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Tilray stock rises after the company shows it can sell recreational pot

MARKETWATCH 7:36 AM ET 3/20/2019
Symbol Last Price Change
TLRY 69.79down 0 (0%)
QUOTES AS OF 04:00:00 PM ET 03/19/2019

Canadian pot producer intends to shift focus to U.S., European markets

Tilray Inc. (TLRY) finally showed investors that it is capable of selling recreational pot in Canada, but emphasized its pivot to markets in the U.S. and Europe that it will need to justify its swollen market value.

Shares in the Canada-based weed producer rose more than 4% in the extended session Monday and were up the same in premarket trade Tuesday, after Tilray(TLRY) said quarterly sales grew to $15.5 million, up from $5.1 million in the year-ago period. Tilray(TLRY) said the average net selling price per gram of pot increased to $7.52 from $7.13 in the year-ago quarter.

While Canada was the first country in the G-7 to legalize the adult use of recreational cannabis, the national experiment has begun with widely predicted fits and stutters. From day one, the major pot producers have been finding it difficult to process cannabis and get it into packages, which has contributed to an inventory backlog, with little product available for sale to consumers.

Tilray (TLRY) did end up selling several million dollars worth of recreational cannabis, but Chief Executive Brendan Kennedy called the U.S. and European markets "orders of magnitude larger" than Canada, and has decided to focus his company's ambitions abroad.

"So while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the U.S. and Europe," Kennedy said in the company's conference call late Monday. "We will not purchase or invest in what we believe to be overpriced . . . assets in Canada, which we believe will erode in value, medium-term to long- term, as the market normalizes."

In case you missed it: Cannabis stocks rally ahead of Tilray(TLRY) earnings (http://www.marketwatch.com/story/cannabis- stocks-rally-ahead-of-tilray-earnings-2019-03-18)

The company reported fourth-quarter losses of $31 million, which amounts to 33 cents a share, compared with losses of $2.9 million, or 4 cents a share, in the year-ago quarter. In the earnings release, Tilray(TLRY) said its losses widened because it was spending money on growth.

Analysts surveyed by FactSet had estimated losses of 14 cents a share on revenue of $14.1 million.

Tilray (TLRY) does not give guidance, but executives said that during the roadshow leading up to its initial public offering last year that it expected 2019 revenue to be about three times more than its 2018 revenue -- which ended up being $43.1 million, as reported Monday.

Kennedy said over the phone to MarketWatch that roughly 30% of the company's fourth-quarter sales were from the adult- recreational-use market in Canada. In the first and second quarter, Kennedy said he anticipates that share to increase to 35% to 40% of overall sales -- though the first quarter will be the first time its Manitoba Harvest acquisition (http://www.marketwatch.com/story/cannabis-stocks-higher-as-tilray-unveils-biggest-acquisition-yet-2019-02-20)will appear in the company's results.

"We sell everything we make," Kennedy said. "So we can't evaluate whether 'is this form factor doing better than that form factor?' It sounds like a non-answer, but when there's not some sort of supply-demand equilibrium, we can't tell."

Kennedy said he doesn't anticipate legal supply meeting demand for another 18 months in Canada.

For the near term, however, Tilray(TLRY) is forced to buy cannabis from third parties in order to keep its product on the shelves. "So the third-party supply is primarily because we have significant demand for our products and we're just not able to produce enough supply," Kennedy said in the earnings call. "The quality of that supply is just not available as well, as just not enough product is available."

Internationally, including in the U.S., Tilray(TLRY) is looking to grow its operations. Kennedy said he now anticipates 100,000 medical-marijuana patients in Germany. And Tilray(TLRY) is tripling the size of its Portugal greenhouses and increasing its outdoor production by tenfold this summer. The German medical-marijuana market is the most advanced in Europe, Kennedy said, and the company plans to supply the European Union with pot from Portugal.

In the conference call, Kennedy said he believes there is demand in Europe for all of the company's current supply in Portugal, which is currently being filled from Canada. Kennedy also said he believes European countries will grow medical-marijuana-patient communities at a similar pace as Canada did, citing Germany specifically.

In 2015, there were 800 German medical cannabis patients, a number that he said will rise to 100,000 by the end of this year, from 40,000 at the end of 2018.

Kennedy noted that European countries, unlike Canada, are not taxing medical cannabis and are providing government subsidies instead.

Tilray (TLRY) stock has fallen 53% in the past six months, with the S&P 500 index falling 2.8% in that time.

-Max A. Cherney; 415-439-6400; [e-mail]


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