Tilray Brands, Inc.

Greetings and welcome to Tilray's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Rafael Gross, Investor Relations. Thank you. You may begin, sir.

Good afternoon, and thank you for joining us on Tilray's 2020 Full Fiscal Year and Fourth Quarter Earnings Conference Call and Webcast. On with me today are Brendan Kennedy, Chief Executive Officer, and Michael Krutek, Chief Financial Officer. Before we begin, please remember that during the course of our discussions, Management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. These statements are based on management's current expectations and beliefs that may prove to be incorrect and involve known and unknown risks and uncertainties. Actual results could differ materially from those described in these forward-looking statements. Please refer to Tilray's reports filed from time to time with the United States Securities and Exchange Commission and Canadian securities regulators, along with the earnings press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements. On December 16, 2020, Tilray and AFRIA announced their plans to combine the two companies and create the world's largest global cannabis company by revenue. In connection with the proposed transaction, Tilray will file a proxy statement on Schedule 14A containing important information about the proposed transaction and related matters, and AFRIA will file a management information circular. Additionally, Tilray and AFRIA will file other relevant materials in connection with the proposed transaction with the appropriate securities regulatory authorities. Because the proxy and information circular contain important information about the proposed transaction, the parties to the transaction and security holders of Tilray and AFRIA are urged to carefully read these entire documents, including any amendments or supplements to such documents, before making any voting decisions with respect to the proposed transaction. The Tilray proxy statement and AFRIA management information circular will be mailed to Tilray and AFRIA shareholders, respectively, and will be available on the EDGAR and CEDAR profiles of the respective companies. Finally, on today's call, management will also refer to adjusted EBITDA and gross margin, excluding inventory valuation adjustments and stock-based compensation, which are non-GAAP financial measures. While the company believes that these non-GAAP measures provide useful information for investors, 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. Today's earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. Now, I would like to turn the call over to Brendan.

Hello, everyone, and thank you for joining us. The headline as we enter today's call on Investor Update is that our outstanding team was able to deliver solid revenue growth for the year and the quarter and positive adjusted EBITDA in the quarter in an environment that was anything but normal. Our ability to achieve these results is a tribute to Tilray's relentless focus on revenue growth, operational excellence, profitability, and shareholder value. Specifically, on the revenue side, we successfully pursued profitable sales growth by focusing our three core businesses, Canadian Adult Use, International Medical, and Manitoba Harvest Hemp Foods, while significantly reducing bulk B2B sales in Canada. These efforts yielded 50% year-over-year growth in our adult use business in Canada, excluding bulk from 2019. as we worked aggressively to introduce a variety of cannabis 2.0 products while expanding our presence across the retail landscape. We also generated over 150% growth in our international medical business as we grew market share in key markets and leveraged our international presence and infrastructure. On the operational front, we significantly reduced our cost structure to better align with market conditions. This process began before the onset of COVID-19, and consisted of right-sizing resources, significantly reducing SG&A expenses, closing high park gardens, and increasing our operating efficiencies. While the pandemic presented unanticipated challenges, it did not hinder our progress. Through Q4 2020, we were able to achieve approximately $57 million in annualized savings compared to our Q4 2019 run rate, surpassing our original goal of approximately $40 million Notably, however, we did not allow our cost-cutting efforts to distract us from our revenue growth goals. Turning now to the details about performance. For the full year 2020, we generated a 26% increase in total revenue to $210.5 million. As noted, this growth was driven by international medical revenue, which more than doubled to $33.9 million. and growth of more than 50% in our Canadian adult use business to $83.8 million. Along with impressive sales results, we achieved the adjusted EBITDA goal we set earlier in the year and delivered $2.2 million of adjusted EBITDA in Q4. These types of results require dedication, commitment, and focus. I'm proud to say that the Tilray team demonstrated all of this and more. Our team successfully navigated changing industry dynamics, changes in our organization, and the ever-present challenges presented by COVID-19 to accomplish outstanding results during 2020. Now, let's discuss each of our business segments in greater detail. Our Canadian adult use business continues to grow and evolve. While many LPs have grown revenues by focusing on the deep value segment of the market, we continue to take a more balanced approach as we manage our product offerings with the goal of maintaining rational pricing and sensible margins. Full-year 2020 revenue grew 50% to $83.8 million, while our Q4 2020 revenues grew to $25.4 million, or 27% sequentially from Q3 2020. our solid performance can be attributed to several factors. First, enlisting Kindred partners as our exclusive sales agent has significantly expanded our distribution profile. Notably, Kindred has roughly 45 people in the marketplace focused on expanding the depth and breadth of our product offerings compared to the 18 internal salespeople we previously had working at Tilray. Second, taking advantage of the increased SOAR count At the beginning of 2020, we estimated an end-of-year store count between 800 and 1,200. During the year, and despite COVID, we were encouraged by the opening of 653 net new stores for a total retail count of 1,319, including 240 stores in Ontario. We view new store openings as a positive for ToeRid's growth, as well as the growth and evolution of the broader adult-use market in Canada. We have thoughtfully and proactively managed our product mix to ensure we effectively compete for our fair share of the consumer wallet. Throughout the year, we improved our process of evaluating our portfolio to ensure our product offerings are priced appropriately across all category segments. As previously discussed, we also made some competitive price adjustments starting in Q3. primarily to bring some of our higher-potency premium products more in line with the competitive set, which we believe paid dividends in Q4. More generally, our product mix for the Canadian adult-use market has been focused on growing our existing portfolio of 2.0 products, introducing new, innovative products that delight consumers, and maintaining a stronger presence in the high-potency and premium price categories. We continue to prioritize the premium sector of the market, During Q4, approximately 75% of our products were in the mid- to high-potency range, while 60% were in the mainstream and premium offerings. While we focus and grow our premium, high-potency, and mainstream offerings, we continue to maintain a presence in the value segment with the batch, and the Oak Drills brand focused on delivering quality cannabis flower and pre-rolls at competitive prices. In Q3, we launched our best-selling Chowdhury Wally gummies with two flavor offerings, THC watermelon, and balanced THC CBD pineapple mango. In Q4, we introduced a third flavor, THC sour cherry. During Q4, we also brought several new form factors to market, including a hash product, a new beverage offering every mint tea. Looking ahead, we will continue to be at the forefront of innovation in the marketplace and have plans to launch new offerings of vapes, topicals, and chocolates. It merits emphasis that the success in our Canadian adult use business also reflected meaningful operational improvements that are resulting in increased yields and potency. In 2020, our yields increased roughly 42% at our MS Bill in Ontario facility relative to 2019, and virtually all of our harvests in Canada during 2020 were above 20% THC potency. We view the ingredients driving success in our Canadian used business as the power of partnerships, smart, disciplined retail growth, a dynamic and appealing product mix, and operational excellence. Based on Q4 results, we remain cautiously bullish on the adult use market and believe we are prepared to address any potential significant unknown challenges resulting from the continually evolving and changing COVID-19 related restrictions on retail activity. In our opinion, any temporary hurdles we face will not impede the longer term inevitable growth of this market. The conversion from the illicit market to the legal market is supported by the expansion of more value added and legal cannabis products, greater accessibility and affordability through increased points of distribution, as well as heightened interest in quality and safety. Consumers are becoming more informed, more discerning, and more accepting of cannabis products. Tilray, and the new Tilray we will be part of, is incredibly well positioned to take advantage of these trends. In international medical, we are excited about our enviable track record of growth and our position as a leading provider of GMP-certified medical cannabis in the European Union and other international medical cannabis markets. As I already mentioned, for the full year, our international medical sales revenue increased 153%. Sequentially in QCOR, revenue increased 44%. We attribute most of our international medical growth to Germany and Australia. More broadly, we remain focused on the opening of other EU markets, which in aggregate represent nearly 450 million people across the EU's 27 member states. Tilray is well positioned, if not better positioned, than other global cannabis companies to win this market. We continue to see opportunities for growth in Germany, as both the number of patients and prescribing doctors continue to increase. We also expect we will continue to gain market share as the overall market continues to grow. As you know, we entered Germany at a very early stage, and we are building our business based on our market knowledge, our customer relationships, and our brand awareness. All these elements position Tilray to generate ongoing revenue growth as the market expands, similar to what occurred in Canada some six to seven years ago. We are further encouraged by the early performance of our relationship with Harmosun, In early December, we announced the signing of the cooperation agreement with Hermosyn for the promotion of medical cannabis extracts in Germany. Hermosyn is primarily focused on pain therapy and neurology and is part of the Lupin Group, an international corporation that sells innovative drugs and generics. The Hermosyn team canvases doctors' and prescribers' offices to familiarize them with Tilray products. our GMP quality standards in our reliable supply. We believe this strategic partnership will continue to expand Tilray's presence in Germany. At the end of 2020, our phase two expansion at our GMP certified Portugal facility is substantially complete. Over the next 90 to 120 days, we will finish work on the small outstanding items and start commissioning the new growing area. As we have discussed for some time, our facility in Portugal is a cornerstone of our long-term commitment to expanding our presence and leadership as inspired GMP-certified medical cannabis throughout Europe. As you know, our EU campus and cultivation site in Portugal consists of a fully GMP-certified facility and includes an outdoor cultivation plot, a state-of-the-art glasshouse growing area, and a manufacturing facility. This facility serves as our international hub for R&D. and primary source of supply for EU medical markets and select other international markets. In France, we recently announced that Tilray has been selected by the French National Agency for the Safety of Medicines and Health Products to supply GMP certified medical cannabis products for a prescription experiment. Beginning in Q1, we will be supplying GMP produced medical cannabis products from Portugal to serve French patients in need for the duration of the French experiment, which is expected to last 18 to 24 months. We expect patient counts to expand quickly during initial study and even more rapidly once there's broader approval of the program. Obviously, we are very pleased and optimistic about the prospects for the French program, and our well-established European team gets all the credit for making this happen. This outcome is another example of how our commitment to and experience in the European market continues to accelerate our business interests. Our European milestones also include the following important events. We received the first and only market authorization to offer medical cannabis products in Portugal. We announced a partnership with World Pharma Biotech in the first export of medical cannabis from Portugal to Spain. World Pharma will produce the first medical cannabis products for clinical trials in Spain with Tilray GMP-certified medical cannabis. And just last week, we announced a new agreement with Grow Pharma to import and distribute Tilray medical cannabis products in the United Kingdom. This new agreement gives doctors and patients access to a sustainable supply of Tilray's full range of pharmaceutical-grade medical cannabis flower and oil products. With these exciting new developments, Tilray Medical cannabis products will now be available to patients in 17 countries around the world. We have many reasons to remain bullish about our existing competitive position and ongoing business potential in the EU's medical cannabis market. Our recent market entries in France, Portugal, Spain, and the UK provide powerful validation for our EU market approach, and we believe these countries will be models for other European and international markets. While the coming quarters may be volatile due to always changing COVID restrictions, we are committed to long-term profitable growth in Europe and are well positioned to take advantage of future opportunities. Following Germany, France, Portugal, and Spain, we believe other EU countries will begin implementing medical cannabis programs as doctors, patients, and pharmacists embrace medical cannabis. Our success across the EU market gives us confidence that we have built a foundation that positions Tilray to benefit from these ongoing opportunities. In 2020, Manitoba harvest revenue increased 28% to $76.9 million, partly due to a full 12 months of operations in 2020 versus 10 months from our acquisition date in 2019. In Q4, however, we did not achieve our goals. Q4 2020 hemp revenue decreased 18% to $15.3 million, compared to the year-ago period to 23% from Q3 2020. While there are several factors that contributed to these results, we were disappointed by this outcome and found it necessary to make changes to the management team. We continue to have high expectations for the Manitoba Harvest business and look to leverage the operations and commercial platform to expand our hemp food products business. and more aggressively establish a solid presence in the CBD products arena. We are confident our management changes will start to deliver results more in line with our expectations, but also remain cautious about COVID-related impacts to consumer behavior and the effects on retailers that carry our products. 2020 was a year in which the Tilbury team delivered outstanding results despite challenging conditions. With a solid year behind us, I'd like to briefly discuss the next chapter in Tilray's journey, specifically the transformative transaction with the PREA that we anticipate completing during the second calendar quarter of this year. There are many strategic and financial benefits to the combination that I would like to highlight before I turn the call over to Michael. First, scale matters in both Canada and beyond. The combined company will be the largest global cannabis company based on pro forma revenue with scale and breadth across major geographies and a complete portfolio of market-leading brands in all major cannabis product categories. We are in the earliest stages of the continued development and expansion of the global cannabis market. It is clear that scale, massive market footprint, broad product range, and brand expertise will be characteristics of companies that win. Additionally, AFRIA has generated positive adjusted EBITDA over the last seven quarters, and we just finished our first quarter of positive adjusted EBITDA. As a combined business, the new Tilray will be positioned to deliver market-leading profitability. Given the EBITDA profile of the two companies and the $100 million Canadian dollars of pre-tax synergies to be realized, the combined business will have a robust platform for future revenue growth, profitability, and cash flow. The combined company will also benefit from the strength of our combined balance sheets and the resulting additional access to capital that will help accelerate the company's global growth opportunities and stockholder value. Second, product leadership. The combined company will have a portfolio of carefully curated and complementary brands in every major cannabis category, including flour, free roll, oils, capsules, vapes, edibles, and beverages. and across all consumer segments, economy, value, core, mainstream, and premium. We will also have a leading Canada adult use retail market share of approximately 17%, which is roughly 700 basis points higher than the next closest competitor. Third, we will have an unrivaled European platform and be able to pursue international growth opportunities with an end-to-end EU GMP supply and distribution chain. This includes our European EU GMP cannabis cultivation and production facility in Portugal and a free German medical cannabis distribution footprint that reaches more than 13,000 pharmacies. Fourth, we will be able to enhance our presence and infrastructure in the United States by leveraging the Sweetwater and Manitoba Harvest businesses. The presence of these two leading brands position the combined company to establish a commanding presence in THC products when THC is federally legalized. The combined company will be able to leverage Sweetwater's craft beer manufacturing and distribution network to build brand awareness via craft beers, hard seltzers, and other beverages, as well as Manitoba Harvest brand presence and distribution in hemp and wellness products to capture market opportunities in the CBD and THC spaces as market regulations permit. Given these positive dynamics, we are thrilled to bring together two leading cannabis companies, and leverage the enhanced scale, geographic footprint, product offerings, developed distribution, brand expertise, and low-cost production of the combined entity to deliver sustainable, attractive returns for shareholders. The entire TILRAY team looks forward to working with AFRIA to leverage our combined strength and capabilities to meet the needs of patients, and consumers around the world while also delivering best-in-class financial results. Finally, when I envision the future landscape of the cannabis industry and when both financial investors and strategic partners are evaluating who is likely to be a global winner and exploit positive political changes that may occur in the U.S., I believe they will look at the Tilraya Freya combined business and all its positive attributes is a clear favorite. With that, I will turn the call over to our CFO, Michael Krutek, to review our financials.