Tilray Brands, Inc. (TLRY) Q4 2020 Earnings Call Transcript

Good morning, my name is Kirsten, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Aphria, Inc. Q4 Quarterly Investors Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session for analysts and/or investor firms only.

Great, thank you, Kirsten. Good morning, everyone. We appreciate you joining us to discuss Aphria, Inc. financial results for the fourth quarter and fiscal year ended May 31st, 2020. On today’s call are; Irwin Simon; and Carl Merton. By now everyone should have accessed to the earnings release, the financial statements, MD&A and investor presentation, which are available on the Investors section of Aphria’s website at www.aphriainc.com. The financial statements have also been filed with SEDAR and EDGAR. Before we begin, please remember that during the course of this call, management may make forward-looking statements. These statements are based on management’s current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect and actual results could differ materially from those described in these forward-looking statements. Please note that – the text of Aphria’s earnings release and the filings issued yesterday include a discussion of the risks and uncertainties associated with such forward-looking statements. All financial references are in Canadian dollars, unless management mentions otherwise. Also, some of the financial metrics discussed on the call are non-IFRS measures. And we’d like to refer listeners to the company’s MD&A for an explanation as to how the company calculates those metrics. And now, I’d like to turn the call over to Irwin.

Thank you, Katie and good morning, everyone. I hope everybody had the opportunity to review our press release this morning. We appreciate you joining us today to discuss our strong fourth quarter financial results and a great end of year to fiscal 2020. I’m proud of the execution of our global team and particularly, in a very dynamic operating environment. Today, I’ll focus on this pivotal time we find ourselves in, before diving into the strength of our revenue growth, brand performance, profit increases, enhanced balance sheet and robust cash position. During the quarter, we continue to ensure the health and well-being of our more than 1,000 employees around the world, as we work together to protect and prevent against COVID-19 in the workplace and in our local communities and in our homes. On a daily basis, I’m reminded of how agile and resilient our team is at Aphria, as we provide our medical adult-use cannabis products to our valued patients and consumers. I’m in Leamington this week, and I have to say, I'm proud to see how well our facilities and greenhouses are operating. Thank you to our great team at Aphria for all their hard work and dedication. At the same time, I’m challenging our organization to evaluate opportunities where we can be better, more supportive, and more united. Not only as we combat this global epidemic, but also in championing the advancement of inclusion and diversity, both at Aphria and externally. As a purpose-driven company, we take great pride in leading with our core values, which are rooted in setting a standard for change and innovation in our industry and beyond. This starts with our talented and dedicated global team, from those in our production facilities, international operations, corporate offices, and of course, our Board of Directors. Everyone at Aphria has contributed to our success and achievements in fiscal year 2020. We are consistently taking a diversified approach to our innovation, corporate citizenship, strategic partnerships, and our global expansion. Boy, what a difference a year makes. In an industry that’s only a few years old and has undergone significant change, Aphria has emerged as a clear leader, helping to both define and change the cannabis industry in Canada and abroad. While Carl will focus more on the details of the fourth quarter, I am incredibly pleased with our strong end to the year and how well we are positioned for continued growth and success. Relative to our largest competitors, Aphria maintained its number one net revenue position, widening the gap from our next closest competitor. In terms of adult-use gross revenue, Aphria moved from number two to number one in Canada, with a 26.8% growth. A few key highlights include; fiscal year 2020 consolidated net revenue increased to 129% and adjusted EBITDA improved by nearly CAD45 million compared to fiscal 2019, with Q4 representing the fifth consecutive quarter of positive adjusted EBITDA. Importantly, fiscal year 2020 adult-use cannabis revenue increased by 184% year-over-year, driven by the strength of our brands that we believe are unmatched in the industry. We also experienced strong growth on the medical side in Germany with CC Pharma. Our distribution generated net revenue of CAD99 million plus in the quarter. We have been partnering with clinics by delivering educational materials to support them in caring for their patients during COVID-19. We remain well positioned to fund future growth in Canada and internationally with just under CAD500 million in cash and liquidity. And as I always like to say, cash is definitely king here. We reduced our net debt position by approximately CAD73 million in the quarter. We made key decisions during the year to favorably monetize strategic investments. We’ve taken a CAD64 million non-cash impairment charge this quarter, which Carl will provide more information on a little later, while our commitment to grow our business internationally remains the same. We have pivoted our business models in international markets away from a large CapEx spend. In the short-term, we will supply our demand in LATAM with cannabis products sourced from Canada, and are exploring our mid to long-term options of whether a smaller production footprint would be appropriate or whether to outsource production to a third-party or simply ship product from Canada. When you look at all we’ve achieved in fiscal 2020 and where we started just over a year ago, we are very pleased with our ability to generate consistent results. A cornerstone of our long-term strategy is to be focused on the highest return priorities for our growth. We believe we have the appropriate capital structure for our business, which provides us with strong financial flexibility. Our teams continue to work closely with our global supply chain partners to manage and minimize any potential business disruptions as we continue to operate through this pandemic. Our team at Leamington executed well across all our facilities, including Aphria One and Aphria Diamond. We are pleased that in Q4, cash cost per gram remained below CAD1 for the second straight quarter and decreased 5% from Q3 to CAD0.88. We’re excited about the tremendous growth opportunities in Canada, as well as our strong medical adult-use brand sales, extraction capabilities, and our ability to export EU GMP products and white label opportunities. Coming up, we’re about to launch our liquid enhancers and topical concentrates in the near future, followed by Aphria edibles and beverages. As I mentioned in the last quarter, consumer behavior is changing, and this change continues to accelerate. Before I turn the call over to Carl, I want to thank the NASDAQ as our new exchange partner, where Aphria started trading in the US on June 8th. We’re also committed to Corporate Social Responsibility, and are excited about our preparation and analysis for our stakeholders in an effort to evaluate opportunities for improvement. In summary, we are building brands that resonate with consumers today and well into the future. Our mission is clear, to be the trusted partner for our patients and consumers, providing them with a cultivated experience through high-quality, differentiated, and innovative products. Once again, I'd like to thank our entire team worldwide for their agility, focus, and tenacity while navigating through a dynamic operating environment. Thank you so much.

Thank you, Irwin, and good morning. Before I discuss our results, I would like to echo Irwin’s sentiment and thank our entire team for all their hard work in fiscal 2020. Our operational and financial achievements are due to their efforts, and as a result, we furthered our leadership position, both in Canada and internationally. We are pleased to present our fiscal 2020 and fourth quarter financial results, which lead the industry in almost every important financial metric, particularly our adult-use cannabis revenue growth, sequential positive adjusted EBITDA, and our ability to maintain a strong balance sheet and cash position. As we emerge from the initial transition of managing the current health crisis to creating our new future, the strength of the Aphria team becomes even more evident. We’re doing everything we can to continue serving our patients, customers, and executing our strategic initiatives. The difficulties caused by the pandemic that our patients, customers, and employees face each day requires strong leadership and communities coming together to support one another. We continue to actively manage our operations and supply chain in anticipation of the changing impacts of the pandemic. From a liquidity perspective, we believe we possess sufficient funds for what we believe will be the expected duration of the pandemic. We have cash and undrawn line of credit facilities of just over CAD500 million and account receivable balances that are largely with Crown Corporations totaling approximately CAD55 million due within the next 60 days. Our net debt maturity is not until July of next year, and we do not anticipate any issues with our debt covenants. Additionally, we announced today that we established an at-the-market equity program under the prospectus we filed in August of last year, allowing us to issue common shares in an amount up to USD100 million, which will provide us additional optionality in the event of an acquisition requiring a cash payment or more flexibility when scheduled debt repayments occur. Irwin provided an overview of the disciplined and well-planned actions we took across our business. And I also want to highlight a few additional industry data points that are important to keep in mind for Aphria. Recent Stats Canada reports highlight a growing market of adult-use purchases at the retail level, most recently indicating approximately CAD2.2 billion of annualized sales, with the market growing approximately 24% during the same period as our quarter end. It’s our belief that provincial cannabis wholesalers took advantage of the pandemic conditions in the quarter to better align their inventory levels with consumer demand. Accordingly, we believe that provincial cannabis wholesaler demand during the quarter was substantially less than the consumer demand portrayed in the Stats Canada report, making our approximately 27% growth in adult-use revenue in the quarter more consistent with the market share growth we observed in our brands during the same quarter. Turning to our financial results, they demonstrate our ability to continue to gain market share. Net revenue in Q4 increased 18% over the prior year and 5% from the prior quarter, to CAD152.2 million. This net revenue is comprised of CAD99.1 million of distribution revenue and CAD53.1 million of cannabis revenue. Distribution revenue increased 12% to CAD99.1 million in Q4, and gross cannabis revenue was CAD65.5 million, compared to CAD64.4 million last quarter. Net cannabis revenue benefited from the growth in adult-use revenue but was offset as communicated in Q3 from the decrease in wholesale revenue. Gross adult-use revenue increased 27% from the prior quarter to CAD56.7 million, and medical revenue is relatively flat, consistent with patients’ reduced ability to get out to see doctors or refill their prescriptions. During the quarter, the company sold 12,557 kilogram equivalents of cannabis, including 10,831 kilogram equivalents of adult-use cannabis and 1,273 kilogram equivalents of medical cannabis. The average gross selling price of adult-use cannabis decreased to CAD5.23 per gram in Q4 compared to CAD5.47 per gram in Q3, primarily due to a shift in product mix, caused by the strength and demand of one of our two core brands, Good Supply, which plays within the value market category, and price reductions in key markets to solidify market share. The average gross selling price of medical cannabis increased to CAD6.63 per gram in Q4, compared to CAD6.41 in Q3. Our cash costs to produce per gram remained below CAD1 for the second consecutive quarter, decreasing 5% to CAD0.88 in Q4. Adjusted cannabis gross profit increased to CAD28.1 million in Q4 compared to CAD23.7 million in Q3. Adjusted cannabis gross margin was 52.9% in Q4, compared to 42.7% in Q3. The increase was a combined result of the increase in higher margin adult-use sales and our higher usage of the lower-cost cannabis product produced by Aphria versus the sale of cannabis purchased through wholesale channels in the prior quarter. Adjusted distribution gross profit increased slightly to CAD11.9 million in Q4 from CAD11.4 million in Q3. SG&A costs increased to CAD116.6 million in Q4 compared to CAD50.9 million in the prior quarter, mainly related to CAD64 million of non-cash impairment charges. As part of the non-cash impairment charges, we recorded approximately CAD5 million of impairment in Lesotho, approximately CAD19 million of impairment in Jamaica, and approximately CAD40 million of impairment in Colombia and Argentina collectively. We reported a net loss of CAD98.8 million, or a loss of CAD0.39 per share as a result of the non-cash impairment. Moving to full fiscal 2020 results, adult-use net revenue increased 307% from CAD36.9 million in 2019 to CAD150.4 million in 2020. We reported net cannabis revenue of CAD204.7 million in 2020, an increase of 129% from CAD89.4 million in 2019. In 2020, we reported positive adjusted EBITDA from cannabis operations of CAD20.1 million, compared to a loss of CAD17.5 million in 2019. 2020 was a transformational progress year for Aphria and we continue to execute on our plan to position ourselves for future growth in Canada and internationally. For the quarter, we are pleased to report a fifth consecutive quarter of positive adjusted EBITDA. Consolidated adjusted EBITDA in the quarter increased 49% to CAD8.6 million from CAD5.7 million. This includes adjusted EBITDA from cannabis operations of CAD9.3 million and adjusted EBITDA from distribution operations of CAD1.9 million, partially offset by an adjusted EBITDA loss from businesses under development of CAD2.7 million. We believe this is sufficient to take advantage of any attractive distressed asset sales in Canada, US expansion, or other income statement accretive opportunities and protect us from any adverse impacts of the pandemic. Cash inflows in the quarter primarily included CAD26 million from the liquidation of the promissory note from GA Opportunities, CAD2.3 million from CC Pharma’s additional term loan, and CAD2.7 million provided by operating activities exclusive of changes in working capital. We believe we can continue to find pockets of industry undersupply and capitalize on them by identification and supply and/or product line extensions that support those pockets of undersupply.

Good morning, gents. Hope all well.

Good morning.

Good morning, Owen.

A couple of questions, please just first of all you’ve had a number of GMP approvals for you now. And you mentioned the continued spend on the German cultivation, could you just maybe talk about your expectations for the EU Germany specifically over the next 12 months when that German cultivation comes online? And then secondly, you spoke about possibly being in the market for attractive distressed assets. Just wondering what would you classify as an attractive distressed asset? A bit more clarity around that? Thank you very much.

Okay, thanks Owen. I’ll handle the first part of the question and Irwin will take the second. The EU GMP certifications that we received in the last couple of quarters are a big opportunity for us. We see the ability to supplement the German market with export sales in Q2, as we’ve now secured all of the external permits necessary, we’re just waiting for the one from Health Canada to make our first shipment. We expect the first sale to happen just at the end of Q1, early Q2. We’re also looking at using our Canadian operations to enter into the Colombian market with that product on an interim basis due to all the changes that were happening in COVID. The cost structure that we’ve been seeing out of our Canadian operations puts it very close to the Colombian market level. So we see that as a positive way to avoid what was supposed to be a short-term CapEx spend.

And Owen, I’ll answer in regards to distressed assets. We would look at some 2.0 assets that ultimately, we could move all our 2.0 production into manufacturing for our brands. We also look at consumer brands that could be converted into cannabis brands in the future. We’re also looking for organic growth assets that will generate positive cash flow. We see opportunities in Europe, particularly in the medical field that can complement our current international platform.

Cool, great. Thank you very much gentlemen, very helpful.

Hey, thanks. Thanks, good morning, guys. First off, I wanted to ask you mentioned the consumption trends and what we’ve been seeing is that your shipments here were kind of well below actually what we’ve seen from the brick-and-mortar provinces. You mentioned the inventory – you mentioned the wholesalers taking advantage of inventory, would you – should you expect to see kind of a catch up in the next couple of quarters or had the provinces taken a permanent step down here?

I think a couple of things. Number one, some of the provinces were looking at their financial position, letting inventories run down. As store openings were on hold and stores were closed during that period of time, not as much inventory was needed. There has been a big demand for products now, and the different liquor control boards are ordering to build their inventories back up.

Okay, got it. And the third question, I know that you guys are refraining from giving guidance during the uncertainty of COVID-19. But just kind of some thoughts on free cash flow generation here in FY ’21? Will we see that in FY ’21, or as perhaps the thought is to spend more aggressively behind Canada to further your position? Thanks.

Getting to positive free cash flow is really a function of the CapEx spend. The first couple of quarters will see a decreased CapEx spend and we should easily be into free cash flow by that.

And also, building inventory during the ramp-up of Aphria Diamond will contribute to positive free cash flow.

Good morning, everyone.

Good morning, Pablo.

One question in terms of just if you can repeat the number on market share trends. So you grew in revenue, 27%. But what’s your estimate of the b2b market during the quarter? And related to that, and maybe more importantly, just help us understand better the sustainability of your market share gains, given that you were first in vapes, and now people are catching up. Or, in flower if other people have been catching up with value brands. Just expand a little bit more on that. If it’s a sales team or the brands that are more sustainable, just some color there would help. Thank you.

The growth at the wholesale level or the b2b market was substantially less than the consumer demand portrayed in the Stats Canada report. That demand was really about half of what we saw in that report. And we think that aligns closely with the 27% growth in adult-use revenue in the quarter.

We’ll continue to spend behind our brands, continue to innovate. Yes, we were number one in vapes, but we have strong sales team working closely with retailers. The opportunity also exists in taking share away from the illicit market, which is twice the amount currently sold through legal stores.

If I can ask a follow-up, I mean, obviously, the question that we, and I’m sure you get from investors, it’s concerns about the oversupply. And the idea is that that’s going to worsen now with the outer growth that we may see in the index drop in the fall. If you can just expand on that. You know, how bad is it? I mean, obviously, your price has reached sequentially didn’t decline that much right, but just more color on that, because it seems to be a concern out there still for investors.

I think oversupply is out there. But on the other hand, you’re hearing and reading about a lot of the bigger LPs taking impairment charges and mothballing their grow houses. We are a low-cost producer, and we have what we need today with our facilities and processes.

The harvest from the outdoor market exacerbates the oversupply situation. If you can grow good saleable flower, people will buy it, which is what we are focused on.

Can I just squeeze one last one, if I may? The news from Bloomberg right about a potential merger with Aurora was very specific. What’s the rationale there? You need the scale to continue to gain share to compete overseas?

I’m not going to comment on that because there’s nothing happening. But, I think, being the most efficient biggest player in the Canadian market is important for opportunities in the US.

Hi, good morning and thanks for the questions. You know first of all for me is kind of continuing to watch in terms of the supply dynamics, if I’m looking at the kilograms harvested during the past two quarters, you know, definitely come up pretty considerably, you know, with diamond coming online. So just how do we think about, you know, those marketplace dynamics for you guys? And just how do you think about the need for additional brick-and-mortar to support that growth with the additional harvest?

There’s a perception of oversupply, but it’s not that simplistic. We’ve built strong brands that are growing, and we have opportunities for saleable flower as retail expands, particularly as Ontario is now planning to approve new stores at a healthy pace.

There are tremendous opportunities for us to grow white label and wholesale. However, we’ve decided to save CAD40 million by not building a greenhouse in Colombia and instead shipping directly from Canada.

Hi, thank you so much.

Hi.

I was hoping to follow-up on some of the commentary around the mismatch between shifts and deplete. I do have a question. I’m trying to reconcile another comment that you made, Irwin, around some of the white space opportunities you guys still think exist from an innovation standpoint. To the extent that some of your peers also feel the same way, what is the risk that there’s another wave like, inventory management, working capital management?

There’s strong competition out there. I’ve met multiple retailers on how to work with them in regards to a private label for them. But we’re not going to allow it to cannibalize our existing brands, which is where brand equity plays a key role. Brands matter, and we will focus on the quality of our brands and the unique products we are bringing to market. Thank you, everyone for joining. We appreciate your time today and wish you a safe and successful day. We’re excited about our future and look forward to continuing to share our progress as we move forward.