Q2 2021 Cronos Group Inc Earnings Call
[music].
Okay.
Good morning, My name is Phyllis and I will be your conference operator for today I would like to welcome everyone to Kronos Group's 2021 second 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.
Thank you Philip and thank you for joining us today to review Kronos group's 2021 second quarter financial and business performance today, I am joined by our President and CEO, Kurt Schmidt, our CFO, Jerry Barbato, our executive Chairman, Mike <unk>, and our EVP of legal and regulatory affairs, assuming from furnace group issued a news release announcing.
These financial results. This morning, which are filed on our Edgar and SEDAR profile of this information as well as the prepared remarks will also be posted on our website under investor Relations.
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 of the factors described in the cautionary statements and risk factors included in the company's earnings release.
Regulatory filings, including the company's most recent annual report on form 10-K, and quarterly reports on form 10-Q, which any forward looking statements made during this call are 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 <unk>.
Change Commission as non-GAAP measures. We believe these non-GAAP metrics of this management and planning forecasting and evaluating the business and financial performance, including allocating resources reconciliations of these non-GAAP measures to the 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.
These non-GAAP measures may not be comparable to measures used by other issuers I'd also like to note that we're conducting our call today from our respective of remote locations as such there may be brief delays cross talk or minor technical issues. During this call. We thank you in advance of your patience and understanding we will now make prepared remarks, and then we will move to a question and answer session with that I will pass.
At over to Kronos group's president and CEO Kurt Schmidt.
Thanks, Jay Good morning, everyone and thank you for joining us today.
At the beginning of this year I noticed how critical a keen focus on building disruptive technology and innovation is to Kronos.
This past quarter, we took an important step in bringing commercial scale cultured cannabinoids to the market.
We amended our agreement with Ginkgo bio works in order to enable us to accelerate the commercialization of cultured cannabinoids at scale.
At this stage, we of all the necessary licenses to commercialize the product using cultured cannabinoids produced in our Winnipeg facility.
And we plan to be the first to market with the product that Leverages. This technology in Canada later this year.
We will be using culture T. B G. In our first product introduced to the market enabled by our partnership with Ginkgo.
And we expect the final productivity target for CPG will be achieved in the coming weeks prior to September of 2021 as previously announced.
We are making strides to ensure that kronos becomes synonymous with innovation.
Launching cultured rare cannabinoids as the broader long term approach to branding and product differentiation. This will not be just the single items featuring C. B G.
We believe the spinach brand is a great platform for them to bring these rare cannabinoids and unique formulations to our adult consumers.
Canada holds many unique compounds with the world.
Wide range of potential use cases and benefit.
Kronos is focused on rare cannabinoids will drive significant market knowledge and consumer insights that are expected to help deliver novel and innovative products.
Our cross functional teams have been busy, bringing our innovation pipeline to life by developing and commercializing new products.
We've taken a methodical approach to product development by focusing on consumer insights product testing and pushing ourselves to bring best in class products to market.
In the second quarter, our Spanish brand launch towers by Spinach, and Canada and exciting new line of candidates gummies with bold and unique dual force flavor combinations.
Salaries by Spinach was developed by Kronos groups experienced team of professional chefs food scientists and consumer packaged goods experts.
And I am proud of the brand's ability of rights of the challenge of creating of canvas edible products rooted in the principles of the confectionery category.
Towers delivers bolt group flavors and the distinctive S shape, where the proprietary coding designed to provide a sour and sweet flavor profile differentiate the product and elevating the consumer experience.
This product has an unparalleled tastes for adult consumers and early feedback from the product isn't great.
According the high fire of data salaries by Spanish has achieved the double digit market share in the edibles category during the July and August to date period.
Ocs data for Ontario sales to retailers reports at all 3 of the flowers by spinning J S. Skus ranking in the top 10 of the edible category during the 4 weeks ending August 1.2021.
Building on the strength of our spinach gummies portfolio, we plan to leverage this brand and product format to bring culture TPG to market.
The soon to be introduced spinach, gummies utilizing cultured C. B G and traditionally cultivated an extract of THC will carry the same core differentiators as our other skus, but with different flavor profiles.
The first 1 is kind of maybe featuring cultured CPG as planned to the pineapple star fruit flavor and early indications from selling the efforts are strong.
The spinach brand also launched a new concentrate product called spinach deaths and the 28 Grand format percentage flower of called the spinach Nuggets in Canada.
The Spanish brand continues to extend into new categories to dress consumer needs and build our presence on shelf at the strength series across Canada.
Along with these exciting launches into new categories, it's been interest shiny and the dry flower category the.
The spinach GMO cookies, 3.5 Gram flour SKU was ranked in the top 5 skus for the 4 weeks ended August 1.2021.
Spending multiple weeks as the number 1 ex SKU across all product formats. According to Ocs data.
This is a true testament to all of the hard work our cross functional teams have put into the brand and the product, which we are now seeing paid dividends on shelf.
Turning to the U S market. We are excited to officially relaunched our CBD brand piece plus through the direct to consumer channel.
These pluses initial portfolio of CBD tinctures are now available on piece plus dot com with many more exciting new products on the horizon.
We are re launching the people piece plus the brand because physically piece plus complements our other CBD brands nicely and provides future distribution opportunity for us by producing a line of CBD products for mass market consumers in the United States.
And giving us an offering out of mainstream price points.
We're looking forward to seeing all of the additional innovations yet to come from this brand and look forward of reaching another group of adult consumers with this offering.
We have so far is free received strong indications of interest in peace Bluff from some significant convenience store chains and our hope of let's start shipping to regional test market soon to complement our direct to consumer efforts.
In July our Masstige position brand happy dance, which we co founded with actress Kristen Bell launch the new facial skincare product the look of like CBD based moisturizer the mall.
He strives her has like texture and is packed with hydrating agree Dan like avocado oil hyaluronic acid and high quality CBD the <unk>.
<unk> is now available online to U S consumers through the brand's direct to consumer website due of happy dance Dotcom and online at Ulta Dotcom.
And then just the anticipated to be available in the Ulta beauty stores throughout the U S in the coming weeks.
Continuing to build our product portfolio is critical the attracting new consumers to the brand and providing existing consumers with options and additional products the.
So they can expand their usage occasion with our brands.
And this is really market the number of registered cannabis patients continues to grow now nearing 100000.
Our peace natural brands continues to resonate well with consumers in this rapidly growing medical cannabis market.
Within the Israeli candidates market are dry flower products, continuing to perform well and recent introductions of oils and pre rolls are gaining traction.
Turning to our people.
I would now like to take a moment to discuss in addition to our board of directors and a few key hires which highlights our commitment to building a winning team of season and passion of professionals.
During our annual General meeting shareholders voted in a new board member Kendrick Ashton.
Hendrick is the cofounder and key co Chief Executive officer of the food chain of.
A leading developer and operator of performance wellness and lifestyle brands.
For founding the St. James He was the founding member and managing director of Perella Weinberg partners of financial services firm.
Kendrick Smith of business acumen, and entrepreneurial experience makes him an excellent fit for our board.
I am pleased to welcome Kendrick accident, the the Kronos Board of directors I look forward to having his expertise help us.
As an organization.
Last month collars Cortez joined the organization as VP and controller.
Carlos leads our global accounting shared services cost accounting and financial reporting team.
<unk> comes to us with 18 years of experience, including serving as the senior Finance director for Discovery, Inc.
Before his time at discovery Carlo spent 5 years as the corporate controller for Malibu boats.
This month, we also welcomed Anthony per easy to Kronos as the new head of global audit Anthony will lead our efforts to create world class internal controls by developing top tier of risk management control and governance profit.
Anthony He comes to us with over 18 years of all of his experience and most recently the vice president of the internal audit for 2 NYSE listed company RPC, Inc, and Marine products Corporation.
Last but not certainly not least Thomas kehl him, joining kronos as head of regulatory and product a newly formed role for Kronos Thomas.
Thomas joined US from the Avon Company, where he served as general counsel and corporate Secretary.
Thomas also spent 18 years with the Federal Trade Commission, where he was responsible for among other things managing antitrust and consumer protection of investigation and law enforcement actions.
Kendrick Carlos Anthony Thomas are a subset of the talent we've added across the organization.
We look forward, the having them and the other new additions to the team contributed to the evolution of Kronos as we work to position ourselves as the leading cannabinoid company.
As we've mentioned before we have been actively evaluating opportunities in the U S cannabis market as legalization efforts and the regulatory process continues to evolve.
As more and more states legalize cannabis and there is a clear momentum the federal legalization, we want to make sure. We have a seat at the table and are well positioned to capitalize on market opportunity at the appropriate time.
In June we were pleased to announce the strategic investment in pharma can which sets the foundation for our entry into the U S market.
Mccann, a leading vertically integrated U S. Cannabis company has demonstrated operating expertise and is well positioned in high value limited license states.
Farmers can't strong geographic footprint in the U S include 6 production facilities and 24 dispensaries operating under the barrel life brand across 6 States, New York, Illinois, Ohio, Maryland, Pennsylvania, and Massachusetts were excited about our opportunity to work with.
The makena in the future because of our share of commitment to elevating product quality and consistency through science and best in class operations and manufacturing.
And farm of can we have found an investment of that checks all of our criteria well look for and the strategic investments.
The market leader unique platforms intellectual property and branding potential.
But the strategic manufacturing infrastructure talent out of the product development team and best in class operations in multiple high growth States States, we are confident in pharma cans potential.
Our U S growth strategy remains focused on delivering long term shareholder value by assembling a portfolio of best in class brands and intellectual property.
While simultaneously positioning the play our products in the U S market through strategic investments in U S leaders that share our vision and commitment to responsibly distributed disruptive cannabinoid products that improve people's lives.
Growth is also anticipated to be achieved through of granite opportunities utilizing the existing brands and IP developed in house, most notably at <unk>.
Poking about earlier are cultured cannabinoid capabilities.
We are also encouraged by the thoughtful and serious legislation brought forward by Senator Schumer, Booker and widen which provide some measure of restored of justice for those individuals and communities harmed by the warrant drugs.
We firmly believe that policymakers and regulators must investment approaches that's that support responsible adult consumption.
Limit harm for consumers bucket, the tailing the illicit market and create a legal and well regulated federal claim framework of the cannabis industry in the U S.
We encourage congress stack swiftly the past the candidates the administration and opportunity Act into law.
In addition of reporting out of business results today, we announced the appointment of Bob made or as our next Chief Financial Officer.
Bob will be officially joining the company on Monday, and see and succeed Jerry Barbato.
Bob is the senior executive with over 30 years of financial and operational experience at a number of well known global consumer brands.
He served as CFO of American Eagle Outfitters, and prior to that he served in a variety of roles of increasing responsibility at Ralph Lauren, including as CFO from 2015 to 2016, yes.
He has the reputation for developing high performing teams and achieving outstanding results.
I look forward to working together I look forward to working together as we continue to execute our strategy and accelerate our growth at Kronos. Please join me in welcoming Bob to his new role.
I also want to thank Jerry first kind of contributions to our company over the last 2 years.
During Jerry's tenure with Kronos he played an instrument.
The finance and procurement functions driving the SAP.
Implementation, both Canada, and the U S and building out our information system and capabilities with the new focus on cyber security.
On a personal note. He helped me tremendously as it got my feet wet.
At Kronos.
Enjoyed working with them and I appreciate his partnership and wish him all the best.
Now I'll turn the call over to Jerry to say a few words on his announcement before getting into the 2021 second quarter financial results.
Thanks, Kurt and good morning, everyone.
It has been a privilege to work with the Kronos team.
And I'm proud of all we have accomplished over the last several years.
I know that under Bob's leadership and with support of the outstanding teams across the organization. The company is well positioned to lead the global cannabis industry and capture the significant opportunities ahead.
I will now move to a discussion of our 2021 second quarter financial results.
The company reported consolidated net revenue in the second quarter of 2021 of $15.6 million of 58% increase in the prior year period.
Revenue growth year over year was primarily driven by the continued growth in the adult use Canadian cannabis market.
And increased sales and the Israeli medical market.
Consolidated gross loss for the second quarter of 2021 was $15.8 million, a $12.9 million dollar increase of losses from the second quarter of 2020 the.
The increase of losses versus prior year was primarily driven by an increase of inventory write downs and the rest of world segment, which totaled $12 million in the second quarter of 2021 versus $3.1 billion in the second quarter of 2020.
The impact of strategic price reductions on various adult use cannabis products in Canada taken in the second half of 2020.
As well as startup costs associated with new product development and the rest of the World segment.
Adjusted EBITDA loss for the second quarter of 2021 was $49.8 million, representing a $22.8 billion dollar increase in losses from the second quarter of 2020.
The increase in losses year over year was primarily driven by an increase in gross loss as previously explained.
The increase in sales and marketing spend due to the brand development in the U S segment, and an increase in R&D driven by spending on product development and developing cannabinoid IP in the rest of World segment.
Turning to our reporting segments and the rest of World segment, We reported net revenue in the second quarter of 2021 of.
$13.4 million.
74% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth in the adult use cannabis flower market in Canada and sales in the Israeli medical cannabis market.
Gross loss for the rest of World segment for the second quarter of 2021 was $16.4 million of $12.9 million increase in losses from the second quarter of 2020.
The increase in losses versus prior year was primarily driven by an increase in the inventory write downs the impact of strategic price reductions on various adult use cannabis products in Canada taken in the second half of 2020 as well as startup costs associated with new product development.
Adjusted EBITDA loss in the rest of World segment for the second quarter of 2021 was $32.6 million, representing a $14 million increase in losses from the second quarter of 2020 the.
The increase in losses was primarily driven by an increase in gross loss and an increase in R&D costs.
Turning to the U S segment, we reported net revenue in the second quarter of $2.2 million and gross profit of <unk> $6 billion, most of which were roughly flat to the prior year period.
Adjusted EBITDA loss in the U S segment for the second quarter of 2021 was $10.7 million, representing a $5.9 million increase in losses from the second quarter of 2020.
The increase in losses was primarily driven by an increase in sales and marketing costs related to brand development.
Overall Kronos group reported an increase in net income versus the prior year period.
Primarily due to the change in fair value of the financial derivative liabilities associated with the Altria investment, which is described in more detail in the 10-Q.
In the second quarter of 2021 the <unk>.
The recorded a noncash gain of $115.2 million related to the change in fair value of these financial derivative liabilities.
<unk> continues to expect there may be significant reported earnings volatility, primarily driven by the fair value of quarterly adjustments related to the movement of Kronos group stock price.
Turning to the balance sheet. The company ended the quarter with approximately $1.1 billion in cash and short term investments, which.
Which is down roughly of $142 million from the first quarter 2021.
As a reminder, as Curt discussed during his prepared remarks, we deployed approximately $110 million to acquire an option for a 10.5 stake and farm again during the second quarter of 2021, which drove a significant portion of the sequential decrease in cash and cash equivalents.
Capital expenditures for the quarter were $2.1 billion with the spending focus 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.
The continued 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 Gerry despite the ongoing challenges posed by the pandemic our industry continues to show resilience.
Against this backdrop, we continue to bring high quality and novel products to market under our brands in the U S, Canada, Israel and Germany.
Our balance sheet existing CBD infrastructure, our strategic investor along with our success and insights ready to really leverage from all of the markets. We are confident we are well positioned to be of best in class cannabis company in any market we compete.
With that let's open the line for questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your touch tone telephone.
Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
We ask that you please limit yourself to 1 question and 1 follow up.
Your first question comes from the line of Andrew Carter with Stifel.
Hey, Thank you good morning, I guess I wanted to ask and maybe of beating a dead horse asking about the gross margin here.
It continues to be underwhelmed.
Wanted to ask what kind of signs we should see to start to see stronger performances line is the innovation going to be margin accretive are you in a position on your kind of third party cost of where that can be the be profitable or do you have the right price price points.
You can help help us on this gross margin line. Thanks.
They think the Andrew.
The way that we think about it.
We had inventory write downs this quarter of $12 million and we continue to evaluate the competitive landscape in concert with consumer preferences to drive product innovation and I think that's the really hampered our margins in the quarter.
As Kurt talked about of prepared remarks, we're definitely seeing green shoots in terms of our revenue and innovations with GMO cookies in the flower category and our salaries and the edibles and obviously the ginkgo fermented cannabinoids products that we're going to be launching later in the year.
Okay second question switching gears, a little bit I mean, the headset data. We've seen has validated of very strong performance by spinach in Ontario, and Alberta, and particularly sort of I guess 1 question I have we know it's a volatile supply chain in Canada.
Or are the reorder and with the strength of the Reorders, keeping up with your expectations or the retailers able to reorder and get it from the provinces. The provinces coming to you could you kind of help us out with that thanks.
Yeah, you're right sours is doing really well the.
You know we have 2 skus in the top 5.5 and 3 in the top 10.
Yeah. The early 2 sets.
It's been very good and we are where we feel confident.
We can handle handle the demand.
Again, we weren't first in market with the gummies and we spent some time trying to get this thing right, but the early results speak for themselves as far as spring of this high quality product in and of that confidence is let us test that we believe.
Our first rare cannibal cannabinoid launch of this with CPG will be under the flowers brand under the.
The edibles brand.
Yeah, but my real question is I get the strength of my real question is is the supply chain are you really seeing the commensurate reorders or is it just kind of more of the same volatility like we we kind of see from the supply chain. Thanks I'll pass it on after that.
Yeah, well, it's early days.
But.
Clearly the feedback from the the of the trade is excellent.
That's the.
That's the surest indicate an indication that there the reorder should be strong as we bring these consumer consumers in into the category of more of an experience and what the marketing programs that we're doing there to educate on the products. So we feel pretty bullish because the products delivery I mean, we get very good feedback that the products delivering.
That's a really good sign for repeat.
Thanks, I'll pass it on.
It might just add that you know I think things have certainly improved in Canada as the COVID-19 restrictions have been lifted so kind of a lot of the supply chain challenges that you've heard about the provinces were related to the the more intense lockdowns of Canada versus the U S.
Yeah.
Your next question comes from the line of Ragusa Zone with Raymond James.
Good morning current Jerry Mike. Thanks, So much for taking our questions I don't feel a big welcome to Bob.
So the terrific news the Kronos from patients called from C. D. G will be included in the Finnish coming before the end of this year, particularly given the ginkgo itself has been highlighting the partnership front of us and its own upcoming of public listing. So my first question is how is the ginkgo ginkgo Kronos partnership evolving towards the development of additional cultured cannabinoid and when do you expect this broad.
The portfolio to be fungible molecules to be included in front of us products and hit the Canadian or potentially even U S shelves.
Yeah.
Again, we we shifted our strategy we've talked about in the last call the focus on the rare cannabinoids.
And Youre, saying, we're progressing our first 1 CPG with that.
Launch coming up coming so we feel very good.
Of that we're on track.
To deliver these products as we go over time so.
Again, it's the anything in the way of us, beating the kind of milestone time lines. We have 4 of launch plant, we reorders to focus on the railroad first versus the kind of in CBD and THC.
And the.
We are really bullish of gonna see those coming over the next.
18 to 24 months Youre going to see these products coming on line.
And and so you know.
Again, it's the strength of this this joint venture and the partnership and the innovation we're spinning off.
Yeah, we're really really confident Mike that I don't want of I don't know if you want to add anything on that since you have been instrumental in the the kimco.
Agreement in process.
Sure Yeah. Thanks no.
And I think that's right, you'll you'll see us continue the Ah.
Include cultured cannabinoid, specifically the the rare ones.
You know the CPG, we're starting off with the with the sours, but you'll see that also.
Spread to other formats, and we're making great progress with with ginkgo and it'll be similar to how we're launching CPG. When you start seeing some of the other rare cannabinoid added the specific formats and then depending on the consumer insights spread into other formats as well so that will just be sequenced.
The.
The next couple of months and quarters.
Great work and I look forward to that so kind of moving to the U S. It's great. It's great to hear that the peace talks have been relaunched.
Are you able to share of anymore color on how the partnership with Altria may enable penetration, particularly of the C store channel across the U S and how we should be looking at that adoption ramp.
Right so.
Yeah. We believe the addition of peace pluses. This time, it's really nice component to a tiered pricing strategy.
And again, we've got 4 tincture of excuse that we're launching.
We're starting on our D to C website.
That will expand we are working with C stores and convenience stores.
And we hope to announce something in the not too distant future on that 1 as far as out of 3.
That that is certainly value added that we could have now that would require some things we've talked about before is as far as the getting the F. D. A to on the edible side on the regulatory side, but as you know as soon as there is clarity there that that leverage point of al trio, we can take advantage of immediately.
Great. Thanks, again all of that stock.
Your next question comes from the line of John's empower all with CIBC.
Thanks, Good morning, I wanted to start with the the spinach brand as well it does seem like it's capturing more market share and price is certainly a part of the picture there but has there been any other strategic shifts that.
You can share the that's helped caused that whether it's promotions or marketing or interaction with retailers or something on the cultivation side.
I'd like to get a sense of what's causing that brand to move so meaningfully when when most of the other large brands are fairly stagnant and then related to that do you think you've found the right level of pricing of expenditure or are there more investments to be made.
Yeah, I think it's the combination of things innovations certain the clearer.
A clear driver that we talked about that.
And our new flower launch.
Which is doing exceptionally well and that that of science behind the genetics of that plant sours, which is just the combination of fantastic some proprietary.
The parts of that product, but really trading at like a confectioner like non delays with true launching of product. It's a fantastic product and carrier. So innovation is going to play a big part of this.
Extending the brand in certain areas will play a part of it we talked about the Nuggets and the 28 Gram of dabbs coming in their sourcing round out of portfolio. The second part is focused.
We're really focused on the finished brand I'd rather have 1 power brand then 28 brands.
That are all kind of doing something we believe in the brand resonate resonates with.
With the consumer so it's got a great brand positioning we worked very hard on that I think there's a lot of the blocking and tackling execution of its probably the third point of that which include some of that marketing and those 3 elements.
I think a really really good.
Our strength going on in the future of it will continue to be the innovation carrier for us.
And that pipeline is being worked on and it's you know we're staging that as we go along Mike already alluded to the culture of cannabinoids, where that could possibly go so we feel.
We feel this is this is our power brands and and and I'd rather have 1 Coca Cola you know the 55 different bump out of water brands right. So we're going to really focus on that brand and I think we're saying the debt.
That pay off that strategy pay off.
Okay. That's great I appreciate the color and then my second question is on the farmer Mccann investment are you exploring other incremental investments of that nature of how would you characterize the attractiveness of the M&A landscape and the rest of the moment and how do you think about targeting brands versus the operators in the cultivation of retail.
Yeah, I'll I'll kick off and then you know.
I'll, let Mike jump in because he's really the leading us in the this adventure first of all we think farm cans of great..1 we.
We are of a set of criteria, we look at what we would want to be part of and far Mccann.
Really checked the checked all of the boxes for us.
So you know, it's a fantastic strategy the best in class operator.
We've talked about before all of this I 80 strategy they have and limited.
Limited license states from Illinois to Massachusetts.
We think they have capacity to grow organically and through M&A.
So it really kind of checked all of those boxes, but we've been pretty consistent saying you know we're not finished you know we looked at the criteria is.
Breadth geographic beachhead items, but brands is also very important so it's not out of the rounds of the possibility that we may focus on something else that brings a different set from the party, but I will tell you. We look at it it has to be complementary to the overall strategy.
Mike.
Yeah, Mike.
You should probably weigh in on this a little bit.
Sure and thanks.
John You know I think I think the M&A landscape certainly is attractive.
1 of the things that I think being focused on by a lot of potential targets is and.
It really was was amplified by the language in the Schumer Bill around the Interstate commerce.
Is what benefits it could be from the potential partnership and how things may change once things are federally legal and that really aligns with the way that we're we're looking at them. So brands are certainly going to be important we think ultimately that's where the value of shifts the long term, we understand that there's a balance between where value shifts of long term within brands and.
Sort of over the medium term, how you build those brands and get the Mt.
So.
I would say that there could be similar structures with other structures that we've looked at but.
We're still very very excited and we think there's a lot of attractive opportunities that will fit very well for us in the U S.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Vivien <unk> with Cowen.
Hi, good morning.
The Army you actually I was hoping we could dive in a little bit on on the C. D. D. I was hoping to get your of his current assessment of of the market from a sizing perspective, and then specifically on the dance if you could comment on any intra quarter trends and whether you're seeing.
At all of a recovery of an uplift as consumers getting acclimated and go back into the stores.
Yeah, I'll kick it off and then the look.
The generator, Mike combat the we're starting to see weight of lot of hopes of Covid recovery, but as you know lately.
And we seem to be going back into the scope of the delta. Thanks. So we don't know how of that one's going to swing out.
We were hopeful because you do see bricks and mortars coming back, but when the interest.
See the Internet I have to say, where you know overall, we're not happy with the results of the U S CBD market.
We don't break out right down our performance by brand but.
But we are taking the street strategic review of the brands.
We've got some good things, but you know certainly I'm not happy I'd like to see faster growth.
So we're kind of reviewing everything on this 1 you know that that could close the portfolio.
<unk> GAAP price management, what we're doing there our.
Product offerings, and we're looking at the marketing mix, we we don't have the full.
The results, yes, we're getting where we're trying to complete that but we have a couple of way of 2 markets that we've been testing advertising and the more aggressive marketing that's on the product now that looks.
Encouraging, but we'll have to see how that how that ends up but we need to review of everything and make sure of that we can get the pace because generally speaking.
We were we were not happy.
With the results this quarter, but again some of that is related to the cold, but it's true some of it's related to some changes and some of the the DC capability, especially with Apple's New security. That's been has as has certainly had an.
And impact.
But.
You know again.
We believe we get the elements right and we get the investment right of the brand.
<unk> resonates very well with.
With consumers that are.
We'll get it for all of the trajectory we want.
Okay perfect. Thank you very much for that and some of your candor in particular.
With the U S and my follow up question. Please on farm of can can.
Can you comment at all around any opportunities around I T or trademark exchanges are sharing thank you.
Yeah, I'll, let Mike weigh in on this because it's good to have them because most of the lawyer in the room with me.
Yeah, we're looking at those types of things, but all of those have to be managed under the guise of path of investment and the lack of federal legalization, but certainly if you look at it.
At the at the announcement, we made theres opportunity there is tremendous opportunity once federal legalization comes but that doesn't mean, we're thinking about what happens if a prior.
Prior to federal legalization of bunch of things happened I, just can't commit to anything.
Because.
We have that restriction of ensuring that we can do that from doing this in a way that is.
Is it sensible for us and the and the guys of the the regulatory environment.
I don't know if you want to add anything to that.
Yeah sure Vivien you know, we certainly see this as something that's very strategic for us as far as pushing the brands out I think the way that we really focused on on getting that advantage was in.
Setting up distribution agreements that we can sort of trigger out of our own option.
So we're going to continue monitoring and making sure that whatever it is that we do to get our brands out is done and.
The way that wouldn't.
And our view of affect anything with the CSA.
But we feel that there's a strong partnership that we can use the leverage brands too early to speak about any imminent trademark swaps, though.
Understood. Thank you.
Your next question comes from the line of Tami, Chen with BMO capital markets.
Thanks, Good morning, everyone I'm. The first question is on the day category I would call them practices moving about 2 years ago..1 of you talked about your initial launch of the product from the Canadian market would be a sort of first chang them, but that you'd be working on nextgen proprietary products.
The category. So I just wanted to see if I can get an update on how that's going with respect to the innovation work for the day category in fact book here right.
Yeah.
Yeah, let's just call. It. Thanks for that question. Yeah, we are working on it and you're going to see something in the not too distant future, but you know I don't want to talk about the the actual dates or anything on innovation, but.
You know we are we are working and in that on the base segment right now.
Okay got it and then my follow up is.
Going back to the first.
Much of CPG product under the flowers format in Canada. Later this year I was wondering if you could talk a bit.
How you're going to position the product.
I presume I like from a marketing perspective, and making sure that staff and stores are educated on that on the differentiation. So that they can communicate with the consumers because with respect of product launches in general in Canada and I recognize this is the little product, but it.
It is a very crowded market theres a lot of different products from brands on shelf and to what degree of confidence do you have that there is going to be strong uptake for our CPG products in particular, and what sort of work you're doing to ensure you know getting the shelf space kind of get the oh by the tender attention and provisioning.
Yes.
Yeah Yeah.
Good question, well, we have a full team from developers innovation to the research we've done to the product developers to the marketing teams.
We don't view this as a product we view this as a concept a business concept and we think we have something really.
Interesting of sub brand under the finish line and we believe that's the way to do it that's my background Blue Buffalo built the billion dollar business on a single brand called Blue Buffalo, but we had life protection. We had wilderness, we had freedom sub brand out of Blue Buffalo, and we had basics there and we built.
This concept and we spent a lot of working on how to communicate with consumers. So.
Obviously, we're rolling out we have to get to each 1 of these rare cannabinoids. So that takes time you can't make all of 6 at once but we are not thinking about this as the product. It's just not of product. This is a brand concept lifestyle positioning against consumers are resonating with consumers.
And that's the way, we look at that strength and and we're confident we're on the road to creating that and whatnot and and.
We think that's really what this whole thing is about.
Yeah.
And Tamara just to add I think you know it.
If you think about edibles, the crowded space, even without rare cannabinoid, which is where we've seen a lot of excitement from from.
From retailers and from.
The provincial boards, when we launched finished showers in and immediately had great success and we saw that as we had preceded the launch of the the rare cannabinoid edibles. So we've had great success without them and we expect that's only going to be.
The stronger once we have the the key differentiator added to those.
And again as Mike said, we're going to grow the business. The edibles of great start for us, but other 2 point of all products are great vehicles for the us and so we've got innovation along the concept, we got innovation, along where we can move the the brand to the products too so it's exciting.
And I you know I think like I said, it's been a hell of a lot of work done by the teams and I think we've got it and I'm looking forward to Youll start to see a little bit of that when we launch.
The first 1 here in September.
Great. Thank you.
Your next question comes from the line of Heather Passkey with Bank of America.
Yeah.
Hi, Thanks for taking my question I'm I'm, just curious it's going back to 1 of the questions at the beginning of the Q&A around gross margin.
And do you think needs to happen what sort of scale of what other.
I guess mix shift maybe that you need to get back to parts of that gross margin.
Yeah.
Yeah. Thanks for the question Heather I think in the U S segment, it's really about driving net revenue growth.
Our revenue was down a little bit this quarter and I think with increased revenue of that will improve the margin in that segment of the Canada side. You know we are seeing some positive momentum on the Spanish brand and the like I said earlier of margins were negatively impacted this quarter, mainly due to the continued development of innovative products.
We have some heightened startup costs within our manufacturing facility. In addition, we're lapping the price reductions that we took in the Canadian market in the second half of 2020, which is causing a portion of the impact on a year over year basis.
Instead of the collar.
Your next question comes from the line of Bill Kirk with M. Cam.
Hey, good morning, everybody I want to go back to innovation the tackle it a bit more philosophically I'm you know it seems the pace has accelerated rather dramatically so.
But philosophically for you and has led to the strategic shift of focus you know what seems like more urgently on recreational use innovation.
Okay. Thanks for the question.
I don't think it's really been of shift I mean, we work on innovation.
And the company and the come from a very disciplined.
Ensuring yeah of distinct.
The difference.
And sometimes that takes longer I think edibles. The classic example, we kind of thrown anything out the door.
But you know we looked at from the.
The consumer side.
You know from kind of the product build side of what kind of what we're trying to do and some of that takes longer in the case of <unk>. You know that you've cultured cannabinoids are you know that that's a pretty hefty projects, that's like new science.
<unk>.
When I sit in the Gainesville meetings.
Undergrad in chemistry, sometimes I can all I need.
The innovation, they give me kind of day.
Tutoring afterwards on some of the stuff so we're moving some pacing.
Facing technologies, we want bigger ideas the.
Tend to take longer and the other hand once you get the system in place you could start to move faster once you get the fundamental building blocks in place between marketing the product development teams.
And the research side you start to go in a lot of that was built so I think we're at the point now where we've got the right. We've got the right machinery and people to get this done but we believe again, we believe the you know the cheetah.
The key for US is to become a branded player in the branded players, bringing great profit, except if at all.
The delight, the consumers and platforms in our Newton, new and unique.
And so that's what we're about and we will not lose that focus on innovation and I think that's really critical to us as the company.
Thanks sure.
So I think what you're seeing is just a quite.
Quite a bit of of work that it's.
With the urgency on product development, we just now have quite of bit of products in the developed and are being very mindful about how we launch them, but having supply chain in place and now with the retail opening back up in Canada. We think it's a good time.
Thank you Mike Thank you Kurt.
Your next question comes from the line of Howard Penney with hedge Hi.
Alright. Thank you so much of the question I was wondering if you could expand on the farm of cans investment in particular, the commercialization of a distribution agreement that you signed and why that's important as you look to enter the U S.
Yeah, Yeah, I'll kick it off and then Mike can jump in yeah. We're in it for the long haul. We're not you know this is not an investment for us of trying to build the partnership in the partnership so that concludes the bunch of things and access for our brands and distribution and access for our you know eventually for our technology.
Allergies.
We have a great allowed to tell you personally I love the guys. There we've got a great relationship Hum, but with far Mccann, where we really see eye to eye on it and we're really trying to build for the long term for the for what can we build the leading cannabis company and the in the U S. So all of those things we want a mutually share.
Or what we do really well what they have so that we really get we really try to drive this thing and so that's why the some of these commercial terms and distribution terms are so important for us.
Again, we'd loved the move faster, but from obviously because of the regulatory environment, we have to move out of different pace on some things, but yeah. We want of commitment because we see this even though we only have 10 per cent we didn't get into this.
As an investment we got in and of 2 it is a long term partnership.
Kind of help drive both of our businesses, Mike I don't know if you want to add anything to that.
Sure Yeah, No I think that's right. We see we see 2 drivers of value here..1 is we think of they have a great core business and so we like the investment of just purely an investment basis, but the other is.
It's it's really important depending on how the regulatory environment shapes up and how things progressed that we do in these key restrictive markets as far as retail like New York. For example, there's currently 10 licenses just knowing that we have a trusted partner with the close relationship to be able to launch our disruptive products.
True.
It's something that really excites us and all of that day.
The keep investing behind innovation, knowing that we'll be able to reach consumers the right when we need to.
Thank you so much.
Yeah.
At this time there are no further questions ladies and gentlemen. This does concludes today's conference call. We thank you for participating you may now disconnect.
[music].
Okay.
[music].
Okay.
[music].