Why Tilray Can’t Rely on Cannabis For Now | The Motley Fool
Tilray Brands (TLRY -3.23%), an international beverage, wellness and cannabis company, recently made major acquisitions that expanded its Canadian, US and European cannabis footprint. Its fiscal year 2022 financial results were mixed, but some positive results were visible in its wellness, beverages and cannabis sectors. Tilray says it could turn even more profits in the coming years — but slow regulatory talks in the US and Germany won’t make it easy for the company to reach its benchmark.
Aphria Merger and Hexo Partnership
Tilray reports its earnings in four categories: cannabis (medical and adult use), distribution (purchase and resale of pharmaceuticals), beverage alcohol, and wellness (cannabis-based foods, CBD products, and other offerings). Tilray has been gaining new ventures in all areas in recent years, but two big deals have emerged that contribute to its mixed earnings report.
In May 2021, the company merged with fellow cannabis company Aphria in an all-stock deal. Aphria’s shareholders swapped each of their existing shares for 0.8381 shares of Tilray, and Aphria’s management took over the combined company. The deal gave what was touted as “the world’s largest cannabis company by revenue” at the time entered the international cannabis market; Aphria operates in 10 other countries outside of Germany and Canada. The merger is expected to save Tilray $100 million in cost synergies by the end of fiscal 2023.
On July 12, 2022, Tilray completed what it is calling a strategic partnership. hexo (HEXO 1.23%), a Canadian-based cannabis company with a presence in the US and Europe, by effectively buying 50% of Hexo. Like the Aphria deal, this partnership is expected to use $80 million in cost synergies to be shared by the two companies over the next two years. The agreement makes Tilray Hexo the official third-party cannabis producer and processor, and says Hexo will have to source all of its cannabis from its new partner except in the US and Canada — two big wins for Tilray.
Tilray reported both big gains and losses in fiscal 2022
Taking into account foreign exchange impacts, revenue grew 29% to $628 million in fiscal 2022, but the company still reported a net loss of $434.1 million. Tilray attributes part of that loss to the tough economic times all publicly traded companies are going through.
But in its earnings call for the year, it also said that $395 million of loss came from impairments from inventory, goodwill and other intangible assets largely related to the Aphria and Hexo transactions. These huge losses basically amount to one-time accounting reforms. They are offset by a reduction in deferred income taxes and may not be as bad as first thought. The company’s cash in the bank also fell from $488 million to $415 million — a 15% decrease, but a respectable cash deposit nonetheless.
betting your future on cannabis
Of its four business pillars, cannabis occupied the company’s top total revenue spot, before excise taxes at $301 million — 43% of total receipts, but only a 14% year-over-year bump. Growth in international medical cannabis sales, up 482% as a result of rapidly expanding medical cannabis expansion in Europe, helped drive those gains. However, Tilray saw adult-use cannabis sales down 6% last year related to a loss in Canadian cannabis market share, a slide it says is recovering.
Even with that decline, Tilray still sold about $210 million in adult-use cannabis in fiscal 2022. But the margin for that segment was 18% lower than that of the company, a sign that it has cut work for it if it wants to. Maximize your cannabis investment.
In contrast, its wellness sector revenue grew 922% to $59.6 million with a gross margin of 31%, and its beverage segment grew 144% of sales to $75 million with a gross margin of 55%. The rapid growth and higher margins here, compared to its cannabis pillar, highlight how heavily cannabis prohibitions are on businesses, and if and when regulators go out of the way of adult-use legalization, Tilray will be able to sell those cannabis. How soon can I start increasing the margin?
Going forward, Tilray is expected to generate $4 billion in revenue by 2024 as the US and Germany legalize adult-use cannabis. However, the prospects for legalization in the US are bleak, and Germany is not expected to sell adult-use cannabis until at least 2024. Tilray’s international medical cannabis, wellness and beverage sectors will help keep it afloat while it awaits the legalization of adult-use cannabis. , but delays in reforms may cause it to miss out on its future targets.
Because most of Tilray’s cannabis revenue comes from Canadian adult-use sales, and because Canada is the homebase of its new partner, Hexo, investors should be concerned about the company’s sales numbers in Canada’s $5 billion-a-year adult-use market. Must watch.
