Tilray Brands Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 10, 2023

Key Takeaways

  • Tilray agreed to acquire 100% of HEXO’s shares for approximately US$56 million in stock, creating a pro forma Canadian market share of 12.9% and targeting over US$25 million in annual cost synergies.
  • Q3 net revenue of US$145.6 million and adjusted EBITDA of US$14 million marked the 16th consecutive quarter of positive adjusted EBITDA, and Tilray reaffirmed its guidance to achieve positive free cash flow in FY 2023.
  • A US$1.1 billion non-cash asset impairment driven by a market-cap decline and rising interest rates led to a US$1.2 billion net loss, though management said underlying business fundamentals remain intact.
  • Sustained price compression (-US$28 million YTD) and high excise taxes (approximately CAD 121 million in the last 12 months) continue to pressure Canadian cannabis margins despite Tilray retaining its #1 market share.
  • Diversification into international medical cannabis (20+ countries, leading EU share) and U.S. CPG brands (Sweetwater, Montauk, Breckenridge, Manitoba Harvest) provides cash-generating businesses amid legalization delays.
AI Generated. May Contain Errors.
Earnings Conference Call
Tilray Brands Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good afternoon, everyone. Thank you for joining us to discuss Tilray Brands Inc. Financial Results for the Fiscal Year 2023 3rd Quarter Ended February 28, 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 through the SAVE Technologies platform.

Operator

Question submission and uploading through the SAVE Technologies platform has already concluded and the company will read aloud and answer the top questions. Conference. Ms. Narada, you may now begin the conference.

Speaker 1

Thank you, and good afternoon. By now, everyone 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. Call. On today's call, we will be referring to various non GAAP financial measures, which can provide useful information for investors. Quarter.

Speaker 1

However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information quarter 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. Quarter. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect.

Speaker 1

Quarter. Actual results could differ materially from those described in these forward looking statements. The text in our earnings press release includes many of the risks quarter and uncertainties associated with such forward looking statements. Note that we have also posted a presentation on the HEXO transaction to the Investors section of the Tilbury Brands website. Today, you will hear from key members of our senior leadership team.

Speaker 1

Erwin Simon, Chairman and Chief Executive Officer, Tilbury Brands Inc. And Carl Merten, Chief Financial Officer, who will provide a quarterly financial review and update our annual guidance. Also joining us for the question and answer segment of this call is Denise Falczyk, Chief Strategy Officer and Head of International Blair MacNeil, President, Tilray Canada and Ty Gilmore, President of our U. S. Beer Business.

Speaker 1

And now, I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin Simon.

Speaker 2

Please? Good afternoon, everyone, and thank you, Barron, and hello, everyone. Thank you for joining us for our report on our Q3 financial results quarter, as well as our exciting announcement that we reached an agreement to acquire 100% of the common shares of HEXO. Quarter? Let me begin by stating the obvious.

Speaker 2

The global cannabis industry continues to be challenging with both industry specific quarter. The Tilray Brands team has demonstrated adaptability, strong execution skills and operation excellence throughout quarter in response to diversify our business and built a strong durable balance sheet. This diversification in particular quarter has been an absolute necessity given the ongoing delays in U. S. Federal cannabis legalization and the delay in Safe Banking Act quarter as well as delays in adult use legalization in Germany, all of which have fundamentally impacted cannabis industry business models quarter.

Speaker 2

Built around the promise of legalization. These industry conditions have compelled us to challenge previous assumptions, Adapt and execute. As a result, we built the most diversified global cannabis lifestyle and CPG company quarter with a clear vision and a strategy to deliver sustainable long term stockholder value and growth. Throughout it all, we have remained focused on the core business fundamentals such as maximizing our revenue growth and profitability, cost management quarter. And of course, cash generation.

Speaker 2

And while due to the current macroeconomic climate, we do not believe the value of the opportunities we've created quarter within our diversified business are fully reflected in our current stock price. We begin that these opportunities quarter. We'll generate significant stockholder value in the long term and that our efforts that we've delivered will suit these following accomplishments. We've repositioned Aphria, optimized operations and cost efficiencies and built the leading Canadian cannabis LP With the Tilray transaction and now with the HEXO transaction. Today, Tilray Brands continues to lead quarter with the number one cannabis market share across Canada, which we've accomplished as a low cost producer, while achieving 1 quarter.

Speaker 2

$122,000,000 in cost savings. We've strengthened and expanded our international cannabis business in over 20 countries and new markets and territories around the globe. And today, we have the leading medical cannabis market share across Europe. Quarter. As an adaptation to delay in the U.

Speaker 2

S. Federal cannabis legalization, we built a strong and profitable U. S. Beverage alcohol business, including repositioning Sweetwater into the number 1 craft brewer in Georgia, The number 2 craft brewer in the Southeast and the 10th largest craft brewer in the U. S.

Speaker 2

We acquired Montauk Brewing Company quarter and grew its points of distribution by 10% within the 1st 4 months of operating this business. Today, Montauk is the quarter. Our highly awarded bourbon brand, Breckenridge Distillery was recently awarded the world's best blended percent by Whiskey Magazine. You got to try this product. We've also stabilized Manitoba Harvest into a profitable business, quarter, creating the world's leading hemp food brand with over 50% of branded hemp market share in the U.

Speaker 2

S. And Canada. Quarter. When federal cannabis legalization does occur, we will leverage these U. S.

Speaker 2

Businesses into beverage, alcohol and wellness, quarter, including their distribution and marketing networks to capture new expansive opportunities across the U. S. And throughout the creation quarter of a broad set of cannabis infused CPG brands. Now let's discuss our agreement to acquire HEXO Corp. Quarter.

Speaker 2

Please refer to the Tilray and HEXO investor presentation available on our website, www.tilray.com for greater details. We view this transaction as building on strength. In that, it takes the proven value proposition quarter of the successful strategic partnership that we forged with the HEXO team last year, and this enables us to fully leverage 30.8% of our businesses. Together, we have the assets and the operating expertise to build a stronger Canadian platform quarter that takes advantage of clear opportunities to deliver stronger top line growth and increase our market share, quarter. Deliver an enhanced margin contribution, accelerating our drive to profitability through operating and cost synergies quarter and ultimately enhancing value creation for our shareholders.

Speaker 2

To provide some further detail, quarter. We expect 3 immediate benefits. First, we expect the combination of our businesses to enable us to grow and strengthen our number one share even further across all major Canadian cannabis markets. Anticipate pro form a combined cannabis market share quarter would rise 4.80 basis points to 12.9 percent and pro form a net sales would rise to approximately US250 $1,000,000 supported by leading low cost operations and complementary distribution across all Canadian geographies. Second, it will broaden our portfolio of high growth brands, expanding Canadian adult use opportunities quarter with the addition of HEXO's top brands, including reticant, the number 7 brand in Canada and add new Canadian medical quarter producing HEXO's assortments, which would bring a new diversified group of consumers and patients in addition to adding capabilities across multiple product categories, while leveraging our robust supply chain.

Speaker 2

And third, we are confident it will enable us to take greater advantage quarter of the complementary operational and cost synergies that exist between our businesses. Since we purchased the convertible notes in HEXO in July of last year, quarter. The HEXO team has made significant strides in reducing cost, improving profitability by making changes to their operations quarter and participating in our joint cost savings effort. Upon completion of the next phase of this transaction, We intend to achieve additional cost savings and synergies in excess of $25,000,000 on an annualized basis. The HEXO transaction, which we expect to be accretive to earnings upon achieving synergies and savings is expected to close in June 2023 and will consist of a purchase price of approximately $56,000,000 payable through the issuance of Tilray's common stock.

Speaker 2

Upon the expected closing in June of 2023, we will integrate HEXO operations into Tilray's Canadian infrastructure quarter across manufacturing, cultivation, operations, sales and marketing and corporate. We also expect to leverage quarter. Redican state of the art growth facility for our low cost production business and we are evaluating the utilization and the optimization of Maison quarter in Gatineau, Quebec for new opportunities, including the premium berry and vegetable business. Quarter. Our management team has a proven track record optimizing operations and setting and achieving synergy targets.

Speaker 2

Quarter. So our confidence in our ability to deliver the synergies we've identified in HEXO Acquisition is very strong. Turning now to how we executed in the Q3. Tilray Brands sustained and grew the top line, while continuing to strengthen our balance sheet through cost cutting initiatives and related steps to optimizing the platform amid complicated market dynamics across Canada, Europe and the U. S.

Speaker 2

This work includes a very deliberate decision to accelerate our path to positive free cash flow driven by the following priorities. 1st, maximizing revenue and growth in our profitable core business, which entails maintaining quarter. Our number one leading position across Canada and that has been since 2020 and continuing to expand and grow quarter. Our cannabis market share across Canada, the largest federal and legal cannabis market in the world. We anticipated the HEXO acquisition quarter will continue to contribute substantially to this objective.

Speaker 2

Solidifying our leadership status and growing market share quarter in medical cannabis across our international markets, establishing new market opportunities as medical legalizations continues to take hold quarter and setting our business up to capture the adult use market when legalization occurs and winning in the U. S. Quarter through our leading and profitable portfolio of craft beverage alcohol and wellness consumer products brands, which resonates powerfully quarter with consumers and are ideally positioned in key markets. When federal cannabis legalization does occur, we will leverage these U. S.

Speaker 2

Businesses quarter and their distribution and marketing network to capture new expansive opportunities across the U. S. And through the creation of a broad set of cannabis infused CPG brands. 2nd, we are diligently optimizing the efficiencies of our global operations quarter and driving the disciplines and accountability that ensure we remain a low cost producer in the cannabis business and our other businesses. Quarter.

Speaker 2

This includes realizing substantial cost savings and synergies in our business, discontinuing certain partnerships quarter and exiting certain unprofitable businesses in order to focus our resources on the businesses that are driving profitability and cash flow. Quarter. These aren't easy decisions, but we made them early and they're unquestionably the right ones to make. And third, we are strengthening our industry leading balance sheet and cash position, which enables us to pursue quarter. Target opportunities for growth and expansion within the context of economically uncertain environment.

Speaker 2

This balance sheet strength is a competitive advantage in this environment and should enable us to achieve the kind of scale and superior competitive positioning quarter that we believe will deliver profitability and stockholder returns in the long term. Now to review our performance in Canada over the past quarter. Quarter. In Canada, most notable challenge is price compression, which impacted us by approximately $28,000,000 year to date, quarter? Almost all, which dropped to the bottom line and negatively impacted EBITDA by approximately $26,000,000 for the 9 months.

Speaker 2

Because of price compression, excise tax has become a larger percentage of each sale and is exacerbating the cost of excise tax, which is calculated largely as a fixed price per gram versus a percentage of purchase price. Tilray has paid approximately CAD120 1,000,000 in excise tax and corporate income tax quarter in the last 12 months of the Canadian government, with the majority coming off the top line sales and impacting the bottom line. Quarter. No question, the Canadian government has been the most profitable cannabis business in our industry. Quarter.

Speaker 2

In order to rectify this imbalance, we continue to work with the government to reduce inequitable taxes between the legal quarter and the illicit cannabis industry. In short, the difficult operating conditions in Canada that we described in recent quarters persist, including ongoing price compression, strained retailer cash flows and exorbitant excise taxes. There also continues to be almost 1,000 LPs, up 300 since we started to report numbers last year quarter in the market, but we are starting to see some consolidation as both the LPs and the retail store levels quarter as well as some inventory levels normalization across the retail market. Against this backdrop, the strength of our brands quarter has enabled us to maintain our number one market share position. In Q3, which was 73 basis points ahead of the number 2 LP, Our adult use recreational brand, Good Supply, continues to be the number one brand in Canada with 6% of the market.

Speaker 2

In Q3, Excluding Quebec, our share across Canada was up 43 basis points in Q3 versus Q2 with solid improvements in Ontario and British Columbia, quarter. And we're seeing this trend continue as we've entered Q4. To provide some further insight in performance of Canada, quarter. Volume deliver was flat in Q3 versus Q2, reflecting continued price compression in the marketplace. Taken together, we saw $3,000,000 of price compression in Q3 results.

Speaker 2

This has slowed significantly from Q2, quarter. Where there was a $12,000,000 of price compression, we do believe we're starting to see the floor on price compression in the marketplace. From a category standpoint, dried flower continues to be a standout, up almost 7% from Q2 and double the industry performance. Quarter. However, we're not resting on this achievement.

Speaker 2

Our beta program continues to provide us with a pipeline of new strains and we have recently made changes to our post harvesting processes, which will ensure our Good Supply brand continues to provide consumer's strong value at competitive price points. In our international businesses, quarter, we're focused on 3 strategic priorities: solidifying our leadership position and growing quarter. We continue

Speaker 3

to focus on market share in medical cannabis in the countries around the

Speaker 2

world in which we participate today, achieving early mover advantage in new countries as medical legalization quarter continues to take hold and of course ensuring strong positioning to capture the adult use market quarter upon adult use cannabis legalization. As we do this, we're optimizing our international platform, including working to remove approximately $8,000,000 of costs from our European businesses, of which we've already achieved $2,600,000 to date. Quarter. In order to achieve long term profitable growth in the event that only medical cannabis legalization continues to proliferate, quarter. We believe that we are well positioned for success driven by the following competitive differentiationers.

Speaker 2

Quarter. Our high quality medical cannabis brands, which are trusted by patients, healthcare professionals quarter and government officials around the world. Our unrivaled platform of assets resources through our cultivation facilities in both Portugal and Germany and our medical distribution network led by our integrated CC Pharma and medical cannabis teams with relationships across 13,000 pharmacies. Based on these trends to date, we built upon momentum in Poland with a rapid and substantial increase in our sales of medical cannabis, received market authorization for 2 additional medical cannabis extracts in Italy, which will distribute through our wholly owned subsidiary, FL Group, quarter. One of the only 5 companies in Italy that is authorized by the Italian Ministry of Health to import and distribute medical cannabis.

Speaker 2

Quarter. And we've expanded our European footprint across the Czech Republic through a new export and distribution partnership. In the event of adult use cannabis legalization, we believe we're strongly positioned to seize on the opportunity based on our differentiators quarter and the industry leading expertise we have as a market leader in Canada and through the deep CPG experience in our management team. Quarter. Turning now to the U.

Speaker 2

S. And our CPG portfolio. In the U. S, participation in the adult use cannabis markets quarter is integral to our long term strategy. However, as we've said in the past, we will not engage businesses quarter.

Speaker 2

The touch cannabis plants if cannabis remains federally illegal in the U. S. In the meantime, we're optimizing the value quarter of our existing high potential U. S. Businesses, which consist of 5 craft beverage alcohol brands and wellness brands.

Speaker 2

The largest of our beverage brand is Sweetwater, headquartered in Atlanta, Georgia. With a nationwide infrastructure spanning 44 states quarter. And innovation driven culture, Sweetwater is now growing into a true national leading craft beer brand. Building on innovation, earlier this year, the brand launched a new consumer focused brewers, including a new Chris Vlogger, Gone Trip It, a West Coast style IPA, both of which are now available across Sweetwater's national footprint. We're also excited to continue our largest music event in the Southeast, Sweetwater 4 25th, which will be held at our flagship brewery in Atlanta This year on April 22 April 23.

Speaker 2

Come visit. In addition to growing Sweetwater, we're Extremely proud to expand our 2 iconic Southern California brands, Alpine Beer, which just opened the Stadium Anchor Eatap Room quarter at Petco Park and Green Flash. We vastly expanded distribution of both throughout our partnerships with Rayus, quarter. The largest beer distributed in the U. S.

Speaker 2

And we're confident by their position for ongoing growth. And Montauk Brewing Company, which we acquired last year is the fastest selling craft beer brand and the number one craft brewer in New York. We were recently able to expand its distribution by approximately 10% in the 1st 4 months since our acquisition. It is now available in over 3,500 retail locations across the Northeast, including expanded distribution across New York, New Jersey entrance into Connecticut and Rhode Island. We are confident that Montauk Brewing quarter has the potential to grow in true national brand, which we accomplished by leveraging Sweetwater's infrastructure to significantly expand month.

Speaker 2

Montauk Brewing, including entry into markets outside of its existing footprint. Finally, our Bourbon and Spirits brand, Breckenridge Distillery quarter continues to firmly establish its position as a category leader, winning key influential awards, including Best American Blended Whiskey, quarter. Best American Blend It limited release, Best American Blend It Malt and most recently, World's Best Blend It Whiskey quarter. In Whiskey Magazine's 2023 World Whiskey Awards, today Breckenridge Distillery is distributed all 50 states quarter. And align nationally with RNDC with a distribution contract guaranteeing nearly 30% sales growth annually, quarter.

Speaker 2

Brackenridge Distillery continues to build momentum for continued strong performance. Turning now to our wellness segment. Quarter. Focusing on Manitoba Harvest branded hemp business, the brand continues to expand in the U. S.

Speaker 2

And Canada, leading market share positions, quarter, including a better than 50% dollar share within branded hemp seed, strong dollar growth in the Mueller and Natural channels. And in the latest 12 weeks reporting period, it also continues to deliver dollar growth of each of its top 8 major U. S. Retailers, quarter, including Sprouts, Walmart, Kroger and its market share in Canada remains at nearly 80%. Quarter.

Speaker 2

The drivers of Grove include distribution expansion, a strong innovation pipeline and new pricing actions quarter to offset cost inflation, coupled with an ever increasing consumer interest in hemp products. Quarter. Given the key role they can play in plant based low carb and keto diets, which are very popular today. In Q3, Tilray Wellness also introduced a new CBD wellness beverage, Happy Flower, during the dry January Via direct to consumer e commerce platform, Happy Flower offers non alcoholic cocktails infused with CBD quarter that meets the needs of Gen Z and millennial consumers. We will look to officially launch and expand the brand quarter in key markets throughout the remainder of 2023, focusing on states with CBD permissibility and established CBD sales.

Speaker 2

Quarter? And as announced last week, we're expanding our distribution with Whole Foods Market with the launch of the brand's 1st regenerated organic certified hemp hearts. We believe our wellness platform continues to be an important part of our U. S. Strategy, providing us with deep connection to our consumers and our customers.

Speaker 2

Quarter. We look forward to building even a greater scale of our wellness business in the near and long term. Now before I turn the call over to our CFO, quarter. Carl Mertan, I want to provide some context around the reduction in our net assets reported in Q3, which includes a non cash 1 $100,000,000 impairment charge resulting from higher interest rates and a decline in our market cap in recent quarters. Quarter.

Speaker 2

This non cash accounting charge does not at all change our strong conviction in our ability to accelerate our path quarter. Positive free cash flow positions our company for profitable growth across the markets we serve and delivers on our foremost priority, quarter. Generating value for our shareholders. The market is challenging right now, but we have the right strategy in place quarter to preserve the strong position we are in across our markets as well as our financial flexibility that we're executing on. Quarter.

Speaker 2

With that, I now will turn the call over to Karl to discuss the financials in greater detail. Karl?

Speaker 4

Thank you, Erwin. Given the challenging environment affecting the economy as a whole and our industry in particular, we are staying focused on what we can control, quarter. Namely, improving our operating efficiencies and realizing cost savings within our business model, reevaluating partnerships in markets

Operator

quarter that no longer meet our criteria,

Speaker 4

strengthening our balance sheet and working towards generating positive free cash flow, even if it inhibited quarter generating additional adjusted EBITDA in the near term. For our financial review, we present our results in accordance with U. S. GAAP and in U. S.

Speaker 4

Dollars and will reference both GAAP and non GAAP adjusted results throughout our discussion. Our earnings press release contains a reconciliation of our reported results under GAAP to the non GAAP measures identified during our remarks. Let's begin with the significant non cash reduction in our net assets we took during the quarter, quarter. A situation that has become very common in the CPG and cannabis industries over the last 12 months. Importantly, the review of our net assets and the calculation of the non cash reduction was not a function of our belief in our business plan quarter or changes in our view as to the future of our business and units.

Speaker 4

As noted by Erwin, this non cash accounting charge was almost entirely led by changes in our market cap. To explain further, due to the decline in our market cap between the last day of our fiscal Q2 and the last day of our fiscal Q3, Together with the rising interest rate environment, particularly in risk free interest rates, the accounting test for indicators of impairment was triggered. The first step in this process required us to update our forecast based on current expectations of the business. Quarter. This reassessment had a negligible impact on the impairment calculation itself, but we then had to reassess the discount rate applied to this forecast due to the sharp increase in risk free interest rates over the last 9 months.

Speaker 4

This increase in interest rates led to $100,000,000 of the non cash asset write down during the quarter. Next, we had to assess the carrying value of our assets, including intangibles and goodwill quarter against our current market cap. And with reduction in our market cap, it led us to record an additional $1,100,000,000 non cash reduction quarter in our net assets. This non cash reduction was allocated as $55,000,000 to inventory, quarter? $54,800,000 to the HEXO Convertible Note, dollars 104,000,000 to capital assets, dollars 38,700,000 to other assets, quarter?

Speaker 4

$205,000,000 to intangible assets and $618,500,000 to goodwill. Quarter. Overall, the allocation resulted in non cash asset reductions of $15,000,000 in the wellness segment quarter and the remainder of the non cash reductions in the cannabis segment. The non cash reduction to inventory was also recorded quarter in contemplation of our acquisition of HEXO to align our inventories to meet the future demands we see in the market. It is notable here that between the time we first announced the Tilray Aphria transaction in December 2020 and when we closed on the transaction in May 2021, The share price of Aphria rose dramatically due to investor enthusiasm over U.

Speaker 4

S. Federal legalization. This surge in Aphria share price directly led to an increase of $1,400,000,000 in the purchase price of Tilray, which itself led to an increase of $1,400,000,000 of intangible assets, a value that is higher than the non cash reduction we announced today. Quarter. Again, we do not believe these non cash asset reductions are indicative of the significant long term market opportunity quarter that still exists for the federally legal cannabis market.

Speaker 4

We are therefore working hard every day to see that our vision in creating the leading and most diversified cannabis lifestyle and consumer packaged goods company in the world across adult use and medical cannabis, beverage alcohol and wellness consumer products quarter is achieved. Now with that, I will discuss our results for the quarter. For the quarter, net revenue increased slightly to 145 $600,000 from the prior quarter of $144,100,000 On a constant currency basis, quarter. Net revenue rose to $154,200,000 from $151,900,000 in the prior year period. Quarter.

Speaker 4

Reported negative gross profit for Q3 was $11,700,000 compared to gross profit of $39,800,000 in the year ago quarter. Included in this quarter's result was a non cash reduction in inventory related to the previously discussed reduction in non cash carrying value of our net assets. Quarter. However, adjusted gross profit for Q3 was $44,300,000 up 11% from last year. Adjusted gross margin rose to 30% from 26% in the prior year quarter.

Speaker 4

This was made possible by our success in implementing numerous cost saving programs, including offsetting part of our allocated overhead for intentionally reducing cannabis production. From the $30,000,000 cost optimization plan that we first announced in Q4 last year, we achieved $22,000,000 on an annualized run rate basis, of which $12,000,000 represented actual cost savings during Q3. Quarter. Net loss was $1,200,000,000 compared to a net loss of $61,600,000 in the prior quarter quarter and net income of $52,500,000 in the year ago quarter. Net loss for the quarter is tied to our quarterly goodwill impairment review.

Speaker 4

From an adjusted net loss perspective, our loss was $0.04 per share. Adjusted EBITDA was $14,000,000 quarter marking our 16th consecutive quarter of adjusted positive EBITDA and a significant increase from Q3 last year of almost 40% quarter despite the decline in revenue. Operating cash flow for the quarter improved to a loss of $18,600,000 from a loss of $46,400,000 in the prior year period, a substantial improvement. The decrease in cash used quarter was primarily related to improved operating efficiencies realized through our synergy programs and management of our working capital requirements. Quarter.

Speaker 4

From a free cash flow perspective, we reported a $19,500,000 use of free cash flow, quarter primarily as a result of working capital changes. More specifically, during the quarter, we used $800,000 of cash on CapEx. We used $1,400,000 on operating our businesses and we used $17,300,000 on managing working capital. The cash used on operating our businesses of $1,400,000 is the lowest level reported since we first brought Aphria and Tilray together quarter and demonstrates the steps we continue to take to remove costs and better balance revenue and costs across all our business units. Quarter.

Speaker 4

Cash used in or provided by working capital changes is expected to fluctuate on a quarter by quarter basis. Quarter. Today, we are also reiterating our guidance with respect to reporting positive free cash flow from our operating segments for fiscal 2023. Quarter. While we are not currently at positive free cash flow for the year, our Q4 is expected to make significant ground in this measure.

Speaker 4

Quarter. Turning to our business segments. Gross cannabis revenue comprised $6,000,000 in Canadian medical cannabis revenue, quarter. $45,300,000 in Canadian adult use revenue and $9,700,000 international cannabis revenue. These were collectively offset by $13,600,000 of excise taxes.

Speaker 4

Excise taxes continue to significantly impact 30% growth revenue. Tilray paid almost CAD120 1,000,000 in the last 12 months to the Canadian government and excise in corporate taxes. This substantial tax burden adds to the challenges facing the cannabis industry today. More importantly, Tilray is one of the few licensed producers in Canada that pays taxes when due and is not using the Canadian government as a de facto financing arm. Quarter.

Speaker 4

Net cannabis revenue was $47,500,000 representing a 14% decline from the year ago period. The variance was mostly related to a reduction in international cannabis revenue and to a lesser extent lower wholesale cannabis revenue and Canadian medical cannabis revenue. On a constant currency basis, net cannabis revenue declined by 7% as the decline in the Canadian dollar and euro quarter resulted in a $3,500,000 decrease compared to the prior year quarter. Price compression, quarter, while slowing continued to have a marked impact on our results. For the fiscal year to date, our revenues are down $28,000,000 directly as a result of price compression in Canada, of which virtually all also represented a reduction in EBITDA.

Speaker 4

Quarter. In the quarter, our Canadian cannabis wholesale team met with a significant number of licensed producers about becoming their B2B outsourced partner. Even though the results of those conversations did not lead to wholesale sales of this quarter, we have secured multiple outsourced partners and continue to work with many more. Quarter. Adjusted cannabis gross profit increased to $22,200,000 from $18,000,000 in the prior year quarter, quarter?

Speaker 4

Well, the gross margin percentage increased to 47% from 33%. Excluding the HEXO advisory fee revenue, adjusted cannabis gross margin would have been 35%, up slightly from the year ago period. The margin improvement was related to continued quarter. The decrease in the utilization of our cannabis facilities to manage demand requirements. Quarter.

Speaker 4

Distribution revenue, which is derived predominantly through CC Pharma, increased 5% to $30,000,000 from $62,500,000 in the prior year quarter, despite the strengthening of the U. S. Dollar relative to the euro. Quarter. On a constant currency basis, revenue would have actually increased 12 percent to $70,100,000 for an additional $4,700,000 of revenue.

Speaker 4

Quarter. Distribution gross profit increased 49 percent to $7,400,000 from $5,000,000 in the prior year quarter, quarter, while distribution gross margin increased to 11% from 8%. These increases were the result of a positive change in product mix quarter and our focus on higher margin sales, including the decision to exit the medical device reprocessing line. Looking ahead, we think we can continue to drive larger business profit margins despite not increasing revenue as we approach full utilization of our facility. Turning to our beverage alcohol segment.

Speaker 4

We generated $20,600,000 in net revenue, which was slightly higher than the prior year quarter of 19,600,000 quarter? The delta was primarily due to our acquisition of Montauk in November 2022. We remain bullish on expanding this segment over time as we leverage our increased quarter. Re gain brand acceptance with Green Flash and Alpine, foster brand acceptance for Sweetwater in California, Build out an extensive innovation pipeline and of course potentially pursue other acquisitions. Quarter.

Speaker 4

Adjusted beverage alcohol gross profit was $11,000,000 compared to $11,500,000 in the prior year quarter, quarter? Well, adjusted gross margin was 53%, a slight decline from 59% as a result of the Montauk acquisition that was period in the prior period comparison and operates at a slightly lower margin than Sweetwater. Also Sweetwater's operations in Colorado in the current period quarter. Had a negative impact on the margin as it is still in the startup phase. Finally, for our wellness segment, quarter.

Speaker 4

Revenue decreased 18 percent to $12,000,000 from $14,700,000 in Q3 last year. The decrease in revenue was due to a reduction in customer inventory levels at warehouse locations across North America quarter and a pullback on margin dilutive non branded sales that led to top line declines in the quarter versus the prior year. Quarter. Adjusted wellness gross profit was $3,700,000 down from $5,400,000 in the prior year quarter, quarter, while gross margin decreased to 31% from 36% due to the impacts of higher input costs of seed ingredients quarter as a result of inflation. However, the increase in prices during Q2 to combat the inflation impacts quarter resulted in a consistent margin from the immediately preceding quarter.

Speaker 4

Our cash, cash equivalents and marketable securities balance as of February 28 was $408,300,000 up $129,000,000 from the $279,200,000 in the year ago period. Quarter. Given our quarterly and fiscal year performance to date against the backdrop of macroeconomic challenging near term market conditions, We are lowering our expectation of adjusted EBITDA generation to between $60,000,000 $66,000,000 an increase of over 30% from last year. However, as I already indicated, we are still projecting being free cash flow positive quarter across all business segments for the year. To conclude, while the quarter was challenging in many respects, quarter largely due to market interest rates and our market cap.

Speaker 4

We are committed to ensuring that our cost structure is consistent with our revenue expectations, quarter. Minimizing CapEx, improving our industry leading balance sheet, reducing debt and driving free cash flow. Quarter. With that, I will conclude our prepared remarks and open the lines for questions from our covering analysts. Afterwards,

Speaker 3

We will

Speaker 4

take a few questions from our shareholders through the SAVE platform. Operator, what's the first question?

Operator

Quarter. Thank you. We will now be conducting a question and answer session. 3rd. 3rd.

Operator

3rd. Thank you. And our first question is from Vivien Azer with TD Cowen. Please proceed with your question.

Speaker 5

Hi, good afternoon and thank you. I'm sure it's a long queue, so I'll just keep it to 1. Irwin, on the HEXO deal, I really wanted to focus percent. Why now? You guys have clearly had the strategic relationship in place, share cost savings already occurring.

Speaker 5

As I'm really curious, is this more quarter. Top line motivated or more cost cutting motivated? Because on the top line, it seems like the market share gap between you and number 2, HEXO, shrunk about over 100 basis points sequentially. So I'm wondering how much of a factor that plays into the timing versus just the cost cutting and whether it kind of run its course in consolidation was the next logical step. So if you can comment on the line now, I'd appreciate it.

Speaker 5

Thank you.

Speaker 2

Good afternoon, Vivien and thank you. I think Vivien there's multiple reasons here. Number 1, I think the Canadian market has to consolidate. You heard me talk about price compression where we've lost $28,000,000 in the 1st 9 months and that comes right off the bottom line, affects our earnings, affects our EBITDA. Secondly is, listen, there's still a big illicit market there.

Speaker 2

The market Out there is fragmented with over 1,000 LPs. The market has multiple retail stores. So with this, this gives us close to a 13% share. And as we spend time with the reticant team, the HEXO 30. Retican, which we think is a great asset.

Speaker 2

The Maison facility is a great asset. We think there's lots of opportunities there. And just think about it, How hard it is for us to achieve earnings in Canada. And with that putting these 3 companies together Aphria, Tilray and now HEXO. There'll be over $25,000,000 $30,000,000 of savings over the next couple of years.

Speaker 2

We think we can really grow quarter? The Reticam brand and the flower, the oil business and the Redis, we think there's lots of opportunities. So It made sense and where the stock was, it ultimately made sense for Tilray shareholders.

Speaker 5

3rd. Okay. And nothing on cost really?

Speaker 2

Well, I think costs again, as I said before, Is consolidation is something that has to happen here and I think is they're moving some of the growth from Maison into our Leamington facilities, Utilizing the same infrastructure of the sales organization, the marketing organization, the distribution organization, the purchasing organization. So listen, Vivien, if we can get $25,000,000 to $30,000,000 of cost savings and each year get an additional $25,000,000 to $30,000,000 in gross margin from this business. And at the end of the day, we think for Tilray shareholders, we paid about $55,000,000 $56,000,000 for this business. And you think about it ultimately what reticant and you think about what other assets that sold for. It's a great deal out there for shareholders and it's a great deal out there for future earnings.

Speaker 2

Listen, the Canadian market has to change. And I think today with Tilray taking that leading position out there and the biggest winner in Canada today is the Canadian government We pay over $120 plus 1,000,000 between excise tax and taxes and HEXO pays $35,000,000 So ultimately, It also will give us some clout in that to go to the Canadian government and say something has to change here in this marketplace. And you know what, Vivien, One day legalization will happen in the U. S. And with the facilities that we have in Leamington, what we now have in Gatineau, What we have in the Redican facility in regards to its slims and its flower and its craft growing, we're really set up For U.

Speaker 2

S. Whether we can NAFTA with free trade and ship into the U. S, we're really set up for international business. So It takes Tilray to the next level and we're ready for the cannabis business in a big way whether legalization happens or not in the U. S.

Speaker 2

Or happens in Europe. So I think it's a great deal. And what the other thing is, not too many times you get to look at a company And spend the last 9 to 11 months being their partner here. And we should be able to integrate this Pretty easy and get all the synergies and savings. So I'm really excited about this.

Speaker 5

Yes. No, absolutely. The prior relationship certainly helps. Thanks for watching.

Speaker 2

It creates a lot of value at the end of the day for both shareholder base. And I think that's the important thing here. And it also will create a lot of value for consumers out there to expand distribution. So it's a win win deal and Vivien trust me and not us, There's other consolidation that got to happen in the Canadian market. You can't have over 1,000 LPs out there.

Speaker 2

And Canada, the size of the country that it is, just 3rd. And hope the industry changes. As I said, the biggest cannabis company in Canada today is the Canadian government with the excise tax.

Speaker 5

Quarter. Understood. Thank you.

Speaker 2

Thank you.

Operator

Thank you. Our next question is from Andrew Carter with Stifel. Please proceed with your question.

Speaker 6

Hey, thanks. I want to build on Vivien's question about kind of the why now with HEXO and doing this transaction. I mean, bringing Aphria to Tilray together, perhaps it was time when new entrants were accelerating, but I don't know, correct me if I'm wrong, but you went to the provinces and it wasn't exactly like I have this brand and this brand. They looked at you and said, You're one company, we only want this much. Do you see that as a risk here of the provinces looking at you and saying, Actually, it could be actually dilutive like, okay, we're not there is no 1 plus 1 here.

Speaker 6

There's 1 entity, we only want so much or have dynamics changed in the market? Quarter.

Speaker 2

So Andrew, good afternoon and thank you for the question. I think it's an excellent question. And when we looked at it, I think it's very complementary. No, reticant has its Slims, reticant has its craft grow flower out there, reticant has its oils. HEXO has a strong platform in the Quebec market out there.

Speaker 2

So it's very complementary to us out there. HEXO does not have really an international business. And some of the things I've said, the Redican facility is an incredible facility that's out there. And there's a lot we can do in the midst of moving some of our edibles there, some of our oil business there, moving some of our drinks into our London facility. So with that ultimately to become that low cost producer, you got to remember in Canada, No matter if there's price compression, excise tax remains the same.

Speaker 2

So for us to get the profitability you want, you got to get bigger. And with a 1,000 LPs out there. It's harder to get bigger by just stealing share or you wait for a lot of them to go out of business. But the big thing here is Consolidation is key and I think this really sets us up. It sets us up to talk to the Canadian government in regards to excise tax.

Speaker 2

It comes back in sort of with certain provinces and like I said before to Vivien, We had the ability to be 49% owner of HEXO and I think it's no shock to anybody that this has happened now. And it's 9 months and it's the right thing for both companies.

Speaker 7

Got it. Second question I'd

Speaker 6

ask And in the write downs, there were some on the MedMen Super Hero Venture. Are you looking at that stake differently? Or would you seek to kind of To move up your claim at all with that or long term is that kind of thesis intact whatever happens with MedMen?

Speaker 2

I'm still very bullish on MedMen. I think a lot of great work has been done to clean it up. I think MedMen still has one of the best known brand names in the MSO and the cannabis business in the U. S. And You know what it does for us, Andrew, it puts us upon legalization.

Speaker 2

We now have a great brand in MedMen, if That was to come to be. We have a great name within Sweetwater if it wanted to go into the cannabis world with infused drinks and stuff like that. So The big thing with Tilray today, it's really set up in the Canadian market today between HEXO Tilray and Aphria to have close to a 13% share. We're really set up in Europe and Germany and Portugal and selling 20 countries safer of Medico and if cannabis legalized tomorrow in Germany, We're ready for the recreational adult use in the German market or any other market. And then in the U.

Speaker 2

S. With Sweetwater, with Montauk Brewery, With Breckenridge, we have a strong business there today in the consumer area where it's very easy for us to do infused drinks or one day Ultimately, is it edibles or is it pre rolls or etcetera? So we're set up quarter. And ultimately, the only thing holds us back is legalization. But in the meantime, we have some great markets that we can operate in today, Whether it's cannabis, whether it's beer, whether it's spirits, whether it's wellness food or whether it's our medical cannabis business.

Speaker 7

Quarter. Thanks. I'll pass it on.

Speaker 3

Thank you.

Operator

Quarter. Thank you. And our next question is from Aaron Grey with Alliance Global Partners. Please proceed with your question.

Speaker 7

Hi, good evening and thanks for the questions. So you've stabilized your market share over at Tilray, but Hetso has still been experiencing share losses. Some of this intentional because they've been simplifying their SKU count. But just curious in terms of how you look at some of the SKU overlap? I mean, you've talked a lot about No reticam, but also think about original stash.

Speaker 7

Do you feel like there still might need to be some more simplification of the SKU count as you now are 100% consolidating net quarter? How do you think about that going forward? Thank you.

Speaker 2

Aaron, hi, how are you? So I'm going to answer part of it, then I'm going to turn it over to Blair McNeil who's here with us, our President of our Canadian market. But I think, listen, HEXO has gone through its challenges And I think the team there under Charlie Bowman and Mark Antesales done a great job in regards to cutting costs. And I think that was the big thing. How do we stay alive by cutting costs?

Speaker 2

And it was not the focus on growing some of the brands, growing percent of the businesses and there's a lot of legacy stuff out there. I think now it's now time to take HEXO to the next step with its brands, with its products, with its strains and with its abilities and we really have seen that. Blair, you want to add to that?

Speaker 7

Yes. Thanks, everyone, and thanks for the color, Aaron. Overall, I would say we mentioned earlier about the complementariness 3rd categories. HEXO strength in straight edge pre roll, there are strength in oils And then some of their strength in flower, especially in mainstream flower with the reticam brand. So the number one thing for us, which I think we bring to the table is the Tilray market coverage.

Speaker 7

We have industry leading coverage. We're going to be able to up the number of distribution points, up the number of sales calls and overall up the number of time that the HEXO brands get talked about. And we think that's going to provide an upside across the board for both of us. And it's going to make conversations with retailers much more valuable for them and us. And so I really see a good benefit for HEXO on that front.

Speaker 2

And Aaron, I think what retailers want to see is a strong Canadian market. They want to see a strong leader that's going to set the path here for growth. They're going to see a strong leader that's going to want innovation And going to be able to invest in brands, invest in product, invest in innovation, invest in quality and control. And Tilray is ready to do that. So and like I said, if you come back and look after Tilray, there's a lot of other great companies But I think like anything, whether it's the soda industry, whether it's consumer packaged goods industry, there's got to be a leader out there that really can evolve and change the industry.

Speaker 2

And I think we have the infrastructure in place in sales, marketing, distribution, grow, innovation to really quarter? Full in HEXO, which we did with Tilray. And 1 plus 1 hopefully is going to equal 5.

Speaker 7

Good, great. Thanks for that color. That's really helpful. Just one for me. On the $25,000,000 cost synergies, can you provide some detail on how much of that split between COGS and SG and A and then just timing of when you expect that to be realized?

Speaker 7

Thank you.

Speaker 2

So the $25,000,000 on synergies It's just $25,000,000 I mean, on top of that, you get them once. And then after that, it's the contribution margin that we start to get From the operation of the businesses.

Speaker 7

Okay. All right. Great. Thanks. And I'll go by the queue.

Operator

Thank you. And our next question is from Tamy Chen with BMO Capital Markets. Please proceed with your question.

Speaker 8

Thanks. I just have one question and it's about your footprint in Canada. I'm curious to hear your perspective on why not consider possibly reducing the square footage, I said, permanently because the Canadian market, as you said, is quite challenged. It's taken a while for some of the competitors To exit the industry, and you have a pretty sizable footprint. I'm not sure how much you're able to That's essentially via that produce initiative that you're talking about.

Speaker 8

So Erwin, are you able to just elaborate a bit more on how you think about that? And I also wonder, being a wholesaler for other LPs, like aren't you essentially aiding some of your competitors through that initiative? Thanks.

Speaker 2

Quarter? Amy, really good question. And between all our growth facilities today, I mean, it's probably 4,500,000 to 5,000,000 square feet for a Canadian market. That's a lot of growth facilities, okay? So with that, you're 100% right.

Speaker 2

And these facilities, I mean, the HEXO facility that was built, It was probably a $250,000,000 of an asset that was spent there. So it's an incredible asset that has a lot of other value In greenhouses that there's tremendous demand out there for premium vegetables and fruit and vegetables. Yes, it's not the same margin, But again, we're not growing cannabis and put in warehouses, okay. And so when I mentioned on my last call, it's amazing how many calls I got from retailers asking me when we're getting into that. So absolutely.

Speaker 2

And we are not in the wholesale business. The name of our company is Tilray Brands And we're out there to build brands. And we're not out there to be a wholesaler and a grower to cannabis and enable other cannabis companies to have product. So there is a big opportunity with Maison. It's a state of the art facility and we're going to look to do other things and just grow cannabis there.

Speaker 8

Okay. I thought I heard earlier that quarter. In the quarter, you had some discussions with other producers. Is that referring to cannabis LPs?

Speaker 2

Well, we've had discussions for some other cannabis, but that's not going to be a major part of our business. We have a major canning line in London, Ontario. We'd look to potentially do some canning for Other companies out there, we have the ability to do edibles, but that's not if you come back and look at our business today, our business is to build brands. Our business is to grow products for ourselves, not be that 3rd party grower out there. I will tell you we'll do some of that, But ultimately, that's not a big part of our business planning going forward.

Speaker 8

Okay. I understand. Thank you.

Speaker 2

Quarter? Thank you.

Operator

Thank you. And our next question is from Federico Gomez with ATB Capital Circuit. Please proceed with your question.

Speaker 9

Hi, good evening. Thank you for taking my question. I just have one question, maybe just moving away from the HEXO deal. Just on the international side, we've seen some news out of year. Recently that could mean a delay in terms of full scale legalization in that country.

Speaker 9

I'm just curious what sort of impact you believe that that could have in other countries legalizing cannabis in Europe. Will that delay that? And How does that impact your view of those markets and your international strategy? Thank you.

Speaker 2

Frederico, good afternoon. I'm going to let Denise answer that in a second. The only thing I'll say is this here. I I mean, yes, there's a delay, but there's still lots of discussion. But you got to remember, in the marketplace, even though it's medical cannabis, There's a big percentage of those consumers that are getting medical cards or getting prescriptions for recreational, okay.

Speaker 2

And that continues to grow tremendously. So and ultimately, I think, Germany, there's something will happen. Listen, we're seeing medical cannabis ultimately will be legal in France. A country like Poland, We're seeing tremendous growth in countries like that. Denise?

Speaker 10

Yes. Thank you, Erwin. So just building on Erwin's answer. So You are right. There seems like there is a little bit of a delay as Germany works with the EU in order to determine a framework that works both for Germany as well as the rest of the European Union.

Speaker 10

And we've recently heard from Health Minister Lauterbach That they're working on a legislative scheme that would provide legalization as broadly as possible, but really Trying to not run afoul of the EU rule. So we're waiting to hear what that framework looks like. They were supposed to release something last week that got We're hoping to see something soon. But as Erwin mentioned, we're not waiting for adult use legalization in order to really continue to grow and look to expand our business. Yes, we are very well 30.5% for adult use, depending upon when it happens.

Speaker 10

And I would say when it will happen at some point because we do have our 2 EU GMP facilities, 1 in Germany, 1 in Portugal. We have our distribution network and we also have the expertise that we leverage from our Canadian colleagues who have been living in an adult use federal legalization market for several years now. And in the event that the scheme says that only in country cultivation is allowed in Germany. We are only 1 of 3 companies that actually have a facility in Germany today. So we're set up depending upon several different ways of the regulations could shake out.

Speaker 10

But as Erwin mentioned, even if we never have adult use, we are very well set up for medical. We have a brand that is considered to be highly reputable based on the feedback that we received from healthcare professionals, from government regulators, from patients, we're synonymous with very high quality, sustainable consistent medical cannabis. We will continue to grow that business and look to see how do we continue to succeed without the legalization of adult use.

Speaker 2

I think the big thing is today, we have facilities both in Portugal and Germany. To go and really build out facilities and to Have that catalyst there would take anybody else a long, long time. So we have infrastructure, we have the distribution with CC Pharma. We have, as Denise said, the brands in place. We have the know how.

Speaker 2

We have relationships with the government. So it's just a matter of time. But in the meantime, the growth today is coming from the medical business, quasi legal rec business. And that's ultimately what's happening in that marketplace.

Speaker 9

Thank you for that. I'll hop back in the queue.

Speaker 7

Please.

Operator

Thank you. Thank you. Our next question is from John Zamparo with CIBC. Please proceed with your question.

Speaker 7

Thanks. Good afternoon. I'll stick to one also since we're past an hour, And it's back to the HEXO deal. I think most of us or maybe all of us are of the view there needs to be more consolidation in this sector. But at the same time, acquisitions in gaining cannabis historically haven't really lived up to expectations.

Speaker 7

Typically, that seems to be because sales fall at acquired brands post acquisition and I think about the Aphria Tilray merger even with the $100,000,000 plus of cost synergies, EBITDA is similar to where it was before that merger and the Tilray legacy brands retail sales declined meaningfully. So I wonder why you expect this deal to be different And specifically, what can you share that you've learned from the Aphria Tilray merger that you think can help avoid HEXO's revenues from falling off and help you make the HEXO deal more quarter? Thank you.

Speaker 2

So every time we do a deal, we learn from it, John, and I think that's important. And I think going back and looking at The Tilray Aphria deal at the time, number 1, there was a lot less LPs out there. Secondly, It was during COVID it happened and purposely we eliminated a lot of strains. We eliminated A lot of SKUs out there to go ahead with it. And I think the big thing on Tilray was Ultimately, it's medical business, it's European business, it's canning business.

Speaker 2

There was just other attributes that complemented the businesses. Now With that, we had price compression this year close to $30,000,000 price compression last year and you didn't have 1,000 LPs. So I think it's just different times. Ultimately, you come back and look at value. I mean, again, Tilray shareholders are getting great value here if you compare to what ultimately, you know, Redican sold to for HEXO quarter?

Speaker 2

At one time. And you come back and look at multiples that have been paid for other deals out there and what we're paying. Tilray's shareholders are getting incredible value here. Listen, we have to execute. We have to make sure we get beyond 13%, 14% share.

Speaker 2

We have to get these synergies and savings. But ultimately, it's there for us to go get and do. And I have said in previous calls, I wanted a 15% to 20% share. You're not getting a 15% to 20% share without buying someone With so many LPs. I was talking through with Carl today, how hard it used to be to get a license.

Speaker 2

It's so much easier to get a license today in the Canadian market to produce cannabis. So I think that's going to change. And I think ultimately, It's going to deter a lot of these smaller growers out there when you see somebody today quarter. With the size of Tilray out there, that's well capitalized on a balance sheet, got the brands that it does, got the grow facilities and the processing facilities To be out there. Listen, there's always opportunities out there for craft growers.

Speaker 2

There's always opportunities out there for small growers and small companies. But again, we got to make it happen. It's just not going to be handed to us on the silver platter either. And as we go into the different provinces, We got to make sure we got our strategy and story right and we got to make sure consumers want our brands. And I got to tell you, the Redican brand, great brand.

Operator

A lot

Speaker 2

of the HEXO brands are great brands. So I think the 3 of us coming together as one is You know, a big thing for the Canadian market.

Speaker 7

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

Speaker 2

Thank

Operator

you. Thank you. Our next question is from Michael Lavery with Piper Sandler. Please proceed with your question.

Speaker 3

Thank you. Good evening. Just wanted to come back to guidance and Just maybe make sure you can help us understand. It looks like you would need a really significant step up in margins in the 4th quarter And you've got a little bit of momentum there, but it would be far above anything you've done recently. Can you just give us some confidence that that's achievable?

Speaker 3

Quarter?

Speaker 4

Yes. Thanks. Thanks, Michael. Great question. So I think the first thing we had we've had these conversations a couple of times With different people.

Speaker 4

Few things to note. First one is that Q4 is traditionally The largest quarter of the year for the beverage alcohol category, which is really just inside of the beer division, More so than Breckenridge. And it's that lead in and the pipeline fill for the summer. And We saw that in and everyone will see it in Montauk's revenue When we did our diligence on Montauk and we've seen it every year that we've owned Sweetwater. So we have some expectations for Significantly improved EBITDA inside of the beverage alcohol division in Q4.

Speaker 4

When you look at the cannabis division, I I think we've got a few sorry, we have 2 or 3 things that are happening at the same time in the quarter. The first one is, As we've continued to reduce costs, a lot of those cost savings have just started to kind of finally hit inside of Q3 and you're going to see the benefit of those in Q4, That further reduction of costs. The second piece is that Q4 is our best quarter during the year for cultivation And we see improvements in gross margin every year in Q4 as a direct result of that. I think you've also seen some of the items that are in the press release today in terms of different pieces that are going on with HEXO that will all happen in the Q4. And So when you combine all of those things together, the improving results we've seen in the distribution business in the last couple quarters as they made those major changes and remove some of their product lines are really what's driving our belief and The calculation of our revised guidance.

Speaker 6

And I think some

Speaker 2

of the biggest thing Carl said, as we started the cost savings, we're starting to see Those cost savings come into effect. The second thing is price compression. The big price compression, basically the $24,000,000 were in the first 2 months. Now those prices are in place, but you're seeing a lot less price compression that's out there today. And price compression comes right off, EBITDA comes right off the bottom line.

Speaker 2

So with that, we don't expect To see price compression out there. Listen, we're looking at is there an opportunity for price increases out there where we could get it if it made sense. So there's a lot in the Q4, a lot of great things happening at Sweetwater. We get a full quarter Montauk and growing the distribution there. We just rolled out our Breckenridge distillery products Through R and D and getting a full benefit of that.

Speaker 2

So there's a lot of things in place as I talked about. Europe, We had some bumps in Europe. Europe is really hitting on all cylinders today. I think there's some great things happening in our CEC Pharma business. You heard me talk about Poland, you heard us talk about some of the other growth that's happening there.

Speaker 2

Denise and team have done a great job of taking costs out of Europe. We're looking for $8,000,000 of costs. We got $3,000,000 to $4,000,000 of it already. So we'll see the benefits of that. So there's a lot of Moving pieces and there's a lot, yes, happening in our Q4.

Speaker 3

Okay. That's helpful. And I just want to follow-up on Tammy's question. You said yourself how just what a big number the 4,500,000 to 5,000,000 square feet is and You mentioned some berries and vegetables you can grow at HEXO's facility. Why not just cut capacity.

Speaker 3

Is are vegetables really so interesting that it's worth hanging on to that much Growing space?

Speaker 2

So number 1, we have some incredible facilities with some incredible value there, okay? So Why just close those facilities when we see demands in the market for categories that really the market needs it? So if we can produce high end vegetables out there where there is a big market and could sell up to multiple retailers And why just get rid of these facilities and close them down when a lot of money has been spent on them and it can put us in unique businesses. And you know what, If there's a time that we're going to need them again for growing cannabis, they're available to us. So I think you've seen other cannabis companies out there Sell these assets offer basically nothing.

Speaker 2

These are assets where a lot of money was spent on them and there's other Uses to these and that's what we're going to look at other uses for these facilities.

Speaker 3

Okay, thanks.

Speaker 2

Thank you.

Operator

Thank you. Our next question is from Matt Begley with Canaccord. Please proceed with your question. Hi, this is Yaelin Tang on for Matt Bottomley. Thank you Just one from me here on the cannabis adjusted gross margins.

Operator

This line item seems to have increased by 10% sequentially. So I was just wondering if you could provide any puts or takes from the quarter on what contributed to the expansion on this margin And how we should think about the cannabis margins going forward, especially with respect to the HEXO acquisition in terms of how onboarding their business would impact the pro form a margins? Thanks.

Speaker 4

So Cannabis margin is up from the prior year like 47 percent it's up to 47% from 33%. And a big reason for that increase is the HEXO advisory fee, right? And so we've been publishing adjusted cannabis gross profit numbers to help people understand what that difference is. And so when you adjust out For the advisory fee, that gross margin is actually 35%. So it's relatively consistent with the prior year, but it is up.

Operator

Okay. And just second part of my question would just be how we should be thinking about the margin profile going forward with the HEXO acquisition in terms of how we should expect their operations 2 have an impact on the pro form a gross margin? Thanks.

Speaker 4

So on a pro form a basis, we're not anticipating a significant change in the margin profile. As Erwin talked about, we see great opportunities with the reticam facility and its low cost production That it has particularly matched against the selling prices that they're able to achieve from their products. And we've talked about the fact we're looking to use Misson In a different capacity and so it would not be included in that number.

Operator

Okay, thanks. Quarter. Thank you. That concludes our analyst questions. We will now proceed with questions submitted by stockholders on the SAI Technologies platform.

Operator

Karen, I will pass it over to you.

Speaker 1

Thank you, operator. And the first question from the SAI Technologies platform is

Operator

what are

Speaker 1

you doing to improve shareholder value?

Speaker 2

So number 1, I am not happy at all about our stock price and I don't think it truly reflects what the value is that we're building for our shareholders today. And you think about Tilray, Aphria, now HEXO ultimately, We've been around 4 years and you think about the assets that we own, the countries that we're in from a global and what we're building out in brands. And I think we're doing everything we can. I have an incredible team that I work with. We have some great brands.

Speaker 2

We have a really good strategy in place. Not everything has worked out on a timing in regards to legalization, Safe Bank Act and there are things that sometimes are out of our control. But with that, we are trying to build out with those shareholder value. And as I've said before, we have number one share in Canada. We're the number one cannabis cup in Europe.

Speaker 2

We have some of the top beers in craft beer in the Southeast in Georgia quarter? And number 10 in the country. We got some great growth going on with Montauk. And to be named the world's best whiskey out there quarter is a major, major accomplishment. And then we have a great wellness brand that when we acquired it was losing money and now the team has turned that around.

Speaker 2

So I think There's a lot in place we're doing to really improve our shareholder value. And I will tell you, quarter? This team is working hard for our shareholders, which we all are.

Speaker 1

Thank you. And the second and last question is, quarter. Mr. Irwin, the CEO holds around 108,000 shares of Tilray and others on the Board only hold around 10,000 shares. Why does the CEO and Board have such a lack of holding in their own company?

Speaker 2

I think somebody got the wrong numbers there. First of all, it's Mr. Simon, not Mr. Irwin. And Right now between vested and non vested shares, I think I hold about 3,600,000 shares in stock options.

Speaker 2

I've never sold a share, not my intention to sell shares. One of the big things to compensate our employees Is part of owning stock and being part of a stock ownership plan. So that is very much what our plan is. I know there's a lot of why aren't we buying back stock, but I think right now as a growth company investing our money back into acquisitions, back into the business quarter to get the growth to return to our shareholders. With that, I want to thank you all for joining us today, Monday, April 10.

Speaker 2

There was a lot of news coming out of here. As I always say, there are some great things that happened. There are some good things and we recognize the challenges out there And we will recognize the challenges in today's environment. I got to tell you, I've been doing this for a long time. Absolutely, the cannabis industry is a Tough industry, but there's no easy industry.

Speaker 2

But we recognize the challenges out there. In the meantime, considering where Aphria was quarter back in 2019 and where Aphria, Tilray and now HEXA will be is a tremendous accomplishment for us As that low cost producer is that company that has the brands, that has the infrastructure in place to sell market grow And the industry is changing dramatically. But stepping back and looking at Tilray today, we were upfront quarter. To diversify, we knew we couldn't commit to the U. S.

Speaker 2

And touch a plan, but we have a very successful CPG business with our beer business with our Bourbon business and our wellness food businesses. We have a very strong business in Europe with our CC Pharma, which originally we wondered why we own it. But hey, it sells into 13,000 drugstore. It's very much EBITDA positive. It's a good business.

Speaker 2

Quarter? And with Europe changing dramatically and challenges in the European market, whether it's Israel, what the team has really done over there is taking costs out and has gone into new markets like Poland, Czech Republic and really have expanded its distribution. And Europe will legalize one day or there'll be more countries That will sell cannabis ultimately that gets converted to the recreational market. So with that, I'm excited about the opportunities quarter. The businesses that we have in front of us, the diversified businesses, we have a strong balance sheet with over $400 plus 1,000,000 of cash.

Speaker 2

Quarter. As Carl talked about, we expect to be free cash flow positive this year. And trust me, we've been out in front quarter of ensuring that we're cutting costs. And you don't hear me announcing today that we're doing all these layoffs and cutbacks because we've been focused on cost containment throughout the last couple of years within the Tilray businesses. We want to reward our shareholders.

Speaker 2

Our shareholders are the key and I want to thank you For the support, as we went out there to get more shares, I want to thank you for sticking with us. I want to thank you for being there. When the stock goes down, it's not fun. But I know as shareholders, every day we wake up, we want to reward our shareholders and hopefully you'll see that one day. Quarter.

Speaker 2

And to our consumers that buy our products, I can rest assure you whether it's our beer or bourbon or food or our cannabis, Quality, quality, quality and that's built around our brands to ensure that we're putting good, safe products out there for the consumer to enjoy. And that's something that's the utmost importance within Tilray. As I said, for 4 years old, we've done a lot quarter. And we are a brand that's well known. We are businesses with well known brands and there's a lot more to come.

Speaker 2

With HEXO, I am really excited about the opportunities with HEXO. Got to know the team over the last 9 months, got to work with them. We got to see the inner workings of HEXO. And I want to welcome all the HEXO employees to Tilray once this deal closes. And I got to tell you, quarter?

Speaker 2

It's going to be exciting as HEXO, Tilray and Aphria come together. A lot of work went into this quarter. And a lot of work went into make it happen. First, I want to thank my fellow Tilray employees that worked around the clock, Whether it's Easter, Passover weekend or whenever to make sure this deal happened and happened right and the diligence and everything that goes into it. I want to thank our Board of Directors for all their support to ensure that we were doing the right things, ask the right questions, go through the right governance.

Speaker 2

I want to thank the HEXO Board that spent endless hours to ensure the HEXO shareholders were rewarded. Mark Entesales, The Chairman, thank you. And I sound like I'm at the Globe's thanking people, but and Charlie Bowman, their CEO and many, many other HEXO employees quarter to make sure this happened. So with that, hopefully the next time I talk to you, the HEXO deal has closed quarter and we move forward. With that, hopefully everybody has a great evening, had a great Easter vacation and look forward to speaking to you soon.

Speaker 2

And again, thank you very much for your support. Good night.

Operator

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

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