Tilray Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 13 speakers on the call.

Operator

Hello, and thank you for joining today's conference call to discuss Tilray Brands Inc. Financial Results for the Fiscal Year 2023 and 4th Quarter Ended May 31, 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session for analysts and investment firms conducted via audio and participating retail shareholders conducted via the SAI Technologies platform. Questions submitted and uploaded through the SAIC Technologies platform has already concluded and the company will read aloud an answer to top questions.

Operator

It's now my pleasure to turn the call over to Ms. Narita. Please go ahead.

Speaker 1

Good morning, everyone. By now, you should have access to our earnings press release, which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Quarter. Please note that during today's call, we will be referring to various non GAAP financial measures that 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 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 and uncertainties associated with such forward looking statements. Today, you will hear from key members of our senior leadership team. Irwin Simon, Chairman and Chief Executive Officer, who will begin with opening remarks and Carl Merton, Chief Financial Officer, will provide a financial review and issue our annual guidance for the 2024 fiscal year.

Speaker 1

Also joining us for the question and answer segment are Denise Paltuschak, Chief Strategy Officer and Head of International Blair MacNeil, President, Tilray Canada and Ty Gilmore, President of our U. S. Beer Business. And now, I'd like to turn the call over to Tilray Brands' Chairman and CEO, Erwin Simon. Quarter.

Speaker 2

Thank you, Barron, and good morning, everyone. We appreciate you joining our call today for the presentation of Tilray Brands' 2023 fiscal year financial results. When I first joined the Aphria team in 2018, Aphria was singularly a Canadian cannabis LP with approximately $50,000,000 in annual revenue and minimal cash, now close to $630,000,000 in revenue and almost $500,000,000 in cash and marketable securities. Boy, have we come a long way. Today, Tilray Brands is one of the most diversified global cannabis lifestyle and CPG companies with 4 distinct and complementary business segments.

Speaker 2

Cannabis, including medical and adult use, beverage alcohol, wellness and medical distribution, not a bad place to be. I'm very proud of what this team has been able to accomplish in just 4 years. Tilray's diversification is purposeful, strategic adaptation to current market realities given the continued delays in U. S. Federal cannabis legalization and more recently delays in adult use legalization in Germany.

Speaker 2

Tilray is not building its entire business model around the eventual promise of legalization, but rather unlike others in our sector, we are diversifying beyond cannabis by building a strong balanced portfolio consisting of successful, profitable, standalone beverage alcohol and wellness brands in the U. S, along with a strategic distribution business in Europe, each with high growth opportunities in their own right. Legalization will happen one day, but we're not waiting for it. We're not dependent upon it. If and when federal cannabis legalization does We are ready to dominate as a leading global CPG company with the resources, infrastructure and operations, the distribution of brands, sales and marketing know how to lead the revolution of cannabis CPG in the mainstream world.

Speaker 2

Tilray Brands portfolio today reflects the successful integration of key strategic acquisition that have enabled us to both grow our top line and deliver substantial cost savings through these synergies. Today across our core business segments Tilray is one of the leading and strongest cannabis LPs with approximately $660,000,000 in annual revenue on a constant currency basis. The most profitable LP with approximately $61,000,000 in adjusted EBITDA, the cannabis market leader in Canada and the largest federally legal cannabis market in the world with approximately 13% cannabis market share including HEXO Brands. The market leader in medical cannabis across Europe with leading market share in Germany, Poland and Luxembourg, a leader in the hemp food industry with a 51% branded market share with Manitoba Harvest. And last but not least, a leader in the craft beverage alcohol industry with a growing leadership position in the U.

Speaker 2

S. Craft beer industry as the 9th largest craft brewer by sales volume. Our vision is to inspire and empower the worldwide community to live their very best lives, enhanced by moments of connection and well-being, and we have not wavered, nor has our overarching objective to deliver sustainable long term shareholder value and growth. We remain wholly committed to delivering for our shareholders tangible progress against our key performance goals by focusing on our core business fundamentals, which are maximizing revenue growth and profitability, realizing the benefits of optimized asset utilization and cost management to ensure that we maintain a low cost, high efficient cost structure. And number 3, of course, continuing to strengthen our industry leading balance sheet and cash position.

Speaker 2

Case in point, in quarter 4 Tilray reported record financial results and delivered on projections of positive adjusted free cash flow and EBITDA guidance with Q4 net revenue of $184,000,000 93% growth in positive adjusted EBITDA of $22,000,000 Our total revenue for the year ended May 31, 2023 on a constant currency basis rose 6% to $668,000,000 in

Speaker 3

the prior

Speaker 2

year. Adjusted gross profit grew 11% to $206,000,000 and adjusted gross margin improved to 33% from 30% in the prior year. We generated $61,000,000 in adjusted EBITDA, 28% or $13,000,000 higher than last year and within our annual guided range. On top of these results, we have maintained a strong foundation with almost $500,000,000 in cash and marketable securities today. Turning now to our business segments.

Speaker 2

Cannabis was our 2nd largest segment by revenue and comprised of 35% of our total mix. In Canada, within our cannabis segment, Tilray remains the market share leader with approximately 13% year in the month of June July. Revenue from Canadian adult use cannabis increased due to new product innovation and performances and the favorable impact of the HEXO arrangement, which was partially offset by the negative impact of price compression and challenges in the province of Quebec. Tilray has paid approximately $120,000,000 in Canadian excise tax and corporate income tax to the Canadian government in fiscal 2023. And we expect this to increase to CAD150 1,000,000 with the addition of HEXO.

Speaker 2

The imbalanced tax burden is an added challenge we continue to face in the Canadian cannabis industry with the majority of these taxes coming off top line sales and of course impacting the bottom line. I have said this before, but it merits repeating roughly 1,000 LPs, 3,700 retail stores are far too many. We need consolidation for the Canadian market to stabilize. We remain confident this consolidation and rightsizing will continue to take hold over the coming quarters. Last month, we set the stage to drive the next evolution of Canadian cannabis by closing on our accretive acquisition of HEXO, which has strengthened our position across Canada.

Speaker 2

In doing so, we brought its leading cannabis brands into our operations and increased Tilray's number one leading cannabis market share to 13%, 5.77 pips ahead of their next LP. From a product category perspective, Tilray continues to lead cannabis sales at every market across Canada. Tilray Now is number 1 in flower, oils, concentrates, number 2 in pre rolls and number 4 in vapes in the top 10 of all categories. In fiscal 2023, Tilray's Canadian cannabis product innovation contribute CAD26.2 million to our adult use sales. In quarter 4, new product Innovation was 42% of our business led by our market leading adult use brands, Good Supply.

Speaker 2

With the launch of Good Supply Monsters and Caniga with the launch of Caniga Darts, the first two of their kind of products in the Canadian cannabis market. We've also prioritized the realization of additional operating cost synergies in excess of $22,000,000 on an annualized pre tax basis of our $30,000,000 plan in Canada, eliminating duplication in corporate costs, SG and A and realizes substantial synergies in cultivation, packaging, logistics, extraction and quality control. Again, before I joined the company, the legacy Aphria Tilray HEXO management teams spent over $1,000,000,000 on greenhouse and infrastructure. Today, our management team and I are laser focused on optimizing our operation and efficiencies, utilizing and repurposing these facilities into profitable business and assets, including our new opportunities with fruit and vegetables cultivation, which is needed in Canada and especially in the Quebec market. Moving forward, we'll continue to strengthen our Canadian position with extensive commercialization rigor while capturing substantial value from HEXO's portfolio and our combined scale.

Speaker 2

We expect our newly expanded portfolio of Canadian cannabis brands to hit approximately $650,000,000 at retail with our biggest brands, good supply and reticant leading the charge with approximately $430,000,000 at retail combined. In international cannabis. In fiscal 2023, we turned our business around. We changed and upgraded our international management teams across key markets. We improved our profitability and positive cash flow, expanded distribution within established international markets and added countries like Italy, Poland, Czech Republic, which offset our decision not to sell within Israel.

Speaker 2

As we look to fiscal 2024, our international cannabis business, we're focused on solidifying our leadership position and growing market share in medical cannabis in the countries which we participate in today, as well achieving early mover advantage in new countries as medical legalization continues to take hold. We are very well positioned to do this based on 3 core strengths. Our high quality medical cannabis brands, which are trusted by patients, healthcare professionals and government officials around the world. Our best in class cultivation facilities in Portugal and Germany, as well as leveraging our Canadian cannabis facilities. And last but not least, our medical distribution network led by our integrated CC Pharma and medical cannabis teams with a relationship across 13,000 pharmacies in Germany.

Speaker 2

Based on these trends to date, we've built momentum in Poland and more recently received market authorization from Italy's Ministry of Health to distribute 3 new medical cannabis compounds through our wholly owned subsidiary FL Group. FL Group is one of the only 5 companies in Italy that can import and distribute MediGo cannabis. We also forged a strategic partnership to market and educate over 11,000 pharmacies across Italy on the benefits of medical cannabis and expand our footprint across the Czech Republic through a new export and distribution partnership. Beyond that the strong platform we built in our medical cannabis coupled with our knowledge of stemming from our adult use market leadership in Canada and our deep CPG expertise of our leadership team positions us well to capture the adult use opportunity as it materializes in Germany and elsewhere. And in the event that only in country cultivation is allowed in Germany, we are one of the 3 companies that actually have a facility here today.

Speaker 2

So we're well situated and have the optimal flexibility to pivot in response to any change in pending regulation. From a bottom line perspective in Europe, we are laser focused on optimizing our platform, working to remove approximately $8,000,000 of costs from our business, of which we've already completed over 6,000,000 In fiscal year 2023, CC Pharma, which will be rebranded to Tilray Pharma, our medical distribution platform for traditional branded and generic pharmaceuticals as well as medical cannabis grew 10% in constant currency and generated $285,000,000 in revenue, representing 43% of our top line and expanded its gross We see this as a major platform to expand into distribution of cannabis and wellness products throughout Europe. Tilray Pharma provides the benefit of an established pharmaceutical relationship and differentiate it through customer centric services and drive still higher profit margins through the ongoing positive change in its product assortment. While we're not planning our business around adult use legalization in Germany, we note the proposed legislation proposes for medical cannabis to be declassified as a narcotic and maybe prescribed through a medical prescription, thereby opening the pathway to accessibility to a larger patient population. We are using our Tilray Pharma distribution platform and relationships to help expand our medical cannabis business throughout Europe and at the same time using this medical distribution company to sell traditional medicines in Germany.

Speaker 2

Now turning to our beverage alcohol and CPG portfolio. While participation in adult use cannabis markets are integral to our long term strategy, let me reiterate that we will not engage business that touched the plant if cannabis remains federally illegal in the U. S. In the meantime, We are optimizing the value of our existing U. S.

Speaker 2

Businesses, which consist of craft beverage, alcohol brands and wellness brands, all which are delivering solid performances today and have the potential for significant growth in the near and long term future. Tilray's growing U. S. Beverage alcohol segment includes strong award winning brands, Sweetwater Brewing Company, Montauk Brewing Company, Alpine Beer Company, Green Flash Brewing Company, Breckenridge Distillery and the highly award spirits brands and world's best blended whiskey. For fiscal year 2023, Beverage alcohol grew 33 percent to $95,100,000 for the year.

Speaker 2

Sweetwater saw revenue gains driven by partnerships with key distributors, United Distributors, Eagle Rock Distribution, Reyes Beverage Group, the largest beer distributor in the U. S. Creativity is a hallmark of our beverage alcohol brands, resulted in a steady stream of product launches that drive ongoing attention and excitement for our brands. In the last few months, Sweetwater released a line of ready to drink mixed cocktails in a can, a red, white and blue American lager in a Colorado Orange Citrus Ale, exclusively in the Colorado market. Since our acquisition of Montauk Brewing, we've expanded across New York, New Jersey and most recently Connecticut and Rhode Island.

Speaker 2

We are confident It can be a national brand by leveraging our national beverage alcohol infrastructure and we're working quickly towards that. Our U. S. Beer business also launched Good Supply Beer, a new light beer and premium lager brewed brand for easy drinking at a refreshing price. Good supply beer is available year round in a 16 ounce can across Georgia, Connecticut, New York with added distribution rolling out this summer.

Speaker 2

Finally, our Bourbon Spirits brand Breckenridge Distillery continues to build momentum. It is one of the most awarded craft distilleries in the U. S. And firmly established its position as a category leader. Today, Brackenridge Distillery is distributed in all 50 states and aligned nationally with RNDC, including a distribution contract guaranteeing nearly 30% sales growth annually.

Speaker 2

Our beverage, alcohol and wellness brands can also be leveraged for cannabis related opportunities when the Time comes through the creation of broad set cannabis infused CPG brands and products, which can be backed by their existing distribution and marketing networks. Turning now to our wellness segment, our Manitoba Hemp business has greater than 50% market share with a branded hemp seed in the U. S, including strong presence in the mulo and natural channels And has Canadian market share of nearly 80%. Our Tilray wellness business continues to deliver positive EBITDA, free cash flow with Q4 being our strongest quarter of fiscal 2023. Our wellness platform remains an important part of our U.

Speaker 2

S. Strategy with our clear growth drivers in the near and long term, including an ever increasing consumer interest in hemp products, given the key role they can play in plant based low carb and keto diets. Distribution expansion including Whole Foods Markets and Walmart, demonstrating the relevance of hemp products across the channels and consumer demographics. A strong innovation pipeline, including the recent launch of CBD wellness beverages like Happy Flower that meet the needs of Gen Z and millennial consumers. And with that, we're excited by the opportunities provided by our diversified businesses.

Speaker 2

And we remain steadfast in delivering on our strategic priorities, maximizing revenue and growth optimization and maintaining our balance sheet strength. I will now turn the call over to Carl to discuss the financials in greater detail. Carl?

Speaker 3

Thank you, Erwin. I am pleased to report that we exceeded both of our financial guidance targets that we laid out for the fiscal year. With respect to adjusted EBITDA, we exceeded the low end of our target range of $60,000,000 to $66,000,000 reporting $61,500,000 and with respect to adjusted free cash flow, we exceeded our target of positive adjusted free cash flow reporting $1,300,000 for the year. More importantly, we generated over $40,000,000 of adjusted free cash flow in the quarter. And on a fiscal year to fiscal year basis, we improved our adjusted free cash flow by almost $200,000,000 These accomplishments are a testament to the hard work by our team managing operating expenses and cash flow, along with our determination to control the controllable.

Speaker 3

At the same time, this strengthens our balance sheet, which I will explain shortly. But first, as a reminder, our financial results are presented in accordance with U. S. GAAP and in U. S.

Speaker 3

Dollars, and we will reference both GAAP and non GAAP adjusted results throughout our discussion. And as Baron mentioned earlier, our earnings press release contains a reconciliation of our reported results under GAAP to the non GAAP measures identified during our remarks. Before reviewing our annual and quarterly performances, I did want to briefly discuss our favorable refinancing in late May, which further strengthened our balance sheet, extended maturity to 2027 and locked in a lower fixed interest rate of 5.2%. Recall that as of February 28, 2023, we had just under $140,000,000 of Tilray convertible notes due on October 1, 2023, and just under $260,000,000 of Aphria convertible notes due on June 1, 2024. The refinancing extended out those maturities on $125,000,000 of the convertible notes.

Speaker 3

Rather than using our cash, which we are reserving for investments and strategic acquisitions, we sought to refinance a meaningful portion of our debt. Importantly, we did not do this to raise money for working capital purposes or to pay off previous losses. One of the consistent themes we heard from the institutional investors that purchased the convertible notes was that we were the only company in the world with a presence in cannabis industry that they currently would have invested in because of our history of financial results, the confidence they have in our strategic plan and the management team leading the company as well as the strength of our balance sheet. Those same institutional investors are now net long in our stock. And assuming they convert the notes into common shares, we'll increase the percentage of institutional investors in our stock.

Speaker 3

Let me briefly discuss highlights for the full year before reviewing the Q4 in greater detail. Net revenue for fiscal 2023 was nearly even at $627,100,000 compared to the prior year at $628,400,000 However, in constant currency, net revenue grew 6% to just under $668,000,000 By segment, cannabis net revenue fell 7% year over year or positive 2% on a constant currency basis, inclusive of over $33,000,000 due to price compression in Canada, of which virtually all of this also represented a reduction in EBITDA. And wellness revenue was down 11% year over year or 9% on a constant currency basis. However, distribution revenue was flat, but rose 10% on a constant currency basis and beverage alcohol revenue increased 33%. Gross profit for the year increased 26% to $147,000,000 from $116,800,000 in the prior year and gross margin increased to 23% from 19% in the prior year.

Speaker 3

Adjusted gross profit increased 11% to just over $206,000,000 from $186,000,000 in the prior year and adjusted gross margin expanded 300 basis points to 33%. By segment. Cannabis adjusted gross margin improved due to the HEXO arrangement. Distribution adjusted gross margin improved due to favorable product mix, beverage alcohol adjusted gross margin fell because of margin contributions from the Montauk and Breckenridge acquisitions, which operate at lower margin than Sweetwater, while wellness adjusted gross margin was basically even. Net loss for fiscal 2023 was $1,400,000,000 compared to $434,000,000 in the prior year.

Speaker 3

Net loss for the year is tied to our annual goodwill impairment review as discussed in our previous quarter. From an adjusted net loss perspective, our loss was $0.21 per share compared to $0.38 in the prior year. Adjusted EBITDA for fiscal year 2023 improved to $61,500,000 a record for our company, up 28% from $48,000,000 in the prior year. We have now generated positive adjusted EBITDA in 4 consecutive years. Turning now to the quarter, net revenue increased by 20% to a record amount of $184,200,000 from the prior year quarter.

Speaker 3

On a constant currency basis, net revenue rose 24% to $189,600,000 from $153,300,000 in the prior year quarter. Gross profit for Q4 was $67,100,000 and gross margin was 36% compared to a loss of $67,000,000 and a negative 4% gross margin in the prior year quarter. Adjusted gross profit for Q4 was $68,400,000 up 36% from last year, while adjusted gross margin rose to 37% from 33% in the prior year quarter. Profit and margin gains with a direct result of our implementation of numerous cost saving programs, including offsetting part of our allocated overhead for intentionally reducing cannabis production and contributions from the HEXO arrangement. Recall that when we reported Q4 2022 last summer, we announced a $30,000,000 cost optimization plan.

Speaker 3

Through May 31, we have achieved $22,000,000 on an annualized run rate basis, of which $18,500,000 represented actual cost savings during the current year. Net loss was just under $120,000,000 compared to a net loss of just under $460,000,000 in the prior year quarter. Year. On an adjusted basis, net loss was $30,400,000 or $0.00 per share, an improvement from net loss of $44,100,000 or $0.00 per share in Q4 last year. Adjusted EBITDA almost doubled to a record amount of $22,200,000 from $11,500,000 in the prior year quarter.

Speaker 3

Operating cash flow for Q4 improved by $64,100,000 to $43,600,000 from a loss of $20,500,000 in the prior year quarter. This was the result of improved operating efficiencies realized through our synergy programs and management of our working capital requirements. From a free cash flow perspective, in Q4, we reported $33,300,000 of free cash flow and $43,200,000 of adjusted free cash flow, which excludes growth CapEx. This compares to a negative free cash flow of $24,800,000 in Q4 a year ago. The improvement is due in part to the reduction of working capital.

Speaker 3

Of course, cash used in or provided by working capital changes is expected to fluctuate on a quarter by quarter basis. Note that for the full fiscal year, adjusted free cash flow was positive $1,300,000 representing an almost $200,000,000 improvement from the fiscal year 2022. These metrics certainly demonstrate the steps we have taken to better balance revenue and costs across all our business units. Turning to our business segments. Gross cannabis revenue was comprised of $214,300,000 in Canadian adult use revenue, dollars 43,600,000 in international cannabis revenue, $25,000,000 in Canadian medical cannabis revenue and $1,400,000 from wholesale.

Speaker 3

Excise taxes totaled $63,900,000 so they are clearly a significant impact to our gross revenue. For the full year, we paid almost CAD120 1,000,000 in excise and corporate taxes to the Canadian government. And with the addition of HEXO, expect this to increase to approximately CAD150 1,000,000. This substantial tax burden adds to the challenges facing the cannabis industry today. More importantly, Toure is one of the few licensed producers in Canada that pays taxes when due and is not using the government as a de facto financing arm.

Speaker 3

Q4 net cannabis revenue was $64,400,000 representing a 21% increase from the year ago period. The variance was mostly related to the HEXO arrangement. On a constant currency basis, net cannabis revenue increased by 28.6% as the decline in the Canadian dollar and euro resulted in a $4,100,000 decrease to foreign exchange losses. Price compression while slowing continue to have a marked impact on our results. Cannabis gross profit was $39,500,000 and cannabis gross margin was 61% for the quarter compared to negative $19,100,000 and negative 36% in the prior year quarter.

Speaker 3

Adjusted cannabis gross profit increased $39,500,000 from $28,400,000 in the prior year quarter, while gross margin increased to 61% from 53% in the prior year quarter. The margin improvement was related to continued cost optimizations offset by the impacts of price compression as well as a decrease in the utilization of our cannabis facilities to manage demand requirements. Distribution revenue derived predominantly through CC Pharma increased 18.7 percent to $72,600,000 from $61,200,000 in the prior year quarter, despite the strengthening of the U. S. Dollar relative to the euro.

Speaker 3

On a constant currency basis, revenue would have actually increased 20.1 percent to $73,400,000 for an additional $800,000 of revenue. Distribution gross profit was 6,700,000 and distribution gross margin was 9% compared to a loss of $4,000,000 and negative 7% in the prior year quarter. Adjusted distribution gross profit increased 91.5 percent to $6,700,000 from $3,500,000 in the prior year quarter, while adjusted distribution gross margin increased to 9% from 6% in the prior year period. Similar to Q3, the year over year increases were the result of a positive change in product mix and our focus on higher margin sales, including the decision to exit the medical device reprocessing line. We reiterate our expectation that we can still drive higher business profits even without increasing revenue as our facility is nearly fully utilized.

Speaker 3

Turning to our beverage alcohol segment, we generated $32,400,000 in net revenue, up 42.6% from the prior year quarter of $22,700,000 The positive delta was due to contributions from our Montauk Brewery acquisition last November, extensive product innovation and increased distribution, renewed traction with our Green Flash and Alpine brands and the building acceptance of Sweetwater in California. Beverage alcohol gross profit was $16,600,000 and beverage alcohol gross margin was 51% for Q4 compared to $11,400,000 50% in the prior year quarter. Adjusted beverage alcohol gross profit was $17,800,000 compared to $13,600,000 in the prior year quarter, Well, adjusted gross margin was 55%, down from 60% in the prior year period. The slight margin decline is a result of the Montauk acquisition that was not completed in the prior year comparison and operates at a slightly lower margin than Sweetwater. Finally, wellness segment revenue decreased 8.8 percent to $14,800,000 from $16,200,000 in Q4 last year.

Speaker 3

The decrease in revenue was due to a reduction in customer inventory levels at warehouse locations across North America and a pullback on margin dilutive non branded sales that led to top line decreases in the quarter versus the prior year. Wellness gross profit was $4,400,000 down from $5,000,000 in the prior year quarter and gross margin remained relatively consistent at 30% from 31%, as we countered the impacts of higher input costs of seed ingredients with higher pricing. Our cash and marketable securities balance as of May 31 was 448,500,000 up from $415,900,000 in the year ago period and today sits at approximately $500,000,000 and working capital was $340,100,000 Let's now discuss our guidance for fiscal year 2024, which ends on May 31, 2024. Adjusted EBITDA is expected to be $68,000,000 to $78,000,000 representing a growth of approximately 20% year over year. We are also projecting positive adjusted free cash flow for the year from operations, excluding our cost to integrate HEXO and the cash income taxes we pay at Aphria Diamond.

Speaker 3

To conclude, we delivered on our guidance for fiscal year 2023 and have set the bar even higher for fiscal year 2024. In addition to projecting meaningful growth, we will be continuing to optimize our cost structure, minimize CapEx, improve our industry leading balance sheet and drive additional free cash flow. With that, I will conclude our prepared remarks and open the lines for questions from our covering analysts. Afterwards, we will take a few questions from our shareholders through the SAID platform. Operator, what's the first question?

Operator

Our first question today is coming from Vivien Azer from TD Cowen. Your line is now live.

Speaker 4

Hi, good morning.

Speaker 2

Good morning.

Speaker 4

So, congratulations on the strong print. For us, top line exceeded expectations across every segment, which is quite nice to see. Maybe we can just start with the adult use cannabis segment, best revenue generation you guys have seen in nearly 8 quarters despite the price deflation that you called out. So a 2 part question, please. Number 1, just from a housekeeping standpoint, would you be able to quantify the impact of the price deflation you guys call that out in the last couple of quarterly earnings calls, 1.

Speaker 4

And then number 2, in terms of the overall improvement that you guys are seeing in the business. Can you articulate whether there are any kind of positive mix shift variances that contributed to the strong gross margin for the overall segment? Thank you.

Speaker 2

Good morning, Vivien. I'll jump in for part of But what we've said about $30,000,000 of price compression throughout our fiscal 2023 that hit us and that comes right off top line and the bottom line. And the good news is I feel that is behind us and I think prices have definitely stabilized. In regards to what's growing cannabis and I'm sitting next to Blair McNeil, who runs our Canadian operations here in recreational. We've introduced some great new products.

Speaker 2

We have really come out in regards The potency, the genetics, consumers knowing their genetics, I think consumers are so much more educated about cannabis today. We really improved our distribution. And I think what's important too is our boots on the street working with our butt tenders And getting them educated about our Tilray brands. I got to commend the team for some of the innovation that we come out with. Blair, you want to

Speaker 5

add to that? Yes. Let me say, Vivien, the one thing in terms of your mix shift is you'll see that on Canneka and RIF, we've really grown our mainstream flower presence. With good supply, we know we dominate the value segment. Canica and RIF growth has come right into mainstream higher margins for us.

Speaker 5

So our innovation is really, really driving our P and L right now. In Q4, we had 40% of our sales come from innovation. We had 121 new products launched in fiscal 2023 and we've got a tremendous pipeline built for the future. So we're very, very optimistic about the path forward and our shipments early in Q1 indicate that we'll continue to see that strength.

Speaker 2

And Viby, I think the other important thing is how much full year of those costs coming out and we get to enjoy the next year. And just to be clear, we closed them HEXO in June. So there's no HEXO numbers in here. And actually there's a lot blaring that this team has to do to offset some of the declines on HEXO. We think incredible opportunities with ready can pre rolls, with flower, with oils and edibles.

Speaker 2

So we're excited about what we're seeing. Listen, there's still challenges you heard me say. There's still a lot of LPs out there. There is still a lot of retailers. There's still an illicit market we have to deal with.

Speaker 2

But sitting today with a combined of 13 share. That's almost double what our next competitors and Blair is just sitting here and showing me some new share numbers until Ray Most recent ones just came out and very impressive.

Operator

Thank you. Q and the interest of time, we ask you please ask one question then return to the queue. Our next question is coming from Andrew Carter from Stifel. Your line is now live.

Speaker 6

Hey, yes, thanks. Good morning. So I wanted to ask about adjusted EBITDA base here, dollars 61,500,000 If you strip out kind of the HEXO fees that you've got, which will It'll be a wash on cash flow of course. You go down to like an adjusted EBITDA number of $31,000,000 So I'm getting next year's growth at $38,000,000 to 48, So a couple of things in there. Year 1 HEXO, will it be positive EBITDA, I.

Speaker 6

E. A contribution? Are you expecting a big step change in the Canadian kind of profit base. Could you give us a reminder of how much incremental synergies are left? And also kind of are you leaning on kind of beverage alcohol profit improvements and is there any projected M and A in those numbers?

Speaker 6

Thanks.

Speaker 3

So good morning, Andrew. Just first off, there's no projected M and A in those numbers. With respect to The adjusted EBITDA for HEXO. I mean, yes, that's obviously the current year's statements have the HEXO arrangement in it. Next year, we're going to see HEXO into it.

Speaker 3

We've been very clear that we were going to drive approximately $25,000,000 of synergies through that transaction. I think everybody can kind of take HEXO's run rate at their last reported quarter end, put those two numbers together and we'll understand a little bit better where we're thinking that comes in within the portfolio. But as Blair has already said, we have a significant amount of innovation that is going to continue to drive results in cannabis. We have a significant amount of innovation that drove results this quarter and will continue to drive results in future quarters coming through the beverage alcohol particularly in the beer division. And then as it relates to cost synergies, we have approximately $8,000,000 left to achieve on the cost optimization target from last year on the Canadian cannabis business and $12,000,000 to actually flow through the income statement still to come.

Speaker 2

Andrew, I think the big important thing here, just let me jump in here for a second, is the growth and the opportunities with exo brand. We really think there's a lot we can do with reticant. As you heard me say on this pre rolls and flower, Already we've integrated the sales into our sales organization, our marketing into our marketing organization. Matter of fact, we're sitting in Gatineau, Quebec today, We're doing our call from and already we've eliminated and Blair has confirmed in the 1st month and a half of owning this, We've hit or succeeded our synergies and savings and taking costs out of this business. So with that, yes, there's a lot of wood to chop to achieve that EBITDA.

Speaker 2

But the big thing with HEXO and owning HEXO and operating it, what We're kind of surprised with them. What we like, we like what we've seen is some of the opportunities. HEXO did not have the growth in the Quebec market HEXO is growing in Quebec. It's a Quebec company. We see tremendous opportunities with HEXO in the 2nd biggest market in Canada, the Quebec market.

Speaker 2

And also what we're seeing out west in that. So, we feel good going into this year with a combination of HEXO, Tilray and the old Aphria brands.

Operator

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

Speaker 7

Good morning, guys. Hope all well. I just Wanted to follow-up on Vivien's question around Canadian adult use. So going very well in flower, oils, concentrates, pre rolls where you're number 1. I'm assuming the goal will be to be number 1 across all segments.

Speaker 7

So I was just wondering what you think you need to do in vape, And also the other categories where you're less strong. I mean, anything you want to call out in terms of investment in specific segments, anything you're doing to Thank you.

Speaker 5

Blair? Yes, I'll take that. Thanks, Owen. Great question. I think if you looked at our most recent vape numbers, you would see some meaningful change in how we've gone to market.

Speaker 5

We've had 2 great innovations there. 1 is Rocket Bomb and the other one is Watermelon. They both done very, very well. But overall, we've added hemp mouthpieces to our vapes, we've upgraded our hardware and our potencies across the board have increased tremendously. So Big, big shout out to our extraction team.

Speaker 5

They worked hard in that category. As you know, that's a category over the last little while where we've lost share. So I'm very confident in our abilities and our innovation pipeline on vape. In terms of your question around being number 1 in all categories, There are certain categories still vape pre roll flower that do between 80% 90% depending on the market. So beverages, Edibles and some of the other smaller categories.

Speaker 5

I would say in those categories, we think about margin first and we think about what they add to our business from a margin standpoint and think about how strong we want to be in those categories at that time. And I do see beverages and edibles long term as being recruitment categories. So we'll always have a presence there, but I think we'll think thoughtfully about when we really scale up in those categories.

Operator

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

Speaker 8

Hi, good morning and thank you for the question. I want to turn a bit to Germany. You mentioned before your thoughts on the medical market removal of cannabis from the narcotics list opening up the medical market more in terms of physician adoption and patient growth. So just want to know in terms of your thoughts on that and the potential to offset of the Phase 1 of adult use legalization potentially having an impact on the medical market like we've seen in Canada and other U. S.

Speaker 8

States with adult use slowing medical growth? And then how you're also looking at potentially Phase 2 of Germany legalization opportunities there? Thanks.

Speaker 9

Hi, Erin, it's Denise. So good question. I think when we looked at Germany, if you heard us the last few calls, we were talking about adult use We're getting ready for it. I think at this point, as you've mentioned, we see a delay in any sort of adult use legalization. But as you mentioned, the newest draft legislation talks about the removal of medical cannabis and cannabis in general as a narcotic, which we believe presents a great opportunity to our business.

Speaker 9

We are very well situated from a medical cannabis perspective in the sense that we've got great brands that are trusted by patients, doctors, regulators within Germany. We are one of the only 3 that have a facility within Germany. And so we have very good relationships within country. And so as we look at our medical brands, we will continue to grow our medical brands in the way that we have. We also are very focused on looking at We are calling the patient driven side of the market.

Speaker 9

We're seeing basically a patient driven side where people are very focused on flower, flower quality. And it is more of a wellness health perspective, but not so much, as medically prescription driven where it's looking at condition. It's looking more like at wellness states. And we're going to focus on this tremendously. It will be a different approach from the medical, the purely pharmaceutical base, and we'll be looking at it more from like a wellness perspective at how do we interact with doctors and pharmacies in that way.

Speaker 9

We will be looking at different brands going to market, etcetera. And we actually did this in Australia just this quarter where we launched Broken Coast. So stay tuned.

Speaker 2

I think the most important thing is we're there. We have facilities there already both in Portugal and Germany. We have a distribution with Tilray Pharma, CC Pharma. We have infrastructure on the streets. We're working with the German government in many ways.

Speaker 2

And I think, listen, we're disappointed that if legalization doesn't happen, but there's a second route to recreational through the medical world that we think there's a big market there. And Again, like I said, we're disappointed, but we think there is opportunities in selling a different way as consumers look to get medical, but ultimately using it for recreational.

Operator

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

Speaker 10

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

Speaker 10

Is it just that the compression is reducing? Or are you actually seeing it fully stabilize and hitting a floor? Thank you.

Speaker 3

So Nadine, I think I already answered the question on adjusted EBITDA. Andrew had asked about the EBITDA coming from HEXO in the current year and then how that would evolve next year. And as we've said, we're targeting basically $25,000,000 of synergies off their existing run rate from their last reporting date. That involves a minor decrease in EBITDA coming from HEXO directly over the course of the next year and the rest is being driven by growth within our existing businesses.

Operator

I'll turn

Speaker 3

it to Blair for the question on cannabis.

Speaker 5

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

Speaker 2

But we're also seeing the different governments putting in some pricing there to stabilize pricing. And I think that's going to be important. The Ontario government has just gone ahead with that. So ultimately, and as we see cannibalization out there, we're also going to see LPs go away. And I think that stops a lot of the price compression out there.

Speaker 2

So again, I think I've always said the cannabis industry is one of the only industries that I haven't seen inflation, not price compression, but I think we will see some, but I think it's not the $30,000,000 that we saw this year, nowhere near that. Quarter.

Operator

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

Speaker 11

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

Speaker 11

Thanks.

Speaker 5

Hey, Tammy, it's Blair. This is not a new phenomenon. When you think about the regulatory environment that we and so THC has always been leading that. And if I think back to a year ago, anything over 20%, mid-20s was recognized. Now the potency has gone up.

Speaker 5

And I think what people forget is commercialized cultivation. The greenhouses aren't sitting still. They're all looking at ways to with the yield of the flower. They're looking at ways to improve the qualities of the flower and THC goes along with that. So We don't see it being any different than what it's been in the last 18 months.

Speaker 5

It's an area where we continue to know that We need to be there. We need to be consistent with the market. But ultimately, what we would like to

Operator

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

Speaker 9

Hi, good morning. This is Yaron King on for Beth Bottomley. Thank you for taking my question. I just wanted to come back To Aaron's question about the CC Pharma distribution revenues. For the quarter, it was sequentially up 11%.

Speaker 9

So I guess could you comment on puts or takes from the quarter that drove the sequential increase? And going forward, should we anticipate this top line to grow given that Germany is looking to expand their medical program as part of their Pillar 1 within its recreational legalization plan. Hi. So this is Denise. So I think in terms of the way that we track distribution revenue is actually from quality management pertaining to medical cannabis.

Speaker 9

We track medical cannabis revenue within our cannabis segment and the distribution revenue in our distribution segment. We are not focused on growing top line distribution revenue. Even though you did see a very large increase in distribution revenue. We have made tremendous improvements in the team in terms of procurement and distribution of traditional pharmaceutical products. And so that is the top line growth that you're seeing as long as as well as the mix and the gross margin improvements because we've been focusing on higher margin products.

Speaker 9

Our longer term strategic goals with respect to Tilray Pharma are not necessarily to focus on top line generation in the traditional pharmaceutical area. We will continue to grow the top line, but our you will see more of a growth in the medical cannabis side where we're projecting around a 30% CAGR over the next couple of years. Whereas in distribution, we're focused more on the lower single digit tinkers. But to the pharmacy. And that's the role it will play within our platform.

Operator

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

Speaker 5

Thank you. Good morning. My question is on HEXO and the integration. Historically, sales of acquired brands have fallen pretty meaningfully post acquisition. So I know it's only been a month since you closed that deal, but I wonder what you can say about HEXO sales in the months since you've owned the business either on a retail basis or sell in to wholesalers.

Speaker 5

Quarter. And can you talk about some of the plans you have in place for HEXO's brands to ensure you sustain the sales levels from pre acquisition? Do you want to rationalize some of those brands? Are there new SKUs or categories coming from the acquired brands? Any additional color there would be helpful.

Speaker 5

Thank you.

Speaker 2

Thank you, John. So I'm going to turn it over to Blair in a second. I think like with any acquisition. You have SKU rationalization, you have product rationalization. I think what's important in the HEXO acquisition.

Speaker 2

Now there's a company called Retican that has incredible pre roll business, incredible flower business, where there's a lot of growth. And throughout the year, there was lots of challenges within HEXO, and Didn't really have the sales organization out there that was needed. So yes, there has been a decline in sales, but I will tell you we closed on June 1, June 2. This team took over and has now got our GND group, our group at a Quebec selling that rose. So we are all over it, but it will take some time and we'll have to clean up some of these lower margin skews.

Speaker 2

But we see tremendous opportunity with Redican brand, both on flower oils and especially the pre rolls with the little Redis. Blair?

Speaker 5

Yes, I would say, look, in the past, What you've seen in acquisitions is the industry not quite as stable as it is today. I know that sounds crazy given some of the conditions we've seen in the marketplace. But I would say Tilray, the work we've done on the back end of our business, around our cost savings, around our processes on the back end just made us more ready to absorb the HEXO business. We've rebuilt their demand and supply plan completely. We've already upped some of their logistics.

Speaker 5

So you're seeing better shipments, better fulfillment on the order side. And as Erwin said, we see tremendous commercial opportunity for improved distribution around their cigarette style pre roll business where they're a leader and a pioneer. And then on mainstream flower, as I talked about earlier in the call, the reticam flower in the mainstream category, we think is under indexed and we see tremendous opportunity there. So I don't think you'll see the track record of the declines that maybe have happened in previous M and As. I think what you're going to see is very quickly, we're going stabilize that business and start to build on it in the marketplace.

Speaker 2

In the cannabis industry, the 2 strongest brands today are Good Supply and Redican. And in our acquisitions, I mean, good supply we built from scratch. And with reticant, it's the 2nd biggest brand within the cannabis industry. So It's one of the first times we've ever really acquired such a strong brand within cannabis and combined at retail, the 2 of them or what $700,000,000 $800,000,000 at retail sales combined between or $500,000,000 between reticant and goodsupply at retail sales. So we're looking for some big opportunities there.

Operator

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

Speaker 12

Thank you. Good morning. Just was wondering if you could touch on maybe a little bit higher level, some of where the priorities and focus are, and maybe through the lens of capital allocation. I guess just looking at to break down your biggest segment is the distribution revenue, the fastest growing has been beverage alcohol, but of course, typically you think of Tilray as a cannabis company as a starting point. You're talking about pushing into vegetable cultivation.

Speaker 12

I guess just help us understand in terms of maybe where you're spending or focusing the most, what the leader what kind of is driving Or do you love all your children equally? Just help us think about the level of prioritization between each of the buckets.

Speaker 2

So number 1, I have 4 kids, I love them all equal most days. Number 2 is, we have 4 distinct businesses here. I love them all most days, okay. I think if you step back for a second and You look at our Canadian cannabis business and our positioning here and our investment and you heard me say earlier on my remarks, We've invested not us, but prior ownership over $1,000,000,000 So we have 5,000,000 square feet of assets today in regards to greenhouses. We have to use those and ultimately repurpose them.

Speaker 2

And to repurpose them into on our cannabis business. And if anything, we're looking how we can take more and more cost out, how we become much more efficient here in those businesses. So yes, there will be some CapEx, but nowhere near what was spent because we're sitting with a lot of capital that's already been invested. In regards to our beer and our businesses and our spirit businesses, again, We talked about our growth on our spirits business with Breckenridge. It's great to see what's happening with Sweetwater right now under Ty's leadership.

Speaker 2

Acquiring Montauk, that is growing at 30%, 40%. We're now only fastest growing beer in New York as we move into New Jersey and Connecticut. So yes, we'll continue to invest in that segment of the business. In regards to Europe, 600,000,000 people in Europe, 20 countries today sell medical cannabis. We see a tremendous opportunity and we See that spring boarding into recreational through the medical world.

Speaker 2

So again, where are our margins, if you look at our business today, is a third cannabis, it's a third spirits and beer and it's a third in regards to our medical distribution. Listen, our medical distribution has nowhere near the margins that the cannabis or the spirits business has, but it's a great vehicle to drive distribution through the cannabis business and that's what you heard Denise say before. We will use that to drive our medical cannabis business. So again, we are a diversified company. Upon legalization, all these businesses come together.

Speaker 2

And we think we have great brands, whether it's Sweetwater, Montauk, Breckenridge one day could be cannabis brands in the U. S. Upon legalization. So we will spend accordingly. We will allocate, but every one of these are important because they're a big part of our growth.

Speaker 2

And the nice thing is they're all nicely growing today and they're in markets and the ability to grow in a lot of markets where there is a tremendous amount of growth for us.

Operator

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

Speaker 5

Hi, good morning. Thank you for taking my question. My question is just on the adult use segment in Canada. Right now, you have 13% market share nationally, you're at the leisure. Do you have any specific goal for this year in terms of growing that share and maybe taking advantage of some of the difficulties your competitors are facing.

Speaker 5

And just talking about the pricing environment, so to gain share, would you need to be more aggressive on pricing? Or are we at a point where now you think you can you have other levers to pull here to maybe significantly gain share over the near term as the market consolidates? Thank you. Thanks for the question. I would say in terms of our goals, obviously, we want to grow and we want to continue to grow.

Speaker 5

When I think about How we do that? I don't think we have a target in mind, but we continue to look at each of the segments, each of the categories. And so if you think about what I talked about earlier with flower on the reticant side, we don't have a huge presence in mainstream. We have broken coast at the premium side. We have good supply at the value side.

Speaker 5

So mainstream is an area where We think we continue to grow and continue to build our presence. So all of our growth strategies are really at the category and segment level, and we think there's a lot of runway for us to do that moving forward. The price compression side, I definitely think it's stabilized to Irwin's point in some of the categories. I don't think it's at the point now where we could think about optimizing our revenue and building our pricing. I don't think we're far away from that environment.

Speaker 5

If you look at the with capacity in the industry over the last 12 months even, there's been a lot of capacity pulled out. So I do think the industry is going to stabilize from an inventory standpoint. And once that happens, I do see the opportunity for us to think about optimizing our revenue versus thinking about price compression.

Speaker 2

Thank you, everybody. I think that has our last question for today. Thank you very much for joining our call. Thank you very much for your interest in Tilray. Before I conclude, I'd like to say thank you to all My team members that I work with, the management team, our board members, we have over 1500 employees, 15 operating facilities around the world.

Speaker 2

And I'm proud to serve our patients, our consumers and just as important our shareholders out there and being today 21 countries and with a lot of interest in the cannabis world, a lot of interest in the beer and the spirits world and a lot of interest in regards to our distribution and medical business. We're an exciting company with a lot happening. And as I go back and I said earlier on my remarks, in late in 2018, 2019, we're a $50,000,000 company and today approaching which we want to get to that $1,000,000,000 in size. There's a lot we've done, there's a lot we can do, and there's a lot we will do with what we've built within there. Tilray team has demonstrated adaptability.

Speaker 2

We've had strong execution skills in some tough categories, in tough markets and some tough times where we've operated excellent diversified our business. And I think that's really important today. And I know as I sit here and listen to a lot of the questions coming at us in regards to the cannabis world, but boy, are we doing some great things within the craft beer business. We will change that industry. Craft beer is cool and will become cooler and some of the stuff that we're doing at Sweetwater in Montauk, some of the stuff that we've done so far in regards to Breckenridge and our bourbons and some of the winnings that we've had in being number 1 is just tremendous.

Speaker 2

Our balance sheet, which is so important today, cash is king and sitting close to $500,000,000 of cash Having the ability to invest in our business, having the ability to invest in acquisitions, having the ability to market our brands where we can and let consumers know about our brands because our brands are cool and our brands today resonate with Gen Z, Gen X, millennials, etcetera. With that, we have tremendous opportunities out there. Over the last couple of years, we've done some great Acquisitions and we'll continuously look at the acquisition world. And if you look at where we are today being that leader in Canada in regards to our cannabis world, that leader where we are on our medical cannabis in regards to Europe and the opportunities there. Just think when the cannabis world legalized and something will happen in regards to legalization, whether it's medical cannabis, whether it's recreational cannabis, Whether it's a Safe Bank Act, we really look and expect something to happen.

Speaker 2

But the thing is today with Tilray, we are not ended upon legalization. We are a diversified company. We have cash flow. We have business that are growth. We're in diversified categories.

Speaker 2

We're in 21 different countries around the world. So we have some exciting things. So with that, I'd like to thank everybody for joining us. Enjoy the rest of your summer and more important, enjoy

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Key Takeaways

  • Tilray reported fiscal 2023 net revenue of ~$668 million on a constant‐currency basis, record adjusted EBITDA of $61.5 million (up 28%), and positive adjusted free cash flow of $1.3 million, closing Q4 with net revenue of $184.2 million, adjusted free cash flow of $43.2 million, and nearly $500 million in cash and marketable securities.
  • Management emphasized a diversification strategy across four segments—cannabis (medical & adult-use), beverage alcohol, wellness, and European pharmaceutical distribution—to mitigate delays in U.S. federal and German adult-use legalization.
  • The June ’23 acquisition of HEXO increased Canadian market share to ~13%, integrated leading brands like Good Supply and Redecan, and achieved $22 million of annualized cost synergies toward a $30 million target, creating a combined $650 million retail portfolio.
  • In Canada, Tilray is the #1 licensed producer by market share (13%), #1 in flower/oils/concentrates and #2 in pre-rolls, driving 42% of Q4 sales from new product innovation despite a ~CAD 150 million excise and corporate tax burden.
  • For fiscal 2024, Tilray guided to $68 million–$78 million of adjusted EBITDA (≈20% growth) and positive adjusted free cash flow, with continued focus on cost optimization, disciplined capex, and maintaining a strong balance sheet.
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Earnings Conference Call
Tilray Q4 2023
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