Q1 2021 Cronos Group Inc Earnings Call
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Good morning, My name is Holly and I will be your conference operator today I would like to welcome everyone to the Kronos Group 'twenty 'twenty first 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 for that your view Kronos group 2021, first quarter financial and business performance.
I am joined by our President and CEO, Kurt Schmidt, our CFO, Jerry Barbato, our executive Chairman, Mike Gordon seed and our EVP of legal and regulatory affairs tubing shop.
Kronos group issued a news release announcing its financial results. This morning, which are filed on our Edgar and SEDAR profiles. This information as well as your prepared remarks will also be posted on our website under Investor Relations.
Before I turn the call over to Kurt 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 for the factors described in the cautionary statement and risk factors included in the company's earnings for the.
<unk> regulatory filings, including the company's most recent annual report on form 10-K, and quarterly reports on form 10-Q by which any forward looking statements made during this call for qualified in their 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 for Michigan.
Non-GAAP measures. We believe these non-GAAP measures assist management in planning for cat and evaluating 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 SEC, which is available on the press room section of our website the Kronos group Dotcom East.
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 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 your patience and understanding will now make prepared remarks, and then we'll move to a 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 in the markets we operate in.
Spike 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 a 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.
On the innovation front Kronos and Ginkgo Bio works were named as one of the winners of Bath companies prestigious 2021 most innovative companies award and the joint ventures category. This.
This is a respected award 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 per minute one of our target cannabinoids CPG at research scale, and we continue to look for or to leveraging our R&D innovation and consumer insights teams to drive the creation of differentiated product offerings.
Recently in April we received our processing license for prevented cannabinoids at our Winnipeg, Manitoba facility from Health Canada.
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 a previously disclosed timing for commercialization.
We look for to advancing that cannabis industry with this technology and our world class R&D and innovation teams in an effort to elevate the consumer experience responsibly.
This week, we released an important commitment our marketing code of conduct as a company. We believe that those below the legal age of consumption should not be targeted and adult use cannabis market rumor.
We recognize that there is a clear need for standard which is why we proactively created our own marketing code at the resorts for the industry and policymakers.
The principles outlined in our marketing code apply to all marketing activities for all our brands globally. The cold represent Kronos is commitment for responsible marketing standards from our leadership team to our external agencies Kronos expect such individuals to understand and pile. These principles.
Our marketing code is an important step toward elevating industry practices, we hope that others within the industry will embrace similar commitments at.
As policymakers consider how best to regulate federally legal U S. Cannabis market. We believe these principles reflect sort of policy necessary for our industry.
Last month, we set a new milestone for the industry by launching our Kronos group employees Pac or.
Our Pac 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 a well regulated safe and legal federal cannabis market in the U S.
We firmly believe that policymakers and regulators must invest in approaches that support responsible adult consumption then.
Harm from consumers by curtailing, the illicit market and create a legal and well regulated federal framework for the cannabis industry in the U S. Establishing this path is one step towards achieving that vision.
As legal latent 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 our 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 responsible legalization efforts in the United States.
While we are doing what we can from the corporate side to support federal legalization in the U S. Mike Ornstein in his role as executive Chairman continues to work with the Kronos team internally to evaluate various opportunities for 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 cannabinoid learnings gained by our research teams in Israel.
We are confident that with our balance sheet.
<unk> CBD infrastructure, and our strategic Investor, we will be a best in class cannabis company in the U S.
Turning to the U S segment towards the end of the first quarter, we began selling our happy dance ran at over 550, Ulta beauty locations throughout the U S as well as on I'll put dotcom.
We're pleased with the response as we gained traction in mind share for multi consumers broadening our distribution capabilities as an essential next step in the evolution of this brand with additional product launches expected to follow on order to expand variety for consumers throughout the year.
In April we announced an exciting update for our Lord Jones brand for the first time in the brand's history large jounce has launched a robust marketing campaign with a mix of market activations, including out of home advertising and TV spots and various test markets in the U S.
Lord Jones is a strong brand in its corner of the world, but this campaign and the muscle we're putting behind it is going to make the brand's voice, even louder greatly expanding awareness among adult consumers.
Early feedback on reactions from our consumers and retail partners have been positive and I'm excited to see how well the marketing campaign does for the brand for Wild 2021 and beyond.
<unk> built a few brands in 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.
As I mentioned on our previous call one of my goals. This year is to build great candidates brands here at Kronos. We're excited about this robust marketing plan for Lord Jones and look for to bring in this beloved brand to more consumers across the U S. We are fortunate to have the resources to build Lord Jones into a strong brand within the CBD market.
Building brand awareness for future line extension into other segments of the cannabis industry.
Our results in the rest of 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 returned to curbside pickup and delivery, which has affected sales growth as.
As the weather in Canada becomes warmer curbside pickup becomes less of an inhibitor of growth as it is in the colder months as recent data shows the cannabis industry in 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 they can't Adrian market continues to be affected by the COVID-19 pandemic, we remain focused on execution and innovation in this important market despite challenges.
In the past quarter, our Canadian innovation and marketing teams have been busy bringing our pipe like for like by developing and commercializing new products planned for the release in the coming weeks and months, we've taken a methodical approach for product development understanding consumer needs and bringing products for the future to market, we are not necessarily concerned about being the first.
We are focused on being the best I'm.
I'm excited to share that we released a 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 to life.
Our innovation, which consists of scientists engineers and experts from the C. G. CPG World has invested an incredible amount of time into this new product.
Which we think can be a leader in the edible segment in the Canadian market.
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 research will unlock the full potential candidates, helping us create standout products and provide us with a long term competitive advantage.
Turning to Israel.
Israeli medical cannabis market continues to grow both with Patriot count numbers 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 in Israel.
Following the signing of the agreement with Super Farm in February the largest pharmacy chain in Israel with over 250 branches. We're very excited about our growth in this rapidly evolving market.
Our peace Naturals brand continues to gain traction in the flower and oil categories within Israel, and we've recently launched pre rolls on to 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 Australia based team I look forward to seeing what they will accomplish in the bag.
<unk> of 2021.
Despite being faced with a challenging macro environment I'm incredibly proud of our team persevered in the first quarter.
As I look at the balance of 2021, 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 in the first quarter of 2021 of $12 $6 million a 50.
<unk> 50 per cent increase from the prior year period.
Revenue growth year over year was primarily driven by the growth in the adult use Canadian cannabis market sales and the Israeli medical market and growth in our U S. Hemp derived CBD business, partially offset by strategic price reductions on various adult use cannabis products in Canada taken in the second half of 2020.
Consolidated gross loss for the first quarter of 2021 was $3 million.
$3 5 million dollar decrease in losses from the first quarter of 2020.
The improvement versus prior year was primarily driven by an increase in net revenue and a decline in inventory write downs in 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.
A marginal increase in losses year over year was primarily driven by an increase in sales and marketing spend due to brand development in 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 in 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 in the first quarter of 2021 of $10 $2 million or 63% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth in the adult use cannabis flower markets, Canada and growth in the Israeli medical cannabis market.
Partially offset by strategic price reductions on various adult use products in Canada in the second half of 2020 and a decrease in sales of cannabis extracts in Canada, which was primarily due to fluctuating provincial demand.
Gross loss for the rest of World segment for the first quarter of 2021 was $4 1 million a $3 4 million dollar decrease in losses from the first quarter of 2020.
The improvement year over year was primarily driven by increased revenue and a decrease in inventory write downs.
And we work to create an efficient global supply chain through 2021 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 for the rest of World segment for the first quarter of 2021 was $22 $2 million, representing and $6 $8 million decrease in losses from the first quarter of 2020.
The improvement was primarily driven by a decrease in gross losses and a decrease in general and administrative expenses, partially offset by an increase in research and development costs.
Turning to the U S segment, we reported net revenue in the first quarter of 2021 of $2 $4 million.
A 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 2021 was $1 $2 million.
100000 dollar increase from the first quarter of 2020.
Adjusted EBIT loss in the U S segment for the first quarter of 2021 was $9 $5 million, representing a $3 $7 million increase in losses from the first quarter of 2020 the.
The increase in losses was primarily driven by an increase in sales and marketing costs related to brand development.
Overall Kronos group reported a decrease in net income versus the prior year period, primarily due to the change in fair value of the financial derivative liabilities associated with al for you as investment which is described in more detail in the 10-Q.
In the first quarter of 2021, the company recorded a noncash losses 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 in 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 million with the spending focused across our global strategic priorities.
We remain committed to deploying capital in a disciplined manner and only in ways that align with our strategic priorities at <unk>.
You need 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 growth. 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 for <unk>.
<unk>.
And thank you in order to ask a question you will need to 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, Sarah Gaffer with Raymond James.
Good morning, Kurt Mike Jerry Thanks, so much for for taking my questions.
So I guess are you know.
My first question really is primarily around biosynthesis Curt you highlighted.
That is a key milestone specifically email Canada license, which of course was was important. So I guess my first question is what is what do you mean by buy research scale of CPG and what scale are you looking to get to and.
You know what cannabinoids can we expect to see next in and timelines to to seeing. These these are these can advertise incorporated into your into your commercial products.
Yeah.
No.
Thank you for the question, we're going to 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 our 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.
<unk> 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 bringing for consumers. So we want to focus on those first versus like the.
The major cannabinoids like CBD and THC.
Terrific. Thanks, Thanks, so much for that card. So I guess, maybe my follow on question. Then is given that Kronos is sort of as far as we know the only cannabis specific cannabis company with its own.
Fermentation capabilities that is driving these products.
So how do you see this as a competitive advantage.
Somewhat being.
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 at our Winnipeg facility. We're learning what it takes to produce these things at scale for produce 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 a.
<unk> 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 CBD side and and the adult use side. So it's vitally important from that aspect and Mike I don't know if you're while you've been.
Early on on this one whether you want to add some comments for this.
Yeah, I'd just add 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 learning so given the timeline, we expect in the U S will be able to launch these products with a lot of information in the U S market as we're able to access it.
With expected federal Permissibility coming in the near future.
Terrific well congrats on that progress and thanks for taking our question I will get back on the queue.
Yes.
And your next question comes from the line of John <unk> with CIBC.
Thank you good morning, I wanted to ask about 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 to a level closer with most of your peers is it just that theres a certain minimum threshold of sales you need to cover fixed costs or is there some ela.
Moving forward purchasing commitments that that needs to roll off.
Any color there would be appreciated.
Yes, Thanks John.
So we're still going to see fluctuations in 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 in your question, our Q1 margins suffered a bit as revenues slowed sequentially and we have a high fixed cost base.
For the West Gainer 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 both on 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 in the Canadian space I'm curious if your view has changed at all here to the point, where you would look at any Canadian assets and how should we think about the U S M&A strategy.
<unk> pre any steps towards legalization.
Thanks, John for that question I'll have Mike jump in as well on this one.
When it comes to.
Canada, we're going to use the same discipline, we've had all along which is 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.
That we've done with everything.
In this area.
In the past so right.
Right now I feel pretty comfortable with what we have when it comes to the U S. Again, that's that's been Mike's focus.
We've always looked at it as building out our own brands, we have our Canadian portfolio. We also have brands in 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, Karen Thanks, John Yes.
That's exactly right.
We feel that the U S were closer to being able to directly operate in we feel comfortable that there are paths for us.
To be able to get.
Optionality in 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 on 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 have the right assets to make sure that they're able to perform as we move and actively on our own.
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 on K market, obviously, a market that provides federally legal template for testing and development developing but how do you balancing getting really an 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 Spanish thanks.
Yes, thanks for thanks for that Andrew.
Yeah first of all we're excited about.
For the setup of launch because it's just not.
The product itself can compete law I believe with any confectionary product.
In the non THC area I mean, this is really an issue.
Innovative product that is really unique for the marketplace.
So we think that debt is great on the question of whether it's applicable not everything but.
Because obviously if you look at the states the regulatory environment generally speaking is more like.
Alcohol versus more of like a pharma 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 on the U S. So it's very very applicable.
And so that's part of the beauty of what we're doing it allows us to test those ideas and concepts and be ready and to be quick one when as Mike talked about early on federal legalization comes about so we think it's very applicable share you have to take in a little bit of.
Dimensionality for the fact that the U S.
It's going 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 that those learnings into the U S.
And second just to add sorry, Andrew 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.
<unk> Avenue and differentiated products.
Those learnings, we think are applicable from a formulation perspective, what type of feedback on and so it might not be on all 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.
Second 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 the tailwind will kick in and be fully supporting the business gains I E. When will grow Kobe fully fully enabled fully on.
On scale to enable the Canadian business as well as domestic Israel fully supporting that business. Thanks.
Yes. This is Kurt I'll kick it off and.
And Jerry May have some things day add but.
As far as growth.
You know again, we've had the philosophy that the biomass will become more commoditized and the larger growers are going to be the key players in here. So we're really pleased to see this partnership with <unk> on mucci.
How it's developing in other project gets running up and running with the necessary licenses now and receiving we just received a processing license means that we can now sell for the wholesale market.
And youre going to see it becoming operational in stages throughout the first half of this year and that includes harvesting.
We're not going to discuss any other kpis associated with it but we're in the early innings, but I will say we are pleased with the development.
And what lucci brings to this book.
Endeavor. So it's we're on track on we're feeling good about it.
Yes.
Yes.
Yeah, just to add a little bit to that euro.
Youre right Israel.
We're really happy with.
How it performed in Q1 on the Kronos Israel team has achieved quite a bit in such a short amount of time and I think as debt medical market expands and then obviously, we had headwinds that Curt mentioned in the prepared remarks, the trends we're seeing during COVID-19 in Canada with consumers either in locked down are generally less mobile is.
Other preferences have shifted and you've seen the provinces order lesson deload their 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 a 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 questions.
I guess for starters focusing on the T.
New product for launching.
How are you thinking about your go to market strategy.
Especially the learning curve for the customers on the bus tenders about the products and also as you launch a product how are you thinking about that.
Educating U S with Humira MLS restricted environment.
Yes.
That's all part of the learning in Canada is going to be.
As the launch of this product in.
How do we how we discuss it with debt.
In the retail sector.
So that that all is in the planning of the works and lot of that will be transferable to the U S. Some of it won't because the U S is a different marketing environment.
And and so.
You know right now we feel like we're getting all those plans set and as we said before it's going to 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.
Thanks, and as a second question.
Separately, you talked about the store pick up by either that you expect it to improve the weather for I'm. Just curious can you glean that occur.
Until late April and early May on weather's warmed up for that.
Yeah, I think we're seeing some signs of that of course.
You are speaking of Canada.
And that will continue I also look at the U S and Israel are the markets, which are farther.
Further down the line. So you see the impacts are big impact of the vaccine. So I think that's a critical piece to as you see the vaccines rollout.
You know in the UAE U S. The northeast for example, in California have been hit harder had been more restrictive more like.
Canada situation, but were seeing the bricks and mortar is open up on for 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, probably the most important one.
As we move forward is vaccination that debt is the key and when the vaccination starts penetrating the market like it is on the northeast now where everyone can be vaccinated, regardless of age now theres no restrictions and youre seeing that you're starting to see sporting events open up bricks and mortars open up.
And you're starting to see Thanksgiving getting relatively back to normal on 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.
Alright, Thank you for watch.
And at this time there are no further audio question are there any closing remarks.
No no other prisons.
And thank you Les.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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