Q4 2022 Tilray Brands Inc Earnings Call

Good morning, everyone and thank you for joining us to discuss <unk> friends incorporated financial results for the 2022 fiscal fourth quarter ended may 31st 2020 tail all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session for analysts and investment firms conducted via audio and participating in retail shareholders conducted through let's say technologies platform.

<unk> submission and uploading through the C Tech.

The C technologies platform. It has already been concluded and the company will read aloud and answered the top questions. Mr. Marotta you may 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 <unk> website at <unk> Dot Com and has been filed with the SEC and SEDAR.

On today's call. Please note, 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 accordance with GAAP.

In addition, we will be making numerous forward looking statements during our remarks and in response to your question.

These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect.

<unk> results could differ materially from those described in these forward looking statements.

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 Terry brands, Chairman and CEO Irwin Simon.

Thank you Barry and good morning, everyone. Thank you all for being with US. This morning I'm joined on this call by several key members of our senior leadership team, who will you'll be hearing from shortly.

Clothing, Denise Falter Chang Chief strategy Officer head of our international business, who will discuss our operational strengths across key global markets and the outlook for legalization across Europe Blair Mcneill President of our Canadian business, who will update you on the Canadian cannabis market and finally.

Carl Merton, Chief Financial Officer, who will provide a financial update including our progress in realizing cost synergies.

Before I turn the call over to Denise I'd like to discuss three items first the work we've done over the course of this fiscal year to optimize our global business and significantly improve our operational performance and lay the groundwork for sustainable profitable growth in 2023 and beyond.

I will discuss our strategic alliance with Hexcel and the important role it plays in our future growth plans and third our plans to generate up to $4 billion in revenue depending upon the federal legalization in the U S and Germany at the end of fiscal year 2024.

With that let me start off by saying that fiscal 2022 was a period of great execution and accomplishments in building until right brands World, leading candidates CPG platform over the past year, we've been laser focused on optimizing our global operations and pursue.

And in our most profitable core businesses across Canada, Europe , and the U S.

This work has included both de prioritizing and divesting lower growth legacy assets, including duplicative production facilities, while renewing investments across our four pillars, including medical adult use wellness and beverage alcohol.

Not only our world class brands and businesses in these areas driving the recent market share gains and growth, but we have also entered into key strategic transactions that are bolstering revenue through improved cultivation brand building and distribution.

Also driving production efficiencies.

The outcome of this work as you will hear about from the team on today's call is evidenced on our performance and to give you. Some highlights we had a record year with net revenue growing 22% to reach $628 million.

This reflects our market leading position in Canada, our market, leading position in Germany, and the growth of our international cannabis sales overall by 200% compared to Q4 in fiscal 2021, and our growth in artillery wellness segment, with our Manitoba harvest business as well.

As the contribution from our award winning beverage alcohol, we acquired over the past two years.

Adjusted EBITDA decreased 8% to $48 million in fiscal 2022.

And as a note the fourth quarter of this year marked our 13th consecutive quarter of positive adjusted EBITDA. We ended the year with a strong balance sheet with more than $400 million in cash and very important we delivered $85 million in cost savings, which exceeded our original target of 80%.

And we're substantially accelerated timeline compared to earlier plans, we now expect to deliver $100 million in cost savings by the end of fiscal 2023, and we believe we'll be operating free cash flow positive at that point as well.

As Carl will walk you through in a few moments, we're taking a noncash impairment charge of $395 million in fiscal 2022 related to both market conditions and the work that we've done to optimize our operations in order to ensure that till Ray brands is best positioned to continue.

<unk> to lead the global cannabis industry and as legalization continues to accelerate.

Moving along to Hexcel, our acquisition of XO Senior secured convertible notes closed on July 12 of this year in short this transaction provides us with broad commercial and financial benefits, including strengthening product innovation brand building and distribution in Canada and international markets.

And eventually in the U S markets upon legalization through leveraging our collective expertise and knowhow and capitalizing on growth opportunities that stem from having expanded world class CPG offerings. In addition to be immediately accretive to our earnings to Nash.

<unk> benefits of XO transaction, including the $80 million of shared cost savings synergies within the next two years.

As til Ray will now complete production and processing products for Hexcel, and Hexcel will source all of its non Canadian and non U S cannabis products exclusively from til rate.

Hexcel will pay until Ray brands at an annual fee of $80 million for advisory services in each of the next four years with respect to cultivation operation and production matters. Carl will discuss this in more detail also I want to share that as a result of our <unk>.

Site and the work we've done to optimize our business over the course of 2022, we believe we have a strong foundation upon which to achieve our strategic plan to reach $4 billion in revenue by the end of fiscal 'twenty four depending of course upon federal legalization of adult use in the U S.

In Germany.

As we've discussed previously this will be accomplished by building a truly global CPG and cannabis company with a portfolio of best in class medical adult use wellness and craft beverage alcohol brands that address the needs of patients and consumers.

In achieving this objective we are fortunate to already have many enviable attributes each of which we sharpened over the course of fiscal 2022 that demonstrates the power of <unk> brands, including our proven brands and complete product offerings, our status as a leading low cost.

Cannabis producer, our strategic footprint and operational scale, our ability to accelerate international growth opportunities, our growing presence and infrastructure within the U S CPG market and our proficiency in generating substantial cost saving synergies.

In pursuit of long term profitability.

Of course, none of this would be possible. If I was not surrounded by an experienced management team who can build upon the lessons of better for you CPG and beverage alcohol to execute against the repeatable growth formulas within medical cannabis adult use cannabis.

Adult use adjacencies and wellness to provide an overview of our strategic initiatives by region in Europe , we have a $1 billion opportunity based upon momentum growth strategic initiatives and adult use legalization.

In Canada, we have a clear path to achieve our goal of delivering $1 billion in revenue and includes working aggressively to further solidify our market leading positions in adult use gain back market share through converting the illicit consumers to the legal market and growing our business among <unk>.

Current and potential customers, while also continuing to bolster our medical business. Its four pillars include delivering continued product innovation and category leadership investing in retail partnerships by educating bus tenders through an enhanced outreach and curating offerings.

To provide retailers with the highest velocity products.

Producing best in class quality products and scale low cost production facilities in which we can implement synergies and finally as it relates to medical expanding our relationship with patients and physicians to bolster our market position, while keeping our product assortment fresh and innovative.

<unk> as we work to advance education responsibility that impact regulation.

<unk> will discuss the Canadian Canada's market in further detail.

And in the U S, where 91% of adults a cannabis should be legalized for medical or adult use and 60% are adults across a variety of demographic groups believe cannabis should be fully legalized, we see a market poised for growth supported by a state by state trend towards legalization.

We believe that we could reach our targeted revenues by the end of fiscal year 2024 through a broad set of candidates focus CVD and craft beverage brands and additional revenue and adult use cannabis pending federal legalization.

Federal legalization would certainly be a watershed event for til Ray brands in the industry, but given the near term uncertainty and see an actual legalization reform, we're pursuing optionality, which we view is the next best thing.

We have a considerable adult use adjacency to our craft beverage alcohol and wellness business, which include key U S and global assets, such as Sweetwater Breckenridge distillery, Manitoba harvest, which together are available in all 50 States and Washington D C.

As we've discussed previously our investment in Mad men during year 2022 exemplifies this approach and we can build upon given our strong balance sheet and leadership expertise in operations profitable CPG businesses and growing brands that consumers love to pursue and.

Additional acquisition opportunities across the U S.

Together, our growing U S. CPG platform represents a portfolio of award winning and highly sought after consumer brands are strong and robust infrastructure are broad global distribution footprint hands on CPG expertise and operational excellence.

Today, our U S CPG business as combined our high margin EBITDA and cash flow positive as well as good adjacencies to the cannabis industry and upon legalization and collectively they have generated over $130 million in revenue during fiscal year 2022.

And nearly $60 million and gross profit.

Our beverage alcohol brands consist of Sweetwater the number one ranked brewery in the southeast and the nation's 10th largest craft Brewer Brackenridge distillery, which recently celebrated two double goal and one gold medal in the 2022, San Francisco World spirits competition, the largest spear.

<unk> competition in the World and Alpine in Green Flash, which are two iconic west coast craft brands.

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

Through recent expansions Sweetwater is now available in 42 states, including California, which is the number one beer market in the U S. Sweetwater also operates a new 32000 square foot production facility and tap rooms in Fort Collins, Colorado, along with a new tap room at the Denver Inter.

National Airport.

Brand commands a loyal customer following and go forward plans for Sweetwater include continuing to launch innovative products, a new spirit based ready to drink beverages continued westward penetration in the U S. While expanding our presence in Canada and other international markets improved.

Production utilization and evaluating strategic acquisition.

Brackenridge distillery is widely known for its award winning Bourbon Whiskey collection, and innovative craft spirits portfolio, including Bourbon Whiskey Gin and vodka distribution already reached across 50 states and the brand is able to benefit from distribution synergies when paired with Sweden.

We are confident that this will drive growth both now and in the future.

And finally, Manitoba harvest is the world's leading brands with production distribution across 17000 stores in North America, and our 50% share in the hemp seed and 15 established markets since the business combination, Manitoba has not only been stabilized but.

It has experienced dramatic trajectory change in measured channels with further opportunities to extend into Adjacencies. We have also manage costs implemented pricing actions amidst a rising input cost environment and decreasing our reliance on big box distribution points.

Sure.

We will leverage <unk> strong brands and their distribution system to grow our U S. Til Ray wellness business that will parlayed into CBD beverages, CBD personal care products and related Adjacencies and upon federal legalization in the U S will have a clear advantage to lead in the U S market.

And strategic infrastructure operation and a place to parlay into the THC based products as well.

Before I turn the call over to the team I'd like to reiterate what we announced this morning, the company expects to generate $70 million to $80 million of adjusted EBITDA and will be free cash flow positive.

Our operating business units in fiscal year 2023, with that let's hear from Denise fall to check our chief strategy Officer, and head of international business Denise.

Thank you Irwin and good morning, everyone internationally, our strategic presence and some continued to accelerate powerful growth.

Signs continue to point to a bright future as we expand our international footprint.

The European candidate industry is heading into a period marked by widespread legalization.

Innovation and considerable economic growth.

Accordingly, prohibition partners sales of medical cannabis in Europe are expected to be approximately 354 million barrels this year growing to $2 3 billion euros by 2020.

Sales of adult use cannabis in Europe are expected to reach one 5 billion euros by 2020 with more progressive candidates legislation being introduced across the continent.

At the international market, we are reiterating ourselves as a front runner in the further development of this profitable market given our proven track record.

We recognize the signs of the times early on.

Several strategic investments that are now resulting from first mover advantage.

Our operational strength as reflected along the entire value chain with our leading medical cannabis brands strong distribution network in Germany with Cc pharma.

In EU GMP supply chain, which includes two state of the art EOG E&P production facilities in Portugal, and Germany with opportunities for expansion at each facility, we are well positioned to continue to pursue international growth opportunities.

In Europe today, we have one of the leading portfolio of medical cannabis flower and oil extract products to meet our patients' needs and we plan to continue to build on this strong foundation and maintain our leadership position.

During Q4 this unique setup.

The international medical revenue increased 205% compared to last year's Q4, but down from Q3 due to shipments in Israel in the prior quarter, which we made the conscious decision not to repeat in Q4 due to the severe deterioration of <unk>.

Market conditions with industrial with medical cannabis sales and pricing declining.

The outlook for other international market is more promising now is the time to seize the opportunities and move the European candidates industry forward with it.

Potential is enormous, especially in Germany at the central market, which is expected to remain the largest medical cannabis markets in Europe and so on.

Also emerge as one of the largest adult use markets. Upon legalization, we are already the leader in medical cannabis and number one in revenue in both flower and oil category.

Based on insight health sales data, Germany's leading provider of health industry pharmacy, and medical cannabis sales data Kilroy has a market share of approximately 20% in Germany across our flower extracts and developing our products and we are ready to make our contribution to the recreate.

<unk> market for which we have created the best condition.

On the one hand, the operational strength of our business model with two state of the art GMP facility.

Now as us to exponentially ramp up our capacity to meet the demand for medical and adult use Canada on the other hand, given our market leadership in the German market today are well established relationship with German Mega lenders, where we have already proven ourselves to be the trusted partner.

Our expertise in adult use cannabis that we developed in Canada. We believe we are well positioned to establish ourselves as a market leader to broadly legalize adult use cannabis market in Germany, and seen a sizable portion of that market.

This puts us in a unique position in Germany, which continues with data consumption to legalize adult use candidates with Germany Health Minister Dr. Carl Lauder by announcing a draft bill on adult use candidates could be published in late fall 2020. However.

However, we believe in that instance, the first commercial sale not commence until the beginning of calendar year 2024.

But also outside of Germany, we firmly believe that Europe is well positioned to insert itself has a new hub for candidates with regulatory reforms.

Cost of the continent, and progressing many European countries have expressed a clear political ambition to broadly legalized adult use candidates.

This is likely to be the start of a wave of change in Europe . In fact, we think all of Europe could legalize medical use candidates within the next two years or sooner with certain countries legalizing adult use shortly thereafter.

A few highlights in the quarter for our international business across various countries in France, we estimate that the French market is roughly the size of Germany. We believe that today, we are serving approximately 25% of the patients within the experiment based on information provided by the Oems.

We also believe that brands will legalize next spring when the experiment.

And we are well positioned to take a leadership role there.

The U K, we have the most comprehensive mix.

Medical cannabis products.

Also launched Colin a CBD lifestyle brand on Amazon in Utah, with a mix of CBD, Tami and dream fast and three signature line.

In Poland I am pleased to announce that we recently received approval for our regulatory submission in Collins and will begin importing to rebranding and white label medical cannabis into Poland and 19 into sales.

In Asia, we continue to evaluate the market and are well positioned to serve Israeli patients with the high quality whole flower products from our Portugal facility, which is <unk> certified compliance in addition to being <unk>.

We have stayed abreast of the continuously changing regulatory requirements and have prepared our operation.

Our compliance with the regulation changes on testing that take effect in the fall.

Finally in Australia, we have expanded our medical cannabis product offerings to now include a complete range of medical cannabis wholesaler can meet patient needs and.

We're seeing great acceptance of our products more importantly, we are one of the few providers of medical cannabis, Australia that are already compliant with the EU GMP regulations take effect next year with that I'll now turn the call over to plan Mcneill President of our Canadian Borgwarner Claire.

Thank you Denise and Hello, everyone.

Over the last four years or $5 billion legal market for cannabis in Canada has been created which is an incredible achievement.

However, this still represents a little more than half the total cannabis market in Canada and the differential provides a significant revenue opportunity ahead not to mention the estimated 40% of consumers of legal age who have not yet entered the category.

Still this is a challenging operating environment characterized by an oversupply of candidates unreasonable regulatory barriers and punitive excise taxation exacerbated by price compression.

For the average license producer ex size is almost one third of gross revenue.

Despite this we continue to see growth in the number of Lps and retail outlets in Q4.

Additionally, Q4 had more new products launched in the marketplace in any period since legalization.

Despite an environment of rising costs in all aspects of their lives cannabis consumers continue to benefit from higher quality candidates at reduced prices, while governments continue to benefit from significant taxation revenue.

This is not sustainable and we see significant consolidation on the LTE front over the next 12 months.

In Q4, our retail market share declined to eight 3% from 10, 2% in the sequential period.

Cause of these challenging industry conditions.

<unk> rationalization and discontinuation of partner brands, our number two market share in Canada, and leading top five positions across numerous adult use categories, including flower pre rolls and dates based on recent high fire sales data suggest to us that our strategies are beginning to deliver.

In May we saw the first of over 23 flower beta strengths come to the market monkey butter and sweep very close shipped limited markets with great success, we experienced a 123% increase in forecasted sell through and completely sold through in Q4 versus extending it.

Q1.

We have an additional 46 streams in our Alpha program reinforcing our commitment to a flower innovation pipeline for years to come.

You will recall the majority of our share loss in FY 'twenty two was due to gaps in flower innovation and we are confident this will reverse the trend moving forward.

We are encouraged that in June we experienced a reversal in trend and began and we're gaining market share a direct reflection of the flower investments we have been making additionally.

Additionally, we have been recently able to account for the gap in high fire data as it relates to Quebec, when we adjust for the overstatement of competitive LP share in Quebec till Ray were gained its number one market share nationally for the month of June .

Our plan to win in Canada is based upon an integrated consumer first approach that leverages, our scale and best in class manufacturing to drive profitability and share leadership over time.

This begins with a deep understanding of the consumer need occasion, and functional benefit to drive our portfolio strategy of brands.

Our consumer insight research project is nearing completion, which will form our thinking for brand strategy. We utilize this strategy to develop our portfolio prioritization and innovation pipeline across all product categories and consumers.

During Q4, we brought exciting innovation to the market across all categories, beginning with solely bites. The brand's first foray into edibles and the first ready to eat THC edible available at the SKU D C, Quebec sole legal retailer for cannabis products.

We then expanded good supplies bestselling cannabis portfolio with the launch of new high potency products, including liquid wax apes and exclusive new flower strains available in select markets across Canada.

Finally last month, we launched CBS Nate oil under the freedom Medical cannabis brand. This was just a small sample of the innovation, we will launch in the coming months ahead.

In FY 'twenty three we expect to launch over 100 Skus of innovation nationally improving our innovation share of revenue to our market leading 20% for licensed producers of our size. This consumer first innovation pipeline will continue to identify white space opportunities for years to come.

As we have consistently communicated by tenders are a key part of our strategy, we are making investments in driving awareness through social media and digital and educating by tenders through store visits and product knowledge sessions, while developing a CRM by tender database for focused communications.

Through our market leading coverage with great North we conducted almost 3000 product knowledge sessions with Bud tenders on our innovation and product portfolio. In Q4. This resulted in over 6200 new points of distribution.

Finally, we have a relentless focus on end to end cost of til rate early in Q4, we identified the opportunity to optimize our cost base. Even further we have put in place an additional $30 million plan, which is over and above our total array of freia and <unk> synergies this demonstrates our commitment.

Managing gross margin amid an evolving retail environment. These plans are already underway, realizing a $5 million in savings in the first six weeks of Q1.

I will now turn the call back over to Carl Merton, Chief Financial officer to discuss financials in greater detail Karl.

Thank you Blair our results for both Q4 and fiscal year 2020 to demonstrate our strength and having a diversified business across distinct operating segments.

Long with the traction we have made in implanting greater efficiencies into our organization despite ongoing market challenges.

Before I review, our financials, let me first remind everyone for one final time that because of the arrangement between our Korea until Ray in fiscal year 2021.

Our results in both the prior fiscal quarter and prior fiscal year consists of three months and 12 months of <unk> financial statements, but only one month in both reporting periods of <unk> operating results.

Our financial results follow U S. GAAP and are presented in U S dollars.

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 Q4 net revenue grew seven 8% to $153 3 million.

Compared to the prior year quarter, although as I just said the comparison itself is not fully apples to apples because Q4 of fiscal 2021 contains only one month of contributions from legacy till right.

It does not include Breckenridge results.

Our Q4 net revenue continued to be negatively impacted by the ongoing strength of the U S dollar, particularly given our biggest revenue sources native currencies are the euro and the Canadian dollar.

For example, if the average foreign exchange rate this year was equal to the rate in the prior year for the same period, we would have reported an additional $9 5 million in net revenue and reported an additional <unk> 7 million and adjusted EBITDA for Q4.

Yes.

Adjusted gross profit increased 16, 7% to $55 million in Q4 from $43 3 million in the prior year quarter, while adjusted gross margin increased 250 basis points to 32, 9% from 34%.

We believe both of these profitability metrics should continue demonstrating improvement as more of our cost saving programs are completed.

Net loss was $457 million in Q4 compared to net income of $33 6 million in the prior year quarter.

The variance is due largely to impairment amortization and other noncash changes in fair values offset partially by lower transaction costs in the quarter.

Yes.

Q4, adjusted EBITDA was $11 $5 million down 12, 8% from the prior year quarter, extending our track record of positive adjusted EBITDA for 13 quarters.

Our positive adjusted EBITDA as a function of higher contributions to adjusted gross profit from our operating business segments, coupled with our strong focus on realizing operational and other efficiencies through integration as we have discussed over the past few quarters.

Contributing to our ability to report positive adjusted EBITDA. This year was the work we did achieving our synergy targets as part of the a free of Kore arrangement.

We finished fiscal 2022, realizing $85 million of synergies towards our revised target of $100 million.

With $60 million in cash savings have already flowed through our operating results.

As Irwin mentioned Q4 is a timing for our annual impairment testing when.

When completing our testing this year, we dealt with a number of factors, including the impact of expected inflation on our cost models increase interest rates, particularly the risk free interest rates.

The strength of the U S dollar against our operating currencies and the general recessionary like atmosphere, including current market conditions for all publicly traded companies.

As a result of these factors and the changes in the market opportunities in front of us.

We recorded an impairment of $395 million.

Split between inventory goodwill and other intangible assets offset by a reduction in deferred income taxes.

The inventory provision partially related to cc pharma, but was largely related to a free one has it repairs for the changes associated with its new relationship with Hexcel as you.

You will recall certain of <unk> production processes are moving to our <unk> facility in certain of our free as one's production processes are moving to access facility.

The remaining portion of impairment tied to goodwill and other intangible assets related to our cannabis business segment portions of which resulted from our ability to focus on our efforts on the best jurisdictional opportunities today.

Moving to our business segments in further detail revenue in our Canada segment decreased less than 1% to $53 3 million from the prior year quarter.

The average foreign exchange rate this year was equal to the rate in the prior year. The revenue in our Canada segment would have increased 4% to $55 9 million.

This decrease included a 4% increase in our Canadian medical cannabis business at 21, 5% decrease in our adult use cannabis business and a 205% increase in our international cannabis revenue.

While our Canadian adult use cannabis revenue decrease recent market share information from high fire for periods after year and demonstrate our ability to regain lost market share.

Regain the share has been in almost a year long effort working on potency levels and product innovation combined with increased presence with Bud tenders.

During the last year, we maintained our belief that the demand for higher quality brands in Canadian adult use cannabis should rise once purchasing decisions are more positively influenced by Bud tenders within a retail setting.

While we are extremely proud of the growth in our international cannabis revenue the amount in the quarter could have been more during the quarter. We were scheduled to ship approximately $6 million 200 Israeli buyer.

We chose not to ship such product as we were concerned about our ability to receive payment.

Reiterating what Denise said earlier, the Israeli market has become oversupplied with candidates from the Canadian market.

We believe we made the prudent business moved by passing on this order.

In terms of profitability and margins adjusted cannabis gross profit increased 19% to $28 4 million in Q4 from $23 9 million in the prior year quarter, while adjusted gross margin increased 890 basis points.

To 53, 4% from 44, 5%.

The latter reflected the traction we are making through cost savings as part of our efforts around synergies.

Turning to our beverage alcohol business, we generated $22 7 million in net revenue in Q4, which was 43% higher than the prior year quarter.

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

All of our Sweetwater contributed an incremental $1 4 million compared to last year due to extensive new line of innovative products and increased distribution points.

Looking ahead, we believe there is significant upside potential for this segment as we strengthen our position in the U S by leveraging our increased distribution, particularly in California.

<unk> innovation pipeline and potentially other acquisitions adjusted beverage alcohol gross profit increased 28% to $13 6 million in Q4 from $10 6 million in the prior year quarter. However, beverage alcohol gross margins decreased to 60% from 66, 5% during this period.

Our distribution business, which is overwhelmingly cc pharma experienced an eight 3% decline in net revenue during Q4 to $61 2 million from $66 8 million in the prior year quarter.

Most 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.

In fact, 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 $5 million of revenue.

Adjusted distribution gross profit decreased to $3 5 billion in Q4 from $6 4 million in the prior year quarter.

Distribution gross margin declined to five 8% from nine 5%.

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

We also experienced higher than normal discounts and returns during the quarter.

Finally for our wellness segment revenue contribution grew to $16 2 million from $5 8 million in Q4 last year. When we only had one month of legacy core results contained within our financials.

We view this business as having stabilized compared to late calendar 2020, as our new leadership team has introduced new products to the portfolio new distribution points and reduce the reliance on non branded big box customers.

Adjusted Wellness gross profit increased to $5 million in Q4.

From $1 6 million in the prior year quarter, while gross margin increased 380 basis points to 37% from 26, 9%.

Last year, we only had one month of legacy <unk> wellness business.

Consistent with some of my earlier comments, we reduced reliance on non branded big box customers as well as operating improvements resulted in an increase adjusted gross margins.

Our cash and cash equivalent balance was a healthy $415 million, while our working capital balance increased 9% to $523 2 million and allows us to meet our operational and capital requirements.

Notably we also utilized proceeds from our ATM program to strengthen our balance sheet by paying down approximately $86 million of our convertible debentures in the last quarter and in doing so significantly reduced our outstanding debt.

Briefly moving to full fiscal 2022 results.

Net revenue was $628 4 million, an increase of 22% from $513 1 million in 2021.

<unk> revenue grew 17, 9% distribution revenue was down six three while we benefited from contributions from both beverage alcohol, which grew 150% due mostly to acquisitions made over this past year and wellness, which grew nine times to $59 6 million from $5 eight.

As we had 12 full months of contribution versus only one month in the prior fiscal year.

On profitability.

We increased our adjusted gross profit by 29, 2% to $186 million compared to $143 9 million and increased adjusted EBITDA by 17, 8% to $48 million compared to $40 8 million in 2021 <unk>.

Included in those results were the synergies we realized from the a free it's Hillary arrangement.

Of course, notwithstanding those synergies we will also have substantial cash generation that will be forthcoming as a result of the kore and <unk> strategic alliance.

As Evan noted these additional operation and production efficiencies amount to up to an additional $80 million within the next two years that will be shared by both parties, including our advisory fee of $18 million that <unk> will pay to us during each of the next four years related to cultivation.

<unk> operations and production matters for fiscal 2023, we believe this alliance will generate close to $40 million in additional cash Victoria.

The Canadian market, he is right sizing through consolidation and competitive contraction.

And as this plays out we are strengthening our position. This is being accomplished through our broader medical and adult use portfolios of high quality strains and formats investments in retail partnerships and physician relationships optimize product offerings scale low cost production facilities and our strategic alliance with XO.

This concludes our prepared remarks, we 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.

Who has the first question.

Hello.

The opex there.

Operator.

Okay.

Thank you. Our first question is from Vivien <unk> with Cowen and company. Please proceed.

Hi, This is actually Victor MA on for Victor as you and thank you for the questions.

So my first question I know post quarter trends look better, but recent data indicates that 200 bps.

I am sure Lawson, but feels and dates in the quarter can you offer some color on the drivers behind this and the trends and specifically do you see categories post quarter.

For sure I'm going to let Blair answer that Blair.

As our president of our Canadian business. So Blair go ahead Andrew.

There's two trends that are really driving I would say, our pre roll numbers and <unk> numbers, but both trends are different on the pre world side Youre seeing some of our strained rats rationalization and some of our discontinuation of some brands, which will continue to be a little noisy, but our innovation pipeline will take care of that overtime.

The second part on what Youre seeing in <unk> is a rise in THC significant Verizon THC levels.

Again, our innovation pipeline will take care of that and we're very confident in the trends moving forward.

Right.

And some of the high fire.

Coming out.

It's not as you look at it month by month.

Not always accurate to look at it that way as the different provinces, how they take product in so we definitely don't look at it month by month, but I would tell you ray.

Now last year. This time, we only had a couple of new products going in to see the Ocs. This year, we have over 35, new products with more to come behind it.

C levels are up.

<unk> points are up which we like to see and we have some incredible programs in place to drive volume. So we feel good.

And a part of part of this what you are seeing too is the Marley brand, which we took over from <unk>.

<unk> is no longer it's a discontinued brand, which was almost a $30 million business. So with that we've cleaned up skus, we did SKU rationalization.

In the midst right now we're coming out with a lot of new products.

Understood. Thank you for the color if I could just squeeze in one more question on beer. So recent Nielsen data suggest that suite what are sales outperformed the craft beer category, which fell 2% in July interact channels year over year can you provide any color on the underperformance. Despite the additional points of distribution stake on the U S West.

Kosta.

Yes.

Listen the West Coast is new for us.

We have one of the top distributors Ray is distributing our products.

It's taken a little longer.

And we expect it to go into the West coast, but we.

We feel really good about Sweetwater and Sweetwater is taking a little longer than we expected, but we're happy what were seeing on green flash.

Nelson and alpine and they are existing brands. So yes, it's taken a little longer but I got to tell you the opportunities on the west coast are tremendous for Sweetwater in our three other brands in that marketplace, and we have a great distributor partner.

And what we're seeing also is other distributors that we have today picking up.

Alpine Green Flash.

These are United distributors, just pick some of those products up.

The other thing, which youre not seeing in IRI data is what we're doing in regards to off premise and we're picking up some nice on premise business.

Great. Thank you I'll hop back into the queue.

Our next question is from Andrew <unk> with Stifel. Please proceed.

Hey, Thanks, good morning.

First off I wanted to ask on the guidance here at the midpoint lets say $37 million year over year increase I wanted to ask first off is the XO fee included in that number that would be I guess $40 $50 million, but could you also talk to kind of what what's your thinking in terms of FX headwind inflation and also.

Revenue stability in particular on the Canadian adult use.

Okay.

Good morning, Andrew.

Yes that helps.

So numbers that I talked about in.

In the call are all included inside of the guidance that we've that we've given.

They are there are there are a few areas, where we're seeing inflationary pressures that are factored into those numbers.

We were looking at rising energy costs in Germany, we're looking at rising input material costs.

At Manitoba harvest.

But we also have been able to secure price increases in a few places along the way and we think that.

To that point, we won't be adversely impacted.

And then in terms of kind of the revenue outlook.

Stability for Canadian adult use like is the timeline for that.

Key to this is it by <unk> 23, <unk> just anything you can help us on that line.

So on that one Andrew.

It started right in Q1 and.

Blair has seen growth already and seeing some good things happening at the same time as our new products really go into the marketplace in September .

So.

It's not back end loaded if thats, what youre asking it basically starts in our first.

Second quarter.

So yes it is.

It's throughout the year for us.

Listen you saw what our margins are we're not discounting our products like others just to gain share.

You saw it even still we continue to where we continue to grow so we feel good about.

The Canadian market, where that's going we feel good about the new products and listen built.

Built into there is still synergies from the free until Ray deal.

Not built into those numbers are all the opportunities and synergies with <unk>. We think there's many many more in the <unk> that are built in they don't all happen day, one they are throughout the year.

So.

There are still opportunities for additional XO deals.

<unk> savings.

Thank you I will pass it on.

Thank you Andrew.

Our next question is from Andrew Bond with Jefferies. Please proceed.

Hi, Good morning, Andrew on the line for Owen Bennett, Thank you for taking our questions.

So first on cannabis margins very nice lift during the quarter to about 50%. Carl you mentioned this was driven by efforts around cost savings. So were there any other onetime nuances or any one time nuances or items, helping with these margins or any seasonal considerations around cannabis margins, we should be making as we forecast fiscal 'twenty three or is <unk>.

<unk>, a relatively fair representation of underlying cannabis markets ex any large bulk sales. Thank you.

So Andrew good morning.

There is a very small seasonal impact on costs.

The growing season from March to me is the best growing season, it's not it's not a huge portion of that number.

But it is a small part of it is a small piece of that.

Fast majority of the increase though has been driven by the cost savings programs, we talked about in the script a little bit in addition to.

The a free until rates savings that we're targeting in addition to the til rate XO piece that we're targeting we also have an internal.

Plan inside of the cannabis business that we're targeting for further cost reductions.

And we put in place throughout the year.

Some initiatives had to take additional costs out of our business. That's why we feel good about cash flow positive not only in our Canadian business, and our international business and our spirits and beer business. So.

<unk>.

The team after three that for years have done a great job in regards to perfecting our grow.

And growing to what our plan is so.

I feel good about where our margins are yes, there is some seasonality in there but.

Our margins will continue to increase as our volume does.

And with our different mix and stuff like that.

Great Super helpful. Thanks, Steve Thanks, Carl just really quick if I may of staying on the same theme.

But for non cannabis CPG now that we're entering the warmer summer months here could you just quickly remind us of the seasonal considerations around beverage alcohol as it relates to on premise consumption and related to that anything to consider.

Seasonally around Manitoba harvest.

Can you just help expect to help set expectations for quarter quarterly delivery in fiscal 'twenty three it would be helpful. Thank you.

In regards to our Breckenridge are.

Bourbon, our backyard gin business is what we're seeing some great sales right now on our <unk> business.

Theres a lot and then just on our way back from Colorado and spent the last three days of their meetings.

There's some changes going on with regards to distribution there.

We like what we see Youll see in the back half.

Our Bourbon businesses start to increase.

Regards to our seasonality in beer.

Right now as a strong time for our our beer business.

And with our new distribution going to California, and the West Coast.

<unk> see increases there.

In regards to Manitoba harvest.

Jerry <unk>, who runs that Theres no real seasonality I mean.

A lot of the baking products and that we're coming out with.

Seeds different products Youll see some pick up as you go into the winter fall months in regards to baking from our standpoint, there and then just to touch on that hemp infused foods. The team has done a tremendous job what we're coming out with new products. You heard me mentioned it in my script is pretty exciting.

So we're really excited about the contribution in the growth.

Coming from our spirits business, our beer business and.

Our Manitoba harvest and you heard me talk about wanting to add additional wellness products to our portfolio and additional acquisitions within the spirits and beer business and there are exciting opportunities for us.

Great looking forward to the developments. Thank you I'll pass it on.

Our next question is from Aaron Grey with Alliance Global Partners. Please proceed.

Hi, good morning, and thank you for the questions. Good morning. So first question. Thank you good morning.

First question for me just wanted to talk a little bit about pricing specifically around the flower category within Canada.

Can you speak to any transfer typically that youre seeing I know you guys had taken some price changes a.

A couple of months ago now.

So what are you kind of see going forward. If you do see some flooring there.

Might differentiate between different categories of premium and value and then just secondarily on that just your take on some asset light model back some other lps might be taking and whether or not you think that might be more taking advantage of the current dynamics and it might need no correlation of their own long term or whether or not that might develop into more of a sustainable model. Thank you.

Yes. Good morning, Thank you for the question.

The flower category is a very interesting category and if you've looked over the last two to three years, what you've seen is the evolution of these consumer segments around value all the way to what we would call ultra premium.

And so what youll see in our beta strained program is thoughtfulness around making sure that we have entrants and all of those categories and so while value and mainstream continue to be big.

Parts of the business, we do see some opportunity in premium and ultra premium and broken coast is our flagship to play there. So in terms of the flower category. Overall I think you have seen some flooring on it I don't think theres much price compression to go but there are those unique opportunities to premium is our brands through the different consumer.

Segments and that is built into our our flower innovation program.

What you saw late in Q4 on Monkey butter, and sweet very crush launches and then going forward you will continue to see some significant beta strange moving forward and we think with regards to flower, which you are talking about.

In.

The category is changing tremendously, where we're seeing tremendous growth in the pre roll category and infuse pre rolls infused flowers. So we see the category changing where flower used to be about 50% of the category and that's no longer the case, but again.

What I feel good about is the quality of our flower, which has improved tremendously.

And also is our our pre rolls and are infused pre rolls and what we're doing and we're coming out with some slim we're coming out with some new products coming.

Coming in September so.

I think where we are today, we got the right mix here and as we talked before.

The fire as we've gone through our SKU rationalization and getting the right types of products into the marketplace is something that I feel good about where we are on the Canadian market.

Alright, great. Thank you for that and then second quick one for me just on the International front, you talked about some changing dynamics within Israel that are occurring right now just given Israel has been a big market for Canadian Lps.

<unk> had some slowdown in terms of growth within Germany can you talk about your outlook for 2023 in terms of P&L and revenue.

As a slowdown in Asia do you think incremental growth within the current Jeremy medical market.

Without explanation for adult use will be enough to offset that three still see some meaningful growth on the international side. There. Thank you very much yeah yeah.

Yes, hi, and thanks for the question and so in terms of the international markets I'm going to separate out Israel for the moment, we absolutely see growth in our FY 'twenty three numbers.

In Germany as well as other countries that have come online and as you know outside of Germany within Europe . Most of the other countries are still fairly small, but we do see growth accelerating in various countries.

For instance, I'm looking at the U K and even though Luxembourg is pretty small so a good size opportunity for us.

And this quarter, we just received our market authorizations for polling both on Colgate branded as well as the private label customer as well and we are looking to see some big opportunity in Holland in France, The medical experiment and in March of 2023, and we are expecting France to legalize.

Medical cannabis.

And thereafter, and we are well positioned there with about a currently in the plan will be about 25% share of the customer base.

Or I should say patient base and we are very confident that we'll be able to maintain a good market share. There. We also see Italy, and Spain also making.

In conversation about medical legalization, which we think are also a big opportunity.

You are right we are not so bullish on Israel. We believe that there is a large oversupply in Israel caused by Canadian Lps shipping into Israel I think what has happened in the marketplace is that as you look at product and an oversupply happening in Canada, Israel with a place.

Where large amounts of product could be uploaded but now that has resulted in an over supply to that market and what we're seeing is patients numbers sort of stagnating and sales declining and if you look at the marketplace. There is a lot of them.

Price discounting with a special deal to for one three for one.

And.

So therefore, we're kind of hitting a little bit of a pause there and looking at what is the right strategy for that market.

Okay, great, Thanks for calling and I'll jump back in the queue.

Our next question is from Tony Chan with BMO capital markets. Please proceed.

Hi, Thanks for the question.

I'm just wondering you've done a really good job at.

Achieving the cost synergies and we can really see that and be part of this gross margin this quarter.

Just wondering going forward.

In terms of balancing the cost initiatives that you have with the quality of the products I recall when you did have that.

Stumble and your flower quality with last year or something like that.

There was the focus on really improving the cost synergies, but as a result, some of the product quality, especially on flower deteriorated a bit. So I just wanted to better understand what has changed what changes have you made in the business. So that going forward you're identifying more of these cost synergies that you want to achieve that there is.

I'm going to be a bit of a VP in terms of quality deteriorating or just not be nimble enough to keep up with trends in the claw back market.

Thank you tammie and thank you for your complements.

Number one.

Like I said before yes, we had some quality with flower, we knowledge that that's over a year ago.

I think with automation last year with some key issues.

In regards to ventilation, but yes.

That is six to eight months behind us in regards to our quality and the other thing you heard me mentioned just in the flower.

<unk> heard me mentioned is where there's a lot of change going on in the marketplace in regards to pre roll and that is where some of the bigger growth is coming from so number one yes. The team has done a great job in regards to taking out costs, but I will tell you. This year none of that has been taken out to affect quality number two we've invested capital in <unk>.

Automation number three we've invested capital and ventilation in regards to <unk>.

<unk> houses in the heat that we endured.

Endured last summer so.

Feel good that costs are not here to hurt our quality and we're in a good place here on regards to potency at some of the genetics that we we have in place today and in regards to the mix of the product.

With some of the new products are coming in and.

The evidence is there by the amount of new products that are being accepted.

By the different control boards.

Kill rate definitely tailoring products.

Got it. Thank you that was it for me.

Thank you.

Our next question is from John Zaro with CIBC. Please proceed.

Thanks, Good morning, I wanted to start on free cash flow.

What was free cash flow in the quarter and on your free cash guide uniting this disclosure being positive in your operating business units. There should we interpret that as it may not be positive on a consolidated basis for F. 'twenty three.

Good morning, John So.

In the quarter.

Free cash flow, it's pretty generally accepted measure we were we burned about $26 5 million.

And that our forecast for next year is positive free cash flow for the year.

And we're saying that's going to be across the <unk>.

This operating gains so.

I'm not sure where youre getting back.

One one or more of that might be negative.

We're forecasting positive for the year.

And John in regards to catch up.

This year a lot of it is as you came into our seasonality a big part of it is just building out our inventories.

As we go into <unk>.

Some of our busy seasonal time, so that's what a lot of the cash was useful.

Okay understood and then my second question is on the EBIT Guide just I'd like to better understand this youre, calling for call it $25 million to $30 million of improvement from F. 'twenty two.

Got the $15 million and incremental synergies from the legacy a three year deal Youre targeting presumably 40 million in savings from the exit deal. If you split those cost savings equally.

Now calling for an additional $30 million in cost savings you mentioned earlier in the prepared remarks, and 5 million saved already.

So just can you help us kind of square all of that or are there multiple incremental costs, you're incurring is it more that the timing of these synergies into F. 'twenty four 'twenty three just anything you can help us understand that would be helpful. Thanks.

Well number one it is.

Timing not everything starts Q1, so I mean, a lot of the savings and synergies are spread out throughout the year. So it's an annualized basis.

You bet, we will get over the next 12 months and.

In regards to hexcel some of it is interest which is not in EBITDA.

And.

The other thing is as we continue to grow our business.

Youll see our G&A grew up as we continue to invest in the infrastructure of building out the business here. So.

Yes.

We bring on some of the axle production and we just not getting the Exxon for nothing.

We have to provide services, which will include adding additional head count adding additional people here. So there is through G&A offsets some of that coming in so number one it's timing number two not all of it is.

As interest, which would go into EBITDA here and three there is offsets from additional <unk>.

So in regards to us, adding to our infrastructure and G&A.

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

Thank you.

Our next question is from Matt Bottomley with Canaccord Genuity. Please proceed yes.

Good morning, Thanks for taking these questions. Maybe this one is just for Karl just wondering if I could get a little more color on the $395 million of impairment charges and lifted some of the.

Some of the factors that went into that is there anyone that's more.

More of a contributing factor obviously with sector valuations.

Continued to decline that's something that a lot of Lps and other companies have had to deal with when it comes to how much of the severity of these impairment charges independent of how operations are going so im just curious how that factor is implementing the charge versus.

Independent assumptions, you have on growth or risks or things like that in your business segments.

Thanks, Matt.

I know in your background.

<unk> as well so I know you understand this is topic fairly well first off I just want to reiterate that impairment is a noncash charge.

Secondly, there are a number of factors that go into the calculation.

Sure.

An impairment when market situations dictate that right and so if you look at what's going on in the market right now.

Actively in a recession if it is not formally been called the recession, yet, we've got lowering stock price and market cap values for entities.

Got interest rates that are that are rising a key component of calculating impairment when when required to calculate impairment is what is the discount rate inside of that discount rate one of the key interest rates is the risk free.

Rate of return and so we have all of those pieces impacting our numbers as we looked at our future cash flows coming out of the canvas business. We also had to adjust for change in currencies. The Canadian dollar is down against the us dollar.

We also had to factor into the equation expectations on inflation.

And so I think when you put all of those together I would say it doesn't really change the pace.

Beliefs of what is coming out of the candidates division, but some of that conversion of those pieces.

Into the calculation has caused that difference which resulted in us.

Not that it would be noncash impairment.

Got.

If you look at the $395 million number a portion of it is sitting in.

Inventory and that was really us getting a free a one ready to take on some of the <unk> production.

Bet that they're going to do as well as us transferring some of the some of the production on some products.

<unk>.

We have about $160 million to $171 million of it was goodwill related and the rest was related to intangibles.

Got it very helpful. Thanks, and just one other question for me and it's more of a crystal ball type questions, but specifically in the.

The Canadian market is there anything that stakeholders and investors can look at when it comes to potential tailwind on the regulatory front.

It looks like some of these committee meetings have been pumped it further down the road with respect any changes, but when we look at.

How high the excise taxes or is it relation to wholesale pricing.

It is now kind of a saturated now even a retail environment, particularly in the Toronto area, Matt just anything that might change for the better that maybe is out of Tel ray or any lp's control, but something that you guys are hoping for cautiously.

So I'm going to let Barry answer that but I think it's an excellent question and were spending a lot of time on.

On the Canadian market listen, we think with regards to the number of Lps the number of retail stores will change dramatically.

But till Ray everything has grown and produced within our facilities. So youre getting consistent grow consistent quality, you'll see what our margins are you'll see where our efficiencies are so with that.

I feel good about how we're positioned I am going to let Blair speak in a second but he is working.

With the Canadian group that is talking to the government, sometimes youre talking to yourself. When you are talking to the government in regards to excise tax, but we're out there.

It's been delayed in regards to the way the government is going to look at the cannabis market, but there absolutely has to be changed to go on in that market and if you come back and think about illicit cannabis has contributed over $20 billion in taxes over the last three and a half four years $6 billion in building out infrastructure of one one.

Third 50000 jobs in Ontario alone I think it was $500 million of contribution from cannabis last year. So it's contributing a lot of tax dollars is contributing employment, but back to your point about 35 cents of every dollar that.

That we produce goes towards taxes here. So the government is doing well, we still can't advertise we still cant go out and talk about our products. So there's got to be changed.

And we're pushing for it but anything you want to add to that yes, no. What I would just say is we're very active with C. III.

And I would say from an LP standpoint, the group is very aligned and we had a very successful event in <unk> back in May.

So while we don't have the crystal ball and I know you alluded to that certainly we do think that as Irwin said that we need to see some big change in the regulatory environment th.

THC elements are being adjusted in a couple of categories, which is a positive move.

We expect to see something from health, Canada today, hopefully around CBD.

Certainly there is theres just a lot of.

Punitive measures going on whether it be size of our advertising. So we continue to push really hard I would say, we're very active with the with the council and we will continue to be.

Great. Thanks, I appreciate all that.

Our next question is from Michael Lavery with Piper Sandler. Please proceed.

Thank you and good morning.

Good morning.

I just wanted to come back to Israel.

It was Aaron's question I know, we touched on this a little bit but.

You had mentioned the potential sale.

And then your reluctance to execute it but it sounds like you pointed to market conditions, maybe instead of something customer specific.

Is it entirely driven by the market and then just to clarify when.

When you talk about I think maybe you said it is on a pause do you have zero sales to Israel in your guidance for this year.

Non zero sales, but we're down on sales listen I think again Israel.

Slide 7 million people. It was a big market I think it was an area where a lot of sales within there there is three things.

We've got multiple markets, we sell into over 20 countries.

We're looking at where there is growth opportunities.

I think theres lots of change going on in the <unk>.

You can sell into Israel and different regulations, there and last but not least when we sell something we need to get paid so that's important.

Yeah, and Michael just to add on to that because what our incentives exactly on point about payment obviously wanted to sell and we want to get paid too and there has been some issues that had been experienced in the market with with payment.

I think also the other thing is there is a.

A lot of changing regulatory environment in Israel, where.

Yes <unk>.

Additional pesticide testing there are additional requirements that are put on almost like an arbitrary fashion, but the one thing I would add you asked the question of whether we had our factory no sales to Israel. We are actually factoring in sales. We are looking at it strategically in a different fashion, where we would rather than simply.

Having bulk sales building to Israel. We are looking at is building out our brand building out the tollgate presence in Israel.

One thing to note I think which is which.

I think is important is that kind of a supply chain perspective, our facility.

Certified totally compliant we are all ready for the additional pesticides putting that comes online. So we are in fact ready to sell the Israel, if and when we decide that it is the right market.

<unk> is on the right terms for us and we're one of the only ones with the right certification to be able to selling days coming out of our Portugal facility instead of coming out of Canada.

So.

We will sell.

When it's right and we will sell knowing we're going to get paid for.

Okay. That's helpful and just would love to follow up with a portfolio question, you've mentioned wanting to pursue more acquisitions in beverage alcohol.

You've also talked about the benefits of the heck. The arrangement you have now and potentially how it could go further I guess, maybe how do you.

Is there a order of priority between.

Two of those and what would it take what catalyst or you're looking for or what conditions would it take for you to want to.

Pushed the relationship with XO further to say like a consolidation or a.

A bigger ownership stake in the equity.

So number one with hexcel I think listen at this has been a great.

Deal for fill rate and again its a great deal for hexcel theres lot of sharing going on here.

And you are taking a number one and number two company and ultimately will they come together.

Good chance, but I think as you look at the marketplace.

You can look what they haven't grow what we haven't grow if you look at the efficiencies and Thats, what the Canadian market needs.

I always say this there was over 800 Lps.

There's too much growth there and you wanted to be able to grow in your own facilities to be vertically integrated in with til Ray wants is to be vertically integrated on its own grow on is on distribution.

Our brands today, we have 12 brands.

So very much is not a branded company other than <unk>.

Ingredient company and I think the complementary where we are very much a branded company, where we're vertically integrated on our grow we have the distribution.

<unk>.

Canada is about 3700 38 million people in you've got two provinces that represent about what.

Three quarters of the.

Population and sales.

But I think what's important here is consolidation there makes sense no different than the consolidation with <unk> a free it made sense, we will take over $100 million of cost out just think additionally, what we would take out in costs until Ray and XO comes together.

In regards to.

The beer or spirits business, we like that business, we think its great adjacency in regards to the cannabis industry on numerous fronts number one if you look at the three tier system that Thats what comes into place is going to go through alcohol.

Distributors.

We use southern Glazer, which is one of the largest distributors.

In the U S and Canada with.

With regards to our salespeople on the street, there's great margins in that business.

I would love to have the multiple that brown forman or <unk> has thats okay. So.

If you think about it there's a lot of adjacencies. The other thing is we are looking at the wellness category in a big way today.

As <unk> builds out its branded consumable business and we think we have great experience in the wellness area.

And we think Theres a lot of Adjacencies there in regards to our Gen Z or Gen X and.

In baby Boomer consumers.

That's helpful color, maybe just one.

A follow up you mentioned the three tier system for alcohol.

What gives you confidence that the candidates would be handled the same way on any federal legalization in the U S.

I don't have any listen.

Don't have any confidence.

The crystal ball, but.

The three tier system has worked well in the alcohol, it's not going away.

It's been here forever.

I think if you look at it the three tier system may be the way it would go.

And one thing today I'd say this year.

In our spirits and alcohol business today, we have a business that has alcohol in it we love to have a business that has spirits and beer with THC or CBD and then we have an infrastructure of distributors today.

That distributor beer or spirits business. So if.

<unk> has happened is that the case, we can put whatever we own in the U S. Right in that distribution system, which is a big asset no. One else has that in the cannabis industry today and that's why we want to grow that and the same thing if you come back and look some of the biggest opportunities out there will be beverages that are infused with THC or <unk>.

And food I mean, I see what's happening with our Manitoba harvest business and our hemp infused.

There is no reason you can't buy potato chips that are not infused with THC or CBD, one day or yogurt that has it spread on top of it so.

We have setting the infrastructure for a lot of these things to happen.

Without knowing what's going to happen, but we will have a circled in every way.

Okay. Thanks, so much.

Our next question is from Scott Fortune with Roth Capital Partners. Please proceed.

Yes, good morning, a lot questions here real quick just one for me maybe for Denise on the international side.

Thanks for the ethane, Germany legalization progress here and commercialization by early 2024, but what are you seeing from the competitive environment there in Germany.

What are you seeing on the pricing pressure potentially there or what.

Kind of a little bit update on the Germany competitive in pricing.

Great.

Yes, sure Hi, Scott So in terms of the competitive landscape in Germany, both on I would say extract and how far we are seeing.

More and more competition come into the space.

Moller entrants are coming into the space and are posing competition, we continuously watch the competition and stay ahead of the trend I think one one thing first mover advantage definitely with key here.

Germany German market is not an easy market just to enter and Theres a lot of high barriers to entry one first and foremost the registration for products, which requires stability testing of radiation permits.

That process alone can take 12 to 18 months to complete.

And also we're looking at not only on the regulatory side, but we also have very high quality flower.

Actually just this morning, we received feedback on one of our screens and it's been how did it one of the top five screens in Germany. This morning, So we will continuously.

Looking at our market entrants and we're continuously compete on high quality flower innovation.

And I'm also watching pricing as well right now we're seeing on pricing that on dried flower within the marketplace could go as low as $3 50 Euro.

Still are seeing our average pricing around 50 Euro price point. So we're very pleased with that and we think that.

<unk> ability to maintain pricing at that level is having a very high quality product in the marketplace.

We're also obviously supplementing all of that with education of health providers.

And patients as well, we just launched our we care.

Our web site.

A couple of weeks ago, which provides a plethora of information for both health care providers and patients and so we continue to build brand awareness and continue to maintain high quality flower.

Across our portfolio.

Thank you.

Thanks for that color.

I'll leave it at that thanks.

And our final question from Pablo <unk> with Cantor Fitzgerald. Please proceed.

Good morning Pablo.

Good morning. This is actually Matthew Baker on for Pablo. Thank you for taking my questions.

I'm going to focus on the German market.

Are you able to consistently ship flower from Portugal to Germany, as we've been hearing different things in the market regarding these types of shipments and then could you just remind us of what what you source from Canada versus Portugal regarding the German market. Thank you.

Yeah. So thank you for your question I am not hearing or anything about issues shipping from Portugal in fact, our fifth.

Actually it's the first time I'm hearing of that we shipped into Germany, almost on a weekly basis, so not really sure.

Yes, Im not sure where you got that comp sign from the.

The question is around adult use legalization, we also have our facility in Germany.

Which is.

Right now providing medical candidates to the German government, but there is plenty of room for expansion there in the event of adult use well.

There is adult use and we believe that we can provide adult use both from Germany, and we are working on the ability to provide some portugal as well.

Okay got it. Thank you for that and then just for my follow up question as you guys kind of alluded to it in your answer but in the scenario that Germany decided to only import recreational candidates from within the EU would you guys need to do anything to adapt for this.

Yes, so we have capacity within our facility today to allow for the production for adult use we as I mentioned to you we have the ability to expand.

An increase that production quite a bit and we.

Also believe that given the fact that we weren't the first company to provide medical cannabis to the German government. We've developed a lot of trust and rapport with German officials. We are also currently.

Speaking with German officials as they build out that framework for adult use as we.

Provide our experience in Canada in terms of what worked in an adult use legalization what has been problematic in adult use legalization theres, obviously, a lot of questions and I give a lot of credit to German officials as they are trying to learn and understand what would be best for the German market, but I think the important thing is this year.

I don't think theres enough capacity anywhere to immediately be able to supply the German market, but <unk> is the only company that does have two facilities.

Within Europe of scale and size.

It took additional capital and we could.

Absolutely expand and both have been no hall have the ability to do it and if we were allowed to ship GMP certified.

Byproducts in Canada, we can do that too. So we are well prepared for the European market upon legalization and we're probably the only company that would be able to do it.

Thank you for the color.

Thank you.

Turn the call back over to Darren to ask the retail shareholder questions.

Thank you operator, and the first question from the retail shareholder group is what are you doing to stop the price the stock price from plummeting.

Thank you Barak and actually.

A good question.

And I hope you heard today, what we're doing I hope you heard within our results if you come back and look.

And I just recently came back from a board meeting and presented what kill Ray and previous a free has done over the last couple of years.

Regards to bringing this company together our plan of how we want to become a $4 billion company and absolutely that does include <unk>.

<unk> happening, but today, we are diversified company that is in medical cannabis adult use cannabis spirits and beer and focused on wellness.

We have an excellent team were focused big on our brands, we're focused on our consumers and important it goes back to this question how do we get back to our shareholders.

In regards to going into next year being free cash flow positive adjusted EBITDA.

Increasing our EBITDA and building out our consumer package goods company, that's focused on many categories and areas, where the adjacency to the cannabis industry listen I wish I could go down to Washington Tomorrow.

Knock on President Bush and knock on Congress and Senate and you get.

Yeah.

<unk> sorry.

Get legalization two.

To happen, but we can't.

I think legalization will happen over the next three to four years.

And.

We will be set in regards to our brands, our infrastructure and have it well surround it and with our balance sheet. It gives us opportunities to be out there to do different things and I think that's what ultimately which will increase shareholder value, which increases our stock price.

Thank you Irwin the next and last question is how will you position yourself in order to enter U S market.

Listen I think again I go back we are well positioned today.

We are well positioned in Canada in regards to brands or grow our knowhow and knowledge, we have the largest cannabis growing facility in the world today that has the ability to grow 265000 kilos, we have two facilities in Europe that grow.

So with that we know how to grow we have 12, great brands in Canada.

We have uniqueness and innovation there.

We havent today between Sweetwater between Green Flash Alpine Nelson and our Breckenridge businesses, and our Manitoba harvest business we have.

Brands and businesses.

With infrastructure and distribution in the U S Army, Manitoba harvest distributes products to 17000 stores. If you think where we sell our beer business and our Bourbon business today and you look at the different distribution. So we know how to build brands. We know how to build businesses. We know the adjacencies that are out there.

We have the strong balance sheet to do it.

And with that depending upon legalization.

And if it's one day merging or buying with one of the larger msos, we have the ability to do that and we won't forget about mad men.

And have an optionality on Mad men is something we have that upon legalization. We could go ahead and acquire Mad men, which has a strong brand name that can be used in multiple products throughout the U S. So we have at circle and let me tell you it's difficult running a business with a lot of unknowns out there.

Are dependent upon regulation, but I think what we're trying to do is build out infrastructure build out areas. Upon legalization that we can pull it altogether.

Thank you.

So with that that ends our call for today.

It's been a tough year 2022.

Regards to cobot.

So closures in the Canadian market in regards to have in vaccine cards to enter stores.

Regards to trying to keep a workhorse together.

In regards to inflation in regards to.

Changing out a lot of our growth integrating our free until rate together with the savings acquire.

Acquiring breckenridge business acquiring green flash alpine.

Businesses and.

I think we've accomplished a lot in regards to what we are able to do.

We built out a very very very strong management team that can take till right to the next level.

Our deal with Hexcel and joining with the number two.

LP in Canada.

With that I think we're well set and well positioned for a strong strong 2023.

Listen, we don't like where our stock is just like everybody else.

Market conditions, I think we're in some tougher times, but with that till.

Ray has definitely tightened the belt, we've taken cost out we're well position on our balance sheet, we're well positioned on our cash we're well positioned in regards to our margins, we're well positioned on our grow.

Got a good diversified business here, so I'm excited about where we're going and I'm excited about what we can do and last but not least we're focus to return to our shareholders at what we can do with that so with that enjoy the rest of your summer.

And thank you very much for joining our call today.

Thank you.

Thank you. This does conclude today's call you may disconnect. Your lines at this time and thank you for your participation.

Yes.

[music].