Q3 2019 Earnings Call
Good morning, My name is Jay and I'll be your conference operator for today.
I would like to welcome everyone to the calling US group third quarter, 2019th earnings Conference call.
Today's call is being recorded.
At this time I would like to turn to cold over two and actually Matt investors Relations Ma'am. Please go ahead.
Thank you Jay and thank you very joining us today to review cone Escharex third quarter, 2019 financial and business performing I.
I'm joined by our Chairman, President and CEO , Mike Weinstein, and our CFO Jerry Barbato earlier, this morning credit <unk> and news release announcing our financial results, which are filed on SEDAR and Edgar profile.
Well the prepared Mount Mark will also be posted on our website under Investor Relations.
Before I turn the call over to Mike I'd like to remind you that our discussion. During this conference call will include forward looking statements that are based on assumptions are subject to risks and uncertainties that could cause actual results could differ materially from those projected in the forward looking statements management can give no assurance.
Any forward looking statement will prove to be crack.
Forward looking statements during this call speak only as of the original data. This call. We undertake no obligation to update or revise any of these statements except as required by applicable law.
Remember proceed at the cautionary statement and risk factors, including the company's most recent on DNA and annual information form by which any forward looking statements made during this call our qualified in their entirety.
We will now make prepared remarks, and then when they took question answer session with that I'll turn the call overnight.
Thank you Ana and good morning, everyone.
In the third quarter 2019, we continue to strengthen krona Scoops foundation for long term growth and success by staying focused on our core strategic initiatives.
I like to begin by sharing or developments in both product and brand launches and what you can expect to see from us in the future.
In the third quarter, we made significant progress in expanding our brand portfolio to include additional brand that resonate with adult consumers.
We closed the acquisition of Redwood in the third border and are very excited to have such a talented and creative team joined the Kronos family.
Right wouldn't manufacturers markets and distribute after I PBD infused skin care and other personal care products.
These products are sold online into premium retail and hospitality partner channel under the Lord Jones brand.
During the third quarter lower Jones introduced several new CBD products to the U.S. market.
We launched the Lord Jones heavy duty Cholbam.
A nursing bomb that melts on contact leading skin with all the team finish and the Lord Joan CBD Formula Basle, which are small batch baffled made who pink Himalayan salt arnica magnesium rich apps themselves.
When you look pedals, and a unique blend of turkeys and essential oils to help support body relaxation.
Lord Jones collaborated with Tamra, Marilyn co founder of luxury shoe brand, Jimmy Choo and apartments luxury footwear brand camera Mellon to develop the hemp derived CBD formula stiletto Gram per foot application before and after wearing shoes.
These new personal care products are part of the broader product portfolio that can be found that over 800 premium stores, including retail brands, such as Afoura soul cycle, Neiman Marcus and other boutiques in the U.S. as well as direct to consumer because a large and web site.
We look forward to continuing support Lord Jones best in class attempt to ride CBD products and innovation pipeline.
Our goal with Lord Jones is to preserve the integrity of the brand while providing additional resources to capitalize on the significant demand for have to ride CBD products.
Today, we are also very excited to produce and introduce a new have derive CBD brand launching in the U.S. market piece plus.
Piece, plus the developed with positivity in mine and the brand philosophy is about more than just making better high quality have derived CBD products.
The brand Ito stems from the belief that well being can lead to a better world full of positivity in possibility. This belief extends beyond the products going into everything the brands seeks to do and stand for the piece was motto is add to life and we're excited to share. This brand the new group of consumers in the U.S.
This quarter piece lots intends to begin selling have derived CBD takes your products. There were test mark to market of approximately 1000 retail stores in the U.S.
Redwood, we'll manage the launch leveraging altria sales and distribution network to accept the convenience store retail channel in order to gain consumer insights and products feedback prior expanding distribution more broadly.
We're very excited to be able to bring this brand to establish traditional retail channel that has been underserved with respect to quality have derived CBD products.
As we move to new geographies trade channels product format and launch new brands, we remain fully committed to leadership in the industry the responsibility.
As always we welcome open dialogue and look forward to working with industry peers regulators and governments to allow for reasonable regulation to prevail and ensure the advancement of consumer education Science research and elevation of standards for candidates consumer products, both domestically and internationally.
Turning to distribution in the Canadian market, we recently added the province of Alberta to our domestic distribution network for adult these products.
Chronos currently sell drive flower pre roles and Canada's oil through with adult use brands code and spinach two candidates control authority in Ontario, British Columbia, Nova Scotia in Prince Edward Island, as well as to private sector retailers. This has got to on.
While these six provinces together represent approximately 70% of the Canadian population the infrastructure for the adult use cannabis market is still in its infancy and is slowly being developed.
The number of retail stores as well as warehousing logistic needs are in the process of catching up to meet the demand of consumers. As a result, we were still not able to fully reached the long term total addressable market represented by this population.
On the International front Kronos, Australia has recently completed the previously announced IPO raising $20 million Kronos now hold and approximately 31% ownership stake of prone Australia.
As we mentioned on the previous call Kronos, Australia will also adopt our asset light model and expect to import and distribute piece naturals branded products to the Australian medicinal cannabis market, while also developing its own branded products.
The Kronos, Australia IPO enables Kronos group to continue to participate in Kronos Australia's growth as it works to become the market leader from it isn't ocana best in the Asia Pacific region.
We also feel its IPO demonstrate a way that we can unlock the value of hidden assets on our balance sheet.
From this group is always maintained an asset light approach to production capacity and you've often heard us say our business model is not to be the farmer.
We believe that there will be value created across many verticals in the candidates industry. However, we see sustainable long term value in the areas of research and development and marketing innovative branded products.
We firmly believe that the best way to create value to the supply chain is by working with contract farmers and suppliers to support our capacity needs versus full vertical integration.
We are structured our supply chain with efficiency and flexibility in mind by creating a global network of co manufacturing joint ventures, Let's first class operating partners to meet the company's needs.
But as supply comes online we were also procuring cannabis and cannabis dry products from third party producers to supplement our production and drive supply chain efficiencies in both Canada and in the U.S. for him to ride CBD.
As new product categories come online regulations change domestically and new markets open internationally, we expect to see our mix of wholly owned assets transition to being used for fermentation manufacturing and packaging for branded products certain facilities that piece naturals will be partially re purpose from cultivation to provide for.
More R&D activities production and manufacturing of derivative products and will allow for increased volte and warehousing space.
This is a natural evolution as our business progressive and there are times, we have to update our facilities to ensure we are achieving our goals.
We also continue to make progress at or international production and manufacturing facility in Israel as we move closer to operational readiness construction of Kronos. Israel's greenhouse was completed in the first half of 2019, while the manufacturing facility was completed in the third quarter of 2019.
Management now beginning the GMP certification process for the facility, which is expected to occur in phases throughout 2020 in relation to the manufacturing processes for bottled flower pre roles and oil.
As we continue to diversify our supply chain. We're also pleased to close the acquisition of prone instrumentation.
This advanced facility is expected to provide the fermentation and manufacturing capabilities, we need to capitalize on the progress underway with Gingo by works.
From a fermentation facilities include fully equipped laboratories, covering microbiology organic and analytical chemistry quality control and method development as well as two large scale fermentation production areas.
Earlier. This month, we were pleased to welcome to Kronos from EBITDAX fermentation and experienced team that includes engineers scientists and production and quality assurance personnel to support the breakthrough research and development and commercial production plan at this facility.
We continue to be pleased with our gingko partnership.
We're making good progress and are on track to bring this disruptive technology to market and we feel that Kronos fermentation will allow us to accelerate that progress by optimizing the can avenue I fermentation manufacturing process in advance of a commercial scale rollout and ensuring that we had the industrial fermentation infrastructure license and ready to go.
I'd like to close my remarks by discussing our highest priorities.
Which is expanding the business and aligning our organization to execute on innovative strategies to drive shareholder value.
Last month, we put into place a realignment of our organizational structure at the senior leadership level and added a new member to our board of directors.
As we continue to enter new markets and product categories. It's critical that we manage the company in a way that meets the evolving business needs.
We announced a new general manager position accountable for territory specific sales and operations for the Canadian and European market.
Jeff Jacobson, the former head of sales and business development, who has been with the company and piece natural since 2013 will be taken on this role and will now be responsible for operations sales and manufacturing in Canada in Europe .
Jay just cross functional knowledge will help us scale in the Canadian and European markets.
In the U.S., Rob Rosen neck, co founder of Redwood and the lower Jones brand, we remain CEO Redwood and will also assume responsibility for Kronos groups operations marketing and brand strategy in the U.S. hemp derived CBD space, including lore, Jones piece, plus and the pipeline of brands and products under development at Redwood.
With this shifting resources and responsibility David to Chief operating Officer, and William Health and Chief Commercial officer will be transitioning from the company the ended the year.
On behalf of myself and the entire Kronos group team, we extend our deepest gratitude to David and Billy for their service and contributions to the company.
They played a pivotal role in the creation and growth at the company and we wouldn't be where we are today without their hard work and dedication.
This realignment will foster new ideas focus our business priorities and influence how we examine and find efficiencies across our organization.
In addition, we welcomed a new board member from Altria Jodi Bagley, who currently serves as a senior vice president of tobacco products for Altria group in which he oversees altria is core tobacco businesses as well as their engineering quality and product development.
Mr. Begley in place is one of ultra its previous director Designees Casey Cross way.
Overall, we believe that we are positioning the company for long term success by investing in innovation and responsibility and ultimately in our business.
Our strategy is focused on long term sustainable growth and we believe we're building will continue to resonate with consumers and will generate long term shareholder value.
With that I'll turn it over to Jerry to provide discussion on this quarter's financial results.
Thanks, Mike and good morning, everyone. Both our press release Mdna includes comparisons of our financials for the same period in 2018.
As we shared last quarter, we believe the best way to evaluate our business and the industry is the comparison on a sequential quarter basis as comparisons to the prior year do not reflect the current operating for regulatory environment.
I will focus the majority of my comments discussing the third quarter's performance versus that of the second quarter of 2019.
Turning to Q3 results. The company reported net revenue of 12.7 billion in the third quarter, a 24% increase from the second quarter.
Revenue for the quarter was driven primarily by opportunistic sales into the wholesale channel and the inclusion of financial results for the Redwood acquisition.
We remain focused on an efficient inventory management, while ensuring we can meet demand in the future for the products available today and the derivative products coming online shortly.
As the market evolves and cultivation capacity across the industry growth the wholesale channel will be utilized opportunistically buy kronos.
We saw an opportunity to sell product that would not be used for home commercial use into the wholesale channel before prices compressed further the wholesale revenue decrease the overall asps for the quarter.
Although our debt a sps in non U.S., barcas was 42% lower quarter over quarter at $3 and 75%. The Graham sold we still maintain a healthy total gross margin before fair value adjustments of 41%.
This is due to lower cost of goods sold for wholesale sales at this channel doesnt require post processing and packaging, nor does that incurred excise taxes.
Turning to operating performance metrics in Canada kilograms of cannabis sold increased 98% to 3142 kilograms in the third quarter of 2019 from the second quarter, primarily due to wholesale shipments.
Operating expenses for the third quarter of 2019 totaled 34.8 million, representing an increase of 32% from the second quarter.
This increase is primarily driven by higher R&D expenses higher professional fees for services in connection with various strategic initiatives and higher gene a expenses tied to increase headcount and marketing spending in preparation for the upcoming Canadian derivative and U.S. product launches.
The company reported and adjusted EBITDA loss of 23.9 billion in the third quarter of 2019.
The loss increased by 35% from the second quarter.
This increase is primarily due to higher operating costs associated with sales marketing and R&D, partially offset by an increase in that revenue.
We will continue to invest in infrastructure people and capabilities to support future growth.
The company reported an increase in that income from the third quarter, primarily due to the change in fair value of the financial derivative liability associated with L. Three is investment which is described in more detail in the M. DNA and the financial statements.
In the third quarter Kronos group recorded a non cash gain of $835 million related to the change in fair value of these financial derivative liabilities compared to a noncash gain of $264 million in the second quarter.
Growth continues to expect their baby significant reported earnings volatility, primarily driven by the fair value quarterly adjustments related to the movement of Kronos group stock price.
Turning to the balance sheet. The company ended the quarter with approximately $2 billion in cash and short term investments a decrease of approximately 332 million, primarily driven by the acquisitions of Redwood and the Kronos fermentation facility during the quarter Kronos also announced that it had entered into a credit.
It agreement with grow CFO for 100 million dollar term loan credit facility to fund the construction of the previously announced custom built greenhouse and for general operating purposes.
Roko has drawn down $27.5 million against the term loan as of September Thirtyth.
We remain focused on having a disciplined and balanced manner and how we deploy capital one which makes sense for our business and is aligned with our strategic priorities.
Capital expenditures for the first nine months of the year were $50.7 million.
This spending includes investments that are piece naturals campus Kronos fermentation, our Israeli facility and device technology innovation that Kratos device labs.
I'd like to provide an update on our capacity disclosures as Mike mentioned, we remain focused on an asset light strategy, we will continue to balance our own cultivation capacity with buying cannabis and cannabis derived products from third parties.
Historically, we have the disclosed all potential capacity at our facilities that are mdna.
Starting with a third quarter and going forward, we've removed the capacity table with our own facilities the ability to source from third parties and the on ramp up Roko and Kronos is real for the future. Our current disclosure is more accurately reflect how our business is evolving and how we are running the business by balancing our sourcing needs.
With our own production.
We are constantly evaluating the best use of our own assets of facilities.
As you saw US announced this morning, we are optimizing our peace Naturals campus for alternative uses like additional R&D facilities and derivative product manufacturing.
At this time, we estimate the pre tax onetime charge of these updates to be no more than $15 billion, primarily related to asset write downs.
I'd like to wrap up by continuing to discussion from last quarter about my priorities as CFO .
First as I mentioned on the last call we need to have an ERP system that can support a global business and an ever changing industry.
We have selected the vendor who we believe can best provide us the right solution and are actively working on the full scope and bids requirements before implementing the upgraded tier one ERP system.
I will provide updates on the status of this implementation as we continue to progress.
Second I continued to remain focused on improving our financial reporting process.
Active December 30, Onest 2019, Kronos will become a domestic issuer with the SEC and will no longer qualify as a foreign private issuer.
As a result, we will report our fourth quarter and full year 2019 results in us gap with the US dollar as the reporting currency. We are currently working through the process of migrating to U.S. GAAP reporting while our segments may change overtime. We currently anticipate having two reportable big business segments the unit.
Thanks, Dave and rest of World when we file our results next quarter. We will also provide historical financial information in U.S. GAAP for comparative purposes.
My focus is on continuing to develop a robust and flexible financial reporting process that gives us the ability to incorporate future changes in the business.
Overall, while we are generally pleased with our progress in the third quarter and the first nine months of the year, we realized that we have a significant body of work to do in order to achieve our long term goals and strategies.
With that I'll turn it over to Mike for closing remarks before Q today.
Thank you Gerry.
For those that had been following kronos for a long time, you'll know that our plan has always been to learn from Canada to develop intellectual property to build an elite team fuel iconic brands and to create a turnkey solution that we can deploy and other markets like the us when they're available to us.
We know the canvas market is real and we believe the opportunity it's huge.
But no one of the industry can force the market to be open immediately at full run rate without using existing channels.
Unlike the U.S. Temporize CBD market, where we can distribute their established infrastructure and Canada, we're developing all new distribution channels, and we can't move faster than the channels open.
We're marketing new products to consumers in new ways and it will take time for existing consumers to switch from the illegal market and for new consumers to adopt new products.
So we continue to invest in researching consumer needs globally, and developing products that meet those needs and we believe strongly as ever that now is the time to continue to allocate capital to R&D and brand development.
We want to continue to be a first mover in innovation, which we believe will position us for long term success.
We are excited and energized by the next phase of the industry and of our business.
One thing that we know won't change about this industry is that it will continue to take disciplined strategy and flexibility to succeed and create value in the long term. We believe the opportunities are large and are excited by the prospects of entering the Canadian derivative market and the U.S. attempt to rise CBD market in a meaningful way.
With that let's now open the line for questions.
Thank you Sir.
At this time you back to take kind of question. Since you may have for US today to ask your question. Please press Star then the number one on your telephone keypad again thats, our one ordinary telephone keypad to withdraw your question. Please press the pound key theme. If your question to one question and one follow up question on the.
Please standby, while we compile the Q any roster.
Our first question comes from line of Michael Danbury Piper Jaffray. Your line is Soufun.
Good morning.
Good morning.
You talked about your asset light model again as you kind of course can you give us a sense. You also mentioned you had some wholesale purchases in the quarter.
Maybe just give a sense of the magnitude of those and then as you look ahead.
What stage are you in the transition to where you would expect or want to be in terms of really taking advantage of lower cost inputs as a buyer growing relatively little and getting a.
The margin benefit from that can you just give a sense of.
What timing might be and when when to expect a turning point on the margin side.
Sure.
Most sales what do wholesale in the quarter, which resulted in our lower ASP and as the market evolves and cultivation capacity across the industry growth. The wholesale channel will be utilized opportunistically to better align our inventory screened with the adult use consumer demand and I think over time, you know what new form factors in Canada.
And sales from have derive CBD products in the US. We believe this will result in a sales mix weighted more towards adult U.S sales and less towards these opportunistic sales through the wholesale channel.
And I think what what you'll see is as.
There is more and more supply of inputs.
Flower based or otherwise crude oil and we see more stores and were allowed to launch derivative products.
The cost of getting those input is going to continue to come down as more and more supply comes online and so I don't think were quite where we want to be in certainly would transition where we want to move from being the one that are producing that to being the ones that are sourcing that and between being able to produce ingredion.
Through Kronos fermentation and Kronos grow we expect within.
Our supply chain as well as third parties that over the next year things will transition pretty rapidly towards margin improvement.
And also I think we're not split for cost to come down, but again, they may pens and other derivative products in Canada to.
To be available to us and I think were while certainly will improve we're already seeing in the U.S. and that helped drive CBD side that the price for ingredients is certainly coming down and there's still work, we can do to optimize that but I think the market will run its course and continue to make.
Those those inputs to become more and more cost effective for us.
Thanks, That's helpful. And then just a follow up on Alberta from the revenue side, you're launching their that that's obviously world stores or can you give us a sense of what we should expect maybe from a topline trajectory.
Both some sense of the opportunity, but also how not to get.
Expectations too high on what that might do.
Yes, I think you know as Youve heard me say last few quarters, we don't know it's appropriate for guidance at this time, there's a lot of of shifts that are difficult to predict we haven't idea of where things and long term but.
Considering where we're about a month away from the first derivative product launch how things will will play out over the next few munched months is difficult.
It really assess so I think I'll hold off on further comment on specifically what numbers will be but overall, we're excited for the new opportunity.
Okay. Thank you very much.
Thank you next question comes from the line of John's Antero ups.
Capital markets your line is stupid.
Thanks, Good morning.
That's what the peace plus testing and lower Jones can you talk about what the margin profile is on these products versus your existing portfolio and I'm not sure. If you can share exact details, but but any directional commentary in outdoor Jones has been growing or perhaps seasonality would be helpful. Thanks.
Sure I think.
Comparing the products, we have a quite a wide range that would be really difficult to speak too.
Speak to specifics I think you will see among the different skus. There there are so different in different price points.
That is.
I think hard to generalize, but I would say that lower Jones is.
Generally.
The.
Premium to ultra premium brand, it's going to be.
Higher margin and lower volume than the rest of our product portfolio.
But we do see just given the environment the ability to communicate consumer benefits.
To build.
Community with our consumers and way that is.
Much less constrained than men in Canada, we do have.
The stronger opportunity piece, plus we're going to in the process of launching so we're excited for that and excited for you to be able to see what were overcoming Atlas.
Okay. That's a that's helpful. Thanks, and then my follow ups on Europe .
You've now got an executive with oversight in Europe , It's Mike you've spoken about the attractiveness of that market and can you talk about your expectations for.
For the region as it is immaterial in 2020 or do you look further out another particular countries that you find attractive.
Yes, Europe I think what we're seeing and again this goes back in my comment on guidance and why we're being hasn't provide guidance at this point a lot of it is certainly driven by regulations, but we are seeing that with with respect to the can avenue and product mix that the trend seems to be towards open.
Thing up for non intoxicating can avenue wide similar to what we're seeing in the us and still there's a lot of restrictions and things that may slow down the in the more medicinal.
Regulated THC side, so we would expect that.
Meaningful growth is likely to be more from non talks hitting and intoxicating.
Okay. Thank you very much.
Thank you next question comes from the line Andrew Carter of Stifel. Your line soup.
Thanks. Good morning first question the point 9 billion in sales for a lower Jones. The came in the quarter can you give us an indication of kind of how representative is is.
That is of the business to state in terms of this distribution channels kind of what we should expect from the contribution of that took to really meaningful step up in the fourth quarter or is it more of a step up in 2020.
Yes, so that.
The Redwood acquisition took place September fit so with a partial the partial month and I wouldn't read too much into the partial month revenue I don't think it has a fair assessment of what the run rate will be going forward.
Okay I'm just kind of second question kind of thinking you mentioned, the new products, what kind of wanted to understand where you stand today in terms of new products submitted to health, Canada is your expectation to get those products as soon as possible. The December or will we see more of our await into kind of the calendar first quarter.
Yes, our focus is getting.
They pans out in the market as soon as possible. So some of them we have submitted.
And again, we're hoping for December but because of the timing.
It's tough to predict whether its end of December beginning of January .
But our focus is really rolling that out to start and then phasing in other derivative products, we certainly have IP product formulations around.
Topicals and edibles, but specifically with edibles, what we haven't been able to see is.
How are the packaging rules.
Specifically around single serve versus Multipacks.
Going to resonate with consumers, we have formulations that have been tried and tested very successful with with consumers in markets, where you can sell multi pack, but we want to make sure that the before we launch that we have a little bit of market data on on how best to satisfy consumer needs.
Got it thanks I'll pass it on.
Thank you next question comes from the line increased carry of Bank of America. Your line is open.
Hi, good morning, guys.
Morning.
So.
On the last call.
He said that you're U.S. CBD sales could be bigger than.
Canadian cannabis and in 2020.
And I guess just.
Taking the war John's run rate and fully appreciating.
Thank you said, that's that's not really typical.
Going to be that.
Constructive on on a go forward.
But we still haven't seen guidance for FDA.
You have you had appear report last week that was calling out.
You know increased competition.
But clearly you know, especially in the context of going U.S., GAAP and reporting segments on us for the rest of world.
It's pretty clear what your intentions are and so I wonder if you can just.
Maybe address the puts take Sean on how you know 2020 is mix might look in.
Not really looking for for guidance at all but just kind of.
Reading the tea leaves on some of the developments you've seen over over the past few matson, how the how that might inform how things shape up over the next year.
Sure I'd say, we're certainly only a few months into our entrance into the CBD market, but just one one illustrative example, when we're thinking about a test market and just starting off with the brand that we're announcing today piece plus.
We're comparing that to Canada in Canada, There's a total of 24 stores in Ontario and for the CBD brand launch our test market is a thousand stores, so I think being able to leverage.
Altria distribution is a huge advantage and our ability to scale.
When we talk about increased competition. We're we think that the opportunity is is very strongly we are.
I'd wide open that we're not going to go into any environment right now where there isn't competition that really just shows that it's a fragmented market theres opportunity and market leaders have not yet commanded dominating share so.
We're very excited we think we have enough advantage on the distribution side.
And we think that between large own piece plus in the other other brands that you'll be hearing about in the in the near future that we can have meaningful contribution.
And I just would point again too.
On our side being able to leverage existing infrastructure, we don't need to go and build out the retail stores are way for them to be built for us.
Get CBD product on shelves. So I think we have just a little bit more clarity, it's less of a comment of what what that means for Canada say in two years or three years. It's just when you can see the stores open and you know the demand is there and then you can address it at side easier for us to be comfortable.
Who is showing where contribution comes from.
Okay that makes sense.
Then just.
On a follow up.
So you've got 2 billion in cash right, which at current cash burn is like 41 quarters I think by my math.
Which I think it makes a lot of sense actually to be to be measured on cash, especially given the.
The capital raising environment right now, but you know just as we go forward here.
How do you think about deploying that cash obviously.
Yeah, I come back to you know changing reporting segments to U.S. and the rest of world. So again, it's it's quite clear what your intentions are.
Is this is just the type approach, where you perhaps day patients.
On any potential change to us law or.
Or is this is just a function of.
Not having the.
The types of investments right now that you think are the most interesting for the long term and it makes more sense to to hold off just just how are you thinking about.
Broader deployment and the sorts of geographies or assets that you might be interested in.
Sure I think.
First as and when you think about some of the markets. We're in today.
It's not simply financial modeling is little bit of game theory that comes into it and so when we look out how things develop and the timing and when you talk about cash burn and.
Being able to.
Wait for the market the come open I think having the capital.
As being able to be patient wafer things develop and watching what happened.
Is it something that we looked at whereas a year ago everyone's focused on speed I think the focus is going to quickly shift to survival and we want to be in an advantageous position to be able to capture that market when it comes online.
As far as thinking of the global picture and whats available to us.
There's been a lot of capital that's poured into cultivation ingredion supply, but it's interesting when you look at most.
Most of how capital deployed and allocated in CPG typically you would think about researching and addressing different consumer needs and we actually think that there has been an under allocation of capital there and then towards.
Research and development against those consumer needs and that's right now where we see the opportunities making sure that.
When there is retail infrastructure open and when there are laws that allow us to be in the markets, where there is the biggest business opportunity. How are we making sure that we've got the best internal landscape and product portfolio and as part of that mapping exercise also what the best targets are.
To be able to go and execute against that and really be able to translate when we look now with the.
Breathable market that we can't address in the short term something that we capture and are able to start generating durable margins and long term shareholder value.
Makes sense makes sense. Thanks, so much.
Thank you next question comes from the line of time Chen of BMO capital markets, you're likely to fund.
Yes. Thanks.
First question on the Canadian business. This past quarter on you mentioned that most of the sales came from.
LP market or the wholesale channel so I'm just wondering.
What does that say about your ability to sell more in the channel. You mentioned this was opportunistic but it seems like you were alluding to that.
Right mix of products that maybe the provinces are consumers are looking for.
Is this is this big Elpida LP sale you had this quarter really a onetime thing or is this something.
Until you.
And your mix, that's better with consumer demand.
More gradual for you to push further into the channel.
Yes, so I think the adult use cannabis market here in Canada is still in its infancy and that means consumer preferences are evolving rapidly as new consent consumers entered a legal market and new products become available and we are aligning our production as well as our third party.
Pool that we've collected to make sure that we're matching consumer demand with what that our inventory. Additionally, as we continue to roll out. This third party strategy, we're going to make sure that we're adapting quickly to consumer demand that being said, we believe that the launch of derivative products is where the brand equity will be built.
With consumers based on quality product differentiation and the ability for brands to match their brand eat though to the derivative products that they sell.
Unfortunately, the current restrictions on marketing and branding for flower products don't really allow for this and contribute to an environment, where it's difficult to build the brand off of flower alone that being said that we believe that the marketing activities that we have executed our creating brand equity. So that once we have the right screens in the marketplace and these derivative products.
That you'll see positive reaction from adult consumers.
Got it okay. Thank you and my follow up is on the U.S. aspect as well.
Just wanted to better understand given how did you mention competitive and fragmented and also the regulations are showing they give us right now in the U.S. CBD market.
I hear you.
To leverage.
But could you speak to other parts.
Believe.
Stand out in this market, whether its product development M&A branch strategy, just trying to understand if you're going to see store channel as a test market what specifically are you.
For on is it all the above that I just mentioned.
We still think of 2020.
Gradual trajectory and basically a test year for CBD before you learn more and you really further develop your CBD strategy 2020.
Sure I think for peace plots and something that we plan to expand gradually throughout the year as we get market learnings and see expansion opportunities.
But what we're really testing for and hoping learner and all the fat so the value equation for specifically here for the tincture category, so consumer preference that consumer insights pricing merchandising.
Insights from the retail partners.
Flavor than it's important for us to get that and.
2000 stores because.
As we look at expanding when you go from 1000 210000 to 50000 100000, we want to make sure that we understand.
Just a logistics around what type of volumes are which skews are going to be moving because there is a lot certainly there will be plan there.
But we think that product development that.
Generally.
Brand and brand management is going to be they're very important.
Like any other consumer category. There is something simple about what we need to do is find out what consumers want and we have a good idea what consumers want and deliver it to them.
I think that there is.
With the different brands will see a lot different channels that we target that aren't just specific to alter distribution.
Lord Jones, I think the only CBD brand and you can go into support our in store and purchase being able to.
Go to places like soul cycle or the standard hotel that are really about brand building.
And I think differentiate more jones and the products that you'll see that.
It's.
Very unique like the into the back salt and Tamra Mellon stiletto pre in some of the other products. You mentioned, we think that's ultimately what the market looks like in the future is differentiated products very differentiated segments.
Okay. Thank you.
Thank you next question comes from the line map Bottomley Canaccord.
Canaccord Genuity airline soup.
Good morning, just wanted to touch again briefly on on your strategy for the 2.0 implementation.
Are you thinking of of launching it.
Does that at a more muted province by province level similar to what we saw it and sort of the dried but an oils and cannabis is we'll call. It 1.0 or are you planning on attacking a broader I guess breadth of markets right or to the gate in Canada.
Yes.
If one of the things that we've been doing is trying to make sure that we internally add logistics and understand how to work with the provinces. So now that we've opened relationships with provinces.
We don't see going and reverting back we make sense for us to continue expanding among the.
On the provinces, but once we've opened to relationship with province, as our focus is really on satisfying.
Satisfying those channels and being able to deliver product so I'd say the.
The way that we approached it with with 1.0 in terms of not wanting to go to all 10 problem to the ones and have so many skews it was difficult to manage we're thinking of it as starting specifically with a focus on on base and then expanding different types of products and layering those in.
So it's still the same idea, making sure that we can stay disciplined and focused but we see proliferating than a little faster than what we did 1.0.
Great. Thanks, and just the second question just switching to the CBD side of things, just obviously, including the lower Joan tempt derive sales that hits your books, how many markets or regions are those and can you give any color on what the distribution distribution points are today.
So specific to two more Jones said roughly 800 stores.
I think about those stores I think a little bit differently than the C stores those are channels like for a full cycle Neiman Marcus a lot of luxury boutique stores.
A lot of the sales, although there is the DTC direct from the website.
And I think online will continue to be.
A place where we see more margin will certainly be scale coming from the wholesale channel meeting into retail stores.
But as that mix will continue to expand and then with piece plus we're seeing that more of a mainstream market so convenience stores grocery stores.
Specialty shops, and they carry CBD products.
Channels channels more like that.
Okay. Thank you.
Thank you next question comes from the line of Korean Kindler, accompanied capital your line is open.
Hi, Good morning, Thanks for taking my questions I wanted to follow up with respect to the comments on the the asset light model and understanding that you're removing the disclosures of capacity at the various assets.
As it relates to grow Coke given what we've seen in the supply demand dynamics and you mentioned earlier that you think inputs are ultimately going to get cheaper in the wholesale market has there been any discussion are viewed to rightsize macro facility because it was no. They could be expected capacity from from lots disclose who is expected to be quite substantial.
Sure when when we've had discussions and maybe I'll go back to originally the whole concept behind grow Kyle.
With the belief that there would be a drop in prices in some form of commoditization on input we looked across Canada and said, what's what the comp for a plant you grow that.
There is going to be price compression and you can be successful and we looked at lettuce Tomatoes cucumbers strawberries and what you find is there is two or three two or three groups that really dominate all Canada and really in any of those agricultural ventures and.
Yeah move cheese or one of those groups. It was our favorite group in our first deck and rather than simply sitting back and waiting we went and we recruited them and we knew they would move into cannabis at some point and so it's not simply about supply demand I think.
Driving some of the efficiency, they're going to be necessary for us to be able to compete.
Indeed in the market and being able to.
Have a close relationship and being able to make sure that the right. The right products are being produced is important but at this point weve.
We've seen I think almost every year, the mucci that builds and other greenhouse and we havent seen the addressable tomato market or strawberry market or cucumber market grow, but it's about driving efficiency and certainly while its competitive.
During the day of consistently had the ability to succeed and thrive and hypercompetitive commodity agricultural markets.
Okay. Thanks, and then as a follow up.
With respect to a higher proportion of wholesale in the quarter I understand that sell Lam has largely been challenged.
During the period in the market, but I was wondering.
What is there any read through there with respect to or any color. You can provide with respect to Kronos is brands that retail what the demand is like what products have been popular.
Given the higher proportion that allocating product into wholesale this quarter.
I don't know that theres much read through there and I think one thing and we talked about being opportunistic I think the ability to see sort of what was coming in terms of changes in prices certainly drove us to be a little bit more proactive there.
The when you look at aided awareness.
Theres a lot of third party studies you can look after aided awareness that gives you. Good idea of how brands are doing I think that is something that read through is very positive for our brands.
But ultimately because of the way the system works.
And the timing it takes to align skews there certainly is.
An element of production planning that.
Without being able to work directly with the retailer and quickly adapt to skews, when we find out which which are skews or in demand.
And when we launched with with listings that were early on we were essentially producing base off of Liftings and some skews or more popular than others. I don't think it was necessarily based off of brand. We're still really in a point in industry, where when you go into a store I think consumers are picking based off of strain or skew rather than brands.
No.
When when some skus move faster some skews just had much more in depth in based off of the way that we planned our production.
It made sense for us to having turned over some of the inventory and then be able to reallocate production to other skews that would say there was more demand and we had supply for and one of the way to think that we can make sure. We address this is by going forward, having everything role to a GM accountable.
For the territory, we have production planning flash operations and demand planning in sales all rolling into the same function and I think that that's something that will help smooth that going forward and I also think that would derivative products the ability to pivot your manufacturing to meet shifting demand it's a much.
Faster cycle, then with cultivation.
[noise], Okay. Thank you very much.
Thank you again, if you will die cast a question. Please press Star then the number one on your telephone keypad again Thats Star one on your telephone Keypad next question comes from the line of seen Lee do Fitch High risk management. Your line is soufun.
Hey, good morning. Thank you very much for question just turning back to the peace boss brand I was hoping to get a little bit more color on kind of what the brand positioning will be is this something that's going to say something like something to the effect of power by lower Jones or is it going to be completely separate brand on its own.
It's a it's a completely separate brand and certainly I think there is there's a halo effect that we expect to get from more Jones, but it's got its own positioning it its own formulations and it's it's really targeted to a specific channel. So we think that consumers are different than the more Jones.
But.
Consumers are increasingly more were not just of of the brand but of that accompanies behind it and what other brands might be produced so we do think that there is.
There's a lot of benefit that we get from having those under the same platform.
But you will see them look quite different and the website is up so you'll be able to take a look and understand what we're positioning and and I think probably get some readers and what that will look like and what we're repairing for in terms of.
Expanding and other other product formats.
And then just turning to the re purpose you have a portion of the peace Naturals facility. How much of this was driven by kind of achievement philosophy.
Kronos to be more heavily focused on derivative products R&D in more of a global view versus a reaction to the competitive cultivation environment, and then kind of the below par rollout of some of the retail locations in some provinces.
Yeah.
It certainly this is not a change in philosophy I think that this was more of a recognition of timing and how things are pacing in one of the reasons, we like having an indoor facility is.
First large facility. We built is the ability to have optionality in being able to pivot from cultivation to downstream manufacturing.
I think that when we when we look forward and the fact that right now there is.
Due to the number of retail stores or.
We think that they're the headwinds in terms of oversupply.
Makes sense for us to really take this is the perfect opportunity to begin converting from more in house manufacturing for derivative products. It's really been are always our philosophy, we just.
I think in terms of timing.
We're going to wait a little bit until we had grow co or fermentation fully up and always thought once we were able to get.
Lower cost and more consistent inputs that it's something that we would do and I think that it's certainly been choppy on we believed at one point oversupply would come earlier than it seem that will come later and I think now the tier we're executing against the plan that we've had.
If I could just squeeze one more on that side of your estimate of the cost to be no more than 15 million is there anyway, you could share in kind of what percentage of the cultivation space will be covered it.
Yeah, we're still working through that so based on preliminary preliminary work that we've completed to date and in the spirit of transparency. The company currently estimates that it's a pretax onetime charge will be no more than 15 million.
And we have a team working diligently to identify all the assets that will be subject to the write down.
So we will provide additional color in the fourth quarter and full year results.
Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect have a great day.