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Tilray, Inc. (NASDAQ:
Q1 2019 Earnings Call
May 14, 2019, 5:00 p.m. ET
Good day, ladies and gentlemen, and thank you for
standing by. Welcome to Tilray's First Quarter 2019 Earnings
Conference Call. At this time, all participants are in a
listen-only mode. If anyone needs assistance during the conference,
just press "*0" for an operator. Later, we will have a
question-and-answer session. If you would like to participate in
that portion of the call, just press "*1" to get in the queue.
Now, it is my pleasure to turn the call to Rachel
Rachel Perkins -- Investor
Good afternoon and thank you for joining us on
Tilray's First Quarter 2019 Earnings Conference Call. On today's
call are Brendan Kennedy, President and Chief Executive Officer,
and Mark Castaneda, Chief Financial Officer.
Before we begin, please remember that during the
course of this call, management may make forward-looking statements
within the meaning of the federal securities laws. These statements
are based on management's current expectations and beliefs and
involve risks and uncertainties that could differ materially from
actual events than those described in these forward-looking
statements. Please refer to Tilray's reports filed from time to
time with the Securities and Exchange Commission and Canadian
securities regulators and its press release issued today for a
detailed discussion of the risks that could cause actual results to
differ materially from those expressed or implied in any
forward-looking statements made today.
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Finally, please note on today's call management
will refer to adjusted EBITDA and adjusted net loss, which are
non-GAAP financial measures. While the company believes adjusted
EBITDA and adjusted net loss provide useful information for
investors, 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. Please refer to
today's press release for a reconciliation of adjusted EBITDA to
net loss, the most comparable measure prepared in accordance with
Now, I would like to turn the call over to Brendan.
Brendan Kennedy -- President
and Chief Executive Officer
Thank you, Rachel. Good afternoon, everyone, and
thanks for joining us. Today, I will review the progress we have
made since our last call just eight weeks ago. This includes
focusing on our global growth strategy and providing an update on
our opportunities for long-term growth in the global medical,
wellness, and adult-use cannabis markets. Mark will then review our
first quarter 2019 financial results in more detail and discuss our
long-term financial targets. After that, we will open the call for
The global transformation of a $150 billion
worldwide industry is just beginning. At Tilray, we are building a
global platform to be a multi-billion dollar consumer packaged
goods company, known for delighting consumers with a house of
trusted brands and delivering those brands to market through
world-class multinational supply chain. We are taking decisive
actions to create a global infrastructure that can be scaled
globally over the long term.
We are pleased with our first quarter results,
which include the first full quarter of adult-use market sales.
Revenue increased 195% year-over-year to $23 million, and total
kilogram equivalents sold increased both sequentially and on a
year-over-year basis to 3,012 kilograms. We are proud to have
achieved this growth despite the continued supply constraints
We now believe there could be a supply balance in
Canada in the next 18-24 months as the market finds an equilibrium
between supply and demand. This is longer than our estimate just
eight weeks ago, as the industry continues to struggle ramping
production in the existing regulatory environment.
That being said, we have seen increasingly high
demand in the Canadian cannabis market for the highest-quality
branded cannabis and have decided to increase our Canadian
production and manufacturing footprint by investing $32.6 million
across three of our five Canadian facilities. The $32.6 million
expansion project will increase Tilray Canada's production space in
Nanaimo, British Columbia by 33% to 80,000 square feet, High Park
Gardens' production space in Leamington, Ontario by 82% to 282,000
square feet, and the High Park processing facility in London,
Ontario will increase 100% to 112,000 square feet. Both High Park
Gardens and High Park processing have room to further expand in the
future. These projects are expected to be completed by the end of
2019 and we will provide updates as they evolve.
These increased investments are in addition to
our expansion efforts in Portugal, which is expected to receive its
GMP certifications over the course of the next several months. This
will allow the product that we produce in Canada to stay in Canada,
as our Portugal production will be used as a hub to serve
international medical markets.
As we have discussed previously, our global
growth strategy remains focused on six top-line performance drivers
that we expect to generate strong returns as the business continues
to grow. First, increase our production and manufacturing capacity
to serve the rapidly growing global medical market, as well as the
adult-use market in Canada and other markets over time. Second,
maintain a rigorous focus on quality as we scale. Third, partner
with established distributors and retailers to scale distribution
of our products further and faster. Fourth, build a differentiated
portfolio of brands and products that appeal to a diverse set of
patients and consumers. Fifth, expand the addressable medical
market by fostering mainstream acceptance with the medical
community and governments. And finally, sixth, pioneer the future
of our industry by investing in innovation, R&D, and clinical
In the first quarter, we announced partnerships
and acquisitions that align with our growth strategy. Our strategic
partnership with Authentic Brands Group (ABG) announced in January
will leverage ABG's portfolio of more than 50 of the world's most
iconic brands, as well as their North American distribution
network. We expect our co-branded products to come to market in the
second half of this year in the U.S. and Canada, focused mainly on
We also completed the acquisition of Manitoba
Harvest, the world's largest hemp natural foods producer, and
Natura Naturals, a licensed cannabis cultivation facility in
Leamington, Ontario. We have made significant progress integrating
Manitoba Harvest and Natura Naturals, accelerating our entry into
the U.S. and furthering our operational capabilities in Canada. We
closed Manitoba late in the first quarter yet we have already begun
to leverage their existing relationships with over 16,000 retail
locations and sharpen our plans for the U.S. market opportunity. We
are excited about the future potential we have with new and
existing retail partners over time and our early progress with this
transaction are on track with our expectations.
We will continue to deploy capital in the most
promising markets where we see the greatest potential to pursue
multiple paths to grow. Our vision has always been to be a global
leader in the cannabis market, which is why we are judiciously
planning for expansion in two of the largest markets: the United
States and Europe. We believe our strategic global partnerships and
acquisitions demonstrate our focus on the diversification of our
global opportunities for long-term growth.
Going forward, we will continue to pursue
strategic M&A that opens new territories, increases our
capacity, increases our brand offerings through innovative form
factors, brings us R&D technologies, and provides us access to
strategic retail distribution channels.
Building a portfolio of trusted brands and
products is a key piece of our strategy to capitalize on the
estimated $22 billion hemp-derived CBD industry in the United
States. With Manitoba, Authentic Brands Group, and Live Well, we
believe we are well-positioned for long-term leadership in the
market. While we expect Manitoba Harvest and ABG U.S. CBD product
sales to ramp in the second half of this year, Live Well will begin
shipping supply in the second quarter.
Focusing on Europe, we have been disciplined in
our approach and chose not to participate in the German tender
process. Instead, we focused on our EU campus in Cantanhede,
Portugal, where we completed a successful medical harvest in March
and held an inauguration ceremony to celebrate the company
milestone. This campus will be our international hub for operations
and includes indoor, outdoor, and greenhouse cultivation sites, as
well as research labs, processing, packaging, and distribution
sites for medical products.
As we are awaiting our GMP certification, we will
continue to build inventory in Q2 and we expect to recognize
revenue in the second half of 2019. We believe we are
well-positioned to serve the European market from Portugal, as more
companies legalize medical cannabis.
While the Canadian market remains challenged with
quality supply, we are confident supply/demand dynamics will become
more balanced over time, as additional production capacity becomes
available. We believe clinical research will help the cannabis
industry by fostering mainstream acceptance with the medical
community and governments.
In the first quarter, we announced our support of
two new clinical studies: a pilot study led by Murdoch Children's
Research Institute in Melbourne to evaluate the feasibility and
acceptance of a larger randomized placebo controlled trial of
cannabis extract as a form of treatment for reducing severe
behavioral problems in pediatric patients with intellectual
disabilities and a study with McGill University Health Center's
Division of Infectious Disease and Chronic Viral Illness to examine
the effectiveness of medical cannabis on immune activation in
people living with HIV.
For the balance of the year and into 2020, we
continue to anticipate the following corporate milestones:
launching Tilray and Manitoba Harvest CBD products in the United
States as regulations permit; signing additional adult-use supply
agreements in Canada -- we started delivering product to Alberta
during this quarter; shipping Tilray products to pharmacy chains in
Canada -- we do have products available on Shoppers Drug Mart
today; exporting Tilray medical products to new countries;
expanding Tilray's medical cannabis product offerings in the
international markets we currently serve -- we did start selling
flour in addition to oil in Germany; extending our existing
pharmaceutical partnerships to additional countries and regions;
completing the build-out of our facility in Portugal -- we did have
our grand opening and completed multiple harvests; obtaining a
manufacturing license and GMP certification in Portugal, a process
that is already under way; obtaining production and sales licenses
for High Park's processing facility in London, Ontario; initiating
additional clinical trials -- we added two during Q1; recruiting
additional executives from outside the industry to further
strengthen our management team -- we added several during the first
quarter; and, finally, adding additional strategic
In summary, we are executing on our strategic
growth initiatives as planned and I am proud of the progress we
have made. We are positioning the company for long-term sustainable
growth globally and are confident in our ability to drive
shareholder value through our multiple avenues for growth.
With that, I would like to turn the call over to
Mark Castaneda -- Chief
Thanks, Brendan. Good afternoon to those of you
joining us on today's call and webcast. It is a pleasure to be
speaking with you today. Please note all the financial information
we discuss today is prepared in accordance with U.S. GAAP and is in
U.S. dollars unless otherwise indicated.
We had a strong start to the year and we believe
we'll continue to gain momentum as we progress throughout the year.
Focusing on Q1 results in more detail, Q1 revenue essentially
tripled to $23 million or $30.6 million Canadian compared to the
first quarter of last year. Excluding excise taxes, revenues were
$21.5 million. Revenue growth was primarily driven by the Canadian
adult-use market, the addition of hemp food sales from the Manitoba
Harvest acquisition, and strong growth in international medical
Extract products represented 37% of non-food
revenue for the first quarter of 2019, compared to 40% of revenue
in the same period last year. We are pleased with our performance
in the Canadian adult-use market so far, which represented 34% of
revenue for the first quarter. Adult-use revenues grew
approximately 80% sequentially from Q4 to Q1. We are still in the
early days of the adult-use rollout, with a limited number of
products available due to regulations and supply constraints. These
constraints will loosen this year with other form factors being
available later this year.
On the hemp foods side, we closed the acquisition
of Manitoba Harvest on February 28, and included one month of
results in our first quarter. As we discussed on a prior earnings
call, we expect approximately $20 million of contribution per
quarter from this business. We also anticipate the rollout of U.S.
CBD products in the second half of this year.
On the international side, our revenues increased
four-fold to $1.8 million from $432,000 in the prior year. The
growth is primarily driven by Germany and Australia. Our growth
internationally and in Canada continued to be limited by lack of
supply that we expect to improve over time.
Moving on to operational metrics, excluding hemp
foods, total kilogram equivalents sold more than doubled to
approximately 3,000 kilograms from 1,300 kilograms in the same
quarter last year. The overall average net selling price per gram
was $5.60, or $7.54 Canadian, and $5.28, or $7.02 Canadian,
excluding excise tax. This compares to $5.94 in the prior year's
Gross margin for Q1 increased sequentially to 23%
from 20% in the prior quarter. Gross margin continues to be
impacted by increased costs, with the ramping up of cultivation
facilities as well as high cost third-party supply. In addition,
hemp food margins were impacted by an approximately $700,000
non-cash charge related to acquisition accounting for the fair
value of inventory. The remaining additional non-cash charge of
approximately $1.4 million will hit in the second quarter of
As we discussed on our prior quarter call, we
continue to expect sequential increases in gross margin throughout
this year, heavily weighted toward the second half of the year as a
result of our Portugal facility coming online, with full GMP
certification and the ability to sell higher value-added products
in Canada adult-use markets.
Total operating expenses increased to $33.3
million, which includes $5.3 million in non-cash stock compensation
and $4.4 million for acquisition-related expenses. Excluding those
items, operating expenses increased by $15.9 million compared to
the prior year's first quarter, which is primarily comprised of an
increase in G&A of $8.7 million and sales and marketing
expenses of $5.6 million. The increase was driven by increased
headcount related to growth initiatives, public company costs, and
operating expenses added through recent acquisitions.
Our net loss for the quarter was $30.3 million or
$0.32 per share compared to a loss of $5.2 million or $0.07 per
share for the first quarter of 2018. Non-GAAP adjusted net loss for
the quarter was $25.2 million or $0.27 per share for the first
quarter 2019. The adjustments in net loss are the non-recurring
We reported an adjusted EBIDTA loss of $14.6
million compared to a loss of $3.2 million for the first quarter of
last year. The increase in net loss and adjusted EBITDA was
primarily due to an increase in operating expenses related to
Turning to the balance sheet, we ended the
quarter with cash and cash equivalents of approximately $325
million. We continue to believe that we have sufficient capital to
execute our growth plans for the next 12-16 months. We continue to
believe we have significant growth opportunities with multiple
paths for value creation and expect to achieve strong growth for
the years to come.
Long-term, we continue to expect to capture a
sizable portion of the global cannabis market, with an estimated
gross margin of 50%-plus and adjusted EBITDA margins of 25% to 30%.
The EBITDA margins are based on the legal markets that exist today
and, as new markets are added, we will invest and develop those
markets, which may have a short-term impact on EBITDA margins but
also provide for greater revenue upside.
We are pleased with the results for the first
quarter. We are still in the very early stages of growth and we
believe we are taking the necessary steps to lay the foundation for
solid long-term growth in the global cannabis industry.
This concludes our prepared remarks. Brendan and
I are now available to take your questions. Operator?
Thank you. And, ladies and gentlemen, if you have
a question at this time, just press "*1" on your touchtone
telephone. If your question has been answered or you wish to remove
yourself from the queue, press "#". Again, if you have a question,
just press "*1".
And our first question is from Vivien Azer with
Cowen. Your line is open.
Vivien Azer -- Cowen &
Company -- Analyst
Good afternoon, Vivien.
So, just to kick things off on revenues. It came
in really nicely, certainly ahead of our estimate, ahead of
consensus. Wondering how your fiscal 1Q results compared to your
internal expectations. And if there was upside to your
expectations, from a second perspective, what drove it? Thanks.
So, Vivien, yes, our numbers came in pretty solid
for Q1. As you know, some of the key drivers to that is having
plenty of supply and sufficient supply to reach these markets. But
if you look at our adult-use market, we are up 80%, which was ahead
of where we were originally expecting for Q1.
Great. That's terrific. Mark, you reiterated that
you expect to be recognizing revenue from novel form factors that
will be legalized later in the year. I'm just curious to understand
how you're thinking about the 60-day notice period because it
doesn't leave a ton of wiggle room to generate revenue in the
fourth quarter if I'm thinking about it right. Thanks.
Yeah, you're absolutely right. If there's an
additional 60 days on top of the mid-October date, that only leaves
a really small window in the second half of December. We are still
expecting to be able to have revenues kick in earlier than that, so
we're still waiting to see the final regulations on that 60-day
Got it. But just to clarify then, you're
expecting some kind of flexibility from the government?
Okay. My last question is on the capacity
build-out. It makes sense, given that you're pushing out your
target for supply and demand balances in the marketplace. Your
comment was that those build-outs will be completed by the end of
the year but thinking in terms of how that translates into revenue
recognition -- and understanding that the construction will be done
by the end of the year and then we should add another 12-15 weeks
for cultivation and processing or could it be sooner than that?
Yeah, so I think you're looking at it the right
way. So, as we finish, it's still going to take time to have the
plants start up and to have the cycles of the plant start. So,
you're thinking about it right.
Great. Thanks very much.
Thank you. And our next question is from Graeme
Kreindler with Eight Capital. Your line is open.
Graeme Kreindler -- Eight
Capital -- Analyst
Yeah. Hi, guys. Thanks for taking my questions
here. First question, just wanted to elaborate on the wholesale
supply available that you were discussing earlier. Now that we're
into sort of mid-May, I just wanted to get some color on what the
picture looks like in wholesale supply. Has it improved into Q1 or
is this something that can be kind of lumpy in the market?
Brendan Kennedy --
President and Chief Executive Officer
I would say it's pretty lumpy. We haven't seen a
whole lot of supply out there and when our team goes out to inspect
the supply that is there, we're not finding the greatest quality.
And so we, oftentimes, will inspect product and it's just not of a
quality where we'd feel comfortable putting it in our packaging and
selling it under our brands. We do see some progress. We see some
very nice facilities coming online but I think we're still
expecting several quarters of supply imbalances here in Canada. I
think you'll see some smoothing of the lumpiness when we start
being able to sell other form factors in Canada. That will give
producers, such as us, and consumers more options of products to
sell and products to buy.
Got it. Thanks. And to follow up on there, the
average net selling price per gram from Q4 look like it decreased
into Q1. So, I was wondering if I could get a bit of color there in
terms of what the contributing factors were.
Sure. So, if you think about our pricing, the
pricing is relatively fixed to the provinces in most of our
channels. So, pricing hasn't moved. It's really a function of mix.
So, we actually have sold a little bit less extracts this quarter
versus the prior quarter or prior year's quarter and versus last
quarter. So, it's more a function of mix as opposed to any price
changes. And as you saw, adult-use was a higher percentage of
revenue compared to last quarter as well.
Okay. Great. That makes sense. And then my last
one here. I'll jump back in the queue. You mentioned about pursuing
other strategic partnerships. So, I was wondering if you could
elaborate on what specific verticals would be higher up in your
pecking order and if you're putting any sort of timeline or range
of timelines in terms of when we could see another strategic
partnership be announced?
That's a good question, Graeme. As we see
cannabis disrupting a number of other industries, we have been
inundated with contacts from Fortune 500 companies who are
interested in exploring partnerships with Tilray. And it's a range
of companies from a broad variety of industries. Generally, the
deals that have been done with other companies, we generally talk
to those people at some point in their process. Right? Imagine if
you're a business development person at a Fortune 500 company
that's looking at the cannabis industry, that person wouldn't be
doing their job if they didn't talk to us. So, obviously, lots of
other tobacco companies are looking at the industry, lots of other
CPG companies are looking at the cannabis industry from all
different categories within CPG, and we're also starting to have
lots of conversations with U.S. retailers who are interested in
carrying CBD products in the second half of this year. Some of the
conversations are focused around carrying our products and other
conversations revolve around essentially contract manufacturing
some of their in-house brands using Tilray-sourced cannabidiol.
Okay. Thanks. I appreciate that and I'll jump
back in the queue. Thank you.
Thank you. And our next question is from Michael
Lavery with Piper Jaffray. Your line is open.
Michael Lavery -- Piper
Jaffray -- Analyst
Thanks. Good evening. How's it going? You
mentioned the harvest in Portugal and that the certification is in
the works. Can you give us a sense of how to think about the
trajectory there? I know working to get the certification is out of
your control, at least to some extent on timing there, but when
should we think about shipments and how that builds over the course
of the year?
Sure. So, I first went to Portugal three years
ago and the first step of the process was signing an MOU,
Memorandum of Understanding, with various departments within the
Portuguese government -- Ministry of Industry, investments there,
Public Health, INFARMED, and then there's an agency called AICEP.
And we signed that MOU. We did what we promised, we invested
heavily and built-out a facility. The facility is now complete and
we have a greenhouse, have had a greenhouse operating since last
December. And so we've had multiple harvests from that greenhouse.
So, we're building up inventory in Portugal. The next step is for
us to process that product and begin to export it from Portugal to
other countries within the EU. I imagine that the first shipment
will likely be from Portugal to Germany.
As we're building up that inventory, I would
expect three different GMP certifications to take place, really
over the next four or five months. So, the first one, we're
expecting within the next month or so. We'll receive another GMP
certification from INFARMED, our regulator in Portugal.
Essentially, the Health Canada equivalent in Portugal. The second
GMP certification, we would expect sometime mid-summer, June/July,
and then the third one in the fall. The third one is for oils and
extracts. And so we expect revenue really in the second half of the
year from that facility in Portugal.
At the same time, we've approved a 300% increase
in our capacity in Portugal. So, we'll build an additional three
hectares of glass house there and that -- so, 7.5 acres. We expect
that to come online just at the end of the year, start of next
year. Obviously, to Vivien's question, at the beginning, it takes a
while to ramp up. Essentially, these facilities are like large
machines. It takes a while to ramp up and start up these
facilities. And then in Portugal this summer, we will have an
outdoor THC grow. We did one last summer. The grow this summer in
Portugal outdoors will be about 50 times larger than the one we did
last year. And we have also approved an indoor expansion in
Portugal and that's probably still about three quarters out from
Thank you. That's great. And then on the
comments around supply balancing, could you give a sense of, when
you look at that, does it factor in, I assume, exports to Europe
and kind of the whole global view? And then, second, just as you
think about the net impact for you, obviously that would suggest
potentially better pricing but maybe less favorable costs on the
spot market. How should we think about where you net out and how
that may have changed relative to what you might have expected
I think the first change you'll see this summer
from us is that more of the product that we produce in Canada will
stay in Canada for the medical market here in Canada and the
adult-use market. And what we'll do is we'll replace the product
that we've previously been exporting from Canada to other countries
with product that's produced and processed and packaged in
Portugal. That's the first and most immediate change. Over the
short term, we expect to see relatively high prices on the spot
market. But we expect those prices to become much more reasonable
over the course of the next -- really, over the course of the next
And a sense of where that nets out? Obviously,
if you're buying on the spot market, that's a cost for you, but the
industry's selling prices would seem to be better. Do you have a
sense of if this shift is -- if the supply balance seems to be a
little bit further out than it was before, is that net positive
overall or negative or not much difference? How should we think
I think over the long term, you will start to
see more pricing segmentation. Most of the provinces, most of the
buyers in the various provinces have a good/better/best -- some of
them have good/better/best/premium -- pricing segmentation. And so
I think that you'll start to see that segmentation look more like
what you see in probably beer, where you have 1x or 2x pricing
segmentation across the lowest-price products to the highest-price
products. And so that's one change you'll see, obviously, with
increased supply. I think you'll also see more pricing segmentation
with the addition of other form factors in the fall. It's much
easier to have pricing segmentation with oils and extracts and
beverages and edibles. And so I think that's one change that's
coming down the path after October.
Okay. Thank you very much.
Thank you. And our next question is from Tamy
Chen with BMO Capital Markets. Your line is open.
Tamy Chen -- BMO Capital
Markets -- Analyst
Thanks. Hi, Brendan. Hi, Mark. My first question
is could you talk a bit about how you're thinking about the pace of
revenues in the Canadian rec market over the coming quarters, in
the sense that we've seen a very slow rollout of retail stores
across the country? And does that have an impact or does that limit
the cadence of demand from the provinces or does demand continue to
actually grow, it's just a matter of having enough supply right
I think there's a bunch of different things
going on. I think you hit on at least two of them. Obviously, it's
taking a while for the retail stores to open, which isn't that
different from what we saw in Nevada and what we saw in Washington.
If you're looking for an analog in the U.S., those are probably the
best two examples. But we now see -- I think there's 450 retail
stores, a little over 450 retail stores in Washington State, which
has a relatively similar population to Ontario, and we have less
than 25 open in Ontario. And so there's a lot of room for growth,
in terms of retail in Ontario. So, I think you're right on that
point. I think there are supply issues.
And I think the other key factor that is sort of
slowing down growth in the industry or creating slower growth than
we anticipated is really the form factors. You can go into illicit
retailers in Canada today and buy all the same products that you
can buy in a U.S. state. You can buy a beverage, you can buy an
edible, you can buy vape oil cartridges, which is what consumers
want based on what we see across the U.S. And so you've got these
consumers in Canada that can't buy the legal products that they
want and so I think that is continuing to fuel the illicit market
in Canada. I think that once the other form factors are allowed in
October, that's when you'll start to see more and more illicit
consumers convert over to this fully legal system.
Okay. Got it. And my second question is a more
high-level one. Just thinking about it from a perspective of a CPG
company evaluating the cannabis opportunity, what do you feel are
the advantages or merits for a CPG company to partner with a
Canadian-licensed producer versus considering a strategy such as
leveraging offtake from a more dedicated extraction company and
then just using their own CPG brands for -- whether it's the U.S.
CPG market or other markets out there.
Brands are expensive and they take a long time
to build and they're the No. 1 asset of any Fortune 500 CPG
company. And when they're looking to enter an industry, enter a
space that is complicated and they don't necessarily understand it,
they have a choice of going it alone or partnering with someone who
understands the cannabis industry and, probably more important,
understands how to partner well. And if Tilray can meet the quality
standards of companies like Novartis and Sandoz, the quality
standards of companies like Anheuser-Busch InBev, that means we can
meet the quality standards of any Fortune 500 company. And so when
they look at making the decision that you describe, they look at
us, they see that we have very high quality standards. We're
inspected regularly, not only by government regulators around the
world but our partners, not only Sandoz and ABI, but all of our
distributors in countries around the world. And we can meet those
standards and we know how to partner well, not only with
pharmaceutical and alcohol companies, but with companies like
Authentic Brands Group that owns over 50 iconic brands. They went
through a similar vetting process and decided that it was much
better for them in the long run to partner with Tilray than go it
Got it. Okay. Thank you.
Thank you. And our next question comes from
Brett Hundley with Seaport Global. Your line is open.
Luke Perda -- Seaport
Global Holdings -- Analyst
Hi. This is Luke Perda on for Brett Hundley. The
first question -- do you guys expect to have beverage production
ready for later this year and what about other products for the
We do. We've been aggressively building out our
capacity in our London, Ontario facility. And in addition to all of
the equipment that we have there today, we are putting in
additional extraction equipment, a small kitchen, and a beverage
line. And we anticipate having edibles and beverages in market as
soon as we can. The edible side is easier. We have lots of people
on our team that have produced those products previously outside of
Canada. And with beverages, the joint venture with ABI has been
aggressively performing R&D, as well as our internal team, over
the past few years. Aggressively pursuing R&D so that we're
ready for that launch. And we have some new brands and new products
that we're excited to bring to market.
Great. Thanks. And second one. Can you talk a
bit about the recent expansion announcement inside Canada?
Specifically, can you speak to the long-term strength of its sales
arrangements and why the company feels confident that capital
should continue to be spent on Canadian cultivation rather than
other areas of the supply chain or even greater levels of
cultivation in other countries?
So, in Canada, when we look at the ROI in terms
of investment dollars, the easiest calculations are with expansion
at our existing facilities. There, it's a very known path. We know
what we're building, we know what we're getting, we know that in
Nanaimo, London, and in Leamington, we know that we have the --
essentially, the utilities are really important. We have the power,
the water already piped into our facilities. We oversized all of
those when we were doing our initial build-outs so we have
capacity. And the return on that investment is -- that's really
easy math compared to a lot of the overpriced M&A opportunities
that are available in Canada today.
Outside of Canada, we're making our most
significant investments in Portugal, where not only are we
investing significantly -- 300% increase in cultivation, several
hundred thousand square feet of indoor capacity, like I said, more
than 50 times our outdoor cultivation this summer than the last
summer -- but our production and manufacturing space in Portugal is
really built for 300% of the cultivation that we can do. And so our
intent is to purchase raw materials -- cannabis and oil -- from
other producers around the world and bring that product into
Portugal, process it, package it, and distribute it in finished
form to other countries. And so that's where we're making our
largest investment because, from Portugal, it's very easy to
distribute products globally.
Thank you. And just one last one here. As
Tilray's engaged in more R&D, what is the view on the company's
ability to drive floor production, inclusion in sale of
unconventional cannabinoids, like CBC, CBN, and the like? Is Tilray
on a similar timeline to that of the overall industry? And what's
the best way to get these cannabinoids, be that biosynthesis or
So, we're seeing increasing demand in the U.S.
for minor cannabinoids -- CBC, CBN, to name a few. We looked at
biosynthesis, whether we're talking yeast or E. coli or microalgae.
We made a few small investments there and explored a number of
them. I think, in the long run, those cannabinoids are likely to be
produced outdoors using specific genetics that are high in certain
cannabinoids. And we've done some work on our end internally, not
necessarily with breeding but selecting the right strains that have
a wide variety of cannabinoids for use in outdoor cultivation. I
think you're going to see really interesting math over the long
term, where I think some of these biosynthetic producers are going
to face some steep competition from large, 100,000-200,000 acre
hemp and cannabis farms.
Great. Thank you, guys.
Thank you. And our next question is from Robert
Wertheimer with Melius. Your line is open.
Robert Wertheimer -- Melius
Research -- Analyst
Hi. Good afternoon, everybody.
So, my first question is just, obviously, you
guys have a lot you can evaluate but I wonder if you would flesh
out for us your decision on the tender in Germany and just the pros
and cons of that. Obviously, you have investments in Portugal
versus importing. I don't know if there's a particular cost that
you were concerned on or whether there was just no need. Maybe you
could give us a little bit of background there.
Sure. I first went to Germany in November 2015.
The first day, I met with two members of German Parliament. That
afternoon, I met with two members of BfArM, the Health Canada or
FDA equivalent in Germany, and two activists. The next day, I hired
our first employee in Germany. I believe we were the first cannabis
company, certainly the first Canadian LP to have an employee there.
Throughout the rest of 2015 and 2016, we had regular meetings with
BfArM and essentially the DEA there, the Bundesopiumstelle.
The more we talked to the regulators there, the
more we realized that the Germans really wanted to control medical
cannabis at the border. They were going to go through this tender
process but my sense was that they wanted to control medical
cannabis at the border. German medical cannabis legalization,
similar to Canada, was the result of a few different lawsuits and
one patient won the right to grow cannabis in his apartment, which
terrified the Germans.
And so they opened up their program. We saw an
initial tender go out, which blew up after, I think, nearly a year.
We didn't participate in that tender. And based on conversations we
had with government officials in Germany, didn't participated in
the second tender. The second tender really is -- I think there
were 13 different -- I'm not exactly sure how many there were. But
I think there were roughly 13 bids to produce about 200 kilograms a
year at a fixed price.
That product is sold to the German government at
a fixed price and so there's no opportunity for refining products
or branding or packaging and it just wasn't a tender we were
interested in when we could obtain a license in Portugal to produce
massive amounts of cannabis there and we knew that the regulators
in Germany were more than willing to import our product from
Portugal, just like they've allowed us to import product to Germany
from Canada where we currently sell Tilray flour and Tilray oil in
pharmacies throughout Germany.
Very helpful. Thank you. If I can ask another,
on your supply/demand analysis look in Canada, obviously Canada has
different pinch points maybe at different times, whether it's
straight up growing or packaging or distribution. You've talked to
some of them today. Do you expect growing to be a shortage for the
next 12 months and is that an advantage? I mean, when do you
expect, I guess, to have a healthy supply of available product to
source in and how much of that might you do?
I don't expect it to be solved in the next 12
months. Going back, 18 months ago, a lot of the media and a lot of
the analysts covering the industry in Canada were talking about how
there was going to be a glut of cannabis today. And I think one of
the main issues was that a lot of the Canadian LPs were being
valued on a really strange metric. They were being valued on a
multiple of funded capacity, which led all of the CEOs of the
public LPs to grossly overestimate the capacities that they would
have in place today.
And we believed them and our intent all along
was to purchase raw materials from some of these cultivators. If
you look at a company like ABI, they don't grow wheat and malt and
hops and barley. And so our intent was to buy raw materials from
these cultivators and process those raw materials and build brands.
If I could go back 18 months, 12 months ago, I would invested
another $100 million to $200 million in terms of Canadian
cultivation. That was a mistake. But we believed all the hype 18
And so I think, based on what I've seen, I think
that we're still 12-24 months out from reaching some sort of
demand/supply equilibrium. Like I mentioned in my answer to
Vivien's question, I think that other form factors in October will
help. But I think that it's still going to take quite some time for
some of these high-quality facilities to come online.
Thank you. And our next question is from Mike
Hickey with Benchmark Company. Your line is open.
Mike Hickey -- Benchmark
Company -- Analyst
Hey, guys. Thanks for taking my questions.
Congrats on the strong quarter. I'm just curious, obviously you
showed some caution on supply and you have obviously become more
conservative over the few weeks since you last talked. Your initial
guidance for '19 was three times '18 sales plus $65 million from
Manitoba Harvest. You did sort of '18 ex-food sales. So, curious if
you think that guidance is still relevant or what sort of
expectation do we set for us for '19? Thank you.
Yeah. So, just first point is we don't give
guidance. We have general direction but we typically don't give
specific guidance. But the numbers we gave out still hold. The risk
that we always see in this industry is regulatory. So, if for some
reason GMP takes longer or the regulations in Canada for other form
factors get pushed -- as Vivien indicated, it may get pushed until
mid-December, which could push out revenue opportunities. Now,
that's just timing. When you're starting a new industry, when you
look back at the alcohol industry, no one remembers whether it
started in Year 1 or Year 3. I mean, it's still a massive industry.
So, there may be delays here and there but we'll stand by our
directional guidance based on what we know today.
All right. Fair enough. I guess on the
regulatory risk point that you just made, when you look at the
edibles market, I think something we should be excited for, but
when you sort of consider the pending regulatory construct, do you
think it's just too restrictive to give legal edibles a real chance
to take market share from the illegal market?
I'm fairly optimistic on the opportunity. I
think that the guidelines, the regulations around potency and form
factor, serving size, all those are fairly reasonable. I think the
biggest challenge is still that they're not certain yet and we
don't have any certainty in terms of packaging. And so we're
installing lots of equipment but we don't know exactly what the
products are going to look like coming out of those manufacturing
lines. And so we'll have to -- that forces us to install a lot of
machinery that has to have some flexibility.
I think, to your question, I think that one
issue that still remains is that lots of the products that are
available in this illicit market are beautifully packaged and
beautifully branded. And it's a little bit strange in that those
products, many of them look like they should be the legal products,
and the packaging that has all the warnings on it, it looks very
different from what you see in individual U.S. states.
Okay. Thank you. Last question from me. A peer
of yours made a recent acquisition of a U.S. multistate operator.
I'm sort of curious of your thoughts on that strategy as a future
path to the U.S. market upon legalization. Thank you.
Yeah. I think we looked at that deal, as we have
with most of the deals our competitors announce, and we decided
that it wasn't the right deal for us. We expect to see copycat
deals between Canadian LPs and U.S. MFOs. We have had lots of those
conversations. I've been in the industry for about nine years,
started in the U.S., and so you can imagine if any of those
companies are contacted by a Canadian LP, they generally reach out
to us. We expect to see further consolidation in the industry. We
expect to see copycat deals. We're focused on making decisions and
placing bets that will pay off for our investors for the long term.
So, if we found the right partner and the right structure, that's
certainly something that we would consider.
Thanks for the color, guys. Best of luck.
Thank you. And our next question comes from
Aaron Grey with Alliance Global. Your line is open.
Aaron Grey -- Alliance
Global -- Analyst
Thanks for the time, guys. Just one quick
question from me. So, it's great to see the momentum on the adult
side, but just taking a quick look at the medical side, where we
saw revenues decline sequentially and what we've seen the past
three quarters, can you just talk about the trends there? I know
some of it might be driven by both but just what you're seeing on
the medical side with about six months of adult use now past us. Do
you think that decline might be more a function of demand or
allocation of limited product or I guess just, more broadly, what
you're seeing from the category dynamics there? Thank you.
Aaron, it's definitely about allocation. We've
taken -- at the start of every quarter, we have to estimate what
demand is going to be and we make decisions based on what we think
demand is. And I think one of the surprises over the last five or
six months is that there's still robust medical demand. And so,
going forward, we would allocate more toward medical. More product
at the beginning of the quarter.
Okay. Great. Thank you.
Thank you. And our next question is from Scott
Fortune with Roth Capital Partners. Your line is open.
Scott Fortune -- Roth
Capital Partners -- Analyst
Good afternoon. Real quick one to touch base on
kind of the CBD opportunity in the U.S. In talking to retailers,
what type of product opportunities are you seeing from the topicals
to the tinctures and such for CBD? And kind of what's your
expectation for the product rollout from Manitoba Harvest going
Yeah, we're having lots of conversations with
lots of different retailers. They all want everything. I think one
big surprise for me over the last six months, one changing dynamic
that is really different in the U.S. is that a lot of the demand
right now is driven by consumers and retailers and not the large
CPG companies that we were talking about earlier in one of the
earlier questions. But every large retailer is looking for a wide
array of CBD products today. And this change is really being driven
by them. They're way ahead of the curve compared to the CPG
So, it's everything from extracts and oils,
tinctures, gel caps, oral sprays, protein powders, looking at lots
of different products like that for Manitoba Harvest. On the
Authentic Brands Group side, looking at lots of different topicals
under some of their brands and expect to launch a topical series of
products, set of products in the second half of this year. And then
I've had lots of conversations with large CPG companies that are
interested in products that we would never manufacture ourselves,
whether it's antiperspirant or gum, things like that. And what
they're looking for is a Tilray-certified CBD ingredient.
And real quick, do you think some of these
larger retailers are waiting for FDA clarity here? We may have a
meeting on May 31 but how do you think they're going to move with
ingestibles versus the more topical side of products? Thanks.
That's a really good question, Scott. So,
there's not one answer. There are retailers in the U.S. that are
going to do this no matter what, which I think is going to lead to
a really interesting second half of the year. And so there are
retailers in the U.S. that aren't waiting for the FDA and then, as
you can imagine, there are more conservative retailers that are
going to wait and see what happens with some of the FDA hearings at
the end of this month and over the course of the summer.
Thank you. And our next question is Mike
Grohndal with Northland Capital. Your line is open.
Michael Latimore --
Northland Securities -- Analyst
Thanks, guys. This is Michael on for Mike. Maybe
just a quick one on the percent mix of extracts for the total.
Should we see that kind of staying the same through the rest of the
year until you get the new regulations in Canada?
Yeah. So, the extract mix was in the 30% range.
It really is going to depend on somewhat of the mix for adult-use
as well as the mix for international. Some of those that might
drive that change in that mix but it'll be relatively in that
Mike, does that answer your question?
Thank you. And I'm not showing any further
questions in the queue. I would like to turn the call back to
Brendan Kennedy for his final remarks.
Great. Thank you. I want to thank our 1,100
employees for their dedication and extraordinary efforts in
building Tilray and for improving patients' and consumers' lives
through cannabis. We appreciate everyone's questions and
participation on today's call. Have a great evening.
And with that, ladies and gentlemen, thank you
for participating in today's conference. This concludes the program
and you may all disconnect. Have a wonderful day.
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