Tilray Brands, Inc. (TLRY) Earnings Call Transcript & Summary

So thank you for sitting in on our fireside chat today with Tilray. I'm Robert Moskow. I'm the Senior Analyst Equity Research at TD Cowen covering Consumer Staples. And very happy to have Irwin Simon, CEO of Tilray; and Carl Merton, who's the CFO, with us today. Tilray is a company that is truly the epitome of the convergence of beverages, cannabis and wellness. It started out as a cannabis company, but it's evolved into something much more. So I'm going to ask a bunch of questions. I'll also put it to the audience to see if anyone has questions at the end. But today, Tilray is a $400 million market cap company, $800 million in sales and has been growing through M&A.

So Irwin, maybe we can start. Tell us a little bit about the diversification strategy that you've been executing. And some of it was out of necessity, I'd imagine, because the regulatory environment for cannabis hasn't turned out as we would have liked.

So good morning, everybody, and Robert, thank you, and good to be here. Number one, Tilray is unique in many ways. I think we're different than so many other companies. And I think in one how, what I would say, the reflection of our stock price is no reflection of what the company is today. As I walk here to this conference, I smell a lot of cannabis on the way. And I'd tell you what, people are drinking a lot of beer and alcohol. So whoever says beer and alcohol are going away, it's absolutely not. After 25 years building a natural organic food, wellness, personal care company, my next venture very quickly afterwards, I got into the cannabis business with a little company called Aphria. We are about a $50 million business. Cannabis just legalized in Canada. And Canada is the only country in the world where recreational cannabis is legal from a federal standpoint. And with that, with regulatory in Canada with high excise tax, Canada being a smaller country where 40 million people, half the population is 21 and over. So that's only 20 million people and only 20% are users. I realized, hey, we need to diversify. Now my first thing was to get Canada right, because it's legal. And how do we get that right? And at the time, Aphria had its challenges. So with that, very quickly, I went on to do acquisitions in Canada. We acquired Tilray. We did a reverse merger at Tilray, and then we acquired a company called HEXO. And today, Tilray is a $200 million U.S. cannabis business in Canada. We're the largest in sales. We have 5 million square feet of grow. We sell flower, we sell pre-rolls, we sell edibles, we sell drinks, we sell tinctures. So we're, if not the largest company from a sales standpoint, and with a lot of technology, a lot of research, a lot of work on medical cannabis. But again, we today pay over $125 million in excise tax, the highest excise tax paid on any product in the Canadian market. So our limitations to grow in Canada are limited because of the size of the country, the excise tax there and just the size of the market. So diversification is something that was very, very important. And with that, we could not move into the U.S. market with cannabis, because cannabis is not legal from a federal standpoint. So the stuff you smell in New York, we can't sell, because we trade on NASDAQ, and we're a company that has banks and banks do not allow, because it's not federally legal. With that, in 2020, I went out and started to acquire beer companies. The first company was SweetWater, then went on and bought some West Coast brands, bought Montauk Brewery and recently bought eight brands from Anheuser-Busch and then bought four brands from Molson. I also, along the way, acquired Spirits business, Breckenridge Bourbon, Vodka and Gin, along with the Tilray acquisition came Manitoba Harvest. And our U.S. assets today are about $300 million, $350 million with all our assets in our U.S. business. So again, we sell no cannabis in the U.S. at all. What we're selling today, which has some great opportunities, and we're seeing a lot of excitement is these Delta-9 drinks, where they derive from hemp and 5% is from hemp and infused available in about 13 states today. I say this, if we could sell hemp drinks or we could sell cannabis drinks in the U.S., it's a $1 billion-plus business. In Canada today, we have about a 45% share of the Canadian market, do about $25 million, $30 million in Canada and only can sell them in cannabis stores. Again, if we could sell them to restaurants, we could sell them to the beer stores, it's a $100-plus million business in the Canadian market. And then in Europe, which is a real interesting market, we today have grow facilities in Portugal and Germany. And we sell on a run rate. And I'll say on a run rate, about $100 million of medical cannabis in Europe. And that has to be prescribed by a doctor. We sell in 20 countries, and we grow it in Portugal, we grow it in Germany, and we ship some from Canada. Also in Europe, we have a medical distribution company called Tilray Pharma, which sells medicines, regular medicines into 13,000 drug stores in the German market. They also distribute our cannabis in those markets. So we're diversified. We're a global business. And with that, the company is 5 years old and it came together with all these acquisitions. And ultimately, as cannabis legalizes, which I believe one day in the U.S. from a medical standpoint, we're well positioned with our Canadian business in regards to medical business or research, and we're well positioned to bring a lot of the medical findings in Europe to the U.S. once ultimately, if that happened here. Also, as I said before, the drink business, which is a big business. With our beer business today, we have over 800, 900 distributors out there that have the infrastructure to sell. We're in every retailer within the U.S. today, whether it's with our beer, whether it's with our Manitoba Harvest. We have sales infrastructure. We have eight manufacturing facilities that produce beer and canned goods today, and we have a spirits distillery that produces alcohol and beverage. So we have the infrastructure. We have the diversification. We are handcuffed a lot by regulatory, whether it's in Canada, whether it's in the U.S. and whether it's in Europe. In Europe, by the way, we only can sell flower. We can't sell pre-rolls or anything there. So that's the good things about Tilray, and that's some of the restrictions that we have from a regulatory standpoint.

Right. And maybe just level set us. So what percent of your sales are today are alcohol beverage, what percent is cannabis related?

Carl, I'll let you.

It's about 30% cannabis, 30% beverage, 30% distribution in the U.S. -- sorry, the U.K. medical business, the EU medical business and 10% Manitoba Harvest.

Okay. And maybe we could start with beverage. You acquired a lot of craft brands. Craft beer had a long period of structural growth and then it kind of hit a wall. But these brands are a great collection of brands. So what have you been able to do from a marketing and operational standpoint with these brands that their prior owners were not able to do?

So, so far, not everything that we wanted to do. Listen, -- we acquired SweetWater and then something COVID comes along. So we had to deal with that. Then we acquired Nelson's Green Flash and Alpine West Coast businesses and expand the distribution where it was owned by private equity. We acquired Montauk, which was owned by a group of investors, and that's been just a great brand from an expansion standpoint. Listen, the eight brands that we acquired from Anheuser-Busch got lost within the ABI distribution system. Most of them were declining. I was asked about HiBall here before, which is a great energy drink, one of the natural energy drinks out there. And basically, ABI had shut that down, and we expect some great growth. It's now listed in Whole Foods on a national basis. So one of the big things we're trying to do here is regionalize these brands, and focus on three or four states with them with Shock Top, which we acquired, which basically had no marketing people, no marketing dollars against it, that we're taking that national. One of the big things being in the ABI system, you have a big distribution system out there. So they bundle it with a lot of their brands. And even though they don't spend any money, they push it out into stores. Tilray does not have that. But one of the big things that we're focused on how we'll sell these in three or four states, how we'll have one or two national brands and how we pay attention to them. And our marketing is different. We're doing a lot with social media. We're doing a lot with event marketing. And the big thing today, Robert, is innovation. What is new out there in light beers, non-alcoholic beers, some of the seltzer drinks that we're doing. And right now, we're cleaning a lot up as we integrate. We've closed two of the breweries since we acquired it. And the question is, you don't want to be running capacity today at 50%. And ABI or Molson' has long runs, and they can produce beer at $30, $40 a barrel where it's much more expensive for us. So we got to get the efficiencies of our breweries, and that's some of the stuff that we're in the midst of doing today. So what are we doing different? We're going to give them love and attention where they got lost within the ABI system and get lost within the Molson' system.

Okay. And your route to market, like what is your -- did you -- you have your own distributor network, like there are independents that you align with or?

So with the ABI for 2 years, we had to stay within the ABI distribution system. And 2 years is up. But there's a lot of good independent distributors that are both ABI and Molson distributors out there that are looking for growth and are looking for craft brands. Craft beer is not going away. And the winner is going to be those that come out with innovation and those that come out with new products. So basically, what we're doing right now, we have 900 distributors out there. And it's not 900 because some of the distributors have three or four locations. But let's say, we got 700 or 800 distributors. We got to make some of the decisions of consolidating these distributors where we're going to be important to these and bring all our brands together, and we're in the midst of going through that right now.

Right. And as you do that, do you have to buy out the contracts for this couple of hundred?

Listen, good question, and we're looking at that right now and what's the cost to do it? Or is there some trading going on? And that's -- we have a team that's just dedicated on that right now.

Right. Okay. You did have to lower your revenue guidance for this year after first quarter. Was that mostly on the beverage side? Or was it on the cannabis side?

So it was basically three things: Number one, it was the beverage side, and part of it is what we decided on the beverage side was to go through a SKU rationalization, where we had a lot of these small brands out there. And so number one, to include the SKU rationalization. Number two is just on currency, which dropped tremendously because of the Canadian currency and the U.S. or European. And number three, it was just ultimately, in Europe, when we're selling products, we cannot ship at a Portugal until we get a permit from the country. And some of this was just timing on getting permits from countries. And that's why we took our guidance down for those three main things.

Okay.

And there are other -- listen, there was new products that we were launching. And one of the things in the beer business, the sets happen in -- there's the spring sets and the fall sets. And if you miss these sets, you just don't get in there, and there was a timing on some of the new products and when the sets were coming into play for us.

Got it. Okay. You mentioned non-alcohol. I mean, if I look at the segments of the market that are really growing, I mean, this is really at the top. You must have capabilities to be able to participate. But are there any special skill sets to making non-alcohol taste good that are unique? Or do you feel confident you can do all that yourself?

So I think there's a lot of special skills. Number one, if you're going to drink a non-alc drink -- and it doesn't taste good. It doesn't feel like you're having a beer. It doesn't feel like you're having one. Drink Ginger Ale, drink Diet Coke, drink Club Soda, okay? And we've come out with three of them: number one, under Montauk Zero, which I would blindfold anybody in this room and put both of them there, and you will not tell me the difference between a Montauk surf beer and our non-alc beer. Number two, we've come out with a product called Runner's High, which is after running, you want a non-alcoholic drink. So we've come out with one that tastes really good. And we've come out with one other under one of our other brands, our 10 Barrel. And -- but again, it's the extraction and having the product taste good, having the foam and having it look like you're drinking a beer and you're not some person that's just sitting there and not drinking not having any fun. You got to feel like you're having fun and there's something about it. So I would challenge anybody to try one of ours and tell me it does not taste like you're drinking a beer.

Okay.

We had a big win in the last couple of months on distribution on that side with Runner's High. We're in 4,500 locations in Public. And so we think that will help bring awareness to that brand and also give us the data to support to go to other big retailers to show them how well the brand does against its competition.

And listen, the non-alc is a category that's out there. But I think the big thing, too, is light beers. And Long Island Light is something we've launched, with 90 calorie 2 carbs. So there's a lot we're doing in regards to the light side of beers, too, which we didn't have before. We have some great beers within Montauk with our surf beer and our summer ales and stuff like that. So again, we've come out with products. We had a great product out there called SweetWater called Gummies, which was a high alc, not the greatest tasting beer. It took off when it came out and it died. So it's getting it right on this new product and new innovation, and there are so many different products that are coming out there today. But again, consumers want product that's taste good, lighter and that they're going to feel they're getting -- whether it's a buzz, whether they're getting something from it, there's a good benefit for it. And what are we doing something unique. We just don't need another IPA out there. There's multiple IPAs, multiple ambers. What are we doing that's different. The other big thing out there, Robert, too, is branding. Montauk, Shock Top, some of these brands that we're doing stuff with today have tremendous brand equity. One of the things that we've done as a company is tied into sponsorships, whether it's with sports teams, whether it's with universities, expensive to do, but getting that brand out in front of them is something important to us.

Okay. I'd like to dig a little deeper on Delta-9, because this is -- this seems like the perfect marriage of all of your skill sets. But there are, I would imagine, obstacles on a state-by-state level as to how you can go to market. So how big is your -- do you have a couple of brands right now in the U.S.? And what is your approach to getting it on the shelf?

Listen, we have three brands right now. Our approach is getting it on the shelf. And it's interesting because we put a team against this, not necessarily with our beer team, but we're using the beer team's distribution system out there. Some of it is direct-to-consumer, whether it's ABC, total wine, we're selling direct to them. But I would say today, half of our business is going through beer distributors and the other half would be going direct right to retail with like an ABC or with a total wine. And again, the product, is it too sweet? How's the product taste? With 5 milligrams, we have 5 milligrams of THC, hemp THC and 10 milligrams out there. Am I getting the benefits from it? 60 calories, and I think we have some great products out there with it today. I think it's a big, big opportunity, but you're right. We just ran into some headwinds in Texas. And we're waiting to hear there. But there's, what, 13 states today that allow us to sell. And within our numbers next year, we're going to have to spend some marketing dollars. We're going to have to spend some money on it. But we think it could be in the millions of size next year for our business, which is all new business and all new innovation.

Okay. So 13 states where you're allowed, does that mean there's 37 states where like there's a hard no and because it has 5 milligrams or 10 milligrams, just not allowed to go on to the shelf?

Yes. Yes.

Okay. Do you see any other chance of those other 37? Or is there any legislation underway? Or do you see any like easy wins in the near future?

We're lobbying. Listen, like I said before, with regulatory, I hate making predictions, because I've been wrong all the time, okay? I thought today cannabis would be legal in the U.S. So I think if I can keep these 13 states right now, I'll be happy. And I get any more, I'll be real happy.

Got it. Do the beer companies, how do they feel about Delta-9? You have your own distributors and they're putting it on the shelves. Like how do the other beer companies like view it? Are they lobbying against you?

So Sam Adams just recently come out with one. Okay. I think the smaller craft beer are on our side. The big guys, I mean, originally, you come back and look at it. It's interesting because, back when, when we acquired Tilray, Tilray and ABI had a deal together, and that's how we got into the cannabis drink business in Canada. We acquired from Molson, a company called Truss, where they had a joint venture with HEXO. I think the big companies are waiting for regulation and cannabis to be approved before they'll touch it, okay? And we're going to make sure we do everything right, have every I dotted and every T crossed in every state that we do it. But I think you'll see, as you just saw, Sam Adams and some of the other craft businesses get into it. I don't think you see the big guys get into it so quickly.

Because in a way, like we are seeing the beer distributor lobby is pushing for greater clarity of the rules across all the U.S. And I think that's a huge win for the industry to have them support it.

And the beer distributors want this. Because as they see consumption and decline in the beer industry today. Every beer distributor today is looking -- if you're down 3%, 4% on your business today, every beer distributor, they still got their same trucks, the distribution out there. What am I bringing in here, that's going to grow, that's going to ultimately help my volume.

Right. And I would imagine like they're your competitors, these big beer companies, but the more it's mainstream to the concept, they could actually help you grow a category if they were successful in putting it -- getting it through?

Listen, I think they can help absolutely. But I think those who get the head start with whether it's our Happy Flower, Fizzy Jane or 420 out there, getting those brands out there. Now there's a lot of small guys out there that are going to just put stuff out there are not going to follow the regulatory like we have to and some of the big guys. But listen, it would be great if ABI or Molsons got into this category, to your point, and legitimizes the category in a bigger way.

Okay. Speaking of smaller players, it's an issue in your Canadian market from what I recall is that you have certain illicit competitors in Canada who have their own pricing structure, very different from yours. They're not paying any excise taxes. Is there any chance of change in the regulatory environment in Canada that you're watching?

So good question. And there's a new Prime Minister in Canada today. I, last week, met with a minister to talk about the taxation in the industry in Canada. And ultimately, there was 1,800 LPs in Canada today and how that has dwindled down, because a lot of them have gone bankrupt or gone out of business. So in Canada today, it would change dramatically if my excise tax got cut in half. If we're paying $125 million in excise tax today, and ultimately, half that came back to us in some of the provinces that changes dramatically. In Canada today, if they tightened up the illicit market, which is still out there that has no regulatory, just gross product and can sell and pay no excess tax. And the biggest thing, the third thing, and I met with a premier in Canada just recently about selling our cannabis drinks outside the cannabis stores. So if you could put it on tap in a bar, you could sell it in a restaurant, what kind of volume and what that could bring, a, to the restaurant industry and what it can help the industry in the Canadian market. So that is something from a big change that I hope could happen. I'm hoping and we're looking at it right now, could we compound and could we sell pre-rolls in Europe, which would help tremendously from a standpoint with us. And in the U.S. market, if we could sell our Delta-9 drinks in all 50 states, and we haven't disclosed what we think this business will be this year. But if I could take those 13 states and multiply that and get to 52, it would be a good-sized business for us within the U.S. next year.

Okay. So I'm going to ask if there's any questions from the audience or if you want to think it through, I'm going to ask one. Yes, please. You have a microphone.

Can you speak to kind of run rate cash flow, kind of how the company is doing given all the challenges you mentioned?

So from a cash flow standpoint, all our businesses, our cannabis business and from a cash flow standpoint, running cash flow positive are European. We've invested a lot of money into the beer business and our spirits business. And again, you have to, as we acquire these businesses, to grow these businesses, to rightsize these businesses. And ultimately, there, we got some work to do as we close facilities and take costs out. We took about $25 million of costs out so far this year. We look to take more. So there's some work to do on our beverage business, and it's a 5-year-old business, and we've brought these together. In regards to the rest of the company, listen, as we said in our last quarter, we have $250 million of cash. We probably have 1x debt. And the company is 5 years old, which I'm trying to build out. So some of the biggest -- my cash outlay has been cleaning up legacy lawsuits that I inherited from Tilray or inherited from Aphria and cleaning a lot of that stuff up. Also the investment in CapEx of how to improve these plants and put bigger tanks in, if I can get longer runs and efficiency. So I'm big on cash. I'm big on debt. I'm big on positive free cash flow. And that's something that's a big, big focus on us is our cash conversion and how our cash -- we use our cash. And listen, we're close to where we need to be on cash flow positive. Carl?

I just -- I would add the last 2 fiscal years, we were positive free cash flow. As Irwin said, this year, we're investing in the beer business behind the two acquisitions that we did at relatively cheap valuations and supporting those businesses that way.

And we bought these businesses with facilities and brands very cheap. But when you buy something at a good price, you're going to let them die or you got to invest in them. And you and I talked before about HiBall. HiBall was dead, no sales. You don't put it into Whole Foods and bring consumer awareness to it. Shock Top, which was basically no money, no attention to it, no innovation, and we inherited all these facilities. So there's capital we've had to put into these businesses to really to rightsize them and get them right and spend on the brands. We've spent in regards to advertising on our sports brands and our licensing deals there. So we've had to invest probably more money than I thought we would back into the brands. And ultimately, we'll see the benefits from them. And I expect some of the declines that would happen within the beer category. But I got to tell you something, we keep hearing about declines in the alcohol spirits category. I got four kids, and they're all over 21. And I had 100 kids at my house for a party last week, and I didn't see one of them walking around, not with a drink in their hand. And they weren't drinking not to my dismay, they weren't drinking non-alc, okay? So -- and I was with Carl last night. And when I go to restaurants, I walk every table to see who has a drink on their table. And it was a Monday night and everybody had a drink on their table. So it's not dry Monday yet out there.

I think, the other thing on the sports sponsorships, if you take the example of what we did with the University of Florida Gators and the success we've had with Shock Top in the State of Florida as a result of that, I think, speaks volumes for what's available to do. You just have to make sure you're spending that money wisely in the right places.

And listen, you got to be scrappy out there today and where the big companies are. Walk into a store today and see the beer displays. And look, there is craft beer, there is local beer and then there's the national brands. And that's the big thing is getting those displays. And the big thing is getting the placements out there. The other major, major thing and one of the things we did lose in some of this transition is these tap handles. When you go into an on-premise bar today and see whose bars on draft and stuff like that, that's real important for us. We also have 20 brew houses out there, which sell food, sell our beer and bring people together for events and occasions, which is important for us to help build our brand.

Okay. We hit our time. So Irwin and Carl, thank you very much for joining us, and please round of applause for Tilray.

Thank you very much, Rob. Thank you.