Tilray Inc (TLRY) Q4 2018 Earnings Conference Call Transcript

TLRY earnings call for the period ending December 31, 2018.

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Tilray Inc  (NASDAQ:TLRY)
Q4 2018 Earnings Conference Call
March 18, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

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. (Operator Instructions) Later, we'll have a question-and-answer session. And as a reminder, this conference is being recorded.

Now it's my pleasure to turn to call to Katie Turner from IR.

Katie Turner -- Investor Relations

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.

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 involves risk and uncertainties that could differ materially from actual event and those described in these forward-looking statements. Please refer to Tilray's report filed from time to time with the Securities and Exchange Commission 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,which is a non-GAAP financial measure. While the company believes adjusted EBITDA will 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 release for the 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.

Brendan Kennedy -- President and Chief Executive Officer

Thank you, Katie. 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 for 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 a portfolio of trusted brands powered by multinational supply chains, who 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 multi-billion dollar consumer packaged goods company.

Focusing on our full year results, we are pleased with our growth and momentum. Revenue increased by 110% year-over-year to $43.1 million. In total, the 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 have seen in certain US states as operators in new legal markets race and government regulators catch up to find an equilibrium between supply and demand. To capitalize on global growth opportunities on both medical and adult use cannabis, Tilray will deploy capital in most promising markets, where we see the greatest potential to pursue multiple paths to grow.

The United States and European markets are orders of magnitude larger than Canada. So, while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the US and Europe. We will not purchase or invest in what we believe to be overpriced supply assets in Canada, which we believe will erode in value in the medium to long term, as the market normalizes.

As we have communicated previously, our global growth strategy remains focused on six top-line performance drivers that we expect to generate strong returns, as the business continues to grow. First, increase our production capacity and inventory to serve the rapidly growing global market. 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, for the differentiated portfolio 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 six, pioneer the future of our industry by investing in innovation, research and development in clinical research. In line with this strategy, our recent strategic partnerships include a global alliance with Sandoz, a division of Novartis, one of the world's leading pharmaceutical companies.

Our original agreement was focused on Canada, and this new global deal legitimizes medical cannabis on a global scale and increases access for patients in need across the world. In the next year, we anticipate distributing medical cannabis to at least a half a dozen more countries globally through this partnership with Sandoz. We also formed a strategic partnership with AB InBev to research non-alcohol beverages containing THC and CBD. The 50/50 joint venture combined AB InBev's deep experience and beverages with our expertise in cannabis products. And each company intends to invest up to $50 million for a total of up to $100 million. We're pleased to report that we have appointed a CEO for the JV and our leveraging the research that Tilray has already performed for duration and time the onset on beverages.

Our revenue sharing agreement with Authentic Brands Group ABG is a long term partnership designed to leverage ABG's portfolio of more than 50 of the world's most iconic brands, as well as their extensive distribution network across North America. The partnership will initially focus on CBD products in the United States, and THC and CBD products in Canada, and we will expand globally as regulations permit.

The branding opportunities in the US and Europe around the retail and OTC consumer products are far more interesting than the branding opportunity today in Canada due to packaging and branding restrictions. Additionally, when we look at net new consumers at CBD and THC, distributors and retailers mark relationships with brands that they already know and trust, which is why we're so excited to partner with ABG.

Strategic mergers and acquisitions remain a core focus of our global growth strategy. Last month, we closed the acquisition of Manitoba Harvest, the world's largest hemp natural foods producer for approximately $317 million. Manitoba Harvest has nearly CAD100 million in gross revenues, distributes its products to more than 16,000 retail locations in the US and Canada, and is the leading hemp foods company, with seed-to-shelf capabilities, maintaining control over quality, production, manufacturing, marketing and distribution of its products.

The acquisition of Manitoba Harvest is Tilray access to relationships with farmers, who plant more than 30,000 acres of hemp, as well as some of the largest distributors in retailers across Canada and the US. We look forward to distributing hemp-derived CBD products across North America under the Manitoba Harvest brand as well as other brands by leveraging Manitoba Harvest's established supply chain going forward.

We also recently acquired Natura Naturals Holdings Inc., a federally licensed cannabis cultivation company based in Leamington, Ontario for approximately CAD70 million. The increased supply from Natura, which we have rebranded as High Park Gardens, will allow us to further expand our market share in the Canadian adult-use market with high-quality branded cannabis products.

Finally, in December, we invested CAD7.5 million in ROSE Life Sciences, a Quebec based cannabis producer, and have an exclusive sale, supply, distribution and marketing agreement to deliver adult-use products under our portfolio of brands in Quebec. We believe our recent strategic global partnerships and acquisitions demonstrate our emphasis, on the diversification of our global opportunities for long-term growth and our disruption of critical industries as we expand our addressable market.

Our team remains disciplined in our approach, making key strategic investments to support the sustainable growth we expect to achieve over the next several years. Last week, we announced that Andrew Pucher has joined us, as our Chief Corporate Development Officer, overseeing M&A and corporate investments. Andrew previously served as the Managing Director at Goldman Sachs, where he most recently covered the Canadian cannabis industry. We are excited about the contributions he will make as we accelerate our growth.

Going forward, we will continue to pursue strategic M&A that opens new territories, increases our capacity, increases our brand offerings through innovative farm factors, brings us R&D technologies and we expect this selectively invest in retail distribution.

As I said earlier, our increased focus on the US and Europe, among other international markets, is tied to the fact that we believe they represent a significantly larger opportunity for Tilray long term, where we can extend beyond our potential in Canada. Simply put, we are building a company for the long term. We believe that the field of battle has changed and that the US and Europe are going to be more important over the long term.

In the US, Tilray is building a portfolio of brands and products with the goal of making them industry leaders in every market, where cannabis is legal. I believe we are a lot closer to federal legalization in the US than most people realize.

The Farm Bill presents an excellent opportunity for Tilray to capitalize on an estimated US$22 billion hemp-derived CBD industry in the US. We have US CBD supply chain in place through the acquisition of Manitoba Harvest in a deal to produce hemp-derived CBD infused products for authentic brands group as regulations permit.

We have also finalized the CBD supply agreement to source CBD from LiveWell Canada, and the United States for wellness and medical Tilray branded CBD products across North America. We expect LiveWell to begin shipping product to us during the second quarter of 2019. In the coming months, we expect to make additional announcements about strategic investments and partnerships in the US to position Tilray for long term leadership in the market.

Focusing on Europe, just last month, the European Parliament passed a resolution similar to the World Health Organization's recommendation to increase access to medical cannabis. Further legitimizing the industry, and we believe this decision will encourage other states and countries to legalize. We began 2018 with 28 countries having legalized medical use globally and ended the year with 41. And we can easily see how that number grows to 50 or 60 by the end of 2019.

Our EU Campus in Portugal completed a successful medical harvest earlier this month and we are well positioned to serve the EU market, as more countries legalize. We expect the EU Campus to produce and distribute cannabis in the EU for the EU and believe that having a local vertically integrated supply chain presence is an important differentiator for us to reduce costs and hedge against regulatory risk. Our campus includes indoor, outdoor and greenhouse cultivation sites, as well as research labs, processing, packaging and distribution sites for medical products.

This first harvest was a significant milestone for the company and we expect multiple harvests in the coming months. By the end of 2019, we expect to increase our production space to 2.2 million square feet, approximately double compared to the end of 2018. On our existing properties, we have the ability to expand our total production space to 4.5 million square feet. Our seven production facilities around the world are significantly increasing our global production output compared to 2018.

While the Canadian market remains challenged with quality supply, we are confident the supply demand will become more balanced over time, as additional supply becomes available. Longer term, we do not believe Tilray will be in the farming business, so we're not allowing the near-term supply disruption to change our strategy for growth over the next two years.

From a retail perspective, we've have taken small steps in Canada including minority investments in Fire & Flower, Inner Spirit and Westleaf, and expect to invest more aggressively in the months to come. To aiding our global expansion, we have formed an International Advisory Board to provide strategic perspective to our executive team and Board of Directors. The Advisory Board consists of 10 internationally renowned business and government leaders, who continue to provide us with strategic insights, as we pioneer the future of our industry.

As mentioned earlier, we have also expanded our global senior leadership team with six strategic executive hires from world-class organizations to help our existing teams spearhead our future growth and development internationally. In addition to Andrew Pucher, as our new Chief Corporate Development Officer from Goldman Sachs, we hired Greg Christopher, who joined from Nestle to be our Executive Vice President of Operations. Rita Seguin joined from Diageo as Executive Vice President of Human Resources.

Dara Redler, our General Counsel, joined from Coca-Cola. Charlie Cain , our Vice President of Retail, joined from Starbucks and Sascha Mielcarek, our Managing Director Europe joined us from Grunenthal . At the same time, our team remains deeply committed to clinical research. This is important for the future of medicine, as well as being a competitive differentiator in the industry and has accelerated awareness, very positive awareness in international medical cannabis market.

Most recently in the fourth quarter, we partnered with researchers at the Lambert Initiative for Cannabinoid Therapeutics at the University to Sydney to complete a study examining the effects of cannabis on driving and cognitive function. The trial phase of the study culminated in 2018 and results are expected to be published sometime this year.

Looking ahead to 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 US, as regulations permit, signing additional adult-use supply agreements in Canada, shipping Tilray products to pharmacy chains in Canada, exporting Tilray medical products to new countries, expanding Tilray's medical cannabis product offerings in the international markets we currently serve, extending our existing pharmaceutical partnerships to additional countries and regions, obtaining a sales license for High Park's processing facility in London, Ontario; additional clinical trials; recruiting additional executives from outside of the industry to further strengthen our management team; and finally, adding strategic partnerships and acquisitions in the United States and Europe.

In summary, we are incredibly proud of our achievements in 2018 and are excited about our growth potential over the next several years. We will continue to execute on our strategic initiatives and take actions that will fuel long term value for our shareholders as well as our customers, consumers, patients, and employees around the world.

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

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Thanks, Brendan. Good afternoon to those of you joining us on the today's call and webcast. It is a pleasure to be speaking with you today. Please note all the financial information we discussed today is prepared in accordance with US GAAP that is in US dollars unless otherwise indicated. We are pleased to report the fourth quarter financial results and the significant growth opportunities that lie ahead.

Focusing on 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 is driven by the inaugural sales for the Canadian adult-use market, bulk sales and accelerated wholesale distribution in export markets.

Extract products represented a greater mix at 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 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 2053 kilograms from 694 kg in the same quarter of 2017. The overall average net selling price per gram increased to $7.52 from $7.13 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 selling price per gram increase 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 tonnes, as we bring our Ontario greenhouse and Portugal facilities fully online. As Brendan mentioned, we've recently completed successful harvest at our EU Campus in Portugal and has a multiple harvest in the coming months.

Gross margin for Q4 decreased to 20% from 57% in the same period last year. As a result, the procurement of third-party supply, costs related to ramping up our production and absorbing the tax for 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 in 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 that support our growth and expansion for the start up 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 $34000 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 primarily due to the expected increase in operating expenses related to driving our expansion forward, such as investing on 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 a $475 million convertible debt private placement, resulting a 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 offer an expansion plans for the next 12 to 18 months.

On a longer term basis, we intend to further build on our early leadership 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 on those margins, but also provide for greater revenue upside and a 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?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Vivien Azer with Cowen and Company. Your line is open.

Steve Schneiderman -- Cowen and Company -- Analyst

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 -- Chief Financial Officer, Secretary and Treasurer

Yeah, that's net revenues, but it does include taxes, that's your question.

Steve Schneiderman -- Cowen and Company -- Analyst

Yeah, thank you. That's helpful. And you mentioned that you're absorbing the excise tax. Thank you for that clarification too.

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Okay.

Steve Schneiderman -- Cowen and Company -- Analyst

Can you guys provide a little bit more detail on the outlook for 2019 in terms of revenues. Is there any cadence, we should be thinking about for the on-boarding of novel form factors later in the year?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Yeah. So, as we mentioned nine months ago, we're doing our IPO roadshow. We talked about 2018 being 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 CAD100 million, or call it US$75 million and we only had a for 10 months of the year. So, let's call it around $65 million for this year.

Steve Schneiderman -- Cowen and Company -- Analyst

Okay, great. And while we appreciate the need to buy from third-party and it seems like it's weighing on your gross margin. Yeah, I understand that you're looked at double your square footage with supply coming online. But can you talk a little bit more about the sequencing of that? And how to alleviate some of your headwinds? And in particular, how much is Natura Naturals coming into play?

Brendan Kennedy -- President and Chief Executive Officer

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

Steve Schneiderman -- Cowen and Company -- Analyst

And on the rest of your supply in terms of when we see that coming online this year?

Brendan Kennedy -- President and Chief Executive Officer

So, we continue to see increases each quarter just as the facilities become more mature and we're able to use 100% of the facilities, as supposed to having to 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'll see margins improve sequentially each quarter this year.

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

We've also completed our first harvest from Portugal and we anticipate regular harvest from that facility. We won't sell product from Portugal until later on this summer. 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.

Steve Schneiderman -- Cowen and Company -- Analyst

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

Brendan Kennedy -- President and Chief Executive Officer

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

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

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.

Steve Schneiderman -- Cowen and Company -- Analyst

All right, great. Thank you guys very much.

Operator

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

Tamy Chen -- BMO Capitals -- Analyst

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

Brendan Kennedy -- President and Chief Executive Officer

So, that the third-party supply is primarily because we have significant demand for our products and we're just not able to produce enough to demand. As in our -- built in our model originally as 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 oversupply 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 just not enough product available.

Tamy Chen -- BMO Capitals -- Analyst

Okay, got it. And in terms of the Enniskillen facility, so I just want to confirm it's the facility now is fully licensed then 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 -- President and Chief Executive Officer

Yeah. 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 at 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.

Tamy Chen -- BMO Capitals -- Analyst

Got it. Okay, thank you.

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

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 then specific question, is that clear to you -- obviously, you're brand new in the JV you're doing. But is that clear to you that THC and CBD beverages can be made like attractive and shelf stable in the near term? Or is that sort of, I think you're going to figure out an indeterminate amount of time?

Brendan Kennedy -- President and Chief Executive Officer

So, we think that they can be manufactured and be shelf stable and be tasteful. Yes, tasty 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 availability, bioavailability, time to peak effect, duration of effect and we've solved a lot of those issues and so we were excited to bring a number of different edible 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's the packaging for those products will be.

Rob Wertheimer -- Melius Research -- Analyst

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 past experience or manufacturing expertise or whatever? I don't know if you view as that of a differentiator or it's early out of the gate or not?

Brendan Kennedy -- President and Chief Executive Officer

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 the brand called the Goodship that operates in Washington State, I believe California.

And there, there's knowledge in terms of manufacturing, specifically with Goodship edibles that contains 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 we do feel like, we have a leg up because of our -- that brand and the know-how 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 a, as you can imagine, a robust supply and distribution chain globally.

Rob Wertheimer -- Melius Research -- Analyst

Very helpful, thank you. If I can ask one other one on Europe and without trying to get your give 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. You know, obviously, we're trending in a great direction. I just don't know the pace of acceptance in the medical community there. And I don't know, whether you can talk about your efforts to educate or whether that channel doesn't need education. It's going to pour in when it becomes available?

Brendan Kennedy -- President and Chief Executive Officer

I believe that there's demand for all of our current supply in Portugal today and demand for our forecasted supply as we ramp 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 a half a dozen extra countries to that agreement, most of which will be in the EU, when the European Parliament passes resolution on medical cannabis.

A few weeks ago, we were expecting that and so that we expect continued growth not only within the countries in Europe that have already legalize medical cannabis, but in really in additional countries in Europe that will legalize medical cannabis. And just to put it in perspective, you know, in Germany back in 2015, there were about 800 patients, medical cannabis patients there. At the start of last year, there are about 16,000 finished last year, 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.

Rob Wertheimer -- Melius Research -- Analyst

Very helpful. Thank you.

Operator

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

Luke Perda -- Seaport Global -- Analyst

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 US and given the FDA's stance, I'm hoping you can help me understand kind of your approach, 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 in the US. Is that something that Tilray plans to be meaningful one?

Brendan Kennedy -- President and Chief Executive Officer

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. And 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 at 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 the United States and Canada.

Luke Perda -- Seaport Global -- Analyst

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?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

So, the growth rate can just on the food side is between 10% and 15%. With the CBD side it 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 US. As far as margins, gross margins in that business will be around the 50% range, with CBD being a larger portion will actually tick up even higher than that.

Luke Perda -- Seaport Global -- Analyst

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? What are your view toward products from market areas? Have your views toward products or market areas changed since the cannabis industry evolved?

And what are your thoughts on ownership of US dispensary assets? That's something that ultimately attractive to Tilray, or would you rather position yourself elsewhere in the supply chain?

Brendan Kennedy -- President and Chief Executive Officer

So, I'll start with the first part of that question. You know, 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 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.

Luke Perda -- Seaport Global -- Analyst

Great, thank you.

Operator

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

Graeme Kreindler -- Eight Capital -- Analyst

Yeah, hi, good evening and thanks for taking my call. Just a 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 that?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

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 a dollar per gram. So, you can do the math on what we sold at adult-use.

Graeme Kreindler -- Eight Capital -- Analyst

Okay. Sure understood. Thanks. And then just to go back to follow on the questions with respect to the CBD market in the United States. We've seen, I think, a bit of a different tap on strategy, some people waiting for individual states to regulate and that will be an acceptable framework versus waiting for, you know, 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 -- President and Chief Executive Officer

So, the FDA commissioner, Scott Gottlieb announced his resignation is coming up here in April. And our perspective is that over the short term that actually speeds up clarification from the FDA in the US. 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 -- before the end of the year.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, thanks. With respect to your comments earlier, Brendan, on investing in the United States, what could that look 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 -- President and Chief Executive Officer

So, I think I mean, for us, we have secured supply of CBD from US hemp CBD source and I would expect to announce additional sources of US hemp-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 13,000 retailers in the US that care the Manitoba Harvest products at Expo West in Anaheim a 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 -- Eight Capital -- Analyst

Okay, great. And just to 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 packaged goods side on the other things.

On the other end, what about the extraction and formulation step in between that in terms of investments being made to take it from seed or from biomass down to sale?

Brendan Kennedy -- President and Chief Executive Officer

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

Graeme Kreindler -- Eight Capital -- Analyst

Okay thanks. And one 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 -- President and Chief Executive Officer

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 products. 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.

Graeme Kreindler -- Eight Capital -- Analyst

Okay, thank you very much. That's it for me.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Operator

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

Michael Lavery -- Piper Jaffray -- Analyst

Thank you. Can you touch on the ABI JV and what are the steps needed for expansion globally? Is it just as simple as getting recreational use legalized in other markets, or how turnkey is it to expand that as new markets open up?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, 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 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 in meeting with our team. Neither party hopes 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 reform 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 -- Piper Jaffray -- Analyst

Okay, that's great. Thank you. We've covered the US CBD pretty well, but can I just 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 the hemp hearts and hemp foods under the Manitoba Harvest brands. You showed it at Expo West, like you talked about, 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 -- President and Chief Executive Officer

Yeah, obviously 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's 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 -- Piper Jaffray -- Analyst

Okay, thanks. 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 imports and potentially box you out? How does the trajectory look? Or is there any risk to that runway there?

Brendan Kennedy -- President and Chief Executive Officer

So, when I -- when we think about opportunities, we think about three buckets. Obviously, we think about the global medical opportunity in currently 41 countries. I think will easily end this year with more than 50 countries that legalized medical cannabis. There's a chance we could get to 70 -- 60 or 70 countries over the next really 18 to 24 months. And so that's a clear opportunity.

You know, those most countries are not looking to sources product from within their countries. Certainly, none of the 28 members of the EU are looking for that. We picked a facility in -- we picked Portugal as a place to build a facility because it had an ideal climate, it had a low regulatory costs, it had tariff free access to the to EU.

And so it would be very difficult for a country to prevent product, to -- from -- 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, elected 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 also translates to physicians and pharmacists, who are looking for a trusted supplier, trusted provider of medical cannabis products. And when they see, when they see that Sandoz a Novartis division label on our products it inspires confidence and trusts. It builds a halo around our brand.

Michael Lavery -- Piper Jaffray -- Analyst

That's great. Thank you very much.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Operator

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

Mike Hickey -- Benchmark Co. -- Analyst

Hey, guys. Great quarter. Thanks for taking my questions. 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 '19. Did that sort of were you already sort of assuming M&A, because I believe you acquired Natura after that you're saying that adding 10 metric tonnes. So, should that be added, or is that sort of already implied in your guidance that you did with M&A?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Yeah, 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 in January 1, and we do have some off-take agreements that we inherited. So, we're not going to get the full 10 for Tilray.

Mike Hickey -- Benchmark Co. -- Analyst

Okay. Thank you. Indeed, on your guidance for '19, or what you're originally expected 3-times 2018 sales, it sounds like you're confident on that plus $65 million in net from Manitoba, is that correct?

Brendan Kennedy -- President and Chief Executive Officer

That's correct.

Mike Hickey -- Benchmark Co. -- Analyst

And then how did the -- has the construct of that guidance changed? I mean, have you sort of fully contemplated the CBD opportunity? Or, is that become a bigger piece of the puzzle? And how much of that X Manitoba's sales sort of Canada versus what you would expect from international?

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

So, I'll break it down, you had a couple of questions in there, so. So, has it changed, or hasn't included US CBD? Originally, when we gave that guidance, it did not include US CBD. The original guidance also assumes that we were going to get plenty of product from Canadian suppliers. So, there are some pluses and minuses for those two.

And then your question about Manitoba. I'm not sure I understood it.

Mike Hickey -- Benchmark Co. -- Analyst

I was just curious, I think, you answered it primarily just $65 million on top of the '18. Yes, I think you answered it.

The last question, in the US, you're seeing an effort from some of the states that are legalized cannabis to offer locations to publicly consume cannabis. Curious your view on how that could potentially happen in Canada or not?

And I guess specifically on beverages, you know, at least in the US, where we see quite a bit of work in beverage products and still remains a very niche product category. And so, I guess the second part of that question is, do you think for the beverages to really work, you'll need that a sort of social public consumption points, call it bars or restaurants for that to be meaningful for you in the future?

Brendan Kennedy -- President and Chief Executive Officer

Definitely, you know, in terms of beverages, it's all about consumer occasions to consume. And whether that's product that's purchased in a, you know, in a bar or restaurant, or a product that's purchased from a 7-Eleven or a 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, and 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 US.

Mike Hickey -- Benchmark Co. -- Analyst

Okay, thank you. Last little question for me. When you look at sort of what Canada Health is given, as they're 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 that the necessity to have separate manufacturing facilities.

Just curious how you sort of fold all that up into making competitive edible products versus the illegal market, where they've already sort of achieved scale and sort of know what the consumer want, some of which seems like Canada Health want to limit particularly like gummies and other products that adult-use has shown a lot of demand for?

Brendan Kennedy -- President and Chief Executive Officer

Yeah, when we've looked at the opportunity in Canada over the past two years, it's always seemed a little incongruous that a public health organization was limiting the product form factor and essentially limiting consumer's options or choices and essentially forcing them to smoke a product. It 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 brands are what beat the black market. And if you look at individual US dates, 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 of 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 a 5 milligram of THC portion cap, we'll adjust our products accordingly.

Mike Hickey -- Benchmark Co. -- Analyst

Thanks guys. Best of luck.

Brendan Kennedy -- President and Chief Executive Officer

Thank you.

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Thanks Mike.

Operator

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

Mike Grondahl -- Northland Securities. -- Analyst

Yeah, 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 -- President and Chief Executive Officer

Oh gosh! We're -- I'll sort of bifurcate that into existing and then future. So, the UK, Australia, New Zealand, we continue to see growth there. And really Chile, Argentina, Peru, Brazil are really early on in their growth curve. And then in Europe; Czech Republic, Croatia, Cyprus 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 online.

There's 19 countries in Europe that have legalized medical cannabis and so we expect -- we expect that a population of more than 500 million people will have access to medical cannabis in Europe over the next -- really 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's 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 prescription, 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 -- Northland Securities. -- Analyst

Sure. Sure. 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 -- President and Chief Executive Officer

Yeah, that's what's interesting about what we saw a few weeks ago at Expo West. We might -- we had a pretty large team there from Tilray, our -- almost our entire US team was there, as well as the team from Manitoba Harvest, and everyone on the team was sending me, they're all sending me pictures of different CBD products produced by really mainstream manufacturers. And it was, -- I mean, it was a cross, 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 CDB toothpaste. And two people sent me a CBD toothpaste and so were -- send me a picture of a CBD toothpaste. And 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 -- trusted sources, and I think that's probably the -- I guess probably the biggest opportunity.

Mike Grondahl -- Northland Securities. -- Analyst

Okay. Thanks a lot.

Operator

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

Brendan Kennedy -- President and Chief Executive Officer

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.

Duration: 71 minutes

Call participants:

Katie Turner -- Investor Relations

Brendan Kennedy -- President and Chief Executive Officer

Mark Castaneda -- Chief Financial Officer, Secretary and Treasurer

Steve Schneiderman -- Cowen and Company -- Analyst

Tamy Chen -- BMO Capitals -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Luke Perda -- Seaport Global -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Mike Hickey -- Benchmark Co. -- Analyst

Mike Grondahl -- Northland Securities. -- Analyst

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