Q3 2020 Cronos Group Inc Earnings Call

[music].

Hi, My name is Jenny and I will be a conference operator today.

I'd like to welcome everyone to the condos group third quarter 2020 earnings Conference call today's call is being recorded.

At this time I would like to turn the call every two Shaley <unk> Investor Relations. Please go ahead.

Thank you Denise and thank you for joining us today to review Kronos group's third quarter 2020 financial and business performance today I'm joined by our President and CEO Curt Smith, our executive Chairman, Mike Goergen, Steve Our CFO, Jerry Barbato in our VP of legal and regulatory affairs, assuming some furnace group issue.

A news release announcing our financial results. This morning, which are filed on our garden seed our profile. This information as well as be prepared remarks will also be posted on our website under investor Relations before I turn the call over to Mike I would like to remind you that our discussion. During this conference call will include forward looking statements that are based on assumptions that are subject to risks.

And uncertainties that could cause actual results to differ materially from those projected in the forward looking statements, including as a result of the factors described in the cautionary statement and risk factors included in the company's earnings release and regulatory filings, including the company's most recent annual report on form 10-K, and quarterly reports on form 10-Q.

Hi, which any forward looking statements made during this call are qualified in the entirety. In addition during this call certain financial measures may be discussed that are not recognized under the U.S. generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management and planning forecasting and evaluate and business and financial performance.

Including allocating resources reconciliations of these non-GAAP measures to their closest reported GAAP measures are included in our earnings press release furnished to the FCC, which is available on the pressroom section of our website. The Kronos group Dotcom. These non-GAAP measures may not be comparable to measures used by other issuers I'd also like to note that we are conducting or.

Call today from our respective remote locations as such there may be brief delays cross talk or minor technical issues. During this call. We thank you in advance for your patience and understanding we will now make prepared remarks, and then we'll move to question and answer session with that I'll pass it over to Kronos Group Executive Chairman, Mike corn seed.

Thank you Shane and good morning, everyone.

I'm proud to speak to you today as Kronos as executive Chairman.

As many of you know after careful planning and thoughtful consideration we expanded our leadership structure with the appointment of Kurt Schmidt as our new President and CEO in September.

And I've transition to the executive chairman role, where I will lead the board and worked with her to continue to drive Kratos group strategy going forward.

I am incredibly confident that Curt will help prone to build on our strong track record of growth and lead us toward many more industry defining accomplishment.

Kurt is a highly experienced consumer package goods executive with the expertise to push grown up even further.

During its three plus decade career, Kurt has built a track record of driving outstanding performance at some of the most respected global consumer goods company.

Including Blue Buffalo, Natalie Gerber and crafted.

He has demonstrated tremendous success partnering with founders of startups to accelerate growth and.

We are excited to leverage his expertise as ccrone with continued do fans.

When I met Kurt as part of my year long search for someone to take over the CEO role. It was immediately apparent that he is uniquely suited to drive the company's next phase of growth and uphold our commitment to lead the industry forward responsibly.

The passionate believer in our mission and potential of our incredible company.

I'm excited to partner with Kurt to leverage growth the strength and continued to deliver best in class brands and products to our consumers.

Our industry is new but that doesn't mean, they can't learn from seasoned executives from adjacent sectors.

In addition to Kurt we further strengthened our senior leadership team by adding Shannon buggy Senior Vice President Global head of people.

Before joining Kronos Shannon was the SVP of global human resources for Nielsen, where she led HR strategy for Nielsen media.

With over 25 years of experience Shannon has a proven track record of leading and managing global human resources team.

As we prepare for the next chapter ensuring our employees throughout the organization are taking care of it is of the utmost importance.

We've come a long way and the industry at large has evolved in a short period together.

Together, we forged a truly differentiated business model with great brands technology strategic partner, a strong balance sheet and importantly, a great team focused on driving results.

As I look at Kronos today, it's clear that the opportunities before us are more exciting than ever.

We look forward to continuing to launch innovative cannot benoit product in Canada and to foster a portfolio of U.S. have derived CBD brand.

Internationally, we're excited to bring our products to more pockets of the world as regulations evolve and continue to establish ourselves as industry leaders.

I want to thank the talented team the Kronos, who have brought us this far and continue to push us forward.

Over these past few months I've had a crash course in the industry challenges and opportunities.

As well as things that matter most to Kronos and how my expertise can help push us forward.

For those who do not know me well I want to share some of my key beliefs and leadership principles.

I believe and creating high quality products for consumers and the importance of building brands that exceed consumer expectations.

I've seen companies rally around products, and feel immense pride and bringing quality products and consumers.

In brand marketing at Kronos.

And the Canadian market I look forward to sharing my more details soon on innovation launches to the adult youth market.

Our innovation team has been working diligently undercut to hone our next generation of product for our brands.

Them to more consumers as a focus of mine is the Canadian market continues to grow and sophistication and socks.

A pre rolls and oils as well and as of October krone.

Kronos Israel's in market with peace naturals branded dried flower annoyance.

Although I have not been able to get to our Israeli operations due to coal, but we.

Yes, we have had extensive virtual team meetings and I look forward to working with them in person.

We have an excellent opportunity to be leader in this rapidly growing medical market as well as the potential don't use market when it opens up.

I've had the opportunity to spend time with Todd and our partners I can't go regarding our fermentation Mark.

And branded sales that will help establish relationships with our consumers.

There's a top tier talent across this organization and I'm excited to lead this impressive team and to the next phase of growth.

With that I will turn the call over to our CFO Jerry Barbato.

Thanks, Curt and good morning, everyone.

Turning to our financial results. The company reported consolidated net revenue in the third quarter of 2020 of $11.4 million and 96% increase from the prior year period.

Revenue growth year over year was driven primarily by the continued growth in the adult use Canadian cannabis market.

The inclusion of Redwoods financial results.

Our us hemp derived CBD business that was acquired in September of last year, and the sale of peace Naturals branded cannabis products to the Israeli medical market, partially offset by nonrecurring wholesale revenue in the Canadian market in Q3 of 2019 and strategic price reductions on various adult use.

Cannabis products in certain Canadian provinces in the third quarter of 2020.

Axles branded cannabis products to the Israeli medical market.

Partially offset by nonrecurring wholesale revenue in the Canadian market in Q3, 2019, and strategic price reductions on various adult use products in certain Canadian provinces in the third quarter of 2020.

Looking briefly at the expansion in the Canadian cannabis market. We are encouraged to see the continued growth of new retail locations in provinces, such as Ontario, providing.

Providing more convenient options for consumers to purchase cannabis products responsibly.

Gross loss for the rest of World segment was $2.2 million, a $1.4 million decrease in losses from the third quarter of 2019.

The improvement year over year was primarily driven by an increase in revenue, partially offset by an increase in cost of sales driven by a higher volume of adult use sales and the associated third party flower purchases and a decline in wholesale sales.

As we work to create an efficient global supply chain through 2020 and beyond for our rest of World segment. We anticipate that gross margins will continue to fluctuate as price and mix change from quarter to quarter.

Reported operating loss in the rest of World segment for the third quarter of 2020 was $18 million, representing a $3.2 million decrease in losses from the third quarter of 2019 the.

The improvement was primarily driven by a decrease in general and administrative costs driven by a reclassification of $4.6 million to corporate expenses in the third quarter of 2020, which had no effect on the company's consolidated statement of net income.

And an improvement in gross loss, partially offset by an increase in R&D spending.

Turning to the U.S segment reported net revenue in the third quarter of 2020 was 1.6 million a 143% increase from the third quarter of 2019.

The increase year over year is primarily driven by a full quarter of results in the third quarter of 2020 as opposed to 25 days in the third quarter of 2019.

Despite some weakness due to cope with restrictions we won't accept that as an excuse and we are pleased with our performance in the U.S.

Alright with oversight from the audit Committee has completed internal testing on all of the eight controls identified and it's remediation plan.

The testing by our independent Otter is in process on certain controls and will progress onto testing the remainder of the controls the route 2020.

Lastly, following the implementation of our new E. R. P system across our Canadian business, which went live in July we have also commence work to broaden the reach of R. E. R. P system to R. U S business, which is expected to be launched in the first half of 2021.

I continue to be encouraged by the work our teams are doing globally.

With that I'll turn it over to Kirk for closing remarks before Q&A.

Thank you Gary.

Provinces, so quite strategic in nature.

And you know as we continue to refine our global supply chain throughout 2020 and into 2021, we expect gross margins are going to continue to fluctuate as price and mix can change from quarter to quarter.

In our us business I think it's a little bit different right.

We've had a heightened promotional activity related to cove it.

Decreased that promotional activity in the third quarter margins.

Margins did improve sequentially and we remain confident in the long term viability of this U.S.C. CBD market.

Yeah, and I I, you know I can't think of a better person to have in this world so to be able to guide us on this so I think that's important and I think that's important strategic markets.

Versus looking at alternative markets right now so.

Mike I don't know if you want to add anything yeah no no.

Kirk thing or are are focused in my focus is there's always been sort of the endgame number one priority is the U F th the market, we expect that the biggest.

Biggest profit pool, and looking at different scenarios and different structures for us it's about how we enter it not not weather.

Whether we enter and of course, the regulatory environment, and we'll certainly dictate when and how that is but.

It's top of mind for us.

Got it thank you very much.

Your next question comes from the line at Andrew Carter.

<unk>.

Hey, Thank you good morning, So I want I want a double click on that gross margin question, because I I I think we all see the price competition on flowers and understand you're kind of lower your prices kind of to keep a gas in line, but what I'm not clear on is kind of a third party cost and you mentioned a lot of inventory is it an issue where the third party.

High quality flower costs are not decreasing at the same rate.

I guess I would ask if that's for our you upside down on prices and how do you see that see that alleviating kind of like the high quality flower and and being able to kind of get your supply chain line, where you have the cost to serve sort of the Canadian Dalton's Margaret.

Yeah, I like Jerry comment as well, but this this.

Reising issues from a couple of quarters, though so I think we're going forward your you're saying the <unk> you know.

Better better raw material pricing, but we still you know we've got this inventory and pass so I see that alleviating itself as we move forward as demand. It gets more insane uhm supply gets excuse me it gets more in sync with the demand side.

Jerry.

Yeah, Yeah, Andrew just to add a little bit more to that we are seeing that are third party purchases. The price program is coming down even for the high quality high THC.

But you really have to separate that inventory based on flour and oil and where it's going and we use the weighted average cost. So that cost will go down over time, but like I talked about and Curtis said in the short run there's just a lot of deflationary pressures of the Canadian market that we have to work.

Through.

Okay got it and then second I want I wanted to ask about Israel, because I think you reported 500000 sales outside of North America. So I wanted to understand I think Israel's kind of my estimates about $250 million annualized market work at that business look like for next year and could Israel actually be a bigger driver of growth.

Essentially next year than Canada. Thanks.

Yes. This is Kurt.

Yeah, <unk>, what really positive on Israel, I mean, it's early stages yet.

But.

The patient count continues to grow so we can see that.

Growing at a pretty.

Good clip and then we are I think position very well there.

Just received our certifications what required for cultivation in production and marketing a dry flour pretty roles in oil drops in Israel, and we're now selling drive.

Schedule, even if the Democrats so to sum it in the White House I'm curious, whether you I share that opinion or if you were more optimistic.

Well I think look I think that's a timing issue I think.

You know I think that.

One of the important things and Oh.

Maintain this was.

Getting past the election, and you know, allowing for Matt just a political process perspective, everyone to sit down and look at what's the best way to putting regulation and put in policies whether that stimulus.

At this point was it.

Competitive pricing damaging price caps price elasticity is price caps relative to the illicit market any incremental caller would be helpful. Thank you.

Yeah.

Go ahead Jerry.

What I would say you know as is typical of most C. V. G companies, we perform a regular strategic review of the landscape and look at differentiation amongst our brands, both cold and spinach byproduct format and price point.

And during that we found that we wanted to better align our pricing versus are desired competitive set so we adjusted to better fit into the group for our respective brands.

The pricing adjustments have only been in place for a few months and we have some early positive results, but we will continue to evaluate the situation in the justice as we see fit.

And you know the beginning we're in the early innings, but it has really been positive momentum and we're going to carry that forward.

Terrific. Thanks, so much like clarity and then so when my follow up would be around around the presentation for so we're now three quarters from what you're projecting in terms of Kronos its first products coming from the fermentation facility.

Could be something that you see before we're using for method cannabinoid it could be something as Lance later, we see it as something that we can fully integrated nor supply chain.

And on the U S side, I would say that the the main division that we.

Thinking of is whether or not.

The cannabinoid.

We're we're thinking of is subject to the control tuffy back or not.

So some of those cannabinoid THC Tacb, we think would be but.

CVD CVV, even it would not be.

Great that's very helpful and thanks for taking my question.

Your next question has been Tammy Chan of BMO capital markets.

Good morning, and most of my questions have been answered so I just have one.

Just curious S. At this point in all relative to something appears in Canada, you do have a smaller Friday. So I'm just curious if at this point <unk> anything interesting in large and that market to invest more N or to acquire.

We believe in the brands, we have and the brand you know you know I think about performance spinach. For example, we think we have a lot of runway and the growth in our branch and will be driving at through in market presence in the innovation funnel we have.

I'm not really going to speak to you know M&A, you know I'm not going to speak that on the phone, but you know.

We always look for opportunities in something makes sense for us and it's it's.

That's what we're trying to do we have the capability do.

Okay. Thank you.

And your next question comes from the line of Graham Keebler of eight capital.

Hi, Thanks for taking the question. This is actually Patrick's holding on the line for ground most of might've been answered already but I guess I just want to touch on the C. V. V started a business again. She said that you guys were refreshing so the marketing campaign and with with kind of directly and put some kirschman I'm wondering if you could just pull out right.

On that a little bit more what exactly a new strategies and trying or what are some new things on her piper.

Pipeline for that thank you.

Yeah, I think it's just accelerating what we what what the team has been working on so again that'll be you know marketing investments side, it'll be distribution side and it'll will be innovation side as we lay out the innovation funneled, which will be an important piece and you'll see that develop over the next 12 months.

Okay. Thank you.