Tilray Brands Inc (TLRY) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Tilray's First Quarter 2019 Earnings Conference Call. (Operator Instructions)

Now it's my pleasure to turn the call to Rachel Perkins.

Good afternoon, and thank you for joining us on Tilray's First Quarter 2019 Earnings Conference Call. On today's call are Brendan Kennedy, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer.

Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Tilray's reports filed from time to time with the Securities and Exchange Commission and Canadian securities regulators and its press release issued today for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

Finally, please note on today's call, management will refer to adjusted EBITDA and adjusted net loss, which are non-GAAP financial measures. While the company believes adjusted EBITDA and adjusted net loss provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to net loss, the most comparable measure prepared in accordance with GAAP.

Now I would like to turn the call over to Brendan.

Thank you, Rachel. Good afternoon, everyone, and thanks for joining us. Today, I will review the progress we have made since our last call just 8 weeks ago. This includes focusing on our global growth strategy and providing an update on our opportunities for long-term growth in the global medical, wellness and adult-use cannabis markets. Mark will then review our first quarter 2019 financial results in more detail and discuss our long-term financial targets. After that, we will open the call for your questions.

The global transformation of a $150 billion worldwide industry is just beginning. At Tilray, we're building a global platform to be a multibillion-dollar consumer packaged goods company known for delighting consumers with a house of trusted brands and delivering those brands to market through world-class multinational supply chain. We are taking decisive actions to create a global infrastructure that can be scaled globally over the long term. We are pleased with our first quarter results, which included the first full quarter of adult-use market sales.

Revenue increased 195% year-over-year to USD 23 million and total kilogram equivalents sold increased both sequentially and on a year-over-year basis to 3,012 kilograms. We are proud to have achieved this growth despite the continued supply constraints across Canada.

We now believe there could be a supply balance in Canada in the next 18 to 24 months as the market finds an equilibrium between supply and demand. This is longer than our estimate just 8 weeks ago, as the industry continues to struggle ramping production in the existing regulatory environment. That being said, we have seen increasingly high demand in the Canadian cannabis market for the highest quality branded cannabis, and have decided to increase our Canadian production and manufacturing footprint by investing USD 32.6 million across 3 of our 5 Canadian facilities. The $32.6 million expansion projects will increase Tilray Canada's production space in Nanaimo, British Columbia by 33% to 80,000 square feet; High Park Gardens productions space in Leamington, Ontario by 82% to 282,000 square feet; and the High Park processing facility in London, Ontario will increase 100% to 112,000 square feet.

Both High Park Gardens and High Park processing have room to further expand in the future. These projects are expected to be completed by the end of 2019, and we will provide updates as they evolve. These increased investments are in addition to our expansion efforts in Portugal, which is expected to receive its GMP certifications over the course of the next several months. This will allow the product that we produce in Canada to stay in Canada as our Portugal production will be used as a hub to serve international medical markets.

As we've discussed previously, our global growth strategy remains focused on 6 top line performance drivers that we expect to generate strong returns as the business continues to grow. First, increase our production and manufacturing capacity to serve the rapidly growing global medical market as well as the adult-use market in Canada and other markets over time. Second, maintain a rigorous focus on quality as we scale. Third, partner with established distributors and retailers to scale distribution of our products further and faster. Fourth, build a differentiated portfolio of brands and products that appeal to a diverse set of patients and consumers. Fifth, expand the addressable medical market by fostering mainstream acceptance with the medical community and governments. And finally, sixth, pioneer the future of our industry by investing in innovation, R&D and clinical research.

In the first quarter, we announced partnerships and acquisitions that align with our growth strategy. Our strategic partnership with Authentic Brands Group, ABG, announced in January, will leverage ABG's portfolio of more than 50 of the world's most iconic brands as well as their North American distribution network. We expect our co-branded products to come to market in the second half of this year in the U.S. and Canada, focused mainly on CBD products.

We also completed the acquisition of Manitoba Harvest, the world's largest hemp natural foods producer; and Natura Naturals, a licensed cannabis cultivation facility in Leamington, Ontario. We have made significant progress integrating Manitoba Harvest and Natura Naturals, accelerating our entry into the U.S. and furthering our operational capabilities in Canada.

We closed Manitoba late in the first quarter, yet we have already begun to leverage their existing relationships with over 16,000 retail locations and sharpen our plans for the U.S. market opportunity. We are excited about the future potential we have with new and existing retail partners over time and our early progress with this transaction are on track with our expectations.

We will continue to deploy capital in most promising markets where we see the greatest potential to pursue multiple paths to grow. Our vision has always been to be a global leader in the cannabis market, which is why we are judiciously planning for expansion in 2 of the largest markets: the United States and Europe.

We believe our strategic global partnerships and acquisitions demonstrate our focus on the diversification of our global opportunities for long-term growth. Going forward, we will continue to pursue strategic M&A that opens new territories, increases our capacity, increases our brand offerings through innovative form factors, brings us R&D technologies and provides us access to strategic retail distribution channels.

Building a portfolio of trusted brands and products is a key piece of our strategy to capitalize on the estimated USD 22 billion hemp-derived CBD industry in the United States. With Manitoba, Authentic Brands Group and LiveWell, we believe we are well positioned for long-term leadership in the market. While we expect Manitoba Harvest and ABG U.S. CBD product sales to ramp in the second half of this year, LiveWell will begin shipping supply in the second quarter.

Focusing on Europe, we have been disciplined in our approach and chose not to participate in the German tender process. Instead, we focused on our EU campus in Cantanhede, Portugal, where we completed a successful medical harvest in March and held an inauguration ceremony to celebrate the company milestone. This campus will be our international hub for operations and includes indoor, outdoor and greenhouse cultivation sites; as well as research labs, processing, packaging and distribution sites for medical products.

As we are waiting our GMP certification, we will continue to build inventory in Q2 and we expect to recognize revenue in the second half of 2019. We believe we are well positioned to serve the European market from Portugal as more countries legalize medical cannabis. While the Canadian market remains challenged with quality supply, we are confident supply/demand dynamics will become more balanced over time as additional production capacity becomes available. We believe clinical research will help the cannabis industry by fostering mainstream acceptance with the medical community and governments.

In the first quarter, we announced our support of 2 new clinical studies: a pilot study led by Murdoch Children’s Research Institute in Melbourne to evaluate the feasibility and acceptance of a larger randomized placebo-controlled trial of cannabis extract as a form of treatment for reducing severe behavioral problems in pediatric patients with intellectual disabilities; and a study with McGill University Health Centre's Division of Infectious Disease and Chronic Viral Illness to examine the effectiveness of medical cannabis on immune activation in people living with HIV.

For the balance of the year and into 2020, we continue to anticipate the following corporate milestones: launching Tilray and Manitoba Harvest CBD products in the United States as regulations permit; signing additional adult-use supply agreements in Canada; we started delivering product to Alberta during this quarter; shipping Tilray products to pharmacy chains in Canada, we do have products available on Shoppers Drug Mart today; exporting Tilray medical products to new countries; expanding Tilray's medical cannabis product offerings in the international markets we currently serve, we did start selling flower in addition to oil in Germany; extending our existing pharmaceutical partnerships to additional countries and regions; completing the build-out of our facility in Portugal, we did have our grand opening and completed multiple harvests; obtaining a manufacturing license and GMP certification in Portugal, a process that is already underway; obtaining production and sales licenses for High Parks processing facility in London, Ontario; initiating additional clinical trials, we added 2 during Q1; recruiting additional executives from outside the industry to further strengthen our management team, we added several during the first quarter; and finally, adding additional strategic partnerships.

In summary, we are executing on our strategic growth initiatives as planned and I'm proud of the progress we have made. We are positioning the company for long-term sustainable growth globally and are confident in our ability to drive shareholder value through our multiple avenues for growth.

With that, I would like to turn the call over to Mark.

Thanks, Brendan. Good afternoon to those of you joining us on today's call and webcast. It is a pleasure to be speaking with you today. Please note all the financial information we discuss today is prepared in accordance with U.S. GAAP and is in U.S. dollars unless otherwise indicated. We had a strong start to the year, we believe will continue to gain momentum as we progress throughout the year.

Focusing on Q1 results in more detail. Q1 revenue essentially tripled to $23 million or CAD 30.6 million compared to the first quarter of last year. Excluding excise taxes, revenues were $21.5 million. Revenue growth is primarily driven by the Canadian adult-use market, the addition of hemp food sales from the Manitoba Harvest acquisition and strong growth in international medical markets.

Extract products represented 37% of nonfood revenue for the first quarter of 2019 compared to 40% of revenue in the same period last year. We are pleased with our performance in the Canadian adult-use market so far, which represented 34% of revenue for the first quarter. Adult-use revenues grew approximately 80% sequentially from Q4 to Q1. We are still in the early days, the adult-use rollout was a limited number of products available due to regulations and supply constraints. These constraints will loosen this year with other form factors being available later this year.

On the hemp food side, we closed the acquisition of Manitoba Harvest on February 28 and included 1 month of results in our first quarter. As we discussed in a prior earnings call, we expect approximately $20 million of contribution per quarter from this business. We also anticipate the rollout of U.S. CBD products in the second half of this year.

On the international side, our revenues increased fourfold to $1.8 million from $432,000 in the prior year. The growth is primarily driven by Germany and Australia. Our growth internationally and in Canada continue to be limited by lack of supply that we expect to improve over time.

Moving on to operational metrics, excluding hemp foods. Total kilogram equivalent sold more than double to approximately 3,000 kilograms from 1,300 kilograms in the same quarter last year. The overall average net selling price per gram was USD 5.60 or CAD 7.54, and USD 5.28 or CAD 7.02 excluding excise tax. This compares to USD 5.94 in the prior year's first quarter.

Gross margin for Q1 increased sequentially to 23% from 20% in the prior quarter. Gross margin continues to be impacted by increased costs with the ramping up of cultivation facilities as well as high-cost third-party supply. In addition, hemp food margins were impacted by approximately $700,000 noncash charge related to acquisition accounting for the fair value of inventory. The remaining additional noncash charge of approximately $1.4 million will hit in the second quarter of 2019.

As we discussed in our prior quarter call, we continue to expect sequential increases in gross margin throughout this year, heavily weighted towards the second half of the year as the result of our Portugal facility coming online, with full GMP certification and the ability to sell higher value-added products in Canada adult-use markets.

Total operating expenses increased to $33.3 million, which includes $5.3 million in noncash stock compensation and $4.4 million for acquisition-related expenses. Excluding those items, operating expenses increased by $15.9 million compared to the prior year's first quarter, which is primarily comprised of an increase in G&A of $8.7 million and sales and marketing expenses of $5.6 million.

The increase was driven by increased headcount related to growth initiatives, public company cost and operating expenses added through recent acquisitions. Our net loss for the quarter was $30.3 million or $0.32 per share compared to a loss of $5.2 million or $0.07 per share for the first quarter of 2018.

On a non-GAAP, adjusted net loss for the quarter was $25.2 million or $0.27 per share for the first quarter in 2019. The adjustments to net loss are the nonrecurring acquisition-related charges. We reported an adjusted EBITDA loss of $14.6 million compared to a loss of $3.2 million for the first quarter of last year. The increase in net loss and adjusted EBITDA was primarily due to increase in operating expenses for the 2 growth initiatives.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of approximately $325 million. We continue to believe that we have sufficient capital to execute our growth plans for the next 12 to 16 months. We continue to believe we have significant growth opportunities with multiple paths for value creation and expect to achieve strong growth for the years to come.

Long term, we continue to expect to capture a sizable portion of the global cannabis market with an estimated gross margin of 50%-plus and adjusted EBITDA margins of 25% to 30%. The EBITDA margins are based on the legal markets that exist today. And as new markets are added, we will invest and develop those markets, which may have a short-term impact on EBITDA margins but also provide for greater revenue upside.

We are pleased with the results for the first quarter. We are still in the very early stages of growth, and we believe we are taking the necessary steps to lay the foundation for a solid, long-term growth in the global cannabis industry. This concludes our prepared remarks.

Brendan and I are now available to take your questions. Operator?

(Operator Instructions) And our first question is from Vivien Azer with Cowen.

So just to kick things off on revenues. Came in really nicely, certainly ahead of our estimate, ahead of consensus. Wondering how your fiscal 1Q results compared to your internal expectations? And if there was upside to your expectations, from a segment perspective, what drove it?

So Vivien, yes, our numbers came in pretty solid for Q1. As you know, some of the key drivers to that is having plenty of supply and sufficient supply to [buy throughout] these markets. But if you look at our adult-use market, we are up 80%, which was ahead of what we originally were expecting for Q1.

Great. That's terrific. Mark, you reiterated that you expect to be recognizing revenue from novel form factors that will be legalized later in the year. I'm just curious to understand how you're thinking about the succeeding notice period? Because it doesn't leave a ton of wiggle room to generate revenue in the fourth quarter if I'm thinking about it right.

Yes, you're absolutely right. If there's an additional 60 days on top of the mid-October date, that only leaves a really small window in the second half of December. We are still expecting to be able to have revenues kick in earlier than that, so we're waiting -- still waiting to see the final regulations on that 60-day window.

Got it. But just to clarify then, you're expecting some kind of flexibility from the government?

We are.

Okay. My last question is on the capacity build-out. It makes sense, given that you're pushing out your target for supply and demand balances in the marketplace. Your comment was that those build-outs will be completed by the end of the year. But I'm thinking in terms of how that translates into revenue recognition, and I'm understanding that the construction will be done by the end of the year and then we should add another 12 to 15 weeks for cultivation and processing? Or could it be sooner than that?

Yes. So -- I think you're looking at it the right way. So as we finish, it's still going to take time to have the plants start up and to have the cycles of the plants starts. So you're thinking about it right.

And our next question is from Graeme Kreindler with Eight Capital.

First question, just wanted to elaborate on the wholesale supply available that you were discussing earlier. Now that we're into sort of mid-May, I just wanted to get some color on what the picture looks like in the wholesale supply. Has it improved into Q1? Or is this something that could be kind of lumpy in the market?

I would say it's pretty lumpy. We haven't seen a whole lot of supply out there. And when our team goes out to inspect the supply that is there, we're not finding the greatest quality. And so we -- oftentimes we will inspect expect product, and it's just not of a quality where we feel comfortable putting it in our packaging and selling it under our brand. We do see some progress. We see some very nice facilities coming online, but I think we're still expecting several quarters of supply and balances here in Canada. I think you'll see some smoothing of the lumpiness when we start being able to sell other form factors in Canada. That will give producers such as us and consumers more options, product to sell and products to buy.

Got it. And to follow up on there, the pricing average net selling price per gram from Q4 looked like it decreased into Q1. So I was just wondering if I could get a bit of color there in terms of what the contributing factors were.

Sure. So if you think about our pricing, the pricing is relatively fixed to the provinces in each -- in most of our channels. So pricing hasn't moved, it's really a function of mix. So we actually have sold a little bit less extracts this quarter versus the prior quarter or prior year's quarter versus last quarter. So it's more a function of mix as opposed to any price changes. And as you saw, that adult-use was a higher percentage of revenue compared to last quarter as well.

Okay. Great. That makes sense. And then my last one here, I'll jump back in the queue. You mentioned about pursuing other strategic partnerships, so I was wondering if you could elaborate on what specific verticals would be higher up in your pecking order and if you're putting any sort of time line or range of time line in terms of when we could see another strategic partnership be announced.

It's a good question, Graeme. As we see cannabis disrupting a number of other industries, we've been inundated with contacts from Fortune 500 companies who are interested in exploring partnerships with Tilray. And it's a range of companies from a broad variety of industries. And generally, the deals that have been done with other companies, we generally talk to those people at some point in their process, right? Imagine if you're a business development person at a Fortune 500 company that's looking at the cannabis industry, that person wouldn't be doing their job if they didn't talk to us. So obviously, lots of other tobacco companies are looking at the industry, lots of other CPG companies are looking at the cannabis industry from all different categories within CPG, and we're also starting to have lots of conversations with U.S. retailers who are interested in carrying CBD products in the second half of this year. Some of the conversations are focused around carrying our products and other conversations revolve around essentially contract manufacturing some of their in-house brands using Tilray-sourced cannabidiol.

And our next question is from Michael Lavery with Piper Jaffray.

You mentioned the harvest in Portugal and that the certification is in the works. Can you give us a sense of how to think about the trajectory there? I know working to get the certification is out of your control, at least to some extent on timing there, but when should we think about shipments? And how that builds over the course of the year?

Sure. So I first went to Portugal 3 years ago. And the first step in the process was signing an MOU, memorandum of understanding, with various departments within the Portuguese government, ministry of industry, investments there, public health regulator, INFARMED, and then their -- an investment agency called AICEP. And we signed that MOU. We did what we promised. We built out -- we invested heavily and built out a facility, the facility is now complete, and we have a greenhouse -- have had a greenhouse operating since last December, and so we've had multiple harvests from that greenhouse. So we're building up inventory in Portugal. The next step is for us to process that product and begin to export it from Portugal to other countries within the EU. I imagine that the first shipment will likely be from Portugal to Germany.

As we're building up that inventory, I would expect 3 different GMP certifications to take place really over the next 4 or 5 months. So the first one we're expecting within the next month or so, we'll receive another GMP certification from INFARMED, a regulator in Portugal, essentially the Health Canada equivalent in Portugal. The second GMP certification we would expect sometime mid-summer, June, July, and then the third one in the fall. The third one is for oils and extracts. And so we expect revenue really in the second half of the year from that facility in Portugal. At the same time, we've approved a 300% increase in our capacity in Portugal. So we'll build an additional 3 hectares of glass out there, and that -- so 7.5 acres. We expect that to come online just at the end of the year starting next year. Obviously, to Vivien's question at the beginning, it takes a while to ramp up. Essentially, these facilities are like large machines. It takes a while to ramp up and start up these facilities. And then in Portugal this summer, we will have an outdoor THC grow. We did one last summer and this -- the grow this summer in Portugal, outdoors will be about 50x larger than the one we did last year. And we have also approved an indoor expansion in Portugal. And that's probably still about 3 quarters out from being complete.

That's great. And then on the comments around supply balancing, could you give a sense of when you look at that, does it factor in, I assume exports say to Europe and kind of the whole global view? And then second, just as you think about the net impact for you, obviously that would suggest potentially better pricing but maybe less favorable costs on the spot market. How should we think about where you net out and how that may have changed relative to what you might have expected before?

I think the first change you'll see this summer from us is that more of the product that we produce in Canada will stay in Canada for the medical market here in Canada and the adult-use market. And what we'll do is we'll replace the product that we've previously been exporting from Canada to other countries with products that produce and processed and packaged in Portugal. That's the first and most immediate change. Over the short term, we expect to see relatively high prices on the spot market, but we expect those prices to become much more reasonable over the course of the next -- really over the course of the next few years.

And a sense of kind of where that nets out, obviously, if you're buying on the spot market, that's a cost for you. But the industry's pricing would seem a bit -- the selling prices would seem to be better. Do you have a sense of if this shift is -- if the supply balance seems to be a little bit further out than it was before, is that net positive overall or negative? Or not much difference? How should we think about that?

I think over the long term, you will start to see more pricing segmentation in most of the provinces. Most of the buyers in the various provinces have this. They have a good, better, best -- some of them have good, better, best premium pricing segmentation. And so I think that you'll start to see that segmentation look more like what you see in probably beer, where you have 1 or 2x pricing segmentation across the lowest priced products to the highest priced products. And so that's one change you'll see obviously with increased supply. I think you'll also see more of that. You'll see more pricing segmentation with the addition of other form factors in the fall. It's much easier to have pricing segmentation with oils and extracts and beverages and edibles. And so I think that's one change that's coming down the path after October.

And our next question is from Tamy Chen with BMO Capital Markets.

My first question is -- could you talk a bit about how you're thinking about the pace of revenues in the Canadian rec market over the coming quarters, in the sense that we have seen a very slow rollout of retail stores across the country? And does that have an impact or does that limit the cadence of demand from the provinces? Or does demand continues to actually grow? It's just a matter of having a supply right now?

I think there's a bunch of different things going on. I think you've hit on at least 2 of them. Obviously, it's taking a while for the retail stores to open, which isn't that -- it's not that different from what we saw in Nevada and what we saw in Washington. I think there's probably -- if you're looking for an analog in the U.S., those are probably the best 2 examples. But we now see, I think there's 450 retail stores in -- a little over 450 retail stores in Washington State, which has a relatively similar population to Ontario. And we have less than 25 opened in Ontario. And so there's a lot of room for growth in terms of retail in Ontario. So I think you are right on that point.

I think there are supply issues and I think the other key factor that is sort of slowing down growth in the industry or creating less growth, slower growth than we anticipated is really the form factors. You can go into illicit retailers in Canada today and buy all the same products you can buy in a U.S. state. You can buy a beverage. You can buy an edible. You can buy vape oil cartridges, which is what consumers want, right? Based on what we see across the U.S. And so you've got these consumers in Canada that can't buy the legal product that they want. And so I think that is continuing to fuel the illicit market in Canada. I think that once the other form factors are allowed in October, that's when you'll start to see more and more illicit consumers convert over to this fully legal system.

Okay. Got it. And my second question is a more high-level one. Just thinking about it from a perspective of a CPG company, evaluating the cannabis opportunity, what do you feel are the advantages or merits for a CPG company to partner with a Canadian-licensed producer versus considering a strategy such as leveraging offtake from a more dedicated extraction company and then just using their own CPG brands for whether it's with U.S. CPG market or other markets out there?

The brands are expensive and they take a long time to build. And they're the #1 asset of any Fortune 500 CPG company. And when they're looking to enter an industry, enter a space that is complicated and they don't necessarily understand it, they have a choice of going it alone or partnering with someone who understands the cannabis industry. Probably, more importantly, understands how to partner well. And if Tilray can meet the quality standards of companies like Novartis and Sandoz, the quality standards of companies like Anheuser-Busch InBev that means we can meet the quality standards of any Fortune 500 company.

And so when they look at making the decision that you've described, they look at us, they see that we have very high-quality standards. We can -- we're inspected regularly not only by government regulators around the world, but our partners. Not only Sandoz and ABI, but all of our distributors in countries around the world. And we can meet those standards and we know how to partner well not only with pharmaceutical and alcohol companies, but with companies like Authentic Brands Group that own over 50 iconic brands. They went through a similar vetting process and decided that it was much better for them in the long run to partner with Tilray than go it alone.

And our next question comes from Brett Hundley with Seaport Global.

This is Luke Perda on for Brett Hundley. First question, do you guys expect to have beverage production ready for later this year? And what about other products for the Canadian marketplace?

We do. We've been aggressively building out our capacity in our London, Ontario facility. And in addition to all of the equipment that we have there today, we are putting in additional extraction equipment, a small kitchen and a beverage line. And we anticipate having edibles and beverages in market as soon as we can. We've been -- the edible side is easier. We have lots of people on our team that have produced those products previously outside of Canada. And with beverages, the joint venture with ABI has been aggressively performing R&D as well as our internal team over the past few years, aggressively pursuing R&D so that we're ready for that launch. And we have some new brands and new product that we're excited to bring to market.

Great. And second one, can you talk a bit about the recent expansion announcement inside Canada? Specifically, can you speak to the long-term strength of its sales arrangements and why the company feels confident that capital should continue to be spent on Canadian cultivation rather than other areas of the supply chain or even greater levels of cultivation in other countries?

So in Canada, when we look at the ROI in terms of investment dollars, the easiest calculations are with expansion at our existing facilities. There, it's a very known path. We know what we're building. We know what we're getting. We know that in Nanaimo and Enniskillen, London and Leamington, we know that we have the -- essentially the utilities are really important. We have the power of the water already piped into our facilities. We oversized all of those when we were doing our initial build-out, so we have capacity. And the return on that investment is -- that's really easy math compared to a lot of the overpriced M&A opportunities that are available in Canada today.

Outside of Canada, we're making our most significant investments in Portugal, where not only are we investing significantly, 300% increase in cultivation, several hundred thousand square feet of indoor capacity, like I said, more than 50x our outdoor cultivation this summer than last summer. But our production in manufacturing space in Portugal is really built for 300% of the cultivation that we can do. And so our intent is to purchase raw materials, cannabis and oil from other producers around the world and bringing that product into Portugal, process it, package it and distribute it in finished form to other countries. So that's where we're making our largest investment because from Portugal, it's very easy to distribute products globally.

And just one last one here. As Tilray is engaged in more R&D, what is the view on the company's ability to drive for production, inclusion in sales, unconventional cannabinoids like CBC, CBN and the like? Is Tilray on a similar time line to that of the overall industry? And what's the best way to get these cannabinoids, be that biosynthesis or plant-reading technologies?

So we're seeing increasing demand in the U.S. for minor cannabinoids, CBG, CBN, to name a few. We're also -- we've looked at biosynthesis, whether we're talking yeast or E. coli or micro algae, and we made a few small investments there and explored a number of them. I think in the long run, those cannabinoids are likely to be produced outdoors using specific genetics that are high in certain cannabinoids. And we've done some work on our end internally, not necessarily with breeding, but selecting the right strains that have wide variety of cannabinoids for use in outdoor cultivation. I think it's going to -- I think you're going to see really interesting math over the long term where I think some of these biosynthetic producers are going to face some steep competition from large 100,000, 200,000-acre hemp and cannabis farms.

And our next question is from Robert Wertheimer with Melius.

So my first question is just, obviously, you guys have a lot you can evaluate. But I wonder if you would flesh out for us the decision on the tender in Germany and just the pros and cons of that. Obviously, you have investments in Portugal versus importing. I don't if there's a particular cost that you were concerned on or whether there was just no need, maybe you can give us a little bit of background there.

Sure. I first went to Germany in November 2015. First day, I met with 2 members of German parliament. The next -- that afternoon, I met with 2 members of BfArM, the Health Canada or FDA equivalent in Germany, and 2 activists. The next day I hired our first employee in Germany. I believe we're the first cannabis company, certainly the first Canadian LP to have an employee there. Throughout the rest of 2015 and 2016, we had regular meetings with BfArM and the -- essentially the DEA equivalent, the Bundeskriminalamt. And the more we talked to the regulators there, the more we realize that the Germans really wanted to control medical cannabis at the border. They were going to go through this tender process, but they -- my sense was that they wanted to control medical cannabis at the border. German medical cannabis legalization really was similar to Canada. Was the result of a few different lawsuits and 1 patient won the right to grow cannabis in his apartment, which terrified the Germans. And so they opened up their program.

We saw an initial tender go out which blew up after I think nearly 1 year. We didn't participate in that tender. And based on conversations we had with government officials in Germany, didn't participate in the second tender. The second tender really is -- I think there were 13 different -- not exactly sure how many there were, but I think there were roughly 13 bids to produce about 200 kilograms a year at a fixed price. That product is sold to the German government at a fixed price. And so there's no opportunity for refining products or branding or packaging. It wasn't a tender that we were interested in when we could obtain the license in Portugal to produce massive amounts of cannabis there. And we knew that the regulators in Germany were more than willing to import our product from Portugal, just like they've allowed us to import product to Germany from Canada, where we currently sell Tilray flower and Tilray oil in pharmacies throughout Germany.

Very helpful. If I can ask another, on your sort of supply/demand analysis looking in Canada, obviously Canada has different pinch points, maybe at different times whether it's straight up growing or packaging or distribution that you've talked to some of today. Do you expect growing to be a shortage for the next 12 months? Is that an advantage? I mean when do you expect, I guess, to have a healthy supply of available product to source in? And how much of that might you do?

I don't expect it to be solved in the next 12 months. Going back 18 months ago, a lot of the media and a lot of the analysts covering the industry in Canada were talking about how there was going to be a glut of cannabis today. I think one of the main issues was that a lot of the Canadian LPs were being valued on a really strange metric or were being valued on a multiple funded capacity which led all of the CEOs of the public LPs to grossly overestimate the capacity that they would have in place today. And we believe them and our intent all along was to purchase raw materials from some of these cultivators. And if you look at a company like ABI, they don't grow wheat and malt and hops and barley.

And so our intent is to buy raw materials from these cultivators and process those raw materials and build brands. If I can go back 18 months, 12 months ago, I would have invested another $100 million, $200 million in terms of Canadian cultivation. That was a mistake. But we believed all the hype 18 months ago. And so I think it's -- based on what I've seen, I think that we're still 12 to 24 months out from reaching some sort of demand/supply equilibrium. Like I mentioned in my answer to Vivien's question, I think that other form factors in October will help, but I think that it's still going to take quite some time for some of these high-quality facilities to come online.

And our next question is from Mike Hickey with Benchmark Company.

Congrats on the strong quarter. I'm just curious, obviously you showed some caution on supply, and that's -- your view has obviously become more conservative. Over the few weeks since you last talked, your initial guidance for '19 is 2x '18 sales plus 65 from Manitoba Harvest, you did sort of [80x root] sales. So curious if you think that guidance is still relevant or what sort of expectations do you [reset] for us for '19?

Yes, so just first point is we don't give guidance. We give general direction, but we typically don't give specific guidance. But with the numbers we gave out still hold, the risk that we always see in this industry is regulatory. So if for some reason GMP takes longer or regulations in Canada for other form factors get pushed, as Vivien indicated, it may get pushed until mid-December, which could push out revenue opportunities. Now that's just timing. When you're starting a new industry, when you look back at the alcohol industry, no one remembers whether it started in year 1 or year 3. I mean it's still a massive industry. So there may be delays here and there, but we will standby kind of our directional guidance based on what we know today.

All right. Fair enough. I guess on the regulatory risk point that you just made, when you look at sort of the edibles market, I think it's something we should be excited for. But when do you sort of consider the pending regulatory construct, do you think it's too restrictive to give edibles, legal edibles a real chance to take market share from the illegal market?

I'm fairly optimistic on the opportunity. I think that the guidelines, the regulations around potency and form factor, serving size, all those are fairly reasonable. I think the biggest challenge is still that they're not certain yet. And we don't have any certainty in terms of packaging. And so we're installing lots of equipment. We don't know exactly what the products are going to look like coming out of those manufacturing lines, so we'll have to -- that forces us to install a lot of machinery that have to have some flexibility. I think to your question, I think that one issue that still remains is that lots of the products that are available in the illicit market are beautifully packaged, right? And beautifully branded. And it's a little bit strange in that those products, many of them look like they should be the legal product. And the packaging that has all the warnings on it. It looks very different from what you see in individual U.S. states.

Okay. And last question from me. A peer of yours made a recent acquisition of a U.S. multistate operator. I'm sort of curious your thoughts on that strategy as a future path to the U.S. market upon legalization?

Yes, I think we looked at that deal, as we have with most of the deals our competitors announce. And we decided that it wasn't the right deal for us. We expect to see copycat deals between Canadian LPs and U.S. MSOs. We have had lots of those conversations. I've been in the industry for about 9 years, started in the U.S. And so you can imagine if any of those companies are contacted by a Canadian LP, they generally reach out to us. We expect to see further consolidation in the industry. We expect to see copycat deals. We're focused on making decisions and placing bets that will pay off for our investors over the long term. So if we found the right partner and the right structure, that certainly is something that we would consider.

And our next question comes from Aaron Grey with Alliance Global.

Just one quick question from me. So it's great to see the momentum on the adult side, but just taking a quick look at the medical side where we saw revenues decline sequentially on what we've seen in the past 3 quarters, can you just talk about the trends there? Also, it might be driven by both, but just what you're seeing on the medical side with about 6 months of adult-use now past us? It seems that decline might be more a function of demand or allocation of limited product, or I guess just more broader way you're seeing from category dynamics there.

Aaron, it's definitely about allocation. We've taken -- at the start of every quarter, we have to estimate what demand is going to be and we make decisions based on what we think demand is. And there's -- I think one of the surprises over the last 5 or 6 months is that there's still robust medical demand. And so we would -- going forward, we would allocate more towards medical. More product at the beginning of the quarter.

And our next question is from Scott Fortune with Roth Capital Partners.

Real quick one, touch base on kind of the CBD opportunity in the U.S. What type of -- when talking to retailers, what type of product opportunities are you seeing from the topical to the tinctures and such for CBD? And kind of what your expectations for the product rollout from Manitoba Harvest going forward here?

Yes, we're expecting -- we're having lots of conversations with lots of different retailers. They all want everything. I think one big surprise for me over the last 6 months, when changing dynamic that is really different in the U.S., is that a lot of the demand right now is driven by consumers and retailers and not the large CPG companies that we were talking about earlier in one of the earlier questions. But every large retailer is looking for a wide array of CBD products today, and this change is really being driven by them. They're way ahead of the curve compared to the CPG companies.

And so it's everything from extracts and oils, tinctures, gel caps, oral sprays, protein powders, looking at lots of different products like that for Manitoba Harvest. On the Authentic Brands Group side, looking at lots of different topicals under some of their brands and expect to launch topical series of products, set of products in the second half of this year. And then I've had lots of conversations with large CPG companies that are interested in products that we would never manufacture ourselves, whether it's antiperspirant or things like that. And what they're looking for is a Tilray-certified CBD ingredient.

Real quick, last fall -- real quick on [IGs]. Do you think some of these larger retailers are waiting for FDA clarity here? We may have a meeting on May 31, but how do you think they're going to move with ingestibles versus the more topical side of products?

That's a really good question, Scott. So there's no -- there's not one answer. There are retailers in the U.S. that are going to do this no matter what, which I think is going to lead to a really interesting second half of the year. And so there are retailers in the U.S. that aren't waiting for the FDA and then there -- as you can imagine, there are more conservative retailers that are going to wait and see what happens with some of the FDA hearings at the end of this month and over the course of this summer.

And our next question is from Mike Grondahl with Northland Capital.

This is [Michael] on for Mike. Maybe just a quick one on the percent mix of extracts for the total. Should we see that kind of staying the same through the rest of the year until you get the new regulations in Canada?

Yes. So the extract mix was in the 30 -- mid-30s range. It really is going to depend on somewhat of the mix for adult-use as well as the mix for international. Some of those -- that might drive the change in that mix, but it will be relatively in that range.

[Mike], does that answer your question?

Yes.

And I'm not showing any further questions in the queue. I would like to turn the call back to Brendan Kennedy for his final remarks.

Great. Thank you. I want to thank our 1,100 employees for their dedication and extraordinary efforts in building Tilray and for improving patients' and consumer lives through cannabis. We appreciate everyone's questions and participation on today's call.

Have a great evening.

And with that, ladies and gentlemen, we thank you for participating in today's conference. This concludes the program, and you may all disconnect.

Have a wonderful day.