Tilray Brands, Inc.

Good morning, everyone. Thank you for joining us to discuss Tilray Inc.' 's financial results for the 2022 fiscal first quarter ended August 31, 2021. Joining me on today's call are Erwin Simon, Chairman and Chief Executive Officer, Carl Merton, Chief Financial Officer, and Barron Narada, Chief Corporate Affairs Officer. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session for analysts and investment firms conducted via audio, and participating retail shareholders conducted through the Say Technologies platform. Question submission and upvoting through the Say Technologies platform concluded yesterday, and the company will read aloud and answer the top questions. Ms. Dorada, you may now begin the conference.

Thank you, and good morning. By now, everyone should have access to the earnings release, which is available on the Investors section of Tilray's website at tilray.com. and has been filed with the SEC and CDAR. On today's call, we will also refer to various non-GAAP financial measures which can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as 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. Also, please remember that during this call we may make forward-looking statements. 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 these forward-looking statements. Please note The text in our earnings press release issued today for discussions on the risks and uncertainties associated with such forward-looking statements. And now I'd like to turn the call over to Tilray's Chairman and CEO, Erwin Simon.

Thank you very much, Barron, and good morning, everyone. We appreciate you joining us for our call today. As you know, we are laser focused on building the world's leading cannabis-focused consumer brands company, while generating $4 billion by the end of fiscal year 2024, assuming U.S. federal legalization and acquisitions. And we're making important strides in delivering on that goal, despite a challenging backdrop in the cannabis world. Reflecting our Q1 fiscal year 2022, revenue and adjusted EBITDA grew compared to prior year, despite the impact of COVID on the top line. Notably, in Canada, where stores did not reopen until mid-June and now are at full capacity. Carl will discuss our results in more detail. but I'd like to note specifically that our adjusted EBITDA margins improved modestly, and we've taken advantage of production cultivation efficiencies and moved forward with integration and executing on the synergies we identified in the Tilray-Afria combination, which are offsetting the impact of our near-term cost pressures impacting every segment of the global economy. Importantly, as well, we did not significantly lower our product pricing to maintain our leading cannabis market share position in Canada. We still estimate that our cannabis-adjusted EBITDA would have been several million dollars higher if the legacy Tilray products had been produced under a more efficient AFRIA cost model. In that regard, we look at the performance of Tilray Since we closed the business combination in May, I am deeply gratified by our early tangible accomplishments. Our confidence in our delivery to meet our goals and deliver for our shareholders is supported by three main factors. Strong movement towards cannabis legalization in our three largest markets, Canada, Europe, and of course the U.S., Whereas evidenced by our recent opportunistic acquisition of MedMen convertible notes, we continue to build our strategic position so that we can benefit from full legalization when the time comes. Leaders with a playbook and proven executional abilities in creating, building, and sustaining value in CPG and wellness categories with particular expertise in building iconic brands, that stand for excellence and offer a selection of products that meet or exceed consumer demand. Educating consumers about our strict quality standards and the benefits of cannabis to inspire brand loyalty. And of course, growing market share through scale and distribution with a laser focus on being that low cost, high quality producer. And then finally, well-defined, organic, acquisitive, and partnership-based growth strategies. When we compare ourselves to the peer set, we are confident that we stand above in having the global reach and resources to make this vision a reality. And with the progress we are making and the COVID-related factors beginning to dissipate, We're building the new Tilray upon four key competitive differentiators. Number one is our broad geographic footprint and operational scale. Tilray's unparalleled and growing presence across our market ideally positions us to lead the global cannabis market. We're focused on doing this through taking full advantage of organic growth opportunities and with the support of a strong balance sheet and access to capital. Accelerating that growth through pursuing transactions and partnerships that would complement our current business enable us to build further revenue growth and EBITDA cash flow. On the topic of M&A, I want to take this opportunity to express my appreciation to our shareholders for approving an increase in the number of authorized shares of our common stock at the special meeting held last month. Because of our shareholders' overwhelming support, we have added the firepower, the resources we need to opportunistically pursue transactions that will enable us to accelerate our growth and further drive value creation. Consistent with this, I will discuss MedMen in more detail shortly. Moving on now to our next critical differentiator, Our position as the number one Canadian LP in total sales on a consolidated basis, a level we have reached due to our comprehensive portfolio of medical and adult use product offerings and carefully curated brands. In our first full quarter since the completion of the business combination, we maintained our retail market share of 16% and held our pricing. even as some of the largest competitors experienced a share reduction. Let me now detail some of those specific accomplishments in the period. In August, we made our first shipment to Nunavut, which was the last step towards making our presence in every province and territory in Canada. This was a record quarter for adult use pre-rolls, with 17% growth in net sales since the fourth quarter of last year, Indeed, we were number one in cannabis flower and pre-rolls and top two and three in all other product categories. Good Supply, our top-selling adult-use brand, reached net revenue on an analyzed basis of $225 million. And this is a three-year-old brand. And in fact, five brands in our portfolio rank in the top five sales-leading brands across all adult-use product categories. including Good Supplies, Chowee Wowee, which recently won a Butt Tender Choice Award for Best Munchies Brand in Canada. Part of our goal of reaching $4 billion in revenue by the end of fiscal 2024, concurrent with U.S. federal legalization, includes expanding our market share to 30%. And we view these recent milestones as reflective, and we're off to a good start achieving that. Please expect to hear more from us about our growth in Canada as we introduce new innovative 2.0 products across concentrates, edibles, drinks, medical products that promote health and wellness. And of course, well-being that will drive distribution across all the channels. This, of course, includes retail stores, We are pleased that there has been a nice uptick in the number of stores open since the end of the lockdown in Canada. Last year this time, there were 600 stores. Today, there's over 1,200 stores. It will take time for all the new bud tenders in these locations to build personal relationships with consumers so they can be seen as trusted resources who can educate and make specific recommendations. This is important as we believe that as consumers continue to shift away from price-based cannabis purchases, effective marketing regarding the quality and safety of our products and brand familiarity will matter more, and our brands will be positioned to reap the rewards and the benefits. Our third differentiator is tremendous international growth opportunities based on two strong medical cannabis brands, Large Distribution Network in Germany, through CC Pharma with access to 13,000 plus pharmacies and end-to-end European Union GMP supply chain. We not only have high-quality production facility in Portugal, but also new state-of-the-art cultivation and production facility in Germany, which announced its first harvest and production in July. This milestone will help us ensure that patients' needs in Germany are met with products of the highest quality, while at the same time reducing dependence on imported supply and solidifying our position as a trusted provider of medical cannabis in Europe. The EU alone, including Germany, Poland, Italy, the UK, France, the Netherlands, and including Israel, has the potential to be a billion-dollar business for us. This is because, from a cannabis perspective, these markets are more medically and pharmaceutically focused than North America. Outside the EU, our business in Australia and New Zealand continues to perform according to our expectations, with our Tilray branded extracts and flour leading that market. Most notably, Tilray high-quality CBD extracts lead the way in many Australian hospitals, serving many patients with seizure disorders under the special access scheme. Tilray continues its success in New Zealand by being the number one company to have CBD balance and THC extracts verified under the New Zealand Ministry of Health's minimum quality standards. The new scheme kicked off October 1st And Tilray is well-positioned to drive market growth. We also see additional opportunities in Argentina, Colombia, Brazil, and even China and India. Next, number four, our CBG platform and infrastructure in the U.S., including our Sweetwater and Manitoba harvest business. Sweetwater's distribution currently reaches over 47,000 on- and off-premise points of sales. 11 higher from the previous year while manitoba harvest is available across 17 000 stores and growing these businesses have already generated 100 million dollars plus in annualized revenue and are quite profitable both still have significant white space lots of growth opportunities to harness that We are expanding Sweetwater's product line of leading craft beers to include vodka sodas under the Riff brand. We're also working on new product categories, including hemp-based CBD drinks and other RTD wine spitzers, wine in cans, and others. Recently, we bought a facility in Fort Collins, Colorado, and have started producing Sweetwater products as it executes on its strategic plan of expanding into the western states. We have also just added 450 distribution points in Publix within the state of Georgia. Our growth plan is led by new innovation, including the introduction of Broken Coast BC lagers, our collaboration with our craft cannabis brand Broken Coast, as well as the launch of our Imperial IPA and hard teas and lemonade. Manitoba Harvest continues to provide us with ample opportunities to grow our footprint in the organic and natural industry. Hemp seed is a super steed, naturally high in plant-based protein, fiber, omega-3 fatty acids. Consumers' interest in hemp seed, hemp seed oil, hemp protein continues to grow in the marketplace as consumers increasingly look to follow plant-based, low-carb, and keto-based diets. Utilizing our footprint in the U.S. today, we are able to leverage these strong brands and their distribution systems to parlay into CBD beverages. CBD personal care products and related adjacencies. These may be later translated into THC-based products upon federal legalization in the U.S. In addition to these four differentiators, another critical driver of value creation for us in the $80 million in cost synergies we've identified as part of the Tilray-Afria business combination in the areas of cultivation and production, sales, marketing, and corporate expenses. We are ahead of our original pace, having reached $55 million on a run-based base to date. with actual cash savings of close to $20 million. Recall that in July, we announced we had reached $35 million in synergies on a run rate basis, with actual cash savings in Q4 of about $7 million. These data points exclude any revenue synergies, notably those that can be derived from 2.0 products in beverage, gummies, and chocolates, that Afria have not produced previously, but we can now go into leveraging legacy Tilray's manufacturing infrastructure. I would like now to spend a few moments on the potentially transformative transaction we announced and closed in August with MedMen. MedMen is an iconic multistate cannabis brand and retailer. that offers its large and loyal consumer base a highly compelling retail experience. And their recent performance reaffirms a turnaround story that firmly is taking hold. MedMen had revenue of $42 million for the fourth quarter of 2021, up 53.9% year-over-year and up 31.3% from the previous quarter. Specifically, we acquired senior secure convertible nodes and certain warrants that are convertible into equity representing 21% of MedMen upon federal legalization. MedMen currently holds 22 retail licenses nationwide, including 14 in California, the largest legal cannabis market in the world, and excluding on-cap licenses in Florida for a total of 27 retail locations. And due to the equity investment that MedMen received concurrent with our transaction, it will be able to further expand its business in key markets, including California, Florida, Illinois, Massachusetts, among other growth opportunities across the U.S. And there's so much Tilray can do with MedMen in Canada and learning about their retail sales and their products that can help with some of our innovation and some of our products in the Canadian and the international markets. In short, this transaction has set the stage for Tilray to become a leader in the U.S. cannabis market upon federal legalization while mitigating downside risk for our shareholders. In addition to benefiting from the strong market position, when legalization allows our strategic opportunities with MedMen including international licensing opportunities in Canada and the EU, we are currently focused on pursuing, as I've said before, as well as commercial and distribution arrangements, joint ventures, or other significant transactions over time. With that, to sum it up, our eyes are firmly on the prize of creating a $4 billion cannabis-focused consumer brands company within the next three years. We have the strategy and the team in place to execute on our plan a leading and differentiated market position, ongoing opportunities to drive synergies, reduce production costs, and a strong pipeline of transaction and growth opportunities worldwide.