Q3 2022 Tilray Brands Inc Earnings Call

Good morning, everyone. Thank you for joining us to discuss <unk> brands, Inc. 's financial results for the 2022 fiscal third quarter ended February 28 2022.

Joining me on today's call are Irwin, Simon Chairman and Chief Executive Officer.

Martin Chief Financial Officer, Denise fault, a shack chief strategy Officer, and head of International Blair Mcneill, President of Til rate, Canada, and bearing erotic Chief Corporate Affairs officer.

All lines have been placed on mute to prevent any background noise.

Absolutely the speaker's remarks, there will be a question and answer session for analysts and investment firms conducting.

Conducted via audio and participating retail shareholders conduct it through the snake technologies platform.

Question submission and uploading through the Sei technologies platform has already been concluded and the company will read aloud and answered the top questions. Mr. Marotta 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 til raised website until Ray Dot Com and has been filed with the SEC and SEDAR on today's call. Please note that we will be referring 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 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 according.

With GAAP.

In addition, we will be making numerous forward looking statements during our remarks and in answering 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 these forward looking statements. The text in our earnings press release issued today includes many of the risks and uncertainties associated with such forward looking statements and now I'd like to turn the call over to Hilary brands, Chairman and CEO Irwin Simon.

Thank you very much bearing and Hello, everyone. We thank you for joining us. This morning, we're pleased to again have several members of our senior leadership team on the call, including the lease quality check.

<unk> strategy officer, and head of our international business, who will update us on the strength of our global operations at the heel up international growth and legalization across Europe Blair Mcneill President of our Canadian business, who will update us on our Canadian business and the Canadian market in our plan.

Yeah.

I will then walk you through our U S CPG business and the progress, we're making against our cost optimization plans and finally last but not least Carl Marta will provide us with an update on our financials.

Turning now to tell Ray brands recent performance in the quarter highlights. We're pleased to have delivered a profitable quarter with year over year revenue growth and achieved our 12th consecutive quarter of positive adjusted EBITDA and was the decent Blair and Carl will discuss these results in detail I.

Want to spend some time outlining how we get to our ambitious goal of $4 billion in revenue by the end of fiscal 'twenty to 'twenty four.

The first is the potential we articulated in December of 'twenty 'twenty, when we first announced the til Ray a freer merger, where our global CPG cannabis growth story back by organic growth and acquisition opportunities in adult use medical and other cannabis and C. B G.

Disease as well as synergistic opportunities that we continue to realize for merger and operational excellence delivered by our world class team.

We have the infrastructure people brands and strategy in place across three main markets.

In Canada, the adult use industry is only now entering its fourth here.

And this means that the first mover has the infrastructure and resources, coupled with a consumer first approach to brand building innovation that will win.

We have the leading brands in Canada, we are investing in new strategies and brands to build upon our leadership position and aggressively gain back market share as Blair will expand in a minute.

Recently in Canada, We announced our proposed acquisition of convertible notes and our partnership with hexcel that advances multiple objectives.

The proposed transaction will be immediately accretive.

It's a pathway to a meaningful equity positions and hexcel generate substantial shared operational efficiencies of approximately $80 million.

Allows us to partner for product innovation that we would benefit from in Canada.

Ross the globe as legalization continues to gain traction.

With Europe , we continue to believe the European market is on the cusp of broad scale adult use legalization and you can be certain of one thing companies with EU GMP certified operations like Hillary brands possess a significant advantage as legalization spreads.

We have a great foundation and an unmatched infrastructure in those markets as Denise will explain soon.

On the medical front, we recently unified the global medical divisions up till right in a free up under a cohesive strategy and mission and now he'll Ray medical is the Premier global supplier a portfolio of high quality effective medical cannabis brands and products for patients in needs around the world.

World and across 20 countries and five continents.

As I said before we believe the EU alone presents a potential 1 billion opportunity and our $4 billion strategy.

Denise will also address international developments beyond Europe that are compelling and moving very quickly.

And then the U S legalization would be a milestone, but till ray brands in the industry given uncertainty as to actual legislative reform. We are pursuing the next best thing Optionality.

Our investment in Mad men is the Best example of this approach and with our strong balance sheet leadership experience operating profitable CPG businesses and growing brands that consumers love, we see a clear path to additional acquisition opportunities across the U S and read.

Main optimistic that recent house passage or the more act will provide additional momentum for legalization.

Another key factor on our path to $4 billion is that the best in class high quality candidates CPG brands platform and turn it means that we are ideally positioned to disrupt the global medical health and wellness consumer products market.

An opportunity that Mckinsey has estimated to be more than 1.5 trillion dollars today on a global basis with annual growth, 5% to 10%.

And while I will discuss our CPG segment performance in more detail later on in this call I do want to reiterate highlights of this business, which include our key U S and global assets of Sweetwater, Breckenridge distillery and Manitoba harvest.

Together, our current U S. CPG platform represents a portfolio of highly sought after brands that bring people together in a memorable and positive way a strong and robust infrastructure are broad global distribution footprint and hands on CPG expertise with opera.

As you know expertise.

Utilizing our current footprint in the U S. Today, we're able to leverage these strong brands and their distribution system to parlay into CBD beverages, CBD personal care products and related Adjacencies.

And they've made later be translated into THC products upon federal legalization in the U S. As well I am confident that the unique experience of our executives will help PRA brands build on the lessons of better for you CPG and beverage alcohol to accelerate our market growth.

Now to hear about that in detail I will turn the call over to Denise fall to check our chief strategy Officer, and head of international business Denise.

Thank you Irwin and good morning, everyone.

As noted earlier, we recently launched totally my car.

Global medical platform that unifies for medical cannabis brands under one strategy mission ambition.

Unifying the global medical divisions of calibrating, a free under a cohesive strategy and mission Hill medical emerges as the Premier and leading global supplier of a portfolio of high quality, consistent and effective medical cannabis brands and products for patients in need around the world.

Internationally, our strategic presence and position continues to accelerate powerful gorilla.

In the third quarter, we saw strong performance from our EMEA business with sequential quarter over quarter growth of 37%.

This growth was primarily driven by increased medical whole flower sales in Germany and Israel.

Potential of the EMEA business with a factor of the kilroy into free of transaction.

And we've seen over 4000% growth in the quarter compared to the prior year quarter.

We have invested in our infrastructure in Europe and as a result celebrate is uniquely positioned as the only company on the contract with to EU GMP facilities, located in Portugal, and Germany. Our German facility also remains the only facility producing medical cannabis in Germany.

In addition to our well received whole flower offering we have a comprehensive portfolio of medical cannabinoid extracts to meet our patients' needs and are excited about the launch of our high THC balanced extract products, which we expect will launch in may and which we developed based upon.

All right.

Today, Germany remains the largest medical cannabis market in Europe and is expected to be one of the largest adult use markets as part as well upon legalization.

We are already the leader in medical candidates within Germany, where the market share of approximately 20% with our whole flower extracts internal thing all products and this together with our investments in infrastructure brand and people positions us exceptionally well for the eventuality of adult use legalization we.

We also see growing potential in our German distribution business <unk> pharma.

With access to over 13000 pharmacy distribution points across Germany.

This business to grow as a medical cannabis continues to gain traction across the country.

Cc pharma as additional children medical products to its distribution point.

Please note that any revenue generated by Cc pharma for cannabis is accounted for within our international Medical health.

Outside of Germany, We believe that there are great opportunities across other European countries as well.

Other countries have expressed a clear political ambitions you broadly legalized adult use Canada, such as Portugal, Luxembourg and Malta.

Some are engaging in an experiment for adult use, including the Netherlands and Switzerland.

Some are debating regulations for cannabinoid based medicine, such as France, Spain, Italy, and the United Kingdom. In fact, we think all of Europe could legalize medical cannabis.

Within the next few years or sooner with certain countries legalizing adult use thereafter.

Let's now discuss our international business across various countries in.

Portugal, we are the only approved medical cannabis product in the market with our high quality medical whole flower, which is distributed through our distribution partners to medical stakeholders in Luxembourg. We were selected by the Luxembourg Ministry of Health is the exclusive supplier for the country's medical cannabis program from medical whole flower and oils.

In Switzerland, we distribute our cannabinoid based medical extract products to switch patients to our local partner in France. We were selected as one of four suppliers in a two year pilot experiment.

We supply approximately 3000 patients with medical cannabis. This experiment will inform our regulatory framework for medical cannabis and we estimate that the French medical market is roughly the magnitude of Germany's medical market.

In Italy, we are one of five distributors licensed to important medical cannabis into the Italian mathematical market.

The U K, we completed our first shipment of broad range medical whole flower products last quarter with high medium and balanced potencies and our shipments this quarter have increased and are growing nicely. We also launched pollen a CBD wellness brand with three broad spectrum CBD products.

Gummies drink drops and then oil across the U K within Amazon and Ireland. We are one of only two suppliers within the Irish market, whose cannabinoid based medical products are eligible for reimbursement.

With this theme of opportunities in Europe .

In February we completed our first sale of medical cannabis flower and Martha and then in March we expanded the offering and the launch the first U T M P medical cannabis oil products and Martha.

Turning now to the Oceana region in January we announced the expansion of our medical cannabis product offerings in Australia.

And a new medical cannabis you learning platform for health care providers.

After listening to patient feedback and leveraging learnings from our operations in Germany. We were very excited to launch new products in Australia to meet consumer needs and now have a broad and complete range of EU GMP certified medical cannabis whole flower offerings.

Finally, we also see additional opportunities in other parts of the world and therefore I look forward to further updates on our progress. These include Colombia, where we are seeking product registrations, Argentina, where we benefit from our distribution business, Edp, Brazil, and even China and India with that.

I'll now turn the call over to Blair I'm Mcneill President of our Canadian business Blair.

Thank you Denise and Hello, everyone.

Is there only noted we are now entering the fourth year of cannabis legalization in the Canadian market.

The total candidates opportunity in Canada is approximately a $10 billion mark of.

Of which only 54% is being serviced by the legal market.

This presents a significant revenue opportunity yet.

However, the Canadian cannabis market remains clouded and over saturated.

With 800 L P and 3200 retail stores.

This has led to an oversupply of product and price compression.

In the last 12 months the market has seen reductions in retail pricing of 24, 5%.

And the last three months the market has seen a reduction of $6 five per cent of pricing.

Despite these price reductions we've been able to maintain our margins in the 40% range.

In Q3, our retail market share declined to $10 two from 12, 8% in the sequential period because of this heightened price compression.

Well, we maintained our number one market share in Canada, and leading positions across numerous adult use categories, including pre rolls and beats based on recent high fire sales data from December through February .

The market share decline was due to a shift in our flowers' strategy and availability of flow.

As well as vaccine passports in Quebec, and the dissolution of our partnership with the Marley natural brand.

Notably the rate of decline in the month of February is the lowest we've experienced in over a year, an encouraging first step which leads us to believe that our pricing and marketing adjustments are paying dividends.

We remain focused on brand and product education, and we have boots on the ground working with retail partners and Bud tenders across Canada.

In Q3, we executed 1076 blood tender product knowledge sessions alone.

According to a bright field research report published in December one.

Uh-huh tenders influence 33% of in store purchases.

Executing these sessions will maximize the opportunity for our brands at retail.

These investments are paying off as a national Budtender Survey released in Q3 has also identified our broken coast brand has the leading favorite consumer brand amongst Canadian Bud tenders, the most recommended and the brand perceived as most premium.

We also continue to rationalize Skus, we currently have 12 brands in Canada.

And we will be rationalizing them to focus our innovation investments and distributor resources on the brands with the scale and unique value proposition, which serves consumer needs and helps improve margins.

Work is already underway.

As part of our innovation strategy, we have made strategic adjustments and investments in data and pre rolls, which are the two largest categories. After flower.

In the basic product category, we grew market share in Q3 from 11, 4%.

To 11, 7% by launching a series of new products, including new file based mix dual path expire bestselling and leading wellness brand Solvay.

New MX duo packs include two great flavors and a single pack at great value.

We also expanded the <unk> brand's functional benefits of candidates with the launch of <unk> renew Moonlight C B and vape pen formulated for nighttime needs.

And yesterday, we announced our collaboration with the SKU D C and launching the first THC edible available in Quebec, So les bikes by your own so lay brand.

In Q3, we also grew our pre roll category and became the number one leader approvals with 14, 9% Marketshare from December through February .

We saw significant growth in good supply one of our leading Canadian cannabis brands and a favorite among consumers and Bud tenders.

Good supply at launch Hashmat, our unique take on infuse pre roll that deliver on consumers' claim for a consistently high potency experience that doesn't compromise on quality nor doesn't break the bank.

Harsh paths quickly achieved a one 6% share of crude oil in its first month of distribution.

And have already become one of our fastest growing products for good supply.

Moving into our medical business in Canada Q3 represented the continued evolution to our global medical platform kill rate medical.

We continue to increase the assortment of products with until way medical leveraging the need Ah patients from our all our platforms, including for Ya and CBS .

Additionally, we continued our partnership conversations with national retailers to grow patient base.

Reduce costs and expand the route to market and the medical channel.

Looking ahead to Q4, we remain focused on gaining back market share and have exciting innovation across all product categories.

This includes our industry, leading bho capabilities at scale.

Okay and extraction allows us to further utilize naturally occurring low potency flower.

Bind with bho distillate to provide the consumer with a better product and industry standard C O two extraction.

Our in house Bho capabilities combined with our extensive girl.

Also allow us to launch very competitive high quality life products in the market, which we have done for the first time in Q3 with the launch of broken coast and major Hayes live resin butter.

We believe we are the only licensed producer able to do this at the scale and cost required to compete in the Canadian market.

From an operation standpoint, we continue to identify significant cost savings beyond our highly successful synergy initiatives.

In Q4, we will invest significant capex to drive massive labor savings and are pretty well capability.

This is in addition to our base of automation and significant improvements for supply chain.

Procurement and packaging savings.

These initiatives illustrate our commitment to gross margin despite a constantly changing retail environment.

In summary, we have a five point plan to win in Canada.

We are investing significant resources in our generics program to capitalize on the consumer need for experimentation.

Second our investment in our consumer first innovation across all categories, but especially pre wells, which we believe will be the largest category in adult use in three years.

Third leveraging the scale of our distributor partnership with great North distributors and road for life Sciences.

We have the most feet on the street and we will be relentless in our execution.

For <unk>.

Bud tenders influence one and three purchases in store, we will leverage our brand investments and our category knowledge to ensure they know our brands and our innovation.

Fifth and finally, we will do all of this with our cost efficiency mindset to ensure we preserve our margins in this competitive marketplace.

I'll now turn the call back over to Irwin.

For a discussion of our U S operations before Karl closes the prepared portion of our remarks with a detailed financial overview Irwin.

Yeah.

Thank you Denise and Blair I'd like to now discuss our growing CPG business in detail our beverage alcohol brands now includes sweetwater, the nation's 10th largest craft brewer and our recent acquisition of Breckenridge distillery. The two iconic west coast craft beer brands Alpine angry at flash.

Our wellness business consists of Manitoba harvest, which is a pioneer and a leader in branded hemp based foods.

In aggregate these businesses generate approximately $130 million and analyzed revenue and our high margin EBITDA positive and have exciting potential for future growth of course, they're also represent good adjacencies to the cannabis industry upon legalization and there.

Therefore, a fit really well within kilroy brands earlier this year Sweetwater Brewing company, who as recently announced by the Brewers Association is now the 10th largest craft brewer in the U S began operating a new 32000 square foot production facility in tap route in Fort Collins.

Colorado, which provides a launchpad for further distributions the west coast and well as open new taproom at the Denver International Airport come visit the brand also launched an extensive new line of innovative products, including Selzer's, a new beer offerings developed in collaboration.

<unk> with our Canadian cannabis broken coast brand and a new Baskas soda offerings developed in collaboration with our Canadian cannabis brand Rip.

As we've discussed in the past, we view our ability to leverage our growing portfolio of brands as a means to launch THC based product adjacencies upon federal legalization in the U S.

Sweetwater has also launched a partnership with the largest beer distributors in the U S. Res beer division to bring its portfolio of Bruce to California through this expansion Sweetwater will now be available through the western states and local restaurant bar grocery chains liquor stores and other.

The retail establishments either on draft or in cans.

We also continue westward expansion into both Washington, and Oregon through our distribution partner Columbia distributing this expansion marks the 39 to 40 of the states respectively were Sweetwater products are now available for purchase.

During Q3, we acquired Breckenridge is still weak the world's highest distillery, which is widely known for its award winning Bourbon whiskey collection, and innovative craft spirits portfolio, including Bourbon whiskey gin and vodka distribution already reaches across 50.

States, but the brand is now poised to further benefit from distribution synergies when paired with Sweetwater. We're confident this will drive growth both now and in the future.

And finally, let's discuss Manitoba harvest, the world's leading hemp food, Brad wood products and distribution across 17000 stores in North America.

This brand was acquired as part of the business combination and prior drew involvement how many starts and stops it had.

We have since given this business great focus as a result have been able to generate measured channel growth and consumption and share gains in Q3, Manitoba harvest Hampton seed products grew nearly 5% in multi outlet and convenience retail load counts and the brand improve market share among.

Have the competitors to a leading 49% of market share the brand invested in marketing communications in Q3 with campaigns that promoted him as a superfood are healthy food and a baking solution with new year's wellness products as part of smoothies and salads the mandatory.

Harvest team has also carefully manage its cost and implementing pricing action amidst rising cost inputs.

During Q3, Manitoba harvest grew revenue and improved its gross profit contribution we intend to accelerate the business through the remainder of calendar 2022 as we introduce a great deal of new product innovation, which enable us to capitalize on the consumers' interest in hemp products and align with.

With plant days low carb keto diets.

Looking forward last month at the natural products Expo West in Anaheim, We introduced a line of HAMP protein items blended with other powerful players like March and Super Greens, We also unveiled new formulas, such as ground hemp seeds, which offer great convenience to consumers looking to incorporate hemp into baked.

Snacks and smoothies. These items will launch exclusively with whole foods across North America. This month and will be available at other locations in the near future.

Let me now leave you with our progress on cost synergies recall that we first identified at least 80 million in benefits as part of the tailoring of free a business combination and have since added another 20 million to our target.

As of the end of February we have achieved $76 million in cost savings on a run rate basis, and $42 million actual cash savings and with that Karl will now discuss our financials in greater detail Karl.

Thank you Irwin in the face of ongoing obstacles, we continued strengthening our business reporting profitability and distancing ourselves globally from our competition.

As already outlined.

As we look ahead, we believe that we are well positioned to navigate through near term market challenges and emerge stronger more diversified and more profitable.

This is because we already built the foundation of key competitive differentiators that provide us with the means to succeed over the long term.

Before reviewing our financials, let me first remind everyone that because of the arrangement between a free until rates are results in the prior fiscal quarter are based on a free as financial statements, which have since been adjusted to follow U S. GAAP and are presented in U S dollars.

Also recall that in July 2021, we published in an appendix to our investor deck.

This is located on our Investor Relations website and contains an unaudited analyst primer that breaks down a free as a U S. GAAP financial statements for fiscal 2020, and 2021 by quarter.

In addition throughout our call today, we will reference both our financial results in accordance with GAAP as well as our non-GAAP adjusted financial results. Our earnings press release contains a reconciliation of our reported financial results under GAAP to the non-GAAP financial measures identified during our remarks.

Beginning with the top line, our Q3 net revenue grew 23% to $151 9 million compared.

Compared to the prior year quarter, although as I just said the comparison itself is not apples to apples because our Q3 of fiscal 2021 does not include any contributions from legacy Tory.

As well as significant fluctuations in FX rates.

And as an example.

If the average foreign exchange rate for the first nine months of this year was equal to the rate in the prior year for the same period.

Year to date, we would have reported an additional $20 million in net revenue and reported an additional $1 $5 million and adjusted EBITDA.

Q3, adjusted EBITDA was $10 1 million.

<unk> extends our track record of positive adjusted EBITDA to 12 straight quarters.

Our ability to generate positive adjusted EBITDA is the result of contributions from all our business segments, coupled with our strong focus on realizing operational and other synergies and efficiencies.

Despite quarter over quarter margin pressures in our cannabis and distribution segments.

These cost management efforts showcase the traction we are making with respect to immigration.

On a related note adjusted gross profit increased to $39 $8 million in Q3 from $30 5 million in the prior year quarter, while adjusted gross margin increased to 26% from 25% percent.

We would expect to see ongoing improvement in these metrics as more of the operating synergies become embedded within the platform and are able to complete the conversion of the legacy <unk> brands to a free is cost structure.

Increased contributions from non distribution revenues as a percentage of the top line will also serve to increase adjusted gross profit because they are higher margin businesses.

Net income for the quarter increased to $52 5 million from a loss of $258 $6 million in the prior year quarter.

This is our second consecutive quarter reporting net income.

Moving to our business segments in further detail.

<unk> medical cannabis.

Revenue for this segment increased 19% in the prior year quarter as we not only benefited from legacy Tory contributions, but also from innovative product launches.

The latter included our new symbiosis brand, which was created to address unmet medical needs and provide patients with more choices to manage their own health.

Patients eligible for reimburse cannabis remains strong and represent the core of our medical cannabis business we.

We continue to face downward pressure caused by COVID-19 from patients paying with their discretionary cash flow, who are either unable or unwilling to see a doctor as well as increased competition from adult use.

Our thesis remains the demand for higher quality brands in Canadian adult use cannabis will rise as the pandemic wanes and purchasing decisions can be more positively influenced by Bud tenders within a retail setting.

To that point Blair provided detailed information on our increased involvement with Bud tenders.

Thereafter, we will then be best able to capitalize on the opportunity because cannabis consumers are most likely to behave similar to how alcohol consumers behave.

Purchasing products from those brands that are most differentiated and offer the highest quality most innovative products.

However, in the meantime, as the industry is still in its early stages of development. The multitude of new entrants has led to increased competition, which resulted in loss of market share and price discounting.

Revenue for the segment decreased 10% versus the prior year quarter as we contended with these factors along with the residual impact of Covid in terms of consumer behaviors and their heavy focus on price.

Although almost $4 million of the decline in revenue is directly attributable to the price reductions we introduced into the market in the prior year quarter on VITAS and pre rolls.

Those price reductions paid immediate dividends as during the quarter, we gained market share in both the vape and pre rolled categories as measured by high fire data.

And while we were able to grow share in vape and pre rolls maintain our overall market leadership, we experienced a market share declined to 10, 2% from 12, 8% in the prior quarter.

Largely driven by weakness in demand for our flower products.

A trend we believe will reverse itself as our potency levels on new harvests are increasing and we introduced new product innovation.

Notably our overall market share decline reflected the smallest decrease in over a year.

Which suggests to us that we are getting closer to stabilization as we are now near the bottom of what we believe will be a U shaped recovery.

<unk> revenue more than doubled to $2 8 million in Q3 compared to the prior year quarter, which reflected opportunistic sales but.

Which will vary quarter to quarter going forward.

While we faced challenges in Canada or international story continues to differentiate us from our competitors.

During the quarter, our international revenue rose to $15 $8 million from zero point $3 million in the prior year quarter due to the contribution of legacy tool raise a larger international canvas business.

As well as newly obtained business to business transactions and.

In Europe , and despite COVID-19 pressure cannabis legalization from additional adult use we will continue to gain traction and we are uniquely positioned to win with our infrastructure as the only company with EU GMP cultivation facilities within two European countries, and our demonstrated commitment to the consistency quality.

City and safety of our products.

In Germany.

Which is by far our largest market internationally.

And where we are the market leader in medical we generated 19% revenue growth in our medical cannabis products quarter over quarter.

These growth metrics were achieved despite some patients being unable or unwilling to see a doctor to due to COVID-19 .

In aggregate net revenue for cannabis increased 32% to $55 million in Q3.

From $41 7 million in the prior year quarter.

Our distribution business, which is mostly related to cc pharma experienced an 11% decline in net revenue during Q3 to $62 5 million from $70 2 million in the prior year quarter.

A major part of the decline was tied to the strengthening of the U S dollar and the inherent weakening of the euro versus the prior year period.

More specifically if the Euro U S. Dollar exchange rate had been the same in the current quarter as it was a year ago Cc pharma would have reported an additional $6 $7 million of revenue.

Turning to our beverage alcohol business, we generated $19 6 million in net revenue in Q3, representing nearly $8 million in additional revenue compared to the prior year quarter.

This was primarily due to our acquisition of Breckenridge in December .

While Sweetwater also contributed an incremental $2 million due to increased distribution points, primarily associated with products shipped from Fort Collins.

Looking ahead, we believe there is significant upside potential for this segment as we strengthen our strategic position in the U S through increased distribution points recent and potential future acquisitions.

With an extensive innovation pipeline.

Finally on Manitoba harvest revenue contribution grew sequentially almost $1 million to $14 $7 million in Q3.

But for which there were no comparable from the prior year quarter.

We are pleased that our new leadership team has now more than stabilize this business and we are presently introducing product innovation and operating improvements to this segment.

In terms of profitability and margins adjusted cannabis gross profit increased to $18 million in Q3 from $16 3 million in the prior year quarter.

Adjusted gross margin fell to 33% from 39%.

The decrease was primarily related to a wholesale cannabis sale.

Without this sale our adjusted cannabis gross margin would have been 40%.

In addition margins were impacted by our price reduction on vape and pre rolled products originally initiated in the prior quarter.

Distribution gross profit decreased to $5 million in Q3 from $9 2 million in the prior year quarter, while distribution gross margin declined to 8% from 13%.

This was due to increased costs as our primary source of products were not able to ship during border closures and during periods of peak demand.

Beverage alcohol gross profit was $11 5 million in Q3, which more than doubled from $4 9 million in the prior year quarter.

Beverage alcohol gross margin increased to 59% from 41%.

As we benefited from contributions from the Breckenridge acquisition, which has a higher margin profile of those sweetwater and a resurgence of Sweetwater driven by the Fort Collins location.

Wellness gross profit was $5 4 million in Q3, and gross margin was 36%, which were both higher than the sequential period of $3 8 million and 28%, respectively and for which there were no comparable last year.

Total general and administrative expenses rose to $38 4 million in Q3 from $24 5 million in the prior year quarter, reflecting an increase in the number of directors executive level personnel head count and stock based compensation, along with onetime costs associated with the upcoming closure of our nine month facility.

Offsetting this was insurance recoveries totaling $4 million under our business interruption policy as part of Cc pharma is property insurance and the previously disclosed flooding in the first quarter.

Net income was positively impacted by reductions in our share price in the quarter, which impacted the valuation of both your free at 24 convertible debentures and our outstanding warrants.

Also impacting net income in the quarter was a reduction in our assessment of the contingent consideration owed on the Sweetwater transaction.

Turning to cash flow and liquidity.

Adjusted free cash flow declined to negative $35 6 million in Q3 from positive $6 3 million in the prior year quarter.

Recall that we are working towards sustaining positive free cash flow generation and view achieving it on a consistent basis is a priority for this business.

To conclude we have great optimism for the future as the Canadian market right sizes and pricing normalizes at a sustainable level. This process is ongoing but it will take more time to unfold.

We also eagerly await the movement to legalization across the globe, including in Germany, Other EU countries and eventually the U S.

In the meantime, our investments in U S assets across our growing roster of beverage brands and in Manitoba harvest are already cash flow positive EBITDA positive and earnings accretive.

And at the appropriate time will be leveraged for cannabis.

And as we consider opportunities across markets and geographies. Our focus remains on the highest return priorities, while actualizing, our business integration efforts to better manage costs through.

Through these objectives, we can best deliver long term value for our shareholders.

This concludes our prepared remarks. Thank you for your interest until Ray will now begin the question segment of our call starting with questions from our covering analysts, which will be followed by a few questions from our retail shareholders through the same platform.

Operator, what is the first question.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

We ask that you please limit yourself to one question and one follow up question. One moment. Please while we poll for your questions.

Our first questions come from the line of Vivien <unk> with Cowen. Please proceed with your questions.

Hi, This is Gerald Pascarelli on for Vivien. Thank you very much for taking the questions.

So julien good.

Good morning, good morning Arun.

So just on the $4 billion revenue guys, certainly encouraging to see that reiterated and it was super helpful to go through.

The drivers.

I guess like taking it all together how do you see the mix ultimately playing out once you get to the $4 billion between cannabis alcoholic beverages health and wellness I'm, just trying to get a sense on how to think about your segment mix overall.

Hi, good morning, good question.

So number one was sort of a lot depends upon legalization here.

And I think if I break it down.

I'd like to get to $1 billion in Canada and that is organic growth as the market grows in Canada to a $10 billion you know as I've said before I'd like to do other acquisitions in Canada and.

Also there are spirits and.

Beverage business in Canada, We think one day, you'll be able to walk into a bar in Canada. It would be a border whether its a beer or a bourbon and tequila that will be infused with THC. So.

That's from.

90% of the business in Canada would be cannabis and maybe another 10% from consumer products.

In the U S. What we've talked about.

Is to get to a half a billion dollars in consumer products in the U S.

Today, we're approximately $150 million and with our current businesses, but the rest would come from a palm legalization.

Msos and we'd like to.

One day, one mad men.

Upon legalization and Theres a lot of other great msos out there that we'd like to buy so we'd like to own about a $1 billion.

In the U S. Upon legalization, if not we'd have to continue to look at other consumer products in Europe today, we have our cc pharma business.

That's part of our business today, which is about $300 million, but the rest of the growth in Europe would come all from cannabis. So if you look at the total of $4 billion, it's about two and a half to 3 billion coming from cannabis and.

And about 1 billion coming from consumer products and just let me be clear a lot of this depends upon legalization now on the other hand, there's a lot of adjacency companies that we would continue to look at.

And upon legalization ultimately have those products infused with cannabis. So that's the plan.

Got it that's that's super helpful color. Thank you if I could just squeeze one more in on an.

What you saw as it relates to Germany, obviously, if they win adult use would be encouraging but.

One of the things, we all we all realize that things take longer than expected and so from your perspective as it relates to Germany. What are the next steps that you need to see to drive confidence in that regulatory change and then when do you think commercialization could realistically take place if you have a timeframe. Thank you.

But I'm going to let Denise jumping on that but I think listen we were expecting hoping in may of this year, we would start to see something.

I don't think we expect a war cranes.

It's slowed some things down, but I mean, we really like what we see today, we like what we're hearing.

From regulators and the government there Denise Yep, Thanks, Alright, Hi, Jeremy So building upon Sterling's response.

We had hoped to see a framework may June timeline, we haven't heard anything from government officials that that timeline is not going to be achieved but as Irwin mentioned a war in Ukraine, obviously takes precedent in terms of policymakers attention as well, it's still any continuing COVID-19 discussion.

So we continue to hear that there won't be any delays yet heard anything talking about delays.

To remain cautiously optimistic in terms of your other question about commercialization when we worked our way through as you mentioned things take longer than you would expect we were looking at first commercialization around December of 2023 in January 2024.

I'm just trying to like work backwards, so that's with our spot.

Well I think the other good news is rationalization.

Youre seeing some movement in Italy, you are seeing movement in France. So you're also.

Basically seen continues increase and you saw our revenue up over 4000%.

In Europe , so demand patients coming back.

After COVID-19 so.

Listen, we'd like to see something happen in Europe , we believe and once we see something happen in one country I think youll start to see that happen in multiple countries, but we'll be ready for it.

Thanks, very much for the color team I will pass it on.

Thank you.

Thank you. Our next question is coming from the line of Andrew Carter with Stifel. Please proceed with your questions.

Hey, Thank you good morning, just putting aside good morning target, which is hey, good morning, putting aside the revenue target, which has some aspirational things in their regulations, even M&A. What do you think the margin profile of the business could be with what you just having to hand today, because it's a compressed year over year, you still got incremental synergies where are you in terms of it.

That's been in Canada, just anything you can you can outline on the margin profile potential of the current business. Thanks.

I'll, let I'll, let Carl jump in on that too, but I think Andrew one other thing if you look at our spirits and beverage margin.

In the high <unk> or so.

If you look at some of our margins ex our distribution business in Europe , There's some high margins there now our margins got affected this quarter by selling off some product to some distributors, which Carl so.

I'd like to see our margins in the high forties low fifties as you look at our consolidated margin between our spirits business.

And you know our cannabis business now again Theres a lot to do in Canada is price compression hit us and Canada and hit our margins but.

Still I think you're only seeing one quarter today.

Breckenridge.

Youre not seeing some of the biggest quarters of our beer business with with Sweetwater.

So it's important that we got that right mix. The other thing is as we continuously take out cost and we had almost 3 million square feet of grow.

What we're doing ultimately with hexcel, what we're doing is bring until ray and getting the efficiencies out of those facilities and getting the grow and the yields that's got to help us improve margins Carl.

So I think Andrew if you look at our our margins across all the different categories right now distribution business kind of has a little bit of a disproportionate share of our revenue base and where we anticipate it being in the future.

And it's obviously the lowest margin.

The group.

As we start to.

To minimize that portion of the business as a percentage of our overall sales. Our consolidated margin is going to increase in the current quarter. We had some headwinds on margin in the distribution business. We had some difficulties getting product we had some difficulties getting product where there was some currency impacts.

Getting that product from the ideal low cost country, and having to find it from somewhere else.

Look at the cannabis business.

We anticipated that our margin was going to drop from the normalized 45%. We were at last quarter, we think that that's somewhere.

In the forties in the low forties.

Normalized the current quarter, we were down at 37% the difference between those two numbers is really that wholesale sale that we made in the quarter.

That time that we did to move some aging product.

And we're able to capitalize and convert some of that inventory to cash, but it had it had it had a little bit of a headwind against against our margin.

As we go forward.

Whereas Irwin just said something in.

The high <unk> low forty's is reasonable for the business, but they are just there needs to be a couple structural changes grow other categories and.

Not have some of these one time impacts in the current quarter, but Andrew I think the important thing in hearing you. There's a plan of how to get to those.

Aspirational margins is just not the sales it's the margins ultimately it is the mix of business, we sell products stay in three different currencies. The euro it is hard.

Nine months, so, but again their excuses out there, but the reality is we got to get to the margins within the high forties.

Thanks, I'll pass it on.

Thank you.

Thank you our next questions come from the line of Owen Bennett with Jefferies. Please proceed with your question.

Good morning, guys, so probably one well I just wanted you to come back to the.

The national patient education, really impressive chums, obviously prospects for scalable growth.

Clearly compelling just a couple of questions on this so first one can you comment on the competitive dynamics in Germany. It was a little light up market.

I mean very crowded now in public probably get even more so with plant deactivation of legalization. So are we seeing any pricing pressure to stay cool and if so how low do you think needs could guys. Just trying to gauge the base case, given kind of pricing pressures, we've seen in powder et cetera. Thanks.

So number one we're used to market is getting crowded I can you know theres no more market theres no market other than like Canada's not proud of okay. So that's number one number two I think the big thing and I'm going to let Denise jump in on this too.

We have a grow facility there we have a grow facility in Portugal, and we have been growing.

I think I know, we can be that low cost producer I know, we also can ship product.

From Canada.

The GMP certified product.

But again, it's taking our expertise in Canada, taking our knowledge, we're not that one trick pony out there.

Taking it back to Germany, you've taken it back to Europe , and utilizing that that we can build our brands. We can ultimately be that low cost producer Denise.

So you're absolutely right there and then to build on what Irwin, saying, there absolutely is pressure coming into the German market and its natural if you think about the world right now so Canada being one of the largest markets outside the United States and in Germany, coming is 85 million people larger than Canada by two and a half times.

So naturally there's a lot of new entrants and to your point and we are.

We are seeing competition coming out that you always point, we've invested in this market. We've got EU GMP supply. We've got expertise, we've got a brand that patients and doctors trust and we spent a lot of time investing and so we have and we've been investing for years now so even though new entrants are coming in we haven't we.

The head start and we will continue to take advantage of that first mover advantage and I think the big thing also is we have the infrastructure. There we have the people and then they have the resources to come back to our Canadian operations and we have moved even people from Canada.

Over to those facilities. So listen you know we used to it we saw it in Canada and we're ready for it.

Okay Fine and then just just a follow up I was wondering.

How you see the situation with the domestic law, it's playing out in Germany going forward with both the medical and then we've got creation do you think the allocations to these <unk>.

That state law and will be increased and I mean, what do we need to see fit so those domestic lots to be profitable obviously does it yesterday about how much the government will pay you for the kind of just coming out of those facilities.

Yes, great question and so as you know today, it's a lots of fixed based on the previous tender I believe that will probably have to be another tender at some point once the adult use is passed.

I think based on our expertise and based on our relationship with the German government, we will absolutely be able to be there.

Meeting for that tender and as I mentioned, we have experienced with the German government, we have been supplying them and so I think it puts us in a best position in order to obtain either additional lots of our expanded lock.

Great. Thanks, guys very helpful. I appreciate it.

Thank you.

Thank you. Our next question is come from the line of fruit passion Perique with Oppenheimer. Please proceed with your questions.

Good morning, Thanks for taking my questions. So two questions just related to the cash flow and the 2023 convertible. So first on your 2023 convertible anything you can share at this point I'm plants in it and trusting that maturity next year.

So.

Most of this.

As you know refresh me from other days I don't like that and.

Ultimately the best thing that can happen is a good rebound on their stock connect converts okay or so it's something we're monitoring closely.

And it's something that we.

We plan to do something about it so.

That's all I can say right now.

Okay, Great and then just just on cash flow I know that I know the goal is to get to a positive free cash flow just any sense just from a timing perspective or anything else you can share in terms of getting to getting to positive going forward.

Listen I.

Again things happened out there.

Part of our cash flow this quarter as we built inventory as we're coming into seasonality. We also now being in the spirits business and we built a lot of.

Inventory in regards to our our Bourbon business, which you put inventory down for three years.

Yeah.

We're close there that's the big thing and I think you know.

We're cash flow positive in all of our businesses today.

We do have in our Canadian market, I think with price compression that happened there and some of the things that you know.

Blair talked about in flower. So we're there and I think the big thing is just step back for a second we took $76 million of cost out of the business with til rate, we recognized $42 million. So we don't have the rest of the.

The rest of all those savings in there yet.

We did have some flower challenges, which hurt our sales price compression came down, but we're not that far away in regards to it if you take out what we put back into inventory.

So I'd like to sit here and say don't hold me to it next quarter, but we will be absolutely cash flow positive next year absolutely.

Great. Thank you probably when you want to say.

Good answer.

Thank you.

I can give you the answer Carl just kind of hold to it.

Uh huh.

Thank you. Our next question comes from the line of John <unk> with CIBC. Please proceed with your questions.

Thank you good morning.

Good morning.

I wanted to start on the Canadian cannabis business, you mentioned, you're looking to rationalize some of your brands on a domestic basis can you give us a sense of the timeline on that project and approximately what percent of Canada sales those make up currently.

So where are you on the call.

Yeah.

Want to ask you want to answer that.

Yeah No problem, let me, let me start first great question.

One of the things that I would tell you is we are currently working through our portfolio strategy and from that perspective, it really starts with a strong consumer understanding and then as we do that and that work's been ongoing for the last quarter, we will see some rationalization of brands Marley natural to good example, bingo is a good example.

More so youll see a real repositioning of our brands and then the assortment of products within that.

Don't expect that the any rationalization going forward would be material to our sales number.

And John I think the market needs that John the market needs that you have to.

The rationalization of the stores youre going to see rationalization of Lp's, if you're thinking about it today. There is 800 L piece out there and if we have 12 brands.

Think about it how many brands they have I mean, you can only have so many pre rolls you can only have so much flower so there needs to be rationalization.

And with that it's not you can't really.

And so the Bud tenders and that is a key there that we are really focused on is educating the bud tenders when a consumer comes into customer comes in the store what they bought what risk stands for what good supplies stands for what <unk> stands for but you can't do that you've got 20 brands out there and I think that was the problem.

Everybody come up with way too many brands and the consumer was totally confused and then consumer is not going to buy every single brand to try it so.

SKU rationalization brand rationalization youll see that in some of our numbers I mean, as we rationalize some of these brands that's why some of our Canadian sales are down.

And to move away from them. It also helps with our inventory helps with our grow helps with our packaging. So theres lots when you do a SKU at a brand rationalization that the benefit for the company is.

Understood and agreed that's helpful. Thanks, and then my second question is.

A broader one on M&A. It does seem like you have a lot of opportunities, whether it's scandium cannabis or U S CPG or our assets in Europe I just wonder how you approach these options and how you prioritize what is it do you look for something strategic in nature that will help you in the longer term or do you just approach it nearly from perspective of ROI.

So first and foremost.

It's got to be accretive and that's the big thing here, what I don't want to do or we don't want to do is buy something that's losing money.

And bringing into our portfolio.

<unk>.

So we've got enough, where we wanted to get your own cash flow positive. So that's number one number two it's got to fit within our <unk> brand strategy and fit within that $4 billion strategy.

We don't want to be in the retail business I mean.

We want to be in the consumer products business, that's focused on consumer products that have adjacencies to the cannabis world and ultimately that we can really scale.

That are good margins and ultimately with my past in ECS past players pass.

Jim's past that we have the knowledge and the base. The Big thing also is how does it enhance our current brand portfolio and how those and enhance our current brands and Trust me, we see lots of acquisitions and plant based products in spirits and beer and beverage in cannabis.

<unk>.

In CBD.

The last thing we want to do is bad.

When you do acquisitions, you got to get them right, but making a bad acquisition would not be good for us.

And there is plenty of acquisitions, we've looked at some of the best acquisitions are the ones we walked away from.

Okay I appreciate the color. Thank you.

Thank you.

Thank you. Our next question is coming from the line of Aaron Grey with Alliance Global Partners. Please proceed with your questions.

Hi, Good morning. Thanks, just one question for me good morning, So you guys talked.

<unk> talked about some of the pricing took on Bates and pre rolls some share stabilization there.

That's softened a bit again in March and then you mentioned no flowers share losses as well. So just wanted to get a sense of how youre thinking about price gap today for your products in the various price tiers.

And how do you look at the balance between market share improvement as well as gross margins for the Canadian market. Thank you.

So I think a couple of things I'll, let Blair jump here in a second I think you know as we explained here.

Number one is we look at SKU rationalization.

What different Skus stand for and how we can get different price premiums for skus solely abate the demand for them and what we can get for their broken coast. So there will be definitely.

Peer tier pricing with different types of Skus out there and the other big thing is they will be different pricing out there for potency and whats infused and what type of flowers. So that's where we got to come back and educate and be able to get pricing. It should not be everything that you know.

<unk> 99, or $2 99, Theres got to be a floor out there and we have to make sure we educate the consumer and what the brand stands for.

So thats whats important.

I think the thing is is this here as we go into our fourth year.

We are realizing consumers do want higher potency, we are realizing what they want and pre rolls. The other big thing is we're seeing the market shift today, where consumers 50% of the market used to be flower now it's moving to <unk>.

<unk> pre roll or some of the biggest growth out there and what's the differentiation out there flowers flower.

I think there's a lot we have to do there and there's a lot we have to do in regards to.

Get that pricing up but the key is who can be that low cost producer out there that can have price that can have quality that can have potency and ultimately be able to win and that's what's important for kilroy and you know with that 3 million square feet of grow 265.

Kilos and continuously trying to take cost so that's where we hope to win in Canada, and that's what's important to win in Canada for Us flare.

Yeah, I think great answer Irwin and great question.

The one thing I would say about twice as much as we track pricing in the marketplace. The real the real angle for US is always to think about the value of our brand and the value of pirate brands relative to the competitive set so it's not about the Irwin point about being low price, it's about being in value at all times.

And so that price value relationship of our brands are important and Irwin talked about it in terms of potency in terms of some of the other characteristics of our brands like infusion. So that's one side on the price side, we're always going to be in value.

On the Conversely on the gross margin side.

Always looking at our cost business in terms of how do we do it more efficiently we find other ways to extract cost out of the business. So we can protect our gross margin for us we're always going to try to find that value in our brands and our skus and balance that with the right cost on the back end of the business and.

We do that in every category we compete.

And I think I asked most people on this call today named five brands in the cannabis business in Canada and of course, social Louie, Canada I'm not sure you could do that by actually the named five kilos out there or bourbons or rooms, you could and would you pay different prices for and I think that's the big thing is educate.

Consumers on brands now we're limited what we can do with regards to advertising, but what we can do through social media.

Through education through the Bud tenders, we've got to build brands, we've got to educate them about the brands and that's ultimately the key to here and not just throw out.

Vanilla pre rolls or defer.

Different names out there it's important that we have a brand that we can stand by and I think if you come back and look at and I was with the team last week and going through some of our new product innovation, what we've got coming out with Solvay and risks in good supply.

In regards to our pre rolls and flower.

There is some pretty exciting stuff and I think that's what's important is getting the message across on our brands.

Alright, great. Thank you for the color that was really helpful and I'll jump back into the queue.

Thank you.

Thank you. Our next question comes from the line of Scott Fortune with Roth Capital. Please proceed with your questions.

Good morning, and thank you for the questions.

Real quick just wanted to follow up on the Canadian side and also the U S. You made some seasonality picking up and can you provide a little color of kind of what you're seeing with the March data, we know usually things bottom out pricing wise and demanding in February .

And with the pricing initiatives that you have.

You do need to stabilize the market share, but can you talk.

By a little more.

Thoughts on any inflationary pressures on discretionary spend the consumer as he is you expect some seasonality pick up here just kind of thoughts around the pressure on the consumer right now.

Sure sure.

You know I think a couple of things and I'll, let <unk> jump in here.

Good news is last year, this time and even four months ago. This time, we are dealing with COVID-19 .

Myself I didn't want to mention the word COVID-19 on this call today, but you know.

It's been part of our lives for us two and a half years and you can't ignore it.

You know as we went through and especially Canada Lockdowns.

Two back in regards to vaccination cards, only a certain amount of customers allowed in the store in regards to no one going back to their offices. So during this quarter, we almost like want to forget about it out there.

As you walk around with Mastodon.

Where are you enjoying cannabis so I think there's a lot here that we have to jump forward.

Say COVID-19 is behind us in many ways.

With that I.

I think theres a lot of small Lps out there that invested in pricing.

Consumers went and tried them.

And I think what we're seeing is they are coming back to brands that they know on the other hand, we had some flower challenges out there, which we've talked about we think we are in a good place there so from our standpoint, there listen on the other hand, we see a world today with <unk>.

The labor shortages that we deal with we see in regards to fuel prices, but the good news is were grown in one facility and that is where the product has grown on the other hand, there is components that we need and packaging base that are higher costs, but we've done a great job and I think that.

Key is I keep coming back to it the costs that we've taken out of our business.

And with that we got to continuously take cost out of our business. We are continuously get the right yields.

In regards to growing our products and you know.

That will translate back into pricing, but.

I don't see a lot of headwinds out there today, that's affected us because we've done a great job in regards to managing all of this here.

<unk>.

Being able to reduce price to pass on to consumers blur or anything you want to say on that.

No. The one thing I would say Erwin and I agree with you I joined Irwin and putting COVID-19 behind us as much as we possibly can what I am seeing out into the stores. A lot is I am seeing traffic back in the stores I'm seeing conversations with Bud tenders in the stores.

In Q3 alone we had 1076 product knowledge sessions with Bud tenders. So.

We're definitely seeing traffic in store come back and that's a good opportunity for us to talk about our brands.

I appreciate that color and if I can get to layer in more in real quick.

Go ahead <unk>.

The point, we got to get customers in our stores I remember I think it was at Richmond and young.

A few months ago at new normally enrichment of young.

It just pull the people I could count the people on two hands of what was standing there, but I think the big thing is.

Getting back in the offices and getting consumers back in stores as a key here.

Perfect and real quick maybe for Denise talked about the kind of the percentage mix of international coming from Germany, and Israel overall, and then what are you seeing a clean unpacking the German sales coming from insurance services private pay we know private basin growing quicker there and how do you look at that growth.

Forward here.

Yes, so in terms of looking at in Germany. So we had about 20% growth.

And Jeremy quarter over quarter base.

Basically in terms of looking at the mix there.

All it around like two thirds dried flower one third coming from ex Tac, we seem that we see that the whole dried flower business growing a bit faster than the oil and I know Irwin mentioned he didn't want to talk about COVID-19 and neither do I think it's something that everyone wants to move move past, but there was some still some lingering impact on.

Covid in the quarter it was harder for our sales representatives to be at the in front of doctors during the quarter and so we'd see the extracts market as more of them moving at the traditional pharmaceutical market and so.

As we start to get past Covid.

Doctors are more willing to accept visits from representatives, where we believe that we'll be able to see our extract business start to book more.

In terms of private versus public on insurance I actually don't have data on the split between the two so that's not a question that I can I can actually answer, but I do know that our extract business is it mostly covered by insurance.

I appreciate the detail thanks.

Youre welcome.

Thank you. Our next question comes from the line of Tami Chen with BMO. Please proceed with your question.

Yes.

Thanks, Good morning, I have a one question here going back to your comment about.

The mix of segments in the 4 billion target.

I just wanted to clarify that are you, saying that.

Yes.

Cannabis legalization does not happen by then.

It still looks to acquire other businesses in the consumer area to ensure that you get to the $4 billion target.

So let me be very clear I'm, not going to buy businesses just to get to a number Tammy. So let me be very clear on that okay. It's not a race to a number.

Again.

We are a cannabis company first.

And the reason we would acquire is for cannabis reasons. So just ultimately.

The answer to your question is if cannabis does not legalized, which I believe it will buy.

By 2030, it will be would it be $100 billion business and you think about the tax dollars cannabis will legalize it's just win but the answer to your question is no I will not be out there just doing acquisitions to hit a two plus billion dollar number in the U S.

If cannabis does not legalize over the next couple of years.

Got it thank you.

Thank you.

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

Good morning, everyone Irwin just wanted to circle back to some of your comments around the Canadian adult opportunity here.

You had mentioned potentially.

Maybe $1 billion of out of the $4 billion would relate to the Canadian market can you just kind of circle back around to how that might relate to market share. So is that $1 billion to til Ray So maybe $2 billion of branded sales.

On a $10 billion opportunity are you, implying a 20% market share just trying to get an understanding of what that those dollars would mean within the greater context.

Sure sure listen I've aspirational I mean, we were there I'd be very happy and I've said, it before to get to a 25% 30% market share.

Fortunately there is a lot of Lps, there's a lot of good competition. There is a lot of good companies in Canada, and I think what's got to happen as the market got a grow and the market's got to grow in regards to <unk>.

Consumers coming into the market from the legal market. The market has got to grow in regards to drinks being sold in <unk>.

Retail borrowers and drinks being sold in convenience stores, I think more and more consumers getting educated about cannabis both for adult use and for medical and with that it gets to that.

$10 billion retail would you cut by 40% I'd love for us to have a 15% share.

Then on top of that we'd like to do acquisitions in the Canadian market and the 200 $250 million plus and then we do like that beverage business and there are some great. Canadian beer companies are spirit companies that we'd love to do something in the Canadian market with so that's what gets me to the bill.

And in Canada.

So it's about a 15% share overall.

On the $10 billion retail, which.

Wholesales about 40% less.

Got it thanks, and just one other quick question. If you don't mind you mentioned.

Focusing in on brand awareness.

What you can in the current environment are there any meaningful catalysts or points in time in the next year, where the federal government might be listening more to what the producers are saying.

I know it is going to be a long pathway of where these stores might look something similar to our beer store at LCBO or or something like that but.

A lot of what's sort of holding back a lot of producers from branding really isn't in their control for a large part and I'm. Just wondering what you think the government may or may not do and any timing for meaningful change.

Listen I think what's got to happen is this here and it's an excellent comment and question here.

As I said and I keep saying that the Canadian government has made over $18 billion and the jobs has created the infrastructure over $6 billion.

Got to take this industry seriously I mean, Walmart doesn't sell cigarettes anymore. So secret tax is going to go down gas tax is going to go down with electric cars.

Regards electrical tax.

Credits and that's going to go down so with that and again there is a lot of great research coming out in regards to the benefits of cannabis I know, Canada right now is going through in regards to the NDP getting dental for every Canadian citizen well cannabis should be part of.

<unk> sets allowed in Canada. So there is stuff that we need to push upon to the Canadian government and recognize.

You'd legalize this three and a half years ago. What is Canada is three <unk> and four point all right now and I think the cannabis companies have done a good job in managing this in regards to safety in regards to education and the benefits from it and I think Thats a big thing that the Liberal government you got to realize this is a real industry.

In Canada, and I got to tell you, it's probably bigger than a lot of other industries that Canada, just don't recognize it.

Thank you.

Thank you our next questions come from the line of Michael elaborate with Piper Sandler. Please proceed with your questions.

Okay.

Good morning.

Good morning, coming back to the revenue aspiration and even if all the regulatory pieces fall into place. It does feel like it could be a.

Pretty aggressive just ambitious targets so curious for the organic growth piece.

Which typically has some level of <unk>.

Investments behind it.

Just how you think about the weight or importance of these targets versus balancing some of that with like a free cash flow objective or how to just have a disciplined approach to spending.

To the extent, there's any tension between those.

Do you think about where the pendulum swings there.

So I think what's important to come back and the last thing I want to do is give guidance out here.

<unk>.

Our consolidated number based on legalization and I was clear before that we're not out there just to get to $4 billion no matter what happens it just buy everything thats in front of us.

But I would like for us and I think it is important and you will see.

The growth opportunities in front of us today in Europe are tremendous growth opportunities in regards to.

Breckenridge is tremendous.

The growth opportunities in regards to what we're doing in the spirit in the beer business with Sweetwater, we green flush in alpine are tremendous so.

There are certain businesses im looking for double digit growth there are certain businesses Im looking for high single digit growth okay.

So to get to a 50% share in Canada, I'm going to need good organic growth there, whether it's mid to high single digits and to get work.

Aspirational, where I want to on the consumer side I'm gonna have to get to double digit growth so with that as.

It comes back to in regards to margins, which I talked about before.

In regards to mix of consumer products and you can look at margins in the spirits business, the ico margins and others and they are high margin products and our margins today in the spirits and beer businesses are great margins from that standpoint. So.

With that were looking in some markets for high to mid single digit growth in other markets you know double digit growth in regards to what I've said before I would like to have our consolidated margins and Carl will look at me like I'm Crazy, but you know in the 40% level as we look at the mix there.

Cannabis is a plant based product the big thing is we have.

<unk> and <unk>.

We're probably one of the lower cost producers today with our size, but with 265000 kilos and growing more and more of that facility are cost comes down tremendously and listen the other thing I didn't talk about as you know.

Every day, when we talked about legalization.

There's a word that they're called free trade and if that ever happens that we can start shipping cannabis.

The U S no different than <unk> EU GMP certified into Europe , now that will be a big plus for us.

Okay. That's helpful color. Thanks, so much.

Okay.

Thank you. Our next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Please proceed with your questions.

Hi.

Late in the call, but I have to.

Just because you mentioned specifically that are in the U S. The TARP.

Target to get to your revenue goal would include.

Acquisitions potentially like U S. Msos can you just give a sense of like what you are.

Ideal profile would be would it be like to grab a company that has like a a wide footprint or are you looking for brands are you looking for.

Specific states and markets that you'd like to get into just the just some color around what your ideal goal is there. Thanks.

Listen I think good question there because every question is a good question.

But I think what's important.

If legalization happens what does legalization happen what does it look like in regards to is it like alcohol to three tier system number one number two is.

If I didn't have to have.

Grow my own cannabis in each state and that's different from the standpoint there.

So it would depend I would want multi state I would want brands.

Not the most excited.

Say that about retail so if it had to be.

Like the like the liquor industry of the spirits industry I'd love to grow because we now know how to grow and getting better at it every day I would like to be able to sell brands not necessarily.

What would the majority of our business like to be in the retail business and that's kind of what we look at how do we.

<unk> be part of a multi state operator that has brands already that has good growth good houses to grow or could we shipped product in from Canada into.

Into the market in the U S. One of the biggest cost today.

Building these different greenhouses in these grow facilities and if you could eliminate that and just be able to sell into that market and I think as you look at the United States no different in Canada.

You take New York do you take California, where prices and then you take the.

The Midwest what are the big markets that you really want to be and where are the people.

And we have discussed this.

Thing is as we look at it how would we grow our e-commerce business in regards to direct to consumer and delivery to consumer as something that would be important to us.

Okay. That's great. Thanks for the color.

Thank you there are no further audio questions at this time I would now like to turn the call back over to the payout ratio to address questions submitted via the assay technologies platform.

Thank you operator, our top question from assay technologies platform adds upon federal legalization, how soon could tell right enter the U S market.

Irwin.

So.

Upon you know legalization and again, how quick that would be in.

There is a bill right now in Congress.

That's gotta go before Senate.

Again for 'twenty will be a very interesting day, not just this quarter <unk> interesting day anyway.

<unk>.

With Sweetwater, there's 421st which was down Atlanta, everybody should come to it.

Right now if something happens we have the ability to do something in regards to the Midland pretty quickly. We think it is a brand that can ultimately be distributed throughout the U S.

There is retail and some great.

States out there already and we've already introduced products today with the risk being broken coast in good supply with our different beer business.

Would love tomorrow to be selling breckenridge products and it's a great Bourbon. If you haven't tried it you really got to try it but we are looking and working on ways to infuse.

And hopefully we can call it Bourbon infuse that product with a THC product.

There's multiple bidders out there today that are infused with THC and again, let me be very clear you can't have alcohol and you can't have THC in a product. So from a business standpoint, we would have businesses that have alcohol businesses that are drinks infused with THC and the big thing is what we would have is the district.

Bhushan and the brands that are already set up that consumers know so we're ready for it and Uh huh.

I think we need as legalization to happen.

And I think the last part of it is.

Theres so much we've done on the medical side in Europe Theres. So much we've done with our Cc pharma and distribution business, there and what we could really do with the doctors out there in regards to prescription for inside the propane.

For sleep et cetera, and really what we come into this market and I got to tell you I must get US 10 times a day, how do I get product for sleep Hello, good product for pain.

Where can I get this product for inside of it. So there is so much demand out there again, its the education and getting customers and consumers feeling good about it.

And with that I want to thank everybody for joining today's call I know some people had some trouble getting on because of the demand Vietnam, but.

A lot going on with Kilroy and and.

It's an industry, that's the three and a half years old.

Till Ray is till Ray brands is a company that's less than a year old that's coming together. If you go back and look at where we were.

With the free of where <unk> was whats part of it today in regards to Sweetwater Alpine and Green Flash in regards to Breckenridge Bourbon.

What we're doing in regards to the Canadian market I'm really excited about what we've announced with the Hexcel deal you heard me talk or it might be.

<unk>, we're looking for 80 plus million dollars of savings between both companies here, even though hexcel will continue to stand alone and there's some exciting stuff there that we continuously work on.

With that we are focused on our balance sheet, we're focused on profitability.

Somebody who is always focused on cash.

We're not totally happy what's happened in the Canadian market, but I will tell you theres a team here thats all over it.

As a team here thats all over making sure we grow this business I think the big thing Thats in front of US where else is there an industry out there where today, where it is in three and a half years, it's heading to a $100 billion in size and with the opportunities out there and I think all we need is legalization and who was in the best.

To do it other than until right.

I have and I get fortunate to work with one of the best group of people out there with wood comes from many industries with many expertise to bring that to <unk> that are helping us do this.

Our board of directors of truly focus on good governance.

Our ESG and really focus to take this company to the next level.

We have in place today, some great grow facilities that were built over the last couple of years and ultimately how do we now take them to the next level. We're in the midst of technology in regards to data content and really understanding the consumer and getting that.

We're focused on making sure we have a very very very strong balance sheet, because I think that's where a lot of the Lps are running into trouble as they run out of money or.

Losing money there.

The Big thing is the focus on the consumer and that's why the brand that's where the name of the company until right brands. We are a branded consumer company.

A lot of questions in regards to margins and mix and how you get to the 4 billion aspiration, but.

One of the things we have is a plan that's out there to get to $4 billion, while everything go right absolutely not will everything hit not totally not our we have control of everything absolutely not but I will tell you. We have a good plan, we have levers to pull and if they don't go right then.

We know another way to go but we will get there and reward our shareholders be true to our consumers and be true to our employees. Thank you very much for joining us and have a great day.

This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.