Q1 2021 Cronos Group Inc Earnings Call
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Good morning, My name of Poly and I will be your conference operator today I would like to welcome everyone to the Kronos group of 2021st quarter Earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to Shayne Laidlaw Investor Relations. Please go ahead Sir.
Thank you Paul and thank you for joining us of that your view Kronos group of <unk> 2021 first quarter financial and business performance.
I am joined by our President and CEO Kurt Schmidt.
And so Jerry Barbato, our executive Chairman, Mike corn seed and our EVP of legal and regulatory affairs and doing something.
Interest group issued a news release announcing the financial results. This morning, which are filed on our Edgar and SEDAR profiles.
Formation as well as the prepared remarks will also be close or on our website under investor Relations before I turn the call over to Kurt I would like to remind you that the 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 and the cautionary statement and risk factors included and the company's earnings release and regulatory filings, including the company's most recent annual report on form 10-K and of course, the reports on form 10-Q by which any forward looking statements made during this call are qualified in their entirety. In addition, during this call certain financial measures may be just got better.
Recognized under the U S. Generally accepted accounting principles referred to by the Securities and Exchange Commission and non-GAAP measures. We believe these non-GAAP measures assist management and planning forecasting and evaluating business and financial performance, including allocating resources reconciliations of the non-GAAP measures to the closest reported GAAP measures are included in our earnings press release furnished.
Of the SEC, which is available and the pressroom section of our website. The Kronos group Dotcom. These non-GAAP measures may not be comparable measures used by other issuers.
I'd also like to note that we're conducting our call today from a respected from melt locations as such there may be breached the law is cross talk or minor technical issues. During this call. We thank you in advance of your patients and understanding the will now make prepared remarks, and then we'll move to the question and answer session with that I'll pass it over to Carlos Group, President and CEO Kurt Schmidt.
Thank you Shane.
I want to open the call up by saying, Thank you to our global team for their continued and relentless effort to help kronos become a leader and the markets we operate in the.
<unk> not being quite at the end of the fight against COVID-19, and bearing degrees of vaccine availability across the markets, we operate and I'm hopeful we can find a path towards the more normal life in the near future.
We are grateful to our team for their creativity, and ingenuity and growing our business and pushing forward no matter the circumstances.
Turning to our first quarter results I will start by reflecting on a few highlights from the quarter, which underlying kronos is commitment to building disruptive technology and innovation and strengthening our ability to compete.
Two of my key areas of focus for this year.
And the innovation front Kronos and Ginkgo Bio works were named as one of the winners of best companies prestigious 2021 most innovative companies award and the joint ventures category.
This is a respected of war that acknowledges the significant and innovative work we are accomplishing with our partners at kimco.
We are humbled by the acknowledgment of the incredible work we are doing together.
Our partnership with Ginkgo is a core component of our innovation story.
Together, we have successfully fermented one of our target cannabinoids CPG at research scale and we continue to look forward to leveraging our R&D innovation and consumer insights and teams to drive the creation of differentiated product offerings.
Most recently in April we received our processing license for prevented cannabinoids, and our Winnipeg, Manitoba facility from Health, Canada, making.
And making a significant achievement for Kronos, which highlights the strength of our organization across all functions.
Receipt of this license at this time was built into our product calendar and we remain on track for previously disclosed timing for commercialization.
We look forward to advancing the cannabis industry with this technology and our world class R&D and innovation teams and an effort to elevate the consumer experience responsibly.
This week, we released and an important commitment our marketing code of conduct as the company. We believe that those below the legal age of consumption should not be targeted and adult use cannabis market <unk>.
And we recognize that there is a clear need for standards, which is why we proactively created our own marketing code at the resorts for the industry and policymakers the.
And the principles outlined in our marketing called apply to all marketing activities for all our brands globally. The cold represent Kronos is commitment to responsible marketing standards from our leadership team to our external agencies Kronos expect such individuals to understand and pile of these principles.
Our marketing code is an important step toward elevating industry practices, and we hope and others within the industry will embrace similar commitments at.
And that's policymakers consider how best to regulate the federally legal U S. Cannabis market. We believe these principles reflect the sort of policy necessary for our industry.
The last month, we set a new milestone for the industry by launching our Kronos group of employees Pac or.
<unk> was established to support and educate legislators who are open to responsibly advancing legislation and regulation for CBD products as well as those taking steps towards of well regulated safe and legal federal cannabis market in the U S.
We firmly believe that policymakers and regulators must invest and approaches that's the sport responsible adult consumption then.
And harm from consumers by curtailing, the illicit market and create a legal and well regulated federal framework for the cannabis industry and the U S. Establishing this path is one step towards achieving that vision.
As legal lightly legalization efforts continue across the U S. We remain committed to being an integral part of the conversation.
Our government affairs work strengthens our ability to compete on a global scale and we believe candidates should be illegal at the federal level and that of comprehensive and reasonable federal regulatory framework should be put in place for the industry.
With our Pac donations and the release of our marketing code, we're proud to be on the record supporting and responsible legalization efforts and the United States.
While we are doing what we can from the corporate side to support federal legalization in the U S. Mike Ornstein and his role as the executive Chairman continues to work with the Kronos team internally to evaluate various opportunities and the market.
While our global organization parallel paths on an organic entry strategy given the robust suite of innovations. We are building at our peace Naturals Center of excellence, and Stayner, Ontario, and deep Cannibal and cannabinoid learnings gained by our research teams and Israel.
We are confident that with our balance sheet.
<unk> CBD infrastructure, and our strategic Investor we will be of best in class candidates company and the U S.
Turning to the U S segment towards the end of the first quarter, we began selling our happy dance bran at over 550, Ulta beauty locations throughout the U S as well as on Alpha Dotcom.
We're pleased with the response as we gained traction and mind share from multi consumers broadening our distribution capabilities as an essential next step and the evolution of the spring with additional product launches expected to follow in order to expand variety for consumers throughout the year.
In April we announced an exciting update for our Lord Jones brand.
The first time and the brand's history large Jones has launched a robust marketing campaign with the mix of market activations, including out of home advertising and TV spots and various test markets and the U S.
Lord Jones is a strong brand and its corner of the world, but this campaign and the muscle we're putting behind it is going and make the brand's voice, even louder greatly expanding awareness among adult consumers.
Early feedback and reaction from our consumers and retail partners have been positive and I'm excited to see how well the marketing campaign does from the brand throughout 2021 and beyond.
He built the few brands and my career it starts with authenticity and high quality product and we certainly have those now we can make sure people know about it and that's where the marketing effort comes in.
Our investment reaffirms our commitment to support the marketing efforts of our core brands across all regions and.
As I mentioned on our previous call one of my goals. This year is to build great candidates brands here of Kronos and we're excited about this robust marketing plan for Lord Jones, and look forward to bringing this beloved brands to more consumers across the U S.
We are fortunate to have the resources the bill Lord Jones into a strong brand within the CBD market building brand awareness for future line extensions into other segments of the cannabis industry.
Our results and the rest of the World segment specific Canada were impacted by market dynamics due to ongoing COVID-19 restrictions and logistics issues brought on by stay at home orders and resulting restrictions throughout the country.
Some provincial store saw extended lockdown measures and the return to curbside pickup and delivery, which has affected sales group.
As the weather and Canada becomes warmer curbside pickup becomes less of an inhibitor of growth and as it is and the colder months as recent data shows the cannabis industry and Canada is recovering from the lows of the first calendar quarter, which is an encouraging sign for the growth going forward.
With that being said as the Ken Indian market continues to be affected by the COVID-19 pandemic, we remain focused on execution and innovation and this important market despite challenges and.
And the past quarter of Canadian innovation, and marketing teams have been busy bringing our pipeline to life by developing and commercializing new products planned for the released and the coming weeks and months, we've taken a methodical approach and product development understanding consumer needs and bringing products of the future to market, we are not necessarily concerned about being the first.
We are focused and being the best.
I'm excited the share that we released the new edible product under the spinach brand in the coming weeks.
During the development of this product, we let deep consumer insights drive our decision, making while leveraging our robust R&D innovation teams to bring this product line.
Our innovation, which consists of scientists engineers and experts from the CG CPG World has invested and incredible amount of time into this new product.
Which we think can be a leader and the edible segment and the Canadian market by.
By taking a thoughtful insights first approach to this new product, we believe will deliver a truly unique and quality brands.
As I mentioned at the beginning of the year building disruptive technology and innovation is vital for Kronos.
We continue to believe that investing in innovation and research will unlock the full potential candidates and helping us create standout products and provide us with a long term competitive advantage.
Turning to Israel the.
Israeli medical cannabis market continues to grow both with Patriot count number of steadily increasing.
Which have now surpassed 88000 registered medical patients and the expansion of distribute distribution, where more and more pharmacies are interested in selling medical cannabis patients and Israel.
Following the signing of the agreement with Super Farm and February the largest pharmacy chain in Israel with over 250 branches. We're very excited about our growth and is rapidly evolving market.
Our peace Naturals brand continues to gain traction and the flower and oil categories within Israel, and we recently launched pre rolls on and the peace natural brands into the market.
From which we have experienced strong early results I continue to be impressed with the strength of our Israeli based team and look forward to seeing what they will accomplish and the balance of 2021.
Despite being faced with the challenging macro environment I'm incredibly proud of our team persevered and the first quarter as.
And as I look at the balance of 2021 and I'm excited about our plans and what we are setting out to accomplish together as a global team.
With that I'll turn the call over to our CFO Jerry Barbato.
Thanks, Kurt and good morning, everyone.
Turning to our financial results the company reported consolidated net revenue and the first quarter of 2021 of $12 $6 million.
The 50% increase from the prior year period.
Revenue growth year over year was primarily driven by the growth and the adult use Canadian cannabis market sales and the Israeli medical market and growth and our U S. Hemp derived CBD business, partially offset by strategic price reductions and various adult use cannabis products and Canada taken and the second half of 2020.
Consolidated gross loss for the first quarter of 2021 was $3 million of $3 5 million dollar decrease and losses from the first quarter of 2020.
The improvement versus prior year was primarily driven by an increase of net revenue and a decline and inventory write downs and the rest of world segment.
Adjusted EBITDA loss for the first quarter of 2021 was $37 $1 million, increasing marginally from the first quarter of 2020.
The marginal increase and losses year over year was primarily driven by an increase in sales and marketing spend due to brand development and the U S segment, and an increase in R&D driven by spending on product development and developing cannabinoid IP.
Partially offset by decreases in sales and marketing spend and the rest of world segment.
Gross loss and general and administrative expenses.
Turning to our reporting segments and the rest of World segment, We reported net revenue and the first quarter of 2021 of $10 $2 million of 63% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth and the adult use cannabis flower market, Canada and growth and the Israeli medical cannabis market.
The offset by strategic price reductions and various adult use products in Canada, and the second half of 2020 and the decrease in sales of cannabis extracts of Canada, which was primarily due to fluctuating provincial demand.
Gross loss for the rest of World segment, the the first quarter of 2020, one was $4 $1 million.
$3 $4 million decrease and losses from the first quarter of 2020.
The improvement year over year was primarily driven by increased revenue and a decrease and inventory write downs.
And we work to create and efficient global supply chain through 2020, one and beyond for our rest of World segment. We anticipate that gross margin will continue to fluctuate as price and mix change from quarter to quarter.
Adjusted EBITDA loss and the rest of World segment for the first quarter of 2021 was $22 $2 million, representing and $6 $8 million decrease and losses from the first quarter of 2020.
The improvement was primarily driven by a decrease in gross loss and a decrease in general and administrative expenses, partially offset by an increase and research and development costs.
Turning to the U S segment, we reported net revenue and the first quarter of 2021 of $2 $4 million of 12% increase from the prior year period.
Revenue growth year over year was primarily driven by the introduction of new hemp derived CBD products.
Gross profit for the U S segment for the first quarter of 2020, one was $1 $2 million.
100000 dollar increase from the first quarter of 2020.
Adjusted EBITDA loss and the U S segment for the first quarter of 2021 was $9 $5 million, representing a $3 7 million dollar increase and losses from the first quarter of 2020 the.
The increase and losses was primarily driven by an increase in sales and marketing costs related to brand development.
Overall Kronos group reported a decrease of net income versus the prior year period, primarily due to the change in fair value of the financial derivative liabilities associated with al for ease of investment which is described in more detail in the 10-Q.
And the first quarter of 2021, the company recorded a noncash loss of $116 $9 million related to the change in fair value of these financial derivative liabilities.
Kronos continues to expect there may be 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 $1 2 billion and cash and short term investments, which is down roughly $50 million from the fourth quarter of 2020.
Capital expenditures for the quarter were $7 1 billion with the spending focused across our global strategic priorities.
We remain committed to deploying capital in a disciplined manner, and only and ways that align with our strategic priorities and <unk>.
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 Jerry this quarter, we continued to execute our strategy and grow despite the ongoing impacts of the pandemic and we're incredibly motivated to keep this momentum building throughout our organization.
With a focus on supporting our regional strategies and supporting our R&D and innovation work on the brand level, we continue to push forward with innovative products and unique marketing campaigns.
With that let's now open the line from <unk>.
<unk>.
And thank you and I wanted to ask a question you will need the press star one on your telephone to withdraw your question press the pound or hash key each person is allowed one question and one follow up please standby, while we compile the Q&A roster.
And your first question comes from the line of Iowa, and Sarah Gaffer with Raymond James.
Good morning, Kurt Mike Jerry Thanks, so much for taking my questions.
So I guess are you know.
My first question really is currently around biosynthesis, Craig you highlighted.
That is the key milestones, specifically email, Canada license, which of course was was important so.
So I guess my first question is what is what do you mean by buy research scale of CPG and what's the scale are you looking to get to and you.
And what cannabinoids can we expect to see next and and timelines to to seeing these days.
These cannabinoid incorporated into your into your commercial products.
Yeah.
So thank.
Thank you for the question, we're kind of move from that obviously, we're making a small R&D pilot scale. We're now moving into the Winnipeg facility to produce at scale, which will allow us to to launch products into the Canadian market on the first molecule, which is the CPG correct as you said.
So we're looking at the sequential.
Net.
As we've stated before we have about seven.
Separate molecules that we're developing with ginkgo and they will rollout sequentially over time as we move forward CBD being the first we also mentioned where our focus will be on the rare cannabinoids to begin with because we feel that brings.
The most interesting part of the product line, the most differentiation and value added products that we can be bring to consumers. So we want to focus on those first versus like the.
The major of cannabinoids of CBD and THC.
Terrific. Thanks, Thanks, so much of that card. So I guess, maybe my follow on question and then is given that Kronos is sort of as far as we know the only kind of a specific cannabis company with its own.
Fermentation capabilities that is driving these products.
So how do you see this as a competitive advantage.
Somewhat.
And being unique to the sector, but also translating that capability as you build out your U S sales infrastructure.
Yeah.
Couple of things one of them, obviously by building up this capability out of Winnipeg facility.
We're learning what it takes to produce these things at scale and produce the cannabinoids at scale, which is an important part. So that's the the manufacturing expertise to go with the innovation expertise, obviously, we always use Canada as the development platform for a potential entry into the U S. On some of these products so that that gives us that leg up.
As we want to enter the U S. Eventually and so both on the street and CBD side and and the adult use side. So it's vitally important from that aspect and Mike I don't know if you want <unk> been early on and that's one whether you want to add some comments for the.
Yeah, I'd just add the names we're excited about now being able to start ramping up and Winnipeg is our focus is on getting these products with rare cannabinoid out early and quickly in Canada. So that we can see how they perform we can get learnings.
Given the timeline, we expect and the U S will be able to launch these products with a lot of information and the U S market and we're able to access it.
And with expected federal Permissibility coming in the near future.
Terrific well.
That's on that progress and thanks for taking my question I will get back in the queue.
Yes.
And your next question comes from the line of John <unk> with CIBC.
Thank you good morning, I wanted to ask the boat gross margins and in particular, the cadence of gross margins over the next year or so and the rest of world segment and really what's required to get these two of level closer with most of your peers is it just that theres a certain minimum threshold of sales you need to cover the next.
Costs are the is there some element of forward purchasing commitments that needs to roll off.
Any color here would be appreciated.
Yes, Thanks John.
Yeah, we're we're still going to see fluctuations and gross margin.
As price and mix change from quarter to quarter and the mix changes are reflective not only of product mix, but also revenue mix between Canada and Israel.
And as you stated and your question, our Q1 margins suffered a bit as revenue slowed sequentially and we have a.
High fixed cost base.
The the west painter facility, but we anticipate that these pressures will ease overtime as our revenue base grows and our manufacturing and purchasing teams refine processes and price is stabilized bolt and the wholesale market and on the shelf.
Okay. Thanks, and then my second question is on M&A and we have seen.
Pretty noticeable increase in M&A and the Canadian space I'm curious if your view has changed at all of year to the point of where you would look at the Canadian assets and how should we think about the U S M&A strategy.
The pre any steps towards legalization.
Thanks, John for that question I'll have Mike jump in as well on this one but.
When it comes to.
The Canada, we're going to use the same discipline, we've had all along which is the first of all we think we have between what we're doing on the innovation side and the brands we already have.
We think we have a pretty good sense of portfolio that doesn't mean that we wouldn't look at things, but we're going to use the same kind of discipline.
And that we've done with everything.
In this area.
And the past so right.
Right now and feel pretty comfortable with what we have when it comes to the U S again, and that's that's been Mike's focus.
We've always looked at it as building out our own brands, we of our Canadian portfolio. We also have brands and the U S and likely see a mixture of potential M&A, but I'd like Mike to weigh in on this because this has been a lot of his focus for the past year.
Thanks, Curt and thanks, John Yes.
And that's exactly right.
And we feel that the U S were closer to being able to directly operate and we feel comfortable that there are paths for us.
To be able to get.
The optionality and the near term so while we'll continue to look at every opportunity. It just keeps pushing us further towards the U S as far as where our focus is and capital allocation.
But we're really looking at ways not only to.
Get exposure to other brands that are performing but ways to set ourselves up so that our brands and the right assets to make sure that they're able to perform as we move and actively in the room.
Okay. That's helpful. Thank you very much.
And your next question comes from the line of Andrew Carter with Stifel.
Hey, Thanks, Good morning, I wanted to ask about the edibles launch and gain market, obviously of market to provides federal and legal template for testing and development developing but how do you balancing getting really and accurate consumer insights given the marketing restrictions as well as the package limit limitations and also could you talk about what price.
<unk> point, you're launching as well as forms and where do you go beyond spinach. Thanks.
Yes, Thanks, Andrew.
Yeah first of all of we're excited about.
And to settle the launch because it's just not.
The product itself could compete lot of I believe with any confectionary product.
And the non THC area and this is really and.
Innovative product that is really unique to the marketplace.
So we think that that is great and the question of weather.
And it's applicable not everything but.
Because obviously if you look at the states the regulatory environment generally speaking is more like.
The alcohol versus more of like a farm of regulatory environment in Canada, but there are things we learned consumer acceptance concept we have incredible.
Research capability and consumer insights and we apply those to the U S. I mean, we could do the same things. We do is looking at the Canadian consumers as we do and the U S. So it's very very applicable.
And so that's part of the beauty of what we're doing that allows us to catch those ideas and concepts and be ready and to be quick one when as Mike talked about earlier and federal legalization comes about so we think it's very applicable.
Sure you have to take and a little bit of the.
Dimensionality for the fact that the the U S.
To be a bigger opportunity, it's not just the size of the market, but stability of the market well, but as far as the Canadian testing platform for the U S. It's pretty important and we've already we've already learning with our capabilities how to apply those learnings into the U S.
And second just to add sorry, and you just to add to that you know I think one thing here that is really important to bring back up.
It's really helpful for us from a learnings perspective to be able to have product formats. So that when we introduced that.
Rare cannabinoid and differentiated products the.
Those learnings, we think are applicable from the formulation perspective, what type of feedback on and so it might not be on all of the brand elements and the marketing plan, but on the actual product itself and having a breakthrough product, we think will still be able to get that information.
Thanks.
So the question I wanted to build about kind of on gross margin, but overall can you kind of give it provides a sense of your expectations for when the global supply chain when all of the tailwind will kick in and be fully supporting the business needs and I wouldn't will croak grow Kobe fully fully enabled fully on Oh and scale to.
All of the Canadian business as well as domestic Israel fully supporting that business. Thanks.
Yes. This is Kurt I'll kick it off and the.
And Jerry May have some things day ad, but.
As far as <unk>.
And again, we've had the philosophy that the biomass and will become more commoditized and the larger growers are going to be the key players and here. So we're really pleased to see this partnership with the <unk> and mucci.
And how it's developing and all of the project gets running up and running with the necessary licenses now and receiving we just received the processing license means that we can now sell to the wholesale market and.
And youre going to see it becoming operational and stages throughout the first half of this year and that includes harvesting.
We're not going to discuss any of the kpis associated with it but we're in the early innings, but I will say we are pleased with the development.
And what the Lucci brings to this day.
Endeavor. So it's we're on track and we're feeling good about it.
And how does that.
Yes.
Yeah, just to add a little bits of that euro.
Youre right Israel.
We're really happy with.
How it performed in Q1 of the Kronos Israel team has achieved quite a bit and such a short amount of time and I think as that medical market expands and then obviously, we had headwinds that Curt mentioned in the prepared remarks, the trends, we're seeing during COVID-19 and Canada with consumers either in locked down and are generally less of the mobile is.
The preferences have shifted and you've seen the provinces order less and Deload the inventory and I think those all have impacts on on margin because as you pointed out you need to continue to grow that revenue base to absorb those fixed costs.
Thanks, I'll pass it on.
And as a reminder to ask the question you will need to press star one on your telephone keypad. Each person is allowed one question and one follow up.
Your next question comes from the line of Heather <unk> with Bank of America.
Hi, Thank you for taking my question.
I guess for starters focusing on the T.
You need new products from launching.
How are you thinking about your crude and market strategy and especially the learning curve for the customer of ours and the bartender is about the product and and also as you launch the product how are you thinking about eventually educating U S consumers and the last restricted environment.
Okay.
Yes, well that's.
And that's all part of the learning and Canada is going to be.
And as the launch of this product and.
How do we how we discuss it with the.
And the the retail sector.
That all is and the planning of the works and lot of that will be transferable to the use of some of it won't because the U S is the different marketing environment.
And and and so.
Right now we feel like we're getting all of those plans set and as we said before its going be the third quarter of this year and we're working along with getting the product ready, we're working with the marketing program as well.
Inc, and as the second question.
Separately.
And you talked about the.
On the store pick up of by either that you expect it to improve as the weather improved I'm just curious can you.
And that occur and you guys with Atlas.
And Kelly April and early May and the weather's warmed up of that.
Yeah, I think we're seeing some signs of that of course.
And speaking of Canada.
And that will continue I also look at the U S and Israel are the markets, which are.
Are there down the line. So you see the impacts of big impact of the vaccines. So I think that's a critical piece to as you see the vaccines rollout.
And the UAE U S. The northeast for example, and California have been hit harder had been more restrictive more of like.
Canada the situation, but we're seeing the bricks and mortars open up once the bricks and mortars open up people start coming back out the weather is additive to that because obviously.
The cold weather has an influence all of those factors coming together the probably the most important one as we move forward is vaccination that that is the key and one of the vaccination starts penetrating the market like it is and the northeast now where everyone can be vaccinated, regardless of age now there is no restrictions and youre seeing that you are starting to say sporting events.
And of bricks and mortars open up and.
And you're starting to see Thanksgiving getting relatively back to normal and progressing so still going to take a while but I'm confident.
Again, we track the back to school right as an important statistic for us and I think that's an important one as we go forward, particularly with Canada.
Great. Thank you so much.
And at this time there are no further audio question are there any closing remarks.
No no the prisons.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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