Tilray Earnings release.
I guess financials published before the CC did not happen this Q and last as well. This might become a theme. While Tilray does put a lot of detail in their schedules to the earnings release, we pull a lot of data from notes. Thus the delay on publishing the Rundown.
What I said last Q
- Sales increased 15% QoQ or US$18 million largely on cannabis sales of +$12 million.
- SweetWater increased sales by 34% as covid restrictions eased and they expanded into new states.
- International sales increased from C$0.4 million to USD $4.7 million QoQ.
- SweetWater has a very sexy 67% GM and it is still hampered by a reduction on Keg sales, which reportedly carry a higher margin.
- Opex reduced to 44% of sales from 57% in Q3, but previous Q’s SBC under IFRS is different under US GAAP resulting in Q3 being C$36 million and Q4 being US$6 million.
- Net Income of +US$ 34 million versus -C$361 million QoQ
Cash on hand US$488 million
- Distribution Sales decreased 5% due to lack of supply due to covid lockdowns in Germany
- Gross Margin decreases to 16% from 25% QoQ or -US$25 million, its lowest % on record as cannabis GM reduced to $4 million after a $20 million impairment to combined inventory.
- Opex less SBC increased from 34% to 40% of sales
- Net Income was largely aided by the swing in stock price QoQ which provided a boost this Q of US$113 million and a swing QoQ of US$325 million resulting from the convertible debenture.
- Current Period debt, contingent consideration, and warrant liability aggregates US$180 million for the next 12 months, which puts a dent in cash if not replenished.
- Goodwill and Intangibles increased USD 3.3 billion to USD 4.4 billion with Tilray folded into Aphria.
Keep in mind that Tilray was on previous Q financials for four weeks versus 13 weeks this Q. Last Q they did not provide any breakdown of old Tilray contribution to cannabis sales versus Aphria. So, it’s tough to see the net difference in cannabis from Tilray for a full 13 weeks. Do not worry… I got you.
- Overall sales increase 18% QoQ with cannabis net of excise +31%… looks to be all acquisition related as Tilray was merged for full Q.
- GM improved to 30% and $51 million versus 16% and $22 million QoQ. $21 million of the $29 million in improvement is the lack of inventory adjustments that occurred last Q.
- Cannabis GM of 43% is highest in Canada.
- Wellness (aka Manitoba Harvest) if factoring a 13-week Q versus 4 weeks last Q… MH would have tracked to $18.8 million in sales versus reported $14.9 million… 26% short QoQ.
- Sweetwater revenue was down 3% QoQ net of excise, disappointing given entry into new states and several new products introduced.
- GM% at Sweetwater dropped from the dead sexy 67% to 57% this Q.
- G&A net of SBC increased to 24% of sales, highest on record. If closing costs provision of $6.2 million for Nanaimo are backed out that drops to 21% versus 17% in last pure Aphria Q.
- I have Adjusted EBITDA backtracking QoQ to $8.2 million, as I did not allow the $6.2 million in Facility Closure and Startup costs. Closure costs are self-inflicted.
Now, open up the financials and MDA and let’s get to it, shall we.
Income Statement Drivers and Breakeven Sales Levels – Trend CAD
Table 1 Sales Segmentation
NOTE: Their Analyst Primer from Q4F21 allowed me to get actual figures for August 31, 2020, through May 31, 2021 (top table).
Tilray recorded a +18% increase in Net Revenue of $26 million to $168 million QoQ.
Cannabis revenue (net excise) increased $17 million or +31%, no mention what old Tilray contribution was. Old Tilray was averaging $27 million cannabis revenue per quarter. Last Q Old Tilray was 4 weeks versus this Q was 13-week contribution, which would have been +$18 million QoQ. At $17 million increase this Q the results are flat when combining Aphria and Tilray.
The last full Q of Old Tilray (March 31, 2021) had cannabis revenue of CAD 34 million and Old Aphria (Feb 28, 2021) CAD 52 million, for an aggregate of CAD 86 million. This Q would be CAD 89 million or only CAD 3 million +3% in cannabis revenue growth over six months. Compare that with the past six months of Canadian recreational sales increases aggregated 21%, and the slide in market share of these combined entities is stark.
Distribution revenue was impacted by four days of flooding in Germany (they are claiming insurance claims under business interruption insurance but that does not show up on top line revenue) and continues its rocky covid period, with flat revenue QoQ at $67 million.
SweetWater decreased $0.5 million -3% to $15.5 million. The reduction in on premises keg sales and continued pressure on off premises sales were noted. Sweetwater did expand into new states and are producing new products (more seltzers, 420 Imperial, and hard teas), so the decrease is a little concerning. More effort for less sales is not a good combination.
Wellness (Manitoba Harvest) contributed $14.9 million for the entire Q, while old Tilray last full Q was $17 million, which represents a -14% decrease. Adjusting last Q of MH revenue from four weeks to 13 weeks yields an even bigger decrease of -26%. This is likely tied to the white labeling by Costco which replaced MH a few Q’s ago.
Cannabis revenue before excise tax removal:
- Cannabis Revenue increased $18.6 million or 26% to $89.9 million before excise and increased $16.7 million and +31% after excise.
- Adult use was +17% increasing by $9.9 million to $70 million. Using old Tilray March 31, 2021, Adult sales of $19 million, and factoring for 2/3rds more revenue for the full Q would have yielded $13 million in incremental sales. So, the $9.9 million falls short of a straight combination result.
- Medical increased 20% by $1.4 million to $8.4 million. Old Tilray had $3.2 million before excise last Q. So, the entirety of the increase looks to be the addition of old Tilray for a full Q, as Aphria medical cannabis was backing up for seven previous Qs.
- Wholesale increased $1.6 million in sales to $1.7 million and
- International increased $5.6 million to $10.3 million. Old Tilray international revenue was quite strong at $8.6 million for the full prior Q but had been as high as $12 million in the past fiscal. This Q, Tilray started selling from their German cultivation facility.
- Distribution Revenue increased $0.4 million or +0.6% to $67 million, the third lowest of five Qs under review.
- Sweetwater recorded $16.5 million in sales or -0.4% -$0.1 million.
- Wellness was $14.9 million, tracking below old Tilray’s last Q and under adjusting last Q’s partial quarter to full quarter.
Table: Revenue by Product Segment
Dislcosure ended 4QF21.
Table KGs Sold and Average Selling Price
Dislcosure ended 4QF21.
Adult Recreational Cannabis Revenue: Trend and Peer- CAD
Recreational sales continued to increase CAD +23.5 million, but it looks like any synergies between the companies on adult use revenue are not showing in the revenue figure. They indicate they are at 16% market share which was down from pre-merger 20%.
Medical Cannabis Revenue: Trend and Peer- CAD
Canadian Medical increased by $1.4 million or CAD 1.8 million, while international medical increased $5.6 million or CAD 7.1 million. The Tilray’s medical platform trails CGC and ACB.
Wholesale Cannabis Revenue: Trend and Peer
Wholesale of $1.7 million or CAD $2.1 million versus minor last Q,
Income Statement Drivers and Breakeven Sales Levels – Peer
Note: Sundial and OGI breakeven could not be calculated due to negative GM%.
Tilray is the largest company by sales in the peer set. Sales do include C$ 85 million in Distribution and C$20 million beer sales.
Table 2: Gross Profit per Segment
and Cost Per Gram Table
Overall gross margin increased to 30% vs 16% QoQ and increased to $51 million this Q in absolute terms from US$ 23 million, for an increase of $28 million in absolute Gross Margin. All but $8 million of the increase is related to no re-occurring impairments of inventory.
- +$26 million in cannabis GM to $30 million
- No mention of returns or unabsorbed overhead.
- -$1.8 million in GM from SweetWater with a 56% GM.
- Distribution GM improved to 11.8% from the low point of 9.5% last Q but below the 13-14% range in the prior three Q’s.
- Wellness had a GM of 27% stable QoQ and above Old Tilray 25% last Q, but well below the 33-42% range in the prior three Qs of Old Tilray.
Gross Margin Cannabis Trend and Peer
The above is strictly the cannabis GM%.
What we said last Q: Expect cannabis GM to be under some pressure as the Tilray acquired inventory and inventory produced at the old Tilray facilities, which costs more than old Aphria, gets sold through.
Tilray improved to the highest in peer group at 43%. They indicate that had the products being produced at old Tilray facilities been produced in Leamington lower cost facilities GM would improve a further $4.9 million to 50%.
Tilray was packing $96 million in inventory (cannabis and hemp) on March 31, 2021, pre-merger. It may take another two quarters for the acquire inventory to be worked down and Nanaimo will be closed in phases until mid C2022.
Gross Margin Large Peer Group
With a large chunk of revenue delivered from lower margin Distribution, Tilray is 3rd from top in this metric.
Gross Margin North American Peer Group
The above has Tilray fifth from bottom of the positive GM crew. But I want our subscribers to consider this… Tilray evidenced a 43% GM on cannabis. This is with tremendous competition and national pricing pressure and no verticality.
That % of adjusted GM would have put them in the bottom quarter of the US MSO group. BUT those MSOs are operating in limited competition state, under supplied, siloed markets with verticality. Under the draft Bill from Senator Schumer, interstate trade would increase competition affecting pricing and gross margins as well as verticality.
When you hear us say “MSO Gross Margins” are bubble wrapped via limited competition and allowed verticality, Tilray does not enjoy that bubble wrap. The point being… when the bubble wrap comes off MSOs will look very similar to Canadian LP’s IMO.
SGA & SBC as % of Sales: Trend Analysis
Note: I strip Transaction Costs from Opex to provide a more consistent peer comparison.
G&A increased by $13 million to $40 million QoQ, increasing 6% as a percentage of sales to 24%. Office and General increased $4.8 million, salaries and Wages increased $5.0 million, Insurance increased $1.6 million, and executive compensation increase $1.3 million for an aggregate of $12.7 million. G&A for old Tilray last Q was $26 million. The increase is tracking for a full Q at $25 million, slightly below old Tilray. Embedded within the above is a provision for $6.2 million for facility closures and in G&A and Salaries. Some serious chopping is required here, over and above the removal of the $6.2 million embedded closure provision.
Selling and marketing expenses decreased $0.7 million to $12.9 million QoQ and to 8% as a percentage of sales a decrease from 10%. Combining selling organizations and eliminating overlap is likely the reason.
Very important to note that SBC under US GAAP is different than under IFRS. Under IFRS they had to adjust the SBC as share price changed. Under GAAP it is just the grant date fair value that gets expensed over the vesting period.
SBC was $9.4 million for the Q versus $5.9 million the prior Q, increasing to 5.6% of sales from 4.2%. These % is not comparable to past Q’s under IFRS. “ The increase is primarily due to increased number of employees and the accelerated vesting of certain of our stock-based compensation awards tied to the Arrangement.”
I would expect SGA to get trimmed in the upcoming Qs, as Tilray attempts to remove $80 million in annual costs (CoGS and SGA) over 18 months. They indicate they have identified and eliminated $55 million on the go forward.
Rounding out Opex is:
- R&D of $0.8 million vs $0.4 million last Q
- Amortization of non-production assets of $31 million versus $16 million last Q as old Tilray assets were brought in and intangibles get amortized for a full Q.
Overall Opex increased to $94 million from $63 million (56% of sales from 44%) QoQ as full Q of old Tilray is accounted versus just four weeks in the prior Q.
SGA & SBC as % of Sales: Peer Comparison
Compared to Peers, Tilray is the second lowest in combined SGA & SBC at 37% with VFF ahead at 16%. Again, Tilray has a low margin high revenue Distribution business that drives the lower figure and a US GAAP SBC advantage to all but CGC, who is also US GAAP.
Net Operating Profit
Before IFRS Voodoo:
NOP was negative $43 million versus negative $40 million last Q. Increase in GM of $29 million was more than offset by OPEX increase of $31 million.
+NOP Breakeven Sales
Tilray is best in this ranking. Tilray requires an incremental sales increase of 84% to reach +NOP at present GM% and OPEX$’s.
Other Income & Expenses of Note:
- Finance Expense:
- Interest Expenses was $10.2 million versus last Q $9.5 million. This increased with the old Tilray debt for the full Q.
- Other Expenses and Income of note:
- Transaction costs of $26 million related to getting the votes for increase share issuance, MedMen and other transactions they reviewed.
- Unrealized gain on Convertible Debentures of $39 million versus a gain last Q of $113 million.
- Change in fair value of warrants of $17 million
- F/X loss of $5.7 million versus a gain last Q of $1.2 million
Total Other Income was positive $13 million after positive $79 million last Q.
Income Before Tax was negative $30 millionversus positive $38 million last Q.
Taxes were $5 million.
Net Income after tax was -$35 million versus +$34 million last Q. The big swing is lower FV gain on debenture, decreased transaction costs, increase in GM, and increase in Opex.
Non-Controlling Interest Net income was $7 million all Aphria Diamond.
+Adjusted EBITDA Breakeven Sales
Tilray is positive Adj EBITDA. At current GM% and Cash OPEX they could run at 87% of existing sales and be +EBITDA. That 87% would have to be spread equally across their widely divergent GMs by segment.
EBITDA: Trend and Peer
I did not allow the USD $6.2 million facility startup and closure cost in adjusted EBITDA that Tilray added back. The only mention was in Adj EBITDA calculation. With EBITDA of $8.2 or CAD 10.3 million we now have ten successive Q’s of +EBITDA.
Unfortunately, they no longer break down Adj EBITDA by segment contribution.
Please keep in mind that the Adjusted EBITDA includes the portion of Non-Controlling Interest owned by JV partners at Aphria Diamond and does not accrue to Tilray shareholders. Interestingly, Aphria Diamond sales revenue is down to $20 million from $30 million YoY same Q. Not sure the reason that the internal sales would drop a third.
Operating Expense Burn: Trend
Cash used in
- Operating activities $93 million of which $54 million was Opex Burn (transaction fees and interest is $34 million of that) and $35 million used in non-cash working capital (largely a $23 million pay down in A/P).
- Investing activities $8.6 million
- Financing activities $8.0 million
Free Cash Flow is primary objective of Tilray, with a view to returning to the positive figure achieved in the prior Q:
Carl indicated this would likely correct in Q3F2022.
Balance Sheet Items of Note:
- Cash decreased $112 million to $376 million.
- A/R increased $10 million to $97 million as sales ramp was backloaded in Q.
- Inventory, now US GAAP is $252 million a small $5 million decrease.
- Cannabis inventory constitutes $178 million of inventory up $6 million QoQ (Vapes were up $14 million).
Cash versus Debt Service
- Annual debt service is $75 million (P due in 12 months + 4 times this past Q’s interest expense). In order to get to a 1.20: EBITDA to Debt Service Coverage (a familiar covenant for traditional debt lending) Tilray would need EBITDA of $90 million annually to cover same (although P amortization is not included). They are at $26 million in annualized EBITDA. However, the Aphria or Tilray Convertible Debentures could be flipped to equity, which changes the look of the company significantly.
“Gas in the Tank”: Trend Analysis
Discontinued in Q4F21 due lack of disclosure.
“Waterfall” – Trend Analysis
Discontinued in Q4F21 due lack of disclosure.
Discontinued in Q4F21 due lack of disclosure.
Harvest vs Sold KGs and Sales versus Inventory
Discontinued in Q4F21 due lack of disclosure.
Inventory to Sales:
- Tilray inventory turnover is stable at 2.15 Qs (Note: Q0-3 and Q0-2 are IFRS from Aphria and are IFRS Inventory to sales versus GAAP Inventory to CoGS)
- Other current assets and prepaids increased $68 million to $117 million. I could not track the reason for increase.
- Capital assets (PPE) decreased by $29 million to $621 million. $40 million in amortization offset by equipment purchase of $16 million and a $10 million reduction in leaseholds. Very little capex planned for the fiscal.
- Goodwill and Intangibles decreased to $4.3 billion from $4.4 billion. $99 million is FX translation and $25 million is intangible amortization.
- Long term investments increased $169 million to $186 million. From Notes: As of August 31, 2021, MM Notes and MM Warrants are accounted for as debt and equity securities and recorded in long-term investments with an offsetting current liability (escrow below of $171 million) for the outstanding consideration due. As partial consideration for the MM Notes and MM Warrants, on September 17, 2021, the Company issued 9,817,061 shares of its common stock. The balance of the consideration for the MM Notes and MM Warrants was paid in cash by the other partners of SH Acquisition.
- A/P and accrued decreased by $23 million from $190 million.
- Contingent consideration of $61 million. Flat QoQ. SweetWater earnout.
- Warrant Liability decreased $18 million to $60 million. Leftover from previous Old Tilray raise.
- Escrow payable appears at $171 million for pending MMEN closing.
- Long Term debt and lease liabilities stable at $218 million.
- Convertible debentures $612 million from $667 million. $342 million is Aphria 2024 and $269 million is Tilray 2023. The Tilray 2023 are so far out of conversion that these would be the most likely candidate to be paid out via negotiation.
What we said last Q
That was a load.
The stock price liked the quarter. Me, not so much.
The float is 80% retail investors who respond well to sales increases and positive net income, albeit net income was 100% due to the stock price dropping and the convertible debenture gain as a result. The comments that Tilray would be pursuing US expansion (beverage and food) and THC related (MSO options until federally permissible) likely also appealed to shareholders.
This acquisition will take a while to digest and wring out the savings of $80 million via cost synergies. On the CC they said they already have $35 million in synergies in hand. But the that is the low hanging fruit of staff, c-suite, filing fees, insurance… and it has been picked. It gets harder from here.
The return to a reasonable cannabis gross margin without inventory stacking up is what I would be looking for going forward.
Next Q should prove very interesting. Full Q of old Tilray sales. Hopefully, no inventory impairments. Seeing Distribution return to pre covid would be welcome. SweetWater has done nothing but impress me so far. Manitoba Harvest needs a kick in the pants. There has been calls for the FDA to bless CBD in food stuffs by the likes of Coca Cola. That would likely bode well for MH.
SGA control, which has always been solid under Aphria, is something to watch for as well.
I have a feeling that CEO Simon has some targets for food and beverage acquisitions already in mind. But what will be very interesting is if he pursues brands in the US THC via option or a full vertical MSO. He was asked this question and he did not answer as the questioner probably would have liked.
Without the share expansion (vote is today) Marshal Simon will not have bullets in gun to achieve his end game.
Where to start?
Cannabis sales are stagnant when adjusting for a full Q of merger. Adult sales, the short-term revenue driver, are flat over two quarters despite market growth. SweetWater this Q was flat. MH and CC Pharma are not expected to be revenue heroes.
When they work through the acquired inventory and the close Nanaimo an improvement in GM should occur, but that is assuming average selling price holds. This will take a few more quarters with Nanaimo closing in phases through the first half of C2022.
Cash Opex is up as a full Q of expenses are onboard and a $6.2 million provision for facility closures is embedded. Non-Cash Opex of $40 million will likely remain high as ¾ is amortization.
Opex (without Transaction costs) is $94 million against GM of $51 million. This is my biggest concern, especially with sales stalled on the main revenue engine (adult use cannabis in Canada).
With the votes in hand to increase share count (which was a costly endeavor. See Transaction costs) I would expect an equity raise to secure additional optionality in US (so they can hopefully spark the share price) and additional funds to pay down the Tilray Convertible Debentures which should be accretive.
Operationally a lot has to go right in the next 2-4 quarters to close the GM to Opex gap. With expected dilution likely.
Will a US legislative catalyst present to ignite MSOs and LPs valuations?
I find the present US Administration almost hostile to MSOs present business model as evidenced in draft Cannabis Administration and Opportunity prohibition on verticality and the excise tax at first sale (couple this with the Administration looking to improve competition for small and medium sized companies in alcohol via Executive Orders… is where I am drawing that opinion from). As such, I do not see the big benefit legislation that would allow uplisting to better exchanges and elimination of 280e tax burden coming to fruition without the social justice components, which need some form of de-scheduling. The votes are not there for that, and I see uplist and 280e being used as leverage being withheld until the votes are achieved or the Administration changes.
With the above in mind, and offsetting some of capital gains foisted by the merger as they converted shares at merger price versus my acquisition costs, I exited what little position I had left over on Aphria/Tilray from my February 2021 sell off. The Serruya’s re-involvement via MedMen and CEO Simon’s arrogant “ankle biter” comment as it pertains to craft cannabis competition had a small bearing but did weigh in to the decision.
That’s all I got.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has no position in Tilray and will not initiate one within the next five days.