Key Takeaways From Cronos Group’s Q4 Earnings

by Trefis Team
Altria Group, Inc.
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Cronos Group, a vertically integrated Canadian marijuana producer, published its Q4 and full year 2018 results on Tuesday, missing market and Trefis expectations. While the company’s quarterly revenues rose by close to 250% year-over-year to CAD 5.6 million ($4.2 million), driven by Canada’s legalization of the recreational marijuana market for adult users early in the quarter, net losses widened due to higher spending. Below we discuss some of the key Trefis takeaways from the company’s results.

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Canadian Market Growth

While Canada legalized its recreational marijuana market on October 17, 2018, Cronos did not provide an exact breakdown of what percentage of sales came from the recreational space. While Cronos says that its cultivation capacity isn’t really a bottleneck at this point, many Canadian producers have highlighted processing and packaging issues. The company currently ships to Canadian provinces including Nova Scotia, Ontario, British Columbia, and Prince Edward Island, and is planning to expand to larger markets including Quebec and Alberta after it gets its operations and supply chain running smoothly. Separately, the process of expanding into new provinces is also complicated by supply chain issues and the federally required tax stamps that must be added for each province. Overall, the company noted that it had sold a total of 1,040 kilograms of cannabis over the quarter, including dried flower and cannabis oil, up from about 349 kilograms in the year-ago period.

Closing Of Stake Sale To Altria

Cronos closed its deal with Altria on March 8, selling a 45% stake in the company in return for a cash infusion totaling about CAD 2.4 billion (roughly $1.8 billion). Besides the significant cash investment, which should help Cronos to bolster its R&D spending, allowing it to speed up projects such as its development of cultured cannabinoids, the company should stand to gain meaningfully from a strategic standpoint as well (related: Why Cronos Group’s Partnership To Produce Cultured Cannabinoids Could Be A Big Deal). For instance, Cronos previously indicated that Altria could help it turn cannabis into a more standardized consumer product. Specifically, Cronos could use Altria’s help in areas such as vape pens and pre-rolled joints, which are typically higher margin products, considering Altria’s extensive experience in the cigarette and vaping market.

Capacity Expansion

Cronos has been making reasonable progress with its capacity expansion plans, as it looks to cater to legalization in Canada and growing interest for medical marijuana in other western markets. While Cronos can grow over 40,000 kilograms on an annualized basis, after it commenced operations at its recently constructed Building 4 facility, the company will also add about 70,000 kg of additional annual capacity via a new joint venture that could come online in phases over 2020. The company already has some supply agreements in place for this new capacity. For instance, it has a deal with Cura Cannabis to supply 20,000 kilos of cannabis annually on a take-or-pay basis.

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