Tilray Brands, Inc. (NASDAQ:TLRY) Q1 2025 Earnings Call Transcript

Tilray Brands, Inc. (NASDAQ:TLRY) Q1 2025 Earnings Call Transcript October 10, 2024

Tilray Brands, Inc. beats earnings expectations. Reported EPS is $-0.04, expectations were $-0.05.

Operator: Thank you for joining today’s conference call to discuss Tilray Brands’ Financial Results for the First Quarter ended August 31, 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: Thank you, operator, and good morning, everyone. By now you should have access to the earnings press release, which is available on the Investor’s 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 first quarter financial results for the 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. 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, and thank you for joining us today. In the last five years, Tilray Brands has evolved into a new company. We no longer are just a Canadian cannabis LP. Tilray Brands has grown tremendously, and we’re setting a new precedent for the CPG industry. Not only have we set the stage for a new era of consumer habits, Tilray Brands has pushed forward, disrupting the global CPG industry and revolutionizing consumer products. Tilray is at the forefront of innovation, pioneering and leading the convergence of beverages, cannabis, hemp, wellness, and distribution industries on a global scale. Our operations span over 20 countries and five continents with 44 consumer-connected lifestyle brands and 20 vertically integrated facilities that produce approximately 90% of our products in-house, ensuring the highest quality of our products.

Tilray continues to lead with the number one cannabis business in Canada, leading medical cannabis business across Europe, the number one branded hemp business in North America, and the fifth-largest craft beer business in the U.S. Our success in building a new era of consumer products that resonates with today’s discerning consumers and caters to their ever-evolving consumption habits and transforming the way consumers eat, drink and unwind with cannabis, hemp, and beverage products is a testament to our commitment on delivering innovative products that meets the needs of the modern consumer and drive growth across industries. Moving on to Q1, we achieved our record first-quarter net revenue results, while strengthening our operations, increasing gross margin, and increasing our gross profit.

We hit net revenue of $200 million, representing a 13% growth year-over-year. Our gross profit increased by 35% and gross margin increased by over 500 basis points compared to the prior year quarter. Our beverage business, including craft beer, spirits, and our new non-alc beers and other non-alcoholic drinks grew 132% in net revenue year-over-year. We strengthened our leadership position as the fifth-largest U.S. craft beer brewer with a 5% market share as a result of our craft acquisition from ABI. We recently launched a new beverage division called Tilray Alternative Beverages, focused on fueling key markets across the U.S., with innovative federally legal, hemp derivative Delta 9, THC branded, and branded products. This is an exciting new segment for us, and our network of distributors, which I’ll get into in more detail shortly.

We focused our cannabis business on strengthening our operations and increasing our margins, leading to a gross profit increasing by 22%. We continue to lead the branded hemp food industry with a 52% branded market share, with Manitoba Harvest in the U.S. and the Canadian market share of nearly 80%. And our financial foundation remains strong with a robust balance sheet, ample cash reserves, reduced debt levels and flexibility to explore potential new acquisitions. Our financial strength enables us to pursue new opportunities and capitalize on emerging trends in the market. Let’s now dive deeper into each of our business segments. Starting with Tilray Beverages. Today, our Beverage division leads with 19 iconic brands, ten network manufacturing facilities and over 700 distributors, 20 brewpubs and restaurants, and leading sales and marketing teams across the U.S. Our beverage strategy is focused on growing our portfolio brands in selected states, regional markets and ensuring product excellence and innovation, driving focused scale, expanding targeted distribution to increase our market penetration and consumer access.

In our Beverage segment we generated $56 million of net revenue in Q1. Across our growing craft brands, SweetWater is the number one volume brand family in Georgia, multi-outlet and convenience stores. Montauk is the number one branded family in New York Metro, having increased at a rate of sale of 240 basis points year-over-year. And Tilray is the number one craft supplier in the Pacific Northwest, thanks in part to the continued success of 10 Barrel’s Pub Beer, Shock Top remains a leading priority as we relaunch the brand’s number one seasonal offering, Shock Top Pretzel. During Q1 and Q2, driving additional 5,000 distribution points in the last 45 days. The Pacific Northwest grew overall Shock Top distribution by 42% during the Q1, adding 1,100 new placements for the brand.

In the Northeast, Montauk’s flagship Wave Chaser IPA continues to post positive year-over-year volume distribution gains adding a net of 139 off-premise accounts during Q1. Three of SweetWater’s top 12-pack SKUs, 420 Pale Ale, OG IPA and the Hazy IPA all posted positive trends for Q1 trending a plus 7%, a plus 24% and a plus 17%, respectively. As we’ve mentioned before, our ambition is far beyond our current reach, as we continue our focus to become a dominant leading beverage business by leveraging and are strengthening our portfolio of beloved local craft brands, recruiting new customers, and activating more occasions, driving new growth across these brands. Additionally, we are innovating across adjacent categories, including flavored malt beverages, ready-to-drink cocktails, spirits, and also beyond alcohol, we will grow our non-alc beer category and expand further into water, energy and other categories.

Our powerful college sports partnerships across the country will be leveraged to bring new LDA consumers and fans into different brand families, especially Shock Top. Separately, our MLS music events and local community partnerships allow our brands to recruit and retain our core customers across different age groups. We have the manufacturing facilities, the distribution, the sales and marketing infrastructure to drive tremendous growth in the Tilray Beverages business. In the non-alcoholic segment, Montauk non-alc craft beer is now sold in 650 counts and new brand, Runner’s High Brewing Company has launched in the Southeast with three brews; Runner’s High Golden Wheat, Raspberry Wheat, and Dark Chocolate, with several expansion markets to follow.

With over 700 beer distributors, Tilray is now a leading supplier in key regions across the U.S., with regional jewels in the Northeast, Pacific Northwest, Colorado, Texas, Michigan, and the Southeast. With each beverage acquisition we’ve made over the past few years, SweetWater, Green Flash, Alpine, Montauk Brewing, the craft acquisitions from ABI and most recently, the acquisitions of our four brands in Molson Coors. We are laser-focused on operational efficiency, optimizing cost structure, and getting the margins of the acquired brands up above 40%, like SweetWater and our other legacy businesses, we’ve identified additional growth opportunities in our beverage business. Tilray Beverage is going after category diversification and we’ve identified four categories.

We expect to generate $30 million in revenue by the end of fiscal 2025. These four categories include: light lagers, $117 million category; flavored malt beverages, a $4.7 billion category; sparkling water, a $12 billion category; and the non-alc brew, a $445 million category. With our recent launch of Tilray Alternative Beverages, we are focused on fueling the U.S. with Hemp-Derived Delta-9 beverages, which is an estimated $2.8 billion market in the U.S. We’re beginning to launch our Hemp-Derived Delta-9 THC brands and products in key states including Florida, Texas, Louisiana, Minnesota, North Carolina, South Carolina, Ohio, Georgia, Alabama, Oklahoma, and Tennessee with distribution driven by our existing and robust beer distribution network.

Our initial portfolio of HDD9 brands include Happy Flower, Herb & Bloom, [420 Hops], Fizzy Jane and we expect to launch additional brands by the end of this calendar year. Happy Flower is currently available online through Drink Happy Flower. The growth of Hemp-Derived Delta-9 THC drink business in the U.S. is remarkable. And we are excited to see its potential for our beer distribution network who are eager to jump into the business and already have begun placing orders. We look forward to sharing more updates on this development soon. Turning to Tilray Cannabis. In Canada, Tilray continues to lead the Canadian market share by almost 170 bps over the next competitor and have been consistently at the top of the industry for the past three years.

From a regional perspective, Tilray is number one across British Columbia, Alberta, Ontario, and Quebec. These provinces combined include over 86% of the Canadian population. We’ve also led in all other markets combined. In adult-use recreational cannabis, we focus on margin improvement across our portfolio brands and products resulting in improved adjusted gross margin by 500 basis points in Q1 versus last year. The margin improvement, partnered with efficient utilization, production, and further cost savings initiatives will allow us to grow our revenue, profitability, sustainability well into the future. In Q1 20% of our net sales revenue came from new innovation. Our mainstream Flower business continued to grow, because of our strong genetics.

Our Redecan brand moved up to the number six position brand in Canada as reported by Hifyre data. In Beverages, Tilray continues to dominate the beverage category with a 45% market share, and at the end of August, with XMG, Mollo, THC beverage brands being the number one and number two brands, respectively. Tilray shipped 78 metric tons of biomass, or approximately 25% of the implied Canadian market volume in Q1. We continue to leverage the wholesale channel where contribution margins are better and supply is starting to balance. On an adult-rec we shipped 16 million pre-rolled cones and over 2.1 million cans of beverages in Q1. Turning to our International business in Q1, we continue to execute against our three basic initiatives. First, the acceleration of growth in Germany.

In Germany, since the Cannabis Act went into effect on April 1, 2024, we’ve seen a 50% increase in medical flower sales, as well as a 22% increase in medical cannabis extracts, where we already have a dominant share of the market, and we believe that our current positioning in Germany provides us with several unique competitive advantages to capture a significant share of the expected medical cannabis market, which is projected to be approximately $3 billion in the medium term. We expect to continue our growth in this very important market through commercial excellence and increased supply. We will continue to leverage the expertise and relationship of our CC Pharma / Tilray Pharma distribution business in Germany, which supports our medical cannabis business through its network of 13,000 pharmacy and wholesalers.

Second, the bifurcation and differentiation of physician-led and patient-led channels. As a market leader in the physician-led channel, we’re turning our focus to accelerating our growth in the patient-led channel. One of our major initiatives in this regard is improving the availability and the quality of our medical cannabis supply to meet needs of patients-led channels by creating a flexible and diversified supply chain focused on high-quality flower and new innovation. At Aphria Rx, our German cultivation and processing facility, we received the very first commercial cannabis cultivation license and commercial distribution license issued in Germany under the new regulations. These new license granted Tilray the ability to cultivate, produce, and distribute premium quality medical cannabis, with the ability to increase our production by approximately 5 times.

Aphria RX can now fully utilize and maximize its growing capacity while also expanding its genetics to a total of 31 approved strains from the previously approved three strains. We’ve already completed our first harvest under new cultivation license. We expect to commercialize these products in Q2. We’ve also begun to supply our international markets with EU GMP-certified medical cannabis products from our Canadian facilities. With medical cannabis from Aphria Diamond launching in Poland and Broken Coast and Redecan launching in Australia. We expect to launch additional cultivation from Broken Coast and Aphria Diamond in the coming months. And finally, we’ll continue to identify and enter new markets with the potential to generate material revenue and profit opportunities.

We expect European opportunities could represent a potential $45 billion medical market over the long term. And with our presence in Europe, it allows Tilray to grow our global brand portfolio to a base of over 700 million people in Europe, which is twice the population in the U.S. Finally, let’s discuss our Tilray Wellness business, focused on improving people’s lives through the power of hemp. Tilray Wellness is represented mainly by Manitoba Harvest, our leading hemp brand with over a 53% market share in branded hemp products. Wellness is also comprised of Happy Flower beverages and HiBall energy drinks. In Q1, Tilray Wellness delivered 11% 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 improve margins, delivering a 300 basis point increase in gross margin to 32%. As Tilray Brands has transformed, expanded and completed numerous acquisitions to get where we are today, our mission has evolved to be a leading premium lifestyle company with a house of brands and innovation of products that inspire joy, wellness, and create memorable experience. With that, I’ll now turn the call over to Carl to discuss our financial results in greater detail. Carl?

Carl Merton: 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 August 31, 2024. In Q1 net revenue was $200 million, a 13% growth rate compared to the previous year quarter net revenue of $177 million. As Irwin stated, our Q1 net revenue was a record amount. In constant currency, net revenue grew to $204 million. By segment, beverage alcohol net revenue increased 132% to $56 million. Cannabis net revenue was in line with expectations at $61.2 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 11% in the quarter.

From a segment perspective, 28% of our net revenue was generated by our beverage alcohol business, 31% was generated by our cannabis business, 34% by our distribution business, and 7% by our wellness business. This compares to 13% in beverage alcohol, 40% in cannabis, 39% in distribution, and 8% in wellness in the prior year quarter. The year-over-year variance is due to our craft beverage acquisition, which occurred in Q2 of last year. Gross profit increased by 35% to $59.7 million compared to $44.2 million in the prior year quarter. Gross margin increased to 30%, and over 500 basis point increase from the prior year period. Adjusted gross profit increased 21% to $59.9 million from $49.3 million in the prior year, while adjusted gross margin increased by 200 basis points to 30%, primarily reflecting our focus on improving our utilizations at our beverage alcohol facilities and favorable sales mix.

Net loss improved by 38% to $34.7 million compared to a net loss of $55.9 million in the prior year quarter. On a per share basis, this amounted to a net loss of $0.04 per share, which was a 60% improvement compared to a net loss of $0.10 per share in the prior year quarter. Adjusted net loss was $6.1 million compared to an adjusted net loss of $27.1 million in the prior year quarter, a 78% improvement year-over-year with adjusted net loss per share coming in at negative $0.01 per share, a significant beat compared to expectations of negative $0.05. Adjusted EBITDA was $9.3 million compared to $10.7 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 quarter is primarily related to building infrastructure and an increased investment in marketing and promotions at Tilray Beverages.

Cash flow used in operations was $35.3 million compared to $15.8 million in the prior year quarter. Adjusted free cash flow was negative $39.5 million compared to negative $6.3 million in the prior year quarter as a result of an increased demand on our working capital in our beverage operations as we moved from the payment terms under the co-manufacturing agreements to our own payment terms after integrating production. Turning now to our four business segments. Beverage alcohol net revenue was $56 million, up 132% from $24.2 million in the prior year. The positive delta was due to contributions from the craft brands which were purchased during Q2 of last year and new innovations across our brand portfolio. Through our expanding footprint, we now own and operate 20 brewpubs/restaurants in the U.S., that are in close proximity to the production of our craft brands.

In the quarter these operations contributed $11 million of 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 alcohol gross profit increased to $22.9 million compared to $12.9 million and adjusted gross profit was $23.1 million compared to $13.5 million. While Beverage alcohol gross margin was 41% compared to 53%, and adjusted gross margin was 41% from 56% from the prior year quarter. Due to the seasonality of our Beverage business, our third quarter ended February 29, 2024 is our most comparable period, reflecting the newly acquired craft brands to which we improved adjusted gross margin by over 300 basis points as a result of our efforts in integrating and optimizing our facilities as well as a favorable product mix.

As we mentioned at year-end, the new craft brands were initially subject to co-manufacturing agreements, inhibiting our ability to optimize production and control costs in a manner sufficient to increase our gross profit and margin. Effective May 31, all the co-manufacturing agreements except for production of Shock Top ended and the production of the brands were in-house, with Shock Top’s production expected to be integrated into our production facilities in Q2. As we integrate production in-house, we are able to better optimize production utilization in our facilities, decreasing unabsorbed overheads as well as achieving purchase price synergies now that we are purchasing the raw ingredients. Gross cannabis revenue of $81.2 million was comprised of $57.2 million in Canadian adult-use revenue, $12.2 million in International cannabis revenue, $6.3 million in Canadian medical cannabis revenue and $5.5 million in wholesale cannabis revenue.

Net cannabis revenue, which includes $20 million in excise taxes was $61.2 million, representing a 13% decrease from the year-ago period. Revenue from Canadian medical cannabis grew 2%, despite the category being impacted by competition from the adult-use market, while revenue from Canadian adult-use decreased 20%, which was a result of our increased focus on preserving gross margin and maintaining a higher average selling price in categories that have experienced a high degree of price compression. International cannabis revenue decreased by 14%, which was largely driven by variability on the timing in countries other than Germany of receiving import and export permits, resulting in fluctuations on a quarterly basis. As Irwin said already, in the five months since legalization versus the five months before legalization, our Flower revenues in Germany are up 50%, and our extract sales are up 22%.

As I mentioned, cannabis net revenue was in line with expectations at $61.2 million, but down $9.1 million versus the prior year. As we focus on our goal of improving cannabis gross margins, we are intentionally less focused on share and revenue in certain categories, particularly those categories facing the most price compression, including infused, pre-roll, and vape. Despite the decline in net revenue and share in those categories, we increased cannabis gross profit by $4.4 million and increased adjusted cannabis gross margin by over 500 basis points from the prior year period. Cannabis gross profit was $24.2 million and cannabis gross margin was 40%. Adjusted cannabis gross profit was $24.2 million compared to $24.3 million in the prior year quarter.

The gross margin increase was driven by our International cannabis business, and in Canada, our continued focus on maintaining a higher average selling price and selling a favorable product mix to improve adjusted gross margins by 500 basis points. Distribution net revenue derived predominantly through Tilray Pharma was $68.1 million, compared to $69.2 million in the prior year quarter. The decrease in net revenue is attributed to the effects of foreign exchange. On a constant currency basis, revenue from distribution increased to $70.4 million for the three months ended August 31, 2024, compared to revenue of $69.2 million for the prior year period. Distribution gross profit increased to $7.9 million compared to $7.7 million in the prior year period.

While distribution gross margin increased to 12% from 11% in the prior year quarter, because of product mix. Wellness net revenue grew 11% to $14.8 million from $13.3 million in the prior year quarter. The increase was driven by our strategic focus on continued innovations and strong organic growth within our branded hemp business related to higher consumption. Wellness gross profit was $4.7 million, up from $3.8 million in the prior year quarter, and gross margin rose to 32% compared to 29%, a result of decreased input costs and continued operational efficiencies. Our cash and marketable securities balance as of October 31 was $280.1 million, up from $260.5 million at year-end. This change was a result of our temporary increase in working capital dependence, offset by the funds raised from our ATM.

Since its initiation, we have raised $94.5 million on our ATM, which we intend to use for strategic and accretive acquisitions, including capital expenditures for acquired businesses. Let me now conclude our prepared remarks and open the lines for questions from our covering analysts. Operator, what’s the first question?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Kaumil Gajrawala: Hi, guys. Good morning. Can I ask a bit about the Canadian adult-use market and just how volumes are trending?

Irwin Simon: I missed that last comment –

Kaumil Gajrawala: Just an idea — yes, how volumes are trending in Canada?

Irwin Simon: Blair is on the phone. I’ll let him jump in a second. But I think the big thing which you see in Canada, how we’ve improved our margins there tremendously, and with Canada now being legal for five years, there’s a lot of LPs that have come and gone and with us having 5 million square feet in Canada and being one of the largest and being the number one, there’s a lot of volume, but the volume we’re going to go after is profitable low volume and there’s sales that we’ll give up for. In the period, we introduced a lot of new products, a lot of new innovation. And what we’ve done with our facilities in regards to our yields, in regards to some of the products that we’re doing today and the amount of pre-rolls, we sell over 80 million pre-rolls a year. We sell over 350 metric tons of flower a year. So volume is absolutely dependent, but it’s profitable volume. Blair, you want to add anything to it?

Blair MacNeil: Yes. Thanks, Irwin. And good question. In the industry overall, I would say, dollar volume is, as Irwin just talked about, compressed by some of the growth in those categories. But dollar volume is up 4.5% to 5% overall. If you look at the kgs shipped or the volume overall, the category is growing at 9% to 10%. So, we’re still seeing healthy amounts of consumers come into the categories. We’re seeing healthy amounts of growth in the business. I think what you’re seeing is the offset of price compression. What we’ve made on choices that you heard in the results from Irwin and Carl is to not play as aggressively in those distillate and distillate-infused categories, which are margin challenged. So overall, I would say, the business is very healthy on the overall industry from a volume standpoint and a dollar volume standpoint still growing at about 5% on the dollar side.

And then on the Tilray side, we’re being very choiceful on how we balance our margin and our volume.

Kaumil Gajrawala: Got it.

Irwin Simon: I think the big important thing is to realize is a couple of things. Number one, where you still pay a flat excise tax in Canada, you heard Carl say, we pay over $20 million in excise tax in the quarter. We pay close to $150 million for a full year. There’s still definitely some price compression, but we’re not going to play in areas where it’s just all about price. And that’s the big focus. The other thing is, our teams have done a great job of taking costs out and getting the yields on our grow, getting the yields on our products, and educating consumers. They’re going to have to pay a little more for the quality products they’re getting.

Kaumil Gajrawala: Got it. Useful. And then maybe just update on where we are on price compression and maybe the balance of supply?

Irwin Simon: So let me just come back and say to this here. The interesting thing, as you go back and look over the last three years, we probably, in Canada, lost well over $200 million on price compression. And I’m not making excuses, that number drops to your bottom line. If you come back and look at ultimately excise tax being cut, and it was half, there’s an extra $50 million, $70 million. So I think we’re seeing price compression stabilize. In regards to inventories, with our growth today in our yields, and us ultimately balancing and right sizing our facilities, I think we’re in a great state, a great place today in regards to what our inventories are. And the market continues to change dramatically in regards to potency.

And that is a big thing today, it’s amazing, and they’re looking for 30% plus potencies today. And if you can grow it, you can sell it. And I think that’s what’s important, and we got caught a little on potencies on our good supply, and we saw some great growth in the quarter with regards to higher potencies in our good supply brand.

Kaumil Gajrawala: Great. Thanks, guys.

Irwin Simon: And the last thing, just let me add there. It’s five years now that cannabis is legal in Canada. Actually, it’s five years what October 18 or something like that, coming up, the anniversary. The consumer now is educated, and we’ve had to build these brands from scratch. So these brands where brands that have been built from scratch, good supply is over a $200 plus million brand at retail, and educate — the consumer there is educated today about quality, potency, genetics, and where the product comes from. And that’s something Tilray has done an incredible job in making sure that we put great products out there. And listen, we still have a lot of restrictions in the packaging, how we advertise the products, how we communicate to our consumers.

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

Aaron Grey: Hi, good morning, and thank you for the question. So, first, I just want to talk a high-level one in terms of how you’re thinking about investing in the business and also driving profitable growth. You laid out a number of initiatives throughout the business. So I wanted to talk about how you’re thinking about that. And then EBITDA growth throughout the year was down a bit in the first quarter. So how best to think about the levers and the cadence of EBITDA and what we should be thinking about for the rest of the year? Thank you.

Irwin Simon: So, number one, we come back, and this probably is one of our lowest quarters in the year. There’s seasonality, which I don’t think everybody looks at. There’s also acquisitions, like in this quarter, there’s nothing on the Molson Coors acquisition that we closed in early September. And in regards to rolling out new products, there’s timing on that. In regards to our Delta-9 products in our beverage division, in regards to our non-alc, in regards to our Liquid Love, in regards to some of our other new products. So again, there is seasonality and there’s timing on a lot of the new products in regards to the distribution of white space. The other big thing that’s not in here is a lot of the costs that we’re still taking out of this business with the integration of the ABI brands, a lot of costs still coming out in regards to our Canadian business.

And in Europe, there’s a lot happening there with Germany. Our flower business was up since the announcement of the new regulations in flower, Germany almost 50%. There’s a time elapse of when we get products into the marketplace. There’s a time elapse when products are shipped into the Poland market and some of the other ones. So a lot of it is just from a timing standpoint and the seasonality and our new products rolling out.

Aaron Grey: Okay, thanks, Irwin. That’s helpful color. Second question for me, just on the Hemp-Derived THC beverages. You laid out a number of states in your prepared remarks. You had previously said two states. I just want to clarify, those states in your prepared remarks are those where you’ll be distributing at brick-and-mortar or just DTC? And then secondly, just on Hemp-Derived beverages, how best to think about the ramping with brick-and-mortar and the impact of bills that have been introduced and the broader farm bill, which looks like it might be delayed another year, and how that’s impacting broader distribution? Thank you.

Irwin Simon: So in regards to Delta-9, it’s basically going to be brick-and-mortar. We’ve already received our first orders and the majority of it will be rolled out into retailers and through our beer distributors that can sell it. Some will be definitely direct-to-consumer, but there’s 19 states today that will allow this product. And we’re pretty excited about the orders already and the demand for the product. And a lot more to come. We have five great products that we’re going to roll out. So it will be basically sold direct — it will basically be sold at retail these products, and through our beer distributors. Some will go through with our Happy Flower will be direct-to-consumer.

Aaron Grey: Okay, great. Thank you.

Irwin Simon: Thank you.

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

Matt Bottomley: Good morning, everyone. Appreciate a lot of the commentary on sort of individual markets in Europe and how things are progressing on the regulatory front and even with respect to some demand. But I’m just curious, without getting into too specific, into the nitty-gritty of any numbers or anything, but if you look at your international contribution, both exports, boots on the ground, it’s been run rating at close to about $50 million for a little while now. And I’m just wondering if any of these changes on the regulatory front are expected to have a meaningful impact on that contribution by the end of your fiscal year?

Irwin Simon: Well, I’ll let Denise jump in here for a second, but I got to tell you, you’ve heard what I said in Germany, since the changes in regulations, our flower business was up almost 50%. And in regards to supply, and that’s been some of our biggest constraints here some supply, we supply from our Canadian operations, we supply from our Portugal and some of the changes that we now have in Germany where we can sell out of our German facility where before we only could sell through the German government. So there’s a lot of pieces in place, but listen, there’s only 20 different countries that allow medical cannabis in Europe. And I think there is some tremendous opportunity to see the size of the category in billions. The demand is there. Denise, do you want to add to what I said?

Denise Faltischek: Yes, sure. Thanks, Irwin. And I just do — I do thank you for the question. I just want to challenge, like the one part about it running at $50 million for a few years now, because actually, I think if you look back over the progression, we actually have seen pretty significant growth year-over-year. If you look basically from the point of time of the Tilray acquisition up until our reported numbers from last year, and we’re expecting very, very significant growth in this year’s market. As we look to our — by fiscal year ’25, as Irwin mentioned, we had 50% growth in our flower business, 22% in our extract business, where we already have a sizable market share. We do have some, as Irwin mentioned in the previous question, we have some timing with import-export permits receiving in certain countries where we ship directly to a distributor versus our own warehouses, and therefore servicing markets through third-party distributors.

So there will be some lumpiness. So it’s really important to look at the business on a year — on a year basis, not necessarily on a quarter basis, to get a full picture.

Matt Bottomley: Okay, got it. Appreciate all that. And then I just wanted to sort of more of a general question, but just given some of the growth headwinds in the domestic Canadian market, obviously, there’s been a lot of attention paid, and you guys have done a lot of good strategic initiatives, whether it’s International or Beverage alcohol. But on the Wellness side of things, I’m just curious if there’s any sort of M&A opportunities you think within there, or do you think this is more of a sort of organic growth story from the exposure you guys already have?

Irwin Simon: Well, in regards to Wellness, I think, listen, there’s a lot of the medical in Canada that’s coming over, and they’re going into the — you know, going into recreational and buying it there. But medical is something that we’re focused on. We see tremendous use for the product, whether it’s anxiety, sleep, pain, epilepsy. So there’s a big medical opportunity for us. Is there acquisitions for us in that area? That is an area that we are focused on in regards to the medical part of the business. But I think the whole thing is, again, is our research that we’re focused on medical, which is a big commitment for us. And being the number one medical producer in Europe, there’s a lot we’re learning there, and there’s a lot as we work with universities and research that we’re sharing back and forth, matter of fact, we’re in Europe next week with our Canadian teams and our European teams working on multiple things there.

So, yes, medical is a big part of our growth, and medical is something that’s very, very important to us in the Canadian market.

Matt Bottomley: Okay. Thanks all.

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

Bill Kirk: Good morning. I don’t think I heard the fiscal ’25 revenue guidance, which had been $950 million to $1 billion. Is that still the expectation for the year? And then, if I recall, that guidance had included some M&A, some expectation for some M&A, was the recent acquisition of the brands from Molson Coors, the M&A that was contemplated in that guidance, or is there still more implied?

Irwin Simon: So that was the guidance for the year. There is some M&A in there. We have not updated our guidance to include the Molson’s acquisition.

Bill Kirk: Okay. So the range is still $950 million to $1 billion?

Irwin Simon: Exactly.

Bill Kirk: Okay. And then on the International side, like I understand that it’s up over a few years, it has been in that like, $11 million to $14 million on a per quarter basis for a little while, despite new positive developments. So, like what’s offsetting the new positive developments in kind of on a more narrow timeframe?

Denise Faltischek: So thank you for the question. The international business, basically, if you remember, we used to actually, there’s been some ins and outs, I think, in terms of the business. So it’s not exactly on apples-to-apples. If you recall, a couple of years ago, Israel was actually a very big part of our revenue number. And if you might remember that it’s been about a year and a half ago, two years ago, we discontinued our business in Israel. Just given the state of the market there, given the influx of products, the price compression, we just didn’t feel that it was a profitable market for us to continue. So we discontinued those sales, which were quite sizable. However, in replacing that, we have sought out additional new countries.

We entered Poland, we entered the U.K., Italy and Portugal. We’ve also identified a bunch of other countries which we will be entering. So stay tuned for that in future quarters. This business, as Irwin mentioned before, the Canadian business was just a few years old. The business in Europe is even more underdeveloped and immature at this point. And so, in essence, it really is just starting to grow and take off now. And so, I think it’s still early innings for this business. We are very bullish about it going forward. And as Irwin mentioned, we look to invest — we’ve already invested and we will continue to invest.

Irwin Simon: I just think, again, you got to come back, there’s been some currency effect in Europe that affected us, as you look at it. But Denise mentioned, as we look at this from a profitability, Europe is very profitable for us. And I think that’s what’s very important is as we focus on profitability. The other thing is Germany being the biggest market there, and we were restricted with our facility in Germany that we only could sell to the German government at a loss. That has changed. So we were losing money in regards to a tender that was awarded five years ago, and we’ve been able to renegotiate that tender and renegotiate the terms of that. The second thing is, as each country legalizes, and we’re not dealing with states here, we’re dealing with different countries with different regulatory.

So building out the European market absolutely has been difficult. And there’s markets that we’ve abandoned. We are not selling into the Israeli market, which used to be one of the biggest markets for us. So, what I can reassure you is, there’s tremendous opportunities of growth. We only really sell flower and tinctures. It’s not like we’re selling pre-rolls and we’re selling multiple different products here. We’re selling over 100 different products, but it’s basically flower and tinctures, and that’s it. So we look for Europe to be a big opportunity. We are the largest grower of cannabis in Europe today. We have the infrastructure on the ground, taking a little time, but what’s important to us is the profitability there. The other thing is we’re vertically integrated with our CC Pharma, CC — our Tilray Pharma there in regards to distributing through the drugstores.

So, yes, you know, it’s not growing as fast, but it is a very profitable business for us.

Bill Kirk: Those details were great. Thank you.

Irwin Simon: Thank you.

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

Michael Lavery: Thank you. Good morning. Just wanted to come back to the Delta-9 beverages. It’s been tough in the cannabis space at least, really, building brands that kind of parallel to how they’ve developed in other categories. And so this is an interesting case to see how it plays out. But I guess with that in mind, you have four brands, I think you mentioned, you’ve got teed up and more to come. Why so many? And how do you plan to develop those and set them up for sustainable growth?

Irwin Simon: So, number one, the brands are developed, and again we’ve had Happy Flower out there for a long time with CBD 420 is one of our brands that are known. Two or three of our other brands have some uniqueness to them. So, again, with our five different products out there, it gives us differentiation in products, it allows us to have multiple products out there. And so far, everything we have shown retailers, distributors, they’ve liked, and we got quite a few orders. So, yes, 420 is a brand that’s well-known out there. Happy Flower has been out there. We have to build some of our other brands out there, and we’ve done that before, as we’ve come out with new products in regards to Runner’s High, which is our non-alc beer and our Montauk non-alc beer, our Liquid Love is our water brand that’s coming out there.

Our Delta-9, our new brand. Listen, the big thing is out there. We got products. We’ve developed these flavors. We developed these products from scratch. We got 700 distributors out there, and these distributors want it now, we only can sell it in the states that is legal. And we got field salespeople out there on the street that will make sure we get this product in the hands. The last but not least, which is important, how do we market that to the consumer? And that’s what’s important for us to make sure we’re getting the message across to the consumer. There’s some really good products that we’re coming up with.

Michael Lavery: Okay, I’m sorry, go ahead.

Irwin Simon: No, I just stopped. Sorry.

Michael Lavery: Yes, no, so that’s helpful. And then just on some of the — you touched on some of the integration of beer production and how you’ve got more flexibility now. How significant can that be and how quickly could it come in terms of just, would we be right to think that you could consolidate some facilities or how do we just think about what to expect in the next several quarters for how that impacts your numbers?

Irwin Simon: So, no, good question there. Listen, we’re in a category today where the craft beer industry is declining 3%, but there’s $100 billion worth of beer sold out there. So it’s not like a small category. So there is tremendous opportunities in the craft beer business, okay? And with that, we think we can go out there and take share with innovation, with some of the new products that we’ve launched. We think we come back and look at whether it’s the non-alc industry that’s growing tremendously within Delta-9. The other thing is, we’re going back to each of our brands today. We have 19 brands out there, and we’re looking at these brands where they should be sold regionally and what should be a national brand. Shock Top definitely should be a national brand.

But if you take Montauk, you take Blue Point and take SweetWater, and you focus them sort of in the Northeast, New York, New Jersey, Connecticut, Pennsylvania, maybe Florida, that’s over 100 million people that we can market our brands to. We don’t need to be in every single state out there and ship 10,000, 20,000 cases there, spend money on it where we’re not going to get the lift. If you come back and look at SweetWater, SweetWater grew a 2.5 million, 3 million case brand. But it went into certain states, whether it’s Ohio or Illinois, it didn’t make sense in those states, California. So what we’re going to do is take these brands, focus on three, four, five states, put our money behind them, work with the distributors, educate the consumers about them, and then take our national brands like a Shock Top.

And the other thing, what we’re going to look at this here, if we have a pumpkin beer, we’ll have pumpkin beer in similar flavors for Montauk, for Blue Point. We’re not going to have all these multiple different formulas out there with a lot of complexity. So we’re looking at how we take our tail of our brands. We’re looking at how to take complexity out of our business. We’re going to do some SKU rationalization. And with this, it will optimize and right-size our footprint and the buying power today with over 15 million cases of beer that we’re buying. And if we have to consolidate some of our facilities, which we’re right now looking at, we ultimately will, but we really feel, you know, within a matter since 2020, we’re now the fifth largest craft brewer out there with a 5% share out there.

And we think we can get this category growing again through our innovation, through our distribution. And I got to tell you, working with distributors out there, they all want to see growth, they all want to see new innovation, they want to see products. And the same with the retailers. The retailers are looking at there’s way too many brands, way too many products, how do we ultimately get this category growing, because it takes up too much space in stores.

Michael Lavery: Okay. Thanks so much.

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

Pablo Zuanic: Thank you. Good morning, everyone. Irwin, maybe can you give us an update in terms of how you’re thinking about U.S. plan touching assets? We’ve seen other companies that set up ring fence structures, Canopy USA, SNDL with SunStream, OGI has talked about that also. I mean, there’s been more consolidation, and we would come to a point that there won’t be much left to buy. So how do you handicap that? And how do you think about, you know, doing something similar in the current context of regulation?

Irwin Simon: So I step back, and listen, the good news is the two presidential candidates are in favor of legalization. And I think in regards to rescheduling, there’s, in December, the recommendations are going to come up on that. So, Pablo, I think something will happen in regards to rescheduling, and something will happen in regards to Federal legalization, whether it’s medical cannabis that will be legalized and ultimately leave it up to the states for everything else. If you come back and look at what we can do, remember, we’ve gone in once Canada was legalized five years ago, they tell me it’s six years ago, but I think it’s still five, it was 2018, so I guess that is six years ago. If you come back and look at it, we built our Canadian business to a $300-plus million business from scratch.

And we built it — we built grow facilities, we built brands, we built vertical integration. And today, as being one of the largest growers up there with almost 5 million square feet, we know how to grow cannabis. We know we have the genetic base. We know how to — you know, make pre-rolls, we know how to make tinctures, we know how to make drinks. We’ll sell this year close to 9 million cans of cannabis-infused drinks. So we have, you know, the DNA, we have the know-how. You know we’re one of the largest medical cannabis companies in Canada and in Europe. So with that, we’re ready to do it on our own in the U.S., depending upon what the guidelines and the parameters are. And on the other hand, with our balance sheet, where it is today, we have the ability to go out and acquire a great strategic partner that can help us, but that makes sense.

The other thing in the U.S. today, we have 18 beer brands or 19 beer brands. We have multiple brands in our spirits business, and we have our wellness brand in Manitoba Harvest. Can these brands parlay over into the cannabis category like we’re doing with some of these in Delta-9? So again, I think, with cannabis going to legalize, and that’s my opinion, I have nothing else, you know, any other insight, we will be ready to jump into which way we can jump in there and be ready for it.

Pablo Zuanic: Thank you. And one last one, maybe for Denise, just going back to the discussion in Germany, maybe using some Michael Porter’s terms here, but maybe remind us of your competitive advantage there, your competitive assets, your asset strengths. What are the barriers to entry? Because what I hear, there’s all these licensed importers that are able to bring products, we saw a big jump apparently in imports in the second and third quarter, and then they are able to go to doctors, promote those products, and sell them to the consumers, right? So I don’t know if I want to see more fragmentation as opposed to consolidation in Germany. But I’m sure you have assets on the ground that give you an advantage. But I’m just trying to understand how the German market plays out in terms of fragmentation versus consolidation.

Just importers versus local producers. And what’s your edge? And why should we assume that you are better positioned than others? If you can just mention that. And as part of that, a quick reminder, if you produce, if you jump production in Germany by five times, I suppose that replaces Portugal or Canada, does that mean that you end up with a higher cost structure? Thank you.

Denise Faltischek: Thanks, Pablo, and thank you for the question. I think, also I just want to also bring back to the previous question that was asked, because I think it — I was remiss in not stating the fact that if you look at our year-over-year growth between FY24 and FY23 in terms of the European market, we grew that market 34%. So I just wanted to actually finish off that last question, which I didn’t do the last time. In terms of Germany, I think you are 100% right in terms of our uniquely positioned in Germany and in Europe, in particular. We mentioned Aphria RX facility with our ability under our new — our newly issued license, we have the ability to produce to full capacity, which basically allows us to produce five times what we were able to produce under the tender.

In addition, we expanded that license, under the tender we were permitted to produce three strains. Today, we now are able to do 31 cultivars, and I’m proud to say that actually what just landed at Neumunster is a bunch of cultivars from our Canadian facilities, where we look at those cultivars that perform best in market in Canada. And we’ve shipped those cultivars over to both Portugal and Aphria RX in order to provide ourselves with the maximum flexibility both in supply chain, as well as the availability of products to patients. Having that facility, as well as our Portugal facility, as well as we’ve opened up the ability to deliver product from Canada, we have the — probably what I would — what I would classify as the most flexible supply chain of any cannabis company in Europe where we see many of — and you mentioned about whether there’s segmentation and consolidation, and as you know, there is a few larger players in the Canadian — in the German market, but there’s, and then there’s a proliferation of a lot of smaller, smaller companies that are — that are coming online and starting and continue in German market.

I do think at some point there will be consolidation, just because if you have a lot of players in a market, you will start to see consolidation of those players. But going back to our unique position, we have the most flexible supply chain, we have a great cost structure. Given the work that we’ve done in order to make sure that we always keep our cost to produce very low and we’re very efficient. In addition, we have a terrific first-class commercial team located in Europe and with boots on the ground in Germany. We have a sales team that is very well positioned in terms of their knowledge, their reputation with doctors, their reputation with government officials, and the fact of the matter of being one of the first in Germany has given us a reputation of being trusted and having the expertise.

So as doctors want to learn more and more about medical cannabis in light of the new regulations, we are one of the first that they seek out in order to get that information because they want to know how to prescribe and they want to know how to continue in the market.

Pablo Zuanic: Thank you.

Operator: Thank you. Our final question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Robert Moskow: Hi. Thanks. I just wanted to ask about the quarterly results in beverage. I didn’t hear whether you said that those — the sales were in line or a little below expectations. I think you said cannabis was in line or better. So can you just tell us like, just how did beverage do versus you thought? The tracking data shows the brands are down a bit. Do they just need like — is it a matter of timing before your new marketing efforts and your consolidation efforts take hold before the retail sales get a little bit better?

Irwin Simon: So, Robert, thank you. We don’t give guidance out there by the major businesses, but we have definitely internal guidance and internal budgets. The beverage business was off a bit and a lot of that is just timing on some of the new products and a lot of it is the products are ready, it’s when the distributors ultimately take them, and that was the biggest thing. The other thing which you heard me talk about earlier is right-sizing the business here and going through our SKU rationalization, going through our brand rationalization, and going through our distribution white space. Also there is timing in regards to customers taking new products in, products for Halloween, products — our pumping products, and some of the different things like that.

So just a timing standpoint. But the other one was integration of some of the ABI brands back into our facilities and supplies. So it’s just from a timing standpoint, it’s a timing standpoint. If you look at our quarterly — if you look at our numbers here, our SG&A was way up in regards to our beverage business. But as we build out the infrastructure and build out people and take over the ABI business and do some of the spending, we expect to get the benefits from that over the year. So with that, we are excited to what we see that’s happening out there. We think we’re well positioned with our brands, with our products, with our innovation. Our customers are giving us good feedback. We have a lot of high hopes for Delta-9, we have a lot of high hopes for our non-alc, we have a lot of hopes for our Liquid Love.

We’ll have a lot of hopes for some of the new innovation that’s coming out under SweetWater, Montauk, and 10 Barrel, and which, again, which is not really in our numbers, with the acquisition that we just acquired, the four brands from Molson Coors, and getting our hands around them and seeing the growth opportunities with that. So with that, it’s just early timing in regards to our beverage business, but there is a real, real, real good plan in place there, Robert.

Robert Moskow: Thank you.

Irwin Simon: Thank you.

Operator: 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: Thank you very much, everybody, and thank you for joining us today. I’m incredibly proud and excited of what we’ve been able to put together over the last five-plus years. As you heard our guidance out there is $950 million to $1 billion of size, and that’s coming from a startup basically at $50 million. Today, we have over 44 brands. We have 2,700 people that work within this company today. We have plenty facilities, we sell in over 20 countries, six different continents. And again, we are dealing in categories where regulation is important. There is no one company out there that does what we do as diversified as us. So it’s not easy. And there’s a lot of noise and a lot of news every day coming up about cannabis.

As we sit here and wait, there’s a lot of changes that got to happen. But again, the cannabis industry in the U.S. is over $40-plus billion in total size. So there’s a big, big, big market out there. You look at the total beer industry out there and the size just of the craft industry, there’s a big business out there. You look at the wellness industry and some of the stuff that we’re doing with hemp and that grew about 11% in the quarter. So we’re well positioned. If you come back and look at our balance sheet, and that’s something I think that’s hurt a lot of other companies out there in the cannabis industry, is we really have managed our balance sheet, managed our cash situation, managed paying down debt. In our last quarter, we paid down over $300 million of our convertible debt.

So we’re focused on this and pulling all this together. Are we totally happy with our stock performance? No. But I don’t think it reflects of what this company has done over the last five years and how we put together some great brands, great people, a great strategy, and how we’re diversified out there. And we’re a global company in the CPG industry. So, I feel there’s exciting times ahead. You have great brands, you have a really committed team. We have a tight, tight strategy out there. We have great partners with our distributors, our retailers, our consumers, who we’re marketing to. And last but not least, our aim is to please our shareholders and reward our shareholders. With that, thank you very much and enjoy your day. Go Mets, go Yankees.

And you go to Citi Field, you’ll find our beer. You go to San Diego, you’ll find our beers. So we want stadiums that are in the playoffs that are selling our beers. So with that, be safe out there, and thank you for joining us.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.