Tilray Inc (TLRY) Q4 2018 Earnings Conference Call Transcript

Motley Fool Transcribers, The Motley Fool - finance.yahoo.com Posted 6 years ago
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. And so we are looking to that as a next step and we're also looking at additional paths to get products to market in the United States that contain CBD certainly before the -- before the end of the year." data-reactid="181">So, the FDA commissioner, Scott Gottlieb announced his resignation is coming up here in April. And our perspective is that over the short term that actually speeds up clarification from the FDA in the US. And so I think we'll see before his departure some clarification on CBD derived from hemp. And so we are looking to that as a next step and we're also looking at additional paths to get products to market in the United States that contain CBD certainly before the -- before the end of the year.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, thanks. With respect to your comments earlier, Brendan, on investing in the United States, what could that look like in the near to medium term before we see any sort of federally legal cannabis framework in place? What sort of forms could that take on?

Brendan Kennedy -- President and Chief Executive Officer

So, I think I mean, for us, we have secured supply of CBD from US hemp CBD source and I would expect to announce additional sources of US hemp-derived CBD in the coming months. So, that was the first step. The second step is, if you think about Manitoba Harvest, Manitoba Harvest, sells their products at about 13,000 retailers in the United States, plus 3,000 in Canada. And so if you think about 13,000 retailers in the US that care the Manitoba Harvest products at Expo West in Anaheim a few weeks ago. Manitoba Harvest was showing their line of CBD wellness products and so those would be the products that we initially would expect to bring to market as well as additional brands.

And when I say additional brands, If you think about our partnership with Authentic Brands Group they own over 50 of the world's most iconic brands and we have been meeting with them to determine, not only which brands, but which products we're going to bring to market by the end of the year. And I expect that we'll see products from an authentic brands, group brands, such as something like Nine West by year end.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, great. And just to follow-up on that. With respect to the CBD supply chain, you talked about the steps made in sort of the procurement of the hemp and CBD isolate on one end. And then the end branding packaged goods side on the other things.

On the other end, what about the extraction and formulation step in between that in terms of investments being made to take it from seed or from biomass down to sale?

Brendan Kennedy -- President and Chief Executive Officer

If you think about Manitoba Harvest, they receive hemp from 30,000 acres worth of hemp cultivated in Canada every year. They receive it into the processing facility in Winnipeg. It then goes from that processing facility to a manufacturing and packaging to state-of-the-art manufacturing and packaging facility outside of Winnipeg, a town called Ste. Agathe. And so, that's their experts in hemp processing. We would expect to either acquire, invest, or partner with a group in the US that would enable us to leverage Manitoba Harvest experience in -- into the US.

Graeme Kreindler -- Eight Capital -- Analyst

Okay thanks. And one last question here on your comments on investing selectively in retail. Is that specifically for the Canadian market, or does that other -- does that extend to other jurisdictions?

Brendan Kennedy -- President and Chief Executive Officer

It does extend to other jurisdictions. The retail will look a little bit different, in different jurisdictions. In Canada, obviously, it's adult-use retail. If you think about retail in the United States, certainly for hemp-derived CBD products. It will look slightly different from that. And if you contrast that with some sort of retail venture in Europe, it'll be much more wellness focused or pharmaceutical focused.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, thank you very much. That's it for me.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question is from Michael Lavery with Piper Jaffray. Your line is open.

Michael Lavery -- Piper Jaffray -- Analyst

Thank you. Can you touch on the ABI JV and what are the steps needed for expansion globally? Is it just as simple as getting recreational use legalized in other markets, or how turnkey is it to expand that as new markets open up?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, at the start of last year, at the start of 2018, we announced a partnership with the Sandoz division of Novartis that was specific to Canada. I think we announced it in January. And in December of last year, so a few months ago, we announced that Canadian partnership had become a global partnership with Sandoz.

We took a similar approach with AB InBev and our initial joint venture is for R&D of beverages for the Canadian market. And if you think about a company of that size going through the process that we went with them for a year in terms of performing due diligence in meeting with our team. Neither party hopes that agreement is just for R&D in Canada.

So, clearly there is an interest and desire to potentially expand that agreement in the future. And so that's what I expect will happen. That's what I hope will happen. But, the first thing we need to do is, develop the products and develop the brands and the packaging reform factor, and further refine the science and get those products to market, when we have an opportunity to commercialize them, perhaps as soon as October in Canada.

Michael Lavery -- Piper Jaffray -- Analyst

Okay, that's great. Thank you. We've covered the US CBD pretty well, but can I just follow-up one clarification there. If before Gottlieb leaves, he doesn't give more detail or color. What's your understanding of the products that are within the regulation? And I know you have the tinctures and the hemp oils and the hemp hearts and hemp foods under the Manitoba Harvest brands. You showed it at Expo West, like you talked about, would it just be limited to that? Is there potentially more? Are any of those ones you think have any question marks around it? What's the right way to understand? What your guardrails are if he doesn't give any color before he leaves?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, obviously the existing Manitoba Harvest products are already in retailers across the United States and don't need any approval from the FDA. They've already been approved. We believe there's a path to market for CBD products, but we need to do it in a way that ensures, we comply with SEC and NASDAQ regulations.

Michael Lavery -- Piper Jaffray -- Analyst

Okay, thanks. And then just one last one. For some of the export opportunities that you've talked about, especially as markets open up. What are some of the restrictions or conditions, if any, that might be in place? And specifically, how dependent is it on those markets not yet having supply built up such that if they built internal capabilities, would they be able to turn off the imports and potentially box you out? How does the trajectory look? Or is there any risk to that runway there?

Brendan Kennedy -- President and Chief Executive Officer

So, when I -- when we think about opportunities, we think about three buckets. Obviously, we think about the global medical opportunity in currently 41 countries. I think will easily end this year with more than 50 countries that legalized medical cannabis. There's a chance we could get to 70 -- 60 or 70 countries over the next really 18 to 24 months. And so that's a clear opportunity.

You know, those most countries are not looking to sources product from within their countries. Certainly, none of the 28 members of the EU are looking for that. We picked a facility in -- we picked Portugal as a place to build a facility because it had an ideal climate, it had a low regulatory costs, it had tariff free access to the to EU.

And so it would be very difficult for a country to prevent product, to -- from -- it would be very difficult for an EU country to prevent product from Portugal from entering that market. So, we're already building that supply in Portugal. And we have a global medical distribution partner in Sandoz, Novartis, that already has an established supply chain. And so, when we meet with regulators, elected officials, bureaucrats in countries around the world, as they enter a new regulatory framework as they look to legalize medical cannabis. There are so many uncertainties that they face. They are strongly encouraged, when they see that we have a partner like Sandoz. And I guess my final point would be, that also translates to physicians and pharmacists, who are looking for a trusted supplier, trusted provider of medical cannabis products. And when they see, when they see that Sandoz a Novartis division label on our products it inspires confidence and trusts. It builds a halo around our brand.

Michael Lavery -- Piper Jaffray -- Analyst

That's great. Thank you very much.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Mike Hickey with Benchmark. Your line is open.

Mike Hickey -- Benchmark Co. -- Analyst

Hey, guys. Great quarter. Thanks for taking my questions. Appreciate it. I think you reiterated your view that you'd be increasing your capacity to 90,000 kilograms or 90 metric tons by the end of '19. Did that sort of were you already sort of assuming M&A, because I believe you acquired Natura after that you're saying that adding 10 metric tonnes. So, should that be added, or is that sort of already implied in your guidance that you did with M&A?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Yeah, the 10 of Natura should be added, but we won't get a full 10 out of natura this year. Again we didn't buy it in January 1, and we do have some off-take agreements that we inherited. So, we're not going to get the full 10 for Tilray.

Mike Hickey -- Benchmark Co. -- Analyst

Okay. Thank you. Indeed, on your guidance for '19, or what you're originally expected 3-times 2018 sales, it sounds like you're confident on that plus $65 million in net from Manitoba, is that correct?

Brendan Kennedy -- President and Chief Executive Officer

That's correct.

Mike Hickey -- Benchmark Co. -- Analyst

And then how did the -- has the construct of that guidance changed? I mean, have you sort of fully contemplated the CBD opportunity? Or, is that become a bigger piece of the puzzle? And how much of that X Manitoba's sales sort of Canada versus what you would expect from international?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

So, I'll break it down, you had a couple of questions in there, so. So, has it changed, or hasn't included US CBD? Originally, when we gave that guidance, it did not include US CBD. The original guidance also assumes that we were going to get plenty of product from Canadian suppliers. So, there are some pluses and minuses for those two.

And then your question about Manitoba. I'm not sure I understood it.

Mike Hickey -- Benchmark Co. -- Analyst

I was just curious, I think, you answered it primarily just $65 million on top of the '18. Yes, I think you answered it.

The last question, in the US, you're seeing an effort from some of the states that are legalized cannabis to offer locations to publicly consume cannabis. Curious your view on how that could potentially happen in Canada or not?

And I guess specifically on beverages, you know, at least in the US, where we see quite a bit of work in beverage products and still remains a very niche product category. And so, I guess the second part of that question is, do you think for the beverages to really work, you'll need that a sort of social public consumption points, call it bars or restaurants for that to be meaningful for you in the future?

Brendan Kennedy -- President and Chief Executive Officer

Definitely, you know, in terms of beverages, it's all about consumer occasions to consume. And whether that's product that's purchased in a, you know, in a bar or restaurant, or a product that's purchased from a 7-Eleven or a Circle K. These products just aren't readily available. But we are seeing more and more millennial consumers, who aren't interested in -- or are less interested in alcoholic beverages, and they are interested in cannabis. And so we think that as a category of cannabis beverages will significantly increase, not only in Canada, but in the US.

Mike Hickey -- Benchmark Co. -- Analyst

Okay, thank you. Last little question for me. When you look at sort of what Canada Health is given, as they're sort of initial view maybe around the regulatory framework around edibles, you're seeing sort of maybe limitations on per serving potency, or you're seeing maybe limitations on sweeteners and coloring and maybe that the necessity to have separate manufacturing facilities.

Just curious how you sort of fold all that up into making competitive edible products versus the illegal market, where they've already sort of achieved scale and sort of know what the consumer want, some of which seems like Canada Health want to limit particularly like gummies and other products that adult-use has shown a lot of demand for?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, when we've looked at the opportunity in Canada over the past two years, it's always seemed a little incongruous that a public health organization was limiting the product form factor and essentially limiting consumer's options or choices and essentially forcing them to smoke a product. It didn't quite make sense to us. We are extremely interested in the opportunity that will be made available to us, when we can begin manufacturing and selling non-combustible form factors, such as edibles and beverage.

I think you touched on a really important point. Scale and marketing brands are what beat the black market. And if you look at individual US dates, the black market has been decimated in Washington state. It's been decimated in Colorado. And every restriction that Health Canada places on the edible market in Canada, all of those restrictions empower the black market, empower products and brands that are already in -- illicit products and brands that are already in consumer hands.

Having said all that, we are strong supporters of portion sizing and limiting the potency of edible products. And whether that is a 10 milligram portion cap or a 5 milligram of THC portion cap, we'll adjust our products accordingly.

Mike Hickey -- Benchmark Co. -- Analyst

Thanks guys. Best of luck.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Thanks Mike.

Operator

Thank you. And our last question is some Mike Grondahl with Northland Securities. Your line is open.

Mike Grondahl -- Northland Securities. -- Analyst

Yeah, thank you guys. Hey, Brendan, I know you kind of called out Germany, but what other countries do you think are most promising for medical use in the near term?

Brendan Kennedy -- President and Chief Executive Officer

Oh gosh! We're -- I'll sort of bifurcate that into existing and then future. So, the UK, Australia, New Zealand, we continue to see growth there. And really Chile, Argentina, Peru, Brazil are really early on in their growth curve. And then in Europe; Czech Republic, Croatia, Cyprus all countries that we already ship to. I think that we'll see progress and really interesting opportunities inside of the EU, really by the end of this year and so whether that's Ireland, Poland, France, et cetera. Those are the opportunities that we think are going to come online.

There's 19 countries in Europe that have legalized medical cannabis and so we expect -- we expect that a population of more than 500 million people will have access to medical cannabis in Europe over the next -- really over the next 12 to 24 months. And I think really an important distinction to make between Canada and Europe is that, in Canada, the Government of Canada's taxing medical cannabis, and in Germany, they're subsidizing medical cannabis.

In Germany and the Rest of Europe, you're going to see this product made available through government subsidized medical programs. And so it's a really different approach from Canada that's sometimes it's hard for people to grasp. In Germany, any doctor can write prescription, any patient for any illness distributed through a pharmacy with insurance company coverage and you just don't see that in North America today.

Mike Grondahl -- Northland Securities. -- Analyst

Sure. Sure. And then quick on CBD, is there any form factors that you think really stick out with hyper demand, or is it just anything with CBD can sell like crazy? How do you think about it?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, that's what's interesting about what we saw a few weeks ago at Expo West. We might -- we had a pretty large team there from Tilray, our -- almost our entire US team was there, as well as the team from Manitoba Harvest, and everyone on the team was sending me, they're all sending me pictures of different CBD products produced by really mainstream manufacturers. And it was, -- I mean, it was a cross, it ran the gamut in terms of form factors. And I think I made a joke the final day, that the only thing I didn't see was the CDB toothpaste. And two people sent me a CBD toothpaste and so were -- send me a picture of a CBD toothpaste. And so we're seeing it in virtually every form imaginable form factor.

I think that -- I think what you're going to see are products, mainstream products that contain CBD. But then you're also going to see really pharmaceutical grade dietary supplement, nutritional supplement products that come from established brands and trusted -- trusted sources, and I think that's probably the -- I guess probably the biggest opportunity.

Mike Grondahl -- Northland Securities. -- Analyst

Okay. Thanks a lot.

Operator

Thank you. And I would like to turn the call back to management for any final remarks.

Brendan Kennedy -- President and Chief Executive Officer

Thanks, everyone, for joining our call. We are very pleased with our performance in Q4, and in 2018 overall. Thanks for listening.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.

Duration: 71 minutes

Call participants:

Katie Turner -- Investor Relations

Brendan Kennedy -- President and Chief Executive Officer

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Steve Schneiderman -- Cowen and Company -- Analyst

Tamy Chen -- BMO Capitals -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Luke Perda -- Seaport Global -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Mike Hickey -- Benchmark Co. -- Analyst

Mike Grondahl -- Northland Securities. -- Analyst

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