Tilray Brands, Inc. Q3 FY2024 Earnings Call

Thank you for joining today's conference call to discuss Tilray Brands' Financial Results for the Third Quarter of Fiscal Year 2024 ended February 29, 2024. 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. 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.

Thank you, operator, and good morning, everyone. By now, you should have access to the 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 for the third quarter and update our financial guidance for the fiscal year 2024. Also joining us for the question-and-answer segment are Denise Faltischek, Chief Strategy Officer and Head of International; Blair MacNeil, President of 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. Good morning, everyone, and thank you for joining us. At Tilray Brands, we take great pride in our mission to be the most responsible, trusted and market leading cannabis and consumer products company across the globe. Today, with our complementary business units, we believe Tilray Brands is the best-positioned company in the world to take advantage of all the positive regulatory tailwinds happening globally with cannabis legalization and drug policy reform. In Canada, Tilray continues to lead the cannabis industry with the leading portfolio of adult-use brands and the number one market share. In the event that the current excise tax regime were to be replaced with a 10% Ad Valorem Tax based on the value of the product sold and not a per gram tax, we expect an annual savings of $80 million. We also expect to benefit from additional cannabis-related regulatory reforms around marketing and THC potencies. I'll take a deeper dive in the Canadian market shortly. In Germany, Tilray has the leading cannabis market share by revenue for the trailing 12 months and we believe we are best positioned to capture a large portion of the expected growth in the medical market with both our in-country cultivation facility in Germany and our state-of-the-art facility in Portugal. We also have the ability to ship products from Canada to Germany. In the U.S., Tilray has multiple options and, in particular, is well-positioned to benefit from the federal legalization of medical cannabis as a result of rescheduling. Yes, we believe that the rescheduling of cannabis from Schedule I to Schedule III in the U.S. would provide a path for Tilray to sell pharmaceutical grade medical cannabis in the U.S. subject to doctor prescriptions. This is a different strategy from what MSOs are doing today. We believe there's an opportunity to supply medical cannabis products from our existing operations into the U.S. for medical purposes. Further, in the event of a future federal adult-use and medical cannabis legalization in the U.S., we believe Tilray is well-positioned to immediately leverage its strong global leadership position, know-how and strategic strengths across operations, distribution and brands to sell THC-infused products across its robust distribution network and sales channels in the U.S. Today, Tilray is a clear outlier in the global cannabis industry, because we're the only company with global expertise in both adult-use and medical cannabis. Our innovation comes from GMP certified pharmaceutical-grade medicines through all recreational cannabis formats, including THC-infused beverages, which also parlays into our beverage strategy. We have rigorous cannabis quality control, regulatory affairs, branding, marketing, sales, and distribution. We also have the number one cannabis market share in Canada, the number one cannabis market share in Germany as measured by revenue, and we distribute medical cannabis in over 20 countries around the world. Since 2019, we quickly developed a diversified and award-winning portfolio of brands backed by a best-in-class operations in Canada, U.S., Europe, Australia, and Latin America that supports our goals of becoming a multi-billion dollar cannabis and consumer products company that addresses the needs of consumers and patients we serve today. As you know, the leadership team at Tilray has the expertise of buying CPG brands and building them into something greater than they were before. Our creative portfolio of beverage brands includes craft beers, spirits, ready-to-drink cocktails, ciders, and non-alcoholic beverages. We are now the fifth-largest craft brewer in the U.S. with a 4.5% share of the craft beer market. With over 500 beer distributors alone, Tilray is now dominating key regions across the U.S. with our craft beer brands in the Northeast, Pacific Northwest, Midwest, and Southeast, along with one of the most awarded bourbon brands with Breckenridge Distillery, which continues to gain market share across whiskey, vodka, and gin products. Our wellness brands include Manitoba Harvest, hemp-based food products, ingredients, and snacks, as well as our Happy Flower, our CBD infused beverages, and our recently relaunched HiBall Energy drinks, which in its first month on Amazon received over $1 million in orders. With the appropriate approvals, we're also looking to introduce hemp-based delta-9 beverages and products with our Happy Flower brand and across other wellness brands in the U.S. And finally, we own and operate a European medical cannabis and pharmaceutical distribution business in Germany, CC Pharma, also known as Tilray Pharma, with a robust footprint reaching 13,000 pharmacies in Germany alone. With broader medical cannabis use, doctor prescriptions in Germany, we expect there to be tremendous demand for medical cannabis within pharmacies. I can't predict the future, but my belief is there will be many cannabis regulatory changes we've seen with Germany, Canada, and the U.S., and Tilray is best equipped to reach these underlying opportunities and we have the assets and the tools to reach our goal for Tilray Brands to deliver industry-leading profitable growth and sustainable long-term shareholder value through a focus on these three fundamentals. Maximizing profitable revenue growth through organic growth and strategic acquisitions with strong synergy opportunities, realizing the benefits of optimized asset utilization and cost management to ensure an efficient cost structure across all our business segments, and to strengthen our industry-leading balance sheet and cash position. During Q3, we achieved net revenue of $188 million, representing approximately 30% growth over the previous year. We grew our revenue across our core business segments. This was achieved by focusing on organic growth of legacy brands and enhancing the performance of our more recent strategic acquisitions. Gross profit was $49.4 million, despite the impact of the newly acquired craft beverage brands, which have a lower margin. Our net loss was $105 million, which only $4.5 million represented loss from operations, and cash used in operating activities was $15.6 million. Adjusted gross profit was $51.6 million, adjusted EBITDA was $10.2 million, adjusted net income of $900,000, and adjusted EPS of $0.00, we delivered positive adjusted free cash flow for the quarter. Over the last three quarters, we significantly reduced our convertible debt by $205 million, decreasing our net debt to approximately $175 million, and we'll work to continue reducing our indebtedness, optimizing our capital structure, and enhancing our financial flexibility. The net reduction in our convertible debt will decrease our annual interest expense by $9.8 million, which flows directly to adjusted net loss and adjusted free cash flow. Let's now dive deeper into each of our business segments. We grew our global cannabis net revenue by 33% to $63.4 million in Q3, compared to the previous year quarter, driven by our acquisition of HEXO and Truss, as well as our international business and innovation in the Canadian markets. Net Canadian cannabis revenue grew 31% to $49.4 million in Q3, compared to the previous year. We achieved this growth with the HEXO acquisition despite price compression building $3.1 million from the prior year quarter and a crippling tax structure that has allowed taxes to spike while prices declined by more than 50%. Excise tax increased by $8.2 million and amounted to $21.8 million or 32% of our gross Canadian cannabis revenue in Q3, compared to $13.6 million or 26% in the same quarter last year. Recent enforcement efforts by the Canada Revenue Agency garnishing LP payments from the provincial boards is already having an impact on our competitors, over 1,000 of whom have negligible market share. The continued enforcement by CRA, we believe, will lead to further and necessary industry consolidation, perhaps on a mass level. Canada continues to be the largest federal legal and commercial adult-use cannabis market in the world, and Tilray Brands maintains that number one market share position in the country. We are number one in Ontario, number one in Quebec, and number one in British Columbia, which together represents over 60% of the population of Canada. We're also number one in cannabis flower, oils, concentrates, and THC beverages; number two in pre-rolls; and number four in vapes, and in the top 10 in all other categories, all while operating under rigorous, high-quality control standards. Our focus in Canada is on two things: First, growing sales primarily through continuous launches of new product innovation. And secondly, taking more and more costs out of our businesses. On a latter, a large part of our acquisition strategy for HEXO and Truss involves removing legacy costs and SKU rationalization from these businesses. For HEXO, we originally targeted $27 million, but then increase that to between $30 million and $35 million, of which we've already achieved $27.5 million in savings on an annualized run rate basis, of which $15.6 million is realized cost savings during the period. Our HEXO integration plan includes streamlining our Canadian operations, improving utilization of our core facilities, improving margins, and maximizing cash opportunities by pursuing divestitures and consolidating facilities. We plan to close the Cayuga facility and move its cannabis cultivation to our existing Canadian production lines. Sell our Masson facility in Quebec, which is currently cultivating cucumbers as a vegetable operator, and sell the Belleville facility and move our manufacturing to our London facility for our beverages. We expect this plan to result in one-time $70 million to $85 million of Canadian cash inflow opportunity and accretive to margins and net income by $5 million to $7 million on an annual basis. From a regulatory standpoint, the expert panel appointed by the federal government clearly highlights three areas of focus, which Tilray would benefit from once implemented. First, excise tax reduction, which I've talked about both in adult recreation and medical would benefit Tilray $80 million. Secondly, there is a proposed opportunity for pharmacies to carry CBD and medical cannabis for medical patients, which would move plant-based medicines into the mainstream as an option for patients to treat ailments. And finally, enforcement against illicit websites, dispensaries that don't contribute to excise tax and put youth at risk through unregulated product channels available easily online with e-transfer and Canadian Post e-mail. We think Canada Post and the Canadian banking systems are responsible for shutting down access to these unlawful establishments. Turning to international cannabis, we grew net revenue organically by 44% year-over-year to $14 million and we remain the number one market leader in medical cannabis across Europe with a leading market share in Germany and Poland. Tilray's international growth has also been driven by increased sales in our existing markets such as Portugal, Italy, the U.K., Australia, and New Zealand. The new German medical market opportunity is projected to be approximately $3 billion in the medium term while the European opportunity could represent a potential $45 billion medical market alone in the long-term. Our presence in Europe allows Tilray to grow our global brand portfolio to a base of over 700 million people in Europe, which is twice the population of the U.S. While much of the media attention related to the new cannabis reform in Germany has been centered around cultivation for personal use and the establishment of cannabis social clubs, the new opportunities for Tilray flow mostly from the removal of medical cannabis from the Narcotics act. This de-scheduled change is expected to significantly expand the medical cannabis market in Germany as it would allow for more doctors to prescribe medical cannabis more easily to patients and potentially allow for broader health insurance coverage. We will therefore be increasing our educational efforts to bring more and more health professionals on board with medical cannabis as therapeutic options. We estimate that less than 0.4% of the population in Germany are presently buying medical cannabis, compared with 4% in states like Pennsylvania. In Germany, we also stand to benefit from the abolishment of the tender process for in-country cultivation of medicinal cannabis, which is being replaced with a licensing scheme. We are currently one of the only three in-country cultivation facilities in Germany today, and these legislative changes would allow us to better meet patients' needs by expanding our medical cannabis product offerings. This would in turn significantly increase our cannabis production in Germany by five times more than double our revenue opportunities. Tilray opportunities in U.S. cannabis remain strong. Over the past several years, our playbook of expanding our business beyond cannabis to adjacencies in complementary markets has positioned Tilray well for the current environment, as well as for future growth opportunities. While we currently do not engage in any U.S. cannabis operations because of federal regulations, we are well positioned to participate and win in a federally legalized market when that changes, whether it be rescheduling or medical cannabis or the passage of federal cannabis legalization, given our deep knowledge, global expertise in medical and adult use cannabis and the regulatory compliance in play. Tilray's playbook in the U.S. is to build and deliver iconic brands in the beverage alcohol and CPG backed by product excellence and innovation, educate consumers about our brands and our stringent quality standards to encourage trial and faster loyalty, and last but not least, to drive and scale distribution to get our brands into consumers' hands to grow our market share. Moving to our beverage segment, which is quickly approaching approximately $300 million annualized. As mentioned earlier, Tilray Brands is now the fifth largest craft brewer in the U.S. with a 4.5% craft beer market share, and we aspire to be a top 12 beverage company in the U.S. Q3 beverage alcohol net revenue was $54.7 million, representing 165% growth year-over-year. Tilray now holds a 4.5% share of the craft beer market in the U.S. and we're just getting started and ramping up. Of this, our legacy brands of SweetWater, Montauk, Alpines, Nelson and Green Flash demonstrate our ability to successfully grow existing brands along with our recent acquisition of 12 craft brands from AB InBev. We have gained in scale and see further expansion opportunities. SweetWater remains the number one brand family in Georgia multi outlets. Montauk remains the number one brand family in Metro New York, having increased its distribution by 28% versus last year. Tilray is now the number one craft supplier year to date in the Pacific Northwest. 10 Barrel's volume growth increased by 413 basis points since Tilray took over the brand, and we're now capitalizing on the success of 10 Barrel Pub Beer brand extensions by adding Pub Ice, Pub Cerveza, and line extensions. Both innovations we are extremely excited to launch, growing 24% Pub Beer is now the top 20 brand on the West Coast with only half the distribution of top competitors, due to its focus on the Pacific Northwest states. Still, our vision is to be much higher as we're aiming and uniquely positioned to become a top 12 beverage alcohol business. This will be accomplished by leveraging our portfolio to win more occasions through core products such as craft beer and beyond through innovation to categories like flavored malt beverages, ready-to-drink cocktails, and spirits. Ultimately, our plans go beyond alcohol as we will be expanding into sparkling water, energy drinks, and other categories. This is important because we have the manufacturing facilities, the distribution and the sales and marketing infrastructure to drive Tilray businesses. Working with BCG, we developed a clear and focused strategy to drive top-line and bottom-line growth for our beverage businesses. The three-pronged approach will deploy our regional strategy called Dual to stabilize scale brands such as SweetWater, Montauk, Blue Point in their respective key adjacent regional markets across the U.S. and maximize their potential to gain market share from competitors. Dual is already paying off. According to BI sales to retail data, Tilray has increased its market share of total beer in 13 states, including key beer markets such as Oregon, Washington, Colorado, Idaho, Minnesota, and Arizona when comparing share before and after the craft acquisition. In the Southeast alone, we've improved trends by 4.6% post-acquisition. For Q3, 10 Barrel has seen a 12.3% increase in distribution among our top 10 distributors when compared to the same time last year. When comparing six months pre-acquisition with the five months post-acquisition, overall trends have improved 3.5%. Overall trends for Blue Point have improved 1.3%, while its number one distributor has improved trends by 3.8%, and those are just a few examples. We are also executing a national brand strategy, beginning with revitalizing Shock Top to win as a national craft beer over time by targeting share and connect occasions to reach mainstream male and female drinkers. We think there is tremendous upside with Shock Top as according to our qualitative research, Shock Top has the highest purchase intent among 12 of the largest beer brands. This is why we're focused on increasing distribution and getting this brand back into the hands of consumers. We are already on our way. In Q3, Shock Top's number one distributor has increased distribution 24% versus last year, while on-premise distribution has increased 0.5% over last year among Shock Top's top 10 distributors. We are aggressively launching new and often disruptive innovation across our beer and non-alcoholic crafts to increase portfolio brand appeal to new consumers and new occasions. Many of our newly acquired brands have not had innovation in the last couple of years among many others. Recent examples include Liquid Love for heartfelt hydration; Runner's High, a non-alcoholic craft brew for athletes; Eyeball and Hardball, non-carbonated 10% ABV products sold in 16.9-ounce plastic resealable containers, and non-carbonated Shock Top LiiT Hard Tea. Let me say that we're working to get the cost structure right, transforming the productivity and profitability of the breweries we acquired. We expect that our beer gross margins will increase once we fully realize the cost savings achieved in connection with the fully integrated beverage alcohol platform as we move away from the existing co-packing manufacturing agreements with ABI and increased productivity in our newly acquired breweries and 13 brew pubs. Finally, let's discuss our wellness segment, represented mostly by Manitoba Harvest, which is fostering a positive impact on people and the planet through hemp by making ongoing commitments to sustainability with breakthrough initiatives such as investment in regenerated agriculture. Revenue grew 12% in Q3 to $13.4 million, compared to last year. We partnered with bioactive company BrightSea to revolutionize the functional fiber market and breakthrough product, Manitoba Harvest bioactive fiber, which is now exclusively available at Whole Foods markets nationwide. Incredibly, 95% of Americans do not consume the recommended daily intake of fiber. This product provides 6 grams of both soluble and insoluble fiber per serving and is the only fiber solution containing two powerful hemp-based bioactives for gut health. Moving forward, the team continues to assess the opportunity to bring hemp derivative delta-9 beverages to market under Happy Flower and Tilray brands. With that, I now turn the call over to Carl to discuss our financials in greater detail.

Thank you, Irwin. Recall that we present our financial results in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussion, we will be referring to both GAAP and non-GAAP adjusted results, and we encourage you to review the reconciliation contained within our press release of our reported results under GAAP to the corresponding non-GAAP measures. Let's now review our quarterly performance for the three months ended February 29, 2024. Q3 total net revenue rose to $188.3 million, compared to the prior year quarter of $145.6 million, representing almost 30% growth. Excluding acquisitions completed within the fiscal year and the $8.7 million HEXO advisory fee captured in the prior year quarter, our legacy businesses remain consistent, despite a 13% revenue decline in our lowest margin segment. We continuously emphasize the strategic importance of our adjacency business model, which is a key differentiator for us. This is best reflected by the contribution of our four segments to our overall results, which shows that we are not too dependent on any individual segment having a disproportionate impact on our sales or profit growth. Each segment is also, in our view, on a path to sustainable long-term growth. Looking at each segment now during Q3 and compared against the prior year period, net beverage alcohol rose 165% and represented 25% of our total revenue mix, more than double relative to last year's 14% of total mix. Net cannabis revenue grows 33% and represented 34% of total mix, up slightly from 33% last year. Distribution revenue decreased 13% and represented 30% of the total mix, down from 45% last year. And wellness revenue rose 12% and represented about 7% of total mix, down only slightly from 8% last year, respectively. Diversification is also reflected in our geographic footprint. During Q3, more than 62% of our net revenue was generated in North America, roughly 36% was generated in EMEA, and the remaining 2% coming from other parts of the world. This compares to about half from North America and EMEA in Q3 last year with the variance related to the North American acquisitions we completed since that time, namely HEXO, the craft acquisition brands, and the remainder of Truss beverages. Let me first touch on the key current item related to cannabis before moving onto a discussion on profitability. We incurred $21.8 million in Canadian cannabis excise taxes during Q3, which are a reduction to revenue, compared to only $13.6 million last year. The increase in excise taxes is reflected by a sharp increase in cannabis revenue generated in Canada versus the year-ago period, due in part to the HEXO and Truss acquisitions and a change in our revenue mix to higher excise tax products. Through the first three quarters of our fiscal year, we have incurred more than $75 million in excise taxes versus $47 million for the year-ago nine-month period. For many quarters, we have been on the record with respect to the inherent unfairness in how the excise tax is predominantly computed, which is largely a fixed price on grams sold rather than as a percentage of the selling price. Because the selling price has declined meaningfully since the law was first enacted in 2018, it has made the excise tax a larger and larger component of net revenue over time, particularly as current growth categories like infused pre-rolls and concentrates become the biggest part of our sales mix. To prove this point further, excise tax amounted to 32% of gross Canadian cannabis revenue in Q3, compared to 26% in the same quarter last year. All through the first three quarters of the year, excise tax came to 34% of gross cannabis revenue versus 27% for the first nine months of fiscal 2023. In our view and in the view of many others, this price-based tax structure is crippling as it has allowed taxes to spike as the price of cannabis has declined by more than 50% since legalization. In late February, the Canadian House of Commons Standing Committee on Finance issued a report outlining several recommendations regarding the regulated adult-use cannabis industry, including the recommendation to adjust the tax structure. Recommendation three to nine, in particular, calls on legislators to make an adjustment to the excise duty formula for cannabis, so that it's limited to a 10% Ad Valorem Rate. If enacted, this would be a welcome change that could result in $80 million in annualized revenue for our cannabis business, which would largely fall to the bottom line. The key to the government's plan and needed relief for our industry is that the provinces not enact their own excise tax, reflecting the loss in taxes they are reaping from the status quo, increasing their profits at the boards or mandating that the tax savings are passed on directly to the consumer in the form of lower pricing. The budget announcement is next week and we'll be following developments closely, but are resolute in our view that reform is greatly needed and measures must be enacted to stabilize the Canadian cannabis industry. Turning back to our performance, gross profit was $49.4 million, compared to a loss of $11.7 million in the prior year quarter. While gross margin increased to 26% from negative 8% in the prior year quarter, adjusted gross margin decreased to 27% compared to 30% in the prior year quarter. I will discuss adjusted gross margin by individual segment in a moment. However, the majority of the decrease relates to the addition of the new craft brands, which are subject to a co-manufacturing agreement with ABI until at least the end of Q1 next year, and the prior year figure including the HEXO advisory fees. Net loss improved to $105 million, compared to a net loss of $1.2 billion in the prior year quarter, which included $934 million of impairments. On a per-share basis, this amounted to a net loss of $0.12 versus $1.90 in the prior year quarter. Recall that last quarter we introduced two new reporting metrics to our discussions: adjusted net income loss and adjusted earnings per share. The definitions of both are identified in the press release along with the relevant reconciliations and calculations. For Q3, we are reporting an adjusted net income of $900,000, which when calculated on a per-share basis, results in EPS of $0.00 for the quarter. Adjusted EBITDA was $10.2 million, down from $13.3 million in the prior year quarter. This is mainly a consequence of the negative impact on the cannabis gross margin related to wholesale revenue, the termination of the HEXO advisory services contract on our acquisition of HEXO in June, and the co-manufacturing agreements with the new craft brands, as I will explain shortly. During the quarter, we made great progress against the HEXO synergy plan, which we had previously increased to between $30 million and $35 million. As of the end of Q3, we achieved $27.5 million in savings on an annualized run rate basis, of which $15.6 million represented actual cost savings during the period. Operating cash flow was negative $15.4 million, compared to negative $18.6 million in the prior year quarter. This improvement in cash used during Q3 this year was primarily related to achieved synergies of previously identified cost savings plans. Turning now to our four big business segments. Beverage-alcohol revenue was $54.7 million, up 165% from $20.6 million in the prior year quarter. The positive delta was due to contributions from the craft brands, which were purchased last fall. However, we note that the impact of dry January was far more of a headwind than it was for the industry in previous years. Beverage alcohol gross profit increased to $18.9 million, compared to $10 million, while beverage-alcohol gross margin decreased to 34% from 48% in the prior year quarter. Adjusted gross margin fell to 38% from 53%. Both of these outcomes were a result of the craft brands, which currently have lower margins than our historical business. This is primarily due to the co-manufacturing agreements for brewing. For greater context, adjusted gross margin for our legacy beverage business was 59% compared to the prior year quarter of 53%, primarily as a result of an agreement with a distributor related to our spirits business. Adjusted gross margin from the crafts brands was 26%. The improvement of gross margins in the beverage alcohol business, primarily in the beer portion of the business, represents a major focus for the organization. Gross cannabis revenue of $85.2 million was comprised of $62.1 million in Canadian adult-use revenue, $14 million in international cannabis revenue, $6.4 million in Canadian medical cannabis revenue, and $2.8 million in wholesale cannabis revenue. Net cannabis revenue, which excludes the aforementioned $21.8 million in excise taxes, was $63.4 million, representing a 33% increase from the year-ago period. The positive variance is related to the increased organic growth of over 14%, combined with contributions from the acquisitions of HEXO and Truss. Offsetting the increase in net cannabis revenue was the elimination of advisory services revenue totaling $8.7 million from the prior year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. While revenue from Canadian medical cannabis grew only slightly as a category, it is being impacted by competition from the adult-use market and its related price compression. Revenue from Canadian adult-use grew 37%, which was driven by new product innovation and increased revenue from HEXO and Truss. International cannabis grew 44%, largely because of growth in our existing markets and the expansion into emerging international medical markets. Wholesale cannabis revenue increased to $2.8 million from essentially zero last year as these sales are opportunistic and variable. We entered into this wholesale agreement to optimize our inventory levels and prioritize the generation of positive operating cash flow; however, it unfavorably impacted our gross profit and EBITDA. Cannabis gross profit was $20.9 million and cannabis gross margin was 33%, compared to negative $32.8 million and negative 69% in the prior year quarter. Excluding the impact of the non-cash fair value purchase price accounting step up and inventory valuation adjustments, adjusted gross margin decreased to 33% from 47%. As I said earlier, a portion of the margin decrease is a result of the termination of the HEXO advisory services agreement, which contributed zero gross profit in the current year, compared to $8.7 million in the prior year, which if excluded would decrease adjusted gross margin to 35%, essentially meaning that our cannabis gross margin was largely flat year-over-year. Distribution revenue derived predominantly through Tilray Pharma decreased 13% to $56.8 million from $65.4 million in the prior year quarter. Revenue was negatively impacted by infrastructure outages and weather, which impacted revenue by just over $3 million and short-term challenges related to new rebate regulations. Tilray Pharma gross profit decreased to $5.6 million, compared to $7.5 million in the prior year period. Tilray Pharma gross margin decreased to 10% from 11% in the prior year quarter because of product mix. Wellness revenue grew to 12% at $13.4 million from $12 million in the prior year quarter. The increase was driven by our strategic focus on targeted advertising campaigns aligned with emerging trends in healthier lifestyles, particularly around the new year, coupled with our continuous innovation efforts. Wellness gross profit was $4.1 million, up from $3.7 million in the prior year quarter, and gross margin held at 30% compared to 31% in the prior year period, as we experienced a change in sales mix towards more bulk retail sales. Our cash and marketable securities balance as of February 29 was $225.9 million, down from $408.3 million in the year-ago period. The majority of the variance was related to the payment on maturity of the Tilray '23s, our cash acquisition of the new craft brands, and settling assumed liabilities from HEXO, including unpaid excise tax, as well as legacy litigation settlements. Having now completed three quarters of our fiscal year, it is clear that our prior fiscal 2024 guidance of adjusted EBITDA between $68 million and $78 million is no longer feasible. We have therefore lowered our adjusted EBITDA range to be between $60 million and $63 million, which takes into consideration our performance through the three quarters over $12 million year-to-date in price compression in the cannabis business and continued expectations for the fourth quarter. Still, the fourth quarter represents a major increase from the current quarter, which is traditionally our lowest quarter due to the seasonality within our segment. The fourth quarter seasonality improvement is a function of our beer business leading up to the summer, a historically busy season. New innovation scheduled to be launched as part of the spring reset and in our cannabis business along with expected wholesale sales in our distribution business as pharmacies buy in bulk for their customers ahead of them going on summer vacation. Recall that we also projected positive adjusted free cash flow from operations for the entire fiscal year, excluding our integration cost HEXO, Truss, the new craft brands, and the cash income taxes associated with Aphria Diamond. Due to the timing of collecting the cash on the various asset sales mentioned, we now do not expect to achieve this prior adjusted free cash flow guidance. While we were adjusted free cash flow positive in the current quarter, our current expectations are for a very strong fourth quarter of adjusted positive free cash flow. Of course, we will continue managing CapEx as part of our efforts to strengthen our industry-leading balance sheet. Let me now conclude our prepared remarks and open the lines for questions from our covering analysts.

Thank you. Our first question comes from Andrew Carter with Stifel. Please go ahead with your question.

Hey, thank you. Good morning. Wanted to ask about the German changes. I mean, obviously, it's going to likely manifest in a big uptick in patients with doctors now having more freedom to prescribe cannabis. But kind of thinking through this competitively, how do you see this as your position unique in being able to attack this market? I know that for the past five years, we've seen a lot of decks with Germany circled and capacity to hit that market. Is that capacity still out there? How expensive it is to maintain this? And can you give us a reminder of kind of the stringent quality standards you have to have in place to serve the German market? Thanks.

Thank you for the question. We see multiple opportunities in Germany. Currently, we have a facility there that previously only supported a tender process for the government, but that will change, allowing us to sell directly into the marketplace. Additionally, previously only a limited number of doctors could prescribe cannabis for specific specialty reasons, but now any doctor can prescribe it since it is no longer classified as a narcotic. We also have a facility in Portugal that will supply Germany. Furthermore, our distribution company, Tilray Pharma, CC Pharma, distributes cannabis and other medicines to over 13,000 drug stores. We have a dedicated team in Germany, including sales, R&D, and quality assurance. We've been established there for four or five years and have faced challenges during this time. Moreover, with cannabis being decriminalized, we see potential for expansion across Europe as more countries are beginning to open up. Denise Faltischek, our head of Europe, is here—Denise, is there anything I've overlooked or that you would like to add?

Yeah, no Irwin, you did not miss anything. Just to add a little bit more in terms of facts. So in terms of that abolishment of the tender that Irwin spoke about and the fact that under the new regulations, we'll be able to apply for a license with our facility in Neumunster. So today, just to refresh everyone's memory, we are subject to a tender contract. We are capped at about 1,000 kilograms that we can grow every year, and that is done pursuant to certain pricing. So with the abolishment of the tender, we now open up into a licensing process where we are now subject to just market conditions as it relates to patient demand. We can utilize that facility to meet that demand, which would allow us to increase our capacities. We have the ability to today grow up to about 5,000 kilograms to 6,000 kilograms without any additional CapEx. And we can basically then also have pricing that is subject to market demand today. So that is an immediate benefit there. In terms of the ability to prescribe, we are Ampping up our ability to be in front of doctors and working on symposiums and educational platforms. One of the things we've done on the prescription platform software, if a doctor wants to prescribe medical cannabis, they go to that page and there's a Tilray banner at the bottom which shows all of our portfolio of products, what the conditions are, how to prescribe, so we are out there also providing basically information for doctors who are willing to prescribe and want to prescribe.

I think the big thing is, Andrew, we do have a brand, the Tilray brand, but the whole thing of socialized medicine and prescription and paying for it, we see lots of changes happening. So we have been working in the German market in regards to products for pain, for anxiety, for sleep, for cancer, for epilepsy. So we've been all over that and take our expertise of what we do at medical cannabis in Canada and translated it to there. And secondly, like I said, there is a market out there that will be looking for medical cannabis, but ultimately using it for recreational cannabis. So from a standpoint, we really are excited about what's happening in Germany. It does not affect us in regards to the social measures that have come in place there. We have the team, we have the grow, we have the infrastructure, the research and development ready to go here, and it's effective now.

Thanks. I'll pass it on.

Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Hi, thank you. Two for me, please. First, on the guidance, I appreciate the added color that you gave. Could you be a little bit more specific in perhaps what exactly has changed versus last quarter and this quarter? What sort of surprised to the downside and how do you see that progressing over the quarters to come? And then my second question, I know you guys called out your number one position in Canadian cannabis. So looking at the market share numbers you guys quote in the press release, I think that's on the downward trend for the last couple of quarters? So could you break down what's driving that? And if you think you can regain that over the quarters to come? And if so, how do you anticipate doing that? Thank you.

I'm going to begin by saying that not all quarters are the same. This third quarter was one of our weakest in terms of both our beverage alcohol and cannabis sectors, especially compared to our fourth, first, and second quarters. There's definitely a seasonal aspect to these businesses. Additionally, we did lose some market share in Canada, partly due to price compression and partly related to our flower pricing. Another factor is that we have a significant amount of innovation that we weren't able to bring to market during the third quarter, but we plan to do so in the fourth quarter. It's also important to note that there has been considerable price compression in Canada, particularly regarding our excise tax percentage. The market dynamics are shifting rapidly, especially with the emergence of infused pre-rolls and other products. Some of this is just a matter of timing. Blair, what’s your perspective on our ability to regain our market share?

Yes. Thanks, Irwin. And thanks, Nadine, for the call. Just to add a little bit more color to what Irwin was talking about, Q2 and Q3 were our most operationally complex periods. So, in addition to what Irwin talked about, what we also saw is when you are moving the location of SKUs and where they're going to be distributed from. One of the things we've done is centralized all our packaging and logistics out of Bloomington. That requires us to draw down inventories in each of the boards and then rebuild that inventory once we’ve changed the source location. So what you're seeing in some of the numbers is in addition to the price compression Irwin talked about and the innovation side is just a reflection of the operational complexity we implemented in Q2 and Q3. Once that is completed, and it was all completed inside of Q3, that will generate very strong operational efficiencies for us moving forward as everything outside of beverages will be shipped out of one location.

Carl?

Yes, I would like to add a couple of points for clarification. In our beverage-alcohol business, as well as the entire industry, we faced a greater impact from dry January than in the past, which affected our sales expectations for the year. The new brands we acquired in the beverage alcohol sector have a lower gross margin compared to the rest of our operations. We are actively working to improve these margins over time, and we anticipate being able to bring them closer to our historical levels, although it will take a few quarters. This improvement is largely dependent on our co-manufacturing agreements and the effective organization of production in our facilities without creating operational issues during the transition. Regarding our free cash flow guidance, we initially had expectations for cash receipts related to significant items, including some provisions in the spirits business, which we now expect to receive in June or July instead of May, and this shift has impacted our projections.

I believe the key issue is timing, which is difficult to predict. Our beer businesses acquired lower margins from ABI, and we're currently transitioning away from the trans-service agreement with ABI, moving operations to our own facilities by the end of May. We anticipate increasing our margins to the high 30s or low 40s soon. Our SweetWater and legacy businesses are already operating at that margin level. Regarding our Canadian cannabis operations, as mentioned by Blair, we're integrating HEXO and rationalizing SKUs, considering various strains and potencies, which is challenging given the agricultural nature of the products. We've made strategic adjustments concerning Cayuga, Molson, and Belleville, consolidating our operations and reducing costs. While we do have guidance available, much of it hinges on timing. Looking ahead, we focus on four quarters rather than six, which makes a significant difference.

Understood. Thank you.

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. Thank you for the question. This is Remington Smith on for Aaron Grey. My first question is in terms of the CRA having the provinces garnish wages, have you started to see any changes in purchase habits from provinces of your overall competitive environment yet? And then with kind of greater focus on those LPs paying their taxes?

I don't think we've necessarily seen changes in purchasing patterns. I think we saw very quickly after CRA started garnishing those wages a couple of LPs filed for protection within the same week. I think there's been a few more that have filed since that period of time. Someone who's excessively behind on their excise tax and having the payments garnished is looking at four, five, maybe six months before they're going to get their next payment; they just don't have a lot of choices. They are having to file for that protection. I don't think the Boards are actually changing those patterns yet. I think that will probably happen over the next three or four months as more of these LPs realize and get caught up in the garnishment.

But there's a lot of the Boards out there that have been asked by CRA to garnish excise tax when they sell into it. The big thing for us is we're finally seeing the Canadian government taking that seriously, and those that weren't paying excise tax could keep going and putting the rest of us at a disadvantage. I think we're going to continuously see changes. We've talked about the study that's come out there in regards to changes, in regards to excise tax and marketing medical cannabis, et cetera. I think there are some major things here that could really benefit the Canadian Cannabis industry.

Great. Thank you. I appreciate the color there. And then my second question.

No, go ahead.

My second question is about the potential excise tax changes mentioned that could occur in next week's budget. You indicated tax savings of around $80 million for Tilray. With those savings, do you expect most of it to be realized by the licensed producers, or could there also be some benefits for the province and the retailers? Any additional insights would be appreciated.

You know, good question. I think as we know provinces and we know government, I'm sure they're going to try and grab some of that. But I think, listen, as we've said and we've openly said it's about $80 million to Tilray. The big thing is you got price compression and you still have the same amount of excise tax that you pay. I think in this quarter, it was 32%, 33% of our sales going to excise tax, so something has to be done. I don't mind if some of it goes back to the governments on education and promoting safety, bringing awareness, marketing, and allowing us to do these things. So again, if we got half of the $40 million back to best scrapping the business. I think it would be tremendously beneficial to Tilray and other LPs.

Yes. I think the key in this piece is that if the government is making a change to strengthen the industry because the tax became in a way oppressive, they need to avoid creating new things that pull that money back. I mean you allow it to go to the industry to help the industry continue to grow and strengthen.

Great. Thank you for the answer today.

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

Thank you for taking the questions. Maybe I missed it in the prepared remarks, but what is the $29 million in assets that have been moved to held for sale? I imagine some of it might be facilities that you mentioned earlier, but what specifically is in that number? And how was it determined?

So that number is the Cayuga facility. It's Molson and it's the Belleville facility that we acquired as part of Truss. In each case, it's a facility; it isn't the business. The business is being reorganized within our existing footprints. We're releasing or selling what become redundant assets at that point in time.

Okay. Got it. That's what I was looking for regarding the businesses. In the third quarter, compared to the second quarter, selling and marketing expenses were slightly higher.

Did we lose you Bill?

I'm sorry, it seems that his line may have a technical difficulty. 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 discuss the situation in the U.S. I realize it's still somewhat hypothetical at this stage, but if rescheduling takes place, you have provided a general overview of your thoughts and a more pharmaceutical perspective. I have a couple of questions regarding your level of patience if that were to happen, especially considering the FDA's reputation for being slow. Is it your understanding that if this opportunity arises, it could still take a considerable amount of time? How are you approaching this? Additionally, in your release, you mentioned your connection to MedMen. How would that relationship fit into the potential changes? Would it remain separate, or could it evolve into something akin to pharmacies? Please share your thoughts on possible U.S. opportunities if regulatory changes happen.

As I said, within the U.S., if medical cannabis is rescheduled and medical cannabis becomes legal, we being a large medical cannabis producer in Canada and Europe and have the expertise and have the research, not knowing what the FDA, and not knowing in regards to what the guidelines will be, Tilray is ready to capitalize on all our expertise. Is there a possibility with NAFTA or with other rules that we can export cannabis from Canada that's GMP certified? Today, you can export cannabis from Canada to other parts of the world if it's GMP certified. I am not sure why that wouldn't be the case in the U.S. if that happens. My personal belief, if it's rescheduled from a medical cannabis standpoint, and they leave it up to each of the states on a recreational standpoint, then that is something different. I think the big thing is I look into a crystal ball of not knowing where this is going. I think something happens from a rescheduling standpoint, and Tilray is ready to move from a medical standpoint if there was an acquisition for us, we're ready to move. We hold the debt of MedMen, and we think the MedMen name still has a strong brand name, even though it's had its challenges and it's going through some changes right now to get rid of some of those liabilities. There's an opportunity that we could execute with the MedMen name across the U.S. The other thing is depending, and I think one of the biggest opportunities, we're seeing some opportunities with Delta 9, which is infused drinks with hemp-infused THC. The biggest opportunity is in drinks, and with our distribution systems, with our brands, within our beer business and spirits, Tilray could get into that. Not knowing what is going to happen, I think, as I've said, Tilray is circled in the U.S., and it's not like we'd have to change our model being an MSO where we're restricted to each state. Right now, we could take our expertise from around the world. We can take our medical expertise; we can take our beverage expertise and bring it to the U.S. once we know which way rescheduling happens.

Okay. Regarding the beverage segment, you mentioned your expectations for increased distribution with many of the recently acquired brands. Do you have any insights into your position as we approach the spring shelf resets and what kinds of shelf space gains you already have secured?

So, hey Ty, you're on the call, right? Do you want to jump in? I need to mention that many of these brands have been lacking innovation and distribution. We have 500 distributors, and I always tell Ty that if each distributor can generate an additional $1 million, that totals $500 million. The potential for beer is significant. When considering pricing and the overall spirits industry, I believe we are very well positioned in beer and innovation. We’re expanding into water, energy drinks, and other infused beverages. We're well equipped with our distributors, as we have over 100 salespeople and marketing personnel. Ty, would you like to discuss some of the developments?

Yes. No. Thanks, Irwin, and thanks for the question, Michael. Yes. No, we feel really solid about some of the distribution gains, not only that we've made in the third quarter. But we also feel solid about the conversations we're having with several national and regional retailers across on- and off-premise with our brands. Specifically, if I look over Q3, we've gained north of 1,200 new effective placements on our existing brands. With the innovation, we continue to see an uptick every day with our distributor network and how they're leaning in with us and helping drive distribution. Chains are going to continue to play a critical role in our success, and we're well suited, as Irwin said, to leverage our partnerships with our distributors and the relationships that we have across the U.S.

Okay, thanks so much.

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

Good morning, everyone. This one is for Carl. I just wanted to go back to the revised guidance here on adjusted EBITDA going into fiscal Q4 here. I’m just wondering if you could give a little more color on the dynamic between overall revenue progression versus margin expansion. There's obviously quite still a big step-up expected even in the revised guidance? And then specifically, within that, I'm wondering how much of that is beverage related given that I think you had commented that you're close to about a $300 million business now in all your beverage portfolios if you run rate this quarter, and I understand there's seasonality. It's close to $200 million to $225 million. So I'm just wondering if there's some step-up on the revenue side, specifically in Q4 when it comes to your alcohol contribution?

Thank you, Matt. We are seeing a significant rise in beer sales in Q4. We have previously discussed the spring reset and its impact on our key summer selling season, particularly evident in our sales results for April and May. Additionally, we have addressed challenges in the spirits business regarding sales growth, which we expect to resolve in Q4. This is factored into our EBITDA expectations and is likely to boost both revenue and margins during this time. In terms of beer margins, we anticipate an increase in Q4 due to higher volume through our facilities as we ramp up production in March and April to meet the demand in April and May, especially given the quick turnaround and low inventory in that sector. We are also preparing our cannabis business for the summer, with increased focus on pre-rolls and other shared consumption products, which will contribute to sales growth. This rise in sales will lead to improved margins driven by production efficiencies.

Okay, very helpful. Thank you.

Thank you. Our next question comes from the line of Doug Miehm with RBC Capital Markets. Please proceed with your question.

Yes, thank you, and good morning. I have a question regarding the excise tax. There's clearly an opportunity for your company there. However, I am curious about the potential impact if these changes go through and you see benefits in the range of $40 million to $80 million as you expect. What are your thoughts on the other companies in the industry? We're beginning to lose some of the smaller companies, but could this provide them with an additional year or two of viability? Additionally, I'm interested in whether this might lead to further downward pricing as companies work to maintain their market share.

I think a couple of things. Yes, I think if companies don't have to pay the same amount of excise tax that everybody is, I think some of these companies absolutely will survive. At the end of the day, we all want a strong cannabis market in Canada. The big thing is, again, what's got to change is the excise tax. Yes, we probably are the highest payer of excise tax in Canada. So for us to receive back $80 million is a lot of money. But at the end of the day, it's money that we're going to put into building our brands, building our products, our innovation, and hopefully marketing and building a bigger category out there. I think that's ultimately the benefit that the money is not going back to taxes; it’s going back into building the marketplace and back into continuously grow the industry. Yes, more competition be out there. Could there be price compression? Absolutely. But I'll tell you what, I don't mind some more price compression. I don't mind some more LPs being in there. I wouldn't mind that $80 million coming into our company where we can invest it back in our business and drive growth, drive innovation and drive marketing of brands to a much bigger category.

It's important to recognize that various companies will experience different win rates in this situation. As we approach the end of market share, the effect on many of those companies will diminish. For those behind on their excise taxes, the tax garnishment may have a greater impact. We are positioned on the opposite end of that spectrum as the largest company, while many others fall in between. Some of these companies will likely find it easier to endure the challenges ahead.

I don't think excise tax is going to keep everybody in business here, okay? I hope not. I continuously see more consolidation in the Canadian market. I see some of the smaller players ultimately going away, and I think that's what happens there as a new industry. There's just a filtration of these LPs. If you come back and look at it today, 25 LPs make up about 50% of the market share. There's about another 1,000 LPs that make up the other 50% market share. So, A, I see some consolidation. You see companies going away. I think what this creates is a much stronger cannabis industry within the Canadian market. If what happens also, as I said before, there could be opportunities for growth in Canada to be shipped into the U.S. and other parts of the world, which could enhance the Canadian cannabis industry.

Okay, excellent. Thank you.

Thank you.

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

Thank you. Good morning. My question is on the cost side, both COGS and SG&A. There's just a lot of moving parts here, and I wonder how much Q3 represents a run rate because you've got additional synergies coming from HEXO. It sounds like you have savings on the beverage side as you move away from co-packing agreements, but you're also investing in innovation and product extensions, and it sounds like another variable is selling the production facilities, which I think you said saves $5 million to $7 million annually? So I wonder, when you think about all of this in aggregate, is there a net benefit on the cost side? And do you expect to see total costs come down from Q3? Because it seems like organic revenue growth is a bit more difficult to achieve in the near term. Thank you.

So first off, I think organic growth is going to come, particularly in the fourth quarter as we see the new launches and the new innovations hit the market, particularly in some of these new categories that we're doing on the beverage alcohol side, including the water and the non-alc playing in that space, things like that are new categories for us. I think there are opportunities for organic growth. But if you're using Q3 as a baseline, I don't think that's the right way to look at it. Similarly, I don't think Q4 is necessarily the right baseline for the exact polar opposite reasons. Q3 is traditionally our lowest quarter in terms of revenue and production, and Q4 is traditionally our highest quarter in terms of revenue and production. So we're going to get an uptick on margins as a result of that incremental volume, particularly in beverage alcohol in our legacy business. That's going to be what drives a chunk of the earnings guidance, and it's going to be what drives our results in the next part.

I think the big thing here is, too, you heard me say before, the savings we're getting from the integration of HEXO and Truss and somewhere is between close to $35 million. We don't get that immediately; it evens out over the quarters. So it takes us a full year to get that amount. The second thing is, as we just own the ABI businesses for two months, and just two quarters, as we integrate them into our businesses and start from the procurement from the distribution standpoint, there's a lot for us to get done here, but we're focused on organic growth, and we're starting to see that already. We're focused on which facilities date and rate these products do, which states we're going to focus on. We also have 13 group hubs out there that we're focused on growing our brand through these brewpubs, big event for us, 4/20, coming up April 20. We have two big events, one in Atlanta and one in Long Island. There's also in every retailer, there's displays built out. July 4 is one of the biggest beer category months that are sold out there from occasions. Right now, as we bring this together, our aspiration is to grow our beer business to a $300 million business. In 2020, we sold 2.5 million cases when we first acquired the SweetWater brand. Today, we're on a run rate to 12.5 million cases with tremendous opportunities with all the innovation that's happening. There are just a lot of evening out here, and there's a lot of moving pieces to bring all this together.

Okay, I appreciate the color. I'll pass it on. Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Simon for any final comments.

Thank you all for joining us today. I wish I could foresee the future of the cannabis industry, but one certainty is that change is coming. We have been anticipating change in the German market for a long time, and it is finally occurring. While there will be much to execute to reach our goals, progress is happening. We have been patient during the Biden administration as we awaited changes in the cannabis sector. There are many discussions around rescheduling, and while we cannot control that, we do know how to cultivate cannabis and sell medical cannabis, as well as conduct research. Currently, we have over 5 million square feet of cultivation space in Canada and two major facilities in Europe. Depending on U.S. developments, we will be prepared to launch necessary initiatives, whether through our existing businesses, acquisitions, or new combinations. Our goal is to expand our beer business to reach $300 million, and we are already the fifth largest craft brewer in the U.S. Additionally, we have a successful operation in Breckenridge Distillery, which has received accolades for some of its whiskey products. I'm also enthusiastic about the progress in our wellness segment, particularly with Manitoba Harvest and the perception of hemp as a nutritious food source. Over the past five years, as Tilray Brands has evolved, we have assembled strong foundations that will create significant opportunities, including our product offerings and distribution strategies, as we develop our global market. Tilray has positioned itself well in terms of regulatory challenges and uncertainties regarding rescheduling. I am proud of the team in place and eager to continue collaborating with them. We have made great strides in banking and maintaining a strong balance sheet, which remains a focus. Personally, I prefer to avoid debt, and I am committed to enhancing our cash flow and reducing costs. Our industry faces considerable taxation on cannabis, beer, and spirits. I wish Tilray had been established earlier, given the substantial tax contributions we are making to the governments of Canada, the U.S., and Europe. I look forward to our next conversation and appreciate your participation today. Have a great week. Thank you.

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