Tilray, Inc. (TLRY) Q1 2019 Earnings Call Transcript

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Tilray, Inc. (NASDAQ: TLRY)
Q1 2019 Earnings Call
May 14, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 Perkins.

Rachel Perkins -- Investor Relations

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 GAAP.

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 your questions.

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 across Canada.

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.

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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 research.

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 CBD products.

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 partnerships.

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.

Mark Castaneda -- Chief Financial Officer

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.