‘Canada is the only country in the world where adult-use Cannabis is legal,’ Tilray CEO says

Tilray CEO Irwin Simon joins Yahoo Finance Live to discuss company earnings, plans to acquire cannabis company Hexo, the challenging Canadian market, global cannabis legalization, and the outlook for the cannabis space.

Video Transcript

JULIE HYMAN: We're watching shares of Tilray today. They're recovering just a bit. Investors looking at the stock again after it dropped 8% yesterday. That's after it announced its plan to acquire fellow Canadian cannabis company Hexo-- also reported some weaker third quarter numbers.

Tilray CEO Irwin Simon is joining us now. Irwin, it's a pleasure to see you. Thanks for being here. You talked on your conference call, and we talked to Vivien Azer also yesterday who tracks the company, about the challenging Canadian market right now.

And I know the conventional wisdom is sort of you get bigger to deal with the challenging market. Can you walk us through exactly how the Hexo acquisition helps you deal with that challenging Canadian market?

IRWIN SIMON: So, Julie, good morning. Always nice to see you and your partner there, Brad. Listen, I come back and say, listen, markets are challenging out there in the cannabis industry, number one. It's only four years since cannabis, recreational, has been legalized.

Number two, there's all these LPs in place today. There's over 1,000 LPs. There are multiple retail stores. And with that, there's got to be a company out there that takes that lead position. It's no different than any consumer packaged goods. At Hain, I did that with Hain Celestial in the natural organic food industry.

And a lot of that has to come from consolidation. But consolidation has got to be right. And there's been a lot of deals done in Canada-- and a question asked to me yesterday is there was deals done just for the sake of deals done and multiples that were paid that never worked out. That's not the case.

With Tilray and Aphria coming together, there was a lot of synergies, there was a lot of savings. And that's why Tilray has over an 8% market share. With Hexo, listen, Redken is a great brand. There's a lot of great brands within Hexo. And with that, not only getting the synergies, Julie, you also got to get the growth there.

And a lot got to change in Canada in regards to how you market the brands, in regards how you educate consumers about buying the product. Listen, Canada is the only country in the world where adult use cannabis is legal.

So ultimately, Canada has put their foot out there and they're kind of responsible for the rest of the world to show, hey, here's how we do it. Here's how we market it. And by the way, the Canadian government is making a lot of tax dollars from this too. So they've got a vested interest to make sure this works in Canada.

JULIE HYMAN: Right, yeah, definitely setting the tone for the rest of the world. So talk to me then-- you mentioned the Aphria acquisition, now the Hexo acquisition. How big is big enough to move the needle? Or do things on the ground need to improve in Canada before you can benefit from that added size?

IRWIN SIMON: Listen, things got to change on the ground. And I think educating consumers, the quality control, the regulatory when you're buying recreational cannabis is just like buying alcohol from a medical standpoint in regards to pain, in regards to anxiety, in regards to sleep, the benefits from it, in declassifying it as a drug. So there's a lot to do.

And one of the restrictions in Canada is what you can advertise, and what it can say, and educate about the safety of it. So there's a lot very important things that got to get done. Listen, the other big thing is working with the Canadian government on the excise tax.

Tilray alone pays over $120 million in excise tax alone. You put it together with Hexo, they're paying another $30, $40. So ultimately, we're paying way too much excise tax. There's been price compression there.

Us alone, $30 million, which drops right to the bottom line. So there's got to be something done in regards to excise tax here. And again, listen, there's an illicit market out there. It's out there. There's illicit markets in everything.

But how do you educate consumers how to buy products that are legal, that are regulated, and that are good quality products? And, Julie, step back for a second-- what we've built a Tilray is a diversified company. We're a CPG company. We're a cannabis company. We're in the spirits business. We're in the beer business. We're in the cannabis business and the wellness food business.

And one day, they're all going to come together. There's going to be beer infused with THC. There's going to be bourbon and vodka infused with THC. There's going to be foods infused with THC that has multiple uses.

BRAD SMITH: Yeah, Pigeon Forge, Tennessee knows a fair bit about the infusion of both of those things together, both weed and on the distillery front there. When you think about what this looks like from a kind of consumption perspective here, or at least the consummation of the deal, what are the key performance indicators that you would look to say that this deal was a success? And over what time period would you start to see, after the deal is complete and finalized, some of those benefits start to filter through to the business results?

IRWIN SIMON: Good question, Brad. Listen, you don't do deals just for the sake of doing deals. And I think there's a number of things that you've got to look at-- what you pay for the deal, number one, and we think we paid a very attractive price and benefit those shareholders for Tilray. And ultimately, benefit Hexo shareholders, where they become a part of Tilray and they get a bigger bite and they're part of a bigger company.

Number two, we've talked about synergies and savings-- in the first year, we're looking for $25 plus million of synergies and savings. Yes, you get those once. You get the synergies and savings, how do we grow share?

Combined share today is about 13%. We need to grow share double digits here. And that's the important thing is how do we grow share. And share has got to grow from taking it from our competitors and also bringing new users in there.

And at the end of the day, listen, how does it really show? Earnings per share. EBITDA contribution for our shareholders. Our shareholders got to win here. And 1 plus 1 got to equal 5-- not 3, not 4, 5. And ultimately the objective for myself and my team is how we make Tilray a bigger company on a global basis.

And the big thing here is one day legalization will happen in the US. There's talk today about what's going on in Germany. What are the learnings coming out of Hexo? What are the learnings coming out of Redken? What are the learnings coming out of Tilray that we can use around the rest of the world once legalization does happen?

JULIE HYMAN: Well, Irwin, I guess I really want to try and pin you down a little bit on timing. You don't have any control, right, over whether legalization is going to happen in the United States or other places around the world. What you seem to be doing is assembling all the pieces, right, on the beverage front, on the cannabis front in Canada. And you're sort of poised, once things change-- what is your message to investors as to when they can expect that EBITDA, right, when they can expect all of these pieces to then be fired into action?

IRWIN SIMON: So, Julie, they're firing into action today. Look what we own in assets as a global company. Look what we have in a diversified portfolio. But they're all adjacencies. We're just not a rollup strategy. They're all adjacencies to cannabis, spirits, beer, and wellness foods. And one day, infused with THC-- and THC, listen, as I've said yesterday to a lot of our investors and I said to analysts, you know, THC is a medicine.

THC is an adult use-- it's similar to alcohol. It's similar to-- it's similar to-- sorry about that. It's similar to medicines, OK? So with that, there is tremendous, tremendous opportunities here. And if you come back and think about-- you come back and think about the opportunities here, look at the size of the medical business.

Opioids, the opportunity that's going to replace in opioids and stuff like that-- so I see a big opportunity. And Tilray is a company-- really, we've been around for years between Aphria, Tilray, and the rest of our brands. In regards to our balance sheet, the company today has over $480 million-- $450 million of cash on our balance sheet. And with that, hey we're ready and poised for growth in many different areas.

BRAD SMITH: Irwin, while we have you--

IRWIN SIMON: There's no fire, I don't have to run. So don't worry.

JULIE HYMAN: OK, good.

BRAD SMITH: While we have you, when we think about even some of the inflation readings that we've been monitoring here and where consumers have been monitoring where their prices have been impacted in one direction or another, where they're starting to abate or where they're still remaining stickly high year over year, or even month to month, what has that been like for the cannabis industry, and especially considering some of the brands that you do own in the beverage division where, yeah, prices have had to go up in one way or another?

Are you starting to see that abate? Is there any insulation than on the cannabis side of the business that you are seeing? What is that breakdown from your perspective?

IRWIN SIMON: You know, Brad, the bizarre thing is in the cannabis industry, there's been price decompression here, OK? I mean, our prices have come down in the cannabis industry. And as I said, close to $30 million of cannabis prices have come down this year in the Canadian market.

In regards to the US, beer canned business-- our beer business, prices have gone up. Our spirits business, prices have come up. And what we're trying to do is become those low cost producers. And that's one of the advantages of doing acquisitions is where you can roll these smaller companies together and have a bigger platform where you can take out multiple costs.

So I'm big on acquisition. Julie, as you know, I've done over 60 plus acquisitions of Hain to build that out, and took out a lot of costs, and used the infrastructure to grow. And that's things we're going to continue to look at Tilray to reward our shareholders with bottom line profits.

BRAD SMITH: Tilray CEO Irwin Simon joining us here today. Irwin, we appreciate the time breaking down some of the details of the deal, as well as what the prospects look like for Tilray going forward from here.

IRWIN SIMON: Thank you very much. Nice to see both of you.

BRAD SMITH: Good to see you too.