Tilray Brands - Earnings Call - Q2 2025

Executive Summary

• Record Q2 net revenue of $210.95M (+9% YoY; +10% constant currency) with consolidated gross margin up 500bps YoY to 29%, driven by cost controls and mix optimization.
• Beverage net revenue rose 36% YoY to $63.08M with adjusted gross margin up 400bps to 42% amid Project 420 synergies ($17M achieved of $25M target).
• GAAP net loss widened to $(85.3)M (EPS $(0.10)) largely due to ~$34M FX loss and other non-cash items; adjusted net loss improved to $(2.23)M and adjusted EPS was $0.00.
• Reaffirmed FY2025 net revenue guidance of $950M–$1.0B; SKU rationalization expected to reduce FY25 sales by ~$20–25M with innovation offset over ~18 months.
• S&P Global consensus estimates were unavailable despite attempts; management noted adjusted EPS significantly beat expectations of a $0.30 loss (contextual datapoint).

What Went Well and What Went Wrong

What Went Well

• Beverage momentum and margin execution: beverage revenue +36% YoY to $63.08M; adjusted beverage gross margin +400bps to 42% on integration and mix. “Through Project 420, we aim to achieve $25 million in cost savings…we’ve already achieved $17 million”.
• International cannabis growth: +25% YoY led by Germany (medical flower +55%, extracts +24% post-regulatory changes), with diversified EU GMP supply.
• Strategic and tech enablement: “We are partnering with Microsoft and their AI platforms on a global scale to…optimize our operations, achieve significant improvements and propel our business forward”.

What Went Wrong

• GAAP loss and FX drag: net loss of $(85.3)M vs $(46.2)M prior year, including ~$34M FX loss amid USD strength; EPS $(0.10) vs $(0.07).
• Cash flow and working capital: cash used in operations −$40.7M with adjusted FCF −$43.6M due to inventory build (Tilray Pharma seasonality, beverages pre-rationalization).
• Canada adult-use pressure: Canadian adult-use cannabis revenue down 18% YoY as Tilray prioritized margin/ASP in high excise categories; cannabis net revenue flat ($65.65M) with excise taxes of $21.56M.

Transcript

Operator (participant)

Thank you for joining us for today's conference call to discuss Tilray Brands' financial results for the second quarter ending November 30th, 2024. 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. I will now turn the call over to Ms. Berrin Noorata, Tilray Brands' Chief Communications and Corporate Affairs Officer. Thank you. You may begin.

Berrin Noorata (Chief Communications and Corporate Affairs Officer)

Thank you, Operator, and good morning, everyone. By now, you should have access to the 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 the CSA. 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 second quarter financial results for fiscal year 2025. Also joining us for the question-and-answer segment are Denise Faltischek, Chief Strategy Officer and Head of International, Blair MacNeil, President of Tilray Canada, and Ty Gilmore, President of Tilray Beverages, North America.

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

Irwin Simon (CEO)

Thank you, Berrin, and good morning, everyone, and thank you for joining us today. Tilray Brands has experienced significant growth over the past five years, revolutionizing consumer products. Tilray Brands today is a leading force at the forefront of the beverage industry, revitalizing the beer market, driving growth in spirits and non-alcoholic beverages, and advancing the legitimacy of cannabis for both recreational and medical use. Through our brew clubs, we focus on bringing people together, creating exceptional experiences through entertainment, and enhancing lives through the moments of connection. As I've said in the past, new industries are not born. They are built. Tilray operates in over 20 countries across five continents, with a portfolio of over 40 consumer-connected lifestyle brands and 20 vertically integrated facilities that produce approximately 90% of our products in-house, ensuring the highest qualities of our offerings.

Tilray maintains its position as the largest cannabis business in Canada by revenue, holds a leading medical cannabis business across Europe, and operates the largest branded hemp business in North America, and is among the top five craft beer businesses in the United States in terms of scale. Tilray has diversified and expanded beyond being a solely Canadian cannabis company. We are advancing the consumer packaged good industry through the introduction of new and innovative products that shape how individuals eat, drink, and relax, and provide relief to medical conditions where other treatment options have failed. These offerings address current consumer needs, and we are prepared to meet their future demands. Our success in establishing a new era of consumer products tailored to evolving consumption habits demonstrates our commitment to delivering innovative solutions that meet modern consumer demands and drive growth across our industries.

At Tilray Brands, we're committed to leverage advanced technology to advance our efficiency and drive growth. We are partnering with Microsoft and their AI platforms on a global scale to bolster our expertise, optimize our operations, achieve significant improvements, and propel our business forward. Tilray Brands is trailblazing the future of consumer products through the infrastructure we have built and the investment we've made and continue to make in our businesses, facilities, systems, and people around the world. In Q2, we achieved strong net revenue results while strengthening our operations and increasing our gross margin and gross profits across our business. Quarter two, net revenue grew 9% year over year to $211 million. Gross profit increased by 29%, and gross margin increased by 500 basis points compared to the prior quarter.

Our beverage business, Tilray Beverages, which includes craft beer, spirits, and non-alcoholic beverages, grew 36% in net revenue year over year. In cannabis, we continue to lead the Canadian cannabis market by revenue. We significantly grew our international business by 25% year-over-year as we launched new commercial products and expanded our reach across Europe. Our wellness business continues to lead the hemp industry, increasing branded market share to 56% with Manitoba Harvest in the U.S. and nearly 80% share in Canada. Additionally, as Carl will discuss further, our financial profile remains strong. During the quarter, we reported an adjusted net loss of $2 million, primarily related to the investment necessary to develop the infrastructure and operating systems across our business sectors and drive industry leadership and innovation. Tilray operates with a robust balance sheet, ample cash reserves, reduced debt levels, and flexibility to explore additional potential acquisitions.

Our financial strength allows us to seize new opportunities and capitalize on market trends. Importantly, Tilray is not exposed to meaningful tariff risk in the U.S. Let's now dive deeper into each of our business segments. Starting with our beverage business to support the expansion of our beverage business and brands, we merged our beer and spirit operations and teams, creating Tilray Beverages under the leadership of Ty Gilmore. Tilray expansion into the beverage category began in December 2020 with the acquisition of SweetWater Brewing Company, followed by the acquisition of Green Flash, Alpine, Montauk Brewing Company, and Breckenridge Distillery, our first spirit acquisition. We significantly increased our footprint through Craft Acquisition One from ABI in October 2023 and Craft Acquisition Two in September 2024 from Molson Coors. To support the growth of these acquired brands and establish a clear path to profitability, we've implemented Project 420.

This comprehensive plan focuses on enhancing margins and profitability through operational optimization, cost savings, and synergies, and portfolio optimization. Through Project 420, we aim to achieve $25 million in cost savings, synergies, and cost avoidance initiatives, on which we've already achieved $17 million. Today, Tilray Beverages generates a third of Tilray's global revenue and includes more than 20 beverage brands, which includes 15 American craft beer brands, 10 network manufacturing facilities, over 700 distributors, 20 brew pubs and restaurants, and a single integrated sales and marketing team operating across the U.S. Our Tilray Beverage strategy emphasizes strategic brand growth within selected states and regional markets, prioritizing product excellence and scalability. In Q2, our beverage business achieved $63 million in net revenue and increased adjusted gross margins by 400 basis points to reach a 42%.

Tilray Beverages has established itself as a leading provider of craft beer, spirits, and non-alcoholic beverages in key US regions, including the Northeast, Pacific Northwest, Colorado, Texas, Michigan, and the Southeast. From a regional brand perspective nationwide, Tilray Beverages is the number one craft supplier in Metro New York, with Montauk Brewing and Blue Point Brewing Brands, the number one craft supplier in the Pacific Northwest, Oregon and Washington, with 10 Barrel Brewing, Redhook, and Widmer Brothers Brewing Brands, the number two craft supplier in the Southeast, Florida and Georgia, with Sweetwater Brewing and Shock Top Brands, and the number four craft supplier in Colorado, according to our data. Notably, we achieved a 10% increase in Shock Top distribution during Q2 in the Southeast, securing 1,400 new placements for the brand.

Within the spirits category, Breckenridge Distillery is a notable brand in the bourbon sector, as it experienced higher depletions compared to others in the declining market. It also made significant progress in the vodka and gin markets, complemented by its world-class restaurant and retail operations that enhance the overall hospitality experience. Our primary objective for growing our spirits business is to expand our market share across the U.S. In our non-alcoholic branded product portfolio, the recently launched brand Runner's High Brewing Company will soon be available in over 1,200 public stores, with plans for expansion into additional markets. The non-alcoholic craft beer segment represents a significant opportunity for growth, with total addressable market estimated to be at $37 billion worldwide. Given our scale and geographic footprint, we will continue to explore ways to capture a share of this rapidly expanding market.

Within the non-alc segment, we've also introduced hemp-derived Delta-9 THC brands and products online through our direct-to-consumer channels and in key states across the U.S., including Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Louisiana, New Jersey, and Texas. We are leveraging our established craft beer distribution network, which is enthusiastic about this growth opportunity in independent retailers, convenience stores, and package stores, including multi-state retailers, Total Wine, and more. Tilray Beverages' strategic growth initiatives are poised to revolutionize our beverage portfolio, attracting a more diverse and expansive consumer base. We are planning to expand our beverage operations internationally, including ventures into Canada and Europe, with a vision to become a global beverage leader. By leveraging our innovative products and exceptional quality, we aim to set new standards in the industry and achieve remarkable success.

Turning to cannabis, in fiscal Q2, our global cannabis business generated $66 million in net revenue and increased gross margin by 400 basis points. In Canada, Tilray remains the leader in the Canadian cannabis market by revenue. In the second quarter, Tilray regained the number one position in the flower category, which constitutes around 35% of cannabis retail sales, with brands like Broken Coast, Redecan, Good Supply, and Bake Sale increasing market share through strong innovation, good genetics, and great value. In the THC beverage category, Tilray had a leading market share of 45%, with XMG Mollo THC Beverages ranking the number one and number two, respectively. We also retained the number one market share in oils and capsules categories combined. 15% of Tilray's Canadian cannabis net sales revenue was from new innovation, and a lot more to come.

We shipped approximately 63 metric tons of cannabis biomass in Canada in Q2, representing about 22% of the implied Canadian market volume. We continue to leverage the wholesale channel, where contribution margins grow as supply tightens. In adult recreational cannabis, we shipped approximately 15 million pre-roll cones and over 1.7 million cans of beverages. Over the past three years, we focused on improving operational efficiency. During this period, we reduced costs by over $100 million through eliminating duplication, consolidating, packaging, logistics, enhancing process with technology to lower labor costs. This effort includes emphasizing revenue quality over quantity, which will improve margins and position our business for future success. For instance, over the past year, we reduced our exposure to lower margin categories such as vape and infused pre-rolls and prioritized other categories even at the expense of some market share.

With a facility footprint of approximately 5 million sq ft along the optimization of our value chain and business process, Tilray is best positioned for long-term success in the Canadian cannabis market. As demand for our cannabis products increased, we possess the flexibility, capability, cost structure, and optimal growth space necessary to nearly double our output. In the U.S., Tilray is strategically well positioned to capitalize on the anticipated $8 billion-$10 billion medical cannabis market upon federal legalization. Our advantage is our best-in-class ability to cultivate large-scale medical and pharmaceutical-grade cannabis, which requires rigorous quality control standards and processes. Additionally, our established medical brands and product innovation can be utilized in Tilray's primary legal market, such as Canada, Germany, Portugal, and various other European countries.

Should the United States legalize medical cannabis, this could represent an additional $250 million opportunity for Tilray, potentially capturing 2%-3% of the U.S. medical cannabis market. Turning to our international business, where we executed against our strategic initiative and drove significant organic growth and margin in the second quarter. In Q2, international cannabis business grew 25% over the prior year period, driven by sales growth in Germany, Poland, the U.K., and Italy. In Germany, since the new medical cannabis act went into effect, we grew medical cannabis flower sales by 55% and increased our medical cannabis extracts by 24%. The increased growth in the German market, especially in the whole flower category, is due to the cannabis rescheduling under the new regulations.

In addition, we continue to see increased differentiation between the physician-led and the patient-led channels, with the patient-led channels requiring a greater emphasis on product assortment, especially in genetics, brand portfolio, segmentation, and quality. As leaders in the physician-led channel, where we have a dominant share of the medical cannabis extract category, we are now focusing on expanding within the patient-led channel. We are confident in our ability to win a sizable share of this channel, given our well-placed investment with two EU GMP-certified facilities in Germany and Portugal, and our route to market through Tilray Pharma. Our German cultivation facility, Aphria RX, was the first to be granted permission to expand our cultivation under Germany's new medical cannabis act, and in the quarter, we sold our first commercial batches of medical cannabis cultivated and processed in Germany under this newly expanded license.

Supplementing these assets are our Canadian cultivation facilities and our deep expertise of our team, which has allowed us to establish a flexible and diverse supply chain to meet the needs of patients we serve in various countries in which we participate by introducing new medical cannabis brands and products to these markets. We believe Germany's new cannabis regulations will drive positive change in drug policy across Europe. Tilray aims to expand its global brand to Europe's 700-plus million people, leveraging our infrastructure, product portfolio, and commitment to medical cannabis, and our experienced team to enter new markets with significant revenue potential. In Poland, demand remains strong as our revenue increased both over the prior year and quarter-over-quarter.

In Italy, we are focused on increasing awareness of the Tilray medical brand and our product portfolio, where we have market authorization for three medical cannabis extracts, as well as investing in the education of physicians regarding medical cannabis. In the U.K., our revenue has increased compared to the previous year, and our Q1 results. We're implementing several strategic initiatives to enhance our presence in the U.K. market, which will serve as our European headquarters for international sales and commercial operations going forward. Turning to Australia, which is still in early stages, it is quickly emerging as a significant medical cannabis market. Similar to Germany, we see increased differentiation between the physician-led and the patient-led channels.

In response, we launched Broken Coast, Redecan, Good Supply brands, and products, which provide the patient with a segmented portfolio of products while we continue to deliver on the trust, safety, and consistency that has become expected from our Tilray medical brand, and finally, in Q2, Tilray Wellness delivered a 13% net revenue growth compared to the prior year, driven by strong core business sales, coupled with hemp innovation and the expansion into wellness beverages. A strong focus on cost helped the business unit improve margins, delivering a 200 basis point increase in gross margin. Tilray is also exploring further expansion opportunities in the wellness segment, especially focusing on protein-rich wellness products and foods to meet the growing consumer demand for healthy and nutritious options. With that, I will now turn the call over to Carl to discuss our financials in greater detail. Carl.

Carl Merton (CFO)

Thank you, Irwin. As a reminder, our financial results are presented in accordance with U.S. GAAP and in U.S. dollars. Let's now review our quarterly performance for the three months ended November 30, 2024. In Q2, net revenue was $211 million, 9% growth compared to the prior year quarter, net revenue of $194 million. As Irwin stated, it was our highest Q2 net revenue ever. On a constant currency basis, net revenue grew 10% to $213 million. By segment, beverage net revenue increased 36% to $63.1 million. Cannabis net revenue was in line with expectations at $65.7 million as a result of our strong focus on margins and strategic growth in key markets, which I will discuss in a moment. Distribution net revenue was flat, and wellness net revenue rose 13% to $14.6 million in the quarter.

From a segment perspective, 30% of our net revenue was generated by our beverage business, 31% was generated by our cannabis business, 32% by our distribution business, and 7% by our wellness business. This compares to 23% in beverage, 35% in cannabis, 35% in distribution, and 7% in wellness in the prior year quarter. The year-over-year variance is due to three months of revenue from our most recent craft acquisition and one month from the prior year's craft acquisition, which we did not purchase until October 1. Gross profit increased by 29% to $61.2 million compared to $47.4 million in the prior year quarter. Gross margin increased 29% and over 500 basis points increase from the prior year period, demonstrating our strong focus on controlling costs, driving revenues from our most profitable SKUs, and the ongoing optimization of our production footprint.

Adjusted gross profit increased 20% to $62.6 million from $52.1 million in the prior year, while adjusted gross margin increased by 300 basis points to 30%, primarily reflecting our focus on integration efforts to improve our utilizations at our beverage facilities and favorable sales mix. Net loss was $85.3 million compared to a net loss of $46.2 million in the prior year quarter, with almost $75 million of non-cash costs. Part of those non-cash costs included a $34 million foreign exchange loss that was largely created as a function of the strengthening U.S. dollar after the U.S. presidential election. On a per-share basis, this amounted to a net loss of $0.10 per share compared to $0.07 per share in the prior year quarter.

Adjusted net loss was $2.2 million compared to an adjusted net loss of $2.7 million in the prior year quarter, a 17% improvement year-over-year, with adjusted net loss per share coming in at zero, a significant beat to expectations of a $0.03 loss. Adjusted EBITDA was $9 million compared to $10.1 million in the prior year quarter. We are now approaching six consecutive years of generating positive adjusted EBITDA. The decrease in adjusted EBITDA from the prior year is primarily related to the SKU rationalization in our beverage business that Irwin spoke of earlier. Cash flow used in operations was $40.7 million compared to $30.4 million in the prior year quarter. Adjusted free cash flow was negative $43.6 million compared to $18.4 million in the prior year quarter, largely as a result of an increased demand in our working capital.

Working capital increases were associated with annual payments in the quarter, increases in inventory at Tilray Pharma as it prepared the stock pharmacist inventories for the holidays, increases in inventory in beverages as we prepared for the positive impacts of the SKU rationalization plan, all offset by a significant decrease in Canadian cannabis inventory levels as it took advantage of positive pricing in the wholesale market. Turning now to our four business segments. Within our beverage segment, our $25 million synergy plan is well on its way with $17 million already realized. Part of our cost-saving initiatives were driven from implementing a product rationalization program to concentrate our product portfolio in key markets, prioritizing high-performing products and optimizing our cost structure.

Year-to-date, the SKU rationalization plan lowered our revenues by $8 million, with an expectation that over the next 18 months, these impacts will be offset by the introduction of new product innovations and brand extensions, improving both sales and margins. The completion of this rationalization program will be accretive to earnings and will have positive impacts on our cash conversion cycle once complete. Beverage net revenue was $63.1 million, up 36% from $46.5 million in the prior year quarter, as previously discussed. As Irwin discussed, we now own and operate 20 brew pubs/restaurants in the U.S. that are in close proximity to the production of our craft brands.

In the quarter, these operations contributed $10 million of the $63.1 million in revenue, and we expect them to be a key part of our strategy going forward, allowing us to increase brand visibility and gain an intimate understanding of our key consumers. Beverage gross profit increased to $25.2 million compared to $16 million, and adjusted gross profit was $26.5 million compared to $17.8 million. While our beverage gross margin was 40% compared to 34%, and adjusted gross margin was 42% from 38% in the prior year quarter. The 400 basis point improvement to adjusted gross margin was a result of our efforts in integrating and optimizing our facilities, as well as a favorable product mix.

Gross cannabis revenue of $87.2 million was comprised of $59.1 million in Canadian adult use revenue, $14.9 million in international cannabis revenue, $6.7 million in Canadian medical cannabis revenue, and $6.5 million in wholesale cannabis revenue. Net cannabis revenue, which was reduced by the $21.5 million in excise taxes, was $65.7 million, essentially flat from the year-ago period. Revenue from Canadian medical cannabis grew 6% despite the category being impacted by competition from the adult use market, while revenue from Canadian adult use decreased 18%, which was a result of our increased focus on preserving gross margin and maintaining a higher average selling price in categories with high excise tax. As a result of recent significant CapEx investments, we positioned ourselves for an improved margin opportunity once the price compression pressures start to ease in the category.

Our CapEx investments and size advantage put us in a position to succeed as margins in high excise tax categories come under pressure. International cannabis revenue rose 25%, which was largely driven by the expanding German medical market, as well as favorable variability in the timing of receiving export permits to countries other than Germany, resulting in fluctuations on a quarterly basis. Cannabis gross profit was $23.2 million, and cannabis gross margin was 35%. Adjusted cannabis gross profit was relatively flat at $23.2 million compared to $23.6 million in the prior year quarter. Distribution net revenue, derived predominantly through CC Pharma, was $67.6 million compared to $67.2 million in the prior year quarter. On a constant currency basis, distribution net revenue increased 3% to $69.4 million compared to $67.2 million in the prior year quarter as a result of a favorable product mix.

Distribution gross profit increased to $8.4 million compared to $7.1 million in the prior year period, while distribution gross margin increased to 12% from 11% in the prior year quarter as a result of our extensive efforts in H2 last year to focus on higher margin SKUs. Wellness net revenue grew 13% to $14.6 million from $12.9 million in the prior year quarter. The increase was driven by our strategic focus on continued innovations, including our launch of hemp-derived Delta-9 products and our granular growth within our branded hemp business related to higher consumption. Wellness gross profit was $4.5 million, up from $3.7 million in the prior year quarter, and gross margin rose to 31% compared to 29%, a result of decreased input costs and continued operational efficiencies. Our cash and marketable securities balance as of November 30 was $252.1 million, down slightly from $260.5 million at year-end.

This change was a result of our purchase of the new craft brands, a temporary increase in working capital demands, all offset by the funds raised from our ATM. During the quarter, we raised gross proceeds of $46 million from our ATM, and subsequent to quarter-end, we raised an additional $11 million. Finally, we are reaffirming our guidance for fiscal 2025. We anticipate net revenues to be between $950 and $1 billion. Let me now conclude our prepared remarks and open the lines for questions from our covering analyst. Operator, what's the first question?

Operator (participant)

Thank you. Before we get to the first question, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Kaumil Gajrawala (Managing Director)

Hey, guys. Good morning. I guess starting with the SKU rationalization, you've been talking about it for a while. We have more details to date. Does it look like the rationalizations will be complete by the end of your fiscal year? Is this something that's ongoing a little for some amount longer?

Irwin Simon (CEO)

So good morning and thank you. I'm not sure it's going to be completed by the end of the fiscal year. We're well into it. You got to remember what we're doing here. We've taken SweetWater, we've taken the Montauk, we've taken the ABI acquisition, the Molson acquisition, as we bring them together. And we're eliminating over 300+ SKUs, and we're ultimately eliminating states where we sold some of our brands before. So the majority will happen by the end of this fiscal year, but there absolutely will be some that will go into 2026. And the big thing here is, listen, we've taken out, as we look for takeout costs of $25 million, we've taken out 15, 16 already.

The big thing is, as we introduce new SKUs to replace some of these other SKUs, and as we focus on certain states that we're only going to sell our product. And it's not only us asking for this, it's retailers, it's distributors. So this is great. And you think about it, as we brought how many companies together under Tilray Beverages and cleaning up the tail and cleaning up some of these lower-margin products. And it shows in our cost cutting, it shows in our margin, and it shows in our growth from some of these brands that this is absolutely working. And we haven't even launched our new products yet, so just stay tuned for that.

Kaumil Gajrawala (Managing Director)

We will. You mentioned gross margins. That was going to be my next question. It's up nicely across a series of divisions. We have a lot of details on some of the blocking and tackling. Is there something bigger going on, maybe with input costs or perhaps price compression or anything that we should know? Because it looks like kind of across the enterprise, the trajectory is the same. Or is it as simple as the programs that you've talked about kind of starting to come to fruition?

Irwin Simon (CEO)

Well, it's not coming from pricing, so that's the first thing. It's coming from just taking costs out of our system. Listen, when we put Tilray and Aphria together and then Hexo, we took out over $100 million. We can come back and in regards to share of cannabis in Canada, we're focusing on margin here. We've had major price compression. So the big thing is we're really focused on gross profit. We're really focused here on profitability. And our adjusted net loss in the quarter is $2 million, okay? The majority of it is non-cash. So there's a big, big drive here to generate cash and really focus on margins here and to invest back in our business. And you're seeing this on gross margin growth here.

Kaumil Gajrawala (Managing Director)

Got it. Thank you, guys.

Irwin Simon (CEO)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, we ask that you each keep to one question. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Robert Moskow (MD)

Thanks. I thought I remembered last quarter that beverage sales were a bit below your internal expectations, and it was due to timing around innovation and shipments to distributors. And I wanted to know, I didn't hear much about it on the call today. Did that factor resolve itself in this quarter? And then also, maybe you can give a little bit more color on what this innovation pipeline looks like. Do you have a lot of work still to do to flesh that out? Thanks.

Irwin Simon (CEO)

So Robert, you're 100% right. In our first quarter, we had some challenges as we brought the ABI businesses into our portfolio.

We had some major out-of-stocks, bringing the ABI distributors on and taking them off the ABI system, putting them on ours in regards to supply costs and issues. There were some accounts that just stopped ordering because they were confused, and just the integration, so 100% in our first quarter, we had some negative comps I can note. Since then, listen, we've seen some great stuff happen in Shock Top. We've seen our Montauk growth 9% since we bought it. We've seen some great growth on Blue Point and Breckenridge, so we're seeing those volumes come back, and Ty's on the call, and he can jump in there, so that's why you're seeing up 36%. Now, some of that is absolutely acquisition growth, but what we're doing is we're taking these growth brands and getting rid of the products which are slow-moving and running them out.

In regards to innovation, and Ty jump in here on some of the new innovation, but I'm not going to tip my hat yet, but we've got, in regards to these products, we've been out there presenting to the retailers, presenting to the distributors, and there's a big focus on a lot of our new beers. There's a big focus on our non-alk. There's a big focus on our energy drinks. There's a big focus on our waters, and our Delta-9 drinks are a big thing that has been happening with us. Ty, you want to add anything to that?

Ty Gilmore (President)

No, I think you nailed it. With regards to innovation, absolutely. We are locked and loaded. And now, through the next seven or eight months, everything is ready to go. It's been presented to retailers and distributors. There is a lot of excitement about the spaces and categories that we're going to play in, which is exciting.

Irwin Simon (CEO)

And Robert, I think the big thing is that's what everybody's looking for, is new innovation out there. I think the important thing is this here, is taking out some of those slow-moving SKUs or taking the SKUs out of states that sold 10,000 cases a year and just plugged up the system. So that's number one. Number two is distributors are looking for innovation. Some of our pub beers, some of our lighter beers, some of our non-alk, some of our infused drinks with hemp. So there's a good lineup here. And the big thing which I've said, what we're trying to do on beer is make it fun again. And I think that's what we're doing.

We have no imports, so there's no tariffs coming on our beers. Our beers are all made in our facilities. We've done a great job, I think, of moving our production around. We've closed one facility in Texas. There's a plan here. And just think about it. We produce close to 15 million cases beer a year, over a million barrels. As we brought all these beer brands together, over 18 beer brands, we've brought all these cases together. We've brought all these facilities together in a matter of four years. Now it's taking costs out, getting the efficiencies, working with these distributors. Ty and team have put a Blitz team on the street to really get out there and hit our off-premise and really sell our products there. I'm excited to see what's happening in the beverage category. Now that we've integrated our spirits business.

And listen, these aren't easy categories. So with that innovation and putting the people behind it and getting your distributors and retailers is something that's real important. And last but not least, got to get our consumers buying our products. And that's a big thing that we're trying to do. And there's a lot of social media, and there's a lot of advertising. In a quarter, we spent about $600,000-$700,000 more in advertising a quarter back on these brands.

Robert Moskow (MD)

Thank you.

Irwin Simon (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 (MD and Head of Consumer Research)

Hi, good morning, and thank you for the question here. So I just want to dive a little bit more on Delta-9 beverages, specifically around potential changes in regulation. The Farm Bill has been delayed two years now. We're now going to have Republicans controlling both chambers of Congress as well as the Republican president. So what's your anticipation in terms of the impact that could have on a Farm Bill getting done this year, impacts on THC hemp beverages? A lot of folks have been talking about potential closeouts of loopholes, but keeping a carve-out for THC hemp beverages. So I'd love your outlook on that, just given right now you're one of the few players with an existing distribution system and alcohol channel that's selling THC hemp and how that could change with regulations evolving. Thank you.

Irwin Simon (CEO)

Thank you. Listen, we do not, and it's good news as the Farm Bill is kicked down, they kicked the can down the road for another two years. So that's number one. Number two, a lot of distributors and a lot of the states and retailers are really excited in this product. And there was $2 million of sales in this quarter that we've achieved already. And so with that, we don't see any changes. We think there's a big, big opportunity for us going forward. And with Happy Flower, which is with our wellness team, which is out there pushing that brand. And then we have our beverage team out there presenting through our beer distributors, distributing that product.

So there's lots of opportunities for us. And we have the products, we have the distribution, and we have the infrastructure and salespeople that are out there pushing it. And the retailers and distributors want it. That's the big thing. So there should be no change for us.

Aaron Grey (MD and Head of Consumer Research)

Okay. All right. Great. Thank you very much.

Irwin Simon (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 Research)

Hi, good morning. Thanks for taking my question. I'm curious if you could talk about cannabis beverages in Canada. It seems like it's a very small part of the market still. So how do you see that segment? Why hasn't it become a more relevant part of the Canadian market, whereas in the US, we see this Delta-9 market growing quite rapidly right now? Thanks.

Irwin Simon (CEO)

Great question. And I have Blair on the call. We have a 45% share of the market. And it's about a $25-$30 million business for us. We have a facility in London, Ontario, that produces that product. And I always say this here. I only sell it today in stores that sell cannabis. And there's different pricing out there, and it's not a cheap product. If we could sell that today in beer stores, if we could sell it on tap, how big a business that would be. But I think one of the biggest problems today is just ultimately, it's only sold in cannabis stores and some of the pricing out there. But the opportunity is we sit today in dry January, that's when you'll see some of the biggest consumption of products.

So we're ready, willing, and able. And I've said this before. If you could sell THC-infused drinks in the U.S., it's a billion-dollar-plus category out there if we could ever do that, just by looking at the size and the opportunities in the 15 states that hemp-derived drinks are today. The consumer is looking for it. Matter of fact, I was at a function last night, and the majority of people were drinking hemp-infused drinks versus alcohol drinks.

Frederico Gomes (Director of Institutional Research)

Thank you.

Operator (participant)

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

Bill Kirk (Senior Equity Analyst)

Hey, good morning, everyone. So I have a question on the revenue guidance. To get to in the range, the final quarters of the year need to be about $60 million or so larger than the revenue just posted in 2Q. So where does that acceleration come from? Thanks.

Irwin Simon (CEO)

Thank you. I think if people go back and look at our results from last year and follow the same pattern that we had, right, when you look at the base pattern, we talked about this a couple of times, you and I individually, where we're doing about half of our sales.

We're doing, sorry, not half of our sales, but half of our EBITDA in Q4, we're doing Q1, Q2, and Q3. Our EBITDA tends to be around the other half, right? And then that's earned relatively evenly between the quarters, right? So if you use that as the starting point, and then you work your way backwards through sales. When you look at the changes we've made this year, last year, we purchased the new brands, the new craft brands, too late in the year to be involved in the spring reset. So this year, Ty and his team and Prinz have been able to get out to the distributors, to get out to our big accounts, and to really be a part of that spring reset with that new innovation. We see significant increases in the sales in Q4 for beer as part of that spring reset.

We also traditionally see sales upticks in our CC Pharma business in Q4. That's predominantly as pharmacists in Germany start stocking their inventories for the summer months as people go on vacation in Germany. We similarly see an uptick in things like pre-rolls and flowers, things that we're higher indexed on in terms of share in the Canadian cannabis market as people get ready for the summer.

Ty Gilmore (President)

Bill, a big part of that is just here. Is there seasonality in supply and new products? Stepping back, as Carl said, as you committed to Dry January, the next five months for us, Memorial Day and July 4th, are some of the biggest beer consumption events out there. We also have our big 420 events around beer. Plus, you heard what I said before. We have over 100 new products that get into the marketplace, and that's when a lot of the resets happen with retailers. In regards to cannabis, Blair, how many new products do you have coming in in the back half? And what are the growth plays?

Irwin Simon (CEO)

30 new innovations in the back half of the year. So the new innovation that will come from our cannabis business. And then one of the big problems that happened to us in Europe was in regards to just having supply from our European, and a lot of that's coming from Canada, and also getting the permits that we could ship in this country had slowed things down. So with that, it's going to come from new products, it's going to come from organic growth, it's going to come from new distribution in the back half of the year.

Bill Kirk (Senior Equity Analyst)

Thank you. And then, Irwin, you quantified a $250 million opportunity for Tilray if the U.S. legalizes medical. I guess, what gives you confidence the incoming administration will be favorable to rescheduling? And even if they were, that they would also be amenable to imports from Canada when there is so much tariff talk?

Irwin Simon (CEO)

So good question, number one. And again, I want to be very clear. This is just looking at a crystal ball and looking at what it could be. And number one, I step back and I say this here, it's an $8-$10 billion medical market today in the U.S. And with that, I think we could get somewhere between a 2%-3% share. So a 2%-3% share, there's a $160-$250 million business. We have a good-sized medical business today in Canada.

We have a good-sized medical business in the U.S. We have the products for pain, for anxiety, for sleep, for cancer patients, for multiple medical reasons. We have the packaging, we have the products, we have the terpenes, we have in regards to genetics, etc. So we would know how to market and package these products. With that, why do I think that it would be allowed? There's not a grow facility out there that could ever supply that. It would take us about 60 metric tons, and we have available to us today about 137 metric tons that could supply that additional cannabis that we could grow. So I don't know, but just that's out there me hoping and guessing. Listen, if there was a duty on it, etc., you'd have to pay it. I'm not sure why not you could.

We ship EU GMP products all throughout Europe coming out of Canada, and some of the best cannabis grown today comes out of Canada. You got to remember, we have 5 million sq ft. So that is, again, just all speculation if that could happen out there. I think the big thing, medical cannabis, if anything's going to legalize, it's medical cannabis. I think medical cannabis ultimately would be sold through drug stores, through the medical market, and would be prescribed by prescription. I do come back and I say this here. The Trump administration is into tariffs, into duty, into regulating stuff. I think if you come back and I say it, the Canadian market for us, and we sell a lot of cannabis in Canada, but we pay a lot of excise tax. There's billions of dollars paid each year in the Canadian market.

You take that as a 10x and you think about the opportunity in the U.S. for the governments here to bring in that excise tax and eliminate illicit market. It's about business. And I think that's how the Trump administration ultimately will look at it.

Bill Kirk (Senior Equity Analyst)

Thank you. Again, that's my first. Thank you.

Operator (participant)

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

Matt Bottomley (MD of Equity Research)

Good morning, everyone. Yeah, maybe staying on the topic of regulation and changes, but maybe moving over to the international side of things. So you got solid $50-60 million of annual contribution in your international line, the way that it's allocated. And I'm just wondering, I guess, two questions there.

So the first is just the visibility on that line with respect to what's been recurring for some time now and growing in some of these select markets that you're in versus maybe things that are more opportunistic and are harder to predict. So I'm just trying to get an idea of the underpinning of that current contribution you have in markets where you have exposure. And then the second side of that question would be, as I alluded to, the regulatory side of things. Anything to note outside of your prepared comments? I know Germany is the market that a lot of us always like to talk about in the last little while, and just wondering if there's anything else to add to that.

Berrin Noorata (Chief Communications and Corporate Affairs Officer)

Yep. Thank you, Irwin. So hi, Matt. The question in terms of what is sort of the base of the business and what's recurring, what's opportunistic, what I would say is that we're very focused on building a sustainable, very solid foundation of profitable growth. We look at our business in terms of building out foundations. And I think if you. I'm just going to take Germany for example. We have a very strong, strong base of medical extract business, which is predominantly reimbursed by insurance and very profitable. We look at that business as sort of our foundation. And as the flower business has been proliferating through the new regulations, we are focused on also growing that as well. And you can see that in our numbers and that we've seen a 55% growth since the legalization. So we're very focused on both sides.

And again, we don't believe that every dollar of revenue is created equal. And so to that end, we look at how do we create sustainable sales that are going to repeat themselves each and every quarter. And so very focused on that in Germany and Poland. We're building out our Italian market, which is very, very small at the moment. But as we build out the reputation of Tilray as a medical supplier of cannabis that's very sustainable, consistent, we do see, in fact, that we're building a base of doctors that are, in fact, trusting in the Tilray product.

Irwin Simon (CEO)

And I think the big thing here, which we come back, is number one, we have supply. Number two is each of these countries today are looking at how we win the medical cannabis. France is going to win there ultimately with certain products, okay? The U.K. is a big opportunity for us.

So I think as you step back, listen, there's a big focus on the countries that medical cannabis is legal today. We have a facility in Germany. We have a facility in Portugal that can supply, and we have supply available to us out of Canada. But I think, again, like the U.S., there's additional countries that are going to continuously open up. And with our infrastructure, and we have a large infrastructure in Europe today, you heard me talk about putting an office in the U.K. that will be our international office. We look to grow our international business. At the same time, we're looking at the same strategy in the U.S.. Do we enter the beverage and spirits business and take some of our beverage and spirits business along with something else that we acquire in the international markets?

Matt Bottomley (MD of Equity Research)

Okay. Great. Thanks for all that. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Please proceed with your question.

Pablo Zuanic (Founder and Managing Partner)

Thank you. First of all, congratulations on the growth in international business. Look, I have a quick question for Ty, and then I want to follow up with you, Irwin, regarding the U.S. Ty, when I look at the hemp Delta-9 drinks market, it's mostly DTC, right? And in theory, you have an advantage with your distribution network to sell your products. But this is not a fast-churning item yet. So it seems to me it's more conducive to DTC, people that are selling through portals and sending and shipping across states from online orders. Any quick thoughts on that?

Ty Gilmore (President)

Yeah. Thanks for the question. Actually, we see the broader opportunity in brick and mortar. When we talk to retailers and distributors, we see both convenience, liquor stores. There's a big national chain that's leaning into HD9 in a really, really strong way. We absolutely are exploring and are taking part of DTC, but we see the much bigger opportunity in brick and mortar. And when you look at the consumer and what's happening in this segment, and you can look at some big chains in Louisiana or what's happened over the last couple of years in Minnesota, you can clearly see that there's a consumer demand in brick and mortar stores to go to be able to look at brands. There's players like us that clearly are going to be the adults in the room that have all the regulations ticked and tied.

But I actually see the bigger opportunity in brick and mortar, not DTC.

Irwin Simon (CEO)

And Pablo, that's great. We have supported many states already with HD9. We're working with partners to educate Congress on what HD9 is and how it should be best regulated, and we would like it to be regulated just like alcohol and sold through alcohol distributors. Today, there's Total Wine. You can go in and buy the product. ABC Fine Wine in Florida, you can buy the product. So brick and mortar absolutely is ultimately where we absolutely want it, but direct-to-consumer is something that we would absolutely look at too.

Pablo Zuanic (Founder and Managing Partner)

Yeah. Understood. I agree. Yeah. Look, Irwin, regarding the U.S., I'm not going to make you repeat what you already said. You have this vision how medical cannabis could be federally legalized in the U.S.. Of course, we'll see how that plays out. You recently appointed Stephen Cohen to your board.

We look at some of your peers like Canopy Growth and SNDL building beachheads in the U.S. with more of a rec type of focus. I just want to understand, given your apparent evolving views in terms of how the U.S. may deregulate, especially with the new administration, how are you thinking about when and how to maybe follow the model of some of your peers in terms of trying to build beachheads on the rec side? You tried to do that with MedMen, and I'm wondering how you're thinking about that right now. Thank you.

Irwin Simon (CEO)

Listen, good question. And I think it's like buying somewhat like a lottery ticket, Pablo. But I think my strategy so far is we would be ready for it and could be ready for it in a very quick period of time.

We have an infrastructure of a whole medical group in Canada. We have an infrastructure in Europe, and put that team together, within 90 days, we could be in the medical cannabis business in the U.S., depending upon what legalization is. And I've seen a lot of companies go out there and buy options, do things that never came to fruition, and spent a lot of money. We did buy the debt of MedMen. We still own the IP for the brand MedMen. So with that, we have a close eye on it. Right now, our focus is on Delta-9 drinks, which we think is a big opportunity. Like I said, we'd love to be able to sell. And let me tell you something.

If we could sell our medical cannabis in Canada, a $250 million business that had a 2%-3%, that would be very additive to Tilray. But until legalization, until things change. My thing is the Trump administration will look at this here just because of the dollars it will contribute to bringing in more tax dollars and also eliminating from the illicit market and eliminating all the confusion, helping with SAFE Banking. When do I think it will happen? As I've said before, I think it will happen during this administration. But I did say it would happen during the Biden administration too. But I think this administration is much more business opportunistic and will look at it with right regulation. And I think that's what's important here.

Pablo Zuanic (Founder and Managing Partner)

In the meantime, that's a good thing in which I've said about Tilray.

Irwin Simon (CEO)

We have built a really strong business in the U.S. today with our beverage business, with our spirits business, and our wellness business. I will mention, there is a big focus today on growing our wellness business. Whether it's additional acquisitions, additional opportunities with hemp, which we think is high protein fiber products, and that's a big opportunity for Tilray.

Pablo Zuanic (Founder and Managing Partner)

Got it. Thank you. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery (MD and Senior Research Analyst)

Thank you. Good morning. Good morning. I just wanted to follow up on a couple of things. I guess first on the Delta-9 beverages, the traction, especially that you just called out, like a Louisiana or Minnesota, it's proven to be strongest where there isn't adult use opportunities legal at the state level. How much do you sort of account for that as a potential limitation, and how does that shape some of your thinking? And then just on the guidance, I know you went through some of that in an earlier question. Just want to follow up on how the SKU rationalization timing fits in. Was that in part of the guidance thinking all along, or has it changed? And if it's newer, is it the innovation that's new to offset it? Just help us think about some of the footprints there.

Irwin Simon (CEO)

So first of all, in regards to where do I see the big states and the big opportunities? Texas, Florida, Georgia are some of the big states, and which are big beer states and big opportunistic states for us. I mean, if you come back and look at the size of those states and some of the biggest states out there, and they're some of the biggest markets where we sell beer today, so that is where I see our big opportunities from a standpoint there. In regards to our guidance and our SKU rationalization, so far, we've taken approximately $17-$18 million of sales. It's probably about a $2 million EBITDA hit. Again, there's probably another 12, about a $10 million of SKU rationalization that will come out of our top line sales.

Now, again, what you heard us say, what's happening now, those sales that come out, we're replacing them with new products and faster-selling SKUs, and I guess it's a rotation of those products. And not everything hits on timing, but it's taking lower margins, slower-selling SKUs out, and replacing them with new products, higher-selling products, and higher-margin products to replace those. And then we should understand that as your color on the spring shelf resets as having that in hand and the one-for-one swaps. Wait, I didn't understand. You broke up on that question.

Michael Lavery (MD and Senior Research Analyst)

Yeah. When you were saying how the innovation would offset the SKU rationalizations, you were talking about the better timing this go around for the shelf resets in the spring. Should we understand that you've got that in hand and already set to go?

Irwin Simon (CEO)

Yes. I mean, there's a timing on that too. It's going to be approximately $20-$25 million of sales that are coming out. But we would hope with our new products and our faster-selling SKUs with more space, we would make up those sales and then some. But there's a lag time on some of that too. It just doesn't all happen at once.

Michael Lavery (MD and Senior Research Analyst)

Okay. Thanks so much. Thank you.

Operator (participant)

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

Irwin Simon (CEO)

Well, thank you, everybody, for jumping on our call today. And first and foremost, I want to put our thoughts with everybody in Los Angeles that's gone through the horrific fires out there that have lost their homes. And we're here thinking of you and also what happened in New Orleans. We're living in an interesting world out there.

From the standpoint of Tilray, as I sit here today and look at what we're doing and trying to understand the growth of this company, you look at the cannabis industry and what we've done in cannabis over the last five years. If we sit and build out facilities today, we have five million sq ft of grow in Canada today with over $1 billion-plus that we've invested in building out those facilities. In regards to our breweries today, we have 10 breweries today that produce our product, 20 brewhouses. We have a distillery in Breckenridge. We have manufacturing facilities in Winnipeg, Canada that produce our hemp. And then we have two facilities in Europe that produce and grow cannabis, medical cannabis for us. So we have an incredible infrastructure out there to produce us with 90% of our products.

We have today over 40 different brands, whether it's in beer, whether it's in spirits, whether it's in cannabis, whether it's in our wellness products, and we have an incredible team that I get to work with to help bring all this together from a manufacturing standpoint, from an operational standpoint, from a distribution standpoint, from a sales and marketing standpoint. Last but not least, we're building something different out there. There's no company out there today that's in the cannabis business, the wellness business, in the beverage business, and bringing it all together. We're handcuffed by regulation. I wish tomorrow I could start selling cannabis in the U.S. and how big opportunity is. Not a lot of companies just can't sell new products and go out there and do it. I wish I could sell cannabis-infused drinks in the U.S..

I'm limited in Canada of how much I can do in Canada in my contribution as I pay $1 per gram in excise tax. The richest cannabis company in Canada today is the Canadian government. We spend about $155 million in excise tax in Canada, higher than beer, higher than wine, higher than spirits, and some of the highest excise tax, if anything. That's one of the biggest challenges. You think how much we sell in Canada today and still from a profitability standpoint because of just the higher excise tax. The beer category is changing dramatically, and we will continue to change it. We will make beer fun again. We'll make it unique. We'll come out with new products.

With RNDC and now the beer group, Brian Noll working with Ty, lots of opportunities that we see in spirits today with our bourbon, gin, and vodka. In my past, I come from wellness foods. I think wellness is something that's going to be around forever. Hemp is going to be a big part as an ingredient, as a food. We're going to look at other opportunities within the wellness area. Last but not least, international, one of our fastest-growing businesses today, one of our most profitable businesses today. We look at it, 700 million people. So there's a lot of great DNA within Tilray today. There's a lot of great businesses within Tilray today as we reach that $1 billion mark. It's taken companies like Tesla, Amazon, Microsoft, a long time, and we've been at it just five years.

We really got a great strategic plan, a great plan to bring it together. So stay tuned. I appreciate the support. Listen, I don't like how our stock performed, but I got to tell you, behind a stock, got to be a great company. That's ultimately what we're trying to build out there. I thank you for your support. Thank you very much for listening today. Just be safe out there. Again, my thoughts go out to people in LA. My thoughts go out to the people in New Orleans and the rest of the world. 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.