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Simon Transcript @ Stifel--->>>Tilray, Inc. (TLRY) CEO Irwin Simon Presents at Stifel 2021 Virtual Cross Sector Insight Conference (Transcript)

Jun. 08, 2021 5:08 PM ETTilray, Inc. (TLRY)

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Tilray, Inc. (NASDAQ:TLRY) Stifel 2021 Virtual Cross Sector Insight Conference June 8, 2021 4:00 PM ET

Company Participants

Irwin Simon - Chairman & Chief Executive Officer

Carl Merton - Chief Financial Officer

Conference Call Participants

Andrew Carter - Stifel

Andrew Carter

Good afternoon. We'll go ahead and get started. My name is Andrew Carter. I'm a Consumer Analyst at Stifel covering the global cannabis sector. And today, we are honored to welcome back to the CSI Conference Tilray. Following the merger of Tilray and Aphria the company’s poised to lead leverage leading positions in the Canadian market and European medical market to capture global cannabis category growth. And today, we're honored to be hosting Chairman, Chief Executive Officer, Irwin Simon and Chief Financial Officer, Carl Merton.

Question-and-Answer Session

Q - Andrew Carter

So with that guy's, I'll go ahead and kick it off. Irwin, we'll start with you, give us a little introduction what brought you to the category? What you're attracted to us? And as you always say, what a difference a year makes what a difference two years make?

Irwin Simon

Good afternoon, Andrew and good afternoon everybody and excited to be here today and excited in a few minutes to talk about cannabis world on CNBC. But listen, I spent 27 plus years building out a consumer-packaged goods company in the natural organic food, personal care, and protein company and build all about brands.

And part of my strategy there was to do a consolidation of the industry, educate consumers about natural organic foods, and why healthy eating was not a fad or another trend. It was very much a way of life and build brand equity, with the brands that we had.

And with that, Hain was built into a $3.5 billion company, a $7-plus billion market cap in an industry that was about an $80 billion industry. So, rewind the tape forward, here we are moved into Aphria in 2018 and in 2019 took over as CEO. Since then, we've had nine adjusted EBITDA profitable quarters. We've had good growth. We built brands. We've done acquisitions. And I think we've created a lot of value for shareholders in regard to that. So, we built a good management team. We built out our brands. We built out our strategy.

And coming back and just looking at Aphria last year this time, we had about a $1.6 billion market cap that combine Aphria, Tilray, and Sweetwater combination today is close to a $9 billion market cap. So, not only do we create brands, create value, and this was in a world where we were dealing with COVID -- with the closed down in Canada since November, closed down in Europe, but our CC Pharma, not even to sell its medication. So, we've created value for shareholders. We've created a lot of new brands and new products for our consumers this year. We introduced over 80 new products under the Aphria side, which brought us about $40 million to $50 million in sales. So, just think, with the opportunities we have with piped-up demand, with our new products and marketplaces opening what Tilray can do and Aphria and Sweetwater can do with the combination.

Andrew Carter

Got it. And I think you mentioned it. So, let's step into it, kind of, the impetus for the merger, Aphria account a leading position organically in the Canadian market. Can you talk about why pursue consolidation why not kind of do it piecemeal in Canada, or does this kind of just accelerate the infrastructure and capabilities to take that next step in this industry?

Carl Merton

So, good question there, you heard me say before, about the size of category. And today if you look at Canada being a $9 billion category, how do you get to, a 30% share and consolidation was a way to get to that quicker. The combined combination of Tilray and Aphria, gave us about a 17% share. So with the combination it gives us a much faster route to gaining share, new products and Tilray brought to the table, they were asset-like and the ability integrated into our growth system was something that will help bring our costs down to be one of the lowest cost producer, they do have some great brands in regards to the Tilray. And with that there was a lot of good things that Tilray was in the midst of developing with oils, with its medical business, et cetera.

In regards to its European business, Tilray has built incredible facility in Portugal, combining it with our Germany facility gave us a real strong foothold into the European market, to raise oils, our number one. And so, the next big question is what do we do in the U.S. that everybody asked me that question every day, Andrew.

Andrew Carter

Absolutely, and we talked about it a little bit this morning, talking about a couple of things, building a business that investors want to own number one, and one of the ways you're different is you're kind of building the capabilities and option. But they have to be as you said -- as you called it, self sustaining cash flow positive. Could you give us some perspective on how you're attacking the U.S., laying the groundwork?

Irwin Simon

Exactly. As you and I had our conversation today, I'm big into cash. I'm big into driving for cash flow, not burning cash and remember that, and I think that's important. I think that whole industry is waking up to that, and as we will be able to talk to you about numbers soon, we'll show you how we're doing that, and how we're cash flow positive.

But I think, as I've said before, with the Tilray and Aphria combination, we're taking $80 million of costs out of this business. On top of that, we will reduce our grow costs with moving that the cost into the freest facility. So, consolidation is important if you can get growth. If you can get cost efficiencies, and you can get costs out of this business, and I think that's what's real important to us and to be driving cash flow positive businesses.

Andrew Carter

And then, kind of, a segue to that is of course the SweetWater business, the beer business, I think, very nice cash flowing business to have especially with Canada and countering some challenges, which Carl and I'll discuss. But I want to talk about like does the integration of Tilray put any kind of your kind of ambitions to do more U.S. CPG asset on hold. Could you give us a sense of what your bandwidth is to do more, how many targets you're looking at, and what we could be seeing at you guys?

Irwin Simon

So, over my years, I've done lots of acquisitions, and our bandwidth is pretty long. We're in the midst right now of integrating, Tilray and Aphria together, and we have a great team in place with the combination of existing Aphria members of the team and now bringing on additional Tilray members and I got to tell you I have a great team to work with.

Number two, we'll look to add to the team and we're in the midst of doing that. But the bandwidth is there. I mean, the key is we have a balance sheet today. We're over 500-plus million dollars Canadian in cash. We have currency that we can ultimately use to acquire companies, which made sense. And they have to be accretive organically on a top-line, and they have to be cash flow generating for us and that's something that we’re excited about.

If you come back and look at SweetWater, it probably made more money than most of the LPs in Canada. So -- and that's something we're going to continue to do. We're seeing some great things happening. Andrew, with Manitoba Harvest, we brought in a new CEO that used to work with T&E. And already we're seeing some differences happening there.

So, yes, we're looking continuously at the beverage business, where we add on to SweetWater that makes sense. As one day, we know that THC and drinks will be something that will be sold. We're looking at the CBD market in the drink market right now, and utilizing our distribution system and our knowledge and our processing facilities of producing drinks.

Yes, and we're also looking at what is the right way for us to have certain options in the US, if that makes sense, when legalization does happen. So we have Europe covered, we have Canada covered. And with that, we'll have the ability to have businesses in the US and build out our brands. We're rolling out Broken Coast, Solei, RIFF brands, through SweetWater today in the IPA and the beer business and the vodka and seltzer businesses.

We're looking at CBD topicals, which we're looking at partnerships out there. And the other thing, which I didn't talk about, Andrew, the way for us to do other things in the US with other major consumer packaged good companies, is to use and leverage their technology and resources for us to do partnerships in the consumer packaged good business and their stuff that we're looking at there.

Andrew Carter

Great. Like, I feel I got one more question for you, if you got time with us. I guess, we were talking a little bit about federal reform. You see a real need to try to get something done over the near term that creates -- just the growing industry creates a lot of problems and just something to be done. But want to give you opportunity to kind of expand on that, while you got a few more -- a minute or two with us.

Irwin Simon

So, as I said to you this morning, over 67% of Americans want cannabis legalized. I think, as we continuously talk about why it should be cannibalized -- why it should be legalized. And I think the importance is that, today we have state by states that is legalizing it. But how do we legalize it on a federal basis.

The thing is, today, we're standing out there and we don't know if the three-tier system, it’s going to be retail, it's going to be wholesale, it’s going to be producing. And with that, I think, we're not moving in the right direction until we have certain standards, whether to see, think, act, whether ultimately, we can go and grow in Canada and ship.

So something's got to happen in the next two years in regards to some type of legalization, whether it's a de-scheduling or something. So I think something happens in the next two years and I've said that before, and will give us a direction or path. And with that Tilray will be there, to play somehow, some way in that method that ultimately legalizes. We will not be participating in anything unless it's legalized and we're able to be a part of it and that allows us to continue to trade on NASDAQ and the TSX.

Andrew Carter

Absolutely. And then, kind of wanted to talk, kind of step back with you a little bit. We did talk a little bit about kind of your advantages that you look at versus kind of the US MSOs, good businesses out there, but no doubt that they are -- they're not necessarily entitled to the $100 billion category. Walk through kind of your advantages as you see it kind of relative to those businesses.

Irwin Simon

So, listen, I come back and say, I'm envious to lot of these MSOs, because of them having businesses in the US and the size of US and the size of market. Listen on the other hand, watch out Israel is going to legalize very shortly and Israel is like an Illinois, or like another state. I think there's opportunities where Germany and Portugal are going to legalize. But I come back and I say this here today, once legalization or some form of legalization happens, we can decide if we want to be a retailer, if we want to be a wholesaler or what we want to be. And that's how we jump in.

And I think, listen, if you look at Tilray today, I mean, you look at our volume of shares that we trade compared to some of the MSOs, I think, there's a plenty advantages of why retail investors want to own a Tilray because they see where we sit, run their mind and what they want to be owning and how they want to be investing in cannabis stocks and Tilray is right up there.

Andrew Carter

Absolutely. And Irwin, you mentioned kind of the European medical kind of business, kind of talk about that I think you think -- you also -- we also mentioned that you wouldn't want to be starting to build the infrastructure you have today in Europe, self sustaining business ready to turn it on with any kind of recreational optionality you get in those markets?

Irwin Simon

So I'm going to ask you, I'm getting my signal that I got to run, but I’m going to turn it over to Carl, you're in good hands with Carl. But what I say is this here, we have an incredible facility in Portugal. We have an incredible facility in Germany. We got CC Pharma, which has the ability distribute over 30,000 drugstores in Germany. I wouldn't want to be building that from scratch today and you heard me say this here, that the opportunities in Germany, opportunities in Portugal, opportunities in other parts of Europe for legalization I think are just around the corner.

Andrew Carter

Sounds great. Thanks for joining us, Irwin.

Irwin Simon

Thank you very much, Andrew. Good to talk to you. And I'm going to turn it over to Carl and you're in good hands.

Andrew Carter

Absolutely. And Carl, I think I might kind of start-off by we want to get Irwin, and just kind of give us a quick intro what brought you to the category, just kind of in your tenure, you've been at Aphria/Tilray the longest at this point?

Carl Merton

Yes. I've been involved with this company for over six years. I started out off for a year on the board at Aphria. It was an interesting opportunity to join a very interesting space, but I think the biggest part that in terms of the advantage of joining was the business was focused on operations from the beginning. It was founded by operators. It was operated as a real business, trying to make a profit.

I think if you look at our history, we had 13 quarters in a row of positive EBITDA and then we invest in for one year. Turn that -- that number turned negative as we got ready for federal legalization then back to as Irwin said, seven, eight quarters in a row of positive EBITDA again. And so, we've had that very strong focus on the revenue coming before the costs.

And that was an exciting opportunity at the time, my role on the board morphed into becoming CFO, about 5.5 years later and I've -- it's been very interesting journey through the cannabis space from the early years until today. I'm glad that there's a lot more process and logic to how the industry works.

Andrew Carter

Absolutely. And I guess Irwin’s going to leave you with a couple of kind of harder questions to tackle. But the first one is, I guess you know I've talked to quite a bit about kind of the more difficult Canadian environment over the near term, a little more challenging than we all expected, especially, with COVID.

Can you walk us through some kind of the co – kind of limiting factors that you're taking some – some of your own internal efforts that are even throttling your sales, but just talk a little bit about that if you don't mind? Just take it off.

Irwin Simon

Sure. And so, I think, it's important as part – part of that discussion, understand the geography of where we where we play. So as legacy of free – kind of played in – in Canada, it played in Germany, and then it played in the US Southeast. In terms of legacy Tilray, they played in Germany, Australia, Portugal, and Canada.

And so when you go out and you look at Canada and I know this is hard to understand for some of the people that live in the US. And we have been in hard lockdowns since November, in Ontario, the most populous province in Canada and the province in Canada that, obviously – has the highest amount of revenue going through the cannabis space. And so that's been difficult.

You know, I've heard stories about 650 stores in Ontario, and 125 of them haven't been able then have a customer inside their door since they got their license because of these lockdowns. And so that's had a real – a real headwind type experience on our business.

And if you – I'm very pleased to say that come Friday of this week, Ontario is lifting a number of their restrictions. Alberta is lifting their restrictions. BC is starting to show signs of lifting restrictions. And so we see – we see a positive tailwind coming from that. So as those restrictions are lifted.

When you look at the Canadian space inside of that period, and you really dig down to what's happening, what's really happened is that because of that faced – lack of face to face interaction between consumers and budtenders and an in-store and being – going into stores, being able to do impulse purchases at the counter, those types of things, you've seen a real move or a shift to people who are playing purely based on price.

And we think that was, as people get back into stores, when they move away from reviewing products online, on websites and e-commerce sites, and they move back to the store and the budtender becomes more relevant, you're going to see people morphed back into the brands, as opposed to – the little bit of the focus over the last five or six months, that's existed on price.

When you shift the analysis of what's going on over to Germany, you know, Germany is very similar to what's going on in Canada, where they’ve been under hard lockdowns, that impacts things that CC Pharma. Traditionally, you would see at a CC Pharma, a summer buy-in or a pantry loading on some of their prescriptions as they got ready to go away for vacation periods, you know, we're not expecting that this year.

Elective surgeries are down in Germany, as a result of the hard lockdowns, that's a portion of CC Pharma’s business. People aren't going to see doctors to get new prescriptions. And so that's had an impact. You know – and those same two markets have impacted Tilray.

When you shift to the US though, you get a bit of a different story. When you look at Sweetwater and, and its regional concentration in the US Southeast, what we've seen there is we're starting to see a lifting of the conditions that have existed and they were never that tie of a lockdown.

And so you're getting a couple interesting pieces happening there. You're getting an increase in on-premise opportunities and we're seeing on-premise increase 30%, 40% each of the last two months for the data that's available for March and April, May is just not available yet, or if it's available, I haven't seen it. And so you're getting a real positive there as people are returning to restaurants, and to bars, and things like that.

On the opposite side that consumption is obviously leaving the off-premise, but you're also comparing it to a prior year when you had a significant pantry load in April and May of beverage alcohol. And so you're actually getting a little bit more of a decrease there. We think all of that, works its way out to increasing revenue base moving forward, and what's really positive is it's moving forward before the cannabis space really is. I talked about the positives of Ontario opening up later this week. Unfortunately, for us, it won't impact our Q4 as our Q4 ended on May 31st. But it's really setting us up for a positive tailwind in Q1.

Andrew Carter

Understood. And I guess, one of the things you talked about in there was kind of a real diversified portfolio of assets you got Sweetwater nice reopening trade. For instance, you got the Global Medical. So, it brings you back to the acquisition and with a diversified portfolio, it's pretty complex integration. So, I guess, the question there is, you're doing -- you're tackling this integration it's I think seven different businesses on three continents, going after $81 million synergies. Can you provide us some confidence in kind of managing through this and kind of realizing those synergies?

Irwin Simon

Yeah. So one, I think, I'm not going to try and mislead people. There's a big lift, as you call it a complex integration. But we've taken a number of steps to really keep that process moving. We went out and we hired a third-party consulting firm to help us with what I'll call pre-integration or pre-transaction integration, and to put us in to have our best foot forward for those very first days when the transaction occurred. We've actually kept them on for the first couple of month's post-transaction just to keep that momentum going internally.

We talked about the achievement of those synergies and we'll get into that more when we release our results. But I think people will be positively pleased with where we're at in terms of achieving those in the initial first month, which we're going to -- which is -- which forms part of our reporting

A big chunk of those synergies have always been targeted for kind of the second six-month period after we close, and that's because they're driven by the cultivation synergies that are going to happen. And it takes time to move some of those plants from one facility to the other and then you have to go through your growth phase at the new facility and that can take upwards of 16 to 20 weeks.

And so, we come out with 8-K, that we closed the Enniskillen facility for Portugal effective in the fall. They're going through a decrease production period as we move those items to Aphria one. And so I think people can have a good confidence level in terms of how we're moving forward with those the steps that have occurred. All along those things weren't going to happen overnight. They were going to take us 18 months to achieve, but we're extremely confident we'll achieve all of that in the 18 months.

The other piece about those synergies is they're only cost synergies. It also does -- it doesn't include the revenue synergies that we think we have opportunities to achieve. Things like taking the production that comes out of Portugal and converting it from a third-party distributor to bring it in internal with CC Pharma, and then being able to move up the value chain on the revenue side when you sell that product. There's a revenue synergy opportunity there for the company that we didn't include in those buckets, to being able to grow a Aphria’s sales base, the legacy of Aphria brand's, sales base, because they now have edibles and beverages available to them as a product. Those types of things were not included in that, inside of that model.

Andrew Carter

Understood. And then putting the portfolio together, back to putting this together, I guess we've estimated mid-teens long-term growth profile. I'm not going to ask you to give guidance or anything like that today. But think about the business segments going one-by-one, Canada -- cannabis is going to do, it's transformational growth, it'll slow a little bit.

Aphria, I guess mid-single-digits, Manitoba Harvest may take a little time, but it's got to -- it’s growth business and then distribution, obviously, GDP. But could you walk us through how we should think about the legs of the stool, and working together to drive this business long-term.

Carl Merton

First off, I think cannabis. You've got this opportunity coming out of COVID. Sales levels have been down. Demands been a little bit down in Canada or it's -- or maybe instead of being down, let's call it, the sales growth has been stunted during the COVID period. And so really, I think what you're going to see is as people start returning to stores, you're going to see demand start to increase. The retailers will be a little bit slow in their initial orders. They don't want to get stuck with a lot of inventory coming out of COVID.

So, they'll place those orders a couple weeks after that -- that the turning on of the tap, so to speak of having customers in the store. That'll then filter up to the control boards, and they'll run through a bit of their inventory before they order. And then, you'll start to see a tailwind for the LPs. And I see that happening in the month to six week period after that initial opening.

And so, I think you've got a nice one-time COVID pickup. That's going to happen, combined with continued growth in the cannabis space. If you look at the space today I think the last month that Stats Canada presented was either March or April and the market on an annualized basis is about $3.6 million based on that month alone. Sorry, $3.6 billion. I think I said million.

That market as Irwin said earlier is forecasted to be an $8 billion to $9 billion market. There's a lot of room for growth going forward. The keys to that growth is going to be conversion of the illicit market, it's going to be getting new product forms available to consumers and continuing to increase access for the consumer.

If I move to the beer business, I know you said traditionally that's a low-single-digit growth, but I think you have to look at what we're trying to accomplish with SweetWater, and SweetWater if it were to stay in its existing lane and its existing markets, I would agree with you on that growth rate. But we've been moving it up the eastern seaboard in terms of additional distribution points.

Moving it through the Rust Belt, we've been going west. We had a press release out about moving into Colorado. We're targeting California, and the Northeast -- sorry the Northwest next. And so, I think as you increase its overall addressable market, you can see growth that's greater than that number. And so that's something that we're focusing on for SweetWater.

When you look at the legacy distribution business, I mean, we don't expect that business from a legacy perspective to really grow. It's pretty standard, but it's not there for that, right? That legacy distribution business is there for distribution of cannabis inside of Germany, and we see very strong growth opportunities in Germany and across the EU, before eventual U.S. legalization of cannabis.

Andrew Carter

Got it. And then -- Thank you. One more question, because we’ve got a minute or two. Just wanted to ask, in terms of, where do you see kind of capital investment behind this business. I mean, you were both Tilray and Aphria were at the end of their capital needs. Is it going to be mainly between -- behind growth CapEx? I mean, should those be pretty light. How should we think about that need in kind of supporting this business going forward?

Carl Merton

I think, we're -- if you look at the legacy cannabis businesses that we have, you're going to see very little need for CapEx. It's going to be focused on maintenance CapEx or cost improvement projects. We found a way to automate a process and its three less employees because of it, or three less workers on that line. You're going to see those types of things.

We've got some minor investments and extraction in Germany that we need to do. We're looking at some lighting projects in Canada that maybe help us in the -- with winter yields and things like that, and completing our concentrates line, but all of that total is less than $10 million of CapEx, really.

Really, the focus of our CapEx spend going forward will really be about an entry to the US, or an opportunity in the EU, where a new country comes online that we don't know is online today. That's where those pieces will be focused.

Andrew Carter

Sounds great. And with that, we are at time. I want to thank you again very much. Thank everyone for joining us, as well as Irwin and Carl from Tilray. Thank you, guys.

Irwin Simon

And thanks very much, Andrew, for having us. Greatly appreciate it.

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