Q4 2023 Tilray Brands Inc Earnings Call
[music].
Hello, and thank you for joining today's conference call to discuss two great brands, Inc. 's financial results for the fiscal year 2023, and fourth quarter ended May 31 2023.
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 retail shareholders conducted via the Sei technologies platform.
<unk> submitted an uploaded through the Sei technologies platform has already concluded and the company will read aloud and answered to top questions.
It's now my pleasure to turn the call over to Mr. Rita. Please go ahead.
Good morning, everyone by now you should have access to our earnings press release, which is available on the investors section of the Cray Brands' website.
<unk> Com and has been filed with the SEC and SEDAR.
Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Yeah.
The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP.
In addition, we will be making numerous forward looking statements during our remarks and in response to your questions.
These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect.
Actual results could differ materially from those described in these forward looking statements.
The text in our earnings press release includes many of the risks and uncertainties associated with such forward looking statements.
Today, you will hear from key members of our senior leadership team.
Irwin Simon Chairman and Chief Executive Officer, who will begin with opening remarks, and Carl Merton Chief Financial Officer.
We will provide a financial review and issue our annual guidance for the 2020 for fiscal year <unk>.
Also joining us for the question and answer segment are Denise I'll, just check chief strategy officer and head of international.
Blair Mcneill President two rig Canada anti Joe Moore, President of our U S beer business and now I'd like to turn the call over to Tilbury brands, Chairman and CEO Irwin Simon.
Thank you Barry and good morning, everyone. We appreciate you joining our call today for the presentation of tail Ray brands 20, twenty-three fiscal year financial results.
When I first joined the <unk> team in 2018, a free you were singularly our Canadian cannabis L. P with approximately $50 million in annual revenue and minimal cash now close to $630 million in revenue and almost $500 million in cash.
And marketable securities Boy have we come a long way.
Today Gil Ray brands is one of the most diversified global cannabis lifestyle and CPG companies with four distinct and complementary business segments.
Candidates, including medical and adult use beverage alcohol wellness and medical distribution not a bad place to be.
I'm very proud of what this team has been able to accomplish in just four years.
Till raised diversification is purposeful strategic adaptational to current market realities, given the continued delays in U S. Federal cannabis legalization and more recently delays in adult use legalization in Germany.
Kill rate is not building its entire business model around the eventual promise of legalization.
But rather unlike others in our sector, we are diversifying beyond cannabis by building a strong balanced portfolio consisting of successful profitable standalone beverage alcohol and wellness brands in the U S along with a strategic distribution business in Europe .
Each with high growth opportunities in their own right.
Legalization will happen one day, but we're not waiting for it we're not dependent upon it.
If and when federal cannabis legalization does happen, we are ready to dominate as the leading global CPG company with the resources infrastructure and operations the distribution of brands sales and marketing Knowhow to lead the revolution of cannabis CPG and the <unk>.
Main Street World.
Delray brands portfolio today reflects the successful integration of key strategic acquisition.
That has enabled us to both grow our topline and deliver substantial cost savings through these synergies.
Today across our core business segments to array is one of the leidy and strongest cannabis Lps with approximately $660 million in annual revenue on a constant currency basis.
Most profitable L P with approximately $61 million and adjusted EBITDA, the cannabis market leader in Canada, and the largest federally legal cannabis market in the world with approximately 13% cannabis market share, including Hexcel brands the.
The market leader in medical cannabis across Europe , with leading market share in Germany, Poland and Luxembourg, a leader in the hemp food industry with a 51% branded market share with Manitoba harvest and last but not least a leader in the craft beverage alcohol industry with a growing.
<unk> position in the U S craft beer industry as the ninth largest craft brewer by sales volume.
Our vision is to inspire and empower the worldwide community to live their very best lives enhanced by moments of connection and wellbeing and we have not wavered, nor has our overarching objective to deliver sustainable long term shareholder value and growth.
We remain wholly committed to delivering for our shareholders tangible progress against our key performance goals by focusing on our core business fundamentals, which are <unk>.
<unk> revenue growth and profitability, realizing the benefits of optimize asset utilization and cost management to ensure that we maintain a low cost high efficient cost structure.
And number three of course, continuing to strengthen our industry, leading balance sheet and cash position.
Case in point in quarter, four <unk> reported record financial results and delivered on projections of positive adjusted free cash flow and EBITDA guidance with Q4, net revenue of $184 million and 93% growth.
And positive adjusted EBITDA of $22 million or.
Our total revenue for the year ended May 31, 2023 on a constant currency basis rose, 6% to $668 million in the prior year adjusted gross profit grew 11% to $206 million and adjusted gross margin improved.
33% from 30% in the prior year.
We generated $61 million, and adjusted EBITDA, 28% or $13 million higher than last year and within our annual guided range on top of these results. We have maintained a strong foundation with almost $500 million in cash and.
Marketable securities today.
Turning now to our business segments.
Cannabis was our second largest segment by revenue and comprised of 35% of our total mix in Canada within our cannabis segment <unk> remains the market share leader with approximately 13% share in the months of June and July .
Revenue from our Canadian adult use cannabis increased due to new product innovation and performances and the favorable impact of the hexcel, Raven, which was partially offset by the negative impact of price compression and challenges in the province of Quebec.
Ray has paid approximately $120 million and Canadian excise tax and corporate income tax to the Canadian government and fiscal 2023, and we expect this to increase to $150 million with the addition of hexcel.
The imbalanced tax burden is an added challenge we continue to face in the Canadian cannabis industry with the majority of these taxes coming off top line sales and of course impacting the bottom line.
I have said this before but it merits repeating roughly 1000 Lps 3700 retail stores are far too many we need consolidation for the Canadian market to stabilize we remain confident this consolidation and right size, we will continue to take hold.
<unk> over the coming quarters.
Last month, we set the stage to drive the next evolution of Canadian cannabis by closing on our accretive acquisition of Hexcel, which has strengthened our position across Canada.
In doing so we brought its leading cannabis brands into our operations and increase till raised number one leading cannabis market share. The 13% 577 Bips ahead of their next L. P.
From a product category perspective kill rate continues to lead cannabis sales in every market across Canada.
Now as number one in flower oils concentrates number two and pre rolls and number four and based in that top 10 of all categories.
In fiscal 'twenty, three till raised Canadian cannabis product innovation contributed $26 2 million Canadian towards adult use sales quarter.
Quarter, four new product innovation was 42% of our business led by our market leading adult use brands good supply with a launch of good supply monsters and mechanical with the launch of Canada Darts. The first two of their kind of products in the Canadian cannabis market.
We also prioritize the realization of additional operating cost synergies in excess of $22 million on an annualized pre tax basis of our $30 million plan in Canada, eliminating duplication and corporate costs SG&A and realize the substantial <unk>.
Synergies and cultivation packaging logistics extraction and quality control.
Again before I joined the company the legacy of free you till Ray Hexcel management teams spent over $1 billion.
On greenhouse and infrastructure today, our management team and I are laser focused on optimizing our operation inefficiencies utilizing and repurposing these facilities into profitable business and assets, including our new opportunities with fruit.
And vegetables cultivation, which is needed in Canada, and especially in the Quebec market.
Moving forward, we will continue to strengthen our Canadian position with extensive commercialization rigor, while capturing substantial value from the <unk> portfolio and our combined scale.
We expect our newly expanded portfolio of Canadian cannabis brands to hit approximately $650 million at retail with our biggest brands good supply and <unk>, leading the charge with approximately $430 million at retail combined.
And international cannabis in fiscal 2023, we turned our business around we changed and upgraded our international management teams across key markets, we improved our profitability and positive cash flow expanded distribution within established international markets and added countries like Italy.
Poland, Czech Republic, which offset our decision not to sell within Israel.
As we look to fiscal 2020 for our international cannabis business, we're focused on solidifying our leadership position and growing market share in medical cannabis in the countries, which we participate in today as well achieving early mover advantage in new countries as medical legalization.
<unk> continues to take hold we are very well positioned to do this based on three core strengths.
Our high quality medical cannabis brands, which are trusted by patients health care professionals and government officials around the world are best in class cultivation facilities in Portugal, and Germany, as well as leveraging our Canadian cannabis facilities.
And last but not least our medical distribution network led by our integrated Cc pharma and medical cannabis teams with our relationship across 13000 pharmacies in Germany.
Based on these trends to date, we've built momentum in Poland and more recently received market authorization from Italy's Ministry of health to distribute three new medical cannabis compounds through our wholly owned subsidiary FL group.
<unk> group is one of the only five companies in Italy that can import and distribute medical cannabis.
We also forged a strategic partnership to market and educate over 11000 pharmacies across Italy on the benefits of medical cannabis and expand our footprint across the Czech Republic through a new export and distribution partnership.
Beyond that the strong platform, we've built and our medical cannabis coupled with our knowledge of stemming from our adult use market share leadership in Canada, and our deep CPG expertise of our leadership team.
Positions us well to capture the adult use opportunity as it materializes in Germany and elsewhere.
And in the event that only in country cultivation is allowed in Germany. We are one of the three companies that actually have a facility here to date.
So we're well situated and have the optimal flexibility to pivot in response to any change in pending regulations.
From a bottom line perspective in Europe , we are laser focused on optimizing our platform working to remove approximately $8 million of costs from our business of which we've already completed over $6 billion.
In fiscal year, 2023, Cc pharma, which will be rebranded to <unk> pharma, our medical distribution platform for traditional branded and generic pharmaceuticals as well as medical cannabis grew 10% in constant currency and generated $285 million.
Revenue, representing 43% of our topline and expanded its gross profit margin to 11% from 9% compared to previous years as we put our ties high margin sales.
We see this as a major platform to expand into distribution of cannabis and wellness products throughout Europe .
Tail Ray pharma provides the benefit of an established pharmaceutical relationship and differentiated through customers centric services and drive still higher profit margins through the ongoing positive change and its product assortment.
While we're not planning our business around adult use legalization, Germany. We note. The proposed legislation proposals for medical cannabis to be classified as a narcotic and may be prescribed through a medical prescription, thereby opening the pathway to accessibility to a larger patient population.
We are using our <unk> pharma distribution platform and relationships to help expand our medical cannabis business throughout Europe and at the same time using this medical distribution company to sell traditional medicines in Germany.
Now turning to our beverage alcohol in CPG portfolio, while participation that adult use cannabis markets are integral to our long term strategy. Let me reiterate that we will not engage business that touch the plant if cannabis remains federally illegal in the U S.
In the meantime.
We are optimizing the value of our existing U S businesses, which consist of craft beverage alcohol brands and wellness brands, all which are delivering solid performance as today and have the potential.
Our significant growth in the near and long term future.
Till res growing U S. Beverage alcohol segment includes strong award winning brands Sweetwater Brewing Company Montoc Brewing Company Alpine Beer company re Flash Brewing company Breckenridge distillery and a highly award spirits brands of world's best blend.
Whiskey.
For fiscal year, 2023 beverage alcohol grew 33% to $95 1 million for the year.
Sweetwater saw revenue gains driven by partnerships with key distributors, United distributors Eagle rock distribution radius beverage group the largest beer distributor in the U S.
Creativity is a hallmark of our beverage alcohol brands, resulting in a steady stream of product launches that drive ongoing attention and excitement for our brands in the last few months Sweetwater released a line of ready to drink mixed cocktails and it can a red white and blue.
American Lager in our Colorado, Orange Citrus ale exclusively in the Colorado market.
Since our acquisition of Montoc brewing, we've expanded Mont talks distribution by approximately 42% with.
With the brand now available in over 7500 retail locations across New York, New Jersey, and most recently, Connecticut, and Rhode Island, we are confident it can be a national brand by leveraging our national beverage alcohol infrastructure and we're working quickly towards that.
Our U S beer business awful watch good supply beer.
Our new light beer and premium lager brewed brand for easy drinking as a refresh at a refreshing price.
Good supply of beer is available year round, and a 16 ounce cans across Georgia, Connecticut, New York with added distribution rolling out this summer.
Finally, our Bourbon spirits brand Breckenridge distillery.
<unk> used to build momentum. It is one of the most awarded craft distilleries in the U S and firmly establish its position as a category leader today Breckenridge distillery is distributed all 50 states and align nationally with R. R and D C, including a distribution contract.
Guaranteed nearly 30% sales growth annually.
Our beverage alcohol and wellness brands can also be leveraged for cannabis related opportunities. When the time comes through the creation of broad set cannabis infused CPG brands and products, which can be backed by their existing distribution and marketing networks.
Turning now to our wellness segment, our Manitoba.
Business is greater than 50% market share with a branded hemp seed in the U S, including strong presence in the new low and natural channels and as Canadian market share of nearly 80% are till Ray wellness business continues to deliver positive EBITDA free cash.
Cash flow with Q4, being our strongest quarter of fiscal 'twenty three.
Our wellness platform remains an important part of our U S strategy with our clear growth drivers in the near and long term, including a never increasing consumer interest in hemp products given the key role. They can play in plant based low carb and keto diets distribution.
<unk>, including whole foods markets in Walmart, demonstrating the relevance of hemp products across the channels and consumer demographics.
Strong innovation pipeline, including the recent launch of CBD wellness beverages like happy flower that meet the needs of Gen Z and millennial consumers.
And with that we're excited by the opportunities provided by our diversified businesses and we remain steadfast in delivering on our strategic priorities maximizing revenue and growth optimization and maintaining our balance sheet strength.
I will now turn the call over to Carl to discuss the financials in greater detail Karl.
Thank you Irwin.
I am pleased to report that we exceeded both of our financial guidance targets that we laid out for the fiscal year.
With respect to adjusted EBITDA, we exceeded the low end of our target range of 60% to $66 million reporting $61 $5 million.
And with respect to adjusted free cash flow, we exceeded our target of positive adjusted free cash flow reporting $1 3 million for the year.
More importantly, we generated over $40 million of adjusted free cash flow in the quarter and on a fiscal year to fiscal year basis, we improved our adjusted free cash flow by almost $200 million.
These accomplishments are a testament to the hard work by our team managing operating expenses and cash flow along with our determination to control the controllable at.
At the same time this strengthens our balance sheet, which I will explain shortly.
But first as a reminder, our financial results are presented in accordance with U S. GAAP and in U S dollars and we will reference both GAAP and non-GAAP adjusted results throughout our discussion.
And as Ben mentioned earlier, our earnings press release contains a reconciliation of our reported results under GAAP to the non-GAAP measured identified during our remarks.
Before reviewing our annual and quarterly performances I did want to briefly discuss our favorable refinancing in late may which further strengthened our balance sheet extended maturity to 2027 and locked in a lower fixed interest rate of five 2%.
Recall that as of February 28, 2023, we had just under $140 million of Tory convertible notes due on October one 2023, and just under $260 million of a free of convertible notes due on June one 2024.
The refinancing extended out those maturities on $125 million of the convertible notes.
Rather than using our cash, which we are reserving for investments and strategic acquisitions, we sought to refinance a meaningful portion of our debt.
Accordingly, we did not do this to raise money for working capital purposes or to pay off previous losses.
One of the consistent themes, we heard from the institutional investors that purchased the convertible notes was that we were the only company in the world with a presence in the cannabis industry that they currently would have invested and because of our history of financial results the confidence they have in our strategic plan and the.
Management team, leading the company as well as the strength of our balance sheet.
Those same institutional investors are now net long in our stock and assuming they convert the notes into common shares will increase the percentage of institutional investors in our stock.
Let me briefly discuss highlights for the full year before reviewing the fourth quarter in greater detail.
Net revenue for fiscal 2023 was nearly even at $627 1 million compared to the prior year at $628 4 million. However in constant currency net revenue grew 6% to just under $668 million.
By segment cannabis net revenue fell 7% year over year.
Were positive 2% on a constant currency basis.
Inclusive of over $33 million due to price compression in Canada.
Virtually all of this also represented a reduction in EBITDA.
And wellness revenue was down 11% year over year or 9% on a constant currency basis. However distribution revenue was flat.
Rose, 10% on a constant currency basis.
In beverage alcohol revenue increased 33%.
Gross profit for the year increased 26% to 147 million from $116 8 million in the prior year and gross margin increased to 23% from 19% in the prior year.
Adjusted gross profit increased 11%.
Just over $206 million from $186 million in the prior year.
And adjusted gross margin expanded 300 basis points to 33%.
By segment cannabis adjusted gross margin improved due to the hacksaw arrangement distribution adjusted gross margin improved due to favorable product mix.
Beverage alcohol adjusted gross margin fell because of margin contributions from the Montauk in breckenridge positions, which operate at a lower margin in Sweetwater.
While wellness adjusted gross margin was basically even.
Net loss for fiscal 2023 was $1 4 billion compared to $434 million in the prior year net.
Net loss for the year is tied to our annual goodwill impairment review as discussed in our previous quarter.
From an adjusted net loss perspective, our loss was <unk> 21 per share compared to 38 in the prior year.
Adjusted EBITDA for fiscal year, 2023 improved to $61 $5 million a.
A record for our company up 28% from $48 million in the prior year, we have now generated positive adjusted EBITDA in four consecutive years.
Turning now to the quarter net revenue increased by 20% to a record amount of $184 2 million from the prior year quarter.
While on a constant currency basis, net revenue rose, 24% to $189 6 million from $153 3 million in the prior year quarter.
Gross profit for Q4 was $67 1 million and gross margin was 36% compared to a loss of $67 million and a negative 4% gross margin in the prior year quarter.
Adjusted gross profit for Q4 was $68 4 million up 36% from last year, while adjusted gross margin rose to 37% from 33% in the prior year quarter.
Profit and margin gains were a direct result of our implementation of numerous cost saving programs, including offsetting part of our allocated overhead for intentionally reducing candidates production and contributions from the hacksaw arrangement.
Recall that when we reported Q4 2022 last summer, we announced a $30 million cost optimization plan.
Through May 31, we have achieved $22 million on an annualized run rate basis of which $18 5 million represented actual cost savings during the current year.
Net loss was just under $120 million compared to a net loss of just under $460 million in the prior year quarter.
On an adjusted basis net loss was $34 million or zero cents per share an improvement from net loss of $44 1 million or zero cents per share in Q4 last year.
Adjusted EBITDA almost doubled to a record amount of $22 2 million from $11 5 million in the prior year quarter.
Operating cash flow for Q4.
<unk> by $64 1 million to $43 6 million from a loss of $20 5 million in the prior year quarter.
This was the result of improved operating efficiencies realized through our synergy programs and management of our working capital requirements.
From a free cash flow perspective in Q4, we reported $33 3 million of free cash flow and $43 2 million of adjusted free cash flow, which excludes growth capex.
This compares to a negative free cash flow of $24 8 million in Q4, a year ago.
The improvement is due in part to the reduction of working capital.
Of course cash used in or provided by working capital changes is expected to fluctuate on a quarter by quarter basis.
Note that for the full fiscal year adjusted free cash flow was positive $1 3 million, representing an almost $200 million improvement from the fiscal year 2022. These.
These metrics certainly demonstrate the steps we have taken to better balance revenue and costs across all our business units.
Turning to our business segments.
Gross cannabis revenue was comprised of $214 $3 million in Canadian adult use revenue.
$43 6 million and international cannabis revenue.
$5 million in Canadian medical cannabis revenue and $1 4 million from wholesale excise taxes totaled $63 $9 million. So they are clearly a significant impact to our gross revenue.
For the full year, we paid almost $120 million Canadian and exercise and corporate taxes to the Canadian government.
And with the addition of <unk>. So expect this to increase to approximately $150 million Canadian.
This substantial tax burden adds to the challenges facing the cannabis industry today.
More importantly, <unk> is one of the few licensed producers in Canada that pays taxes, when do and is not using the government as a de facto financing arm.
Q4, net cannabis revenue was $64 4 million, representing a 21% increase from the year ago period.
The variance was mostly related to the hexcel arrangement.
On a constant currency basis net cannabis revenue increased by 28, 6% as the decline in the Canadian dollar and Euro resulted in a $4 $1 million decrease to foreign exchange losses.
Rice compression, while slowing continued to have a marked impact on our results.
<unk> gross profit was $39 5 million in cannabis gross margin was 61% for the quarter compared to negative $19 1 million and negative 36% in the prior year quarter.
Adjusted cannabis gross profit increased $39 5 million from $28 4 million in the prior year quarter.
While gross margin increased to 61% from 53% in the prior year quarter.
The margin improvement was related to continued cost optimizations offset by the impacts of price compression as well as a decrease in the utilization of our cannabis facilities to manage demand requirements.
The distribution revenue derived predominantly through Cc pharma increased 18, 7% to $72 6 million from $61 2 million in the prior year quarter. Despite the strengthening of the U S dollar relative to the euro.
On a constant currency basis revenue would have actually increased 21% to $73 4 million for an additional 800000 of revenue.
Distribution gross profit was $6 7 million and distribution gross margin was 90% compared to a loss of $4 million and negative 7% in the prior year quarter.
Adjusted distribution gross profit increased 91, 5%.
$6 7 million from $3 5 million in the prior year quarter.
While adjusted distribution gross margin increased to 9% from 6% in the prior year period.
Similar to Q3 the year over year increases were the result of a positive change in product mix and our focus on our higher margin sales, including the decision to exit that the medical device reprocessing line.
We reiterate our expectation that we can still drive higher business profits, even without increasing revenue as our facility is nearly fully utilized.
Turning to our beverage alcohol segment, we generated $32 4 million in net revenue up 42, 6% from the prior year quarter of $22 $7 million.
The positive Delta was due to contributions from our Montauk Flurry acquisition last November .
Expense of product innovation and increased distribution.
The renewed traction with our Green flash and alpine brands and the building acceptance of Sweetwater in California.
Beverage alcohol gross profit was $16 6 million and beverage alcohol gross margin was 51% for Q4 compared to $11 4 million and 50% in the prior year quarter.
Adjusted beverage alcohol gross profit was $17 8 million compared to $13 6 million in the prior year quarter, while adjusted gross margin was 55% down from 60% in the prior year period.
The slight margin decline as a result of the <unk> acquisition that was not completed in the prior year comparison and operates at a slightly lower margin since we water.
Finally wellness segment revenue decreased eight 8% to $14 8 million from $16 2 million in Q4 last year.
The decrease in revenue was due to a reduction in customer inventory levels at warehouse locations across North America, and a pullback on margin dilutive non branded sales.
Led to top line decreases in the quarter versus the prior year.
Wireless gross profit was $4 $4 million down from $5 million in the prior year quarter and gross margin remained relatively consistent at 30% from 31% as we countered the impacts of higher input costs of seed ingredients with higher pricing.
Our cash and marketable securities balance as of May 31 was $448 5 million up from $415 9 million in the year ago period, and today sits at approximately $500 million.
And working capital was $341 million.
Let's now discuss our guidance for fiscal year 2024, which ends on May 31 2024.
Adjusted EBITDA is expected to be $68 million to $78 million.
Renting to growth of approximately 20% year over year.
We are also projecting positive adjusted free cash flow for the year from operations, excluding our cost to integrate <unk> and the cash income taxes, we pay at a free diamond.
To conclude we delivered on our guidance for fiscal year 2023, and have set the bar even higher for fiscal year 2024.
In addition to projecting meaningful growth, we will be continuing to optimize our cost structure minimize capex improve our industry, leading balance sheet and drive additional free cash flow.
With that I will conclude our prepared remarks and open the lines for questions from our covering analysts.
Afterwards, we will take a few questions from our shareholders through the same platform <unk>.
Operator, what's the first question.
Our first question today is coming from Vivien <unk> from TD Cowen. Your line is now live.
Hi, good morning.
Good morning.
So congratulations on the strong trends for us top line exceeded expectations across every segment, which is quite nice to see if we can just start with.
Adult use cannabis segment best revenue generation you guys have seen in nearly eight quarters. Despite the price deflation that you called out. So a two part question. Please number one just from a housekeeping standpoint would you would you be able to quantify the impact of the price deflation you guys called that out in the last couple of quarterly earnings calls.
One and then number two in terms of the overall improvement that you guys are seeing in the business can you articulate whether there are any kind of positive mix shift.
That contributed to the strong gross margin for the overall segment. Thank you.
Good morning, Vivien I'll jump in for part of it but what we've said about $30 million of Christ price compression throughout our fiscal 2023 that hit us and that comes right off the top line and the bottom line.
And the good news is I feel that is behind us and I think <unk>.
<unk> has definitely stabilized.
In regards to <unk>.
What's growing cannabis that I'm sitting next to Blair Mcneil, who runs our Canadian operation here in recreational.
We've introduced some great new products, we have really come out.
In regards to the.
Potency the genetics.
Consumers knowing their genetics I think consumers are so much more educated about cannabis today we.
Really improved our distribution and I think what's important too.
Please our boots on the street working with our Bud tenders and getting them educated about our til rate brands.
I got to commend the team for some of the innovation that we came out with Blair do you want to add to that Yeah. Let me, let me say.
Maybe in the one thing in terms of your mix shift as Youll see that on Khanna Cowen Rasp, we've really grown our mainstream flower presence.
With good supply we know we dominate the value segment <unk> growth has come right into mainstream higher margins for us. So our innovation is really really driving our P&L right now in Q4, we had 40% of our sales come from innovation.
We had 121 new products launch in fiscal 'twenty, three and we've got a tremendous pipeline built for the future. So we're very very optimistic about the.
The path forward and our shipments in early in Q1 indicate that we will continue to see that strength and maybe I think the other important thing is how much cost we have been able to take out of our business, especially from a cannabis side.
And thats done throughout the year. So we don't even have a full year of those costs coming out.
We get to enjoy the next year and just to be clear we closed on <unk> in June So theres no hexcel numbers in here and actually Theres a lot Blair and his team has to do.
To offset some of the declines on <unk>. So we think there's some incredible opportunities where <unk> can pre rolls with flower with oils and edibles. So we're excited about what we're seeing there is still challenged as you've heard me say theres still a lot of Lps out there. There is still a lot of retailers. There is still an illicit market we have to deal with but.
Sitting today with a combined 13 share that's almost double what our next competitors and Blair's just sitting here is showing me some new share numbers until ray.
Most recently just came out and very impressive.
Thank you as a reminder, that star one to be placed in the question queue and the interest of time. We ask you. Please ask one question then return to the queue. Our next question is coming from Andrew Carter from Stifel. Your line is now live.
Thanks. Good morning, So wanted to ask about the adjusted EBITDA base here 61, 5 million. If you strip out kind of the hexcel fees that you've got which will there'll be a wash on cash flow of course, you go down to like an adjusted EBITDA number of $31 million. So I'm getting next year's growth at 38% to 48. So a couple of things in there year, one heck so we will.
It be positive EBITDA contribution are you expecting a big step change in the Canadian kind of profit base could you give US a reminder of how much incremental synergies are left and also kind of how.
Are you leaning on kind of beverage alcohol profit improvements and is there any projected M&A in those numbers. Thanks.
So Andrew just first off there is no projected M&A in those numbers.
With respect to the.
<unk>.
The adjusted EBITDA for Q.
So I mean, yes that's.
The current year.
Statements have the actual arrangement next year, we're going to see <unk> into it we've been very clear that we were going to drive approximately $25 million of synergies through that transaction I think everybody can kind of take excellent run rate at their last reported quarter and put those two numbers together and we'll understand a little bit better where.
Where we're thinking.
That comes in within within the portfolio, but as Blair as already said, we have a significant amount of innovation that is going to continue to drive results in.
Candidates, we have a significant amount of innovation that drove results this quarter and will continue to drive results in future quarters coming through the beverage alcohol portfolio, particularly in the in the beer Division.
And then as it relates to cost synergies.
Approximately $8 million left to achieve on the on the cost optimization target from last year.
On the Canadian cannabis business and $12 million to actually flow through the income statements still become Andrew I think the big important thing here is somebody jump in here for a second is the growth and the opportunities with the Hexcel brand. We really think there's a lot we can do with <unk>.
You heard me say on his pre rolls and flowers.
Already we've integrated the sales into our sales organization, our marketing into our marketing organization matter of fact, we are sitting in Gatineau, Quebec today, where we're doing our call from and already we've eliminated in Blair's confirmed in the first month and a half of owning this.
We've hit our succeeded our synergies and savings and taking costs out of this business. So with that yes, there's a lot of wood to chop to achieve that EBITDA, but the big thing with XO and owning hexone operating at what were kind of surprised with what we like we like what we're seeing is some of the opportunities.
<unk> did not have the growth in the Quebec market XO has grown in Quebec as to Quebec.
Company, we see tremendous opportunities with <unk> in the second biggest market in Canada in the Quebec market and also what we're seeing.
Out west in that so.
We feel good going into this year with a combination of XO to array in the older for your brands.
Thank you. Our next question is coming from Owen Bennett from Jefferies. Your line is now live.
Good morning, guys hope all well and I just wanted to follow up on <unk> question around Canadian Idol E. So going very well in flower oil concentrates Primo way in limbo, while on a machine the goal will be to be number one across all segments. I was just wondering what you think you need continuing.
Sure that and also the other <unk>, where you have less strong I mean anything you want to call out in terms of investment excitement Damien to try and convince Andy Nigel the segments. Thank you.
Yes, I'll take that.
Thanks, everyone. Great question I think if you looked at our most recent <unk> numbers you would see some meaningful change in how we've gone to market. We've had two great innovations there.
One is rocket bomb and the other one.
As watermelon.
They both done very very well, but overall, we've added note pieces to our vape suite upgrade at our hardware and our potencies across the board have increased tremendously so big big Shout out to our extraction team. They worked hard in that category as you know thats a category over the last little while where we've lost share so I'm very.
Confident in our in our abilities and our innovation pipeline on vape.
In terms of your question around being number one in all categories.
Category instill faith pretty raw flower that do between 80 and 90% depending on the market. So.
Beverages edibles and some of the other smaller categories.
I would say in those categories, we think about margin first and we think about what they add to our business from a margin standpoint, and think about how strong we want to be in those categories at that time.
Do see beverages, and edibles long term as being recruitment category. So we'll always have a presence there, but I think we'll think thoughtfully about when we release our scale up in those categories.
Thank you next question today is coming from Aaron Grey from Alliance Global Partners. Your line is now live.
Hi, Good morning, and thank you for the question I wanted to turn a bit to Germany, you mentioned before your thoughts on the medical market removal of candidates from the narcotics Lis opening up the medical market more in terms of physician adoption and patient growth. So I just wanted to in terms of your thoughts on that and the potential the offset of the phase one of <unk>.
Usually because they should potentially having an impact on the medical market like we've seen in Canada and other U S states with adult use.
Following medical growth and then how you're also looking at potentially phase two.
Germany legalization opportunity Sam Thanks.
Hi, Aaron it's Denise.
Good question I think when we looked at Germany.
The last few calls we were talking about adult use.
Getting ready for it I think at this point you've mentioned, we see a delay in any sort of adult use legalization, but as you mentioned the newest draft legislation talks about the removal.
Medical candidates and kind of some general answer narcotic, which we believe presents a great opportunity to our business. We are very well situated from a medical perspective in the sense that we've got great brands that are trusted by patients doctors regulators within Germany.
One of the only.
Three that have us still.
<unk>.
In Germany.
And so we have very good relationships within country.
So as we look at our medical brands, we will continue to grow our medical brands in a way that we have we also are very focused on looking at what we are calling the patient driven side of the market. We're seeing basically a patient driven side, where people are very focused on flower flower quality.
It is more of a wellness.
Health perspective, but not so much.
Medically prescription driven where its looking at condition, it's looking more like wellness state and we're going to focus on this tremendously there will be a different approach from the medical the purely pharmaceutical base and we'll be looking at it more from like a wellness perspective, how do we interact with doctors and pharmacies in that way we will be looked.
At different different brands going to market et cetera, and we actually did this in Australia. Just this Pat this quarter, we launched broken coast. So stay tuned I think the most important thing is we're there we have facilities are already both in Portugal, and Germany, we have a distribution with <unk> pharma Cc pharma.
Sure.
We have infrastructure on the streets.
We're working with the German government in many ways and I think listen we're disappointed that if legalization doesn't happen, but theres a second route to recreational through the medical world that we think there's a big market there.
And.
Again like I said, we're disappointed but we think there is opportunities and selling.
Different way as consumers look to get medical but ultimately use it for recreational.
Thank you next question today is coming from Nadine <unk> from Bernstein. Your line is now live.
Hi, Thank you for taking my question just coming back to the point on guidance can you offer any commentary on that adjusted EBITDA growth guidance that have been on an organic basis. So excluding the addition of pack. So it would just be good to get a sense of what you expect from the core business versus the base that we just had reported.
Today, and then I am glad that you called out seeing price stabilization could you put some numbers around that is it just that the compression is where do you think are you actually seeing it fully stabilize and hitting a floor. Thank you.
So I think I already answered the question on adjusted EBITDA, Andrew had asked about the EBITDA coming from <unk> in the current year and then.
How that would evolve next year.
We've said, we're targeting basically $25 million of synergies off their existing run rate.
From their last reporting date that that involves.
Minor decrease in EBITDA coming from Hexcel directly over the course of the next year and the rest is being driven by growth within our existing businesses.
Turning to blur the question on canvas, yes, certainly on the price compression side I would not say.
It's stabilized.
Price compression by category is directly tied to.
Skus saturation and if you look at some of the latest categories, where you've had pretty large growth.
You will see that they are still relatively under skewed relative to some of the other categories. So I definitely see it flattening out and in areas like flower and.
Some aspects of pre roll, but there are other categories, where I think youll continue to see some compression, but we're also seeing the different governments, putting in some price pricing there to stabilize pricing and I think thats going to be important the Ontario government has just gone ahead with that so ulta.
Emily.
As we see.
<unk>.
Cannibalization out there. We're also going to see Lp's go away and I think that stops a lot of the price compression out there so again.
I think I have always said the cannabis industry is one of the only industries that I havent seen inflation net price compression, but I think.
We will see some but I think it's about a $30 million that we saw this year nowhere near that.
Okay.
Thank you. Your next question today is coming from Timmy Chen from BMO capital markets. Your line is now live.
Thanks. Good morning. My one question is we saw one of your other competitors recently really callout this phenomenon.
Inflation.
AHD potency labeling cherry picking testing results.
I'm just wondering what your perspective on that it sounded like from your commentary.
Which I think had been kind of going around in the industry for a bit of time apparently.
Accelerated over the last recent months thanks.
Hey, Tammy its Blair.
From a this is not a new phenomenon.
When you think about the regulatory environment that we live in.
There is there is a very narrow communication that you can have around your brands and so THC has always been leading that.
Think back to a year ago.
Anything over 20% mid Twenty's was was recognize now the potency has gone up and I think what people forget is.
Commercialized.
Cultivation.
Greenhouses aren't sitting still they are all looking at ways to improve the yield of the flower theyre looking at ways to improve the quality and some of the flower and THC goes along with that so we.
We don't see it being any different than what it's been in the last 18 months.
It's an area, where we continue to know that we need to be there we need to be consistent with the market.
But ultimately what we would like to see is some relaxation of the regulatory environment. So we can talk about other attributes beyond THC.
Thank you. Your next question today is coming from <unk> <unk> from Canaccord Genuity. Your line is now live.
Hi, Good morning. This is Darren King on for that modern Lee. Thank you for taking my question.
I just wanted to come back to Aaron's question about Cc pharma distribution revenue for.
For the quarter was sequentially up 11%.
So I guess could you comment on any puts or takes on the quarter that drove that sequential increase and going forward should we anticipate this topline to grow given that Germany is looking to expand their medical program as part of their pillar along with recreational legalization plan.
Hi.
So I think in terms of the way that we track distribution revenue is actually exactly appointed separately from candidates. So even though cc pharma may be involved in the P&L logistics and dealing with customer service and other asset quality management pertained to medical cannabis, we track medical cannabis revenue within our <unk>.
Canada segment and the distribution revenue in our distribution segment, we are not focused on growing topline distribution revenue, even though you can see a very large increase in distribution revenue. We have made tremendous improvements in the team in terms of procurement and distribution of traditional pharmaceutical.
And so that is the topline growth that youre seeing as long as as well as the mix and the gross margin improvements because we have been focusing on higher higher margin products.
Our longer term strategic goals with respect to <unk> pharma are not necessarily to focus on topline generation in the traditional pharmaceutical area. We will continue to grow the top line, but you will see more of that growth.
In the medical cannabis side, what we're projecting around a 30% CAGR over the next couple of years, whereas in distribution, we're focused more on the lower lower single digit market.
Tankers.
But.
<unk> will continue to play a much bigger role in terms of three PL quality management customer service to the pharmacy and that's the role that will play within our platform.
Thank you next question is coming from Johnson <unk> from CIBC. Your line is now live.
Thank you. Good morning. My question is on <unk> and the integration and historically sales of the acquired brands have fallen pretty meaningfully post acquisition. So I know, it's only been a month since you closed that deal, but I wonder what you can say about ex us sales in the months since you've owned the business either on a retail basis or sell into wholesalers and can you talk about some of the plans yet.
Place for ex those brands to ensure you sustain the sales levels from pre acquisition do you want to rationalize some of those brands are there new skus or categories coming from the acquired brands any additional color there would be helpful. Thank you.
Thank you John So I'm going to turn it over to Blair in a second but I think like with any acquisition you have SKU rationalization, you have product rationalization I think what's important in the hexcel acquisitions, There's a company called <unk> that has been credit both pre roll business incredible flower.
Business.
So theres a lot of growth and throughout the year, there was lots of challenges within XO.
And didn't really have the sales organization out there that was needed. So yes. There has been a decline in sales, but I would tell you. We closed on June 1st June 2nd. This team took over and has now got our GNP grew our group added cubic's selling that rose so we're all over it.
It will take some time and we will have to clean up some of these lower margin skus, but we see tremendous opportunity with the <unk> brand.
Bolt on flower oils, and especially the pre rolls with already supplier, yes, I would say look.
In the past what you've seen in acquisitions is the industry not quite as stable as it is today.
I know that sounds.
Crazy given some of the conditions, we've seen in the marketplace, but.
I would say till Ray the work we've done on the backend of our business around our cost savings around our processes on the backend just made us more ready to absorb the <unk> business.
We've read.
Rebuilt their demand and supply plan completely.
Already up some of their logistics, so youre seeing better shipments better fulfillment on the order side.
And as Irwin said, we see tremendous commercial opportunity for improved distribution around their cigarette style pre roll business, where they are a leader and a pioneer and then on mainstream flower as I talked about earlier on the call.
<unk> flower in the mainstream category. We think is is under indexed and we see tremendous opportunity there so I.
I don't think Youll see the track record that declines that may be up happened in previous M&A, I think what youre going to see it as very quickly we're going to stabilize that business and start to build on it in the marketplace and in the cannabis industry.
Two strongest brands today are good supply ready camp.
And in our acquisitions I mean, good supply we built from scratch.
And with Reddit candidates, the second biggest brand within the cannabis industry. So it's one of the first times, we've ever really acquired such a strong brand within cannabis and combined at retail the two of them are what seven $800 million at retail sales combined between.
Our half 1 billion between rhetoric and good supply at retail sales.
So we're looking for some big opportunities there.
Thank you. Our next question is coming from Michael Lavery from Piper Sandler Your line is now live.
Thank you and good morning.
Just was wondering if you could touch on maybe a little bit higher level some of.
Where are the priorities and focus are.
Through the lens of capital allocation.
I guess just looking at some.
Breakdown youre.
Biggest segment is the distribution revenue the fastest growing has been beverage alcohol, but of course.
Typically you think of <unk> as a cannabis company as a starting point.
Talking about pushing into vegetable cultivation, I guess, just help us understand in terms of maybe where you are spending or focusing the most what the leader.
Kind of.
Driving the ship or do you love all your children equally just help us think about the level of prior to the prioritization between each of the buckets.
So number one I have four kids I love them all equally most days.
Number two is we have four distinct businesses here.
I love them all most both space most most days, Okay. I think if you step back for a second.
Look at our Canadian cannabis business, and our positioning here and our investment and you heard me say earlier on in my remarks, we've invested.
<unk> us put prior ownership over a $1 billion. So we have 5 million square feet of assets today in regards to greenhouses.
Have to use those and ultimately repurpose them.
To repurpose them into vegetables, we're not looking at major capital allocation here, we're not looking at major capital allocation in regards to our grower in our processing.
Our cannabis business and if anything we're looking at how we can take more and more cost out how we'd become much more efficient here in those businesses.
So yes, there will be some capex, but nowhere near what we spent because we're sitting with.
A lot of capital that's already been divested in regards to our beer and our businesses and our spirit businesses again.
<unk> talked about our growth on our spirits business with Breckenridge, it's great to see what's happening with Sweetwater right now under <unk> leadership.
Acquiring montauk.
That is growing at 30%, 40%, we're now not only the fastest growing beer in New York as we move into New Jersey, and Connecticut. So yes, we will continue to invest in that segment of the business.
In regards to Europe 600 million people in Europe too.
<unk> countries today sell medical cannabis, we see a tremendous opportunity and we see that spring boarding into recreational through the medical world. So again, where our margins. If you look at our business today, It's a third Canada third spirits and beer.
Beer and its a third in regard to our medical distribution listen our medical distribution is nowhere as near the margins that the candidates or the spirits business has but it is a great vehicle to drive distribution through the cannabis business and Thats, what you heard to say before we will.
Use that to drive our medical cannabis business. So again, we are a diversified company upon legalization. All these businesses come together and we think we have great brands, whether Sweetwater Montoc Breckenridge, one day could be cannabis brands in the U S. Upon legalization.
So.
We will spend accordingly, we will allocate but every one of these are important because they are a big part of our growth and the nice thing is they are all nicely growing today and they are in markets and the ability to grow and a lot of markets, where there is a tremendous amount of growth for us.
Thank you. Your next question today is coming from Federico Gomez from ATB capital market. Your line is now live.
Yes.
Hi, Good morning. Thank you for taking my question. My question is just on the you said when you in Canada right now we have 13% market share nationally Liza do you have any specific goal for this year in terms of growing that share and maybe taking advantage of some of the difficulties your competitors.
They're facing and just talking about the pricing environment to gain share would.
Or would you need to be more aggressive on pricing or are we at a point where now you think you can you have other levers to pull here to to Navy.
Gained share over the near term as the market consolidates. Thank you.
Thanks for the question I would say in terms of our goals, obviously, we want to grow and we want to continue to grow.
When I think about how we do that I don't think we have a target in mind, but we continue to look at each of the segments each of the categories and so if you think about what I talked about earlier with flower on the <unk> side, we don't have a huge presence in mainstream we have broken coast.
That the premium side, we have good supply it's a value side. So mainstream is an area, where we think we continue to grow and continue to build our presence.
So all of our growth strategies are really at that at the category and segment level and we think theres a lot of runway for us to do that moving forward.
The price compression side I definitely think it stabilized to <unk> point in some of the categories.
I don't think it's at the point now where we can think about.
Optimizing our revenue and building our pricing I don't think we're far away from that environment. If you look at the.
The capacity in the industry over the last.
12 months, even theres been a lot of capacity pulled out so I do think the industry is going to stabilize from an inventory standpoint, and once that happens I do see the opportunity for us to think about.
Optimizing our revenue versus thinking about price compression.
Thank you everybody I think that has our last question for today.
Thank you very much for joining our call.
Thank you very much for your interest and fill rate.
Before I conclude I'd like to say, thank you to all my team members that I've worked with the management team or board members, we have over 500 employees.
<unk> operating facilities around the world and I'm proud to serve our patients or consumers and just as important our shareholders out there.
And being today in 21 countries.
And with a lot of interest in the cannabis world a lot of interest in the beer and spirits World and a lot of interest in regards to our distribution medical business, where an exciting company with a lot happening and as I go back and I said earlier on my remarks in 2000 late 2018 2019 were 50 million.
Company and today approaching which we want to get to that $1 billion in <unk>.
Theres a lot we've done there's a lot we can do and there's a lot we will do with what we've built within their <unk>.
<unk> team has demonstrated adaptability, we've had strong execution skills and some tough categories in tough markets and some tough times, where we've operated excellent diversified our business and I think thats whats really important today and I know as I sit here and listened to a lot of the questions coming at us with regards to the cannabis world, but boy are we doing some great things with.
In the craft beer business, we will change that industry craft beer is pool, it will become cooler and some of the stuff that we're doing with Sweetwater in Montauk.
Some of the stuff that we've done so far in regards to breadth and reach and our bourbons and some of the wins that we've had and being number one is just tremendous our balance sheet, which is so important today cash is king.
Sitting close to $500 million of cash and have the ability to invest in our business has the ability to invest in acquisitions, having the ability to market our brands, where we can and let consumers know about our branch because our brands are cool and our brands today resonate with Gen Z Gen X millennials et cetera.
With that we have tremendous opportunities out there.
Over the last couple of years, we've done some great accretive acquisitions, we will continuously look at the acquisition world.
And if you look at where we are today being that leader in Canada in regards to.
Our cannabis world that leader, where we are on our medical cannabis in regards to Europe and the opportunities are just think with the cannabis world legalized and something will happen in regards to legalization, whether it's medical cannabis, whether it's recreational cannabis whether it's a safe bank, we really look and expect something to happen.
But the thing is today with til rate, we're not dependent upon legalization.
Our diversified company, we have cash flow, we have a business that our growth. We're a diversified categories. We're in 21 different countries around the world. So we have some exciting things so with that I'd like to thank everybody for joining us enjoy the rest of your summer and more important enjoy some of our great products out there. Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.