Tilray Brands (NASDAQ: TLRY) CFO Carl Merton faced shareholders on Reddit after markets closed on Tuesday, addressing a wide range of questions from the company’s plans in Europe to when the company expects to turn a profit.
But a core focus for the executive was the opportunities in cannabis beverages, a segment which Merton said offers strong opportunities for expansion and acquisitions.
Beverages
Tilray estimates that the U.S. hemp/cannabis beverage market could be worthy more than $10 billion, but only if significant changes are made to regulatory rules.
“We see a day where a hemp/cannabis beverage will be available broadly in restaurants, grocery stores, convenience stores and gas stations, like alcohol. Oh wait … that is already possible in select states,” Merton said. “Margins on (hemp-derived delta 9) are better than our beer margins. We will have more details on HD-D9 as part of our Q3 reporting.”
The company launched its Tilray Alternative Beverages business unit earlier this year to introduce its portfolio of hemp-derived delta-9 THC beverages in key U.S. markets.
Merton also told posters that its biggest opportunity for acquisitions was in beverages in Canada or Europe, where the company can leverage the scale and distribution it’s already built in cannabis. That strategy of acquiring beverage brands with leadership in certain geographic regions – as well as a few national brands – has worked so far in the U.S. to establish an infrastructure and scale that could be leveraged.
“Instead of targeting individual states and craft brewers, which would have required multiple deals at higher costs, we identified an opportunity to acquire almost ten brands from ABI in one transaction with an ideal geographical footprint at a much lower price,” Merton said. “These brands were in decline, which allowed us to acquire them at a much lower price (distressed price from ABI’s perspective?). We understand that we need to work on bringing these brands back to growth and focus on profitability.”
Acquisitions
Where Tilray doesn’t have immediate plans for acquisitions is Canada. Merton noted that sales in the Canadian market weren’t growing that fast, but recent changes to market dynamics provide the opportunity utilize existing capacity.
Merton noted that they initially expected to see insolvency and consolidation in the market as competition grew fierce. Instead, companies began shedding capacity. The company now believes that demand once again exceeds supply, as evidenced by dwindling inventory levels.
“As a result, we are looking at ways of bringing our available production capacity on-line to take advantage of the opportunity to supply Canada and international markets,” he said.
Merton also pointed out that some companies are going through multiple rounds of insolvency by selling off assets and then surviving on that cash – only to sell again later. “In the US, with our acquisitions to date we have achieved scale and look to benefit from this going forward and we will continue to build out our portfolio where it makes sense,” he said.
Dilution
During the session, several questions were raised regarding the company’s stock dilution, and many participants were upset over what they called the company’s use of stock to pay debts. Merton pushed back.
“I understand that some shareholders may have a perception of constant dilution. However, I don’t agree that this is the case … Despite perception, shares have not been used for housekeeping items,” he said. “At the end of last quarter, Q1FY25, we had over $280M in cash and marketable securities on our balance sheet and we had two consecutive years of being adjusted free cash flow positive. We are using the additional shares as part of our war chest for acquisitions and to pay down convertible debt, as disclosed in the use of proceeds associated with the ATM. Last year, we paid down approximately $315M of our convertible notes, with $110M in cash and $205M using our stock.”
While Tilray’s stock hovers just over a dollar, one Reddit poster asked whether the company would engage in a reverse split to protect the share price and avoid getting a delisting notice from the Nasdaq. The CFO said it has no plans to do such a split.
Merton also said it wouldn’t buy back stock because it considered itself a growth company and as such wouldn’t engage in that practice. However, Merton did acknowledge that several in the C-suite had recently purchased shares and that executives were incentivized through stock compensation, which would align their interests with shareholders.
Profitability
Multiple posters also noted that Tilray has made many declarations in the past about profitability, but that doesn’t seem to have happened. In response, Merton said that the company was already profitable from an EBITDA standpoint and has been since 2019.
“In each of the last two fiscal years, we have been adjusted cash flow positive. We have every intention of being cash flow positive, but as we invest for the long term there may be isolated periods when we are not,” Merton said.
That wasn’t good enough for some posters, who were looking for positive net income and earnings per share instead of EBITDA.
Merton pushed back, saying, “I can’t go out and buy or pay for anything with net income. I can’t pay a dividend, buy back shares, or invest in my brands with it. We are very focused on being cash flow positive.” He emphasized that net income profitability was an accounting concept.
“Our ability to report net income is impacted by the more than $160M a year in non-cash charges we take related to amortizing our intangible assets (acquisition-related) and our share-based compensation. Most of those non-cash charges relate to old Aphria transactions and the Tilray Aphria business combination, which are at least four years old. Our recent transactions have not involved overly material amounts for intangible assets, and we have not added to our goodwill number.”
Still, Merton said that Tilray has moved to a profitability model and that, year-over-year, gross profits were basically flat this past quarter, while the revenue number decreased by more than $5 million.
“To me, that shows that our plan of focusing on profitability is working,” Merton said.
He also noted that the strength of the U.S. dollar has impacted the company’s numbers.
International play
When asked about the company’s international business, Merton said there have been significant improvements in Germany, with flower revenue increasing 50% since that country expanded its legal framework earlier this year.
“As we have discussed, the international markets revenues are lumpy due to the importing and exporting of medical cannabis into our distributors into various countries. Therefore, we may have shipped an order into a particular country the previous year quarter that was not repeated in the current year quarter,” he said.
Merton added that in fiscal 2022, the international business segment reported significant revenue streams from Israel, but it has since exited that market, which caused a decline in international sales. Still, he said, “While we are not providing guidance, we see significant revenue growth opportunities over the next few years in international markets. We currently believe that a tripling of fiscal 2024 revenues by end of fiscal 2026 is more than possible based on current growth rates.”
The executive also said that if more countries legalize medical marijuana, then its extensive experience at medical registration would give it a head start.
The company has also been active in Australia, but Merton noted, “competition increased significantly in the last nine months, and Australia is experiencing a strong amount of price compression.” Tilray still was able to grow sales there by 11% during the fiscal year.
MedMen
Merton also addressed another thorn in Tilray’s balance sheet: the company’s 2021 $165 million investment in MedMen, which is now in receivership. He noted that Tilray continues to “work on the restructuring of MedMen’s remaining assets following the U.S. insolvency proceedings.”
But he wasn’t ready to write it off entirely, suggesting that there might be some value in the company’s name, which was characterized as having “national brand equity.”
“To be explicitly clear, other than our write downs on the MedMen convertible notes, we have not written off any acquisitions to this point. Accounting rules have required us to take impairment a couple of times,” Merton said.
[[{“value”:”The company’s chief financial officer also fielded numerous questions regarding the use of stock to pay debts and its plans to reach profitability.
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