jam-packed, so who knows?
I am confident that that day will return. Okay. All right, so, let us kick off. We are really pleased to welcome Mike Gorenstein here again at our conference for the second year in a row, I think, from Cronos. Thank you for joining us.
Thanks for having me back.
So, just about, as we were discussing before we talked, I feel like just about every investor at this conference has actually asked me about cannabis, even if they're just looking into alcohol, because of the rescheduling news we've had, it's been in the headlines. And when we combine that with some weaker alcohol volumes in the last couple of months, everybody's turning their attention. So, I think we have a lot to cover. But for those here who are maybe less familiar with Cronos, how about we start there? You know, how do you think about the priorities in your business and where you're paying most attention today?
Sure. So, you know, we really think of ourselves as a, you know, a global cannabinoid company, really focused on branded products. I think probably unique versus most cannabis companies, in that we really do think similar to a CPG company. We don't think that vertical integration makes sense. We want to make the best possible products. We want to have differentiated products and take products and move from market to market.
All right. So let's start with Canada, your core market, and then we're going to make sure to touch on Israel, U.S. operations, and everything in between. So, starting with Canada, I think we're almost at 6 years now of having legal recreational cannabis in my home market. So, what are your key learnings over that period? If you were to redo the last couple of years, any key takeaways that you would have different?
No, but I think we've kind of always had the belief that having a you know, differentiated quality product would matter. I think we've always had a focus more on you know, starting with R&D, starting at what a consumer wants and work back to supply chain. And I think it's that was sort of the opposite of what the industry was always talked about years ago, where it was capacity, capacity, supply chain. We continued to if you do provide a differentiated product, whether it's from the rest of the cannabis market or from the illicit market, that's where the incremental gains will keep coming from. That's where stickiness comes from, that's where margin durability comes from. So, that, and I would say you know, don't bank on regulatory change.
Doesn't mean it's not coming, but timing of regulatory change is always unpredictable. Very political. You know, it's always a very political topic.
When you have the type of consumer demand and usage, regardless of whether it's legalized or not, I think it's still heading in one direction.
Well, what really sticks to my mind whenever I think about Cronos is the strong position that you have with your brands in an incredibly challenging market, where market shares have been all over the place for different players, and you're top three in both flower, edibles, and vapes, if I have my numbers correct here. So, how do you go about building brands that have strong consumer loyalty and equity in a market where marketing, promotions, advertising are completely different to other CPG?
Yeah, and I think, you know, first, it's not a coincidence that if you looked. And I don't know that market cap always dictated the actual size of the LP, but if you looked at, you know, our peers and who we were, you know, comping in, we started off, you know, in a medical brand, and there was originally two adult-use brands, still are two adult-use brands. But it was very focused on putting our energy into making brands actually separate versus just saying, this brand, which is the same flower as, you know, our other brand. This is a new brand, and this is why, and it should be to this segment. You can, you can speak it out in the world, but if you don't have something different, doesn't make a difference.
Every brand, there's a certain amount of fluff and a certain amount of stuff. You know, if you don't have something that's, you know, has stuff in it, no matter what you say, a consumer is going to be like, "Okay.
There's nothing here." And if you don't have any fluff, no one's going to ever hear about the stuff, and they're not going to try it. I think cannabis, unlike the rest of CPG, it's actually the opposite. It's very easy to get trial. Very easy. It is very difficult to get repeat. And because of the marketing restrictions on top of that, like, you have to really have something that's different. People are, you know, very busy consumers, and they are, there's a culture to it where, you know, people are very interested in the product. If you don't have something that's different, they just won't return.
So, I think it really started with, you know, years of R&D, right? The success you're seeing now came from years ago when we were, like, often described as an R&D company. So, you know, if you look at flowers, it's a very differentiated product. There's nothing like it on the market. You know, if you look at some of the things in, like, the genetics that we have-
like the flower, I think we're like an accidental number one flower brand, and so we're going to focus on genetics. The same SKUs that are the top SKUs in Canada are also, you know, go to Israel, go to Germany, you see the same success. So, it really is, you know, having something differentiated.
So, I want to-- I like that, fluff versus stuff. That might be my next research title. But in terms of, you know, the actual quality of the product, I think that's something many consumer's feedback is consistent across cannabis, especially as technologies evolve. And one thing that struck me about your SOURZ brand when I was back in Canada is the gummies did not have any aftertaste of cannabis.
It tasted like a regular gummy bear that I might have. Can you talk us through how do you go about creating a product in such a new industry to the point where it is consumer-ready to engage that loyalty?
Sure. So, it's segmenting and it's looking, you know, what generally does the consumer want? And if you were to ask everyone about edibles, you would get two main pieces of feedback. It had one of which we could, and we couldn't, which is, we wish that it was, you know, stronger. We want to have, like-
... Canadian government.
There you go. The other one was, "This tastes like crap.
Like, well, taste is something we can address.
So, we spent a lot of time and resources on flavor masking, and then it went a little bit beyond that of, okay, we could make something to taste like a normal gummy bear, but then what advantage we have if someone else figured out flavor masking?
Yep.
It was about the types of flavors. We actually set it up that each SOURZ has dual flavor.
Right? And there's actually a third flavor if you eat it together. So, if you eat one side, you know, you could have, raspberry, you could have watermelon in there, but if you eat the whole thing at once, you actually have an arc of flavor in the way it releases, so you get a third kind of combined flavor, which I think is really cool. And it's a sensory experience. You want part of cannabis should be a little bit of a ritual. People like the action of it. There's something social about it, and we wanted to keep that with an edible, and you don't really have that with a lot of, edibles, where it's like, "Oh, this tastes bad. I don't," you know-
I don't look forward to it." It's not like people are taking shots and they're excited. So, it was making something taste good, make it a cool experience. And that was, that was the incentive, was setting out and, you know, putting in the work to figure out how do we, how do we mask different cannabinoids? What, you know, what amount of cannabinoids, and doing it without just being like: Here is a ton of, of flavor that tries to overpower it. It was actually masking the flavor of the cannabinoids and then-
And then sticking with that technology element, what is the actual product offering? The other thing people or consumers might mention is onset period, especially when it comes to edibles or beverages versus your traditional inhalable.
Can you talk through that process? Because I, I would imagine solving for some of those challenges helps bring incremental consumers.
There is, and, you know, there's some technology out there. You know, we've used it. We've done a lot of research on it. I think there's a few things, and one that's interesting is it's tough to change consumer behavior, and everyone expects an edible to hit them now in, like, 20 or 30 minutes, and there's a timing people are used to. So, for your existing consumers, I actually think that if you give them the choice, something that's 5 minutes, it's just not what they're used to.
It's like, "I'll take this. It'll, it'll take X amount of time." I think it's consistency-
- is the most important thing, but there's a lot of different ways you can do onset. You know, whether it's, different types of emulsions, and there's, you know, a whole host of things we deal with there. You know, you've got types of, like, protein binding, other things. But I don't know that you need to have the same type of effect as inhalation. That's obviously would be amazing.
Yeah.
Then you start changing what the actual effect is. The time is the same, the effect can be different. So, it's something that we still research and we've been doing work on, but I think the most important thing is having consistency for now, so people know what to expect.
That's really what, what drives it.
Yeah. So, we've seen an incredible amount of growth, whether that's in Canada or also here in the US, and one of the number one questions I get, both from people looking directly into investing in cannabis, but also other CPG, is: Where is that incremental cannabis dollar coming from? So, I'd love to get your thoughts. Where is that incremental dollar and consumer coming from? Where is that being sourced? And, you know, that's another way of asking: Who's losing out from cannabis growing?
So I guess, let's see, this quarter, the industry was roughly flattening down like a point or two, and we're up roughly 30%, so it's coming from competitors.
But it's the same trend that. You've got an illicit market out there that has just Ziploc bags of flower or very commoditized gummies that don't taste great. If you come out with something better, I think that is still a huge market to take from.
So, taking from the illicit market is big. You know, certainly taking from competitors, a lot of them were just, you know, we talked about it before, using sort of inventory as a way to stay alive. It was less of a, less of an operating company, and as those start to move, you know, you see that happen. But I think that some of the younger adult consumers are, are drinking something like beer less and less.
I think that's, you know, so whether we're taking from them or they're just, you know, cannabis is more a product for them, I think that's certainly it. You've got people that are using it, you know, for sleep.
Yep.
Need help sleeping, a lot of fear of opioids, moving away from opioids, using it for, you know, for pain relief. So, there's a lot of different areas it comes from, but just given the size of the illicit market and markets coming online, I still think that's the biggest-
The main share donor.
Yeah.
And then it'll be followed by maybe taking out some from alcohol, simply offering consumers more choice.
Yep, that's right.
And so, you mentioned here, you know, you outgrowing the category in the last quarter, gaining share. How are you thinking about the growth trajectory of your Canadian cannabis business? I appreciate you don't want to put a target, given how volatile it is, but something, you know, to give us a little bit of guidelines as to how you're thinking about growth.
I think about it a lot with what the specific products are.
Mm.
So I, you know, you saw, like, a very rapid growth for vapes for us, right? You know, we make tweaks, we do a lot of work on getting the product right.
We launch it, and then you see that sort of grabs a lot. You have more gradual growth from some of the other categories. Right now, we're doing a ton of work on pre-rolls. I think that's going to be the next blockbuster category. Lord Jones, you know, we, we launched that recently, and I think it's finding something that's durable, something that's sticky. It's taking a narrow focus for a product and saying, "We're going to do something that," you know, if you have a very broad offering that applies to, you know, 80% of consumers, chances are I can find 10% of those people that would much rather have something I'm offering made for them than for 80%.
And so taking those products and launching them and holding on to share is much more important than trying to launch something out of the gate-
... that just based off of cost or potency gets people. So that, that's, you know, I think you'll see the products we launch, and then once we have that, you know, that format right... We have a number of SKU extensions, whether that's flavor or cannabinoid, you know, effect that we go from there. But I think that's, that's sort of what's driving in Canada. And obviously, flower, there's going to be capacity limits.
So that's going to be more step functions when you need to get significantly more capacity. But for vapes, edibles, pre-rolls, they're pretty much uncapped in growth.
Yeah, and I, I realize here we're talking a lot about cannabinoids and things that maybe frequent consumers of cannabis will be more familiar with distinguishing different products. How educated are you finding the consumer is today, or is it such a broad range that you're able to target certain subsets?
I think it's a broad range, but also most of the marketing we're doing now is in-store.
So again, there's a culture around it, where people are very, very interested in the products, are interested in the effects of the different brands. And so, if you go in and you talk to the, you know, budtenders-
... sales associates, whoever you want to refer to them as, they know a lot, and they know the products. And consumers usually go in with questions, and a lot of times they're not informed. I mean, even sativa versus indica, doesn't mean what people think. But people know what they want. They want something that's going to, you know, help them wind down. They want something to be more energetic, more creative. And it's a trial from, you know, from budtenders or from other consumers that talk to them. I think they get up the curve quickly.
So if I play devil's advocate here, you know, someone would say someone who's choosing to step into a cannabis store has already made a decision to either cast away past views of the category or were already consumers. So the actual real question is, how do you bring in that person into the store who's never considered the sector before? And, you know, maybe for those of you who have never been to Canada, many of the stores are lovely on the inside, but, you know, they have to have their windows covered. It's not like going and shopping for some beer. So how do you actually get that consumer who is completely new to the category?
Well, yeah. You know, funny enough, the first thing that someone does when they walk into a, you know, a specialty shop that they know nothing about, is they ask.
Like, "Well, I want this," and there's a dialogue. And so the constant education, you know, in store, that's why we focus our marketing dollars, you know, there. I think that's really important, and I think that if you do the right education, if you have... and we have, I think, the best sales team in the industry. Making sure that we're always there, talking about the new products, and having products that really are superior-
I think it finds its way to the new consumers.
Right.
Now, sometimes a consumer just walks in, and they're saying: I don't know what all this means. I want the... And I know cannabis, but I want to try a vape. What vapes do you have? Sometimes they will just pick the cheapest vape.
That does happen, which is actually fine. I think then over time, they come back second, third time, you know, they start asking nuances about it.
Okay, well, I like this. I didn't like this." And, you know, I think, you know, we find our way there. But, there is a big value category still, and, you know, or, or segment, and it's not one that we feel like we need to attack.
But once they come in, they convert from illicit market. I think it's finding something that targets that specific person, but it really depends on who the consumer is.
Yeah. So sticking with Canada, let's dive into some of the nitty-gritty factors that affect how your performance and earnings would materialize, starting with pricing. It's been a huge headwind in Canada for a number of years. What are you observing in pricing today? Is it still falling? Are we stabilizing? Are we maybe seeing even some growth? What are you observing?
So, I'd say usually people are looking at flower, when they're talking about the pricing trends. I, at least, you know, for us and what I've seen is, it's actually almost turning the opposite. We haven't seen a lot of compression, and I think that there's a potential shortage coming for a couple of reasons, but we've seen an opportunity to take price. You've had a lot of companies exit supply, shut down facilities. You've got a lot of companies now that are, you know, they haven't been paying their taxes.
And so, you know, if you're not paying your taxes, you're basically subsidizing your cost of production. The CRA, the Canadian IRS, is essentially, you know, taking some more aggressive action. I think there's still room to ramp up, but telling people, "You're going to have to pay eventually. We're going to garnish it." 50% of the bankruptcies in Canada last year were cannabis companies, so that's slowing down the amount of irrational supply going in the market. And on top of that, with Germany opening, you know, with UK and Australia ramping, there's more demand internationally that's pulling, and there's less supply that's going in. So, I think you're seeing a shift.
Okay.
I think there still might be movement around edibles and vapes, but you know, as long as you're in a position to scale, I think you can offset that-
-with fixed cost absorption.
Yeah.
But yeah, I think flower, you know, cautiously optimistic. We've seen, we've seen the bottom, and I think the trends probably will show that.
All right. You know, one question I have on, you mentioned taking some price. I had an investor ask me this question a couple weeks ago, and I actually didn't have an answer, which is, you know: What does the price elasticity of cannabis look like? This was in a conversation of how do we compare price elasticity of beer, versus spirits, versus cannabis, if consumers were to feel the crunch of macro environment, you know, towards them, companies still taking price.
I'm curious to see what you've seen.
I think it, like other categories, definitely depends on the consumer.
I think that, you know, one interesting thing is format to format. I think that flower historically has been the cheapest, and so, also if someone, you know, we saw this during COVID, or someone kind of out of work, a large pack format of flower, consumers switch to that because you're not going to pay the same premium for convenience. You don't need the premium for pre-rolls. So I think that you do see shifts towards formats. But also, it's not all flower is the same. There is a price for potency. So, if you look at the data, you might say, okay, this, you know, bag of flower is cheaper, that's 20% THC than the 30% THC. In the consumer's mind, it's not necessarily the case.
There's definitely a price to potency equation, and I think that's one of the ways also Spinach's won, the breeding program, the tissue culture, and with GrowCo, everything sort of propelled it. So, I think that that is a factor in how we're switching. But without question, consumers are still going to, you know, ultimately look at it and say, "What is the effect I'm going to get for the dollar I'm spending, and what is the convenience of that effect?" I do think there's a lot of room in pre-rolls to, you know, to disrupt that, to create more margin, but I think edibles tends to be more affluent consumer than large pack flower, and so you can see some shifts among that.
You've made the comparison between flower and pre-rolls. What do you think the sort of end stable market is going to look like between that split? I'll often get this asked in the context of tobacco, which, you know, moved to that fully almost rolled market, depending on which country you're in. Do you think cannabis is going to go down that route, or is there a ritualistic element for many people to having flower that means it'll always have its place?
I would—I mean, I'm probably, you know, I'm always a contrarian in the industry, but I think that pre-rolls will eventually be larger than flower. I think that it will go a few different ways. One, I think you're able to sell pre-rolls that are cheaper than flower. It's like the ugly fruit model, right? Where you don't have to spend the time manicuring and, you know, doing all the different things with flower. You're just immediately milling it and rolling it. You can do infusions. So, I think that you can actually standardize and make a product that is cheaper in potency than flower. I think that will be... You know, and we still haven't seen a lot of the tech from, let's say, be, you know, put in terms of making a rod, reducing hollowness.
There's a lot of opportunity. But I also think that you're going to see on the premium side, we had the, the Lord Jones hash we recently launched, and that's, that's a better experience than just taking traditional flower. All that being said, I, I think there will always be some segment of the market, and it, it probably shrinks over time now that, you know, you're, you're growing up in a legal world-
versus in, you know, illicit. Maybe less of that same type of ritual, but people still like to hunt, and they're connoisseurs. It's like a wine market.
Yes.
You know, like craft beer, where I think that will always exist. I think that the large pack format, though, may eventually be replaced by pre-rolls because of the cost. So I think, you know, I can't give you an exact number, but I would bank on pre-rolls eventually surpassing. And maybe an interesting question is how much of that is going to be infused pre-rolls versus just pre-rolls.
Regular, yeah.
But I would think infused pre-rolls will, over time, or some type of manufactured pre-roll versus just, you know, calling it non-infused-
Yeah.
will be the largest category.
Hmm. So, you mentioned GrowCo a couple moments ago. Your, Cronos has taken a very different approach to many industry peers in terms of production and capacity. So, could you give us an update on how that model is functioning for you today and where your capacity sits today?
Yeah, I think it's worked out extremely well. So if everyone's benefit, Cronos GrowCo, we... you know, I always had this philosophy of, like, you can't do everything in the industry, and I thought, like: Okay, who's going to be the best growers? That, you know, a couple people that love the industry and moved up to the middle of nowhere, and, you know, we... Yeah, we hired a lot of horticulturists who were very good at research and breeding and all the-
... you know, things like that, that you want to spread globally. But when I looked to Canada, I was like: Who's the best at growing strawberries, tomatoes, lettuce, cucumbers? It was coming back to, you know, one of two to three groups every time. Turns out globally, like, you can go and you can look and see who's the best grower. The infrastructure you need to be a dominant industrial farmer is very difficult. It's very, you know, it's very difficult to do that and still work on all the other things. So, we went and recruited who we thought were the best ag group in Canada, and we struck a partnership at 50/50 on the equity, and then we provided debt to them, and we purchased from them. So, I think they are, I think they're the most efficient growers.
I think you've seen the results in our flower. We're able to focus on the consumer, and rather than having to push out supply, we pull supply, which I think has been a big-
... advantage for us. We didn't need to, you know, to invent, like, five brands that should really have been one, because we have tons of capacity we have to sell. It was, okay, this is the demand, we're going to pick it. It also let us focus on breeding, and then continue to develop genetics to give to them. So it's been one of the biggest successes that we've had. You know, capacity, I never thought we'd get to the point where we're like, well, you know, we certainly could use more given, you know, where demand is and what's happening in the industry. But very comfortable, very comfortable with the fact that we, you know, we don't see us writing down to flower. We've got-
We've got more demand, and we have the opportunity to take price. So, I think it's going well, and I still think it's a model. It's funny, I think about, like, you know, so much about ROIC, but I wouldn't want to have to build greenhouses around the world. Obviously, if anyone was going to be the one, the next question is: Well, you, do you have the capital to do it? A lot of it's just focus. I don't know that, you know, we would be able to do it better than a local ag partner in any market.
I think that as things open, and it will open rapidly at some point, we'll hit that inflection point.
I'd rather have the genetics to give to the farmers than vice versa.
Sticking with the question of profitability, first on a general question on gross margins, how should we be thinking about that evolving over the next couple of quarters and years, both given your view on where top line is going and as well as managing your cost base?
So, yeah, there's still room for us to take costs out. I think we've been consistently doing that. And then I think top line, there's a lot of opportunity for growth still, whether it's adding incremental brands, international, and our fixed cost base, I think, is pretty established. So, if you—you know, when I look at it, I think what we need to do is continue to add products that are incremental and absorb more fixed costs. That's going to be really what's most accretive to the margin in Canada, and international margins are significantly higher than Canada. And already having that fixed cost base sitting in Canada, that's a big driver. And so, with Germany coming online, I think Israel moving back to the trajectory it was on and rebounding after-
You know, what was certainly a tough Q4, that's where I think the margin upside comes. But yeah, that, that's... You know, the, the model hasn't changed what we need to do, and I think that, we're on track to get it done.
All right. And then maybe one last question on Canada. We've been discussing all these different moving parts, from the consumer to your production. The big thing that's looming is the regulatory environment, and we touched on that briefly in terms of packaging restrictions.
Excise tax is another issue. Do you think there needs to be meaningful change in the regulatory model for profitability to dramatically improve, or do you feel you have enough at your disposal without that to meaningfully improve bottom-line profitability?
No, I think, I think that-- Look, it would be great if, if it did improve. I guess, I would say that there's a long-term, you know, and almost like a, a Bond villain, you know, answer of the fact that it is the way it is, and given balance sheets and where everyone's at, it may long term work out better for us. But no, I think we, we don't bank on regulatory change.
You know, maybe we look at a part of the investment thesis is that other markets open, and we'll be able to continue to operate, but Canada needs to be sustainable, and I think that we can do that without regulatory change.
Got it.
Now, if there's regulatory change, that'd be a huge, you know, huge advantage, a huge boom, but it, it's hard to know when it'll happen, if it'll happen. But eventually, given, you know, what, where the industry dynamics are, if you want to keep sustaining a, you know, a legal market, they're going to have to do something.
Speaking of regulatory change, let's talk about the U.S.
Something happened?
Yeah. So obviously, for those in the room who are maybe less aware, the U.S. recently has made a move to reschedule cannabis to Schedule III. So, before I ask you what it means for Cronos, I actually want to take a step back and ask you, what do you think it means for the industry, given your experience in the industry? And, you know, that can be from a Canadian perspective, a U.S. perspective, but a real, you know, big step back, what does this policy change actually mean?
I think we needed any type of policy change and movement for the industry-
Sure.
because it had been a while. I think that it's certainly more impactful than, you know, everyone was really focused on SAFE or SAFER banking , which I never thought did anything. I think this is actually a real change because it addresses 280E. So, I think that's really positive. And maybe one of the biggest things that no one's talked about is that the reason, and the way, and the time it was done, if nothing else, what it does show is that cannabis is a very relevant political issue. It was, you know, the timing of the AP, the leak to AP, which doesn't usually happen.
A lot of coincidence.
Right. Timing before with student loans, you know, it is very clear that it is a politically relevant, you know, point. And I think that is, that does show that there will be, you know, continued movement.
As far as what it means day-to-day, I mean, I think that there's a lot of, a lot of details that need to be worked out. You know, what will happen with the FDA? What is the licensing state by state going to look like? What are some of the legislative, bills that will come, you know, shortly after? I think you're going to have to still have a federal legislative solution. I don't believe that anyone's interested in, in having, you know, this, this sort of interim period, where you no longer have this, tax coming from cannabis. You know, everyone wants a federal excise tax in some way. I think that's going to come. I think that you'll have much more, much more detailed rules and a, a more sustainable framework come out.
But I, you know, I think that eventually it will look like a normal market. I think that this doesn't necessarily allow for interstate commerce, but then there's questions over, what about international? Are you going to create a bifurcating market, where you've got, a national medical market versus a state-by-state, adult use market?
So, you know, I think it'll be really interesting, and there's a lot of questions to be answered still, but it'll be busy in the cannabis regulatory space for the next year.
Yeah, I mean, I always say, if you cast your mind back to 1933, when U.S. prohibition was removed, and how long it has taken for us to get to the alcohol market we have today, with all its rules and regulations and societal point of view, you know, that took well over 100 years, and cannabis is just starting.
Yeah, I think, and also, though, the way that cannabis has just developed the last few years and the rapid growth, it's just too hard to ignore. You can't put the toothpaste back in the tube. So, I think it will evolve, you know. I, I don't think it'll take 100 years.
I hope not. Nor do I think it will. I mean, you're also seeing the measure is going to be on the ballot in Florida. Remains to be seen whether it will pass... But the fact that there is at least enough people to get it on the ballot in the first place, in a state like Florida, tells you the amount of support it has across the nation. So, what does this mean for Cronos? Was my next question. You know, if I look at your peers, everybody seems to be taking a different approach to the U.S., the risk tolerance they're willing to take. Where do you lie on that spectrum, and how are you thinking about the U.S.?
We think about it, like, you know, really similar to other markets where it's, you know, it's very difficult to predict what the regulatory system is going to look like. It is, I think, easy to predict the regulatory system will change frequently and multiple times before it's settled. But what really matters is having the best portfolio of products and the competition for consumer. As long as that's available to us, which I think it will be, we have the flexibility. We've certainly maintained flexibility to be able to move in and do that. So still staying away from going and being vertically integrated.
I think there's going to be a lot of disruption in the way the market structure is in the U.S. today, so, having optionality is key. And that's sort of our, you know—and that's like when you ask, what's the approach to Germany? It's really, it's had the best products. When you go to U.K., have the best products, and whether we're using a distributor or self-distributor, putting our own boots on the ground, we will likely start with, you know, with a CMO until we have an idea of what's the right level, that it makes sense for us to put the CapEx in and capture the margin on our own. But I think we have to see exactly what the regulations work out to be, to understand what's the best spot for us-
... to pick, to enter and go from there, and do it.
Yes, going blind without regulation.
And of course, look, we do have partnerships already. We've got the investment in PharmaCann, you know, which has a really strong presence across the U.S. Obviously, the partnership with Altria, if things went to a full national system, that's more of a future end state. It does help us sort of get comfortable knowing that that infrastructure is there. And yeah, I think having a pretty large war chest, so depending which way regs go, you know, we think there's probably brands that would make sense to acquire, and we can, yeah.
Speaking of Altria, you know, that's something we saw as well at the beginning, is large, whether alcohol or CPG players taking, an investment stake in cannabis, where they felt it was an important adjacency. How is that relationship today? How are Altria feeling about their relationship with you, given the very volatile couple of years we've had in the world of cannabis?
Look, I think, I'd say that if you've got a lot of volatile categories that, you know, tobacco deals with, then maybe it's easier for vapes to get worked out first before cannabis. But, I think Altria is a very U.S.-focused company, given, you know, where their infrastructure is, and we all thought that things would develop earlier.
Yeah.
We were very careful in the way that we approached it and that we, you know, we were very disciplined in the investments we made, the way we allocated capital, to balance. If things moved forward, we'd be ready-
... but also still have all the, you know, flexibility to execute on our plan if things went, ultimately, where they ended up going. So I think, similar to us, we're all sort of, you know, pushing and waiting for things to happen, but, to plead that we're in a position that, you know, we aren't, we haven't given up any strength. If anything, we've gained strength from, you know, being disciplined.
Moving away from North America to your other, you know, meaningful market, which is Israel. Obviously, a challenging period, given the conflict in the region, though your Israeli business did beat expectations, I believe, in the last quarter. Could you provide us with an update on the performance in this market, especially everything that's going on?
Yeah. This quarter is actually the best quarter we've had in Israel since the end of 2022. We've had a lot of regulatory change we've been waiting for in Israel, but for obvious reasons have been delayed. Q4 was very tough, and specifically, October was very tough. The first few weeks after October seventh, things really did shut down. It was, you know, a lot of questions. You had 10% of the population get called on the reserves. Managing the business became, you know, very difficult, but it's an extremely resilient country. The people are very resilient. I think things, you know, things rebounded very well. Certainly, it's very helpful to us to have our own operation there versus, you know, exporting to-
... partners. I think that you are seeing a lot of challenges with some of the Israeli companies in capitalization now, so controlling our own destiny is pretty key. But I think that, you know, the market, we still expect it should grow. The fundamentals of the market, of not having a strong illicit market, which is very different than everywhere else we've seen, having one of the highest, or I think actually the highest, you know, consumption usage rate in the world, high prices, those are all very, very positive. The geopolitics is really the negative. I don't expect that significant advancement for cannabis regulations is or should be a priority for Israel right now.
Continuing to rebound, kind of take share as others are sort of pulling back and from the market is a big opportunity for us.
And so, if we cast our mind forward, perhaps five years, how do you think about the potential for that market and room to grow? You know, obviously, bearing in mind that we don't have a crystal ball when it comes to the conflict portion of the conversation.
I think that if all things are equal and things develop, it's a... I would, I would say it's a better market than Colorado.
Okay.
I think that, you know, the lack of an illicit market, or a sophisticated illicit market, you know, makes sense. It's very difficult to illegally grow things to smuggle things into Israel, you know, is pretty strong. And then, you know, population, it's bigger than Colorado, so, will it get to Colorado within five years? Harder to say. In 10 years, I think, you know, I think it does. So, it's not, you know, does it have the potential of Germany? Like, you know, no. But I think that as far as consolidated, I think you're going to see three to four very strong players, and you're already seeing it shape up that way. So, we're very excited about it as a market.
So, I want to take a step now back to focus on the overall business. I understand that some investors, due to the federal status in the U.S., are still sort of trying to figure out, you know, their investment attitude towards cannabis because of that status from a regulatory perspective. But the second pushback I'll often get is investors are not sure where it stands on an ESG or sustainability perspective. Does it fall closer to tobacco, alcohol, not even close, and in another category? So, if an investor here in the audience were to ask you that, you know, "How do I make the case to the higher-ups at my firm when it comes to an ESG standpoint of cannabis?" What would you say to them?
Yeah, I'd say that, you know, it's... I think there's, like, a common sense part of cannabis is got prevalent use, whether it's legal or not.
But then if you look at all the dangers associated with cannabis historically, it, it's usually about the fact that it's illegal, right? Is there any transparency in the supply chain? What are you getting? You know, you hear pushback of, "Well, cannabis is dangerous because of things that might get spiked in it," which, you know, that can be, that can be solved. I think that being able to prevent youth access is a huge thing that, you know, it's a huge argument for legalization. You know, moving it away from organized crime, it's really important. And then, I think generally, when you look at look at when a state goes goes legal for cannabis, look at the immediate drops in fatal opioid overdoses, right? There's a lot of positives that come from cannabis.
I don't know that it's a situation where it's like, is it, is it, are you going to eliminate cannabis or not eliminate cannabis? It's what is the best option. And I think that legal cannabis, for a number of reasons, is by far the best option. And then there's other parts on the medical side that, you know, it's hard to paint it very specifically. So, are you looking at purely adult use, are you looking at medical? You know, when you've got cancer patients that are struggling to eat and you're able to help their appetite, that's, to me, is a very positive effect of an industry. And are those smaller parts of the business? Yes, but they still exist.
Mm-hmm. Mm-hmm. Yeah, and it's about adding that, that nuance. And coming against your point, there are many different pockets of cannabis, and it's still an incredibly young legal industry.
Yeah.
So still sticking with the overall group, when we consider your investor base, obviously there are institutional investors, but also retail investors will form a very big chunk for the sector as a whole. How do you think about that? Obviously, you have a big stake from Altria, but how do you think about the presence and role of retail investors, how it impacts volatility in terms of your stock?
You know, I feel like this is more something probably that I leave to others to think about. I think I've got a very long kind of lens here. I think as long as we continue to execute, that volatile or not volatile stock, you know, should go where it should go.
Right.
I think it's really about driving results.
Obviously, you know, and I think I've described this before, it's almost like a, almost think of it like biotech, but instead of needing, you know, an agency to approve a drug, we need an agency to approve a category.
Yeah.
So certainly, there's different risk tolerances around who wants to price that in, and what timeline, and, you know, what incremental news people buy or sell on. But it's probably year nine for me now, so I'm so used to the volatility. I think it's-
part and parcel with it.
Yeah.
Yeah.
It's you try to ignore the, you know, the boom and the bust cycles. And you know, we don't need to use our stock as currency, you know, anytime soon. We don't need to raise money, so I think it affects us less than other cannabis companies-
... given the balance sheet.
Got it. Now, pulling on your nine years of experience here, neither you nor I are politics experts, but I'd be curious to get your view and your experience of when we could expect any form of federal reform or legalization beyond the Schedule III rescheduling, we're seeing? And whatever answer you give, I'm not going to hold you to in the future.
That's a, it's a tough one. I think obviously who wins the election, not just, it's not just who the president is. I actually think that the belief that Biden is pro-cannabis and Trump is anti-cannabis is probably not true. It may even be the opposite. I don't know if either have that strong of a view. But it. I would say two years from November, because I think a lot of it has to do with what happens, you know, midterms, and it's going to be really driven by who takes seats, you know, in the Senate and in the House, less than who the president is. So, I think that's probably more of the driver than who's actually sitting as president.
And then coming back to composition of the House and the Senate, what we did have was Schumer's proposition, which didn't get as much traction as I think he or many people were hoping. What do you think are the key things that the U.S. needs to figure out in order to get everybody on the same page? Because when you look at the statistics of how many people in the U.S. are in favor of legal recreational cannabis, it really is mind-blowing, the politics, the population view versus the House of Congress.
Part of it is just getting past how much of a partisan issue it is.
Right? I think that also you've got generally a lot of agreement on both sides, politically, but it's generally, it's generational. I think generationally, younger generations are much more pro-cannabis than older generations. I think, you know, Reefer Madness definitely, you know, had an effect. I think that the more normalized it, it is in different states, people just get more and more used to it. So, I think that the biggest thing to work out will probably end up being the tax framework.
I think that that always needs to be-
Always money.
It will. Look, it needs to be worked out. It's, it's going to really drive regulations. I think tax, I think, you know, scientific data, so you need, you need research, you need general consensus on the research, and then a really strong responsibility framework. I think that's going to be very, very important. And I think those will all go hand in hand.
Yeah. Now, your tax point is interesting because I had a thought there where I remembered that one of the main reasons U.S. prohibition was reversed is because coming out of the Great Depression, they really needed to raise more tax revenue, and they thought, "Well, look at this industry that we've been ignoring for 13 years.
You don't have to believe in cannabis. If you believe in having a road that doesn't have a pothole, you're probably for it. You know, if you want-
Very low.
Well, look, if it's already occurring, right, you can make it safer. You can control where and to who it's distributed, and you can have tax revenue to fix a lot, a lot of issues. So I think that the media probably won't be talking about taxes often-
Yeah.
But I think that what actually will drive things will, taxes, for whatever reason. Before, I think we had a more discussed cannabis capital market, and people didn't... You know, people knew taxes, it would drive it, and I still think it will be.
This is where we tell people to call their representative to make sure. All right. Well, with the sort of two minutes that we have left, I actually always like to end with a very similar question for all our management teams, which is: What is the one thing about Cronos that you believe is either misunderstood or underappreciated by the capital markets today?
You know, I'll give you two answers since I think we have a little longer than two minutes.
Sure.
But the first one, the simplest one, would be GrowCo. I think that because it's not consolidated and it's just maybe not as easy to break out and explain the fact that we are, we do own half of it, and we own all the debt, which is, again, rare for a cannabis company to be. You know, our net debt is actually higher than net cash. So, it's a profitable company. It is something that, like, you know, the business has only been improving, and it's a huge strategic advantage. So, for, you know, maybe we, it depends on the day, we may be trading above cash today, but the fact that we own, you know, trade above the credit facility and there's no credit for that business, you know, I think is interesting.
And then also, I don't know that, I think that our margins are, are probably better than they look because GrowCo is something that we just, it's just a bottom-line pickup. And the other, I'd say, is borderless products. So, you know, the strategy we have has always been to use Canada as a sort of a, like, launchpad or testing ground, and as markets open up, you know, we enter them when it makes sense, whether that's because it's allowed or because it's a opportunity where we can actually start generating a profit. And obviously, the edibles is an example of, of kind of the value we're, you know, we're creating. If you look across the US, it's generally the same edibles brands that are leaders.
You know, you look three or four brands are generally where it is, and it's very different from, say, flower, because it's a differentiated product. You're far away from, you know, commoditized plant, and you can actually check and see, like, okay, it's the same place. I can see on the packaging. I know what the taste is going to be. And those same brands are also all in Canada, and you can see how we compete against them, how we succeed. When things open up in the U.S. or, you know, Europe for edibles, having already developed that brand, having, you know, the IP already set, that is a big advantage when we move in.
Because you'll see that the first-mover advantage, I don't think has meant anything in, you know, in edibles. I think better beats first. I think consistently better is beating first, and you're seeing that in U.S. states-
- seeing it in Canada. So I think that's, you know, you'll see that eventually with pre-rolls and vapes, but, you know, edibles is a perfect case study.
Yeah, the brand loyalty and brand quality really winning out in that subsegment.
Yep.
Well, Mike, thank you so much. I think that is a perfect place to end.
All right.
So hopefully we'll have you here next year, and we'll see what the status of federal regulation is, is then. But until then, thank you so much for joining, and thank you, everybody.
Thank you.