Cronos Group Inc. ($CRON)

All right. Good morning, everybody. This is the consumer track. We are in the blue room where we're about to hear from Cronos Group, Chairman and CEO, Mike Gorenstein. Mike, thank you for being here. Cronos is a leading cannabis LP who in 2025 started putting its ample cash balance to work and that came with results. Year-over-year, 2025 revenue was up 25%. Gross margin rate basically doubled year-over-year. So Mike, again, thank you for being here.

Where I want to get started is Canada. I want to start in Canada because for the longest time, supply and demand were imbalanced. It seems like it's gotten better, but I want to hear from your perspective, maybe how supply and demand in Canada has evolved, how the relationship has evolved and where you see it today and where you see it going forward.

Yes, and thanks for having me. It's a great question. I think that what you saw early days, these cycles are starting to get smaller, but as soon as you have a real buildup of demand because of the access to capital in Canada, you had a lot of people overbuilding. A lot of people tried to get big before they got good. And so just because you had numbers of supply, that doesn't necessarily mean that you had good supply and that supply would actually sell or consumers would want it. So you had a lot of shutdowns. You had a lot of struggles there. And I think as things started rationalizing, you then had finally, people were also built for Europe and then you had Europe start to open. So now you have people that are able to ship product to Europe, and that caused more of a shortage in Canada because you simultaneously had supply come offline and you had additional demand. And so I think that really did lead to a shortage. You've also had the CRA start to collect not a lot, but collect a little bit more, which I think gives people some pause. So yes, we feel like there hasn't been enough supply, but my assumption is always that we'll reach equilibrium and be prepared for supply to outstrip demand. That's why it's so important for us to think about quality and efficiency. So I think you've seen in the past years, we're pretty deliberate about how we expand and we have a place to put supply. And for us right now, and for the last, I guess, 2 years, we've really been struggling to keep up with demand. So having GrowCo online is pretty important for us.

And we'll definitely get to GrowCo, but I want to spend a little time on Spinach. It's, I think, the #2 vape brand in the country. It's SOURZ edibles, 20-ish percent segment market share. And in flower, it's probably about the #4 brand. So maybe how did you build a brand like Spinach in an industry and a market where building brand equity and brand loyalty is pretty hard.

Yes. I think one of the things that makes it hard is if you, as a company, come out with double-digit number of brands and those brands don't have anything unique. It's just the same strains in each brand and you're finding ways to push product. We really thought of Spinach is what is the demand we have and how do we get supply to fill the demand. And I think that approach was much different than others that were building out supply and saying what brands can sell our supply. So it's really starting with the consumer and working back from that. It's not a coincidence that we -- primarily in Canada, almost all of our revenue is Spinach. I mean certainly, Lord Jones, it takes more time to build. That was the first thing. And then I think also starting with product. So building from product up, making sure we actually have something that's differentiated, something that has a better value proposition. And that's where you see SOURZ and now PUFFERZ is the newest example. That's what the strategy has always been is have products and those products will build the brand versus a brand sort of just attaching to me-too products.

You mentioned PUFFERZ. Is that the innovation you're most excited about now? Is that the newest? Can you maybe talk to us about what that product is, what need state it's trying to fit?

Yes. So the success you've seen in vapes is really we've been in 510s, but we've taken a pretty long road for all-in-one, same is with SOURZ and edibles where we didn't launch immediately, but we kept doing all the consumer work and the R&D to make sure we can hit a need. And so all-in-one has been a big category. It's been growing, and this is our entry into it. And I think our long-awaited entry that probably a couple of years coming. So it's just -- it's a differentiated device. It's -- the fact that we have a boost button that can give you a really large hit or you can have something that's more normal and giving that toggle. The way it feels in your hand, if you've been able to grab one yet, yes, I think it's a great feeling for consumers. We want it to be something that you could take everywhere with you, fits neatly in your pocket. The actual texture doesn't roll off of things. So just a number of kind of insights we had that we wanted to make sure we provided and then still the same flavors that we have in the 510s that have made us really successful.

And the other big kind of inflection that I mentioned in the intro was on the gross margin side. It doubled basically year-over-year, but 4Q was a little bit lighter than the previous quarters in 2025. So maybe what was abnormal about the profitability in 4Q? And where can it go back to going forward?

Yes. So part of the Phase 2 coming online for GrowCo, that's a 70% capacity ramp-up. And in doing that, there are certainly challenges. I would expect the full year for '25 gross margin to be what things look like going forward as Cronos stands today, excluding the Netherlands. But we have things like there was a -- despite the meter running the whole time, we got a catch-up electricity bill in January that was, hey, here's extra -- and it's a government utility, you can't really change that. Just what we have to do to get kind of overtime labor and bring people in when you have that 70% expansion, producing more of Grade C than Grade A. So just in terms of like trim versus flower. So I think just temporary ramp-up thing that gets smoothed out, and I think you'll see the facility dialed in pretty quickly.

So let's spend some time on GrowCo. You have some of the first grows that have come out of there. What are the early learnings from the expansion at GrowCo? And how long does it take for the new capacity to get to the standards of, call it, the legacy GrowCo capacity?

Really not that long. I think we have the same facility. It's generally the same team, although you need certainly more people. A lot of it is scheduling. You get into a cadence of how things move through from flower rooms to your dry rooms to vault, how you fill orders, how you process it. And so just getting that scheduling down, making sure everyone is trained and dialed in. But overall, it's the same process. It's the same processing facility. We just expanded the glass part. So I think it's pretty quick.

You talked a little bit ago about how demand had exceeded your supply availability of product. So with this extra capacity coming on, what tough allocation decisions are removed? Like what kind of impediments to growth are now removed with this extra capacity?

Yes. Frankly, I think it's Canada. So when you saw us go from #1 flower brand and move down to #4, you also saw Israel grow. You saw other markets in Europe grow. We've definitely been playing a game of trying to make sure we allocate and keep people happy, but also try to build demand in new markets. And so finally having that online being able to fill channels is something that feels really good. Of course, the plan is always to have demand outstrip supply. We -- part of making sure that the brand is in a good place is not having to oversaturate market. So we'll keep working on the marketing side and looking at different ways of expanding, but I think it was a really important step to get that out and take care of our first primary market.

GrowCo is kind of one aspect of this kind of I want to call it new phase of Cronos where you're putting more capital to work. You did some M&A. You made an investment in Canada's largest cannabis retailer. So what convinced you maybe after years of not much cash leaving Cronos to start putting capital behind ideas? Like I assume you had ideas the whole time. What convinced you like now is the time we need to start acting on some of these ideas?

Yes. Look, I think it's a couple of things. One, as I mentioned before, for us, a lot of the focus was let's -- like early R&D was really important, making sure that we dialed in operationally, it's a lot easier, and this is very different than a lot of what happened in Canada, but it's easier to get really good at what you're doing and then expand than to expand and then try and dial it in later. So as the efficiency there, we then feel more comfortable to grow. But maybe one of the bigger things is that you don't have a flood of capital coming in the industry anymore. And I think that's led to some of the asks of external and third parties coming down. So we see more value where we've never really been a look at relative value type of company, like if it doesn't pencil if I can't see that it's a better return than treasuries, and we're not doing it. And I've been told that's harsh by people. It's one of the first questions I ask whenever I have a conversation with someone is like, can I do better by whatever it is you're suggesting than treasuries. And...

Interest rates going up help the treasury yield, right?

Right. So maybe that's a factor. But I also think that you see markets start to mature. When I look at a market, you always have to forecast some price compression. There's different market structures, but eventually, they start moving towards a pretty similar equilibrium and understanding that and modeling it, we can be patient and wait until things move there. And then I think we're able to find a place where we'll win based off of being able to optimize, bringing our portfolio of IP and brands over. But modeling something on crazy margins doesn't work out.

So you put more capital to work. You still have a cash balance, I think, over $800 million. What does it take? And maybe is it a change in U.S. legislative outlook, but what does it take for you to put even more cash to work?

Look, we look at a lot of opportunities all the time. There is on strategy opportunities that are accretive. There's nothing stopping us from doing them. Obviously, the U.S. is still the biggest opportunity long term. I have gotten to the point where I don't really like bet on regulatory change. So it's sort of when it happens. But yes, I think you're seeing growth in Europe. I think you're seeing things move. People probably never would have thought Netherlands would have been a big opportunity, but I'm really excited about that market. And so I think regulation is moving. I think that supply-demand rationalizing and markets maturing really is what's key.

We'll get to the Netherlands. What is your expectation for the U.S., right? Like people -- the executive order happened in 2025. There was some very encouraging language within that executive order suggesting a quick time line. We haven't seen much since. So what's your expectation for the U.S.? Is it a 2026 rescheduling year?

It's really difficult to predict, and I've always tried to stay away from. Well, that's why I'm trying. I try to stay away from predicting. What I will say is I think that we probably have a -- you've got more volatility in this administration as far as what potential outcomes or actions there are. I think that's a good thing because if we're following a normal political process, given where things stand, it's tougher to get things through. And a reality is we could wake up any day and it could be done. And you could see almost any outcome. And I think that we need that. We need some type of high variance. So I'm more optimistic than I have been in past years, but I'm also -- part of that is it's really, really difficult to predict. And so it's making sure that we're positioned the right way, making sure that we're ready to take advantage of it. We have the benefit of a really great partner that we have infrastructure in the U.S. that we can immediately leverage. So I think people don't talk about hemp enough. I think that how hemp gets regulated, there's going to be some potential horse trading around that. How will that affect rescheduling or eventually descheduling is really important to watch. I do still think it makes sense to have a harmonized framework. But I think there's other priorities at the moment.

Okay. Another -- one of the other investments you made that I referenced was into High Tide, Canada's largest cannabis retailer. For years -- or years ago in Canada, some of the LPs did pursue like a partially owned retail model where they own some stores. You did not. But 9 months ago, you made that investment. So why 9 months ago do you say, I want exposure to the retail tier when for so long, you hadn't had that exposure?

Yes. I mean I think, look, first, and there's a few different reasons for it. First, I think it's a great company, and I think it's a great investment. But more than anything, it's actually that same philosophy carried over. It's that we wanted to preserve the independence of retailers and the independence of suppliers. And this is making sure that the leader in retail in Canada could stay independent. And I think that it's an investment sort of in a model that we're winning in and making sure that the brands are ultimately what consumers are choosing and not choosing because of different ownership structures. And so that's really what drove the decision from a high-level perspective.

Got it. Now let's go to international. There's been a lot of excitement for Germany. There's a lot of investment in Germany. You're a part of it, but maybe it's not -- maybe it hasn't been like as large of a focus for you as it has been for some others. What would it take for you to get more excited about Germany and to make a bigger kind of investment into the country?

Yes. First, we're very excited about Germany long term. It's probably be one of the most important, if not the most important market in Europe. But just this comes down to regulatory certainty, I think, is a major one, seeing what happens with telemedicine, what happens with delivery, having that certainty would go a long way. We're in a phase now. We're still building demand, getting our brand out there. We're seeing good growth. But without that certainty on what potential changes to the model there are, it's really hard for us to invest. And we're still growing in the meantime. So I think that -- and I think also, again, like some of these other markets we talked about, you're seeing price discovery change a little bit. We want to be able to know kind of where prices go to, what supply levels are. And so if there's that much uncertainty, we're happy to supply and partner with others. And if we have certainty and we see something that's attractive, it's something that we're not afraid to move when the opportunity is right.

Does the relationship with High Tide give you kind of a more asset-light access to Germany at some point? I mean they can be maybe a conduit between Canada and Germany. Is that something you plan to use for the -- for German exposure?

Yes. Look, I think it's a great relationship to have and something that certainly can be helpful. We also have other relationships. We've been in Germany before the deal. So we're focused on whatever the best way to get brands to patients are, whether that's through High Tide, through Cansativa, through another partner. We look at all options.

Okay. On Israel, it's a country where you're already quite large. It's been growing. Has the recent conflict with Iran, has that disrupted anything in Israel? But more importantly, over time, where do you see Cronos in Israel going in terms of size and profitability?

Yes. Israel has been a great market for us. As a wholesale brand supplier, we're pretty clear #1 share now, roughly 23%. I think it's got potential to be a great market for a lot of different reasons. You do not have a strong illicit market. In fact, the illicit market is essentially purchasing from the legal market. You've got high usage. It's a pretty high GDP country, but it's unfortunately been a tough few years. I think that we're built to withstand sort of adversity, which is why you've seen us kind of grow and be really successful in the last few years, but that certainly held back some of the reform people have expected, some of -- we wanted to change. I think it's a market that's really important to have boots on the ground. It's -- the time we spend in the market is really important. But we've kind of adjusted to the way life is, right? You're in meetings and you're used to there's a siren goes off. You have -- within 8.5 minutes, if your phone gets the alert, we've got on-site bomb shelter, everyone gets to the bomb shelter and then the meeting continues. So we've been fortunate that we haven't had any damage to the facilities. Our people are safe. We've learned how to deal with people going in the reserves. We've learned how to deal with shelter in place. We're still an essential business. So we -- there's all types of different contingencies we plan for, but Israel is still moving. And I think when things are over, there's potential upside. And when you look at what the actual patient counts are for population, you compare it to other medical markets, you could see it pretty easily 2x or 3x from here. And so it's similar to the U.S., it's just when that becomes the priority, there's just really pressing security concerns that I think are front of mind right now.

Okay. You brought up the Netherlands earlier. You recently announced the acquisition of CanAdelaar there. It makes you a prominent Dutch player right off the bat. I guess let's start with what got you excited about the Netherlands, but also in the context of that market, as I understand it, is still an experiment market, and it has an expiration date. So how did you get comfortable with those assumptions and those criteria when deciding to enter?

Yes. So I mean it would sound almost the opposite of what I was saying about certainty given that. But I look at it as you've got now 50 years of this history of having a tolerated market. And so for those of you who aren't familiar in the Netherlands, the retailers or coffee shops are essentially allowed to supply product to consumers, but the growers that actually sell into the coffee shops are completely illegal. So you can get arrested for going and selling to one of those retailers, and it's not the most logical. And I think the Netherlands is approaching this is like we want to have safer, transparent supply chain. We want to get rid of crime. And the way they've approached it makes it clear that their objective really is eliminating all the kind of criminal organizations around it. And so I love the idea of having licenses that can actually start in these different municipalities. It would be really difficult to imagine saying, okay, now -- I don't see them getting rid of the 50 years of history of retailing and it'd be really tough to like, yes, after these 4 or 5 years have decided, everyone is going to go get product illegally again. That's like -- it's just very, very unlikely to me a question is sort of where does it evolve? How does it expand? Does it extend? I love the approach that making -- this is the only market I've seen with -- maybe medically in Israel, but the legal market has an advantage over the illicit market, and that's very rare to see in any market. So I like that. I think structurally, CanAdelaar has an advantage of being the only commercial greenhouse in the program. So that gave certainty. And we modeled it out even if the program is not extended, we still would recover our principles. So I think that was a pretty key thing for us.

What can you build on -- they've been operating there for a little while. What can you build on that they've already done, either revenue opportunities or cost synergies that you can bring with your infrastructure? Or what can you build on that they've already put in place to take it to kind of the next more exciting level?

Yes. We definitely don't look at this as a cost synergy acquisition. I think of it as a pretty valuable platform for us. For years, we've been doing a lot of R&D, whether it's genetic breeding, developing, the #1 edible with SOURZ. We're really excited about PUFFERZ. We've just got a portfolio of IP, and they're a much younger company, even though they're very profitable and very, very large as a market share leader, being able to tech transfer that over, that's the whole model of borderless products for us. So having another platform, we can take what we have and put it into the Netherlands, that's where we see the opportunity. They still haven't launched vapes in any meaningful way. So being able to get brands over there and do that, being able to get SOURZ in market. That, I think, is where we can do it. And when you think about brand leverage in Europe, the Netherlands is really kind of like the core of where cannabis culture came from. And I remember 20 years ago, I went there and I was like, wow, that'd be really cool to be -- imagine if we legal one day -- but I will say, I think that the market, it hasn't really changed in 20, 30 years. I mean maybe 50, I don't know because I've been there that long ago. But you've seen a lot of shifts in terms of product quality, innovation in North America, and you just haven't really seen that in the market there because you haven't had legal investment and you haven't had really long-term views on products and brands.

I think we touched probably on 5 countries as we kind of went through. We did Canada, U.S., Netherlands, Germany, Israel, 5. So outside of those 5, what countries have you most excited? And then we'll kind of wrap up because we're getting a little tight on time.

That's a bunch. I'd say markets where you're seeing growth and seeing potential. And again, everything often depends on regulatory change. So obviously, we're always optimistic or hopeful of things moving in the U.S. But I think U.K. and Switzerland are 2 markets that you're seeing progress forward, potentially Italy at some point. But we're monitoring. I think that it tends to -- as you get progress in one country, it tends to help the neighboring countries. So you've got a little corridor there that's really starting to move.

It's a good start. All right. For the last one, what aspects of the cannabis industry and Cronos in particular, do you think maybe are not appropriately appreciated?

Yes. I think a lot of times, I mean this is a really basic one, but with us, there's a general perception of like a market cap versus enterprise value and most people generally assume that your enterprise value is higher than your market cap. That has not been the case with us. I still get a lot of questions about our debt, which we don't have. But we have a growing profitable business. It's growing pretty fast, and profitability is increasing. We have a lot of opportunities to grow organically with M&A and active buybacks. So I think we're really excited and understand that the industry isn't necessarily as, I guess, favorably looked at by investors as it used to be, but I think not all companies are the same. And I think we've shown we're pretty disciplined and opportunistic and can operate the company.

I think that's a perfect spot to stop. Mike, thank you for joining us. It was wonderful.

Thank you.