Tilray sees global medical pot as ‘good hedge’ against Canadian risk

Cannabis producer Tilray (TLRY) expects its international medical business to balance out risks in Canada’s year-old recreational market. 

Speaking on a conference call following the company’s fiscal third quarter earnings release, chief financial officer Mark Castaneda said the company will achieve positive EBITDA by the fourth quarter of 2020, bolstered by strong medical sales.

“International medical is by far the highest margin part of the mix, and we expect significant increases in that business to offset any kind of risk on the Canadian adult-use side,” he told analysts after markets closed on Tuesday. “Having that extra leg of growth at high margin is a good hedge.”

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Tilray booked US$51.1 million in sales in its fiscal third quarter, topping Wall Street’s expectations. But the Nanaimo, B.C.-based company posted a deeper than expected loss for the three months ended on Sept. 30. 

Tilray reported a net loss of $35.7 million or $0.36 per share compared to a loss of $18.7 million or $0.20 per share for the prior year period. Adjusted EBITDA was a loss of $23.5 million compared to a loss of $7.4 million in the prior year period.

Analysts had expected a net loss of $28.2 million or $0.29 per share on $48.9 million in revenue for the quarter, and adjusted EBITDA of negative $19.2 million, according to Bloomberg estimates.

“The challenges in the Canadian market are ongoing, with a limited number of retail locations and a supply/demand imbalance,” Tilray president and chief executive officer Brendan Kennedy said on the call.

Those concerns have dampened investor enthusiasm for cannabis stocks, most recently driving down shares of Organigram (OGI.TO)(OGI) after that company lowered its guidance late Monday due to a lack of stores in Ontario amid rising supply. 

The company blamed increased operating expenses, expanding international teams, and the addition of its hemp foods acquisition Manitoba Harvest for the increased quarterly loss and adjusted EBITDA declines.

“We are in the early days of seeing our strategic initiatives bear fruit – including our European expansion, brand portfolio evolution and strategic partnership product launches,” Kennedy stated in a news release. “We continue to expect significant growth in the fourth quarter and into 2020.”

Tilray said gross margin in the quarter increased sequentially to 31 per cent from 27 per cent in the prior quarter, and was flat compared to the third quarter of 2018. 

Average net selling price per gram decreased to $3.25 (C$4.32) compared to $6.21 (C$8.26) in the prior year period. The average net selling price excluding excise taxes for adult-use was $2.98 (C$3.96) per gram for the third quarter of 2019. 

Turning to the U.S. and Europe

While its revenue continues to be driven by the Canadian adult-use sales, Tilray said in March that it is de-emphasizing investment in Canada in favour of international market. The company distributes cannabis to 13 countries and hemp to 20. 

Kennedy said on Tuesday that revenue from international medical cannabis sales grew more than five-fold year-over-year to $5.7 million following GMP certification at the company’s Portugal facility, which recently began exporting to Germany. In July, the company announced its first medical cannabinoid oil shipment from Canada to Ireland. 

International revenue as a portion of total sales increased to 11 per cent versus four per cent in the second quarter of this year. 

“We believe that supply inventory market from the EU is a significant competitive advantage and look forward to ramping our sales from this facility which have higher ASPs (average selling price) and higher margin than our Canadian adult-use business,” Kennedy said.

THC drinks still in the research phase

Last December, Tilray announced a joint venture with Anheuser-Busch InBev, (ABI.BR) the world’s largest brewer, to develop cannabis-infused drinks for the Canadian markets.

Kennedy said Tilray intends to have CBD-based beverages ready for sale as early as next month. Research continues on intoxicating THC drinks, which he said are expected to launch “sometime next year.”

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