Tilray Brands - Q1 2024
October 4, 2023
Transcript
Operator (participant)
Thank you for joining today's conference call to discuss Tilray Brands, Inc. financial results for the 2024 fiscal first quarter ended August 31, 2023. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session for analysts and investment firms conducted via audio, and participating retail shareholders conducted via the Say Technologies platform. Question submission and uploading through the Say Technologies platform has already concluded, and the company will read aloud and answer the top questions. I will now turn the call over to Ms. Berrin Noorata, Tilray Brands Chief Corporate Affairs and Communications Officer. Thank you. You may now begin.
Berrin Noorata (Chief Corporate Affairs and Communications Office)
Good morning, everyone. By now, you should have access to our earnings press release, which is available on the Investor section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties which may prove to be incorrect.
Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer, who will provide opening remarks and commentary, followed by Carl Merton, Chief Financial Officer, who will review our quarterly financial results and maintain our Adjusted EBITDA guidance for the 2024 fiscal year. Also joining us for the question and answer segment are Denise Faltischek, Chief Strategy Officer and Head of International, Blair MacNeil, President, Canada, and Ty Gilmore, President, U.S. Beer. And now I'd like to turn the call over to Tilray Brands Chairman and CEO, Irwin Simon.
Irwin Simon (Chairman & CEO)
Thank you, Berrin, and good morning, everyone. We appreciate you joining our quarterly call. At Tilray Brands, we strategically diversify our cannabis-lifestyle and CPG company globally, and we've done so for several reasons, including the tremendous growth opportunities we see within the beverage category and across markets like craft beer, ready-to-drink cocktails, non-alcoholic beverages, energy and nutritional drinks. These product categories and others in our portfolio further allow us to address the ever-changing cannabis market conditions while driving market share in the industries in which we compete. This effort is backed by our portfolio of high-quality lifestyle brands and the strong and growing distribution networks that are behind them. Our goal is doing this is clear: to accelerate our ability to deliver industry-leading, profitable growth and sustainable long-term shareholder value.
To this end, our achievements in fiscal 2024 to date and expectations for the balance of the year reflects the stride we're making by focusing on our core fundamentals. Number one, maximizing profitable revenue growth through organic expansion, initiatives, and key strategic acquisitions with strong synergy potential. Number two, realizing the benefits of optimized asset utilization and cost management to ensure a lean, efficient cost structure across all our business segments. And of course, number three, continuing to strengthen our industry-leading balance sheet and cash position. Our strategic execution and achievements affirm that we have emerged as the most diversified cannabis-lifestyle and CPG company globally, with four distinct and complementary business segments. These consist of Cannabis, broken out into medical and adult-use, along with beverages including craft beer, spirits, ready-to-drink mixed cocktails, and non-alcoholic drinks and CBD beverages, wellness products, and a medical distribution business.
As a result, we had a record Q1 with net revenue of $177 million, representing 15% growth year-over-year. We grew EBITDA in our Cannabis business and our international businesses. We grew Canadian cannabis revenue by 16.5% in the quarter and remain the leading, strongest, and most profitable international cannabis LP, with approximately a 13.4% share in Canada, inclusive of HEXO and Truss, 631 basis points ahead of the next LP. From a product category perspective, we continue to lead Cannabis sales in almost every market across Canada, the largest federally legal cannabis market in the world. Tilray is number one in cannabis flower, oils, concentrates, and THC beverages, and number two in pre-rolls, number four in vape, and the top 10 in all other categories.
Aggregating all categories in either inhalables or ingestibles, Tilray is number one in both of these groups. We grew international cannabis revenue by 37%, and we are the market leader in medical cannabis across Europe, with leading market shares in Germany, Poland, and Luxembourg. We are a leader in the hemp food industry with a 52% branded market share, with Manitoba Harvest in the U.S. and Canadian market share of nearly 80%. With our recent acquisition of eight craft beer and beverage brands from Anheuser-Busch, we are growing fast in the craft Beverage Alcohol industry, solidifying our leadership position as the fifth largest U.S. craft beer brewer, with 5% market share in a growing market. Since year-end, we paid down $177 million of our debt.
The balance we have brought to our business model by going beyond Cannabis has given us a strong position today and is positioning us well for higher growth, future opportunities, including when U.S. federal cannabis legalization and German legalization of adult-use cannabis happens. We believe we're in a great place going forward, well-positioned with the resources, infrastructure, and operations, the distribution of brands, sales and marketing, and know-how to lead the revolution of cannabis CBG into the American and European mainstream.
Let us now discuss our individual segments with the context of our overall business. Cannabis was our largest segment by net revenue and comprised of approximately 40% of the total revenue. Gross revenue from Canadian adult-use cannabis increased 22%, driven by innovation and share growth in dried flower, vapes, and pre-roll.
This was achieved both organically and as a result of our recent acquisitions, and despite price compression in the quarter of approximately $3 million from the prior year quarter. Notably, in Q1, according to combined Hifyre and WeedCrawler retail sales data, Tilray sold over double the units of the number one and number three LPs combined. In equivalent kgs, we sold double the amount of the number two LP. As pre-rolls continue to grow, we shipped over 18 million pre-rolls, 200,000 per day. That is a lot of pre-rolls. In terms of market share in our core business of Tilray, when we exclude HEXO and Truss, we finished Q1 with 8.76% market share, which is up versus Q4 2023 and year-over-year versus fiscal year 2023 Q1 by 57 basis points and 38 basis points, respectively.
We maintained our number one market share position and expanded the gap by an additional 20 basis points to an overall gap of 136 basis points versus the number two LP by market share. Our combined market share for Q1, when including Tilray, HEXO and Truss, was 13.4%. Regionally, we grew our share at all four major markets in Ontario, Alberta, British Columbia, and Quebec, furthering our best-in-class market coverage to a highly fragmented retail network. Finally, we continue to have a relentless focus on synergies. We reported planned synergies up $27 million with the HEXO transaction. In just two months, we have had already achieved $17.1 million of the target through elimination of duplicate costs, streamlining SG&A, and renegotiating key contracts.
In Q2, we will complete the integration of HEXO from an operational standpoint, which includes centralizing our packaging and logistics into our three-in-one facility, driving further efficiencies. With regard to our Masson facility in Quebec, we've invested in making the necessary changes to convert and optimize the facility to grow cannabis and fruits and vegetables for the Quebec marketplace. This work is on track, and we will begin planting cucumbers this year. On a related acquisition note, in August, we purchased the remaining 57.5% equity ownership of Truss Beverage Company from Molson Canada. The transaction further strengthens our number one cannabis market share position in Canada, with a combined market share of approximately 40% in the THC beverage, and positions us at the forefront of the adult-use beverage sector.
Our expanded Cannabis portfolio now includes the fastest-growing beverage brands, including XMG, Mollo, House of Terpenes, and Little Victory. We believe that THC beverages present a significant opportunity. There are nearly 11 million customers in Canada for cannabis beverages, and the category is already roughly CAD 100 million at retail. In addition to the category opportunity, transitioning THC beverage production to our London facility will generate further cost savings and synergies. Turning to international cannabis, which achieved revenue growth and improved profitability in Q1, our intentions are twofold: strengthening our leadership position and market share in the medical cannabis category, where we currently operate across 21 countries, and achieving early mover advantage in new countries as medical legalization advances. Based on these trends to date, we are building momentum in Poland, Italy, the U.K., and the Czech Republic.
As we look to fiscal 2024 for our international cannabis business, our focus is on: high-quality medical cannabis brands, which are trusted by patients, healthcare professionals, and government officials around the world. Of our best-in-class cultivation facilities in Portugal and Germany, where we are one of only three companies in Germany that can cultivate in-country, as well as leveraging our Canadian cannabis facilities and expertise, our medical distribution network, led by our integrated Tilray Pharma and medical cannabis teams, with relationships across 13,000 pharmacies. From a bottom-line perspective, we are laser-focused on optimizing our European platform, working to remove approximately $8 million of costs from our businesses, of which we've already completed over $6.8 million. CC Pharma, which we are rebranding to Tilray Pharma, is our established medical distribution platform for traditional branded and generic pharmaceuticals, as well as medical cannabis.
This business segment, from a revenue perspective, is currently equal in size to our Cannabis segment, comprising slightly less than 40% of the total sales mix. It grew 14% in Q1 from a year ago and expanded its gross profit margin due to a reduction in production costs and improving product mix. Similar to the U.S., we are not planning our business around adult use legalization in Germany. However, there is proposed legislation in Germany for medical cannabis to be declassified as a narcotic, and if the proposed German legislation comes to pass, it may be prescribed as a medicine rather than a narcotic, which is more difficult for healthcare providers to prescribe. This, in turn, would open accessibility to a larger patient population.
Now turning to our beverage, alcohol, and CPG portfolio, a high-quality, growing portfolio of lifestyle, craft, beverage, alcohol, and wellness brands that have enabled us to build a strong footprint in the U.S. market without engaging in business that touches a cannabis plant. Importantly, beverages are a fast-growing category, with significant growth through innovation and M&A, and high future growth and healthy margins. Within beverages, for example, the craft beer business is expected to grow to $282 billion globally by 2032, a CAGR of 10.5% between 2023 and 2032, with North America accounting for 40% of the revenue today, of that $40 billion in 2023. Given that, it is a market we have been following closely in order to seize on the clear opportunity that exists today.
Reflecting that, earlier this week, we welcome the newest additions to the Tilray Brands family as we close on our acquisition of eight beer and beverage brands from Anheuser-Busch. These brands, Shock Top, Breckenridge Brewery, Blue Point Brewing Company, 10 Barrel Brewing Company, Redhook Brewery, Widmer Brothers Brewing, Square Mile Cider Company, and HiBall Energy, have enabled us to further diversify and expand our Beverage Alcohol segment while elevating our position within craft beer from number nine to projected number five. We are confident that as we layer on our team's deep experience and skills in product innovation and marketing, we will able not only grow our brands, but also evolve the overall craft beer category, where there is clear and strong opportunity to grow the consumer demographics and expand into new products and formats such as RTD and new channels.
Taken together, over the last three years, we've added a total of 13 brands to our Beverage Alcohol portfolio. The eight that I just referred to, in addition to SweetWater Brewing Company in December of 2020, Alpine Beer and Green Flash Brewing Company in January of 2022, and Montauk Brewing Company in November of 2022. We also own Breckenridge Distillery, the award-winning spirits brand, and the world's best blended whiskey, which was acquired in December of 2021. In terms of overall segment performance, quarterly revenue for the Beverage Alcohol business was $24.2 million in Q1, representing a 17% growth from last year, and we're just getting started in making this segment a more meaningful component of our financials. We project pro forma revenue for our Beverage Alcohol segment, including these recently acquired brands, of about $300 million.
Finally, our Wellness segment is delivering higher gross profit on a stable topline as it's Adjusted to higher ingredient costs through increased pricing from a year ago. It remains an important element of our U.S. strategy because of these factors: Strong consumer interest in hemp products, expanded distribution into Whole Foods and Walmart, and product innovation to meet needs of the Gen Z Millennial consumer through new hemp-forward foods and supplement offerings in CBD wellness beverage like our Happy Flower. It's also worth noting that Manitoba Harvest is the industry leader in terms of sustainability, having recertified as a B Corp for the tenth consecutive year and having launched the first Regenerative Organic Certified hemp heart SKU this past spring.
Across the board, we are delivering solid performance by optimizing our U.S. businesses and setting the stage for significant growth in the near and longer-term future for existing and newly acquired brands. In summary, we think the opportunities afforded by our intentional business diversifications are numerous and exciting as we look ahead. Our go-forward plan is to execute on what matters most, maximizing revenue and growth, optimizing efficiency, and maintaining our balance sheet strength as we invest in our industry-leading brands. I will now turn the call over to Carl to discuss the financials in greater detail.
Carl Merton (CFO)
Thank you, Irwin. Before reviewing our quarterly performance, let me remind everyone that our financial results are presented in accordance with U.S. GAAP and in U.S. dollars, and we will reference both GAAP and non-GAAP Adjusted results throughout our discussion. In addition, our earnings press release contains a reconciliation of our reported results under GAAP to the non-GAAP measures identified during our remarks. Q1 total net revenue rose to $177 million, compared to the prior year quarter at $153 million, representing 15% growth. In constant currency, net revenue similarly grew 15%, based upon constant currency revenue of $176 million in Q1 this year.
By segment, Cannabis net revenue rose 20%, or 22% on a constant currency basis, inclusive of $3.1 million due to price compression in Canada, of which virtually all also represented a reduction in EBITDA. Distribution revenue rose 14%, or 11% on a constant currency basis. Beverage Alcohol revenue rose 17%, and Wellness revenue declined 1%, but was flat on a constant currency basis. Cannabis excise taxes, which are a reduction from revenue, totaled $26.6 million, compared to $17.1 million last year. This reflected a sharp increase in cannabis revenue generated in Canada versus the year-ago period, due in part to the HEXO acquisition, which closed during Q1, offset by continued price compression in the market. Recall that excise tax is predominantly computed as a fixed price on grams sold rather than as a percentage of the selling price.
While there is an excise task force to present these challenges to the Minister of Finance in Canada, we do not believe some level of reform is likely in the near term. As Irwin already emphasized, the inherent benefits of having a diversified business model. It is notable that in both Q1 this year and last year, our Cannabis and Distribution segment each represented about 40% of our total revenue mix, while beverage, alcohol, and wellness represented about 14% and 8%, respectively. These percentages will change with a full quarter of contributions from the Hexo and Truss acquisitions, along with the addition of the acquired brands from Anheuser-Busch. We believe we will achieve a balance of 30% Cannabis, 30% Distribution, 30% Beverage Alcohol, and the final 10% Wellness.
But the key takeaway here is that we have achieved great balance and are not overly dependent on any one segment from a top-line or even gross profit standpoint. In terms of our geographical footprint, we are also highly diversified, with slightly more than half of our revenue from North America and about 45% from EMEA, with the remainder from other parts of the world. Gross profit was $44.2 million, compared to $48.6 million in the prior-year quarter, while gross margin decreased to 25% from 32% in the prior-year quarter. Adjusted gross profit, inclusive of purchase price accounting step-up, was nearly flat at $49.3 million, compared to $49.7 million in the prior-year quarter, while Adjusted gross margin was 28% compared to 32%.
I will discuss Adjusted gross margin by individual segment in a moment, but it improved across three of our four segments, with the exception being cannabis. That was primarily due to the prior quarter having a 100% gross margin on the HEXO advisory fee revenue. Net loss improved to $55.9 million, compared to $65.8 million in the prior year quarter. On a per-share basis, this amounted to a net loss of $0.10 versus $0.13 in the prior year quarter. Adjusted EBITDA was $11.4 million, down from $13.5 million in the prior year quarter. The primary variance relates to the HEXO advisory fee revenue in the prior year quarter that was not duplicated this quarter as we owned HEXO for the majority of the quarter.
Other contributing factors include the timing difference in recognizing synergies from operating results after completing acquisitions. Recall that when we reported Q4 2022, during the summer of 2022, we announced a $30 million cost optimization plan. Through August 31 of this year, we have achieved $22 million on an annualized run rate basis, of which $21 million represents actual cost savings through Q1. This is up from $18.5 million when we reported last quarter. Operating cash flow improved by $30.5 million, to a loss of $15.8 million, from a loss of $46.3 million in the prior year quarter. This was the result of improved operating efficiencies realized through our synergy programs and management of our working capital requirements. Turning now to our business segments.
Gross cannabis revenue of $96.9 million was comprised of $71.2 million in Canadian adult-use revenue, $14.3 million in international cannabis revenue, $6.1 million in Canadian medical cannabis revenue, and $5.3 million in wholesale cannabis revenue. Net cannabis revenue was $70.3 million, representing a 20% increase from the year-ago period, or 22% in constant currency. The positive variance was mostly related to increased organic growth and the acquisitions of HEXO and Truss. Canadian medical cannabis decreased slightly due to increased competition from the adult-use market and price compression in the medical cannabis market. Adult-use cannabis increased 22% due to organic growth from our existing brands launching new products, as well as the increased revenue from the acquisition of HEXO and Truss.
Offsetting the increase in the current period was a substantial reduction of advisory services revenue from the prior year quarter due to the HEXO acquisition, which terminated the previous strategic arrangement that was in place. The substantial increase in wholesale cannabis revenue was an opportunistic sale, which helped increase our cash flow from operations, even though it had a negative impact on gross margin and EBITDA. International cannabis grew 37%, largely because of the expansion into emerging international medical markets. Cannabis gross profit was $19.8 million, and cannabis gross margin was 28%, compared to $29.7 million and 51% in the prior year quarter. Adjusted cannabis gross profit, which removes the purchase price accounting step-up, decreased to $24.3 million from $29.7 million in the prior year quarter.
While Adjusted gross cannabis margin decreased to 35% from 51% in the prior year quarter. However, if we are to exclude advisory services revenue from Hexo of $1.5 million in Q1 2024, and $7.8 million in Q1 2023, and the wholesale transaction with a negative gross profit of $2.7 million in the quarter, our Adjusted cannabis gross margin would have been 39% compared to 43%. The remaining decrease is a result of price compression. Distribution revenue, derived predominantly through CC Pharma, increased 14% to $69.2 million from $60.6 million in the prior year quarter. The increase was driven by increased capacity and a revamped sales approach to expand our Distribution network of procured products, and was aided partially by the strengthening of the euro relative to the U.S. dollar.
Distribution gross profit increased to $7.7 million, compared to $5.6 million, while Distribution gross margin increased to 11% from 9% in the prior year quarter. Similar to the last three fiscal quarters, the year-over-year increase was a result of a positive change in product mix. Our focus on higher margin sales, including the decision to exit the medical device reprocessing line. Beverage Alcohol revenue was $24.2 million, up 17% from $20.7 million in the prior year quarter. The positive delta was due to contributions from our Montauk Brewery acquisition last November. Beverage Alcohol gross profit increased to $12.9 million, compared to $9.8 million, while Beverage Alcohol gross margin increased to 53% from 47% in the prior year quarter.
Adjusted Beverage Alcohol gross profit, which removes the purchase price accounting step-up, was $13.5 million, compared to $10.9 million in the prior year quarter, while Adjusted gross margin rose to 56% from 53% in the prior year quarter. This increase was related to a favorable sales mix change between beer and spirits, partially offset by the impact of the Montauk acquisition that was not completed in the prior year period. Wellness segment revenue held at $13.3 million, compared to $13.4 million in the prior year quarter, despite increasing pricing to combat ingredient cost inflation. Wellness gross profit was $3.8 million, up from $3.5 million in the prior year quarter, and gross margin rose to 29% from 26%, as we countered the impacts of higher input costs of seed ingredients with higher pricing.
Our cash and marketable securities balance as of August 31st was $464.9 million, down from $490.6 million in the year ago period, but increased from the balance at year-end of $448.5 million.
During Q1, we entered into a new $120 million credit agreement led by Bank of America and included syndicate members, City National Bank, TD Bank, and Pinnacle Financial for our Beverage Alcohol division, which is comprised of domestic-owned subsidiaries and provides for, among other things, a $70 million term loan facility, a $20 million delayed draw term loan facility, which we drew in full as part of the payment of the purchase price on the acquisition of the Anheuser-Busch brands, and a $30 million line of credit, of which we have only drawn $7 million. The new credit agreement extended the maturity date on the loan from December 2023 out to June 2028, with reduced repayment requirements, improved financial covenants, all while maintaining the interest rate spread on the loans.
On August 31st, we settled our obligations under a $50 million convertible promissory note, which had a maturity date of September 1st.
Finally, subsequent to quarter end, we settled and paid in full our Tilray 2023 convertible note. Let's now reiterate our guidance for fiscal 2024, which ends on May 31, 2024. Adjusted EBITDA is still projected at $68 million-$78 million. Note that we are not increasing this range after having acquired the beverage brands. They will be accretive to EBITDA, as we said when we first announced the transaction, but will not have a material impact on EBITDA in the first year post-closing. We also project positive Adjusted free cash flow from operations, excluding our cost to integrate HEXO and Truss and the brands from Anheuser-Busch and the cash income taxes we pay in at Aphria Diamond. We will also work to minimize CapEx and improve our industry-leading balance sheet.
With that, I will conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what's the first question?
Operator (participant)
Thank you. As a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Vivien Azer with TD Cowen. Please proceed with your question.
Robert Holby (Equity Research Associate)
Good morning. This is Robert Holby for Vivien Azer, and thank you for taking the question. First off-
Carl Merton (CFO)
Good morning.
Robert Holby (Equity Research Associate)
Yeah, good morning. Congratulations on closing the acquisition of the ABI Beverage Brands. Today, you called out the margin accretion from the Montauk acquisition to your overall beverage margins. Could you please speak to how you see margins for that segment evolving over time, in particular, that you're not only acquiring craft beer brands, but also on-premise infrastructure? Thank you.
Carl Merton (CFO)
So, the increase in gross margin in Beverage Alcohol this quarter was a combination of two things. One, it was a minor shift in sales mix or in product mix between beer and spirits, and also as a result of the acquisition of Montauk. Going forward, we are very confident that the beer brands themselves will be able to maintain a margin above 50%, but our spirits business traditionally has been closer to 50%. So as that blend gets mixed in with the new brands we've acquired, we'll start to see it move a little closer to the beer margin.
Irwin Simon (Chairman & CEO)
And I know one of Vivian's favorite questions is regards our brewhouses. We sell more beer in our brewhouses than food, and I think that's what's the important thing is of how, you know, food does not dilute our margins in our brewhouses. And that's what our brewhouses are about, is to go out there and market and sell more and more beer. And, you know, that's very much what our plans are.
Operator (participant)
Thank you. Our next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.
Andrew Carter (VP and Senior Equity Analyst)
Hey, thanks. Good morning. Okay, so I want to just go back to the short report that was out last month and just use this, use this opportunity to clear the air. First off, regarding Aphria Diamond, could you help us fully understand the liability? What is the required annual payment to your partners? Is it variable based on performance? Do you have the ability to throttle their production, therefore, adjust to market demands? And then the second question: Do you pay some proportion of your minority shareholder in stock? And if so, are these stocks added back to EBITDA? Thanks.
Carl Merton (CFO)
Thanks, Andrew. I appreciate the opportunity to just make sure that everyone is crystal clear on this transaction. What I want to start off with first is that there. We have never paid for an actual operating expense at Aphria Diamond out of the dividends that we've issued. The dividends that we have issued to our partners in Aphria Diamond, it has always been a payment of profit distribution. There's a quarterly payment that happens, and then there's a true up at the end of the year. That is the only amount that we have ever paid through those dividends.
At one point during the year, last year, we did provide some downside protection, and when that payment was triggered, that payment went through the income statement, and that was added back to EBITDA. That is the only piece of those dividend parts that has ever flown through the income statement, and it was an extremely small amount, and it was fully disclosed in our financial statements.
Irwin Simon (Chairman & CEO)
I think, Andrew, what's important is this here, our, our partner in Diamond, you know, will take equity, and if he keeps it, it's his prerogative. If he sells it, it's his prerogative. But again, there's a distribution of dividends. At the same time, there's, you know, profits where we have 50%, 51%, and, you know, we're enjoying the profits of that, too. So I think that's, that's what's important. But to Carl's point, you know, those, the stock is not used to pay for operations of the business. I think that's what's important.
Andrew Carter (VP and Senior Equity Analyst)
Thank you. I'll pass it on.
Irwin Simon (Chairman & CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Aaron Grey (Managing Director and Head of Consumer Research)
Hi, good morning, and, thank you for the question. So just regarding the EBITDA and EBITDA guidance, you guys held it now, you know, despite the beer brands acquisitions will be accretive. But if we just look at the quarter, you know, excluding, you know, the small HEXO advisory fee, so, you know, call it about $10 million or so. So can you walk us through, you know, how we think of the step-up to get to that $68 million-$70 million for the fiscal year? And maybe if you can talk about the drivers and how we should think about the sequencing of the EBITDA step up to reach that guidance.
I think that'd be very helpful in any puts and takes, where I think that's gonna be more through top-line generation, or more margin improvement via cost efficiencies or otherwise. I think that'd be appreciated. Thank you.
Carl Merton (CFO)
Thanks, thanks, Aaron. That question kind of reminds me of some of the questions we had last year when people asked the same questions on phasing, when we ultimately did get to the EBITDA guidance number. We traditionally have stronger performance in our spirits brand in Q2 every year. That's because it's the buy-in for the Christmas holiday season that happens. And so we see strengthening in that quarter, in that business. And then as we evolve through the year, you know, we have a significant outperformance in Q4, traditionally in our Distribution business, as people... As pharmacies buy in for their customers going on vacation in the summer, in our Distribution business.
And then we see significant buy-in on our beer business in the fourth quarter, in the lead up to summer. Overlaying that this year is the synergies that we're achieving at HEXO, sorry, on the HEXO transaction and our other open cost-saving plans that we've had throughout the year. And so we're going to see, you know, we're going to see a bigger jump in EBITDA next quarter. In Q2, you may see Q3 flat to down a little bit versus Q2, and then you'll see a bigger Q4.
Irwin Simon (Chairman & CEO)
You know, and I think the big drivers here is top line. And you saw our top line in our first quarter, and you heard me mention, you know, we sold 20 million pre-rolls. You know, our beer business, both SweetWater and Montauk, you know, were up. And that is the big thing, is getting the new distribution, but getting the new products out there. You know, Ty and team launched a product called Gummies, which, you know, is a new product for us, and it was a big percentage, you know, of our growth of new products. You know, getting Montauk, you know, into other states, whether it's New Jersey, Pennsylvania, Georgia, is gonna be a big part of our growth.
You know, in our international business, you know, growing our medical business, you know, in Poland, Germany, Italy, and places like that, is, is gonna be a big part of our business. And the big thing you gotta remember, which I talked about, you know, we did three acquisitions, and we're looking to take $27 million of costs out of HEXO. We're gonna be looking to take tremendous amount of costs out of the ABI, and it's gonna take time. And with the acquisition of Truss that we bought from Molson's, you know, we'll be moving those products to our London facility, and we have an excellent facility in Belleville, Ontario, that we're gonna look to do non-alc drinks and energy drinks, you know, some other types of drinks there. So, you know, we're looking for a big year on organic growth and new products, innovation, new distribution.
We're focused on taking more and more costs out of the business. In regards to our facility in Masson, you heard me talk about that, where we're converting that to vegetables, and that should be online by the end of the year, and taking tremendous amount of cost. So, you know, the drivers here are gonna be top-line growth, taking costs out, which ultimately improve margins and drives profitability to the bottom line.
Aaron Grey (Managing Director and Head of Consumer Research)
Okay, great. Thanks very much for the call. I'm dropping in the queue.
Carl Merton (CFO)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.
Matt Bottomley (Managing Director of Equity Research)
Yeah, good morning, everyone. Just wanted to first touch base on kind of that first strategic priority. I know you're just sort of talking about it now with respect to some of the organic growth. But on the M&A front, what is the current landscape if we're looking at you know, the cannabis sector in general, in federal legal environments with respect to what we're seeing in Canada and international markets? Is this something that you think probably has the least amount of you know, opportunistic assets out there, just given some of the headwinds we've seen in federal markets, and should we expect maybe more Beverage Alcohol focus when it comes to M&A allocation? I'm just curious if you have an indication one way or the other.
Irwin Simon (Chairman & CEO)
So I'm gonna bring two other people in to talk about that. I have Blair MacNeil here, who runs Canada. And I got to tell you, I spent some time with Blair and team in Toronto and spent some time with other control boards. You know, it's five years since cannabis is now legal in Canada, and, you know, what we're seeing is tremendous amount of consumers moving over to the legal market, tremendous amount of consumers, you know, partaking in the recreational. You know, you heard us say we sold 20 million pre-rolls. And where that is going, we expect to sell 80 million pre-rolls a year. You know, you see lots of consolidation at retail, much more awareness out there.
Listen, there's still lots of problems in the Canadian market, but I got to tell you, for the first time, you know, I'm starting to feel really optimistic about the opportunities there. Blair, you want to add anything to it?
Blair MacNeil (Canada President)
Yeah. So, you know, to your question, Matt, on the, on the opportunity on the M&A side, from an asset standpoint, I think if you look at our portfolio, we're very well-rounded. I'd say, you know, maybe we've got a small gap, on the edibles side, but when you look at the rest of our portfolio, we are very well represented. So there's not a lot of assets out there that we would look to acquire over the next, period of time. We do have, as Irwin alluded to, all of our facilities are starting to really get up there in utilization, and we have availability of some capacity to be able to bring edibles into that. So we'll, we'll look to do that over this, next period of time.
So, you know, at least from a Canadian perspective, I'm happy with the growth we're seeing in the market. I'm happy with where the industry is, you know, not without its challenges, as Irwin said. But, from an M&A standpoint, we don't see a lot of opportunity there.
Irwin Simon (Chairman & CEO)
Before I pass it to Denise, though, you know, we're really excited about the beverage category. If you come back and think one of the biggest opportunities and, you know, you walk into cannabis stores today, there's a small fridge in there with drinks at $7-$8. But think about, you know, how the beverage category within the world today, you look at the craft beer category, $280 billion, and you come back and think this is a whole new category and the opportunities there. You know, we have 2 facilities. We're the leader in the, you know, beverage business, and, you know, everybody wants to figure out what's the right way to roll this out and merchandise it.
My hope, one day, that you would be able to go into a beer store, a convenience store, or go into a bar, and it would be on tap. So that, to us, is one of the biggest opportunities. Internationally, medical has tremendous opportunities. Denise?
Denise Faltischek (Chief Strategy Officer & Head of International Business)
Thanks, Irwin. Yeah, so internationally, if you look at Europe first, really the only cannabis market today is a medical cannabis market, and Germany still remains the largest market within Europe. However, we do see some countries that are coming online and developing very quickly. The regulations are still, as we all know, really shaping out. We are looking to see medical cannabis in Germany become descheduled as a narcotic and become a regular medicine that can be prescribed. And so if we look at our business, we really see, like, our business is very nascent today, and it's still developing. And so we are evaluating where do we have gaps in capabilities and where can potentially M&A fill in those gaps.
So we are very much looking to see what is out there, what, what can we do to make our business have full capabilities, whether it's technology, whether it's online platforms, et cetera. And we are looking at the same thing in Australia, New Zealand, whether it's looking at clinics, et cetera. And then also, talking about potentially looking at how Beverage Alcohol might play a role in Europe as well. So we are very much focused in seeing what, what might be available to round out our capabilities and, and make a more wholesome business.
Irwin Simon (Chairman & CEO)
To round out the third part of your question in regards to beverage, you know, alcohol. Listen, we own some great brands today, and, you know, Ty and I are on the road to start visiting them after today. And how we start integrating them and where we will be looking to sell them in each, you know, state and each tri-state, we will figure that out. But, if you come back and look what, you know, the team has done with Montauk in a short period of time and growing that 9% and, you know, seeing SweetWater growing 4%, we're excited about Blue Point. We're excited about Breckenridge Brewery. We're excited about 10 Barrel, and the rest that come along with this.
So, also, you know, there's a lot of good things happening in, with Breckenridge Distillery, as this ultimately gets together with Breckenridge Brewery, as we continue to, you know, leap on the bourbon craze and get new and new distribution. And let's, let's not forget our Manitoba Harvest business, where we have about a 52% share, in a category that's developing a lot of new products, and we're getting a lot of new distribution. And I think the big thing is there, I mean, we're in supermarkets, we're in, you know, Costcos, we're in the Walmarts, so we have avenues if we decide to bring other products in, and we're selling, you know, our beer products in those today.
So we have, you know, an avenue of retail if we bring other wellness foods in there to make sure we, you know, they're accompanied by it.
Blair MacNeil (Canada President)
Got it. Appreciate all that color, and it was a long response, so I'll just get back into queue.
Irwin Simon (Chairman & CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Frederico Gomes with ATB Capital Markets. Please proceed with your question.
Frederico Gomes (Director of Institutional Equity Research)
Hi, good morning, thank you for taking my question. Just on your capacity utilization, I know that you addressed this a little bit, but maybe could you provide a bit more color on, you know, where you currently stand in terms of utilization in your cultivation and manufacturing facilities in Canada? And, you know, with your organic growth initiatives, where do you see that utilization ending over the remainder of the fiscal year and sort of the potential benefit that you could see in your margins as a result of that? Thank you.
Blair MacNeil (Canada President)
Thanks for the question. Yeah, from a capacity and utilization, it's probably easiest for me to go, you know, across the facilities really quickly. But if you look at Masson, we're in the middle of the conversion of B9, which is 80% of that facility, to vegetables, and that's on track to be fully utilized by January. And then the remaining 20% will service the Quebec market with locally grown cannabis for Quebec. So we're 100% utilized in Masson. At the Redecan facility, we'll be 100% utilized. We have an outdoor grow in Cayuga, which is currently at 50% utilized, but our plan is to grow that through pre-rolls to be up to 100% utilized by the end of the year.
You know, that'll be very close to the end of the year because May is when we plant the outdoor grow. Then from a Leamington standpoint, we'll be 100% utilized in Aphria Diamond, and we do have some opportunities that will currently fill up our Aphria One facility by the end of the year, and then Broken Coast has always been fully utilized. So we feel very good about capacity and utilization overall. I definitely think that will help the margins on the balance of the year. I don't have a crystal ball on that front, but certainly, as Irwin talked about, as we move all of our packaging from the acquisitions into Leamington, we're gonna see great synergies on that side. The London facility on beverages will be close to 90% utilized with the transition of Truss.
So definitely we're gonna be able to allocate the overhead of those facilities across more volume throughout the end of the year.
Irwin Simon (Chairman & CEO)
I think not only utilization, we're vertically integrated here. So we can grow flower, we can, you know, oil, you know, we're probably the largest pre-roll, you know, producer today in the Canadian market. We're the largest producer of cans. You know, we can produce, you know, any type of edible. So with that, you know, and what we're doing basically today is producing for ourselves, we are doing some wholesale. So, you know, not only, you know, are we, from a utilization standpoint, we're vertically integrated to support our 12 brands out there. The big thing here is new product development, and that's what we've realized is in the Canadian market. Consumers are looking for new products all the time.
Whether, you know, the potency of the product, it's infused products, the genetics of the product, the big thing, what we have to work on, is how we develop brands and get, you know, consumers used to buying brands, and that's one of the big opportunities, and that's one of the things we need to, you know, work on.
Frederico Gomes (Director of Institutional Equity Research)
Thank you very much. I'll hop back in the queue. Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Michael Lavery (Managing Director and Senior Research Analyst)
Thank you. Good morning. Just wanted to come back to the eight new brands that you've just closed and purchased. And at least on the retail side, where we can see some data, those have been declining for the last two or so years. I guess, maybe first, is that the full picture? Is there a more holistic view that's got you know, better momentum? But either way, then, what does it really take to get that to... You know, you've said how important organic growth is. Obviously, it's not already in hand. So what does it take to really get those going? And you know, how much more spending? Is there distribution upside? They've all been around for quite some time. How do you just think about driving growth there?
Irwin Simon (Chairman & CEO)
I'm gonna turn it over to Ty in a second. What goes down, gotta ultimately go up, right? So I think that's, you know, what, what's important here. And yeah, they're, they're declining, and that's what gave us the opportunity. I think, you know, from some standpoint, did they get the attention, that was needed? And, you know, I think it goes back and shows what we've done with SweetWater and what was done with Montauk, what's done with Green Flash and Nelson. And, you know, the team knows how to do it. Ty, you want to add something to that?
Ty Gilmore (U.S. Beer President)
Yeah, yeah, Michael, I'd say I'm not real sure you're seeing the full picture when you look at it at a total brand level. When you dive a little bit deeper and you get into the SKU level, we're really, really excited. You see brands like 10 Barrel, their Pub Beer, which is growing. You see Avalanche growing share in Colorado. You see what the Big Ballard, part of the Redhook family, and their SKUs and how they're getting into new segments is really, really exciting. So yeah, I'm not real sure you're seeing the full picture. You know, we've built out a national account team, and as you know, chains play an integral part in building distribution and building brands.
You know, we, we've had some really good conversations with big retailers around the U.S., and they're excited about the brands. Our distributors are extremely excited about us coming over and bringing energy and investments, and focus. Just like we've done with Montauk and SweetWater, you know, we are gonna build out a plan to drive quality distribution, build the brands, and really lean in on the SKUs that are driving some of these brands, which are exciting.
Irwin Simon (Chairman & CEO)
And I think the big thing is, it's not just these brands, but the whole craft, you know, beer industry, and what we can do. And we're working with BCG on a whole overall strategy here on the brand, the positioning, who the consumers are of craft beer, where the non-alcohol, where, you know, from an ingredient standpoint, nutritionals on a beer, in regards to can versus bottle versus, you know, other types of packaging. What's sold in a brew pub, what's sold on premise, what's sold in convenience stores, which are the biggest sellers, you know, of craft beer. So there's a lot we're studying right now. There's a lot we're doing in data and research and working with BCG to bring that together. But we're pretty excited about the opportunity in the craft beer business, and we're pretty excited.
Listen, we're even though they're declining, we're now the fifth largest craft brewer, and I think the evolution of big beer versus craft beer is changing dramatically, too.
Michael Lavery (Managing Director and Senior Research Analyst)
Okay, thanks for that. And can I just follow up on the cucumber farming? Not a sort of a piece of the portfolio I had anticipated, maybe initially. Can you just help us understand maybe why that's interesting to you and what the margins and growth might look like for that?
Irwin Simon (Chairman & CEO)
Number one, you know, listen, we got a $1.5 million facility. If we went to sell it today, what the values in that you're getting for in, you know, cannabis facilities. We think, and we've been asked by multiple retailers in Quebec. There's a major shortage, and they want vegetables grown in Quebec. There is better margin there than just, you know, keeping the place dark, or selling cannabis that you can't sell. And we'll see what happens. Ultimately, maybe one day we could sell it as, you know, a vegetable farm to someone else that wants it. But right now, with minimal investment, and that facility, you know, had probably a $200 million investment in it, and there is big demand for, you know, fruits, vegetables, and that in the Quebec market.
The other thing is, what we're going to do there is grow cannabis just for the Quebec market, where they want cannabis, you know, grown in their province for their, you know, retailers.
Michael Lavery (Managing Director and Senior Research Analyst)
Okay.
Irwin Simon (Chairman & CEO)
It is a profitable business, so that's... I want to be very clear on that.
Michael Lavery (Managing Director and Senior Research Analyst)
Okay, thanks.
Operator (participant)
Thank you. Our next question comes from the line of Bill Kirk with Roth MKM. Please proceed with your question.
Bill Kirk (Managing Director and Senior Research Analyst)
Hey, thank you for taking the questions. Irwin, you mentioned expanded distribution at Whole Foods in your prepared remarks, and given your incredibly strong history with them, could you maybe talk about how your background helps with this particular account? And I guess, what does your experience tell you about the trajectory of brands into other retailers once you find success at Whole Foods?
Irwin Simon (Chairman & CEO)
You know, back in the day, it's interesting, and that's a great question because other retailers used to go to Whole Foods and see what was new, what was natural, what was organic, and what was selling, because everybody wanted Whole Foods customers. I think that's changed quite a bit today. But again, you know, Whole Foods is an important customer for us, you know, on our SweetWater, on our Montauk, on our Blue Point, and some of our other products. Also a very important customer for us on Manitoba Harvest. You know, and again, I think what Whole Foods is doing, where they have their 365, but they want brands, and that's what consumers are looking for.
But, you know, I will tell you, whether it's Kroger, Albertsons, you know, HEB, they're important customers to us, and it's interesting what they're saying when we've introduced them to new... the new Gummies product or Montauk Pumpkin, what that is doing. So what retailers are doing out there, yes, they're looking at what's selling in Whole Foods, and is it a beer kombucha combined, et cetera, and some of the new innovation. But, you know, my experience before is retailers went to Whole Foods and see what, what was selling. Not as probably as much anymore, but retailers today in the craft beer industry want new innovation out there. Because if you look at craft beer, there's a lot of IPAs.
You know, there's a lot of, you know, other beers out there, but what's new and unique and is just not an IPA out there, and I think that's what we're trying to bring to the party.
Bill Kirk (Managing Director and Senior Research Analyst)
Excellent. And then, Carl, you mentioned that 4Q buy-in helps beer. Does that load in explain the sequential difference for beverages in 1Q from that 4Q, about $8 million or so? And is... Should we think about the, before the ABI brands coming over, should we think about that $24 million in beverages, 1Q, as, like, a pure volume consumption number? No load in, no destock, that's more of a volume consumed type number?
Ty Gilmore (U.S. Beer President)
So I'll let Ty talk about the volume consumed, but on the profitability side and the margin side and then ultimately down to EBITDA, yes, that is a portion of the decline that is going on in that space is just a decrease in volume because you don't have that main bias.
Irwin Simon (Chairman & CEO)
Just let me jump on something there. I was just emailed by one of our employees on some of our hemp products that were in Whole Foods. I won't mention the other retailer, but they saw them in Whole Foods, and we picked up two other retailers because they were in Whole Foods. Sometimes Whole Foods is, you know, one of our best showrooms. So that, that is something that happened, just to answer your question on that.
Ty Gilmore (U.S. Beer President)
Yeah. And on the, on the volume piece, Phil, I'd just say that, you know, consumption, seasonality drives consumption, so I wouldn't use the word load in. You know, consumption peaks over times, over quarters. And, you know, like Carl said earlier, there is a higher seasonality and consumption of beer, in, in our Q4, which is the start of the summer. And as we take on these new brands, as we look into our Q2, you know, we expect, we expect to see kind of organic consumption to be in line with what everything else is doing.
Bill Kirk (Managing Director and Senior Research Analyst)
Got it. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.
John Zamparo (Director and Equity Research Analyst)
Thank you very much. Good morning. My question's on the regulatory side, and specifically, if you do get the DEA following the HHS recommendation, what does that change for Tilray? Does it adjust your M&A strategy at all, or would you need to see additional developments or clarity from different departments?
Irwin Simon (Chairman & CEO)
So, I think I've been very clear in regards to, you know, classification here. Listen, I'd love to see it happen, and I've been very clear. It does not affect us day one, but what it does, it helps get some confusion out of the market. The way cannabis is classified today is, you know, the same as heroin, the same as other drugs out there, and it's absolutely not. Number two, I think from a medical standpoint, there are so many applications for it, and to legalize it from a medical standpoint would be something very important. There is so much confusion out there on legalization, and, you know, customers want it. I mean, basically, it is legalized without being legalized, because everywhere you walk, whether it's New York, California, no matter what state you're in, cannabis is being utilized.
So we might as well do something with it, collect the tax dollars, and ultimately get the regulatory in place where you're getting products out there that go through regulatory that are not cut with, you know, other drugs or, you know, other ingredients out there that are not safe. In regards to what ultimately the opportunities are for Tilray, listen, if one day, and again, this is hope, no reason to believe, if we could grow it in Canada and ship it into U.S., is an opportunity for us. You know, we have a big medical business in Europe. We have a medical business in Canada, which ultimately would get us into the business here in the U.S. So I think first, there is, you know, ultimately no benefit to Tilray.
I don't think anything is gonna happen here for a little while, for over the next two years anyway, but it would basically be very, very, very good for the cannabis industry.
Frederico Gomes (Director of Institutional Equity Research)
Okay, great. I'll leave it there, thank you.
Operator (participant)
Thank you. That concludes our analyst questions. We'll now proceed with questions submitted by retail stockholders on the Say Technologies platform. The question reads: Why should we keep investing in Tilray?
Irwin Simon (Chairman & CEO)
Listen, again, I hope, you know, by our results today and some of the things that we're doing, that number one, investors believe in the management team and believe in our strategy. You know, some don't believe in our strategy, but I will tell you, we have, you know, a defined strategy. We have a structured strategy with a lot of process and a lot of levers there that we're ultimately pulling to have a structured strategy. We are, secondly, a very diversified business, but ultimately, how do they all come together under one common denominator? We're not just a cluster of a bunch of products, brands, and categories. And, you know, upon legalization, you know, we have multiple brands that can convert to cannabis.
Ultimately, we have tremendous amount of grow, we have tremendous amount of production today, you know, with, with our beer and our spirits business. We are one of the only ones with two cannabis grow facilities in Europe, where we have a great medical platform. So we're different than most other cannabis companies, we're different than most other craft beer businesses. We're different than any other, you know, healthier food business with our hemp, Manitoba Harvest. So we're absolutely different. We're a big believer in building brands, brand equity, brand equity, brand equity, and there's a lot of work we have to do on our brands in Canada and make consumers familiar with our brands. Again, cannabis has only been there for five years, and again, it's educating the consumers on the brands.
And listen, it's hard to build brands when you're not legally allowed to advertise in the Canadian market to consumers, but we have to do that. Number 2, we've got some great brands in regards to beer. We got great brands in regards to Breckenridge Bourbon and Manitoba Harvest, and we have a really, really strong relationships with doctors and distributors in the European market in regards to our medical business. Tilray Pharma, which was CC Pharma, is a distributor that distributes into 13,000 drugstores. We're looking to convert that business and working with other distributors throughout Europe of how we increase margins. Just think about it, that's a $300 million business, and every margin dollar that we increase there is a major contribution to our bottom line. So with that, we have a strategy. We are about making money and managing our balance sheet.
Will it take some time to come together? It absolutely has been, but I'll tell you, the components are there, and I think that's what's different and unique, and that's why I hope, you know, our investors stay with us. And those that are, thank you very much. That is the questions for today. I want to thank all that have joined the call, all that have gone online to listen to us. Listen, I can reassure you this year, the cannabis industry is a tough industry. The beer industry is a tough industry, but there's no business, there's no industry out there that's not tough. But what's important today is that you have a team that knows how to deal with the toughness, knows how to deal with the environment.
Today, with the acquisition of the Anheuser-Busch businesses, we have close to 2,300 employees around the world, that are working hard every day. Just remember, in 2019, we were a $50 million business. Today, on the run rate to being close to a $1 billion business. We were not diversified. We have a diversified portfolio, we have diversified brands, we have diversified facilities that, you know, are out there around the world. You know, the world today is looking for innovation, looking for new products, and looking for new things. And again, consumers want cannabis. Consumers want to drink beer for the right reasons. Consumers want to drink bourbon. Consumers want medical cannabis for pain, for anxiety, for sleep, for cancer patients, for epilepsy.
So there's so many opportunities, and we're in the right areas today where consumer demand will continue to move into. You know, with the combination of Aphria, Tilray, HEXO, SweetWater, Montauk, and the eight brands that we just acquired from, you know, from Anheuser-Busch, we've got a great portfolio of a lot of things. And with five million sq ft of grow, we're going to repurpose these. And ultimately, how do we make it work? If not, you know, there's. Ultimately, we can sell these off. So there's plenty of levers to pull within Tilray today. I, again, I want to thank everybody for being on the call, listening to us, and look forward to speaking to you again at our next earnings call. Thank you very much.
Operator (participant)
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.