Tilray Brands, Inc.

Hello and thank you for joining today's conference call to discuss Tilray Brand's financial results for the fourth quarter and fiscal year 2024 ended May 31st, 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'll now turn the call over to Ms. Vera Narada, Tilray Brand's Chief Corporate Affairs and Communications Officer. Thank you. You may now begin.

Thank you, Operator, and good afternoon, everyone. By now, you should have access to the earnings press release, which is available on the Investors section of the Tilray Brand website at tilray.com and has been filed with the SEC and CDAR. 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 the forward-looking statement. 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 Erwin D. Simon, Chairman and Chief Executive Officer, who will provide opening remarks and commentary, followed by Carl Merton, Chief Financial Officer, who will review our financial results for fiscal year 2024 and fourth quarter. Also joining us for the question and answer segment are Denise Valterchuk, 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, Erwin D. Simon.

Thank you, Barron, and good afternoon, everyone, and thank you for joining us today. Before diving into our FISBOOK 2024 results, I'd like to take a moment to reflect on the evolution of Tilbury Brands. Back in 2019, Afria was a cannabis-focused Canadian LP with only $50 million in revenue and minimal cash reserves. Since then, we've taken a strategic approach to diversifying our operations and growing our global businesses. Through a combination of organic growth, strategic acquisitions, we have disrupted the CPG industry by expanding our footprint into new markets and adjacent business categories. Today, Tilray Brands is a leading global lifestyle company spearheading the conversion of cannabis, beverages, and wellness products and is elevating lives through moments of connection. We are operating in more than 20 countries across North America, Europe, Australia, and Latin America, with five businesses in medical, adult-use cannabis, beverages, spirits, wellness products, and 44 consumer-connected lifestyle brands. As a vertically integrated company, we have 20 facilities that service our collective businesses, allowing us to produce approximately 90% of our products internally, ensuring the high quality of our products. This is a testament to our success in building a diversified global business that is dedicated to providing the best possible products for our consumers. We're incredibly proud of the progress we've made in this short time and are excited to continue driving innovation and growth in the years ahead. Fiscal 2024 marked a year of significant accomplishments for Tilray Brands, achieving our best financial results to date. We achieved 26% net revenue growth with annual record net revenue of $789 million, record adjusted gross profit of $236 million, record adjusted EBITDA of $60.5 million, adjusted net income of $6.2 million, and positive adjusted free cash flow. We also strengthened our balance sheet by significantly reducing our net convertible debt by approximately $300 million, reducing our net debt EBITDA ratio to 1.73. We also exceeded our cost-saving synergy target by 31%, delivering $35 million of savings. Additionally, not only we met our revised annual guidance for adjusted EBITDA, but also generated adjusted free cash flow of approximately $7 million for the year. Our record financial results were achieved despite the challenges we faced in the fiscal year, absorbing approximately $10 million in cannabis price compression, paying approximately $100 million in excise tax and regulatory fees in Canada. and paying higher operating insurance rates of nearly $7 million because of our cannabis businesses, which together equate to approximately $120 million that directly hit our bottom line. Our ability to deliver record financial results while navigating these challenges is a testament to the resilience and dedication of our team, who have worked tirelessly to ensure the success of our businesses. Over the past fiscal year, our strategic acquisitions have significantly benefited our financial results, which we expect will continue to benefit us well into the future. In June 2023, we acquired Hexo and Redican to expand our cannabis business. Our productions and capability and grand growth in opportunities in Canada and internationally. Since then, we have broadened Tilray's cannabis product portfolio across multiple form factors, including an 85% year-over-year increase in mainstream flower sales in adult-use cannabis. The addition of Retican brand has further strengthened our category, such as pre-rolls, oils, capsules. Today, Tilray is the number one player in the straight-edge pre-roll category, with a 46% market share, and a top player in the oils and capsules category, combined with a 21.5% market share in the adult use business in Canada. In August 2023, we acquired Trust Beverages, fortifying Tilray's leadership in the Canadian cannabis beverage market. This acquisition increased our market share in the beverage category by 400%. growing our market share in the THC beverage category to 41% at the end of fiscal year 2024. In September 2023, we acquired eight iconic beer and beverage brands from ABI, along with related breweries and brew pubs. As a result, we're now the fifth largest craft brewer in the U.S., with a 4.5% share of the craft beer market. Our growing beverage portfolio now includes craft beers, spirits, ready-to-drink cocktail, ciders, and non-alcoholic beverages. The combination of our legacy businesses and these acquisitions resulted in our best fiscal year results. Let's now dive deeper into each of our business segments. Tilray Cannabis, global cannabis net revenue increased by 24% during fiscal 2024. In Canada, Our quarter four marked the culmination of a transformative year in Canadian cannabis. It was the highest revenue quarter of the year at $58.8 million, and it marked the completion of our Hexo and Trust beverages integration, a significant operation overhaul resulting in extensive improvements in our facility utilization. We continue to lead Canadian cannabis market share by almost 200 bps over the next competitive. and have consistently at the top of the industry for the past three years. From a regional perspective, Tilray was number one across British Columbia, Alberta, and Ontario, and Quebec provinces combined, which include over 80% of the Canadian population. And we've also led in all secondary markets. In Canadian cannabis volume, Tilray shipped approximately 60% more in kgs reaching 140 metric tons. Our unit sales grew approximately 130% to almost 35 million units. In fiscal 2024, approximately 27% of our Canadian adult use cannabis net sales revenue came from new innovation, which is a testament to our successful ability to innovate and launch new products. Cannabis consumers have a unique attribute of being open to trying new products. And in fiscal 2024, we capitalized on this by launching over 150 new students. Looking ahead to next year, we anticipate that innovation will continue to play a significant role in driving our net sales. Brands such as Broken Coast, Redicamp, XMG, Molo, and Good Supply will be launching exciting new products based on feedback from our consumers and our bartenders. Our strategic acquisition of Hexone Redican aimed to integrate their sales plan into our infrastructure and expand our brand portfolio and product mix. In fiscal 24, we almost doubled the Redican flower share with the launch of three popular genetics, Animal Runs, Space Age Cake and Purple Churro. In Ontario, Animal Runts became the number one and number three selling genetic for 14G and 3.5G Pactides respectively. Spice Age Cake was number eight in the 14G flower segment, despite limited availability. In fiscal 25, we expect these genetics will continue to be within the top 10 performing genetics in the mainstream flower segment. In 2024, we made significant steps to right-size our operational footprint in Canada to balance supply and demand. We sold the Trust facility and transitioned all our cannabis beverage production to our London, Ontario drinks facility, pushing the London facility's utilization above 70% and improving our cannabis gross margins. These cannabis beverages are phenomenal. I wish we could sell them in the U.S. today. We centralized all our HEXO brand packaging and logistics into Leamington, Ontario, lowering our labor cost per unit by 35% and delivering $35.4 million in synergies and exceeding our initial target of $27 million by 31%. We successfully transitioned our Broken Coast cultivation to our Nanaimo BC facility, increasing yields by 30% and lowering our cost per gram by 15%. We also paused the out there growing during the year at our Cayuga facility that will drive additional savings of $4.5 million on an annual basis. Finally, we transitioned a large portion of our Quebec cultivation facilities of vegetables, which we expect to contribute over $5 million annually to offset the cost of the facility, improving the marketability and the value of the facility, and continue to grow cannabis in smaller portions of the facility to meet the needs we want for our Quebec consumers. All of these initiatives were designed to significantly lower the cost of grow to manufacture and package and ship our leading cannabis brands to market. These consumer and operational initiatives are entirely leverageable in markets around the world for years to come. In fact, early in fiscal 25, we shared significant learnings in cultivation and genetics with our teams in Europe. Turning to our international cannabis, we grew net revenue by 22% year over year to approximately $53 million and remain the number one market leader in medical cannabis across Europe. Our annual growth during the fiscal 2024 was driven by increased sales in Germany, Poland, the UK, Australia, and New Zealand. In Germany, we believe we're best positioned to capture a majority of the expected incremental growth in the cannabis medical market, which is projected to be approximately $3 billion in the medium term. On April 1st, the Cannabis Act became effective in Germany, which declassified cannabis to a non-narcotic expanding pill-raised market opportunity in Germany. Since the Cannabis Act went into effect, We have already seen a 65% increase in sales. And we believe that our current position in Germany provides us with several unique competitive advantages. Our cultivation facilities in Germany and Portugal, combined with our Tilray Pharma Medical Distribution Network, provides Tilray with a critical vertical integration. allowing us to consistently supply the market with high quality and a reliable source of medical cannabis. FreeRx was the first facility in Germany to receive both its cannabis cultivation license and commercial distribution license for medical cannabis under the new regulations, allowing Tilray to cultivate, produce, distribute premium quality medical cannabis, increasing its production by five times. a free 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 believe that this coupled with the steps being taken by Germany to liberalize the reimbursement of medical cannabis significantly increases the opportunity in the German market. We believe that Germans declassifying cannabis as a non-narcotic will also have a far-reaching impact on the drug policy throughout Europe. The European opportunity could represent a potential $45 billion medical market alone over the long term. And our presence in Europe allows Tilray to grow our global brand portfolio to a base of 700 million people, which is twice the population of the U.S., Turning to another promising international market, this fiscal year we launched Broken Coast Medical Cannabis Products in Australia. Medical cannabis patients in Australia now have access to Broken Coast's renowned cannabis strains, cultivation from our facility in Canada. This launch came in response to the feedback we've received in Australia and leveraged our insights from our operations in Canada and Europe. Now briefly on our CC Pharma, Tilray Pharma distribution business in Germany, which represents our medical cannabis business through its network of 13,000 pharmacies. CC Pharma revenue was nearly flat at $259 million, both in fiscal 2024 and fiscal 2023. But our gross margin held at 11% during both periods. but may fluctuate with change in product mixes as we focus on higher margin sales in future periods.