Tilray Brands, Inc.
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Tilray’s Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. And as a reminder, this conference is being recorded. Now, it’s my pleasure to turn the call to Katie Turner from IR.

[Katie Turner:]

Good afternoon. And thank you for joining us on Tilray’s fourth quarter and full fiscal year 2018 earnings conference call. On today’s call are Brendan Kennedy, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer.

[Brendan Kennedy:]

Thank you, Rachel. Good afternoon, everyone, and thanks for joining us. On today’s call I will review the progress we have made on executing on our global growth strategy, including our recently announced strategic partnerships and acquisitions, and provide an update on our opportunities for long-term growth in the global medical and adult-use cannabis markets. Mark will then review our fourth quarter and full-year 2018 financial results in more detail and discuss our long-term financial targets. After that, we will open up the call to your questions. We are still in the early stages of the global transformation of $150 billion worldwide industry. We believe that over the long-term companies such as Tilray with the portfolio of trusted brands powered by multinational supply chain, will win the market by earning the confidence of patients, consumers and governments around the world. Taking advantage of Tilray’s best-in-class global platform, our team continues to focus on being a leader in defining the future of the industry, and delivering on the potential we see to be a multibillion dollar consumer packaged goods company. Focusing on our full-year results, we’re pleased with our growth and momentum. Revenue increased 110% year-over-year to US$43.1 million. And total kilogram equivalents sold increased both sequentially and on a year-over-year basis. We achieved this growth despite supply chain constraints across Canada that have created pricing pressure for cannabis that meets our quality standards, forcing us to source from other suppliers. Over the next 18 months, we believe there will be oversupply, just as we’ve seen in certain U.S. states as operators and newly legal markets race and government regulators catch up to find an equilibrium between supply and demand.

[Mark Castaneda:]

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 are pleased to report the fourth quarter financial results and the significant growth opportunities that lie ahead. Focusing on the fourth quarter results in more detail. Q4 revenue was $15.5 million, representing an increase of 204%, as compared to the fourth quarter last year. Revenue Growth was driven by the inaugural sales for the Canadian adult-use market, bulk sales and accelerated wholesale distribution and export markets. Extract products represented a greater mix and approximately 54% of revenue for the fourth quarter of 2018, compared to 24% of revenue for the same period last year. We are pleased with the performance in the adult-use market so far and expect adult-use to be a growth driver for 2019 as we continue to ramp up supply and with additional form factors that are expected to be included in our results later this year. Moving on to operational metrics. Total kilogram equivalents sold increased more than threefold to 2,053 kilograms from 694 kilograms in the same quarter of 2017. The overall average net selling price per gram increased to $7.52 from $7.13 says in the prior year. The increase is primarily due to an increase in mix of higher priced extract products with improved price per gram as a percentage of total revenue, compared to the prior year. Looking at the Canadian direct-to-patient sales. Our average net selling price per gram increased 9.4% to $7.43 compared to $6.79 per gram, again primarily due to product mix. Drilling into adult-use. Our average and selling price per gram was $5.40 per gram, which we expect to increase over the longer term as higher price value added products become available in Q4. On the production side, we continue to expect significant increase throughout 2019 as we expand our capacity to 90 metric tons, as we bring our Ontario greenhouse and Portugal facilities fully online. As Brendan mentioned, we recently completed successful harvest at our EU campus in Portugal, anticipate multiple harvests in the coming months. Gross margin for Q4 decreased to 20% from 57% in the same period last year as a result of procurement of third-party supply, costs related to ramping up our production and absorbing the tax for our medical patients. We expect to see margin pressure during the ramp-up of our production facilities and during the temporary lack of industry supply. Longer term, we continue to expect 50% plus gross margins as we lower our costs through greenhouse and outdoor cultivation, and as we ramp those facilities past the start-up phase. We also expect reduced revenue per unit as selling wholesale and the adult-use market becomes a bigger mix of our revenues. Our total operating expenses increased to $26 million, which includes $4.1 million in non-cash stock compensation expense. Excluding that, operating expenses increased to $21.9 million from $5.5 million in the prior year. The increase was primarily due to $12.3 million increase in G&A associated with higher professional fees and increased resources to support our growth and expansion for the startup of operations for adult-use. Net loss for the quarter was $31 million or $0.33 per share, compared to $3 million or $0.04 per share in the fourth quarter of 2017. Net loss included non-cash stock compensation charge of $4.1 million compared to $34,000 charged in the prior year. Adjusted EBITDA was a loss of $17.8 million, compared to a loss of $2.1 million in the fourth quarter of last year. The increase in net loss and adjusted EBITDA was probably due to the expected increase in operating expenses related to driving our expansion forward, such as investing in continued growth, expansion of international teams and costs related to M&A and public company costs. Turning to the balance sheet. We ended the quarter with cash and short-term investments of approximately $517 million. As a reminder, in October, we announced the pricing of $475 million convertible debt private placement, resulting in net proceeds before expenses of about $460 million. We intend to use the proceeds for working capital, future acquisitions and general corporate purposes. We believe we have sufficient capital to execute our CapEx and operating expansion plans for the next 12 to 18 months. On a longer term basis, we intend to further build on our early relationship in the global cannabis industry and to achieve growth for years to come. We see an opportunity to capture a sizable portion of this market with estimated gross margins 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 to develop those markets, which could have a short-term impact in those margins but also provide for greater revenue upside and the stronger business longer term. We are proud of our results and confident we are well-positioned to continue to be a leader in the global cannabis industry. This concludes our prepared remarks. Brendan and I are now available to take your questions. Operator?

[Operator:]

Thank you. And our first question is from Vivien Azer, with Cowen and Company. Your line is open.

[SteveSchneiderman:]

Hi. This is Steve Schneiderman pinch-hitting for Vivien tonight. Thanks for taking the call. Just to lead off, just quick housekeeping item. Can you please clarify whether the revenue numbers of $15.5 million are based on a gross or on a net basis?

[Mark Castaneda:]

Yes. Tat’s net revenues, but it does include taxes. So, if that’s your question.

[SteveSchneiderman:]

Yes. Thank you. That’s helpful. And you mentioned that you’re absorbing the excise tax. So, thank you for that clarification too. On the -- can you guys provide a little bit more detail on the outlook for 2019 in terms of revenues? And is there any cadence that we should be thinking about for the on-boarding of novel form factors later in the year?

[Mark Castaneda:]

Yes. So, as we mentioned nine months ago when we were doing our IPO roadshow, we talked about 2018 being a double from 2017 and 2019 being at least 3x what 2018 is. So, as you know, we don’t give specific guidance but we do give some directional guidance. And that 3x was excluding Manitoba Harvest. And for Manitoba Harvest, it’s about C$100 million or call it US$75 million and we only have it for 10 months of the year. So, let’s call it around $65 million for this year.

[SteveSchneiderman:]

And while we appreciate the need to buy from third-party, and it seems like displaying on your gross margin. I understand that you’re looking to double your square footage with supply coming on line. Can you talk a little bit more about the sequencing of that, and how that will litigate some of your headwinds, and in particular, how much is Natura Naturals coming into play?

[Mark Castaneda:]

So, Natura is coming into play as relatively short, small for Q1 just because we’ve purchased it during the quarter. There was also some commitments for them to sell to other third parties. So, the offtake we’re going to have is relatively small in Q1. For the full-year, it’s around 10 metric tons and could be up to 20 for next year, if we do an expansion project there.

[SteveSchneiderman:]

And on the rest of the year’s supply in terms of when we should see that coming on line this year?

[Mark Castaneda:]

So, we’ll continue to see increases each quarter, just as the facility has become more mature and we’re able to use a 100% of the facility as opposed to having the scale it up throughout this year. So, you’ll see revenues continue to grow, especially revenues from our own harvest continue to grow. So, you will see margins improve sequentially each quarter of this year.

[Brendan Kennedy:]

We’ve also completed our first harvest from Portugal and we anticipate newer harvest from that facility. We won’t sell product from Portugal until later on this summer. And so, you’ll see inventory begin to accumulate there in anticipation of our GMP inspection, so that we can export from Portugal to other countries around the world.

[SteveSchneiderman:]

And just a follow-up to that point, Brendan. Can you offer some specificity how that may impact the financial model, and how that buildout out may impact gross margins, and will sales from that facility be gross margin accretive to the company?

[Mark Castaneda:]

So, if you think about, Portugal and its costs, it’s cost base is significantly lower than Canada. And we’re going to do an outdoor crop, as well as greenhouse crop. So, again significantly lower costs than our Canadian costs. So, as we’re able to sell that product, which is going to be more of the second half of this year, that’ll be -- that’ll definitely expand the margins. And that’s all medical product, which generally has higher price points.

[Brendan Kennedy:]

And then, the final thing you’ll see from that Portugal facility is that we’ll use that facility to meet demand from countries around the world. And we’ll begin to leave product cultivated in Canada inside of Canada and so no longer export nearly as much from Canada.

[Operator:]

Our next question is from Tamy Chen with BMO Capital Markets. Your line is open.

[Tamy Chen:]

First question, I just want to go back on the procurement from third-party supply. Is that because of where the timeline of the ramp is at Enniskillen or is it just quality differences or is it there’s different streams of the provinces want that, you’re not growing it Enniskillen right now? I’m just trying to understand the rationale on the third-party supply.

[Brendan Kennedy:]

So, the third-party supply is primarily because we have significant demand for our products and we’re just not able to produce enough demand. As in our -- built in our model originally is we were planning to have third-party supply. And if you remember the articles from a year ago, we’re saying that we were going to be oversupplied in Canada at this point in time. That hasn’t happened. So, it has been part of our plan to use third-party supply. The quality of that supply is just not available as well as there’s just not enough product available.

[Tamy Chen:]

Okay, got it. And in terms of the Enniskillen facility, so I just wanted to confirm is the facility now is fully licensed and all areas are planted and growing? And can you help me think in terms of timing of the next big harvest from that facility that we should keep in mind when it comes to thinking about your pace of sales in Q1, Q2, the rest of this year?

[Brendan Kennedy:]

Yes. So, as far as licensing, so that facility is licensed today. The production facility in London is not fully licensed. So, we’re using some of the space in the Enniskillen facility that will be used for other things like trying, so we’re not using the full capacity of our Enniskillen facility because of the licensing requirements in London. So, that will happen we believe in the near term and we’ll be able to use Enniskillen at more full capacity.

[Operator:]

Thank you. Our next question is from Rob Wertheimer with Melius. Your line is open

[Rob Wertheimer:]

Hi. Good evening. I wanted to ask about your view on the progress and development of edibles or beverages and other products that might be on sale in Canada in 4Q, just general thoughts. And a specific question, is it clear to you -- obviously, you’re brand new and the JV you’re doing. So, is it clear to you that THC and CBD beverages can be made, like a track of shelf stable in the near term or is that sort of a thing you’re going to figure out in indeterminate amount of time.

[Brendan Kennedy:]

So, we think that they can be manufactured and be shelf stable and be tasteful -- yes, tasty, over the over the short term. I think that -- so, those are obviously in terms of prioritizing our objectives. Those are the first things we’re looking at. We’ve also spent a lot of time over the last few years looking at other simple, scientific problems to solve, so water solubility, bioavailability, time to peak effect, duration of effect, and we’ve solved a lot of those issues. So, we’re excited to bring a number of different edibles products to market whenever we can. I guess, the big uncertainty is when. We’re anticipating October of this year but that hasn’t -- there’s not complete clarity there and there’s also not complete clarity on which exact form factors, which exact ingredients will be allowed and what the packaging for those products will be.

[Rob Wertheimer:]

Do you have a view on whether your experience to-date allows you to have a leg up in that when and if it becomes allowed in 4Q? I don’t know what the process is going to be like for approvals, whether the past experience or manufacturing expertise or whatever? I don’t know if you view as that as a differentiator to early navigator on that?

[Brendan Kennedy:]

I think we have some advantages. So, while we were building out our London Ontario facility, we built out space for beverages, we built out space for oil extraction, we built out space for edibles. And so, from an operations perspective, I think being licensed, we already -- we have some advantages there. I think, where we have a lot of experience that will turn out to be advantageous is that we’ve licensed a brand, called The Goodship that operates in Washington State and I believe California. And there, there’s knowledge in terms of manufacturing specifically with Goodship edibles that contain CBD and THC recipes, SOPs, what packaging, what manufacturing equipment to use. And so, those are all things that we’re putting into our facility in London, Ontario, and that we do feel like we have a leg up because of our -- that brand and the knowhow from that brand. We also think that our joint venture with AB InBev gives us a leg up on beverage, they own 8 of the top 10 beer brands in the world. They know how to manufacture beverages all over the world and they have, as you can imagine, a robust supply and distribution chain globally.

[Rob Wertheimer:]

If I can ask one other one on Europe, and without trying to get you to give a specific guidance or outlook. But, I mean, can you see a path where you actually have ready demand for production out of Portugal for the full facility, when you do it. I just don’t know the pace of acceptance. Obviously, we’re trending in a great direction. I just don’t know the pace of acceptance in the medical community there. I don’t know whether you can talk about your efforts to your educate or whether that channel doesn’t need education; it’s going to pour in when it becomes available?

[Brendan Kennedy:]

I believe that there’s demand for all of our current supply in Portugal today, and demand for our forecasted supply as we ramp up that facility. We export today from Canada to about a half a dozen European countries. We have a global agreement with the Sandoz division of Novartis that we signed last December. And we think we’ll add roughly half a dozen extra countries to that agreement, most of which will be in the EU. When European parliament passed this resolution on medical cannabis a few weeks ago, we were expecting that. And so, we expect continued growth not only within the countries in Europe that have already legalized medical cannabis, but in really an additional countries in Europe that will legalize medical cannabis. And just to put it in perspective, in Germany back in 2015, there were about 800 patients -- medical cannabis patients there; at the start of last year, there were about 16,000, finished last year with about 40,000. I expect -- I estimate that we’ll get to about 100,000 patients in Germany by the end of this year. And so, we’re seeing rapid growth, not only in the number of countries, but the number of patients within individual EU countries.

[Operator:]

Our next question is from Brett Hundley with Seaport Global. Your line is open.

[Luke Perda:]

Hi, this is Luke Perda on for Brett Hundley here. Thank you for the detail on your interest in the CBD products market in the U.S. And given the FDA’s stance, I’m hoping you can help me understand kind of your approach and your view on what the company expects on this front. It’s our understanding that large CPG companies are putting out RFPs for fairly large quantities of CBD isolate in the U.S. Is that something that Tilray plans to be meaningful on?

[Brendan Kennedy:]

It is. So, we’ve signed an initial supply agreement for a number of different CBD products from either farmers or groups of farmers or processors within the United States. And we anticipate signing additional agreements, additional supply agreements in the coming months and quarters. There’s tremendous demand for CBD isolate and hemp-derived CBD extracts. We’ve been approached by a number of CPG companies that have asked us to certify their supply chain, whether it’s from CBD hemp farmers in Montana or Colorado or Oregon. So, we are obviously having conversations with a number of different CPG companies. It’s really the rationale behind our acquisition of Manitoba Harvest -- with Manitoba Harvest, if you can imagine buyers, Amazon, Whole Foods, Costco, Albertsons, as they’re looking to put CBD products on their shelves, there are a lot of unknown brands out there and a lot of unknown sources of CBD. And those retailers, they’re going to go with a brand they know and a supply chain they trust, like Manitoba Harvest which has been in that business for years, the world’s largest hemp food manufacturer, they control 30,000 acres of hemp cultivation, and they’re already on the shelves of 16,000 major retailers in United States and Canada.

[Luke Perda:]

Thank you. And kind of building off that Manitoba Harvest acquisition, do you have any growth rate expectations for the next couple of years and kind of an ultimate target margin for that business?

[Brendan Kennedy:]

So, the growth rate kind of just on the food side is between 10% and 15% with the CBD side is going to be significantly higher than that. So, we haven’t given -- again, we don’t give guidance but -- and some of that is dependent upon timing of CBD and when we can get it on shelves in the U.S. As far as margins go -- gross margins in that business be around the 50% range with CBD being a larger portion, it’ll actually tick up even higher than that.

[Luke Perda:]

Great, thank you. And just one more here, kind of looking at M&A. What’s on the top of the list for your company? And what are your view towards products or market areas? Have your views towards products or market areas changed since the cannabis industry has revolved? And what are your thoughts on ownership of U.S. dispensary assets. Is that something that’s ultimately attractive to Tilray or would you rather position yourself elsewhere in the supply chain?

[Brendan Kennedy:]

So, I’ll start with the first part of that question. When we look at strategic M&A, we look at transactions, we look at companies that open new territories, that increase our capacity, that increase our brand offerings through new form factors. We look at R&D, so some disruptive technology. And selectively we are looking at retail and I put that -- the second part of your question into that retail category. I guess, when we think about geography, we do -- we are focused right now on the United States and Europe and focused on aggressively deploying capital there. We certainly are not spending a whole lot of time looking at state licensed dispensary retail locations in the United States today.

[Operator:]

Our next question is from Graeme Kreindler with Eight Capital. Your line is open.

[Graeme Kreindler:]

Just the first question here as a matter of housekeeping. Just wanted to confirm the treatment of the excise tax. Is any of that showing up in the cost of goods sold line? And if so, what is the amount?

[Mark Castaneda:]

So, excise tax is -- it does show up in cost of goods sold. I don’t have those numbers handy. It’s relatively small. If you think about excise tax, it’s about $1 per gram. So, you can do the math on kind of what we sold at adult-use.

[Graeme Kreindler:]

Okay, sure, understood. Thanks. And then, just to go back to follow-on on the questions with respect to the CBD market in United States. We’ve seen, I think bit of a different cap on strategy. Some people waiting for individual states to regulate and that will be an acceptable framework versus waiting for I guess a full FDA ruling. Where does Tilray stand on that side in terms of what’s needed before we can see commercialization?

[Brendan Kennedy:]

So, the FDA Commissioner, Scott Gottlieb announced his resignation in -- coming up here in April. And our perspective is that over the short-term that that actually speeds up clarification from the FDA in the U.S. And so, I think, we’ll see, before his departure, some clarification on CBD derived from hemp. And so, we are looking to that as a next step. And we’re also looking at additional paths to get products to market in the United States that contain CBD, certainly before the end of the year.

[Graeme Kreindler:]

With respect to your comments earlier, Brendan, on investing in the United States, what could that like in the near to medium term before we see any sort of federally legal cannabis framework in place? What sort of forms could that take on?

[Brendan Kennedy:]

So, I think, I mean, for us, we have secured supply of CBD from U.S. hemp CBD source. And I would expect to announce additional sources of U.S. have derived CBD in the coming months. So, that was the first step. The second step is, if you think about Manitoba Harvest, Manitoba Harvest sells their products at about 13,000 retailers in the United States, plus 3,000 in Canada. And so, if you think about the 13,000 retailers in the U.S. that carry the Manitoba Harvest products, at Expo West in Anaheim few weeks ago, Manitoba Harvest was showing their line of CBD wellness products. And so, those would be the products that we initially would expect to bring to market as well as additional brands. And when I say additional brands, if you think about our partnership with Authentic Brands Group, they own over 50 of the world’s most iconic brands, and we have been meeting with them to determine not only which brands but which products we’re going to bring to market by the end of the year. And I expect that we’ll see products from an Authentic Brands Group brands such as something like Nine West by year end.

[Graeme Kreindler:]

Okay, great. And just a follow-up on that. With respect to the CBD supply chain, you talked about the steps made in sort of the procurement of the hemp and CBD isolate on one end and then the end branding package goods side on the other things -- on the other end. What about the extraction in formulation step in between that in terms of investments being made to take it from seed or from biomass down to sell?

[Brendan Kennedy:]

As you think about Manitoba Harvest, they receive hemp from 30,000 acres worth of hemp cultivated in Canada every year, they receive it into processing facility in Winnipeg, it then goes from that processing facility to a manufacturing and packaging -- state-of-the art manufacturing and packaging facility outside of Winnipeg and a town called Sainte-Agathe. And so, it’s that’s -- their experts in hemp processing. We would expect to either acquire, invest or partner with a group in the U.S. that would enable us to leverage Manitoba Harvest experience into U.S.

[Graeme Kreindler:]

Okay, thanks. And last question here on your comments on investing selectively in retail, is that specifically for the Canadian market or does that other -- does that extend to other jurisdictions?

[Brendan Kennedy:]

It does extend to other jurisdictions. The retail will look a little bit different in different jurisdictions in Canada, obviously, it’s adult-use retail. If you think about retail in the United States, certainly for hemp-derived CBD product, it will look slightly different from that. And if you contrast that with some sort of retail venture in Europe, it’ll be much more wellness focused or pharmaceutical focused.

[Operator:]

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

[Michael Lavery:]

Can you just touch or ABI JV? And what were the steps needed for expansion, globally? Is it just as simple as getting recreational use to legalize in other markets or how turnkey is it to expand that as new markets open up?

[Brendan Kennedy:]

At the start of last year, at the start of 2018, we announced a partnership with the Sandoz division of Novartis that was specific to Canada. I think, we announced it in January. And in December of last year, so a few months ago, we announced that that Canadian partnership had become a global partnership with Sandoz. We took a similar approach with AB InBev. And our initial joint venture is for R&D of beverages for the Canadian market. And if you think about a company of that size going through the process that we went with them for a year in terms of performing due-diligence and meeting with our team, neither party hopes that that agreement is just for R&D in Canada. So, clearly, there is an interest and desire to potentially expand that agreement in the future. And so, that’s what I expect will happen. That’s what I hope will happen. But, the first thing we need to do is develop the products and develop the brands and the packaging, the form factor and further refine the science and get those products to market when we have an opportunity to commercialize them, perhaps as soon as October, in Canada.

[Michael Lavery:]

We’ve covered the U.S. CBD pretty well. But, can I follow-up one clarification there? If before Gottlieb leaves, he doesn’t give more detail or color, what’s your understanding of the products that are within the regulation? And I know you have the tinctures and the hemp oils and hemp carts and hemp foods under the Manitoba Harvest brands, you showed at Expo West, like you talked about it. Would it just be limited to that? Is there potentially more? Are any of those ones you think have any question marks around it? What’s the right way to understand what your guardrails are, if he doesn’t give any color before he leaves?

[Brendan Kennedy:]

Obviously, the Manitoba -- the existing Manitoba Harvest products are already in retailers across the United States and don’t need any approval from the FDA. They’ve already been approved. We believe there is a path to market for CBD products, but we need to do it in a way that ensures we comply with SEC and NASDAQ regulations.

[Michael Lavery:]

And then, just one last one for some of the export opportunities that you’ve talked about, especially as markets open up. What are some of the restrictions or conditions, if any, that might be in place? And specifically, how dependent is it on those markets not yet having supply built up such that if they built internal capabilities, would they be able to turn off the import, so -- and potentially box out? How’s does the trajectory look or is there any risk to that runway there?

[Brendan Kennedy:]

So, when we think about opportunities, we think about three buckets. Obviously, we think about the global medical opportunities. And currently, 41 countries I think will easily end this year with more than 50 countries that have legalized medical cannabis. There’s a chance we can get to 70, -- 60 or 70 countries over the next really 18 to 24 months. And so, that’s a clear opportunity. Those -- most countries are not looking to source this product from within their countries, certainly none of the 28 members of the EU are looking for that. We picked the facility and -- we picked Portugal as a place to build a facility because it had an ideal climate, it had a little regulatory costs, it had tariff-free access to the EU. And so, it would be very difficult for a country to prevent products to -- it would be very difficult for an EU country to prevent product from Portugal from entering that market. So, we’re already building that supply in Portugal. And we have a global medical distribution partner in Sandoz, Novartis that already has an established supply chain. And so, when we meet with regulators, like the officials bureaucrats in countries around the world, as they enter a new regulatory framework, as they look to legalize medical cannabis, there are so many uncertainties that they face. They are strongly encouraged when they see that we have a partner like Sandoz. And I guess, my final point would be that that also translates to physicians and pharmacists who are looking for a trusted supplier, trusted provider of medical cannabis products. And when they see that Sandoz, a Novartis division label on our products, it inspires confidence and trust, and it builds the halo around our brand.

[Operator:]

Thank you. Our next question is from Mike Hickey with Benchmark. Your line is open.

[Mike Hickey:]

Hey, guys, great quarter. Thanks for taking my questions, I appreciate it. I think, you reiterated your view that you’d be increasing your capacity to 90,000 kilograms or 90 metric tons by the end of 2019. Did that -- were you already sort of assuming M&A because I believe you acquired Natura after that and you’re saying that’s adding 10 metric tons. So, should that be added or is that sort of already implied in your guidance that you did with M&A?

[Mark Castaneda:]

Yes, the 10 of Natura should be added. But, we won’t get a full 10 out of Natura this year. Again, we didn’t buy it on January 1. And we do have some off-take agreements that we inherited. So we’re not going to get to full 10 for Tilray.

[Mike Hickey:]

And on your guidance for 2019, or what you originally expected 2 times 2018 sales, it sounds like you’re confident on that plus $65 million in net for Manitoba, is that correct?

[Mark Castaneda:]

That’s correct.

[Mike Hickey:]

And then, how did the -- has the construct of that guidance changed? And, have you sort of fully contemplated the CBD opportunity or has that become a bigger piece of the puzzle? And how much of that ex-Manitoba sales is sort of Canada versus what you’d expect from international?

[Mark Castaneda:]

So, I’ll break that down. You had a couple of questions in there. So, has it changed or has it included U.S. CBD? Originally, when we gave that guidance, it did not include the U.S. CBD. The original guidance also assumed that we were going to get plenty of products from Canadian suppliers. So, there’s some pluses and minuses for those two. And then, your question about Manitoba, I’m not sure I understood it.

[Mike Hickey:]

I was just curious, I think you answered it primarily, just $65 million on top of the $18 million. Yes. So, I think you answered it. The last question, in the U.S., you’re seeing an effort from some of the states that have legalized cannabis to offer locations to publicly consume cannabis. Curious to sort of your view on how that could potentially happen in Canada or not. And I guess, specifically on beverages, at least in the U.S. where we’ve seen quite a bit of work in beverage products, it still remains a very niche product category. So, I guess, the second part of that question is, do you see for the beverages to really work you’ll need sort of social public consumption points, now call it bars or restaurants for that to be meaningful for you in the future?

[Brendan Kennedy:]

Definitely, in terms of beverages, it’s all about consumer occasions to consume. And whether that’s product that’s purchased in a bar or a restaurant or a product that’s purchased from 7-Eleven or Circle K, these products just aren’t readily available. But we are seeing more and more millennial consumers who aren’t interested in -- or are less interested in alcoholic beverages than they are interested in cannabis. And so, we think that as a category of cannabis, beverages will significantly increase, not only in Canada, but in the U.S.

[Mike Hickey:]

Last little question for me. When you look at sort of what Canada Health has given as their sort of initial view, maybe around the regulatory framework around edibles, you’re seeing sort of maybe limitations on per serving potency or you’re seeing maybe limitations on sweeteners and coloring, and maybe the necessity to have separate manufacturing facilities. Just curious how you sort of pulled all that up into making competitive, edible products, versus the illegal market where they’ve already sort of achieved scale and sort of no other consumer wants, some of which seems like Canada Health wants to limit, particularly like gummies and other products that adult-use has shown a lot of demand for?

[Brendan Kennedy:]

Yes. When we’ve looked at the opportunity in Canada over the past few years, it’s always seemed a little incongruous that a public health organization was limiting the product form factor and essentially limiting consumers’ options or choices and essentially forcing them to smoke a product that didn’t quite make sense to us. We are extremely interested in the opportunity that will be made available to us when we can begin manufacturing and selling non-combustible form factors such as edibles and beverage. I think, you touched on a really important point, scale and marketing and brands are what beat the black market. And if you look at individual U.S. states, the black market has been decimated in Washington State, it’s been decimated in Colorado. And every restriction that Health Canada places on the edible market in Canada, all those restrictions empower the black market, empower products and brands that are already in -- illicit products and brands that are already in consumer hands. Having said all that, we are strong supporters of portion sizing and limiting the potency of edible products. And whether that is a 10 milligram portion cap or 5 milligram of THC portion cap, we’ll adjust our products accordingly.

[Operator:]

Thank you. And our last question is from Mike Grondahl with Northland Securities. Your line is open.

[Mike Grondahl:]

Yes. Thank you, guys. Hey, Brendan, I know you kind of called out Germany but what other countries do you think are most promising for medical use in the near term?

[Brendan Kennedy:]

Oh, gosh. We’re -- so, I’ll sort of bifurcate that into existing and then future. So, the UK, Australia, New Zealand, we continue to see growth there. Really Chile, Argentina, Peru, Brazil are really early on in their growth curve. And then, in Europe, Czech Republic, Croatia, Cyprus are all countries that we already ship to. I think that we’ll see progress and really interesting opportunities inside of the EU, really by the end of this year. And so, whether that’s Ireland, Poland, France,et cetera, those are the opportunities that we think are going to come on line. There’s 19 countries in Europe that have legalized medical cannabis. And so, we expect that a population of more than 500 million people will have access to medical cannabis in Europe over the next 12 to 24 months. And I think really an important distinction to make between Canada and Europe is that in Canada, the Government of Canada is taxing medical cannabis. And in Germany, they’re subsidizing medical cannabis. In Germany and the rest of Europe, you’re going to see this product made available through government subsidized medical programs. And so, it’s a really different approach from Canada. That’s -- sometimes it’s hard for people to grasp. In Germany, any doctor can write prescriptions, any patient for any illness distributed through a pharmacy with insurance company coverage. And you just don’t see that in North America today.

[Mike Grondahl:]

And then, quick on CBD. Is there any form factors that you think really stick out with hyper demand or is it just anything with CBD can sell like crazy? How do you think about it?

[Brendan Kennedy:]

That’s what’s interesting about what we saw few weeks ago at Expo West. We had a pretty large team there from Tilray, almost our entire U.S. team was there, as well as the team from Manitoba Harvest. And everyone on the team was sending me -- they were all sending me pictures of different CBD products produced by really mainstream manufacturers. And it was -- I mean, it was across -- it ran the gamut in terms of form factors. And I think, I made a joke the final day that the only thing I didn’t see was the CBD toothpaste. And two people sent me a CBD toothpaste. And so, we’re -- sent me a picture of the CBD toothpaste. So, we’re seeing it in virtually every form -- imaginable form factor. I think that -- I think what you’re going to see are products, mainstream products that contain CBD. But, then, you’re also going to see really pharmaceutical grade, dietary supplement, nutritional supplement products that come from established brands and trusted sources. And I think that’s probably the biggest opportunity.

[Operator:]

Thank you. And I would like turn the call back to management for any final remarks.

[Brendan Kennedy:]

Thanks, everyone for joining our call. We are very pleased with our performance in Q4 and in 2018 overall. Thanks for listening.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.