Tilray Inc (TLRY) Q4 2018 Earnings Conference Call Transcript

As we have communicated 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 capacity and inventory to serve the rapidly growing global market. 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, for the differentiated portfolio 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 six, pioneer the future of our industry by investing in innovation, research and development in clinical research. In line with this strategy, our recent strategic partnerships include a global alliance with Sandoz, a division of Novartis, one of the world's leading pharmaceutical companies.

Our original agreement was focused on Canada, and this new global deal legitimizes medical cannabis on a global scale and increases access for patients in need across the world. In the next year, we anticipate distributing medical cannabis to at least a half a dozen more countries globally through this partnership with Sandoz. We also formed a strategic partnership with AB InBev to research non-alcohol beverages containing THC and CBD. The 50/50 joint venture combined AB InBev's deep experience and beverages with our expertise in cannabis products. And each company intends to invest up to $50 million for a total of up to $100 million. We're pleased to report that we have appointed a CEO for the JV and our leveraging the research that Tilray has already performed for duration and time the onset on beverages.

Our revenue sharing agreement with Authentic Brands Group ABG is a long term partnership designed to leverage ABG's portfolio of more than 50 of the world's most iconic brands, as well as their extensive distribution network across North America. The partnership will initially focus on CBD products in the United States, and THC and CBD products in Canada, and we will expand globally as regulations permit.

The branding opportunities in the US and Europe around the retail and OTC consumer products are far more interesting than the branding opportunity today in Canada due to packaging and branding restrictions. Additionally, when we look at net new consumers at CBD and THC, distributors and retailers mark relationships with brands that they already know and trust, which is why we're so excited to partner with ABG.

Strategic mergers and acquisitions remain a core focus of our global growth strategy. Last month, we closed the acquisition of Manitoba Harvest, the world's largest hemp natural foods producer for approximately $317 million. Manitoba Harvest has nearly CAD100 million in gross revenues, distributes its products to more than 16,000 retail locations in the US and Canada, and is the leading hemp foods company, with seed-to-shelf capabilities, maintaining control over quality, production, manufacturing, marketing and distribution of its products.

The acquisition of Manitoba Harvest is Tilray access to relationships with farmers, who plant more than 30,000 acres of hemp, as well as some of the largest distributors in retailers across Canada and the US. We look forward to distributing hemp-derived CBD products across North America under the Manitoba Harvest brand as well as other brands by leveraging Manitoba Harvest's established supply chain going forward.

We also recently acquired Natura Naturals Holdings Inc., a federally licensed cannabis cultivation company based in Leamington, Ontario for approximately CAD70 million. The increased supply from Natura, which we have rebranded as High Park Gardens, will allow us to further expand our market share in the Canadian adult-use market with high-quality branded cannabis products.

Finally, in December, we invested CAD7.5 million in ROSE Life Sciences, a Quebec based cannabis producer, and have an exclusive sale, supply, distribution and marketing agreement to deliver adult-use products under our portfolio of brands in Quebec. We believe our recent strategic global partnerships and acquisitions demonstrate our emphasis, on the diversification of our global opportunities for long-term growth and our disruption of critical industries as we expand our addressable market.

Our team remains disciplined in our approach, making key strategic investments to support the sustainable growth we expect to achieve over the next several years. Last week, we announced that Andrew Pucher has joined us, as our Chief Corporate Development Officer, overseeing M&A and corporate investments. Andrew previously served as the Managing Director at Goldman Sachs, where he most recently covered the Canadian cannabis industry. We are excited about the contributions he will make as we accelerate our growth.

Going forward, we will continue to pursue strategic M&A that opens new territories, increases our capacity, increases our brand offerings through innovative farm factors, brings us R&D technologies and we expect this selectively invest in retail distribution.

As I said earlier, our increased focus on the US and Europe, among other international markets, is tied to the fact that we believe they represent a significantly larger opportunity for Tilray long term, where we can extend beyond our potential in Canada. Simply put, we are building a company for the long term. We believe that the field of battle has changed and that the US and Europe are going to be more important over the long term.

In the US, Tilray is building a portfolio of brands and products with the goal of making them industry leaders in every market, where cannabis is legal. I believe we are a lot closer to federal legalization in the US than most people realize.

The Farm Bill presents an excellent opportunity for Tilray to capitalize on an estimated US$22 billion hemp-derived CBD industry in the US. We have US CBD supply chain in place through the acquisition of Manitoba Harvest in a deal to produce hemp-derived CBD infused products for authentic brands group as regulations permit.

We have also finalized the CBD supply agreement to source CBD from LiveWell Canada, and the United States for wellness and medical Tilray branded CBD products across North America. We expect LiveWell to begin shipping product to us during the second quarter of 2019. In the coming months, we expect to make additional announcements about strategic investments and partnerships in the US to position Tilray for long term leadership in the market.

Focusing on Europe, just last month, the European Parliament passed a resolution similar to the World Health Organization's recommendation to increase access to medical cannabis. Further legitimizing the industry, and we believe this decision will encourage other states and countries to legalize. We began 2018 with 28 countries having legalized medical use globally and ended the year with 41. And we can easily see how that number grows to 50 or 60 by the end of 2019.

Our EU Campus in Portugal completed a successful medical harvest earlier this month and we are well positioned to serve the EU market, as more countries legalize. We expect the EU Campus to produce and distribute cannabis in the EU for the EU and believe that having a local vertically integrated supply chain presence is an important differentiator for us to reduce costs and hedge against regulatory risk. Our campus includes indoor, outdoor and greenhouse cultivation sites, as well as research labs, processing, packaging and distribution sites for medical products.

This first harvest was a significant milestone for the company and we expect multiple harvests in the coming months. By the end of 2019, we expect to increase our production space to 2.2 million square feet, approximately double compared to the end of 2018. On our existing properties, we have the ability to expand our total production space to 4.5 million square feet. Our seven production facilities around the world are significantly increasing our global production output compared to 2018.

While the Canadian market remains challenged with quality supply, we are confident the supply demand will become more balanced over time, as additional supply becomes available. Longer term, we do not believe Tilray will be in the farming business, so we're not allowing the near-term supply disruption to change our strategy for growth over the next two years.