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Great interview: Tilray, Inc. (TLRY) CEO Irwin Simon

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Great interview: Tilray, Inc. (TLRY) CEO Irwin Simon Presents at Oppenheimer 21st Annual Consumer Growth and E-Commerce Conference (Transcript)

Jun. 15, 2021 3:28 PM ETTilray, Inc. (TLRY)1 Comment


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Tilray, Inc. (NASDAQ:TLRY) Oppenheimer 21st Annual Consumer Growth and E-Commerce Conference June 15, 2021 11:35 AM ET
Company Participants
Irwin Simon - Chairman and CEO
Carl Merton - CFO
Conference Call Participants
Rupesh Parikh - Oppenheimer
Rupesh Parikh
Good morning to everyone. Thank you for attending Oppenheimer’s 21st Annual Consumer Conference. My name is Rupesh Parikh. I'm the senior food grocery and consumer product analyst at Oppenheimer. I'm happy to introduce our next presenting company Tilray. We're excited to have joining us today Chairman and CEO, Irwin Simon; and CFO, Carl Merton. Thank you both for being here. So first off, I just want to say congratulations on the completion of the Aphria Tilray merger.
For those who are not familiar with the company, Tilray is a leading global cannabis lifestyle CPG company that cultivates, processes, markets and sells medical and adult use cannabis, cannabis derived extracts and derivative cannabis products in Canada and globally. The company recently completed its merger with Aphria medic. The combined company has operations in Canada, US, Europe and Latin America. In addition, the company manufacturers, markets and sells alcoholic beverages in the US. The cannabis has been in challenge, challenge for all players as we’ve seen over time but we're getting optimistic that Tilray is better positioned towards a more profitable future and could emerge as one of the bigger winners in the space longer term.

So format, today’s session will be a fireside chat. So let’s get started. So I first want to begin with a few questions on the current environment. So first as we look at the current backdrop, clearly, there are still challenges related to coronavirus in some of your markets, can you remind us of what is currently happening on the ground and the potential impacts on Tilray?
Irwin Simon
Good morning. Good afternoon, Rupesh and great to see you again. Listen, coronavirus you know, has absolutely hurt us during this pandemic as it has a lot of companies. During you know the early part last March as consumers stayed home absolutely were enjoying cannabis. Came the fall this year, the Canadian government did close the cannabis stores in Canada, which allowed you only two buy products either curbside or online, which again, prohibits consumers from going in the store, do shopping, see the products, et cetera. So with that, absolutely that affected us. At the same time in our European markets, stores were closed, drug stores were closed and having our CC Pharma business which distribute medicines to drug stores and that affected this year. In regards to our SweetWater on-premise closed down. But listen, that's in the rear view mirror. The world continues to open up, as I sit here and watch the news and mass are going away opening up to 100% in California, I think there's tremendous pent up demand in Canada. So looking forward, I see a lot of great opportunities for us.
Rupesh Parikh
So if you look at coronavirus impacts in Canada, like are they fully reopened, or maybe you can just share with us what's currently happening on the ground?
Irwin Simon
So since Carl is sitting in Canada today, you and I are not, I'm going to let the Canadian expert. And even though I’m Canadian, I couldn't go to Canada for part of this twos, I would have quarantined for two weeks and live in a hotel or whatever. But Carl, you want to tell us exactly what's going on on the ground right now in Canada?
Carl Merton
Yes. So in the biggest market that we have in Ontario, the province has started a phased reopening, that started on Friday of last week. Consumer stores can open back up and they can have about 10% capacity in the store at any one time. And so we're starting to see some positive steps in Ontario. If you move to Alberta or BC, those provinces are in the same process of a phased reopening. There are about a week ahead of Ontario and so they had their initial openings one week before. And they're just getting to the point where next week they are going to start moving into phase two of the reopenings. Phase two of the reopenins allows a few more activities to occur but really for -- in terms of cannabis, it lets you have more people in the store at one time.

Rupesh Parikh
Okay. Great. So I guess as we think about your business, so it sound like to there’s still some headwinds out there right now that maybe they can linger a bit more into the summer. But then hopefully by the fall, at least on your business we move past on these coronovirus headwinds. Is that a fair way of looking at it?
Irwin Simon
Yes, that is actually the case, Rupesh. And listen, we’ve worked all the different boards and our social media to help with those that went to retail and were able to either order online and those were able to order curbside. And there was a big number, I feel that we were affected during the year, because the store has been closed. But like I said with the combination of Tilray and Aphria, once things get back to normal, stores open, we're going to be aggressive as there from regards to the way we communicate to our consumers. We're going to be aggressive on new products and innovation getting out there. And the good news is this here, Rupesh, there's a lot of licenses that were handed out that they didn't -- the stores didn't open until this was behind them. So now I think the number is like 660 stores that are in Ontario today. And the big job that we have to do is educate consumers why cannabis is beneficial for them and the benefits of it, and from a medical standpoint and from an adult use standpoint.
Rupesh Parikh
Okay. Great. So switching to a few industry question. So on Canada, how do you see teams either longer term development and potentially Canadian market? And then what do you believe are the key factors that are needed to drive a healthier more profitable backdrop for leading players?
Irwin Simon
So number one, combined share now with Tilray and Aphria is about 16%,17%. And with that, how we're going to drive growth, drive share? My objective is I'd like to get to a 30% share. And again, it’s like when you've covered me once before, how do I build out our brands, it’s our RIFF brand, our Solei brand, our Good Supply, our Bingo, our Broken Coast, our Marley brand. And that's what we have to do is build out brands, number one, that consumers trust, know they've gone through regulatory, know they've gone through quality control, and they're buying a product that they know is safe and they're seeing the benefits from us. So that's number one. Number two, in regards to products and innovation is something that we’ll continuously do. And that is from cannabis 2.0 in regards to edibles and gummies, and drinks, which we did not have much of a market share in that. Number three is our medical business in regards to our value added on our medical business and we just introduced the product last week.

And last but not least is how are we that low cost producer and that is the big thing where we got to get our costs well underneath dollar out there and from a production standpoint. And again, what I said is this here Canada's had handcuffs on in regards to the way you could market to consumers. Listen, it's important and never ever forget the safety of the products and making sure you communicate that. But it's also very important that you're able to communicate to them and educate them about the products and the benefits of cannabis. And that's something that we have to do. Canada is a $9 billion market at retail. So it's still a pretty big market. And there's no reason that a billion dollar site for us is not something that's not achievable.
Rupesh Parikh
Great, that’s helpful color. And then switching topics just to consolidation. So clearly, we've seen a number of players besides [tourists] being active on the M&A front lately. Where it is further M&A consolidation rank as a buyer for the company and then how do you feel Tilray is positioned versus some of the pending acquisitions out there, whether Canopy, Supreme or HEXO in the multiple acquisitions that they have pending right now?
Irwin Simon
So listen, I think, when I got to Aphria the first and foremost was to foot up the foundation of what Aphria was, and we were a Canadian LP with real major grow facilities and [Indiscernible], and we had our brands. And that was what my objective was to strengthen our growth, to strengthen our brands, to strengthen our balance sheet, get rid of businesses that were cash drains and ultimately, we're losing money for us. We did that and then we went out to look at what is the right strategic partner for us. So we went through an exercise to look at what made sense for us. And Tilray made sense for us, because they were asset light in Canada and have the ability to bring their grow into our facilities. They had the great asset in Europe in regards to their Portugal facility, very strong and medical there and much stronger than Aphria was.
In regards to cannabis 2.0, they did have with beverage line, they did have with edible line, which we didn't. And last but not least, there was about $80 million US in synergies and savings as you bring these companies together. So with that, as I looked at it what was the best for us? It ultimately, looked at Tilray being the best for us. Now listen, I think everybody else realized consolidation is key. And I think there will be some more calls consolidation. I think from a Canadian standpoint right now, the most important thing for us is to integrate Tilray and to get those cost savings, drive down our costs. And as you know, I like cash and being cash flow positive is something that we ultimately got to continuously drive within the new Tilray.

Rupesh Parikh
Okay, great. So staying up that Tilray after your combination. So a few more questions for me. So how has the transition process gone thus far, has there been any major surprises or challenges that you'd call out?
Irwin Simon
So if I sat here today and said, no, there's no one out there. And you know I've done over 55 acquisitions at [Indiscernible], there's no one out there that has not got surprises as you peel back the onion, and both good and bad. Listen, as I said before, there's lots of heavy lifting to do. I think, we're happy with a lot of the things we see within Tilray. We're happy with some of the share they've been able to achieve in the Quebec market, and very happy with the Portugal facility. But with that, I am very fortunate to have a real good team of both Aphria employees and Tilray employees that make up a great team for the new Tilray. I have a very good board. We have a strong balance sheet. We're all over these cost savings pretty quickly. We've already achieved a pretty good number so far. We're probably a little bit ahead of plan. But things happen out there that you could fall backwards. But we're in a good place in regards to moving things. And I'm a big believer, as you move quick on these things, not let things linger. So yes, there has been surprises both ways. But I like what we see and where we're going out there. Carl, you want to add anything?
Carl Merton
I think you've nailed it. Anyone who suggests that you go through these processes and they're not heavy lifts or that things happen seamlessly, they're just not telling you what's really going on. That being said, there's been a lot of hard work to get us to this point. There's a lot of hard work still to go. We're very focused on achieving the synergies and getting the two entities fully integrated. And we've got the right team to do it.
Rupesh Parikh
Okay. Great. And then this is -- I mean, this is something, as I look at the industry and just seeing all the consolidation out there. When you acquire someone, right, and you combine the shares, it's not always easy to maintain that share during integration process. So in this case, I think you've said 16% share that you guys have right now with Tilray after you’re combined. What's your confidence to be able to sustain and grow that share during the integration process?
Carl Merton
Listen, that's a great question. Because you're bringing together organizations, you're bringing together marketing groups, you're bringing together brands that were popular in certain provinces and not the other. And that lists from publicly and said, I'd like to be able to be at 30% share. But what we got to do is what I've said before is we got to aggressively get out there and make sure that -- and there's -- the interesting thing is it’s here. There’s a lot of smaller guys out there that are trying to steal share from us, okay? So it's not only the bigger ones, the cannabis, the Auroras’ and HEXO’s, it's some of the smaller ones. So that is where we got to have the good boots on the street. We got to have brands that can resonate and we got to go out there and educate consumers about our brands.

And I go back and say to again refer back to the old consumer packaged goods companies, you can’t stack them behind and just think they're going to fly off the shelf. There's a lot of consumers out there today that need education. There's a lot of consumer be brought up to awareness of the potency in regards to the different flower, in regards to the different pre rolls out there, certain decisions on vapes, on price, et cetera. So you got to go back and react pretty quickly. And as the stores open, we have some pretty aggressive strategic plans in place of how we're going to do it, both on new products, social media, getting products out there, getting a pipeline filled again. The other big thing is working with the liquor control boards to make sure they have the right inventory, the right mix and everything to get caught back up, because a lot of these stores, as you said, have been closed to consumers since last November.
Rupesh Parikh
That’s helpful. And just on the [Indiscernible]. So obviously, I watch you’re here and you guys -- and your M&A. Consistently on your synergy targets there. So here obviously a more difficult competitive backdrop and maybe even a more difficult integration. What gives you confidence of being able to deliver on the synergy targets that you led out? And at this point, any insight whether that could be conservative in terms of the target or is it too early to say?
Irwin Simon
So I'll take it for a second and then I'll turn it to Carl, because he's the keeper of that. So what we did is we hired a third party to help us with this year. And again, we have a plan line by line what our people, what our facilities, what our COGS, what our duplications in public company costs, et cetera. So with that, we have every Tuesday at 4 o'clock we have a call and we go through it line by line where we at, why we're getting it or why we're not getting it, to make sure that we're on top of it. So listen, I think there is more there, but some things could fall away. So right now, we're committed to the $80 million or $81 million, a CAD100 million Canadian and still feel very good about it. Carl, you want to add anything?
Carl Merton
I think, it's important to note that you've committed to the $80 million and that you're going to have things that you thought you were going to achieve that you ultimately don't achieve but you find something else through the process. One of the other important pieces of the $80nmillion is it’s only [cost] synergies and it doesn't currently reflect any of the revenue synergies that we think are out there. And the most obvious one that -- it's going to take us about six months to put it into place. But one of the most obvious revenue synergies is taking CC Pharma to be the distributor for the product that Tilray used to be paying the third party for. And so now you're taking a product that you used to sell at the LP’s selling price and you're now selling them at distributor’s price to the pharmacy. And so you've picked up more of that value chain and you'll actually be able to drive our revenue number as a result. All of those types of things, the cannabis 2.0 products that Irwin talked about earlier in terms of beverages, gummies and chocolates, and those things that Aphria was not involved in previously that we can now go into, those are all revenue synergies. And we didn't drive the number up over the longer term but not part of that $81 million.

Rupesh Parikh
That’s helpful color. And then my last question on this topic, with the recent merger, how do you guys feel about your pre-auction footprint today? Do you believe the company is now right sized to capitalize on the development within the Canadian market without having too many write-downs or too much supply at this point?
Irwin Simon
So if you look at our footprint today and what our capabilities are for the Canadian market, when it's fully developed, I'm very, very comfortable with what we have, right? If you go back to where we were a year ago at this time and where the Canadian market was, obviously, that footprint is bigger than is necessary. And we made some changes in and took some production offline to adjust for that. Now that we bring Tilray into the equation and we start closing their cultivation facilities and we leverage it through the Aphria footprint, we can bring some of that back online. And so what I think is most important is we have the capacity without the need to add more capability and more CapEx as the market grows and we can flex down on when necessary and flex back up again when necessary.
Rupesh Parikh
Okay, great. So now switching to some other topics I was hoping to , starting with cannabis 2.0. Can you remind us of key parts of your cannabis 2.0 product offering? What has been the biggest surprise thus far and then which categories do you believe hold the most potential longer term?
Irwin Simon
So cannabis 2.0 so far for us, vapes have been a major home run for us. And we've sold well over $100 plus million in vapes, and I think that will continue to be a major product line for us. And the rest of cannabis 2.0, I think tremendous, tremendous opportunities in edibles and gummies, and drinks and with our self aligned with SweetWater that will help us tremendously there. Listen, I come back and I say this year in regards to flower, flower will continue to be one of the biggest product lines out there. Flower is a great margin product. The number that we’re selling in pre-rolls it’s within millions every quarter there. So I think pre-rolls will continue to be a big part of our portfolio, as we’ve gone the different waxes and hashish and stuff like that, we’ll absolutely. And the other big thing for us will continuously be topicals, or oils, or products in regards to the medical aspect of it and Symbios which we just introduced last week in regards to arthritis are key is a product that we see has tremendous potential. Carl, anything?
Carl Merton
It's not really 2.0, but also the recent introduction of our high potency CBD oils. I think it provides a more diverse offering to all the consumers.
Rupesh Parikh
Okay, that’s helpful. And I don't know if this is something you guys have disclosed. What percent of your mix is cannabis 2.0 right now, and how do you expect this to change in coming quarters?
Carl Merton
So in the last few quarters, we've been just a little bit below 20% in terms of 2.0 products and really the only 2.0 product Aphria had was vapor, was the predominant one. The majority of the product was flower, and pre-rolls and oils, which we classify as 1.0. I think that has a significant opportunity to expand though as we take advantage and leverage Tilray's capabilities, gummies, beverage. We just introduced, as Irwin said, all of the wax products and the concentrates. And so we're going to see that number grow significantly.
Rupesh Parikh
And is cannabis 2.0, do you envision it as being a higher margin business down the road than flower, or how do you guys think about the economic of 2.0?
Irwin Simon
Yes, I think it is, particularly as you get into formats where the cannabis is measured really in milliliters, in milligrams, right, as that product ends up having a higher average selling price.
Rupesh Parikh
Okay. So next topic I wanted to discuss is the SweetWater US craft to your business? Is there anything you can share on the business specifically and how it's performed during the pandemic and versus your expectations? And then really I guess my main focus is what are the bigger opportunities you see with the SweetWater business in the US?
Irwin Simon
So SweetWater, like a lot of other craft breweries in regards on-premise, was weak, because restaurants and bars were closed. And a big part of SweetWater’s business is in on-premise business. I mean a big part -- a good part of it is but we picked up a lot of business as consumers. But here in our Oasis, which was about to sell so we also introduced a lot of new products, our [Hazy] product, ultimately was something that has done a great job, our Oasis product, which it was about to sell through. So we picked up a lot of that business in regards to retail that we lost during -- being restaurants and that were closed. The opportunity there is extension of the brand, which we'll continue to do and we've come up with a lot of new products.
The other big part there is distribution and going into more and more states is what we're doing, we're in 26, 27 states and right now, our plan is to go into 30 states. SweetWater is a very profitable business. And with that is growing that business with new products, growing that business in regards to expansion and distribution in the US. And last but not least, we're working on lots of interesting stuff in the CBD area. We're working on stuff in regards to tequila mixes, wine spicier mixes, wine in a can, et cetera. So there's a lot of stuff we're working on on new and innovation there.
Rupesh Parikh
And then going forward, I'm not sure how much you can share here. But is there anything you can share in terms of top-line growth rates and margin profile of the SweetWater business going forward?
Irwin Simon
I'm not sure that we can now. I think we've given margins of their, Carl. But listen, I'd like to grow this business in the mid single-digits and that's something we're looking to do. And again, from a margin it’s one of our highest margin business, it’s very, very high margin business and especially within the draft area, there's over 50% margins in that area. And I got to tell you, SweetWater is probably one of the most efficient craft breweries in the US today. When you go to that factory, you walk through the fact that, you got to go looking for people and they produce a lot of products. So it was a great acquisition. I'm very happy with it. And there's lots of opportunities there for us to really grow that business.
Rupesh Parikh
Great. So switching to another topic, it’s clearly on a lot of people's mind. What are your thoughts on the timeline for potentially US cannabis [legalization] down the road?
Irwin Simon
I wish I could just look into this crystal ball right now and give you an answer. I think there's couple, Rupesh, ways to look at it. Will there be legislation in regards to the safe bank that, will -- in regards to the scheduling, will medical cannabis should be legalized and they leave it up to each of the states. So I think over the next couple years, if we don't see anything, and the house changes to republican or the senate does, I think then we may have some issues. But I come back and look at Tilray today, we have a strong business in Canada, we have a strong business in Europe. I think you may see some European countries ultimately legalized, like Portugal, ultimately, Middle East, Israel, could legalize now with the new regime in place there, Poland, et cetera. And if not, what we're going to continue to do in the US, we're going to look at types of options we could have if it made sense for us, like Cronos did yesterday but with companies that really make sense, or we're going to do other acquisitions in the US, similar to a SweetWater, or Manitoba Harvest that ultimately will parlay into cannabis once legalization does happen. But I hate, as you asking this question, when it's something that's not in your hands and it's a guessing game, and it's the politicians that are deciding it, it's frustrating to be in that position. And again, if you come back and look at SweetWater and then Manitoba Harvest, together, they're $100 million plus businesses, and both of them are quite profitable and could be parlayed into THC drinks, CBD drinks, CBD food, et cetera. So is there businesses out there similar to that, that we would do that with.
Rupesh Parikh
That's helpful prospective. Yes. Clearly, I mean, that's our challenge to figure this all out. So I guess just taking a step back and looking at the global cannabis backdrop beyond the pandemic. What would you say right now storage with longer term, where you guys see the most attractive areas of opportunity? You did mention Europe and obviously, US is on your radar. But where do you prioritize -- what's most exciting to you guys as you look out on the global cannabis out there?
Irwin Simon
So number one, listen, if I can pick up in 10 to 12 percentage points in Canada, that's worth a lot, out of $9 billion retail sales. So that's number one. Number two is expanding throughout European countries where medical cannabis legalizes, big opportunity there. If one of these countries adult use legalize, which I think will happen in the next year or so, I see a big opportunity there. And then the last but not least is finding another SweetWater, another Manitoba Harvest that ultimately brings revenue, EBITDA and income to our bottom line. The other thing we look at, Rupesh, is this year where does it make sense for us to align yourself with strategic partners, where they're into a certain category and we can do something together, not necessarily for their money or investment but more for the knowledge, and R&D< and technology in categories.
Rupesh Parikh
Okay. And then within Europe, at least from our seat, there's obviously, Germany, UK, there's so much going on here, but it's hard to say where the greatest opportunity is. As you look at Europe, I mean, what countries are you guys most excited about? Obviously, Germany is on everyone's list. But where do you see the most potential for your business?
Irwin Simon
So Germany, one of the biggest populations. Portugal, we have we have a big facility in Portugal. Poland, we see opportunities there. Deutschland, which we feel, you know, opportunity is there. We think even though it's not a large country, Israel, where a major percentage of population today where medical cannabis is legal there. Listen, I don't think you're going to see some of these other countries legalize. But I think there will be continuously where countries will legalize from a medical standpoint. The other place is South America. You have 600 million people in South America. And again, not so much from the legalization of adult use but we have a foothold into Argentina, into Colombia and we see some opportunities there. We’ve shipped some CBD oils into China more from an online business. We also see opportunities eventually in India. And today in India THC is used in a lot of medicines. It's not legal, it's not illegal. So I think there's some big opportunities there going into those countries.
Rupesh Parikh
Okay, great. That's helpful color. And now I'd like to wrap up with just a few remaining questions. So longer term targets. Is there anything else you can share as a longer term opportunity for Tilray as you see it? I know you mentioned the 30% market share in Canada. Is there anything else publicly that you guys have started to think about the opportunity for Tilray?
Irwin Simon
What I've said is this year, step back. I want to be the consumer packaged goods, CPG company that's built around cannabis and cannabis derivative products, whether it's adult use, whether it's medical, whether it's drinks, whether it's edibles, et cetera, and built around brands and brands that consumers trust. So that's number one. Number two, I want us to be growing organically EBITDA positive, cash flow positive. And, with that look at other opportunities for us and acquisitions that can ultimately complement our products lines once legalization happens. It’s a hundred billion dollar category but there's a lot of heavy lifting to do. Rupesh, it's no different than I had to do in 1993 and educate consumers about natural organic foods and healthy eating. What are the benefits of cannabis? No one has ever died overdosing of cannabis as it led to other drugs, I don’t have the research on that. But I think again, it's educating consumers to get them out there to try cannabis and the benefits for them.
Rupesh Parikh
Okay., that's great. And then maybe just one final question. So clearly, we're seeing your team as well as others, including Canopy and HEXO acquiring other buyers lately and building a more diverse portfolio of brands. So I'm just curious given your experience at hand, how do you see the eventual evolution of cannabis brands at retail, do you expect to maybe see I don't know a few brands down the road similar to maybe in tobacco? Just any thoughts on how you see the landscape for cannabis evolving just given your background over the years.
Irwin Simon
I think it depends. And as that goes similar towards alcohol and I think it's going to be important, if there is CBD drinks or THC drinks, will you be able to go into a 7-Eleven, will you be able to go into the Exxon station and buy it, will you be able to go in there and buy pre rolls in those. Ultimately, that's what's going to get the volume. But I do potentially see down the road that happening. But I think with anything, it’s convincing politicians it’s convincing everybody that cannabis is not a drug that has all the effects that everybody thinks it does. I think there is lot of benefits to it. Last night, Carl and I did a Reddit and there is an oncologist on there and he talked about how he prescribes the first patients, we know how you prescribe it for epilepsy, for pain, for sleep. So again, there is a lot of education that has to be done around cannabis.
Rupesh Parikh
Okay, great. Well, thanks Irwin and Carl for joining us today. And best of luck for the balance of the year.
Irwin Simon
Thank you, Rupesh and really good to see you again. And thank you.
Carl Merton
Thanks for seeing us today, Rupesh.
Rupesh Parikh
Thanks, Carl. Bye.
Question-and-Answer Session
End of Q&A

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Tom Smithson

Today, 6:54 PM

Comments (155)

Watch TLRY the next few days, the hedge fund short sellers are going to get slaughtered!!


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