David George-Cosh

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Tilray Brands Inc.'s Chief Executive Officer Irwin Simon understands the company's shareholders might be frustrated with its market performance as of late.

Its stock has fallen by nearly 50 per cent on the Toronto Stock Exchange over the past year, while its leading share of the Canadian market has slid from about 17 per cent when it merged with Aphria Inc. to just above 10 per cent now, according to industry sales tracker Hifyre.

"There's a lot of frustration in the industry, there's a lot of frustration out there," he said at the end of an analyst call on Thursday. "I read the texts, I read the emails when you send them to me and where I can answer I try, but there's a lot of times I can't, but we listened and we want to improve."

That frustration might be dulled a bit after Tilray reported a surprise profit in its fiscal second-quarter despite lingering questions about how the cannabis giant can stop the bleeding of its market share to more nimble, smaller producers in Canada.

"Although the erosion of market share is largely a sector-wide phenomenon given the saturated nature of the industry, we believe the velocity of Tilray’s decline in [its fiscal second quarter] serves as red flag for the sector as a whole as virtually all LPs are struggling to gain critical mass," said Matt Bottomley, an analyst at Canaccord Genuity.

Tilray's Simon believes the company's focus on high-quality brands and releasing more innovative products to the market will help contain any market share erosion. As well, the company looks to maintain its gross margins above 40 per cent as it keeps the cost of growing its cannabis lower than the market average and avoids lowering the price of its products just to fuel sales.

"Market share is not everything," Simon said in an interview. "If you come back and look at the companies that gain market share does their profitability increase and does their stock price increase?"

The New York-based company announced that it made US$155 million in revenue during its second quarter, an annual increase of 20 per cent, as its cannabis, beverage, and wellness divisions reported a jump in year-over-year sales.  On a sequential basis, Tilray's revenue fell by 7.6 per cent.

Tilray also reported US$13.8 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and a US$64 million repricing of its corporate bonds helped the company report a US$6 million net profit in the quarter.

Analysts expected the company to report US$166 million in revenue and US$11.3 million in adjusted EBITDA, according to Bloomberg data.

Sales of Tilray's recreational cannabis fell by about 15 per cent to US$49.5 million in the quarter, while it reported increases in its medical and international cannabis businesses. On a sequential basis, Tilray's cannabis revenue fell 29 per cent.

Simon said that the company's sales were hit by removing underperforming products in the Ontario market and a lack of available labour to help meet the demand for pre-roll products, but is not willing to broadly discount its offerings like how some of its competitors have done. On the analyst call, executives said the average price of Tilray's products fell by just below two per cent last year compared to an industry average decline of 22.6 per cent.

"I think a lot of those companies have done a great job getting share, but can they continue to drop prices?" Simon said.

Simon still sees consolidation as a main theme to watch for in the Canadian market, but has described his initial plans of reaching 30 per cent market share in the next several years as being "overzealous.” The company still expects to see US$80 million in synergies with the merger of Aphria Inc. and Tilray and identified an additional US$20 million in its next fiscal year.

He now doesn't expect to see the U.S. legalizing cannabis for another two years, which will see the company keep its focus on the Canadian marijuana market while exploring possible tuck-in acquisitions in the U.S.

"I think getting to that 20 per cent to 30 per cent market share and doing M&A is something that's got to be a part of it," Simon said. "If there is an M&A deal out there, we would be interested to do something in the Canadian market."

Cannabis actually represents just 38 per cent of Tilray's total revenue base as the company has made strides in diversifying its sales to include alcoholic and wellness products as it looks to build its U.S. consumer-packaged-good business ahead of the U.S. legalizing cannabis.

That diversified strategy is being reflected in the company's new parent name - Tilray Brands Inc. - that Simon hopes will better resonate with investors and consumers alike.

"We have to build brand loyalty and brand awareness among our consumers," he said. "It shouldn't be called the 'Tilray Price Company.'"