Q2 2024 Tilray Brands Inc Earnings Call

Presentation

Operator

Thank you for joining today's conference call to discuss Tilray brand's financial results for the second quarter of fiscal year 2024 ended November 30, 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 by audio. I will now turn the call over to Miss Berrin Noorata, Chief Corporate Affairs and Communications Officer.
Thank you.
You may now begin.

Thank you, operator, and good morning, everyone. By now you should have access to the earnings press release, which is available on the Investors section of the Tilray Brands website at Tilray.com and has been filed with the SEC and Cedar.
Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from these described in those forward-looking statements. This text in our earnings press release contains many of the risks and uncertainties associated with such forward-looking fifth. Today, you will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer. I will provide opening remarks and commentary followed by Paul Morrison, Chief Financial Officer, will review our quarterly financial results for Q2 fiscal year 2024. Also joining us for the question and answer segment are Denise VocalTec's, Chief Strategy Officer and Head of International flair MacNeil, President of Tilray Canada, and Tiger, more President of our US beer business. And now I'd like to turn the call over to Taylor Brands, Chairman and CEO, Irwin Simon.

Thank you, Darren, and good morning, everyone, and Happy New Year to date you for your continued support of Tilray. Bruce for joining our call today. Over the last several quarters, we have been articulating what truly sets Tilray brands apart. Our diversified business model of cannabis, CPG, lifestyle brands, all operating under a strategy and a vision which we believe will drive our continued growth and future success.
As we've demonstrated by our record revenue in Q2, with the dedication and efforts of our more than 20,300 employees worldwide. We have created a global portfolio of beloved brands and innovative high quality products backed by best-in-class operations facilities and robust distribution that supports our goal of becoming a multi billion dollar company for the states and complementary business segments consists of cannabis consisting of adult use and medical cannabis across a broad portfolio of product formats, including whole flower pre-rolls states concentrates, oils, edibles, topicals and THC infused drugs, beverages, including craft beers, spirits and ready-to-drink flavored malt beverages, ciders and energy drinks and non-alcohol beverages, filmless, which consists of our Manitoba Harvest hemp-based food products, ingredients and snacks, as well as our hemp-based CBD and THC beverages.
And of course, our European medical distribution business, which distributes pharmaceuticals, including medical cannabis in Q2 we continued to focus on organic growth as well as strategic transactions. In Canada, we maintained our number one market share position with our recent exit and trust acquisitions, which drove considerable cost savings and operational efficiencies.
We continue to strengthen our market positions, operations, distribution network and innovation across both medical and adult use markets. Internationally, we continue to grow our existing medical markets and strengthen our Medical Distribution and medical cannabis operations through a relentless focus on cost and efficiency.
And finally, we've extended our beverage alcohol business with our recent acquisition of a iconic brands from Anheuser-Busch, which tripled our beer business and 4 million cases a year in 12 million cases on an annualized basis. We remain committed to our vision of changing people's lives for the better one person at a time Guided by this purpose, we are inspiring and empowering the worldwide community, deliver the very best life enhanced by moments of connections and well-being. At the same time, we've earned the trust of our stakeholders, patients, consumers, communities and partners across the spectrum of wellness and lifestyle products in doing so for delivering on our mission to be the most responsible, trusted and market leading cannabis and consumer products companies across the globe.
In fact, through our strategic execution and achievements, our business are comprised of a leading global cannabis business, operating best-in-class portfolio of brands with high quality products that passed the most rigorous quality control regulations in the world with the number one market share in Canada and leading market share. You're the fifth largest craft brewer in the US with highly sought-after brand dominating key regions across Northeast Pacific, Northwest and Southeast. And one of the most awarded bourbon brands with Breckenridge distillery with recent awards, including best American blended whiskey, best whiskey under $50 and [2003] world's best blended whiskey at the world with the awards and we're also leader in hemp foods and snacks with our Manitoba Harvest brand. Diversifying our business beyond cannabis has put us in a very strong position today and has positioned us well for future growth opportunities. Today, we do not engage in any cannabis operations in the U.S. due to it being federally illegal is that and when rescheduling of cannabis more to happen, in the US for Tilray brands, we expect this would open the opportunity for certain institutional investors to invest until rate, and that were not previously able to to invest in the cannabis industry and potentially provide a path for Tilray to sell pharmaceutical grade medical cannabis in the U.S. subject to DR prescriptions. As you know, Bill is a leading medical cannabis provider in the world with our knowledge and expertise in medical cannabis and the regulatory compliance that applied were well positioned to participate in a federally legalized medical market in the US, our underlying goal for Tilray, bringing this to continue to deliver industry leading profitable growth and sustainable long-term shareholder value through our focus on three fundamentals, number one, maximizing profitable revenue growth through organic growth and expansion initiatives as well as key strategic acquisitions with strong synergy opportunities, realizing the benefits of optimize asset utilization and cost management to ensure a lean efficient cost structure across all our business segments and continuing to strengthen our industry-leading balance sheet and our cash position. During Q2, we generated record net revenue for Tilray brands of $194 million, which marks a 34% growth from the prior year period and generated gross profit of $47 million and adjusted gross profit of $52 million. We also significantly reduced our convertible debt by $127 million in the quarter, an additional $18 million after the quarter and plan to further reduce our indebtedness, optimizing our capital structure and enhancing our financial flexibility.
Now moving to our businesses. We grew our Canadian net revenue by 31% in the quarter compared to the previous year, driven by innovation across all product categories. This was achieved both organically and due to recent acquisitions, despite price compression of approximately $3.6 million from the prior year quarter, which also negatively impacts top line revenue and profitability. Tilray continues to maintain the number one market share position in Canada, the largest federally legal cannabis market in the world with approximately 12.5% market share in adult use cannabis. This is 570 basis points ahead of the Knicks LP. Bill Reilly, Canadian adult-use cannabis sales and is number one in Ontario, Quebec and British Columbia, which represents approximately 60% of the Canadian population on a combined basis. We are also number one in cannabis flower foils concentrates and THC beverages and number two in pre-rolls, number four and date and the top 10 and all other categories, all while operating under rigorous quality control standards.
In Q2, Tilray sold a parcel of 17 million grams of cannabis flower, 19 million pre-rolls and over 1.5 million units of cannabis beverages, almost 5,00,000 base and over 4,00,000 units of edibles in Canada, and we expect to sell 85 million pre-rolls by the end of fiscal 2024 for our August purchase of the remaining 57.5% equity ownership of Truss beverage company from Molson Canada, elevated our market share in THC beverages to approximately 40% and positions us at the forefront of adult use beverage sector where we are trusted by patients, health care professionals and government officials in over 20 countries and achieved early mover advantage in new countries as medical cannabis legalization advances.
During Q2, we grew our international cannabis net revenue by 55% and are the market leader in medical cannabis across Europe with leading shares in Germany and Poland and other countries in which we participate similar to the US. The growth of our international cannabis business is not dependent on adult use legalization. We continue to take an active government relations role internationally. And just recently, we met with various members of German parliament to discuss the proposed regulation and advancing adult use medical cannabis initiative, which we believe will increase the accessibility of medical cannabis to patients in Germany and further work to reduce any stigma of medical cannabis has therapeutical option for are also optimistic about the potential involvement of the tender procedure for in-country cultivation in favor of permit procedures. Providing Tilray with the flexibility to meet the needs of patients. It is expected that these regulations will be passed in the first quarter of calendar 2024. We remain committed to advancing medical cannabis as evidenced by our investments made in Europe behind our high quality medical cannabis products and best-in-class facilities in Portugal, Germany, where we are currently one of the only three companies in Germany that can cultivate in-country as well as our Medical Distribution Network led by our integrated medical distribution company with access to approximately 13,000 pharmacies. We also remain committed to medical cannabis Education and Research. In October, we announced our support of an independent clinical trial to research the efficacy of medical cannabis as a treatment for glioblastoma, Tilray pharma, also known as CC Pharma business, establish medical distribution platform for traditional branded and generic pharmaceuticals, as well as medical cannabis across 13,000 pharmacies as well as wholesalers and distributors from a revenue perspective, it is currently equal in size for our cannabis segment, comprising of 35% of total sales in Q2, it grew 12% from the prior year period, driven by improved procurement of pharmaceutical products and increased demand from a bottom line perspective were laser focused on optimizing our medical distribution platform. In the quarter, we expect the cost optimization plan to reduce costs with our Medical Distribution segment by $1.5 million annually. The actions to achieve these savings were already executed in the quarter, and we continue to evaluate for further cost optimization and production efficiencies.
Now turning to our beverage alcohol business. Beverage alcohol revenue, Q2 was $46.5 million, representing a 117% growth year over year, and we're only getting started in ramping up this segment. The craft beer industry today is still a large category in beverage alcohol with approximately [$21 billion] at retail in 2022. With our recent acquisition of an eight iconic craft beer and beverage brands, we have anchored Tilray leadership position as the fifth largest craft brewer in the US by sales volume. Working with the Boston Consulting Group, we have developed a beverage strategy, identifying new opportunities for pockets of growth across craft beverages, focusing on brand newness, it's more connected to drinkers and by playing the leading role in driving excitement around craft beer to a broader consumer audience through product innovation, marketing, sponsorships and events that connect with consumers across demographics. Bel-ray brand is now uniquely positioned to become a top 12 beer and alcohol beverage company by leveraging our portfolio to a more occasion to core products such as craft beer and beyond through innovation to categories like flavored malt beverages, ready-to-drink cocktails and spirits. This will be accomplished through a three pronged approach. We will deploy a regional approach to scale our brands in key markets across the U.S. and maximize potential of the portfolio to gain share from competitors. We will execute a very focused national brand strategy, revitalizing ShockHound. We have national craft brand by targeting share and connection occasion to reach mainstream male and female beer drinkers through one national brand and many regional brands who provide robust coverage across the U.S. and other countries will expand our innovation strategy to increase brand appeal to new consumers and occasions beyond craft beer and secondary targets. We can also leverage our regional foothold to further grow our brands in new markets by using test-and-learn taxes, which may include multi-brand best of variety packs or installing multi-brand tasks and pass-throughs before entering the market with full distribution we can similarly capturing new consumers and increase off premise consumption through breakneck innovations. We will build on our demonstrated success, growing brands such as Sweetwater and Montage to grow our newly acquired consumer love brands, including startup, BluePoint, Breckenridge brewery and barrel, Redhook Brewery, Widmer Brothers Square Mile Cider and fireball energy. Our strategic playbook is already in play for expand our beverage alcohol business across the U.S. and Canada and getting our cost structure right, transforming the productivity and profitability of the breweries we acquire, we expect our beer gross margins to increase once we fully realize the cost savings achieved in connection with our fully integrated beverage alcohol platform. We are aggressively working to launch new innovations across our beer and nonalcoholic craft brands and expect to roll out new products in Q3 for retailer and distribution. Susie has already provided confidence in our ability to execute on our growth strategy and to achieve our ambitions to grow our beverage segment into a top 12 business.
Finally, our wellness segment is an important element of our U.S. strategy due to strong consumer interest in better-for-you snacks and end products since the Tilray and Aphria business combination, we've turned around the Manitoba Harvest business onto a path of growth and greater potential. Again, product innovation is a core focus needs of Gen Z and millennial consumers who knew him forward snack foods and supplements offering in CBD beverages.
Back to your day from Q2, revenue was consistent of $12.9 million. Manitoba Harvest branded hemp business continues to expand its US and Canadian latest market share since consumption up in both natural and conventional channels. With the brand's top five customers all see growth to conclude, we've set the stage for continued growth in the near and long term and consider opportunities across our diversified business, both numerous and exciting as we continue to disrupt the global CPG industry with products that fuel consumers' needs and change people's lives for the better one person on the time in everything that we do, we intentionally do to maximize profitability sustainable revenue and ensure optimal efficiencies, all while maintaining our balance sheet strength as we invest in our industry leading brands.
With that, I will now turn the call over to Carl to discuss our financials in greater detail. Carl?

Thank you earlier. As a reminder, our financial results are presented in accordance with US GAAP and in USD. We are also referencing both GAAP and non-GAAP adjusted results throughout our discussion today and our earnings press release contains a reconciliation of our reported results under GAAP for the non-GAAP measures identified during our remarks.
Let's now review our quarterly performance for the three months ended November 30, 2023, Q2 total revenue rose to a record $194 million compared to the prior year quarter at $144 million, representing 34% growth and our legacy businesses grew 10% organically when excluding acquisitions and the actual advisory fee by segment cannabis. Net revenue rose 35% in total, with international cannabis up 55% and Canadian cannabis up 41% despite $3.6 million of price compression in Canada price compression not only negatively impacts top line revenue, but also profitability as it would have dropped to the bottom line.
Cannabis excise taxes, which are a reduction to revenue totaled $27.4 million compared to $16.8 million last year. This reflected a sharp increase in cannabis revenue generated in Canada versus the year ago period due in part to the excellent trust acquisitions and a change in our revenue mix. The higher excise tax products note that excise tax is predominantly computed as a fixed price on Graham sold rather than as a percentage of the selling price and therefore continues to become a larger component of net revenue, particularly as current growth categories like infused pre-rolls and concentrates become the biggest part of our sales mix for an excise tax force has been established to present these challenges to the Minister of Finance in Canada. We do not believe some level of reform is likely in the near term, still about two-thirds of LPs have excise taxes owed and this could lead to additional insolvencies and even more industry consolidation, which is needed to stabilize the industry distribution revenue from our Tilray pharma, also known as CC Pharma, our European medical distribution business rose 12%, net leverage alcohol revenue rose 117% and wellness revenue rose 2%. The inherent benefits of our diversified business model are reflected in the segment contributions to our overall revenue mix. We are not overly dependent on any business line from a top line or gross profit standpoint and believe each segment, including cannabis, wellness, distribution and beverage alcohol, are on a trajectory for sustainable growth.
In Q2. Our cannabis segment represented about 35% of our total revenue mix comparable to last year. Distribution segment represented 35%, down from 42% last year. Beverage alcohol represented 24%, up from 15% last year, and wellness represented about 7%, down from 9% last year respectively. These percentage changes from Q2 last year are due primarily to contributions from Paxil truss and the new craft beverage brands acquired in early October next quarter. We believe the mix will balance to approximately 30% cannabis, 30% distribution, 30% beverage alcohol and 10%. Wellness diversification is also reflected in our geographic footprint with about 60% of our net revenue from North America and slightly less than 40% from EMEA with the remainder from other parts of the world.
Turning to profitability. Gross profit increased 11% to $47.4 million compared to $42.9 million in the prior year quarter, while gross margin decreased to 24% from 30% in the prior year quarter, while gross margin for US GAAP purposes declined from the prior year adjusted gross margin, exclusive of the impact of the Hexal advisory fee, which ceased after we purchase XO, rose to 27% compared to 26%. I will discuss adjusted gross margin by individual segment in a moment.
Net loss improved to $46.2 million compared to net loss of $61.6 million in the prior year quarter. On a per share basis, this amounted to net loss of $0.07 versus $0.11 in the prior year quarter. During Q2, we renegotiated a supply agreement between a free and a wholly owned subsidiary and a free environment, a non-wholly owned subsidiary that is expected to result in $33 million annually in additional income being allocated to Tilray shareholders as opposed to the noncontrolling interest Further, as part of this renegotiation, we believe we will save more than $22 million annually in cash income taxes. The renegotiated supply agreement was effective September first, 2023, if its amended agreement had been implemented at the onset of the fiscal year and would have improved our loss per share attributable to Tilray shareholders by $0.02 for Q1, which would have increased the value attributable to Tilray stockholders by [$15 million]. Despite all this, we still expect to pay over $140 million in Canadian excise tax this year. Beginning this quarter, we are introducing two new reporting metrics to our discussions, adjusted net income loss and adjusted earnings per share for definitions of both are identified in the press release, along with the relevant reconciliations and calculations for the quarter, we are reporting an adjusted net loss of $2.7 million, which would be calculated on a per share basis resulted in EPS of zero for the quarter. Adjusted EBITDA was $10.1 million, down from $11 million in the prior year quarter. This is consistent with the termination of the actual advisory services contract upon our acquisition of XO, which represented $7.8 million of the $11 million in adjusted EBITDA in the prior year period.
During the quarter, we continued to make great progress against perhaps a synergy plan, increasing the amount of the synergy from $27 million to between $30 million and $35 million. As of the end of the quarter, we achieved $22 million in annualized savings on an annualized run rate basis, of which $14 million represented actual cost savings during the period. The synergies are being achieved via consolidating packaging, procurement, freight and logistics. Operating cash flow was negative $30.4 million compared to positive $29.2 million in the prior year quarter. The increase in cash used during Q2 this year was primarily related to the settlement of pre-acquisition liabilities assumed in connection with the Axiall acquisition and an increase in accounts receivable in the current period. Also, the prior period included a working capital reduction and the cash collection of $18.3 million from HDI. related to the Hexal convertible note, which did not recur in the current year.
Starting now to our business segments. Gross cannabis revenue of $94.6 million was comprised of $72 million revenue, $11.9 million in international cannabis revenue, $6.3 million in Canadian medical revenue revenue and $4.3 million in wholesale cannabis revenue. Net cannabis revenue was $67.1 million, representing a 35% increase from the year ago period. The positive variance related to increased organic growth of over 11% and the acquisitions of HEX for Wintrust. Offsetting the increase in net cannabis revenue was the elimination of the advisory services revenue from the prior year quarter due to the Exel acquisition, which terminated a previous strategic arrangement that was in place. International cannabis grew 55%, largely because of the expansion into emerging international medical markets. Additionally, in the prior period, the Company recognized a one-time return adjustment of $3.1 million related to a former customer in Israel. Cannabis gross profit was $20.6 million and cannabis gross margin was 31% compared to $21.3 million and 43% from the prior year quarter. Excluding the actual advisory fee and return adjustment in the prior year quarter and the wholesale sale in the current quarter, Adjusted cannabis gross margin increased to 37% from 33%. I would just reference a portion of the decrease in gross profit was a result of the termination of the Hexal services agreement. This agreement contributed nil of gross profit in the current year compared to $7.8 million in the prior year. Additionally, we made a significant wholesale transaction that resulted in negative gross profit of $0.2 million. We entered into this agreement to optimize our inventory levels and prioritize the generation of positive operating cash flow. European distribution revenue derived predominantly through CC Pharma increased 12% to $67.2 million from $60.2 million in the prior year Quarter.
The increase was driven by the strengthening of the euro relative to the USD, increased capacity through outsourcing to third party production facilities as well as leveraging internal production and improved procurement processes has allowed Tilray farmer to improve its product mix. We also continue to be focused on optimizing portfolio and production capacity to prevent constraints on continued revenue growth. Toray pharma gross profit decreased to $7.1 million compared to $7.7 million in the prior year. For a pharma, gross margin decreased to 11% from 13% in the prior year quarter, which was due to product mix. Beverage alcohol revenue was $46.5 million, up 117% from $21.4 million in the prior year quarter. Positive delta was due to contributions from increased organic growth of over 10% and our Montage brewery acquisition last November and the newly acquired brands acquired in early October this year, beverage alcohol gross profit increased to $16 million compared to $10 million, while average beverage alcohol gross margin decreased to 34% from 47% in the prior year quarter. Adjusted gross margin from beverage alcohol from our legacy business was 54.8%, up from the prior year quarter of 47% adjusted gross margin from our newly acquired craft brands was 21% for wind. As previously addressed the efforts we are spending to improve the newly-acquired craft brands, adjusted gross margins levels consistent with our legacy beer adjusted gross margins.
Wellness revenue was relatively consistent at $12.9 million compared to $12.7 million in the prior year quarter. With the increase being driven by a promotional sale at a large US retailer.
Wellness gross profit was $3.7 million, down from $3.9 million in the prior year quarter and gross margin fell to 29% from 31% as we experienced a change in sales mix towards more golf retail sales, which have a lower margin it is specific to this quarter. Our cash and marketable securities balance at November 30, was $261.4 million, down from [$133.5 million] in the year-ago period. The majority of the decrease related to the redemption of the Tilray 23 convertible notes upon maturity in the amount of [$107.3 million], combined with litigation settlements inherited from acquired businesses and Axel exit costs.
Having now completed half of our fiscal year, we are reiterating our fiscal 24 guidance of adjusted EBITDA between $68 million and $78 million. Note that when we first issued this guidance, we projected a significant step-up in EBITDA contributions during the second half of the year, most particularly in Q4, which we continue to anticipate. The step up is a function of our beer business leading up to the summer, a historically busy season. The new innovations scheduled to be launched as part of the spring reset certain volume guarantees associated with our spirits business and our distribution business as pharmacies by involved customers ahead of them going on vacation for call that we also projected positive adjusted free cash flow from operations, excluding integration costs from Exel trust, the newly acquired brands and the cash income taxes related to a three a diamond. We are also managing CapEx and working to strengthen our industry leading balance sheet.
Let me now conclude our prepared remarks and open the lines for questions. From our covering analysts. Operator, what's the first question?

Question and Answer Session

Operator

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

Thank you. Good morning. So looking at back half guidance, I appreciate kind of what you just said, but if I've got my math right, then you need $16 billion to $14 billion of incremental EBITDA in the second half of the year. And then you've got $25 million second half last year from extra fees of $35 million to $45 million of incremental EBITDA to meet the guidance in the second half. Could you talk about kind of stepped-up seasonality, how much that's going to contribute incremental synergy capture year over year or making progress on done kind of ABIR., the ABS craft brands, gross margin, how much of in second half and then kind of one more within this quarter, how much was kind of one-time costs associated with the ABI., obviously, nothing's you excluded that could swing the profit second half and help that number? Thank you.

It's Andrew on. So just in terms of a number of the items. First off, when we look at the heck, so and for us acquisitions, we've increased our synergy target to $30 million to $35 million. We already have $22 million of that and got $14 million of it in the most recent quarter. So you're going to see you're going to see that flow through the store on tax. So our numbers are through the end of the year. We're seeing our increased seasonality in the cannabis and Canadian cannabis business in Q4, and we see increased seasonality every year in the distribution business in Q4 every year, except for the two years of COVID. And that was that's really driven by pharmacies stocking up on medicines in advance of the summer months when a lot of Germans disappear from Germany for their holidays over the summer and they buy in effect. And as you as you go through and if we look at the ABI trends transaction sorry, the newly acquired brands, what we're seeing is even more seasonality than than Sweetwater. And we all know what happened last year was water at Montara in the fourth quarter. And so we see profitability increases there as well. We have a couple of internal cost savings plans that are that are going to net us about $5 million over over the back half of the year on. And we have investing immensely in new innovation for both ABI. and for Sweetwater for that spring reset. And then the back half of the year.

And Andrew, I think the big thing is this year you got to remember we closed on the AVI. deal only two months ago, so we really didn't get any benefits from it. But you got to step back to our beer business was up 10% in this quarter where traditional beer businesses had been down or flat. So we're seeing some good organic growth from our beer business. We're seeing good organic growth from our cannabis business. You saw what happened in Europe. You saw what happened in our Canadian market, and that's even with price compression.
So let's step back.
You heard what we said. We increased our synergies. You know that we're going to get now from the Exxon deal $30 million to $35 million. We were only operating that for about three months. We closed on trust. We're consolidating that business into our London facility, and we have a and major market share on that. So we're well positioned and I think the big thing is how do we take and get organic growth is a key number one number two is cost savings and we put in place very early on for just a corporate here. We've taken out $5 million, $6 million and then focusing on the integration of the actual business, the trust business in the ABI. deal. And then last but not least, we got a lot of innovation coming out in our product line, both in beer and cannabis. So we feel there's a good path to achieve the back half.

A second question just from Canada. You mentioned the price compression ongoing, obviously at a much lower rate but it's still a headwind in the profit. You also mentioned mix going kind of where the consumer is that stagnation? I mean, at a certain point, looking at Canada, do you see the profit pool increasing. And I guess risks, you mentioned two thirds of LPs are paying kind of a regressive tax taxes owed. Do you see any risk there that the number one enforcement obviously isn't happening, but number two, there could be settlements or whatever that could make basically the whole kind of Canada, the adult use market, just a very difficult value proposition overall to where you would kind of reconsider investment in that?
Thanks.

So you'll step back for a second. We also Canada is the only market in the world where recreational cannabis legal. We have one of the largest share. We're number one in Ontario, number one in Quebec and number one in British Columbia, which is over 60% of the population what we're seeing in Canada, yes, we don't like price compression and we got a 12.5%, 13% share with our next competitor out there about 4.5% share points lower at what we have to focus on is a couple of things. You know, more and more sales, number one, number two, taking more and more costs out you heard Carl talked about renegotiating our agreement and taking costs out of our agreement with our grower. And as we bring Hexal in there, we're looking to take $35 million of total costs out of there. But as we grow sales, we will now grow. We will now sell $18 million, $19 million pre-rolls a year.
We'll sell more and more flower. The big thing is organic growth and taking out more and more cost. Ultimately, listen, the industry is only five years old. I come back and I see this here. More LPs will go away more consumers will get educated about cannabis and the cannabis market will grow. I see a big opportunity in the beverage category for us in the Canadian market and the edibles and listen with our infrastructure in Canada and now having a facility in Belleville and London. But it doesn't stop us from going into the beverage business, the beer business, the craft beer businesses or other businesses in Canada to offset some of our costs or interest infrastructure to diversify like we've done in the US. So we're committed to the Canadian market and the we think there's a lot of opportunities there.

Thanks, Al.

Thank you.

Operator

I think as a reminder, to allow as many analysts as possible to ask questions, we ask you please ask one question at this time.
Our next question comes from the line of Aaron Grey with Alliance Global Partners to seize your quest.

Hi, good morning, and thank you for the question from a so from me, I wanted to touch on some of the comments you made in terms of potential rescheduling in the U.S. and opportunities on the medical side, so assuming if it might be Schedule three as many people predicted might be, can you speak to how you think you'll be able to leverage your Canadian in your European expertise as you spoke to prescriptions, I do think there need to be additional steps in terms of the current existing framework of the U.S. participate in terms of selling into pharmacies or do you think you'd be able to utilize that in terms of the existing dispensaries? Were most cannabis medical medical sales are being done? If you could expand upon how you might be able to participate in the US in the event of rescheduling on medical side.
Thank you.

And I think as I've said and I said in my comments, what rescheduling does and medical cannabis legalized. A couple of things. I think it brings in some additional shareholders in regard to still shareholders. It changes the way in regards to some of the banking reform things possibly, but more important medical cannabis now, which is legal in about 10 states, medical cannabis is a big opportunity to sell medical cannabis in the U.S. nationally, where today, we are the largest in Europe and we have a big business in Canada. So taking our infrastructure and hopefully we could import products from the Canadian market or ultimately would we buy something in Europe in the US that would allow us to get into the medical business. But again, we have the expertise. We have the research we work with the doctors. We work with the doctors on writing prescriptions. To date. We work with multiple hospitals, as you heard us talk about doing research on brain cancers and some other sleep apnea some other diseases out there as IV. I mean, we've been doing this now for the last 5, 6 years. So taking that knowledge, taking that research and taking the expertise and we may have to move some of our people here and set up the infrastructure to do it, but it would not be a big issue for us to do it to get into the medical business in a big way in the US.

I'm going to go right next door to the call direct in the queue.
Thank you.

Operator

Once again, to remind you, you should please ask one question to allow as many analysts as possible to ask questions.
The next question will be from the line of Tamy Chen with BMO Capital Markets. Proceed with your question.

Hi, good morning. Thanks for the question. I just wanted to ask if you can talk a bit about how you view your current liquidity position I think you're targeting for this fiscal year to be positive adjusted free cash flow. But that would suggest there's still be other cash outlays you exclude from this, but it would be a burden on your cash balance and you've highlighted a number of there innovation investments in, for example, your beverage alcohol segment. So just wondering how at this point you view your liquidity position, and I view we're in a pretty good shape.

At the end of the quarter, we had close to [$260 million] of cash flow. Our debt bank debt and our subordinated debt, you know, is basically a little over a little less than $500 million and we're working off the 20 fours. So I view us as generating cash investing back in our businesses. And you've got to remember this year, Tammy, as we go into the back half and get more and more with cost savings out of this business and generating more and more cash, neither birds alcohol spirits business, our international business, it helps us to reinvest back in their business. So I come back and see us being in a pretty good place.

Okay.
Thank you.

Thank you.

Our next question is from the line of Owen Bennett with Jefferies. Please proceed a your question.

Morning, gents. Helpful, well.
And just a quick one on the international business.
You mentioned Phil spoke about share and drivers into into the back half and imminently and talk about the international business.
So I was hoping you could just touch a bit more on expansion into new international markets you called out in the quarter and then assuming that the new legislation gets passed in Germany, when can we expect to see a meaningful pickup in terms of number of patients in that market and commission that will also support in the back half of the year?

No, I want to thank you for that. And I think it's important.
As you know, we talked about rescheduling in the US and what our international business has done because it's all medical cannabis and our growth of cannabis. You know, it was over 50% in internationally without, of course, any acquisitions. And the team has done a great job. And I'm going to let Denise talk about that in second. But we have spent some time in Germany meeting with the German government, and we expect some things from that.

So Denise Thanks, Karen, in Ireland. And to answer your first question in terms of the back half. So we have a we have a strategy that looks at how do we grow our existing markets and major markets for us today, as we've talked about our Germany, Poland and Luxembourg.
And then also how do we continue to grow the ones that were that are emerging and we're entering in. We consider those along the lines of the UK, Portugal, Italy and Czech Republic. We are monitoring, of course, of all the new regulations that are being discussed whether Ukraine, legalize this and also looking at Switzerland.
In terms of the medical market, we continue to basically roll out what we consider our go to market strategy, which is to be among the first mover, get that early advantage. We find that doctors are utilize the worldwide knowledge that we have on medical cannabis.
And so as we go into new countries, our reputation in medical cannabis, where we've been looked at as an expert by both medical professionals as well as government and health care professionals we go in, we provide education symposiums and really work to bring the reputation and knowledge of Tilray and each of those markets.
I'm answering your second question in terms of the legislation that's coming on board, we know that in sometime in January, the legislation is going to be in front of the German parliament again on early February and be in front of the state parliamentary system for their review. And we are hoping to see that legislation passed in Q1 of this year 2024.
And then shortly after that, we expect to see the rollout of decarbonization and social clubs as well as the on the scheduling of medical cannabis as narcotic will, we'll see doctors come onboard. We are obviously increasing our educational efforts to bring more and more health professionals onboard with medical cannabis as a therapeutic option. And we're really, really optimistic about future Germany.

Great. Thanks, guys.
Really helpful. Appreciate it.

Thank you.

Operator

Our next question is from the line of John Zamparo with CIBC.
You're correct.

Thank you.
Good morning. I want to get to the change in the agreement with a free a dime, and it sounds like a material wins, just confirming the amounts you now expect to save $30 million to $35 million, typically paid your JV partner and also $20 million plus in cash taxes a year, so $55 million a year annually, the increased value to Tilray just confirming that.
That's that's the change.
And then the question is how did this come about and why did the JV partner agree to it?
Sorry, I have to give up something to receive, Patrick, so the banks are.

Thanks, John, Tom, good question. So just I just want to be clear that because of the way the accounting works for the for for Aphria Diamond, that the number that you thought that you raised in terms of the [33 to 35]. That's going to change the on the allocation of net income or net loss in an individual quarter. It doesn't it doesn't flow through the income statement. It will create additional net income for the consolidated entity. It changes the of the allocation of that income between the JV partner and us. And as it relates to the cash taxes that that obviously impacts our cash balance on it. And it also will that part only will flow through our through our income statement.
And in terms of the negotiation, I think when we when we looked at the agreement and when our when our partner looked at the agreement, they realize that the Canadian market had had changed and we needed to we need to modify the agreement. Obviously, there were there were given takes on associated with that with that agreement. But at the end of the day, we've been able to to modify that and deliver that value to our shareholders.

I think the most important thing is, you know, we have a good partner in the master annuities that have worked with us. I think as we look at the long term of the industry. But the most important thing is we went in there. Price compression has hit this company close to $200 million over the last couple of years. And no, they were not sharing within the price compression. I think there's important here that there was even though there's a there was a time limit on this here, but data I'm walking in there, win-win for both and hopefully we can sell more cannabis. We've consolidated some additional cannabis into his specific into their facilities with the Tilray and some of the Hexal acquisitions and some of the other stuff we're doing. So there was multiple parts of it that made sense. And I think part of that too was in doing that was benefit of some tax opportunities for us. That was very, very helpful. So it was a win-win situation.

Got it.
That's helpful.

Thank you.

Operator

Our next question is from the line of Matt Bottomley with Canaccord Genuity.

Good morning, everyone. I just wanted to follow up with some of Irwin's comments with respect to when you're asked about sort of the value proposition out of Canada and specifically with respect to ultimate market share, at least in the medium term, I know on the back of the sort of Telaria free combination there was there was a hope of maybe getting as high as 30%.
So given the fact that you're, you know, you're 500 basis points ahead in terms of market share of who's number two, how much of sort of increased market share is things that are in your control, whether it's through innovative products versus just continuing to wait for this market shakeout, which seems to be taking longer than everyone had anticipated?

It's a great question. As I look at it and say, we have a 12.5%, 13% market share. And I look at everybody else, you know, there's about another 10% market share. And then I look at the other 800 LPs with 1%, 0.5%. There's a lot there's just a lot of growers out there. I think what we're seeing is either a lot of consolidation or a lot of small LPs going away on originally, I had come out there and said, no, I want a high spec, high double digits or in the 20% or 25% market share you got to remember, we're number one in Canada are number one in Ontario, number one in Quebec and number one in British Columbia, which represents now 60% over 60% of the population. So I think there's good opportunities to grow market share.
But on the other hand, where I look at big opportunities in the beverage category, the edibles category, I think there's some big opportunities in vaping going forward. And you heard what I said before as more and more consumers, the market is growing in Canada. The problem is there's still way too many LPs. There's still high costs with excise tax. And, you know, from a standpoint here, I think we can go to grow in other categories. And that's the big thing and how do we become that low cost producer.
The other big thing in the Canadian market, which we have to focus on is building brands and hard to build brands when the government does allow you to advertise. So how do we advertise within the marketplace and ultimately be within the guidelines of what Health Canada does. As you heard what I said before, I think we have a great infrastructure, great leadership team in Canada. We now have a Belleville facility which we acquired from Moses that can do nonalcoholic drinks. Second, do energy drinks can do water drinks, we do other drinks. So with that, do we expand into other categories and other adjacencies to our cannabis business. But I'm looking for some conditional major growth coming from the beverage category, which I think is from a size standpoint. And I think there's still big opportunity in vapes and edibles category in Canada.

Okay, thanks.

Thank you.

Operator

Our next question is from the line of Michael Lavery with Piper Sandler. Please just use your question.

Craig, you morning. I just wanted to come back to the beverage alcohol segment. And focus on the about recently acquired brands. I know you gave some of the gross margin drivers of just how you've got line of sight on improvement there, but it sounds like you're really expecting to turn the top line around as well. It looks like those it running down cost to 10% or so. Can you just get us a little more confident that you've got some plans that can make that happen. And we've seen that US consumer be pretty fickle sometimes in craft beer, especially. So what is it that would excite them and get these bank credit card brands back to growth.

Good question. I think again, let's come back and look at our legacy brands of Sweetwater, Montauk, Alpine at Nelson and green flash. And you heard what I said, we grew 10% in our legacy beer businesses in the last quarter. So we're growing our current legacy businesses, which is important Could you come back and look at the brands we acquired from ABI. there's some great brands in there. I mean, Shock Top, we talk to people, but shocked often talk to people some of the stuff in Blue Point here in the Northeast Breckenridge brewery, um, you know, a 10 barrel.
So we really have some great brands that you know, from a regional standpoint that may be only sold in certain parts of the country. Where do we expand our distributor base is excited about it. Our retail base is excited about at our convenience store stores excited. So that's what makes me feel good as we've been out there making presentations and talking to our customer base right now, there's a lot of interest.
Second thing is we have a pipeline of innovation that we have moved very quickly and these brands have not had innovation done with them in the last couple of years. So I feel good about the innovation. I feel good about the distribution. I feel good about getting the distributors excited. And now as we bring this together and there's a real focus on it with a dedicated sales team, a dedicated national accounts team. We're putting pressures on our distributors. I feel we can really get the growth.
The next thing is as we bring these into our facilities and we look at some of the cost synergies, we can get our margins back to where our traditional margins are with our current brands. So I'm real optimistic and I come back and I say this here, yes, the beer industry has gone through some challenges in growth. I think you know, and again, spending time with BCG and doing our studies here, I feel there's some great opportunities within the beer category.
Now there has been changes to what I'll call there has to be changes in regards and nonalcoholic, there's got to be some other changes. And how do we get males and females and Gen Z during can be or is a lot of the stuff that we're going to do and we've talked about it. We're going to expand into some water business, energy drink business and some other categories.
We're not going to be just the beer business will be the Tilray beverage business, I think which is important because we have manufacturing facilities. We have distribution out there and we have a sales and marketing infrastructure to go drive this behind it. And I got to tell you that there's a tremendous amount of sporting venues. There's tremendous amount of universities that have reached out to us. They want us a part of their sponsorship.

Okay. Thanks so much.

Thank you.

Operator

The next question is from the line of [Frederico Gomez with ATB Capital Markets].
Please proceed, sir.

Hi, good morning. On my more than you. You mentioned two strategic acquisitions in your prepared remarks as something you look at. So can you remind us how you look at acquisitions and between your alcohol and cannabis segment? And then also geographically, whether you're focused on Canada being West or are you also looking at opportunities elsewhere?

Thank you.
So I come back and look at strategic acquisitions as I've said, you know, we got a lot of grow, got a lot of brands and we're into most categories in the Canadian market. And with that, if there was something strategic that could help our cost structure on that would help us to take that would be within our portfolio of brands. We'd absolutely look at it. But you heard what I said before, one of the big things I'm looking at the candidates, they how do we diversify and be in other categories with adjacencies to the cannabis industry and this that bev alcohol is that drinks, et cetera. So that's what we're looking at in the Canadian market.
In regards to the U.S. market, we're focused on Feb alcohol here, and we're focused on in regards to our Manitoba Harvest, is there food businesses with adjacencies that would make sense to be part of our Manitoba Harvest business is something that we would look at and then internationally, we like the beverage alcohol business internationally. There's some stuff that we've looked at there and how do we expand some of our medical business and in our international market and there's markets where we could do an acquisition or two.
So we're looking as strategic. They got to be accretive there, got to be good value there for us and how do we integrate it into our current infrastructure to come back and look with the Tilray a free acquisition, we took out over [$100 million] of costs with the Hexal business will take a close to $35 billion of cost with truss and our beverage business will take out additional costs there. If you come back and look at the AVI. Sweetwater Montauk will take a good amount of costs out of there.
So what's got to be in businesses that fit with it where we can take out costs, but the more important thing is we need organic growth and ultimately use that infrastructure. And as a company today of our size, I mean, just being a public company cost out there today it's higher costs for our insurance because we have cannabis within years. So again, how do we absorb some of those costs with putting more sales on at these? That's not something that we look at there.

Thank you, Ray.

Operator

Our next question is from the line of [Vivien Azer with Cowen].

Good morning. This is Roger Hawley on for Vivien. Azer, and thank you for taking the questions. I just wanted to follow up on the international question specifically in Australia, where we've been seeing some strong patient growth, any updates for your plans in that market?
And do you see any of these international markets becoming saturated as more competitors achieve the necessary certifications that you've seen?

Yes.
No, thank you for the question. I'm so in terms of Australia, we see a really great opportunity in Australia. We have a more of a leading business there in both Australia and New Zealand, both with our extracts results. Our flower from what we have done is we have expanded our portfolio of flour in order to take advantage of that market, including as of last quarter, we introduced Broken Coast into the market and that the market really was looking for more of a proliferation around medical cannabis flower. And we will continue to evaluate that market for new form factors.
In terms of your question about competition, achieving more certifications, and we have been in the market with GMP. certification. Our GMP certification is actually above the standards that's actually required in Australia. And we find that health care professionals and government regulators and enjoy the fact that we take the higher standard approach considering that medical cannabis, we think high standards is our key, and we will continue to grow that market and looking for opportunities to partner with additional cannabis dispensaries, partnering with health care clinics, et cetera.

Got you.

Operator

Thank you. At this time we've come to the end of our question and answer session, and I'll hand the floor to management for closing remarks.

Thank you very much, everybody, and thank you for joining us today. I sit here and proud of where we are, and we are a global company. We are a diversified company. And if you look at public companies out there today. There's very few companies that will emulate or resemble what we do in cannabis alcohol food and sell on a global basis. We're dealing in categories today that are new to the marketplace in regards to cannabis, we're dealing with categories today where there's a lot of regulatory requirements, and that's something that we do as a company to ensure when we produce cannabis, it goes through strict regulatory and quality control before we put any product out there. And that's the same with every single product.
You know, I came back and I remember joining a free when we are a $50 million business today on the run rate to close to $1 billion. We had record net revenue of $194 million, and that is after excise tax comes off the top. We're number one in the Canadian market, like I said before, a tough market with a lot of LPs, still an illicit market there and still a market that's just five years old where a lot more consumers are being educated and we're trying to build brands out there and not being able to advertise.
And so with that, we've accomplished a lot and we got a lot more to do in Europe. Again, we're the largest medical cannabis company in Europe with a 55% growth, which we see lots of opportunities in different countries. We see lots of change coming in Germany. And with that spending a lot of time over there and having a growth facility in Portugal and Germany gives us a leg up in a very good way.
And I think the important thing is there's a lot of sharing between the Canadian market medical business and the European market that we're doing that ultimately, like I said before, the scheduling never happened what we can bring to the U.S. So I'm I'm really excited about our bev alcohol business, our beer business being the fifth largest cannabis business. I remember when we first bought Sweetwater, we were selling about 2 million cases plus a beer a year and now we'll sell close to 12 million cases, have over 12 brands, 6 processing facilities, 12 brew houses and brands that got tremendous opportunity.
I see a big resurgence happening in the beer category in multiple ways. And I think that's something that we're going to help evolve and change with innovation with distribution with new products for the education of both beer. And as I said, and tried to coin this, how do you make beer cool again and not from just a drinking standpoint and you know, from a standpoint of people, I really have to say I'm very lucky to get to work with a great organization over 20,300 people around the world. We onboarded over the last two months, over 700 new people with the acquisition of ABI. And with that, that went seamless. And I'm very much want to welcome them as part of the Tilray family.
I was asked a question about our balance sheet. That's something that Karl and I spend a lot of time on managing our balance sheet, something that keeps me up at night is debt. So how do we deal with our debt? How do we generate cash? And again, we're a five year old company. They've done multiple acquisitions. We've spent a lot of CapEx on growth CapEx and how do we do that? And at the end of the day, manage our balance sheet.
And last but not least, our shareholders you know, we're here for our shareholders. We're here to work for our shareholders, and we're here to deliver, you know, upon our shareholders who invest money. And that's so we got lots to look forward to the back half is a big back half for us. There's a lot of heavy lifting to do we know. But I'd tell you we have a good plan and a path to hopefully let us get there.
So thank you very much for listening to today's call and look forward to speaking to you in the near future.
And happy new year and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.