December 18, 2018

CannTrust Holdings Inc (TSE:TRST) CEO on Pelham Expansion Progress

Midas Letter
Midas Letter
CannTrust Holdings Inc (TSE:TRST) CEO on Pelham Expansion Progress

CannTrust Holdings Inc (TSE:TRST) (OTCMKTS:CNTTF) (FRA:C9S) CEO Peter Aceto discusses the company’s Q3 revenues and addresses concerns about CannTrust’s expansion plans in Pelham, Ontario. He states that Phase 2 of the company’s expansion, which will allow CannTrust to produce 50,000 kilograms of cannabis annually, should be completed by the end of January. Unfortunately, Pelham has placed a temporary moratorium on cannabis permits. As a result, CannTrust’s Phase 3 expansion, which would push production to 100,000 kilograms of cannabis annually, is currently halted because it requires the approval of additional permits. However, Aceto stresses the company is having productive conversations with town representatives and expects to complete Phase 3 construction by the end of 2019. CannTrust is still planning to uplist to a major US exchange and is taking steps to move to the NYSE.


James West:   Peter, welcome.

Peter Aceto:  Thank you. It’s an honour to be here.

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James West:   Yeah, you bet. So Peter, this is your first time on as the new CEO of CannTrust, so I want to start with an overview of the company’s financial performance in the last reported period, quarter ended September 30th, wherein it was revealed that CannTrust is actually a profitable company. And so is that going to continue, or is that a one-time just blip on the radar, or is that going to keep going?

Peter Aceto:  It’s a great question, and it’s one I get asked a lot about, because it does seem to be different than some of our competitors. So yeah, I t we’re really happy with our revenue 4number in Q3, and we had EBITDA number this year, which is good.

For us, you know, it’s very important for us as a company to be trusted with our shareholders, institutional investors, our patients, our customers, etcetera. So that financial rigour, financial discipline, smart capital allocation and profitability and revenue increases is fundamentally part of our strategy. So that is something that shareholders should expect to see more of in the future.

James West:   Uh-huh. One of the things that stands out to investors, and you see a lot of it in the social side as people are talking about, well, where is CannTrust’s Constellation Brands? And I like to point out to people, well, they’ve got a partnership with Apotex, which don’t really know the details of, but I’m wondering, does that have a bearing on your ability to partner with large consumer brands?

Peter Aceto:  So partnership is important; I think it’s fundamentally part o our strategy going forward. I mean, we are really, really good at certain things, but in order to grow and expand globally and into different verticals, partnership is going to be important.

So yes, we’ve got a partnership with Apotex which we’re thinking about as we think about cannabis from a pharmaceutical perspective, but also international expansion. But we’re really, really proud of some of the other relationships we have. One is with Kindred, which is the Canadian cannabis subsidiary of Breakthrough Beverage, the number one alcohol distributor in Canada, and we’ve got an exclusive arrangement with them where they’re representing our four cannabis brands for the recreational market from coast to coast. and I think their skills and their abilit8ies in retail and understanding branding and educating the people who are selling coast-to-coast in retail distribution that’s a really important relationship for us that we’re already seeing bear fruit.

We’ve got a relationship with National Access Cannabis, which has the ambitions of opening 200 stores coast-to-coast, so that’s an important relationship for us as well. And of course, like others, we’re talking to many other potential partners that give us a lot to be excited about in the future.

James West:   Was Altria – Altria was one of the companies, they mentioned that they were talking to CannTrust.

Peter Aceto:  Well, we did speak to Altria along the way. I’m not sure if they shared that openly, but yeah, we do know that they spoke to many of us in the cannabis space.

James West:   So I guess at this point, is there a sort of a business line that contemplates the production of cannabis as an ingredient in an extracted and concentrated form for, like, consumer beverages and food product?

Peter Aceto:  Absolutely, and I would say that is fundamentally core to the CannTrust strategy. So yes, I mean, we’ve been very much a leader on the providing of medical cannabis; very much a leader in terms of educating physicians. We’re seeing quite an acceleration on that as well. But another one of our competencies really is our extraction capabilities. 70 percent of CannTrust sales are in oils and capsules, so we really think we’re the leaders in Canada when it comes to extraction, and with new legislation expected not too far away, we’re calling it edibles legislation, but it think it has a much broader impact than edibles. That science, that innovation, the nanotechnology that will ultimately allow cannabinoids to be an ingredient in beverages, in topicals, in medicinal applications…we think is really, really important. And we see a significant increase in demand coming from those changes, and CannTrust is positioning itself to be a leader there.

James West:   Okay, great. In terms of the expansion of CannTrust’s production footprint, there’s been some discussion on Reddit where it’s been suggested that CannTrust has not been forthcoming with some of the challenges that might be being face in things like permitting and licensing for both Phases II and III, and especially in the context of the City of Pelham, who put a moratorium on cannabis licensing for a period of one year. So how would you sort of address that? What is the status of Phase II and Phase III in the context of the City’s licensing?

Peter Aceto:  Yeah. So I’m glad that you asked the question. We’re very aware of these conversations that are going on in the marketplace and just really much prefer to just talk about them openly. I’ll say before I answer the question, and I will very directly, which is, you know CannTrust really has been about trust. Also one of my personal values in terms of my leadership throughout my career has been very much about transparency. So we certainly want to lead the way in terms of transparency and trust with all of our stakeholders.

So here’s the update in Pelham and our views going forward. So we had Phase I, Phase II, Phase III; let me just talk briefly about Phase II. So Phase II is expected to be completed in the month of January; I believe what we’ve communicated to the marketplace is that our hope was that that was going to be done by the end of 2018, we’re actually pretty close, which should get us in a position where, from an annualized production capacity, we’re at about 50,000 kilograms annualized. So we’re off maybe 30 to 40 days on that one, but I think we’re really in the home stretch. We’ve got three rooms coming onboard in the next four weeks, and that will be the end of Phase II.

Phase III, which I think is some of the discussion about, we have 10 permits with the town of Pelham. You’re right, they have felt generally a little uncomfortable about the amount of cannabis players that are in their area, and they have put a temporary moratorium on some of the permit granting. Now it was really interesting in our case; we bought an additional 19 acres of land adjacent to our land, and actually, if those had been combined before we submitted the application, we would have had all of our permits approved beforehand – but here we are.

So we’re in regular conversation with the Town of Pelham. We still think that our Phase III plans are very possible, that that can continue to go forward.

That being said, we’ve got obligations to our shareholders and we need to drive our business forward, so we’re looking at alternatives as well. For example, using our property for outdoor grow, and accelerating that. That, we don’t need town permitting for; we do need Health Canada approvals for, and we are taking steps already to seek that. We’re talking to other greenhouse providers in Ontario, but also all around the country. And I think in the future you’re going to hear us talking a lot more about outdoor grow and ideal environments to grow outdoor, particularly for the extraction market.

So I think what’s really important from a shareholder perspective, or from any stakeholder perspective is, our hope was that at the end of 2018 we’d be at a 50,000 kilogram annualized production capacity; we’re pretty close. Our plan with phase 3 was to be at 100,000 kilograms annualized by the end of 2019, so we’re optimistic that we’re going to be able to maintain that commitment.

The other thing we’re able to share is that we were able to repurpose something that we already have on that land, so we’re going to be bringing an additional 35,000 square feet on in the first quarter over and above what we’ve already talked about. So that’s exactly where we stand.

Things are a little bit different with the town of Pelham, but the conversations are still ongoing. They have not stopped them in any way. We’re actually optimistic that all of the commitments that we have made and our view about our plans in the next 18 months are all very, very much on plan.

James West:   So you say you have 10 permits associated with Phase III in place?

Peter Aceto:  Mm-hmm.

James West:   And it’s only the Town of Pelham that’s holding up what has been permittable by these other ten agencies?

Peter Aceto:  No, no my mistake there. So we have 10 permits that we’ve submitted that haven’t yet been approved, and they were caught up in this temporary moratorium by the Town of Pelham.

James West:   I see. And is there a definitive timeline on the moratorium, or is it just sort of like a subjective, whenever we feel we are comfortable again, we can re-initiate the licensing process?

Peter Aceto:  So my understanding it’s the latter, that it isn’t they won’t consider anything for 12 months; if that was their view, then we would definitely have, my answer would be different. We’re continually in conversations with them, and we’ve certainly received not signs that we’re not going to be able to proceed.

But as I said, we have to pursue other options, as well.

James West:   Has anybody pointed out to them the financial benefit of having this operation in their economic jurisdiction?

Peter Aceto:  Yeah, I think it was pointed out, I think it was in the Reddit thread. I mean, we had people at the Town Hall meetings to make sure that, we’re a good, we employ a lot of people in that region, very, very engaged employees. So I think you’ve got to be thoughtful and careful. There’s two sides to this story, but certainly we’re trying to show them that, yeah, it’s in everyone’s best interest if people like CannTrust can make Pelham their home.

But there’s a lot of other options, and to be very honest with you, the inertia as this cannabis expands very, very rapidly, I understand why people, if they see things coming quickly, they want to slow things down and just be thoughtful about it, and I think the rational thinking will work in the end of the day. But we have a business, so we’ve got to make sure that we continue to drive forward and we have options.

James West:   Okay. And previously there was some discussion on CannTrust’s part about an uplisting to a major US exchange. Is that still in progress?

Peter Aceto:  Absolutely. So we announced in our Q3 earnings call that we were going to be listing on the New York Stock Exchange. We have continued since then to take steps to do that, and it continues to be our plan to do that. We’re working a little bit on the paperwork and those, but things are moving forward very, very nicely.

James West:   Great. Okay, so then, in 2019, what are the big milestones that your investors should be keeping their eye out for that will be representative of shareholder value?

Peter Aceto:  Yeah, I think that’s, so, first things, what you pointed out in terms of what you might see from a running, smart business with financial responsibility, smart capital allocation, revenue growth, engaged employees and happy customers – I mean, you should continue to see that from a quarter-to-quarter basis, because we’ve very, very focused on those things, as well.

We want to continue to be a leader when it comes to growing high quality cannabis at a very low cost, and we think we’re the best at doing that today. But as we see this market shifting from a supply and a demand perspective, as we see new legislation coming, we want to be a leader when it comes to innovation and product development. So we’re really spending a lot of time and energy on the science and the product development side, from a health and wellness perspective, from a beauty perspective, from a recreational perspective, and, of course, from a medicinal cannabis perspective.

James West:   Wow, that’s great. All right, Peter, we’ll leave it there. We’ll come back to you soon. Thanks for joining me today.

Peter Aceto:  Yeah, it was a great pleasure to be on. Thank you.


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