Edited Transcript of CRON earnings conference call or presentation 9-May-19 12:30pm GMT

Thomson Reuters StreetEvents - finance.yahoo.com Posted 6 years ago
. Is this me?" data-reactid="289">Hi, this is Rob Wertheimer. Is this me?

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [48]

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Yes.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [49]

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I'm sorry, the intro was confusing. So just a couple -- Rob Wertheimer, Melius Research. Just a couple questions on your comments on vapes, I just wanted to understand the timeframe a bit, the ability to sort of buy in biomass and tailor or recombine, is that a statement that applies in the near term to 4Q, 1Q, 2Q kind of thing or would that take longer to do? And then maybe just commenting on the timeframe on differentiated devices in the same vein?

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [50]

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Sure. Yes, I think that certainly does apply. Assuming again this is really, let's say, all plans are contingent on how regulations develop, but assuming that we're able to have the derivative market open up, we think that there is a secondary market that's starting to develop and that there is availability. As far as -- we look at that like other -- now if you think of generally how consumer hardware works, it's really iterative. So it's not something where we're going to wait, wait years to have the end product. And it's something that we want to continually iterate and make sure that we're constantly improving. So you'll see l think multiple product lines but that is a long-term ongoing initiative where we think that the device market will become increasingly competitive and being able to iterate is going to be important. And I would contrast that with what you see in the nicotine device market. And it's important to remember that it's very difficult to launch new nicotine based devices because of the FDA restrictions and needing to apply for approval. So we think that because of using that as sort of one device being locked in, isn't necessarily going to be applicable and a good comp for how things will develop in the cannabis-based market.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [51]

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That's very helpful, thank you. And if I may just a follow-up on dry flower, is it the same kind of timeframe as you get into more harvest coming out in 4Q or shortly thereafter. Market's been in shortage. Maybe there's less of a shortage by then who knows. Are you confident that you have the customer base and shelf space for distribution, whatever you want to call it, to sell through all the increased production, is that obvious to you or will it be a competitive fight at that time?

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [52]

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It's certainly hard to predict. But I would say that 4Q we think we're still extremely confident. We do believe though that the principles of supply and demand will 100% apply to Canada, whether it's talked about or not, it is inevitable. I think our model certainly being a little more asset light and not focusing on trying to be vertically integrated does rely on the assumption that supply will catch up with demand and we do expect that competition. As that continues to happen in the flower category, one of the things that we would expect will happen in terms of differentiation is understanding, how to still change format. So being able to have unique pre-rolls and make sure that you have some brand element being able to work on standardization and consistency there and genetics will really be, I think, what wins. We're also seeing a lot of the brand selection right now based off of strain, which again supports the importance of genetics. So it's really a long way of saying in the short-term, absolutely. But there is demand and there is still a shortage but there's been a lot of capital, that's important, there is A lot of planned projects and we do think that it will become competitive, but it's contingent upon execution across the industry, which is always hard to predict.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery [53]

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Thanks so much.

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Operator [54]

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Your next question comes from the line of Ryan Tomkins with Jefferies. Your line is now open.

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Ryan Tomkins, [55]

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Yes, I was just looking to ask a little bit around the derivatives side of things. I know it's been asked about but in terms of actual facilities or processes, I'm just on that whether Israel would be up and running, and contributing to any sort of products that may be on the market come October or whether that will be after that? Thanks very much.

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [56]

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I think there is a number of different products that will be released, and we wouldn't expect the full suite to be something that's released Q4. I think a lot of the formats we're still trying to understand what the final regulations will be in terms of packaging specifically for edibles. So we do still have facility space that is allocated that will allow us to enter certain categories, but as we see the market and regulations develop, we expect to be able to continue adding to the product line.

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Ryan Tomkins, [57]

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Okay. Thank you.

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Operator [58]

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Your next question comes from the line of Shayne Laidlaw with Hedgeye Risk Management. Your line is now open.

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Shayne Laidlaw, [59]

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Hey, good morning guys. Thank you very much for the question. I don't mean to beat a dead horse here on the derivative products front within the Canadian market, but just want to ask kind of a follow-up question on, if you could add a little bit more color, you just mentioned you have facility space, could you add more color on kind of what additional investments from a kind of manufacturing process and machinery perspective that needs to happen and maybe if you're thinking about any specific categories that you're more focused on than others, whether it be beverages, edibles or the like, that would be very helpful?

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [60]

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Sure. So to be more direct, I think you could expect us to in the early days prioritize vaporizers first. I think that the regulations around vaporizers are we feel that those are much more likely to stay the way that they are today versus sort of iterate and change over time. Edibles for us it's really about understanding what those final regulations are and how we launch products, and specifically in what categories. Outside of Canada and thinking longer term, you'll see it in a lot of different categories of oral ingestibles. I'd also say topical is an area that we're focused on even sooner than just the research we're doing on skin in Israel. But Canada specifically, the regulations at least were proposed were different than what we've seen and we've been able to pull data from the US, packaging sizes, how that affects pricing overall demand. So before we put a significant amount of capital investment into unique packaging automation, we want to make sure that we know what the final regulations are, so that we're not taking up space and commissioning equipment that is for single-serve packaging only to find a few months later that that changes over to something that we're more used to in terms of multi-pack. But again, prioritizing vape we feel there's more certainty and continuing to have a platform technology that allows us to move quickly and be flexible as we see the edible regulations publishes is what we're working on.

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Shayne Laidlaw, [61]

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Okay, thank you for that. And then just moving to Ginkgo Bioworks and biosynthesis more broadly, and if there's any kind of color you can share on progress being made there? And also thinking about kind of the broader market and how biosynthesis is, the space in general is being more talked about, I think more accepted over time kind of versus last summer where no one was really thinking, it was like a viable solution longer term. So, if you could just talk about kind of how that space has evolved, and your mindset from a competitive standpoint and if you have any color on the progress at Ginkgo, that would be helpful? Thank you.

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [62]

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Yes. So, I think of all the initiatives we have, we still continue to be extremely bullish about the partnership and working closely with Ginkgo. We won't go into specific details on the technical milestones we've hit. You can see the R&D payments in the financials. We've been hitting milestones and continue to be extremely impressed, and with what Ginkgo has been able to do, how quickly they're able to do it, and generally just the breadth and depth of their platform. As far as competition and things heating up, I can say that we again feel very fortunate that we were sort of looking at this very early compared to the competitive set and we're able to have our first choice of partner. It's really not a surprise. I think that if you looked back a few years, people thought of biosynthesis as futuristic Star Trek-like idea, where, oh, it'll happen in five or 10 years, and we'll figure it out. And I think now the entire cannabis industry is accelerating, and people are starting to look for how will cannabis be disrupted, not just how will cannabis disrupt other industries. And as that happens, companies start turning towards biosynthesis. So it does in some ways validate thesis. We feel that we have a very strong advantage with Ginkgo being by far and away the leader in synthetic biology. So overall confident, but we do expect that this space will increasingly have focus as the science is more and more understood.

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Shayne Laidlaw, [63]

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Great. Thanks very much.

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Operator [64]

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We have no further question at this time. I will now turn the call back to the presenters.

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Michael Gorenstein, Cronos Group Inc. - Chairman, President & CEO [65]

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Thank you everyone, and have a good morning.

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Operator [66]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.