Tilray Brands Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2024

Key Takeaways

  • Tilray reported record FY24 results with 26% net revenue growth to $789 M, adjusted EBITDA of $60.5 M, and positive adjusted free cash flow of $7 M.
  • Balance sheet strengthened by reducing convertible debt by ~$300 M, bringing net debt to EBITDA to 1.73x and enhancing financial flexibility.
  • Strategic acquisitions including HEXO, Trust Beverages, and eight ABI beer brands propelled market leadership in cannabis and made Tilray the 5th largest craft brewer in the US.
  • FY24 results absorbed ~$120 M in headwinds from cannabis price compression, C$100 M in Canadian excise taxes, and higher insurance costs, pressuring margins.
  • Tilray provided FY25 guidance of $950 M–$1 B in revenue with mid-single-digit organic growth, reflecting confidence in continued expansion.
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Earnings Conference Call
Tilray Brands Q4 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Hello and thank you for joining today's conference call to discuss Tilray Brands' Financial Results for the 4th Quarter and Fiscal Year 20 24 Ended May 31, 2024. I'll now turn the call over to Ms. Vera Narada, Tilray Brands' Chief Corporate Affairs and Communications Officer. Thank you. You may now begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. By now, you should have access to the earnings press release, which is available on the Investors section of the Tilray brand website attillray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to non GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non GAAP financial measure to the most comparable measure prepared in accordance with GAAP.

Speaker 1

In addition, we will be making numerous forward looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in the forward looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin D.

Speaker 1

Simon, Chairman and Chief Executive Officer, who will provide opening remarks and commentary followed by Carl Merton, Chief Financial Officer, who will review our financial results for fiscal year 2024 Q4. Also joining us for the question and answer segment are Denise Volterczyk, Chief Strategy Officer and Head of International Blair MacNeil, President of Tilray Canada and Ty Gilmore, President of Tilray Beverages North America. And now, I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin DeSimon.

Speaker 2

Thank you, Baron, and good afternoon, everyone, and thank you for joining us today. Before diving into our fiscal 2024 results, I'd like to take a moment to reflect on the evolution of Tilray Brands. Back in 2019, Aphria was a cannabis focused Canadian LP with only $50,000,000 in revenue and minimal cash reserves. Since then, we've taken a strategic approach to diversifying our operations and growing our global businesses. Through a combination of organic growth, strategic acquisitions, we have disrupted the CPG industry by expanding our footprint into new markets and adjacent business categories.

Speaker 2

Today, Tilray Brands is a leading global lifestyle company spearheading the conversion of cannabis, beverages and wellness products and is elevating lives through moments of connection. We're operating more than 20 countries across North America, Europe, Australia and Latin America with 5 businesses in medical, adult use cannabis, beverages, spirits, wellness products and 44 consumer lifestyle brands. As a vertically integrated company, we have 20 facilities that service our collective businesses, allowing us to produce approximately 90% of our products internally, ensuring the high quality of our products. This is a testament to our success in building a diversified global business that is dedicated to providing the best possible products for our consumers. We're incredibly proud of the progress we've made in the short time and are excited to continue driving innovation and growth in the years ahead.

Speaker 2

Fiscal 2024 marked a year of significant accomplishments for Tilray Brands, Achieving our best financial results to date, we achieved 26% net revenue growth with annual record net revenue of $789,000,000 record adjusted gross profit of $236,000,000 record adjusted EBITDA of $60,500,000 adjusted net income of 6,200,000 and positive adjusted free cash flow. We also strengthened our balance sheet by significantly reducing our net convertible debt by approximately $300,000,000 reducing our net debt to EBITDA ratio to 1.73. We also exceeded our cost savings synergy target by 31%, delivering $35,000,000 of savings. Additionally, not only we met our revised annual guidance for adjusted EBITDA, but also generated adjusted free cash flow of approximately $7,000,000 for the year. Our record financial results were achieved despite the challenges we faced in the fiscal year, absorbing approximately $10,000,000 in cannabis price compression, paying approximately $100,000,000 in excise tax and regulatory fees in Canada and paying higher operating insurance rates of nearly $7,000,000 because of our cannabis businesses, which together equate to approximately $120,000,000 that directly hit our bottom line.

Speaker 2

Our ability to deliver record financial results while navigating these challenges is a testament to the resilience and dedication of our team, who have worked tirelessly to ensure the success of our businesses. Over the past fiscal year, our strategic acquisitions have significantly benefited our financial results, which we expect will continue to benefit us well into the future. In June 2023, we acquired HEXO and reticant to expand our cannabis business. Our productions and capability and grand growth in opportunities in Canada and internationally. Since then, we have broadened Tilray's cannabis product portfolio across multiple form factors, including an 85% year over year increase in mainstream flower sales in adult use cannabis.

Speaker 2

The addition of reticcan brand has further strengthened our categories such as pre rolls, oils, capsules. Today, Tilray is the number one player in the straight edge pre rolled category with a 46% market share and a top player in the oils and capsule category combined with a 21.5% market share in the adult use business in Canada. In August 2023, we acquired Trust Beverages, fortifying Tilray's leadership in the Canadian cannabis beverage market. This acquisition increased our market share in the beverage category by 400%, growing our market share in the THC beverage category to 41% at the end of fiscal year 2024. In September 2023, we acquired 8 iconic beer and beverage brands from ABI along with related breweries and brewpubs.

Speaker 2

As a result, we're now the 5th largest craft brewer in the U. S. With a 4.5% share of the craft beer market. Our growing beverage portfolio now includes craft beers, spirits, ready to drink cocktail, ciders and non alcoholic beverages. The combination of our legacy businesses and these acquisitions resulted in our best fiscal year results.

Speaker 2

Let's now dive deeper into each of our business segments. Tilray Cannabis, global cannabis net revenue increased by 24% during fiscal 2024. In Canada, our quarter 4 marked the culmination of transformative year in Canadian cannabis. It was the highest revenue quarter of the year at $58,800,000 and it marked the completion of our HEXO and Trust Beverages integration, a significant operation overhaul resulting in extensive improvements in our facility utilization. We continue to lead Canadian cannabis market share by almost 200 bps over the next competitive and have consistently at the industry for the top of the industry for the past 3 years.

Speaker 2

From a regional perspective, Tilray was number 1 across British Columbia, Alberta and Ontario and Quebec provinces combined, which include over 80% of the Canadian population, and we've also led in all secondary markets. In Canadian cannabis volume, Tilray shipped approximately 60% more in KGs reaching 140 metric tons. Our unit sales grew approximately 130 percent to almost 35,000,000 units. In fiscal 2024, approximately 27% of our Canadian adult use cannabis net sales revenue came from new innovation, which is a testament successful ability to innovate and launch new products. Cannabis consumers have a unique attribute of being open to trying new products.

Speaker 2

And in fiscal 2024, we capitalize on this by launching over 1 150 new SKUs. Looking ahead to next year, we anticipate that innovation will continue to play a significant role in driving our net sales. Brands such as Broken Coast, Reticam, XMG, Molo and Good Supply will be launching exciting new products based on feedback from our consumers and our butt tenders. Our strategic acquisition of HEXO and reticulum aim to integrate their sales plan into our infrastructure and expand our brand portfolio and product mix. In fiscal 2024, we almost doubled ruriticand flower share with the launch of 3 poplar genetics, Animal Run's Space Age Cake and Purple Churro.

Speaker 2

In Ontario, Animal Runts became the number 1 and number 3 selling genetic for 14 gs and 3.5 gs packed sites respectively. Spice age cake was number 8 in the 14 gs flower segment despite limited availability. In fiscal 2025, we expect these genetics will continue to be within the top 10 performing genetics in the mainstream flower. In 2024, we made significant steps to right size our operational footprint in Canada to balance supply and demand. We sold the Truss facility and transitioned all our cannabis beverage production to our London, Ontario Drinks facility, pushing the London facility's utilization above 70% and improving our cannabis gross margins.

Speaker 2

These cannabis beverages are phenomenal. I wish we could sell them in the U. S. Today. We centralized all our HEXO brand packaging and logistics into Leamington, Ontario, lowering our labor cost per unit by 35% and delivering $35,400,000 in synergies and exceeding our initial target of $27,000,000 by 37 by 31%.

Speaker 2

We successfully transitioned our Broken Coast cultivation to our Nanaimo, BC facility, increasing yields by 30% and lowering our cost per gram by 15%. We also paused the out there growing during the year at our Cayuga facility that will drive additional savings of $4,500,000 on an annual basis. Finally, we transitioned a large portion of our expect to contribute over $5,000,000 annually to offset the cost of the facility, improving the marketability and the value of the facility and continue to grow cannabis in smaller portions of the facility to meet the needs we want for our Quebec consumers. All of these initiatives were designed to significantly lower the cost of Gro to manufacture and package and ship our leading cannabis brands to market. These consumer and operational initiatives are entirely leverageable in markets around the world for years to come.

Speaker 2

In fact, early in fiscal 2025, we shared significant learnings in cultivation and genetics with our teams in Europe. Turning to our international cannabis, we grew net revenue by 22% year over year to approximately $53,000,000 and remain the number one market leader in medical cannabis across Europe. Our annual growth during the fiscal 2024 was driven by increased sales in Germany, Poland, the UK, Australia and New Zealand. In Germany, we believe we're best positioned to capture a majority of the expected incremental growth in the cannabis medical market, which is projected to be approximately $3,000,000,000 in the medium term. On April 1, the Cannabis Act became effective in Germany, which declassified cannabis to a non narcotic expanding Tilray's market opportunity in Germany.

Speaker 2

Since the Cannabis Act went into effect, we have already seen a 65% increase in sales. And we believe that our current position in Germany provides us with several unique competitive advantages. Our cultivation facilities in Germany and Portugal combined with our Tilray Pharma medical distribution network provides Tilray with a

Speaker 3

critical vertical

Speaker 2

integration, allowing us to consistently supply the market with high quality and a reliable source of medical cannabis. A FreeRx was the 1st facility in Germany to receive both its cannabis cultivation license and commercial distribution license for medical cannabis under the new regulations, allowing Tilray to cultivate, produce, distribute premium quality medical cannabis, increasing its production by 5 times. AphriaRx can now fully utilize and maximize its growing capacity while also expanding its genetics to a total of 31 approved strains from the previously approved 3 strains. We believe that this coupled with the steps being taken by Germany to liberalize the reimbursement of medical cannabis significantly increases the opportunity in the German market. We believe that Germans declassifying cannabis as a non narcotic will also have a far reaching impact on the drug policy throughout Europe.

Speaker 2

The European opportunity could represent a potential $45,000,000,000 medical market alone over the long term and our presence in Europe allows Tilray to grow our global brand portfolio to a base of 700,000,000 people, which is twice the population in the U. S. Turning to another promising international market. This fiscal year, we launched Broken Coast Medical Cannabis products in Australia. Medical cannabis patients in Australia now have access to Broken Coast renowned cannabis strains cultivation from our facility in Canada.

Speaker 2

This launch came in response to the feedback we received in Australia and leveraged our insights from our operations in Canada and Europe. Now briefly on our CC Pharma. Tilray Pharma distribution business in Germany, which represents our medical cannabis business through its network of 13,000 pharmacies. CC Pharma revenue was nearly flat at $259,000,000 both in fiscal 2024 and fiscal 2023, but our gross margin held at 11% during both periods, but may fluctuate with change in product mixes as we focus on higher margin sales in future periods. Moving on to Tilray Beverages.

Speaker 2

In the U. S, we operate the 5th largest craft brewery by sales with 6 manufacturing facilities over 500 distributors, 11 brewpubs and 1 distillery restaurant and the sales and marketing team across the country. Our Tilray beverage strategy focused on growing our portfolio of iconic craft brands, ensuring the product's excellence and innovation, driving scale, expanding distribution to increase market reach and consumer access. In our beverage segment, we generated $200,000,000 in fiscal 2024. On an annualized basis, we'll quickly approach $300,000,000 as we ramp up.

Speaker 2

Across our growing brands, Sweetwater remains the number one brand family in Georgia multi outlet. Montauk remains the number one brand family in Metro, New York, having increased its distribution by 5 70 basis points over last year. Tilray is now the number one frac supplier year to date in the Pacific Northwest. 10 barrels volume growth increased by 6 40 basis points since Tilray took over the brand and we're capitalizing on the success of 10 Barrels Pub Beer brand extension with Pub Iced pubser vessel line extensions. Both innovations have done extremely well in the market with 4,200 new distribution points.

Speaker 2

Growing 18%, pub beer is now the 11th largest brand on the West Coast with only half the distribution of top competitors due to its focus on the Pacific Northwest states. Since Tilray acquired Shock Top in 2023, we have made significant progress in turning the brand around. In just 8 months, we have cut total Shock Top declines in half and our top 10 distributors have shown a remarkable 35% basis point improvement. As a result, ShotSpot finished quarter 4 with 13.5% growth year over year since we acquired the brand, a testament to our team's hard work and a commitment to delivering outstanding results. We're excited to continue building on this momentum and driving growth for Shock Top in the years ahead.

Speaker 2

As we have mentioned before, our vision is far beyond our current reach as we continue our focus to become a dominant leading beverage business by leveraging our portfolio of beloved local craft brands to win more hearts and occasions and bring these brands back to growth with innovation into new categories, including our non ALF beers, flavored malt beverages, ready to drink cocktails, spirits and beyond alcohol as we expand further into water, energy drinks and other categories. We have the manufacturing facilities, the distribution and the sales and marketing infrastructure to drive growth in Tilray's beverage businesses. In the non alcoholic segment, we launched a new brand, Runner's High Brewing Company, For those who love a great beer, flavor without the buzz, this brand seeks to be the beer of choice of runners and their community of social and casual runners, not just elite athletes. There are currently 3 brews, runners high golden, wheat, raspberry wheat and dark chocolate with several expansion markets to follow. In April, we celebrated high honors and awards at the 2024 Craft Brewer Conference and the World Beer Cup.

Speaker 2

10 Barrel Brewing won 4 craft beer awards and 10 Barrel Brewmaster was recognized for renovation in craft brewing. Green Flash Brewing also took the homeowners for the world class hazy West Coast IPA. I'm incredibly proud of Tilray Beverage's team for these outstanding achievements. With over 500 beer and beverage distributors, Tilray is now a leading supplier in key regions across the U. S.

Speaker 2

With regional jewels in Northeast, Pacific Northwest, Colorado and Southeast. Per BI shipments for retail, Tilray has increased its market share of total craft beer in 7 states, including key markets such as Oregon, Washington, Florida, Colorado and Arizona when comparing share and after the acquisition of our 8 craft brands. With each beverage acquisition we have made over the past few years, we have optimized our cost structure, operational efficiencies and we brought these back to our beloved brand of growth. As we compete our integration process, we expect to get the margin of these 8 craft brands through gross margin shared by Sweetwater and our other legacy businesses. We also relaunched High Vault Energy Drinks on Amazon and plan to launch new hemp derived Delta 9 Beverages strategically in selected markets, including Texas and New Jersey, where we can leverage our existing beverage distribution network.

Speaker 2

Our Hammock derived delta-nine formulations are complete and we're actively developing a target launch strategy to ensure maximum impact. We look forward to sharing more updates on this exciting development soon. With their operational strength, Tilray is on a path to become a lightning rod for the beverage industry, rejuvenating growth into these brands. In Tilray Spirits, Breckenridge facility continues to win accolades as the best American whiskey 2 years in a row and now is one of the most awarded craft distillers in the U. S.

Speaker 2

In addition to its awards in winning bourbon, Breckenridge Distillery also produces highly coveted gin and vodka. Finally, let's discuss our Tilray Wellness businesses focused on improving people's lives through the power of hemp. Tilray and Wellness is represented mainly by Manitoba Harvest, our leading hemp brand with over a 53% market share in branded hemp products, happy flower, CBD infused beverages and high vol energy drinks. In quarter 4, our Tilray wellness business saw impressive growth with a 6% increase in revenue to $15,700,000 For fiscal 2024, the business generated 5% growth bringing in $55,300,000 with stable improvements to gross margin to 30% from 29% last year. Tail Ray Wellness strengthened its leading market share positions in both the U.

Speaker 2

S. And Canada over the past year, with consumption increasing both in the natural and conventional channels. As Tilray Brands has transformed, expanded and completed numerous acquisitions to get to where we are today, Our mission has evolved to be a leading premium lifestyle company with a house of brands, innovative products that inspire joy, wellness and create memorable experience. With that, I'll now turn the call over to Carl to discuss our financial results in greater detail. Karl?

Speaker 4

Thank you, Erinn. I'll begin with a brief overview of our annual results for fiscal 2024 before moving on to a more in-depth review of Q4. Note that we present our financials in accordance with U. S. GAAP and in U.

Speaker 4

S. Dollars. Throughout our discussion, we will be referring to both GAAP and non GAAP adjusted results, and we encourage you to review the reconciliation contained within our press release of our reported results under GAAP with the corresponding non GAAP measures. Net revenue for fiscal 2024 grew 26% to $788,900,000 compared to the prior year at $627,100,000 which as Erwin stated was a record outcome. By segment, beverage alcohol revenue increased 113%, largely attributed to the acquired brands.

Speaker 4

Cannabis net revenue rose 24% year over year, inclusive of $9,800,000 due to price compression in Canada, of which nearly all represented a reduction in EBITDA. Distribution net revenue was flat and wellness net revenue rose 5% for the year. From a segment perspective, 25% of our net revenue was generated by our beverage alcohol business, 35% was generated by our cannabis business, 33% by our distribution business and 7% by our wellness business. This compares to 15% beverage alcohol, 35% cannabis, 41% distribution and 9% wellness last fiscal year. The year over year variance is due to our acquisition of HEXO, the new craft brands and the remainder of the Truss Beverage brands.

Speaker 4

Further, as we progress through a full year with the new beverage alcohol brands, we anticipate these ratios to converge around 30% beverage alcohol, 30% cannabis, 30% distribution and 10% wellness. Gross profit for fiscal 2024 increased 52 percent to $223,400,000 another record compared to the prior year at $147,000,000 Gross margin increased 28% from 23% in the prior year. Adjusted gross profit increased 14% to $235,600,000 from $206,400,000 in the prior year, while adjusted gross margin declined by 300 basis points to 30%, primarily reflecting the removal of the HEXO advisory service revenue in the prior year with their initially lowered margins and the impact from the recently acquired Kraft Brands. By segment, beverage alcohol gross margin was 44% compared to 49% in the prior year due to lower cost margin contributions from the Kraft acquisitions, which is the result of temporary excess capacity that we are in the process of optimizing and enhancing. Beverage alcohol adjusted gross margin was 46% compared to 53%.

Speaker 4

This was offset by a $2,500,000 volume commitment reimbursement in our spirits business with no associated costs. For greater context, adjusted gross margin for our legacy beverage business was 58% compared to the prior year of 53%, primarily as a result of an agreement with the distributor related to our spirits business and more volume flowing through the facilities as we ramped up production in March April to meet seasonally strong April May sales. Adjusted gross margin for the newly acquired Kraft Brands was 33%. The improvement of gross margins in beverage alcohol, primarily in the beer portion of our business, as Erwin said earlier, is a major focus of ours, and we should begin to demonstrate improvements in Q1 of fiscal 2025. As of the end of our fiscal year, we successfully integrated production of all the acquired brands into our production facilities and exited their related co manufacturing agreements with the exception of Shock Top.

Speaker 4

As a result of this production integration, we will no longer separate the gross margins between legacy products and the new craft products starting next quarter. Cannabis gross margin was 33% compared to 26% in the prior year, and adjusted gross margin was 36% compared to 51%, primarily due to the termination of the HEXO Advisory Services Agreement, contributed only $1,500,000 of gross profit in the current year compared to $40,400,000 in the prior year. We also experienced a change in sales mix with a higher percentage of sales coming from wholesale, compounded by the price compression in the Canadian adult use market, as I will explain in further detail shortly. Distribution gross margin held steady at 11%, although it was expected to improve with changes in product mix as we focus on higher margin sales in future periods. At wellness, adjusted gross margin was up slightly at 30% compared to 29% driven by lower material cost and overhead optimization.

Speaker 4

Net loss for fiscal 2024 improved to $222,400,000 or $0.33 per share compared to $1,400,000,000 in the prior year or $2.35 per share with the latter tied to non cash goodwill impairment in the prior year. From an adjusted perspective, we are reporting adjusted net income of $6,100,000 or $0.01 per share compared to $400,000 or $0.00 per share in the prior year. Under the current year's adjusted EBITDA definition, fiscal 2024 improved to a record $60,500,000 up 3% from $58,700,000 in the prior year. Under the prior year's definition, we would have reported adjusted EBITDA of $65,100,000 in the current year, while reporting CAD61,500,000 in the prior year. We have now generated positive adjusted EBITDA for 5 consecutive years.

Speaker 4

Cash flow used in operations was $30,900,000 compared to $7,900,000 of cash generated by operations in the prior year. Adjusted free cash flow was $6,600,000 for the year, which we view as a very positive outcome considering that just last quarter we have communicated that we did not believe we would achieve our goal of reaching positive free cash flow in fiscal 2024. While we had still expected a very strong Q4, it proved to be stronger than we had anticipated. Over this past year, we reduced our convertible debt by almost $300,000,000 decreasing our net debt to approximately $61,300,000 and leaving us with a net debt to EBITDA ratio of 1.73. Our intention is to continue lowering our indebtedness, optimize our capital structure and enhance our financial flexibility.

Speaker 4

The net reduction in our convertible Let's now review our quarterly performance. Q4 total net revenue rose by $45,700,000 to $229,900,000 compared to the prior year quarter of $184,200,000 representing almost 25 percent growth. The diversification of our business through our adjacency model really came into play during Q2. For the first time, our beverage alcohol segment exceeded the size of our cannabis segment in Q4, representing 33% of our total revenue mix compared to only 18% in Q4 during the previous fiscal year. In Q4 compared to the prior year period, net beverage alcohol revenues rose 137 percent to 76,700,000 dollars Net cannabis revenue rose 12 percent to $71,900,000 Distribution revenue decreased 10% to $65,600,000 and finally, wellness revenue rose 6% to $15,700,000 We are disappointed that the Canadian government did not resolve the issue of cannabis excise taxes during their last budget and maintain our view that reform is essential to long term viability of the Canadian cannabis industry.

Speaker 4

The current fixed price tax structure is inherently unfair

Speaker 2

as it

Speaker 4

has allowed taxes as a percentage of revenue to spike even as the price of cannabis has declined by more than 50% since legalization. Still, as Erwin mentioned, as a result of this, we paid over 1 $100,000,000 in excise taxes last year, and we'll continue to do so every year in the future until it has changed. We are encouraged that CRA is beginning to crack down on delinquent LPs, asserting cash flow pressures on our less financially strong competitors, potentially forcing an industry needed LP rationalization. We incurred CAD 22,100,000 in Canadian cannabis excise tax during Q4, which are a reduction to revenue compared to CAD 16,400,000 last year. But due to a change in our revenue mix to higher excise tax products and without the advisory fee, which is not taxed, excise tax amounted to 33% of gross Canadian cannabis revenue, excluding wholesale in Q4 compared to 25% in the same quarter last year.

Speaker 4

Gross profit was $82,400,000 compared to $67,200,000 in the prior year quarter. Gross margin remained consistent at 36%, while adjusted gross margin decreased 100 basis points to 36% compared to the prior year quarter. Most of the variance was related to cannabis, which included significantly higher HEXO advisory fees in the prior year, along with higher sales from wholesale and price compression in the Canadian adult use market in the current year. Net loss improved to $15,400,000 compared to a net loss of $119,800,000 in the prior year quarter. On a per share basis, this amounted to a net loss of $0.04 per share versus $0.15 per share in the prior year quarter.

Speaker 4

Adjusted net income in the quarter was $35,100,000 which when calculated on a per share basis resulted in an adjusted EPS of $0.04 for the quarter, a $0.06 improvement from the prior year quarter. Adjusted EBITDA was $29,500,000 up 37% from $21,500,000 in the prior year quarter, representing a new record level of quarterly adjusted EBITDA. On synergies and cost reductions, recall that our revised HEXO synergy plan targeted between $30,000,000 $35,000,000 in savings. We exceeded that by achieving $35,400,000 of savings on an annualized run rate basis, of which $26,200,000 represented actual cost savings during the year. Operating cash flow was $30,700,000 compared to $43,600,000 in the prior year quarter.

Speaker 4

This decrease in operating cash flow was primarily a function of restructuring in HEXO exit costs as we complete the integration of HEXO's operations into our operations. Adjusted free cash flow was $30,600,000 compared to $48,300,000 in the prior year quarter, consistent with the changes in operating cash flow. Turning now to our 4 business segments. Beverage alcohol revenue was $76,700,000 up 137 percent from $32,400,000 in the prior year quarter. The positive delta was due to contributions from the craft brands, which were purchased last fall, a strong beer business leading up to the summer, which is a historically busy season and new innovations across the portfolio launched as part of the spring reset.

Speaker 4

Beverage alcohol gross profit increased to $40,800,000 compared to 16,600,000 dollars and adjusted gross profit increased to $41,000,000 compared to $17,800,000 While beverage alcohol gross margin increased to 53% compared to 51%, and adjusted gross margin decreased to 53% from 55

Operator

percent in the prior year quarter.

Speaker 4

Gross cannabis revenue of $94,000,000 was comprised of $61,500,000 in Canadian adult use revenue, dollars 13,100,000 in international cannabis revenue, dollars 6,400,000 in Canadian medical cannabis revenue and $13,000,000 in wholesale revenue. Net cannabis revenue, which excludes $22,100,000 in excise taxes, was $71,900,000 representing a 12% increase from the year ago period. The positive variance is related to increased organic growth excluding the HEXO advisory fee combined with contributions from the acquisition of HEXO and Trust. Offsetting the increase in net cannabis revenue was the elimination of advisory services revenue totaling $16,100,000 from the prior year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. Revenue from Canadian medical cannabis grew 6% despite the category being impacted by competition from the adult use market and its related price compression.

Speaker 4

Wholesale revenue increased to $13,000,000 from $800,000 last year. The Canadian cannabis industry is currently experiencing an interesting previously unexperienced phenomenon that we took advantage of in the current quarter. As many in the industry moved to asset light business models, a significant portion of previous production capacity in the industry has disappeared. This in turn has resulted in previous excess inventory levels in the industry dissipating. With lower inventory levels, securing supply appears to have become more difficult and pricing in the wholesale market is increasing as much as 5x in some product categories.

Speaker 4

Against this new backdrop, we took advantage of advantageous pricing in the quarter, resulting in the significant increase in our wholesale revenue. While opportunities related to wholesale product demand from asset light Canadian LPs is expected to remain in the short term. We do not anticipate this level of quarterly wholesale revenues to be the new norm. International cannabis net revenue was $13,100,000 in the quarter compared to $15,700,000 in the prior year due to timing differences of shipments in the international markets to various countries.

Speaker 3

Cannabis gross

Speaker 4

profit was $28,800,000 and cannabis gross margin was 40% compared to $39,500,000 61% in the prior year quarter. Distribution revenue derived predominantly through Tilray Pharma decreased to $65,600,000 from $72,600,000 in the prior year quarter. Distribution gross profit increased to $7,800,000 compared to $6,700,000 in the prior year quarter, while distribution gross margin increased to 12% from 9% in the prior year quarter, driven by our increased focus on margin. Wellness revenue grew 6% to $15,700,000 from $14,800,000 in the prior year quarter. Walnut's gross profit was $4,900,000 up from $4,400,000 in the prior year quarter and gross margin rose to 31% compared to 30%.

Speaker 4

Our cash and marketable securities balance as of May 31 was $260,500,000 down from $448,500,000 in the year ago period. The majority of the variance was related to the repayment of the Terre 23s, the cash purchase price of our acquisition of the Kraft Brands and settling assumed liabilities and exit costs from HEXA, including the unpaid excise tax we inherited as part of the transaction, as well as legacy litigation settlements. Fiscal 2024 was a year marked by major acquisitions in both the beverage alcohol and cannabis segments. In addition to the revenue increases we enjoyed from these acquisitions, we also made significant progress in integrating those acquisitions into our existing infrastructure. For the cannabis segment, this integration is largely complete with redundant assets available for sale, the largest pieces remaining in our integration plan.

Speaker 4

For the beverage alcohol segment, there is still work to be done on the integration. As I said previously, all brands except for Shoppe Top have exited their co manufacturing agreements and are now being produced in our facilities. Our integration work will continue to ensure we are maximizing low cost production footprints and their related utilizations, fully integrating purchasing decisions across all brands to take advantage of pricing commensurate with our status as the 5th largest craft producer in the U. S. And fine tweaking all our production activities, all to bring our consolidated beverage alcohol margins back up above 40%.

Speaker 4

Finally, we are pleased to provide the following guidance for fiscal 20 25. Net revenues to be between $950,000,000 $1,000,000,000 with mid single digits of organic growth. Let me now conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what's the first question?

Operator

Thank you. Our first question is coming from Robert Moskow from Katy Cowen. Your line is now live.

Speaker 3

Hi, thanks for the question. I believe you normally give EBITDA guidance. I'm kind of new to the story. So can

Speaker 2

you tell

Speaker 3

me whether what was the decision regarding EBITDA guidance for fiscal 2025?

Speaker 2

I think from anything drove, but I think sales and as a growth company, it's based around revenue, but our cash flow, our free cash flow, and I think as we've outlaid where

Speaker 4

our goals are

Speaker 2

to get to margins, I think, Robert, you're a pretty smart analyst. I think EBITDA is something we can figure out. And I think as a growing company and things happen, but I think it all starts in the sales number and all starts on the organic growth number and the rest runs back through the P and L, that's why. No other reason why.

Speaker 3

But you used to give it and now you've decided to not provide that range going forward?

Speaker 2

I think it's we give the sales, we give our organic growth and we give expectations on where our margin is. I think the rest can usually flow through the P and L.

Speaker 3

Okay. Can you give us a little kind of step by step status on for the next 12 months towards integrating your ABI brands and how the gross margins will improve? Like what needs to happen next?

Speaker 2

Well, I think number 1, it starts with these brands starting to grow again. And some of the examples we showed is what was happening with Shokoff, what was happening with some of the 10 barrel. So that's number 1. We put a lot of innovation out there and getting that innovation out there. And we've seen some great results so far from that.

Speaker 2

As we look today at our manufacturing facility, you've heard what I said before, 90% of our products are made in their own facilities. So ABI was doing some of our manufacturing and how do we bring more and more of that manufacturing into our facilities. Our prior gross margin at Sweetwater was in the high 40s, low 50s. So how do we get some more efficiencies at a purchasing at some of the production standpoint. So that is number 1.

Speaker 2

Number 2 is we have 500 distributors out there and some excellent distributors that came along with the ABI, some excellent distributors. Is there some consolidation opportunities there? And all these distributors are looking for more and more business. So how do we grow with them? So that is the big thing.

Speaker 2

And also, we're looking at some international opportunities where we can grow our business internationally. So that's the big thing. And you come back and look at it today, where these margins were when we bought them and where our legacy margins are. And that is a big focus. Last week was our strategic planning meetings and that's our big focus.

Speaker 2

If you can grow our gross margins by a few points, that's a lot of dollars dropping to the bottom line. And you heard Carl talk about giving guidance in regards to high to mid single organic growth plus the acquisition growth, that's pretty good growth out there where beer category is not growing at all. And if we can get a few points on the gross margin, there's a lot of money that drops to the bottom line here.

Speaker 3

Okay. Thank you very much.

Speaker 2

And the big thing is, when we went on to get our 1st acquisition of beer, we're selling 2,500,000 cases. We're going to sell 12, 13,000,000 cases of beer next year. So there's a lot there of cost that we can take out. Thank you. Thank you.

Operator

Thank you. Next question is coming from Andrew Carter from Stifel. Your line is now live.

Speaker 5

Hey, thanks. Just want to get back to the EBITDA kind of thinking about you came in at a 7, 8 kind of EBITDA margin this year. Your growth for year kind of putting you in incremental 162 to 200. Could you how should we think about incrementals? Does the EBITDA margin expand from here?

Speaker 5

Just anything directionally and then I'll just I'll tie this all into one question. As far as the free cash flow outlook goes, I don't know if you gave CapEx. Could you give that? How should we think about working capital this year? And anything else that should the free cash flow grow from here?

Speaker 5

Thanks.

Speaker 2

So just and I'll turn it over to Karl too. Just on the EBITDA margin, first of all, as you heard me say before, when we acquired these businesses, it was pretty low in regards to where the gross margin was. They were not integrated and there's a lot of costs that we have taken out. And you heard what I said before on the HEXO business, we've taken out over $31,000,000 $32,000,000 in regards to cost savings on HEXO. So today as a company and as we gave sales guidance between $950,000,000 to $1,000,000,000 and as we add on to that top line organic growth plus acquisition growth, get those margins a lot more that enter the top that drops to the bottom line there that goes into your EBITDA margin.

Speaker 2

And listen, I come back and you heard what I said in my script. We expect that there would be some relief in regards to excise tax is not happening. So between excise tax at $100,000,000 paying much higher cost for insurance because of our cannabis business and much higher cost in regards to some of our legacy license that we have with IT. We're digesting well over $100,000,000 just of cost and price compression, which over the last few years has been over $200,000,000 So we're digesting a lot of these costs within our P and L. But we're taking a lot of costs out of our business and we're also getting a lot of organic growth to offset that.

Speaker 4

Carl? Just on CapEx, we spent about $30,000,000 this year on CapEx. We spent a little over $20,000,000 a year before CapEx for next year will be right in that range. As it relates to working capital, we don't see the need to grow the working capital

Speaker 2

we spent it on Maison in conversion there. We spent over $6,500,000 in regards to our Sweetwater facility. We've had some other CapEx in some of our other facilities. So with that, we got some pretty efficient facilities and pretty a lot of CapEx expense. So we don't expect to spend a lot of CapEx going into next year into this year.

Speaker 5

I guess just one more question on kind of the you mentioned the $10,000,000 headwind to EBITDA this year from price compression. If you had to kind of like straight line pricing at this point, where would the headwind be to EBITDA next year from pricing? And as you mentioned the innovation, are you able to is the innovation accretive from a pricing perspective, therefore less excise tax or gross margin accretive, whatever you want to call it? Is it accretive to your cannabis growth? Thanks.

Speaker 2

So I hate to tell you, there's no relief on excise tax. And just to be clear to everybody on this call, excise tax is a fixed amount. We're paying $1 a gram. If the prices keep coming down 20%, 30%, 40%, you're still paying excise tax. So a matter of fact, as a percentage, our excise tax as a percentage of sale keeps going up.

Speaker 2

So just remember, our price compression over the last couple of years has been about $200 plus 1,000,000 If that never happened, that would just ultimately your cost of goods that drops to your bottom line. So with that, we feel good. And you heard what Carl said in regards to other LPs not being able to pay excise tax and the Canadian government going after them and forcing them away. So number 1, we feel good that pricing now basically has flattened out. And if anything, we're looking to get some price increase.

Speaker 2

And the question you ask, some of the new innovation that we're coming out with is unique to what Tilray can do. And hopefully, we can get higher prices for them. So hopefully we're not going to see anywhere near the price compression we have seen over the last couple of years, Andrew.

Speaker 5

Thanks. I'll pass it on.

Speaker 4

Just to give

Speaker 2

some go

Speaker 4

ahead, Karl. Just to give some cadence on that through the year, we were looking at about $3,000,000 a quarter up until the Q4 and we did not see any price compression in Q4. Thank

Operator

you. Our next question is coming from Aaron Grey from Alliance Global Partners. Your line is now live.

Speaker 6

Hi, good evening and thank you for the question. So first question for me, I want to talk a bit about Germany since the law changed there. I believe you mentioned a 65% increase since April 1. So just wanted to clarify, was that specifically for increase on the quarter or where you see it today relative before the change? And then just any further commentary you can provide, I know you talked about your own production increases, 5x domestically and you have Portugal as well.

Speaker 6

But anything you're seeing overall within the market in terms of scripts? Are you seeing some bottlenecks that are maybe keeping the market from growing even faster than it could? So just overall sense in terms of how you're seeing the market evolve there. Thank you.

Speaker 2

Thank you. I'm going to let Denise answer that question.

Speaker 7

Thanks, Erinn, and thanks for the question. So in terms of your first question, in terms of the 65% growth, given that we're reporting the end of the fiscal year as of May 31, this is a number that reflects basically our Q4 growth from the April 1 adoption of the new regulations. And then second, in terms of like your question in terms of what bottlenecks and potential challenges we're seeing in the marketplace, one of the things we are seeing is, in fact, the German government is becoming overwhelmed with the import and export permits into Germany. And we've been hearing number of prescriptions. We have in fact seen the permit timing going from 2 weeks to 6 weeks.

Speaker 7

The other thing that we're seeing also is in terms of the ability to fill prescriptions very quickly, given the in phase demand. So those are the 2 bottlenecks that we see. And I think both are more short term, as in fact, both sort of aspects of the supply chain when the import permits in the German government and then fulfillment of prescription start to level out as more and more resources that could against those. So I do see them as temporary measures in terms of restrictions on growth.

Speaker 6

Okay, great. Thank you very much for that color there. And then second quick one for me, just on the hemp derived delta-nine beverages that you mentioned again on this call. Formulations are complete. You mentioned some you're going to do it state by state.

Speaker 6

I believe you mentioned Texas and New Jersey as 2 of the states. So just any commentary of how many states you believe right now you'd be able to sell into? And then how the conversations you're having with some of your distributors, both larger and smaller, in terms of the desire for these hemp derived beverages? Have you seen the desire increase, especially, their ability to participate with someone, which is an existing player like you guys with alcohol beverages. So how are you seeing the overall demand for these Delta 9 beverages?

Speaker 6

And how many markets do you think you're going to build into within the current environment? Thanks.

Speaker 2

So number 1, you heard me say before and I would put a dollar value on it, but if we could sell our THC beverages that we produce in Canada today in the U. S, it would be a large sized business for us if we could ever do that. With that, we can't as we can't sell anything that are THC infused products. We're looking and you heard me mention the states we're looking at and I will tell you this here. There is a lot of our beer distributors that have reached out to us and want the product right away because they have seen in markets where it is how well the sales are doing.

Speaker 2

So we'll look rolling it out online in some markets and the markets we feel that we can do it and we can do it legally, we can do it right. There's about 3 or 4 markets that we would do right away. We do have the product do have the product that has been developed. We have the formulations. We don't have products out there today, but we do have the formulations, we do have the product ultimately ready to go once we can get the go ahead and we know what our plans are in which markets.

Speaker 6

Great. Thanks for the call and I'll jump back into the queue.

Speaker 2

Thank you.

Operator

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

Speaker 8

Afternoon, guys. Hope all are well. I just had a couple of questions on beverages. The first one on energy drinks, obviously, a very attractive category, but also very competitive. I was just wondering how you're thinking about what you think you need to do to be successful in that category?

Speaker 8

And will the focus be on HIBOR? Or are you planning to launch additional brands as well? That's the first one. Thanks.

Speaker 2

So I think and again, you crossed a little broken up. Will the focus be on our beverages? Was that what you're asking? And what beverages what brands within our beverage business?

Speaker 8

No, no, sorry. You didn't hear me. It was on the Energy Drink specifically. And

Speaker 2

On the Energy Drink?

Speaker 8

It's actually very attractive. Yes, very attractive, but very competitive. What do you think you need to be successful in that category? And will it just be highball or additional brands beyond highball?

Speaker 2

Okay, okay, okay. I got that one. Sorry about that. So, Owen, I got to tell you, in my career, I've got lots of requests from consumers. I've never had so many requests for consumers on HIBAL when ABI discontinued the product.

Speaker 2

So there will be a big focus on our Highball product. We come out with a water product called Liquid Love, and we test it in the marketplace with some very, very high results and good results on that. Our non alcoholic beers, if I was to put that in a glass and even you who knows beer, Ultimately, I'm not sure you'll know the difference between that, a regular beer and a non alp. So we've come out with energy drinks, we've come out with some great non alp beers. We've come out with some water drinks with Liquid Love, both in sparkling and still in multiple flavors.

Speaker 2

And so far, the demand from our distributors and that and our consumers has been strong. But we'll continue to push out the innovation that we have put forth in regards to some of the stuff that we've come out with Montauk, some of the Sweetwater, some of the 10 barrels, some of the new flavors that we've come out with Shoftop are some of the exciting things. So we see tremendous growth and tremendous growth in some of the brands that we acquire returning to growth where they were declining.

Speaker 8

Okay. Thanks, David. And then just one quick follow-up on Aaron's question on MTHC. Are you planning to sell this via e commerce as well so you can get these brands national?

Speaker 4

So sorry, Owen, it sounds like you're

Speaker 2

talking into like a cut. Can you just repeat the question? I think the question was on Delta 9.

Speaker 8

Yes. Are you planning to sell that by e commerce as well?

Speaker 2

Yes. Like I said before, on Delta 9, it's something that we're going to focus on and we will sell it in e commerce, but we will sell it into retail through beer distributors that everybody is in agreement that can take it and in retail markets that we can sell it. And so far, we've had a great response from our distributors and retailers that are interested in this product.

Speaker 8

Great. Thanks guys. Apologies for the bottom line.

Speaker 2

No, no, no problem. Thank you, Owen.

Operator

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

Speaker 9

Hi, thanks for the question. Just a follow-up on Germany, given the increased demand that you mentioned there. Can you just comment on what you're seeing on the supply side? Is there enough product there to serve that market as demand grows? And in terms of pricing, are you seeing any sort of increase there?

Speaker 9

Thanks.

Speaker 7

Yes. No problem. Basically, what we're seeing in terms of supply, so in essence, product seems to be selling as soon as it comes into the market, not only it's what I'm hearing not only on our product, but also in terms of product from other competitors into the market. It does not feel as if the market is saturated at all at this point. And so in essence, I think there's still definitely room for additional supply on medical cannabis into the market.

Speaker 7

And when I say that, I mean mostly on whole flower. The extract market is growing at a slower pace, whereas the patient led whole flower side of the market is growing at more a faster pace. And so what we see is the market will probably enter into a segmented approach in terms of looking at premium, midstream products and value products. And you'll start to see more, I think, segmentation come through the market as there's more proliferation in terms of product quality. And we will look to participate in all the various different parts of that segmented market.

Speaker 7

We're pretty excited about it.

Speaker 9

Thanks for that. And then my second question is just on your organic growth guidance. Could you just maybe provide a bit more color in terms of your segments? Is there any specific segment that you expect will be responsible for most of that organic growth? Thanks.

Speaker 2

And just in that organic growth number, a big part of our business, there's no organic growth that we're kind of looking from in our CC Pharma. If anything, what we're looking there is margin growth and cash flow. It's just a smaller business in regards to our wellness growth. We're looking for same growth last year. But we're looking at double digit growth coming out of both our cannabis and our beer business, our beverage businesses, and that's where the big growth is.

Speaker 2

Low to mid single dose on wellness, no growth really coming from our CC Pharma, our medical distribution business.

Speaker 9

Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Erwin for any further or closing comments.

Speaker 2

Well, thank you everybody for joining us on this summer day. Listen, we've had a lot of good stuff to report today, record sales. And if I look back to 2019, that being a $50,000,000 business and this

Speaker 4

year we have guidance out

Speaker 2

there between $950,000,000 to $1,000,000,000 And that is without anything happening in the U. S. So none of this guidance includes anything in regards to rescheduling in the U. S, anything that happened in the U. S.

Speaker 2

And over the last 5 years, everybody kept asking me what's happening in the U. S, what's happening in the U. S. A lot of things would change within Tilray. If something happened in the U.

Speaker 2

S, we're excited about the opportunities in Germany in regards to even the change in selling more and more infused drinks in the U. S. Could change dramatically. We've had to deal with the higher excise tax in Canada. We've had to deal with higher costs because of cannabis, issues in regard to insurance and IT costs and protecting ourselves.

Speaker 2

But this is a team that's made sure we could overcome that in other ways. One of the things as companies look today is leverage. And as we sit today with 1.7x leverage and that we're able to pay $300,000,000 off off of our subordinate debt last year between our cash, our cash flow and just using equity is something to be very, very proud of. So over the last 5 years, we have built something that's pretty exciting, a lifestyle company that's focused on cannabis, which is cannibalizing alcohol, of course. We have a real exciting craft beer business and we think there's a lot of growth in the craft beer business.

Speaker 2

We think there's a lot of growth in the beverage business. We think there's a lot of growth in the spirits business and our wellness business. I think Europe is just beginning and we're well positioned with 2 facilities, 1 in Germany and now for the first time, we can supply the whole market of the Germany facility where before we only could supply the German government. We have an incredible facility that's working with our Canadian facility in regards to growth. And with that, you're going to see a lot of opportunities where there's going to be growth in a lot of other countries within Europe.

Speaker 2

You heard me talk about genetics in regards to us looking at our genetics and bank of genetics and the quality. The thing is the cannabis user today is becoming more and more educated about the potency, the genetics and what they're using. The cannabis consumer today is just not the Gen Z and millennials. It's an older generation that's looking at cannabis for pain, for sleep, for anxiety, cancer patients in treating epilepsy and other things. So cannabis is just not a relaxation or a product to get high on.

Speaker 2

It's a product for a lot of medical reasons. It's a product for relaxation. And as we talk about bringing people together through exciting times. Tilray will continue to evolve into a lifestyle company And as we look at growing this business and not sure what's going to happen in the U. S, as we look at other categories and what we should expand into as we go through our strategic plans, we've identified what is that lifestyle opportunity for us to bring within the Tilray brands.

Speaker 2

As you said, as I said before, over 40 brands within this company and that is since 2019. We produce over 90% of our products. We have over 2,500 dedicated employees that are really dedicated and very lucky to work with this team. We have a great Board of Governance that is focused on our ESG, focused on good governance. And last but not least, I want to thank every shareholder out there for being loyal shareholders and being patient with us.

Speaker 2

With that, enjoy the rest of your summer. Thank you very much for joining us and enjoy one of our great products. Thank you.

Operator

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

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