Cronos Group Inc (CRON) Q4 2018 Earnings Conference Call Transcript

The Cultivations Building 4, runs under a perpetual harvest cycle, similar to a manufacturing facility. Like other large-scale agricultural facilities, we expect that with each cycle, our yields will continue to improve as we dial in controls. We are very proud of this facility, our Peace Naturals campus, as a whole, and what we were able to build in such a short period of time.

While yield in cost-per-gram has been the standard unit cost metric for the cannabis industry to-date, we think this is starting to evolve. We still think that COGS will be an important measuring stick, but by that, I mean cost of goods sold, not cost of grams sold. Efficiency, in downstream processing and packaging in categories such as pre-rolls, will be a differentiator in an area we will increasingly focus on. And as value added products come online, the relevant cannabis cost will shift from grams of cannabis flower to milligrams of cannabinoid. And we've already seen the shift begin in the proposed tax regulations in Canada from weight of dried flower, to active ingredient.

With this shift in mind, we will continue working to optimize our supply chain toward final products. As supply catches up to demand, we believe that having experienced large-scale agricultural expertise and labor management practices will be extremely important. This is why our approach to further scaling at capacity involves taking our genetics, growing methodologies, and best practices that we developed at Peace Naturals, our center of excellence, and in creating co-manufacturing relationships with sophisticated agricultural operators around the world. We are confident and committed to our cultivation partnerships.

In Canada, we launched a joint venture, Cronos GrowCo, with a group of investors led by Bert Mucci, a leading Canadian large-scale greenhouse operator. As discussed during our previous earnings call, Cronos GrowCo is constructing an 850,000 square foot purpose-built greenhouse, which is expected to produce up to 70,000 kilos of cannabis, annually. Construction of the greenhouse has begun, and we expect to complete the superstructure of the greenhouse in the second half of 2019. And similar to how we're bringing Building 4 online, we expect this greenhouse to become operational in phases, in 2020.

We are also making progress on our international production footprint. First, turning to our joint venture of Cronos Israel, with the Israeli agricultural collective, Kibbutz Gan Shmuel. Cronos Israel, is focused on the production, manufacture and distribution of medical cannabis, and is in full construction. We anticipate the construction of the 45,000 square-foot greenhouse will be complete in the first half of 2019, and construction of the manufacturing facility will be complete in the second half of 2019.

Cronos, holds an effective 90% economic equity ownership across the entities in Cronos Israel. In January, 2019, the Israeli government approved the export of medical cannabis from Israel, which will allow license holders to export to countries that have explicitly approved the import of medical cannabis. We intend to pursue the licensing for, and export of medical cannabis products from Cronos Israel, to our European and global distribution partners, once production operations are up and running.

In 2018, we also brought our production model to Latin America. Cronos, announced a JV with a leading Columbian agricultural services provider, with over 30 years of research and expertise, managing industrial scale horticultural operations. This partnership, establishes the newly formed entity, NatuEra in Columbia, that will: develop, cultivate, manufacture, and export cannabis-based medical and consumer products for the Latin-American and global markets. NatuEra, was granted a license to cultivate non-psychoactive cannabis plants to produce seeds for planting and the manufacture of derivative products.

We understand that many investors are modeling cannabis companies off of capacity. However, our business model is not to be the former. We think that there will be value created across many verticals in the cannabis industry's value chain, including cultivation, and wholesale supply, research and development, branded product manufacturing, marketing, and retail. We see tremendous opportunity across the whole industry, but recognize that we can't be all things to all people. Rather, we will focus on areas where we see long-term sustainable value like, developing and marketing innovative-branded products, and then, work with experts in the other verticals.

This focus has proven successful in analogous industries such as consumer packaged goods, and pharmaceuticals. And we think it will prove successful in the cannabis industry, as well. In other words, you can expect our focus to be on making the cheese rather than raising and milking the cows.

Moving on, to distribution. Canada, became the first G-7 country to legalize cannabis sales for adult use. Cronos, participated in the launch of this new market through our 2 adult-use brands: COVE, and Spinach. Currently, these brands are distributed in Ontario, British Columbia, Nova Scotia, Prince Edward Island, and Saskatchewan.

As our production capacity grows, we intend to expand distribution into additional Canadian provinces and territories. In 2018, we also announced to join venture with MedMen Enterprises to create MedMen Canada. The private retail landscape is evolving and changing, so we continue to review and analyze the situation as it develops in each province. We think this is a valuable relationship with a large recognizable brand.

Additionally, this year, we announced that Cronos GrowCo entered a supply agreement with Cura Cannabis. Cura, signed a 5-year take-or-pay supply agreement to purchase a minimum of 20,000 kilos of cannabis annually, from the date they received those licenses. We believe, partnering with companies like Cura and MedMen set Cronos Group up for strong relationships as new and large markets opened and regulations evolve.

Internationally, Cronos Group made strides in 2018 to expand its global reach, with a distribution agreement, supplies in medical market in Poland. In June, 2018, we entered into a 5-year exclusive distribution partnership with Delfarma, a pharmaceutical wholesaler, with a distribution network of over 5,000 pharmacies, and more than 200 hospitals to supply Peace Naturals brand cannabis products. We also have a 5-year exclusive distribution agreement with Pohl-Boskamp, an international European pharmaceutical manufacture and distributor for the German market, which was signed in 2017.

We see Europe and Asia Pacific to be extremely important markets for the future, but in the near-term, it is our belief that the development of pharmaceutical foreign factors and delivery systems for medical cannabis will play a crucial role in growing the prescription and patient base in these markets. We are in the process of pursuing regulatory pathways for additional non-combustible products with our partners, at Pohl-Boskamp, who have expertise in the registration of new drugs in Germany.

We take a calculated approach in committing our current supply, as we want to ensure we support our direct-to-patient clients, our provincial and private retail partners, our international partners, and the end-consumers in all of these markets. As new distribution channels open, we must balance supporting our existing global footprint, and meeting the demands of the newly created channel. At this stage of our business, we are very cognizant of this delicate balance, while our supply ramps to meet the growing demands of our global distribution.