Tilray Brands, Inc. (NASDAQ:TLRY) Q1 2024 Earnings Call Transcript

Tilray Brands, Inc. (NASDAQ:TLRY) Q1 2024 Earnings Call Transcript October 4, 2023

Tilray Brands, Inc. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.05.

Operator: 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 speakers’ remarks, there will be a question-and-answer session for analysts and investment firms conducted via audio and participating retail shareholders conducted via the 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: Good morning, everyone. By now, you should have access to our earnings press release, which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. 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, Tilray Canada; and Ty Gilmore, President of U.S. Beer business.

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

Irwin Simon: Thank you, Berrin, and good morning, everyone. We appreciate you joining our quarterly call. At Tilray Brands, we strategically diversified 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 strides we’re making by focusing on our core fundamentals: number one, maximizing profitable revenue growth through organic expansion initiatives and key strategic acquisition 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 complimentary business segments.

These consists 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. Aggregated 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.

And since year-end, we paid down a $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 CPG 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 shared 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 combine HyFire and Weed Crawler retail sales data, Tilray sold over double the units of the number two 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 a 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 Aphria 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 C$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 approved 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 UK and the Czech Republic. As we look to fiscal 2024 for 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; 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 competed 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 an 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 CBG 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 welcomed the newest additions to the Tilray Brands family as we closed 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 be 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] (ph) 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 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.

Dozens of pharmaceutical capsules piled on top of one another to show the scale of the company’s drug contributions to the industry. Editorial photo for a financial news article. 8k. –ar 16:9

Finally, our wellness segment is delivering higher gross profit on a stable of top-line 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] (ph) 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 10th consecutive year and having launched the first Regenerative Organic Certified Hemp Hearts 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: 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 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 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 31st of this year, we’ve 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 to do 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 growth 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 focused 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 31, we settled our obligations under a $50 million convertible promissory note, which had a maturity date of September 1. And finally, subsequent to quarter-end, we settled and paid in full our Tilray ’23 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 to $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, Truss and the brands from Anheuser-Busch and the cash income taxes we pay 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?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Vivien Azer with TD Cowen. Please proceed with your question.

Robin Holby: Good morning. This is Robin Holby on for Vivien Azer, and thank you for taking the question. First off, congratulations on closing…

Irwin Simon: Good morning.

Robin Holby: 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: So, the increase in gross margin in beverage alcohol this quarter was a combination of 2 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: And I know one of Vivien’s favorite questions is — regards our brew houses. We sell more beer in our brew houses than food. And I think that’s what the important thing is of how food does not dilute our margins in our brew houses. And that’s what our brew houses are about, is to go out there in market and sell more and more beer. And that’s very much what our plans are.

Operator: Thank you. Our next question comes in line of Andrew Carter with Stifel. Please proceed with your question.

Andrew Carter: Hey, thanks. Good morning. Okay. So, I want to just go back to the [short] (ph) report that was out last month and just use this opportunity to clear the air. First off, regarding Double 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 minor shareholder in stock? And if so, are these stocks added back to EBITDA? Thanks.

Carl Merton: 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 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 has always been a payment of profit distribution at the — there’s a couple — sorry, there’s a quarterly payment that happens and then there’s a [true-up] (ph) at the end of the year. And 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: I think, Andrew, what’s important is that our partner in Diamond 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 profits where we have 50% — 51%, and we’re enjoying the profits of that too. So I think that’s what’s important. But to Carl’s point, those — the stock is not used to pay for operations of the business. I think that’s what’s important.

Andrew Carter: Thank you. I’ll pass it on.

Irwin Simon: Thank you.

Operator: Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.