Tilray Brands, Inc. Q1 FY2024 Earnings Call

Thank you for joining today's conference call to discuss Tilray Brands, Inc. Financial Results for the 2024 Fiscal First Quarter ended August 31, 2023. 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 via the Say Technologies platform. Question submission and uploading through the Say Technologies platform has already concluded and the company will read aloud and answer the top questions. I will now turn the call over to Ms. Berrin Noorata, Tilray Brands' Chief Corporate Affairs and Communications Officer. Thank you. You may now begin.

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 those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer, who will provide opening remarks and commentary followed by Carl Merton, Chief Financial Officer, who will review our quarterly financial results and maintain our adjusted EBITDA 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 U.S. 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 quarterly call. At Tilray Brands, we strategically diversified our cannabis lifestyle and CPG company globally, and we've done so for several reasons, including the tremendous growth opportunities we see within the beverage category and across markets like craft beer, ready-to-drink cocktails, non-alcoholic beverages, energy, and nutritional drinks. These product categories and others in our portfolio further allow us to address the ever-changing cannabis market conditions, while driving market share in the industries in which we compete. This effort is backed by our portfolio of high-quality lifestyle brands and the strong and growing distribution networks that are behind them. Our goal is clear: to accelerate our ability to deliver industry-leading profitable growth and sustainable long-term shareholder value. To this end, our achievements in fiscal 2024 to date and expectations for the balance of the year reflect the strides we're making by focusing on our core fundamentals: number one, maximizing profitable revenue growth through organic expansion initiatives and key strategic acquisition with strong synergy potential; number two, realizing the benefits of optimized asset utilization and cost management to ensure a lean, efficient cost structure across all our business segments; and of course, number three, continuing to strengthen our industry-leading balance sheet and cash position. Our strategic execution and achievements affirm that we have emerged as the most diversified cannabis lifestyle and CPG company globally with four distinct and complementary business segments. These consist of cannabis, broken out into medical and adult-use, along with beverages, including craft beer, spirits, ready-to-drink mixed cocktails, and non-alcoholic drinks, wellness products, and a medical distribution business. As a result, we had a record Q1 with net revenue of $177 million, representing 15% growth year-over-year. We grew EBITDA in our cannabis business and our international businesses. We grew Canadian cannabis revenue by 16.5% in the quarter and remain the strongest and most profitable international cannabis LP with approximately a 13.4% share in Canada inclusive of HEXO and Truss, 631 basis points ahead of the next LP. From a product category perspective, we continue to lead cannabis sales in almost every market across Canada, the largest federally legal cannabis market in the world. Tilray is number one in cannabis flower, oils, concentrates, and THC beverages, and number two in pre-rolls, number four in vape, and the top 10 in all other categories. Aggregated all categories in either inhalables or ingestibles, Tilray is number one in both of these groups. We grew international cannabis revenue by 37%, and we are the market leader in medical cannabis across Europe with leading market shares in Germany, Poland, and Luxembourg. We are a leader in the hemp food industry with a 52% branded market share with Manitoba Harvest in the U.S., and Canadian market share of nearly 80%. With our recent acquisition of eight craft beer and beverage brands from Anheuser-Busch, we are growing fast in the craft beverage alcohol industry, solidifying our leadership position as the fifth largest U.S. craft beer brewer with a 5% market share in a growing market. And since year-end, we paid down $177 million of our debt. The balance we have brought to our business model by going beyond cannabis has given us a strong position today and is positioning us well for higher growth future opportunities, including when U.S. federal cannabis legalization and German legalization of adult-use cannabis happens. We believe we're in a great place going forward, well positioned with the resources, infrastructure, operations, the distribution of brands, sales and marketing, and know-how to lead the revolution of cannabis CPG into the American and European mainstream. Let us now discuss our individual segments within the context of our overall business. Cannabis was our largest segment by net revenue and comprised approximately 40% of the total revenue. Gross revenue from Canadian adult-use cannabis increased 22%, driven by innovation and shared growth in dried flower, vapes, and pre-rolls. This was achieved both organically and as a result of our recent acquisitions, and despite price compression in the quarter of approximately $3 million from the prior year quarter. Notably in Q1, according to combined HyFire and Weed Crawler retail sales data, Tilray sold over double the units of the number two and number three LPs combined. In equivalent KGs, we sold double the amount of the number two LP. As pre-rolls continue to grow, we shipped over 18 million pre-rolls, 200,000 per day, that is a lot of pre-rolls. In terms of market share in our core business of Tilray, when we exclude HEXO and Truss, we finished Q1 with an 8.76% market share, which is up versus Q4 2023 and year-over-year versus fiscal year 2023 Q1 by 57 basis points and 38 basis points, respectively. We maintained our number one market share position and expanded the gap by an additional 20 basis points to an overall gap of 136 basis points versus the number two LP by market share. Our combined market share for Q1 when including Tilray, HEXO, and Truss was 13.4%. Regionally, we grew our share in all four major markets in Ontario, Alberta, British Columbia, and Quebec, furthering our best-in-class market coverage to a highly fragmented retail network. Finally, we continue to have a relentless focus on synergies. We reported planned synergies up $27 million with the HEXO transaction in just two months. We have already achieved $17.1 million of the target through elimination of duplicate costs, streamlining SG&A, and renegotiating key contracts. In Q2, we will complete the integration of HEXO from an operational standpoint, which includes centralizing our packaging and logistics into our Aphria One facility, driving further efficiencies. With regard to our Masson facility in Quebec, we've invested in making the necessary changes to convert and optimize the facility to grow cannabis and fruits and vegetables for the Quebec marketplace. This work is on track and we will begin planting cucumbers this year. On a related acquisition note, in August, we purchased the remaining 57.5% equity ownership of Truss Beverage Company from Molson Canada. The transaction further strengthens our number one cannabis market share position in Canada with a combined market share of approximately 40% in the THC beverage and positions us at the forefront of the adult-use beverage sector. Our expanded cannabis portfolio now includes the fastest-growing beverage brands, including XMG, Mollo, House of Terpenes, and Little Victory. We believe that THC beverages present a significant opportunity. There are nearly 11 million customers in Canada for cannabis beverages and the category is already roughly C$100 million at retail. In addition to the category opportunity, transitioning THC beverage production to our London facility will generate further cost savings and synergies. Turning to international cannabis, which achieved revenue growth and approved profitability in Q1, our intentions are twofold: strengthening our leadership position and market share in the medical cannabis category, where we currently operate across 21 countries; and achieving early mover advantages in new countries as medical legalization advances. Based on these trends to date, we are building momentum in Poland, Italy, the UK, and the Czech Republic. As we look to fiscal 2024 for our international cannabis business, our focus is on 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, where we are one of only three companies in Germany that can cultivate in-country, as well as leveraging our Canadian cannabis facilities and expertise; our medical distribution network, led by our integrated Tilray Pharma and medical cannabis teams, with relationships across 13,000 pharmacies. From a bottom-line perspective, we are laser-focused on optimizing our European platform, working to remove approximately $8 million of costs from our businesses, of which we've already completed over $6.8 million. CC Pharma, which we are rebranding to Tilray Pharma, is our established medical distribution platform for traditional branded and generic pharmaceuticals, as well as medical cannabis. This business segment from a revenue perspective is currently equal in size to our cannabis segment, comprising slightly less than 40% of the total sales mix. It grew 14% in Q1 from a year ago and expanded its gross profit margin due to a reduction in production costs and an improving product mix. Similar to the U.S., we are not planning our business around adult-use legalization in Germany. However, there is proposed legislation in Germany for medical cannabis to be declassified as a narcotic. And if the proposed German legislation comes to pass, it may be prescribed as a medicine rather than as a narcotic, which is more difficult for healthcare providers to prescribe. This in turn would open accessibility to a larger patient population. Now turning to our beverage alcohol and CBG portfolio, a high-quality growing portfolio of lifestyle craft beverage alcohol and wellness brands that have enabled us to build a strong footprint in the U.S. market without engaging in business that touches a cannabis plant. Importantly, beverages are a fast-growing category with significant growth through innovation and M&A and high future growth and healthy margins. Within beverages, for example, the craft beer business is expected to grow to $282 billion globally by 2032, a CAGR of 10.5% between 2023 and 2032. With North America accounting for 40% of the revenue today of that $40 billion in 2023. Given that, it is a market we have been following closely to seize on the clear opportunity that exists today. Reflecting that earlier this week, we welcomed the newest additions to the Tilray Brands family as we closed on our acquisition of eight beer and beverage brands from Anheuser-Busch. These brands, Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy, have enabled us to further diversify and expand our beverage alcohol segment while elevating our position within craft beer from number nine to projected number five. We are confident that as we layer on our team's deep experience and skills in product innovation and marketing, we will be able not only to grow our brands but also evolve the overall craft beer category, where there is clear and strong opportunity to grow the consumer demographics and expand into new products and formats, such as ready-to-drink and new channels. Taken together, over the last three years, we've added a total of 13 brands to our beverage alcohol portfolio. The eight that I just referred to, in addition to SweetWater Brewing Company in December of 2020, Alpine Beer and Green Flash Brewing Company in January of 2022, and Montauk Brewing Company in November of 2022, we also own Breckenridge Distillery, the award-winning spirits brand and the world's best-blended whiskey, which was acquired in December 2021. In terms of overall segment performance, quarterly revenue for the beverage alcohol business was $24.2 million in Q1, representing a 17% growth from last year, and we're just getting started in making this segment a more meaningful component of our financials. We project pro forma revenue for our beverage alcohol segment, including these recently acquired brands, of about $300 million. Finally, our wellness segment is delivering higher gross profit on a stable top-line as its adjusted to higher ingredient costs through increased pricing from a year ago. It remains an important element of our U.S. strategy because of these factors: strong consumer interest in hemp products, expanded distribution into Whole Foods and Walmart, and product innovation to meet the needs of Gen Z and millennial consumers through new hemp foods and supplement offerings in CBD wellness beverages like our Happy Flower. It's also worth noting that Manitoba Harvest is the industry leader in terms of sustainability, having recertified as a B Corp for the 10th consecutive year and having launched the first Regenerative Organic Certified Hemp Hearts SKU this past spring. Across the board, we are delivering solid performance by optimizing our U.S. businesses and setting the stage for significant growth in the near- and longer-term future for existing and newly acquired brands. In summary, we think the opportunities afforded by our intentional business diversifications are numerous and exciting as we look ahead. Our go-forward plan is to execute on what matters most: maximizing revenue growth, optimizing efficiency, and maintaining our balance sheet strength as we invest in our industry-leading brands. I will now turn the call over to Carl to discuss the financials in greater detail.

Thank you, Irwin. Before reviewing our quarterly performance, let me remind everyone that our financial results are presented in accordance with U.S. GAAP and in U.S. dollars, and we will reference both GAAP and non-GAAP adjusted results throughout our discussion. In addition, our earnings press release contains a reconciliation of our reported results under GAAP to the non-GAAP measures identified during our remarks. Q1 total net revenue rose to $177 million compared to the prior-year quarter at $153 million, representing 15% growth. In constant currency, net revenue similarly grew 15% based upon constant currency revenue of $176 million in Q1 this year. By segment, cannabis net revenue rose 20% or 22% on a constant currency basis, inclusive of $3.1 million due to price compression in Canada, of which virtually all also represented a reduction in EBITDA. Distribution revenue rose 14% or 11% on a constant currency basis. Beverage alcohol revenue rose 17%, and wellness revenue declined 1%, but was flat on a constant currency basis. Cannabis excise taxes, which are a reduction from revenue, totaled $26.6 million compared to $17.1 million last year. This reflected a sharp increase in cannabis revenue generated in Canada versus the year-ago period due in part to the HEXO acquisition, which closed during Q1, offset by continued price compression in the market. Recall that excise tax is predominantly computed as a fixed price on grams sold rather than as a percentage of the selling price. While there is an excise task force to present these challenges to the Minister of Finance in Canada, we do not believe some level of reform is likely in the near term. As Irwin already emphasized the inherent benefits of having a diversified business model, it is notable that in both Q1 this year and last year, our cannabis and distribution segments each represented about 40% of our total revenue mix, while beverage alcohol and wellness represented about 14% and 8%, respectively. These percentages will change with a full quarter of contributions from the HEXO and Truss acquisitions, along with the addition of the acquired brands from Anheuser-Busch. We believe we will achieve a balance of 30% cannabis, 30% distribution, 30% beverage alcohol, and the final 10% wellness. But the key takeaway here is that we have achieved great balance and are not overly dependent on any one segment from a top-line or even gross profit standpoint. In terms of our geographical footprint, we are also highly diversified with slightly more than half of our revenue from North America and about 45% from EMEA, with the remainder from other parts of the world. Gross profit was $44.2 compared to $48.6 million in the prior-year quarter, while gross margin decreased to 25% from 32% in the prior-year quarter. Adjusted gross profit, inclusive of purchase price accounting step-up, was nearly flat at $49.3 million compared to $49.7 million in the prior-year quarter, while adjusted gross margin was 28% compared to 32%. I will discuss adjusted gross margin by individual segment in a moment but it improved across three of our four segments except for cannabis that was primarily due to the prior quarter having 100% gross margin on the HEXO advisory fee revenue. Net loss improved to $55.9 million compared to $65.8 million in the prior-year quarter. On a per-share basis, this amounted to a net loss of $0.10 versus $0.13 in the prior-year quarter. Adjusted EBITDA was $11.4 million, down from $13.5 million in the prior-year quarter. The primary variance relates to the HEXO advisory fee revenue in the prior-year quarter that was not duplicated this quarter as we owned HEXO for the majority of the quarter. Other contributing factors include the timing difference in recognizing synergies from operating results after completing acquisitions. Recall that when we reported Q4 2022 during the summer of 2022, we announced a $30 million cost optimization plan. Through August 31st of this year, we've achieved $22 million on an annualized run rate basis, of which $21 million represents actual cost savings through Q1. This is up from $18.5 million when we reported last quarter. Operating cash flow improved by $30.5 million to a loss of $15.8 million from a loss of $46.3 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. Turning now to our business segments. Gross cannabis revenue of $96.9 million was comprised of $71.2 million in Canadian adult-use revenue, $14.3 million in international cannabis revenue, $6.1 million in Canadian medical cannabis revenue, and $5.3 million in wholesale cannabis revenue. Net cannabis revenue was $70.3 million, representing a 20% increase from the year-ago period, or 22% in constant currency. The positive variance was mostly related to increased organic growth and the acquisitions of HEXO and Truss. Canadian medical cannabis decreased slightly due to increased competition from the adult-use market and price compression in the medical cannabis market. Adult-use cannabis increased 22% due to organic growth from our existing brands launching new products as well as the increased revenue from the acquisition of HEXO and Truss. Offsetting the increase in the current period was a substantial reduction of advisory services revenue from the prior-year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. The substantial increase in wholesale cannabis revenue was an opportunistic sale, which helped increase our cash flow from operations, even though it had a negative impact on gross margin and EBITDA. International cannabis grew 37%, largely because of the expansion into emerging international medical markets. Cannabis gross profit was $19.8 million, and cannabis gross margin was 28%, compared to $29.7 million and 51% in the prior-year quarter. Adjusted cannabis gross profit, which removes the purchase price accounting step-up, decreased to $24.3 million from $29.7 million in the prior-year quarter, while adjusted gross cannabis margin decreased to 35% from 51% in the prior-year quarter. However, if we are to exclude advisory services revenue from HEXO of $1.5 million in Q1 2024 and $7.8 million in Q1 2023 and the wholesale transaction with a negative gross profit of $2.7 million in the quarter, our adjusted cannabis gross margin would have been 39% compared to 43%. The remaining decrease is a result of price compression. Distribution revenue, derived predominantly through CC Pharma, increased 14% to $69.2 million from $60.6 million in the prior-year quarter. The increase was driven by increased capacity and a revamped sales approach to expand our distribution network of procured products and was aided partially by the strengthening of the euro relative to the U.S. dollar. Distribution gross profit increased to $7.7 million compared to $5.6 million, while distribution gross margin increased to 11% from 9% in the prior-year quarter. Similar to the last three fiscal quarters, the year-over-year increase was a result of a positive change in product mix focused on higher margin sales, including the decision to exit the medical device reprocessing line. Beverage alcohol revenue was $24.2 million, up 17% from $20.7 million in the prior-year quarter. The positive delta was due to contributions from our Montauk brewery acquisition last November. Beverage alcohol gross profit increased to $12.9 million compared to $9.8 million, while beverage alcohol gross margin increased to 53% from 47% in the prior-year quarter. Adjusted beverage alcohol gross profit, which removes the purchase price accounting step-up, was $13.5 million compared to $10.9 million in the prior-year quarter, while adjusted gross margin rose to 56% from 53% in the prior-year quarter. This increase was related to a favorable sales mix change between beer and spirits, partially offset by the impact of the Montauk acquisition that was not completed in the prior-year period. Wellness segment revenue held at $13.3 million compared to $13.4 million in the prior-year quarter, despite increasing pricing to combat ingredient cost inflation. Wellness gross profit was $3.8 million up from $3.5 million in the prior-year quarter, and gross margin rose to 29% from 26% as we countered the impacts of higher input costs from seed ingredients with higher pricing. Our cash and marketable securities balance as of August 31st was $464.9 million, down from $490.6 million in the year-ago period, but increased from the balance at year-end of $448.5 million. During Q1, we entered into a new $120 million credit agreement led by Bank of America and included syndicate members, City National Bank, TD Bank, and Pinnacle Financial, for our beverage alcohol division, which is comprised of domestic-owned subsidiaries and provides for, among other things, a $70 million term loan facility, a $20 million delayed draw term loan facility, which we drew in full as part of the payment of the purchase price on the acquisition of the Anheuser-Busch brands, and a $30 million line of credit, of which we have only drawn $7 million. The new credit agreement extended the maturity date on the loan from December 2023 out to June 2028 with reduced repayment requirements, improved financial covenants, all while maintaining the interest rate spread on the loans. On August 31, we settled our obligations under a $50 million convertible promissory note, which had a maturity date of September 1. And finally, subsequent to quarter-end, we settled and paid in full our Tilray '23 Convertible Note. Let's now reiterate our guidance for fiscal 2024, which ends on May 31, 2024. Adjusted EBITDA is still projected at $68 million to $78 million. Note that we are not increasing this range after having acquired the beverage brands. They will be accretive to EBITDA as we said when we first announced the transaction but will not have a material impact on EBITDA in the first year post closing. We also project positive adjusted free cash flow from operations, excluding our costs to integrate HEXO, Truss, and the brands from Anheuser-Busch and the cash income taxes we pay at Aphria Diamond. We will also work to minimize CapEx and improve our industry-leading balance sheet. With that, I will conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what's the first question?

Thank you. Our first question comes from Vivien Azer with TD Cowen. Please proceed with your question.

Good morning. This is Robin Holby on for Vivien Azer, and thank you for taking the question. First off, congratulations on closing the acquisition of the ABI beverage brands. Today, you called out the margin accretion from the Montauk acquisition to your overall beverage margins. Could you please speak to how you see margins for that segment evolving over time, in particular that you're not only acquiring craft beer brands but also on-premise infrastructure? Thank you.

So, the increase in gross margin in beverage alcohol this quarter was a combination of two things: one, it was a minor shift in sales mix or in product mix between beer and spirits, and also as a result of the acquisition of Montauk. Going forward, we are very confident that the beer brands themselves will be able to maintain a margin above 50%, but our spirits business traditionally has been closer to 50%. So, as that blend gets mixed in with the new brands we've acquired, we'll start to see it move a little closer to the beer margin.

And I know one of Vivien's favorite questions is regarding our brew houses. We sell more beer in our brew houses than food. And I think that's the important thing about how food does not dilute our margins in our brew houses. And that's what our brew houses are about, is to go out there in market and sell more and more beer. And that is very much what our plans are.

Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.

Hey, thanks. Good morning. Okay. So, I want to just go back to the report that was out last month and just use this opportunity to clear the air. First off, regarding Double Diamond, could you help us fully understand the liability? What is the required annual payment to your partners? Is it variable based on performance? Do you have the ability to throttle their production, therefore adjust to market demands? And then, the second question, do you pay some proportion of your minor shareholder in stock? And if so, are these stocks added back to EBITDA? Thanks.

Thanks, Andrew. I appreciate the opportunity to just make sure that everyone is crystal clear on this transaction. What I want to start off with first is that we have never paid for an actual operating expense at Aphria Diamond out of the dividends that we've issued. The dividends that we have issued to our partners in Aphria Diamond have always been payments of profit distributions. At one point during the year last year, we did provide some downside protection. When that payment was triggered, that payment went through the income statement and that was added back to EBITDA. That is the only amount that we have ever paid through those dividends. At one point during the year last year, we did provide some downside protection. And when that payment was triggered, that payment went through the income statement and that was added back to EBITDA. That is the only piece of those dividend parts that has ever flown through the income statement and it was an extremely small amount and it was fully disclosed in our financial statements.

I think, Andrew, what's important is that our partner in Diamond will take equity and if he keeps it, it's his prerogative. If he sells it, it's his prerogative. But again, there's a distribution of dividends at the same time. There's profits where we have 51%, and we're enjoying the profits of that too. So I think that's what's important. But to Carl's point, that stock is not used to pay for the operations of the business. I think that's what's important.

Thank you. I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.

Hi, good morning, and thank you for the question. So, just regarding the EBITDA guidance, you guys held it now despite the beer brands acquisitions, it will be accretive. But if we just look at the quarter, excluding the small HEXO advisory fee, so call it about $10 million or so. Can you walk us through how we think of this step-up to get to that $68 million to $70 million for the fiscal year? And maybe you can talk about the drivers and how we should think about the sequencing of the EBITDA step-up to reach that guidance? I think it'd be very helpful in any puts and takes. Or I think that could be more through top-line generation for more margin improvement via cost efficiencies or otherwise, I think that'd be appreciated. Thank you.

Thank you, Aaron. Your question reminds me of last year's conversations regarding the timing of reaching our EBITDA guidance. Typically, we see stronger performance in our spirits brand during the second quarter due to the seasonal increase in purchases leading up to the Christmas holiday. As we progress through the year, we usually experience significant growth in the fourth quarter of our distribution business, as pharmacies prepare for summer vacations. Additionally, there's considerable demand for our beer products in the fourth quarter as summer approaches. This year, we also have the synergies from the HEXO transaction and our ongoing cost-saving initiatives. Consequently, we anticipate a notable increase in EBITDA next quarter, in Q2, though Q3 might be flat or slightly decrease compared to Q2, followed by a larger jump in Q4.

I think the big drivers here are top-line. And you saw our top-line in our first quarter, and you heard me mention, we sold 20 million pre-rolls. Our beer business, both SweetWater and Montauk, were up. And that is the big thing: getting the new distribution, but getting the new products out there. Ty and team launched a product called Gummies, which is a new product for us. And it was a big percentage of our growth of new products. Getting Montauk into other states, whether it's New Jersey, Pennsylvania, Georgia, is going to be a big part of our growth. In our international business, growing our medical business in Poland, Germany, Italy, and places like that is going to be a big part of our business. And the big thing you got to remember, which I talked about, is we did three acquisitions. And we're looking to take $27 million of cost out of HEXO. We're going to be looking to take a tremendous amount of costs out of the ABI and it's going to take time. And with the acquisition of Truss that we bought from Molson's, we'll be moving those products to our London facility and we have an excellent facility in Belleville, Ontario that we're going to look to do non-alcoholic drinks and energy drinks, and some other types of drinks there. So, we're looking for a big year on organic growth in new products, innovation, new distribution. We're focused on taking more and more costs out of the business. In regards to our facility in Masson, you heard me talk about that, where we're converting that to vegetables, and that should be online by the end of the year and taking a tremendous amount of cost. So, the drivers here are going to be top-line growth, taking costs out, which ultimately improves margins and drives profitability to the bottom-line.

Okay, great. Thanks very much for the call. I'll drop back into the queue.

Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.

Good morning, everyone. Just wanted to first touch base on kind of that first strategic priority. Irwin, you were just sort of talking about it now with respect to some of the organic growth. But on the M&A front, what is the current landscape if we're looking at the cannabis sector in general and federal illegal environments with respect to what we're seeing in Canada and international markets? Is this something that you think probably has the least amount of opportunistic assets out there just given some of the headwinds we've seen in federal markets? And should we expect maybe more beverage alcohol focus when it comes to M&A allocation? I'm just curious if you have an indication one way or the other.

So, I'm going to bring two other people in to talk about that. I have Blair MacNeil here who runs Canada. And I got to tell you I spent some time with Blair and team in Toronto and spent some time with other control boards. It's five years since cannabis has been legal in Canada. And what we're seeing is a tremendous amount of consumers moving over to the legal market, tremendous eating and drinking. You heard us say we sold 20 million pre-rolls. And where that is going? We expect to sell 80 million pre-rolls a year. You see lots of consolidation at retail, with much more awareness out there. Listen, there's still lots of problems in the Canadian market, but I got to tell you for the first time, I'm starting to feel really optimistic about the opportunities there. Blair, you want to add anything to it?

To address your question about the M&A opportunities, I believe our portfolio is quite balanced overall. We might have a minor gap in the edible category, but the rest of our portfolio is well represented. Currently, there aren't many assets available that we are interested in acquiring in the near future. As Irwin mentioned, our facilities are reaching high utilization, and we do have some capacity available to incorporate edibles. We plan to pursue that in the upcoming period. From a Canadian market perspective, I am pleased with the growth we are observing, and while the industry does face challenges, as noted by Irwin, we don’t see many M&A opportunities at this time.

Before I pass it to Denise about Europe, we're real excited about the beverage category. If you come back and think one of the biggest opportunities, when you walk into cannabis stores today, there's a small fridge in there with drinks at $7 or $8. But think about how the beverage category within the world today, you look at the craft beer category, $280 billion, and you come back and think this is a whole new category of opportunities out there. We have two facilities. We're the leader in the beverage business, and everybody wants to figure out what's the right way to roll this out and merchandise it. And my hope one day is that you would be able to go into a beer store, convenience store, or go into a bar, and it would be on tap. So that, to us, is one of the biggest opportunities. Internationally, medical has tremendous opportunities. Denise?

Thanks, Irwin. In Europe, the primary cannabis market is still medical, with Germany being the largest. However, we are observing several countries that are rapidly developing. The regulations are still evolving, and we expect medical cannabis in Germany to be reclassified so it can be prescribed like other medications. Currently, our business in this area is still in its early stages, and we are assessing our capabilities to identify any gaps that could potentially be addressed through mergers and acquisitions. We are exploring various options to enhance our business, including technology and online platforms. The same assessment is being conducted in Australia and New Zealand, particularly regarding clinics. Additionally, we are considering the role of beverage alcohol in Europe. Our focus is on finding opportunities to expand our capabilities and strengthen our overall business.

And to round out the third part of your question in regards to beverage alcohol, listen, we own some great brands today. Ty and I are on the road to start visiting them after today and how we start integrating them and where we will be looking to sell them in each state and each tri-state, we will figure that out. But if you come back and look what the team has done with Montauk in a short period of time and growing that 9% and seeing SweetWater growing 4%, we're excited about Blue Point, we're excited about Breckenridge Brewery, we're excited about 10 Barrel and the rest that come along with this. So, there are a lot of good things happening, and with Breckenridge Distillery, as this ultimately gets together with Breckenridge Brewery, as we continue to leap on the bourbon craze and get new and new distribution. And let's not forget our Manitoba Harvest business where we have about a 52% share in a category that's developing a lot of new products and we're getting a lot of new distribution. And I think the big thing is that we're in supermarkets, we're in Costcos, we're in Walmarts. So, we have avenues if we decide to bring other products in and we're selling our beer products in those today. So, we have an avenue of retail if we bring other wellness foods in there to make sure they're accompanied by.

Got it. Appreciate all that color and it was a long response. I'll just get back into the queue.

Thank you.

Thank you. Our next question comes from the line of Frederico Gomes with ATB Capital Markets. Please proceed with your question.

Hi, good morning. Thank you for taking my question. Just on your capacity utilization, I know that you addressed this a little bit, but maybe could you provide a bit more color on where you currently stand in terms of utilization in your cultivation and manufacturing facilities in Canada? And with your organic growth initiatives, where do you see that utilization and being over the reminder of the fiscal year and sort of the potential benefit that you could see in your margins as a result of that? Thank you.

Thanks for the question. Yeah, from a capacity and utilization standpoint, it's probably easiest for me to go across the facilities quickly. But if you look at Masson, we're in the middle of the conversion of B9, which is 80% of that facility to vegetables, and that's on track to be fully utilized by January. The remaining 20% will service the Quebec market with locally grown cannabis for Quebec. So, we're 100% utilized in Masson. At the Redecan facility, we'll be 100% utilized. We have an outdoor grow in Cayuga, which is currently at 50% utilized, but our plan is to grow that through pre-rolls to be up to 100% utilized by the end of the year. And that'll be very close to the end of the year because May is when we plant the outdoor grow. And then, from a Leamington standpoint, we'll be 100% utilized in Aphria Diamond, and we do have some opportunities that will currently fill up our Aphria One facility by the end of the year. And then, Broken Coast has always been fully utilized. So, we feel very good about capacity and utilization overall. I definitely think that will help the margins on the balance of the year. I don't have a crystal ball on that front, but certainly as Irwin talked about, as we move all of our packaging from the acquisitions into Leamington, we're going to see great synergies on that side. The London facility on beverages will be close to 90% utilized with the transition of Truss. So, definitely, we're going to be able to allocate the overhead of those facilities across more volume throughout the end of the year.

We are not only focused on utilization; we have a vertically integrated operation. This allows us to grow flour and produce oil, and we are likely the largest pre-roll producer in the Canadian market. We also lead in canned production and can create any type of edible product. Currently, we are primarily producing for ourselves while also engaging in some wholesale activities. Additionally, our vertical integration supports our 12 brands. A major focus for us is new product development, as we have observed that consumers in the Canadian market are continually seeking new offerings. Whether it pertains to product potency, infused options, or genetics, our challenge is to effectively develop brands and acclimatize consumers to purchasing them. This represents a significant opportunity for us, and it is an area we need to enhance.

Thank you very much. I'll hop back into the queue. Thanks.

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you. Good morning. I wanted to ask about the eight new brands that you've recently acquired. Looking at the retail side, where we can access some data, those brands have been experiencing a decline over the past couple of years. Is that the complete picture, or is there a broader perspective indicating better momentum? Regardless, what will it take to stimulate growth in these brands? You've highlighted the importance of organic growth, so what steps are necessary to achieve that? How much additional funding is required? Is there potential for expanding distribution? These brands have been established for quite some time, so how do you approach driving growth in this area?

I'm going to turn it over to Ty in a second. What goes down has to ultimately go up, right? So I think that's what's important here. And yeah, they're declining and that's what gave us the opportunity. I think from some standpoint, did they get the attention that was needed? And I think it goes back and shows what we've done with SweetWater and what was done with Montauk, what's done with Green Flash and Nelson. And the team knows how to do it. Ty, you want to add something to that?

Yeah, Michael, I'd say, I'm not real sure you're seeing the full picture. When you look at it at a total brand level, when you dive a little bit deeper and you get into the SKU level, we're really, really excited. You see brands like 10 Barrel, their pub beer, which is growing. You see Avalanche growing share in Colorado. You see what the Big Ballard part of the Redhook family and their SKUs and how they're getting into new segments is really, really exciting. So, yeah, I'm not real sure you're seeing the full picture. We've built out a really national account team. And as you know, chains play an integral part in building distribution and building brands. And we've had some really good conversations with big retailers around the U.S., and they're excited about the brands. Our distributors are extremely excited about us coming over and bringing energy and investments in focus. And just like we've done with Montauk and SweetWater, we are going to build out a plan to drive quality distribution, build the brands, and really lean in on the SKUs that are driving some of these brands, which are exciting.

The key factor is not just the brands but the entire craft beer industry and what we can achieve. We are collaborating with a consulting firm to develop a comprehensive strategy related to brand positioning, understanding the consumer demographics of craft beer, and analyzing the differences in ingredients and nutritional content across various packaging types, such as cans and bottles. Additionally, we are looking into the sales dynamics in brew pubs, on-premise locations, and convenience stores, which are major sellers of craft beer. We are currently conducting extensive studies, gathering data and research, and working with consultants to integrate our findings. We are very optimistic about the craft beer opportunity. Despite the current decline, we are now the fifth largest craft brewer, and we see significant changes in the dynamics between big beer and craft beer.

Okay, thanks for that. And can I just follow up on the cucumber farming? Not a sort of a piece of the portfolio I had anticipated maybe initially. Can you just help us understand maybe why that's interesting to you? And what the margins and growth might look like for that?

We have a $1.5 million facility, and if we were to sell it today, we would consider the current values for cannabis facilities. We believe there is a significant demand in Quebec, with multiple retailers expressing interest due to a major shortage of locally grown vegetables. Growing vegetables in Quebec offers better margins than keeping the facility unused or solely selling cannabis. Therefore, we see this as a profitable business opportunity, and I want to emphasize that point.

Okay.

Thank you. Our next question comes from a line of Bill Kirk with ROTH MKM. Please proceed with your question.

Hey, thank you for taking the questions. Irwin, you mentioned expanded distribution at Whole Foods in your prepared remarks. And given your incredibly strong history with them, could you maybe talk about how your background helps with this particular account? And I guess, what does your experience tell you about the trajectory of brands into other retailers once you find success at Whole Foods?

It's interesting to note that in the past, many retailers would visit Whole Foods to observe what was new, natural, organic, and selling well, as they all wanted to attract Whole Foods customers. However, that dynamic has changed significantly today. Nevertheless, Whole Foods remains a crucial customer for us with our SweetWater, Montauk, Blue Point, and other products. When we've introduced our new gummies and Montauk pumpkin products, it's fascinating to see their response. Retailers are still monitoring sales at Whole Foods, looking at things like beer-kombucha combinations and other innovations. In my past experience, retailers primarily looked to Whole Foods for sales trends, though that may not be as common now. Today, craft beer retailers are eager for new ideas, as the market is saturated with IPAs and other common beers. We are focused on bringing something new and unique to the market beyond IPAs.

Excellent. And then, Carl, you mentioned that 4Q buy-in helps beer. Does that load-in explain the sequential difference for beverages in 1Q from that 4Q, about $8 million or so? And should we think about that before the ABI brands coming over? Should we think about that $24 million in beverages 1Q is like a pure volume consumption number, no load-in, no de-stock, that's more of a volume consumed type number?

So, I'll let Ty talk about the volume consumed, but on the profitability side and the margin side, yes that is a portion of the decline that is going on in that space is just decreasing volume because you don't have that maintenance bias.

Just let me jump on something there. I was just emailed by one of our employees some of our hemp products that were in Whole Foods, I won't mention the other retailer, but they saw them in Whole Foods and we picked up two other retailers because they were in Whole Foods. Sometimes, Whole Foods is one of our best showrooms. So that is something that happened just to answer your question on that.

Regarding volume, Bill, I would like to emphasize that consumption is influenced by seasonality. Therefore, I would refrain from using the term load-in; instead, consumption tends to peak at certain times throughout the year and across different quarters. As Carl mentioned earlier, there is increased seasonality in beer consumption in our fourth quarter, which coincides with the start of summer. As we introduce these new brands and look ahead to our second quarter, we anticipate that organic consumption will align with overall trends.

Got it. Thank you.

Thank you. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.

Thank you very much. Good morning. My question is on the regulatory side, and specifically if you do get the DEA following the HHS recommendation, what does that change for Tilray? Does it adjust your M&A strategy at all? Or would you need to see additional developments or clarity from different departments?

So, I think I've been very clear in regards to classification here. Listen, I'd love to see it happen, and I've been very clear. It does not affect us day one. But what it does, it helps get some confusion out of the market. The way cannabis is classified today is the same as heroin, the same as other drugs out there, that's absolutely not. Number two, I think from a medical standpoint, there are so many applications for it. Legalizing it from a medical standpoint would be something very important. There is so much confusion out there on legalization and customers want it. I mean, basically, it is legalized without being legalized because everywhere you walk, whether it's New York, California, no matter what state you're in, cannabis is being utilized. So, we might as well do something with it, collect the tax dollars, and ultimately get the regulatory in place where you're getting products out there that go through regulations that are not cut with other drugs or other ingredients out there that are not safe. In regards to what ultimately the opportunities are for Tilray, listen, if one day, and again, this is hope, no reason to believe, if we could grow it in Canada and ship it into the U.S., it is an opportunity for us. We have a big medical business in Europe. We have a medical business in Canada, which ultimately would get us into the business here in the U.S. So, I think first, there is ultimately no benefit to Tilray. I don't think anything is going to happen here for a little while, for over the next two years anyway, but it would be very, very, very good for the cannabis industry.

Okay, great. I'll leave it at that. Thank you.

Thank you. That concludes our analyst questions. We'll now proceed with questions submitted by retail stockholders on the Say Technologies platform. The question reads, why should we keep investing in Tilray?

Listen, again, I hope by our results today and some of the things that we're doing, that number one, investors believe in the management team and believe in our strategy. Some don't believe in our strategy, but I will tell you, we have a defined strategy. We have a structured strategy with a lot of process and a lot of levers that we're ultimately pulling to have a structured strategy. We are, secondly, a very diversified business, but ultimately how do they all come together under one common denominator? We're not just a cluster of a bunch of products, brands, and categories. Upon legalization, we have multiple brands that can convert to cannabis. Ultimately, we have tremendous growth opportunities on our balance sheet. Will it take some time to come together? It absolutely has been. But I'll tell you, the components are there. And I think that's what is different and unique. And that's why I hope our investors stay with us. And those that are, thank you very much. That concludes the questions for today. I want to thank all that have joined the call, all that have gone online to listen to us. Listen, I can reassure you this: the cannabis industry is a tough industry. The beer industry is a tough industry. But there's no business, there's no industry out there that's not tough. But what's important today is that you have a team that knows how to deal with the toughness, knows how to deal with the environment. Today, with the acquisition of the Anheuser-Busch businesses, we have close to 2,300 employees around the world that are working hard every day. And just remember, in 2019, we were a $50 million business. Today, on the run rate, to be close to a $1 billion business. We were not diversified. We have a diversified portfolio. We have diversified brands. We have diversified facilities that are out there around the world. The world today is looking for innovation, looking for new products, and looking for new things. And again, consumers want cannabis. Consumers want to drink beer for the right reasons. Consumers want to drink bourbon. Consumers want medical cannabis for pain, for anxiety, for sleep, for cancer patients, for epilepsy. So, there are so many opportunities and we are in the right areas today where consumer demand will continue to move into. With the combination of Aphria, Tilray, HEXO, SweetWater, Montauk, and the eight brands that we just acquired from Anheuser-Busch, we've got a great portfolio of a lot of things. With 5 million square feet of growth, we're going to repurpose these, and ultimately, how do we make it work. If not, there are, ultimately we can sell these off. So, there are plenty of levers to pull within Tilray today. Again, I want to thank everybody for being on the call listening to us and look forward to speaking to you again at our next earnings call. Thank you very much.

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