch different brands in the market. Recently, we launched Broken Coast in Australia this quarter, so stay tuned for more developments.

I think the most important thing is we're there. We have facilities there already, both in Portugal and Germany. We have a distribution with Tilray Pharma, CC Pharma. We have infrastructure on the streets. We're working with the German government in many ways. And I think, listen, we're disappointed that if legalization doesn't happen, but there's a second route to recreational through the medical world that we think there's a big market there. And, again, like I said, we're disappointed, but we think there are opportunities in selling a different way as consumers look to get medical but ultimately using it for recreational.

Thank you. Next question today is coming from Nadine Sarwat from Bernstein. Your line is now live.

Hi, thank you for taking my question. Just coming back to the point on guidance, can you offer any commentary on that adjusted EBITDA growth guidance that have been on an organic basis? So excluding the addition of HEXO, it would just be good to get a sense of what you expect from the core business versus the base that we just had reported today. And then I'm glad that you called out seeing price stabilization. Could you put some numbers around that? Is it just that the compression is reducing, or are you actually seeing it fully stabilize and hitting a floor? Thank you.

So, Nadine, I think I already answered the question on adjusted EBITDA. Andrew had asked about the EBITDA coming from HEXO in the current year and then how that would evolve next year. And as we've said, we're targeting basically $25 million of synergies off their existing run rate from their last reporting date. That involves a minor decrease in EBITDA coming from HEXO directly over the course of the next year and the rest is being driven by growth within our existing businesses.

I'll turn it to Blair for the question on cannabis.

Yeah. Certainly, on the price compression side, I would not say it's stabilized. Price compression by category is directly tied to SKU saturation. And if you look at some of the latest categories where you've had pretty large growth, you will see that they are still relatively under-skewed relative to some of the other categories. So I definitely see it flattening out in areas like flower and some aspects of pre-roll, but there are other categories where I think you'll continue to see some compression.

What we're also observing is various governments implementing pricing measures to stabilize costs, which I believe will be significant. The Ontario government has recently taken steps in that direction. As we witness some market saturation, we are likely to see licensed producers disappear, which could help alleviate much of the price pressure currently experienced. I've consistently mentioned that the cannabis industry is one of the few sectors where I haven't noticed inflation or price reductions. While some changes are likely, I don't expect them to approach the $30 million we experienced this year, certainly not to that extent.

Thank you. Next question today is coming from Tamy Chen from BMO Capital Markets. Your line is now live.

Thanks. Good morning. My one question is, we saw one of your other competitors recently really call out this phenomenon of inflation on THC potency labeling, cherry-picking testing results. I'm just wondering what your perspectives are on that. It sounded like from their commentary, this sort of phenomenon, which I think had been kind of going around in the industry for a bit of time and apparently really accelerated over the last recent months. Thanks.

Hey, Tamy, it's Blair. This is not a new phenomenon. When you think about the inventory environment that we live in, there is a very narrow communication that you can have around your brands. And so THC has always been leading that. And I think back to a year ago, anything over 20%, mid-20s was recognized. Now the potency has gone up. And I think what people forget is, commercialized cultivation, the greenhouses aren't sitting still. They're all looking at ways to improve the yield of the flower. They're looking at ways to improve the quality of the flower and THC goes along with that. So we don't see it being any different than what it's been in the last 18 months. It's an area where we continue to ensure that we need to be there. We need to be consistent with the market. But, ultimately, what we would like to see is some relaxation of the regulatory environment so we can talk about other attributes beyond THC.

Thank you. Next question today is coming from Yewon Kang from Canaccord Genuity. Your line is now live.

Hi, good morning. This is Yewon Kang on for Matt Bottomley. Thank you for taking my question. I just wanted to come back to Aaron's question about the CC Pharma distribution revenues. For the quarter, it was sequentially up 11%. So I guess could you comment on puts or takes from the quarter that drove the sequential increase? And going forward, should we anticipate this top-line to grow given that Germany is looking to expand their medical program as part of their recreational legalization plan?

Hi. So this is Denise. So I think in terms of the way that we track distribution revenue is actually put it separately from Canada. So even though CC Pharma may be involved in the P&L, logistics and dealing with customer service and other asset-front quality management pertaining to medical cannabis, we track medical cannabis revenue within our Canada segment and the distribution revenue in our distribution segment. We are not focused on growing top-line distribution revenue even though you did see a very large increase in distribution revenue, we have made tremendous improvements in the team in terms of procurement and distribution of traditional pharmaceutical products. And so that is the top-line growth that you're seeing as well as the mix and the gross margin improvements because we've been focusing on higher margin products. Our longer-term strategic goals with respect to Tilray Pharma are not necessarily to focus on top-line generation in the traditional pharmaceutical areas. We will continue to grow the top-line, but you will see more of a growth in the medical cannabis side where we're projecting around a 30% CAGR over the next couple of years. Whereas in distribution, we're focused more on the lower single-digit CAGRs. But Tilray Pharma will continue to play a much bigger role in terms of 3PL quality management customer service to the pharmacy, and that's the role it will play within our platform.

Thank you. Our next question is coming from John Zamparo from CIBC. Your line is now live.

Thank you. Good morning. My question is on HEXO and the integration. Historically, sales of acquired brands have fallen pretty meaningfully post-acquisition. So I know it's only been a month since you closed that deal. But I wonder what you can say about HEXO sales in the months since you've owned the business either on a retail basis, your selling to wholesalers? And can you talk about some of the plans you have in place for HEXO's brands to ensure you sustain the sales levels from pre-acquisition? Do you want to rationalize some of those brands? Are there new SKUs or categories coming from the acquired brands? Any additional color there would be helpful. Thank you.

Thank you, John. So I'm going to turn it over to Blair in a second. But I think like with any acquisition, you have SKU rationalization, you have product rationalization. I think what's important in the HEXO acquisition, now there's a company called Redecan that has the incredible pre-roll business, incredible flower business, where there's a lot of growth. And throughout the year, there were lots of challenges within HEXO and it didn't really have the sales organization out there that was needed. So yeah, there has been a decline in sales, but I will tell you we closed on June 1, June 2, this team took over and have now got our GND group, our group in Quebec selling at Rose. So we are all over it, but it will take some time, and we'll have to clean up some of these lower-margin SKUs. But we see tremendous opportunity with the Redecan brand both on flower, oils and especially the pre-rolls a little already. Blair?

Yeah. I would say, look, in the past, what you've seen in acquisitions is the industry not quite as stable as it is today. I know that sounds crazy given some of the conditions we've seen in the marketplace. But I would say Tilray, the work we've done on the back end of our business around our cost savings, around our processes on the back end just made us more ready to absorb the HEXO business. We've rebuilt their demand and supply plan completely. We've already upped some of their logistics, so you're seeing better shipments better fulfillment on the order side. And as Irwin said, we see tremendous commercial opportunity for improved distribution around their cigarette-style pre-roll business, where they're a leader and a pioneer. And then on mainstream flower, as I talked about earlier in the call, the Redecan flower in the mainstream category we think is under-indexed and we see tremendous opportunity there. So I don't think you'll see the track record of the declines that maybe have happened in previous M&As. I think what you're going to see is very quickly we're going to stabilize that business and start to build on it in the marketplace.

In the cannabis industry, the two leading brands right now are Good Supply and Redecan. We built Good Supply from the ground up, and Redecan is the second largest brand in the cannabis sector. This is one of the first times we've successfully acquired such a strong cannabis brand. Together, their retail sales are around $700 million to $800 million, with approximately $0.5 billion coming from Redecan and Good Supply combined. We're optimistic about the significant opportunities available.

Thank you. Our next question is coming from Michael Lavery from Piper Sandler. Your line is now live.

Thank you. Good morning. Could you provide some insights into your priorities and focus? Specifically, in terms of capital allocation, your largest segment is distribution revenue, and the fastest-growing area is beverage alcohol. While Tilray is typically viewed as a cannabis company, you are also venturing into vegetable cultivation. Can you clarify where your spending and focus lie? What is guiding your decisions, or do you consider all your segments equally important? Please help us understand how you prioritize among these areas.

I have four kids, and I love them all equally most days. Similarly, we have four distinct businesses that I care about a lot. When we examine our Canadian cannabis business and our investment, it's important to note that previous ownership invested over $1 billion. We currently have 5 million square feet of greenhouse assets that we need to utilize and repurpose. Repurposing these assets for vegetable cultivation doesn't require significant capital investment. We're not planning for major capital allocation in our cannabis growth and processing. Instead, we aim to reduce costs and improve efficiency in these areas. While some capital expenditures will occur, they will be much lower than what has previously been spent since we have substantial capital already invested. In our beer and spirits businesses, we have seen good growth, particularly with our spirits brand Breckenridge and SweetWater, which is thriving under Ty's leadership. The acquisition of Montauk, which is growing significantly, has positioned us as one of the fastest-growing beers in New York as we expand into New Jersey and Connecticut. We will continue to invest in this segment. Looking at Europe, with 600 million people and 20 countries currently selling medical cannabis, we see substantial opportunities that could also lead to recreational markets. Our current business breakdown shows a third in cannabis, a third in spirits and beer, and a third in medical distribution. The medical distribution margins are not as high as those of cannabis or spirits, but it serves as a valuable channel for distributing our cannabis products, as Denise mentioned earlier. We are a diversified company, and with legalization, all our businesses will integrate. We take pride in our brands, such as SweetWater, Montauk, and Breckenridge, which could eventually include cannabis brands in the U.S. once legalization happens. We will allocate our resources accordingly, as each area is integral to our growth. The encouraging news is that all these segments are currently growing in markets where we see significant expansion potential.

Thank you. Next question today is coming from Frederico Gomes from ATB Capital Markets. Your line is now live.

Hi, good morning. Thank you for taking my question. My question is just on the adult use segment in Canada. Right now, you have 13% market share nationally, you’re the leader. Do you have any specific goal for this year in terms of growing that share and maybe taking advantage of some of the difficulties your competitors are facing? And just talking about the pricing environment, so to gain share, would you need to be more aggressive on pricing? Or are we at a point where now you think you can you have other levers to pull here to maybe significantly gain share over the near term as the market consolidates? Thank you.

Thanks for the question. I would say in terms of our goals, obviously, we want to grow and we want to continue to grow. When I think about how we do that, I don't think we have a target in mind, but we continue to look at each of the segments, each of the categories. And so if you think about what I talked about earlier with flower, on the Redecan side, we don't have a huge presence in mainstream. We have Broken Coast at the premium side, we have Good Supply at the value side. So mainstream is an area where we think we continue to grow and continue to build our presence. So all of our growth strategies are really at the category and segment level, and we think there's a lot of runway for us to do that moving forward. The price compression side, I definitely think it's stabilized to Irwin's point in some of the categories. I don't think it's at the point now where we could think about optimizing our revenue and building our pricing. I don't think we're far away from that environment. If you look at the capacity in the industry over the last 12 months even, there's been a lot of capacity pulled out. So I do think the industry is going to stabilize from an inventory standpoint. And once that happens, I do see the opportunity for us to think about optimizing our revenue versus thinking about price compression.

Thank you, everybody. I think that was our last question for today. Thank you very much for joining our call. Thank you very much for your interest in Tilray. Before I conclude, I'd like to say thank you to all my team members that I work with, the management team, our Board members, we have over 1,500 employees, 15 operating facilities around the world. And I'm proud to serve our patients, our consumers, and just as important, our shareholders out there, and being today in 21 countries and with a lot of interest in the cannabis world, a lot of interest in the beer and the spirits world and a lot of interest in regards to our distribution and medical business, we're an exciting company with a lot happening. And as I go back and I said earlier on my remarks, in late 2018, 2019, we're a $50 million company and today approaching, which we want to get to that $1 billion in size, there's a lot we've done, there's a lot we can do and there's a lot we will do with what we've built within there. Tilray team has demonstrated adaptability. We've had strong execution skills in some tough categories in tough markets and some tough times where we've operated excellent, diversified our business. And I think that's what's really important today. And I know as I sit here and listen to a lot of the questions coming at us in regards to the cannabis world, but boy are we doing some great things within the craft beer business. We will change that industry. Craft beer is cool and will become cooler. And some of the stuff that we're doing at SweetWater and Montauk, some of the stuff that we've done so far in regards to Breckenridge and our bourbons and some of the winnings that we've had in being number one is just tremendous. Our balance sheet, which is so important today, cash is king and sitting close to $500 million of cash and have the ability to invest in our business, have the ability to invest in acquisitions, having the ability to market our brands where we can and let consumers know about our brands because our brands are cool. And our brands today resonate with Gen Z, Gen X, millennials, et cetera. With that, we have tremendous opportunities out there. Over the last couple of years, we've done some great accretive acquisitions and we'll continuously look at the acquisition world. And if you look at where we are today being that leader in Canada in regards to our cannabis world, the leader where we are on our medical cannabis in regards to Europe and the opportunities there, just think when the cannabis world legalizes and something will happen in regards to legalization, whether it's medical cannabis, whether it's recreational cannabis, whether it's a SAFE Banking Act, we really look and expect something to happen. But the thing is today with Tilray, we are not dependent upon legalization. We are a diversified company. We have cash flow. We have business-centered growth. We're in diversified categories. We're in 21 different countries around the world. So we have some exciting things. So with that, I'd like to thank everybody for joining us. Enjoy the rest of your summer, and more importantly, enjoy some of our great products out there. Thank you.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.