Q4 2021 Cronos Group Inc Earnings Call
Good morning, My name is Myra.
Conference operator today I would like to welcome everyone to <unk> 2021 fourth quarter and full year 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. Sir. Please go ahead.
Thank you Mara and thank you for joining us today to review Kronos group's 2021 fourth quarter and full year financial and business performance today I'm joined by our President and CEO , Kurt Schmidt, our CFO , Bob <unk>, and our executive Chairman, Mike Gordon Steve.
<unk> group issued a news release announcing its financial results. This morning, which are filed on our Edgar and SEDAR profile. This information as well as the 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 of the factors described in the cautionary statements and risk factors included in the company's earnings release and <unk>.
Go towards filings, including the company's most recent annual report on Form 10-K .
<unk> 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 Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management in planning forecasting and evaluating business and financial performance, including allocating resources reconciliations of these non-GAAP measures to their <unk>.
Most comparable reported GAAP measures are included in our earnings press release furnished to the SEC, which is available in the press room section of our web site. The Kronos group Dot Com. 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 remote locations as such there may be brief delays cross talk or minor technique.
<unk> issued during this call. We thank you in advance for your patience and understanding we will now make prepared remarks, and then we'll move into a question and answer session with that I'll pass it over to Kronos group's president and CEO Kurt Schmidt.
Thank you Shane and good morning, everyone.
We appreciate your patience and for joining us for the second time in about two weeks. We are pleased to share our 2021 fourth quarter and full year results and business updates with you.
As I touched on during our call on February 18, we started this year by undertaking a realignment of the business too.
To position Kronos to drive profitable and sustainable long term growth.
This realignment puts our products and agility at the focal point.
I've used the realignment in three distinct pillars.
First we have realigned the organization, removing redundancy and centralizing functions under common leadership.
Second we are reducing complexity I continuing to.
Our asset light model.
As part of that we've decided to exit the peace Naturals campus.
Elaborate more on these plans in a minute.
We're also continuing to perform product reviews, and pricing optimization scenarios across our brands and products at <unk>.
Finally, we have implemented a cost reduction initiatives expected to reduce operating expenses by approximately 20% to $25 million in 2022.
When we spoke two weeks ago, we bought you updates primarily on the first and third pillars of our realignment initiatives.
To date wed like to first provide a further development on the second pillar.
This morning, we announced in our earnings release that we are exiting our peace Naturals campus and Stayner, Ontario.
Extensive analysis went into this decision.
And while we know this will mean transition and change. We also know this is the right decision to help ensure a promising long term growth.
Our goal has always been the operating asset light business focused on brands and R&D. This transition allows us to that patient.
We have always maintained that cultivation will shift to large scale agricultural specialists as the industry matures.
Which is why we focused on building joint ventures and partnerships around the world with best in class operator.
We now feel confident that the industry and our supply chain in Canada are at a maturity level, where we can implement this approach.
We have consistently focused on having a diverse supply chain aided by contract manufacturers and third party producers to supplement our cultivation and manufacturing needs.
In addition to building those relationships over many years, we have the development capabilities with our JV partner Kronos rollout in order to execute the slope.
We are very pleased with their premium flower cultivation, which has increasingly become an important component to our biomass supply.
We know their capabilities and efficient downstream processing will enable our goal of improved profitability.
Protecting topline growth and continued momentum on R&D is up.
Most importantly for our go forward strategy and they are top priorities for the transition.
To ensure smooth execution Kronos will continue to operate the peace Naturals campus with a phase reduction in transition of activities throughout 2022 with a plan to exit by the end of 2022.
In addition, we are focused on maintaining our relationship with our Canadian customers.
We intend to obtain a sales license from health, Canada at Brookhouse facility.
Sure that continuity.
Regarding our R&D efforts all initiatives will continuous plan across our various facilities.
There'll be many moving pieces and complexity to manage during this transition.
But we're focused on staying as close to our timeline as possible, while maintaining our high and growing revenue and bringing innovative products to market.
We are grateful to our stand our associates for their hard work and contributions to Kronos group.
And we appreciate those associates, who continue to work at our peace Naturals campus to provide a seamless transition out of the facility throughout this year.
I now want to turn to our business and walk you through some highlights from the fourth quarter and full year 2021.
While this year had its challenges. It's also important to note our wins all the fundamental work, we have put into making our brands successful and win with the consumer is starting to shine through in our results.
The spinach brand continues to win in the Canadian market.
In the fourth quarter salaries by spinach Gummies continued to strengthen its double digit market share in the category.
All three salaries by spinach flavors, we're in the top 10, and the edibles category nationally and within Ontario, Rasbury holds the number one spot.
Our market share for spinach in the flower category ended the quarter in the high single digits.
Strength in the flower category as a result of years of R&D work in breeding of genetics.
Importantly, we have shared a lot of the genetics with Brookfield and look forward to continuing to help them elevate their flower portfolio overtime.
We also launched our sub brands spinach field.
Brand designed to deliver a unique and enhanced experiences.
Made possible through a proprietary blend of rare cannabinoids alongside more common cannabinoids like THC and CBD with a wide variety of products and formats and.
In October 2021, we launched our first cultured cannabinoid product under spinach feel the chill Bliss coming which is making significant inroads within the edibles category.
And although our base launch utilizing culture CPG is early we are happy with the trends.
The success of our Spanish brands and products to date is a testament to getting the fundamentals right.
We will continue to invest in our innovation to bring consumers the products they want and other products that haven't even thought of.
We're starting to see success in the Canadian market with spinach, while readying ourselves to utilize our innovation and key market learnings and other markets as they emerge.
As we restructured the organization to match our go forward strategy. The primary focus of our energy will be towards elevating our brand by utilizing rare cannabinoids and focusing on adult use products.
We have always viewed the Canadian market as a REIT as a region to fine tune, our innovation and product development initiatives.
We bring most of our adult use products to consumers in Canada, but we continue to conduct extensive consumer insights work and all the regions we operate in.
With an eye towards adult usage.
Nick.
The United States remains a great place to learn more about the evolution of consumer preferences.
We focus on creating those turnkey solution within the markets we operate in today.
Turning to Israel, we continue to be delighted with the results of our medical business.
We started selling our peace naturals brand to medical patients to participating pharmacy in the second quarter of 2020.
We have increased our distribution to participating pharmacies to nearly all pharmacy that sell medical cannabis.
And we will continue to expand as more pharmacies come online.
Total patient count in Israel has also increased substantially to approximately a 190000.
Which is up 40% versus the same period last year.
With a long runway for continued growth.
But the recent survey conducted by cannabis magazine naming peace Naturals. The most recognized cannabis brand in Israel, we have a lot to look forward to as we work towards meeting our patient demand in this market.
Given the growth of our business, we thought we could take some time to dive more into the Israeli market and how we positioned ourselves as a leader there.
Israel has a population of just over 9 million people and boasts one of the world's highest candidates usage rates.
Unlike the North American cannabis market, Israel is much less competitive illicit market, given Israel's stringent border controls and security infrastructure.
The rapid growth in the Israeli medical market reminds us of the early days in Kansas as medical markets with demand outpacing supply and the stigma associated with the product quickly fading away.
With our manufacturing footprint.
Established local team strong branded product portfolio, we are very well positioned to succeed in the Israeli market.
As we realign the organization to match our go forward strategy.
Primary focus of our energy will be towards elevating our brands by utilizing rare cannabinoids and focusing on adult use products.
I want to conclude by outlining our four core business priorities all of which are focused on driving initiatives aligned with our vision and designed to deliver sustained sustainable growth.
In 2022, we look to one accelerate growth by focusing on the core business.
Leveraging our top selling products to deliver on each brand's potential.
While maintaining a disciplined approach to investing our time and resources and the opportunities. We believe will provide the most significant returns.
We diligently evaluate our manufacturing strategies to ensure that we only move forward with new products and processes.
Add incremental value and contribute to our strategic vision.
Three.
Creating a robust platform for innovation across prognosis group portfolio of global brands.
Supported by our belief that rare cannabinoids will drive differentiation.
Four key U S market entry as our North star by managing our turn on capital spend and external capital allocation to maintain the flexibility to capitalize on opportunities that will position Kronos as a leader in the U S market.
We have a lot of work ahead of us, but I feel confident that the actions we've outlined today will improve our business and set us up for success in the long term.
With that I would like to pass it to our CFO Bob made or.
Thanks, Kurt and good morning, everyone.
Before getting into financial results allow me to provide further details on our planned exit from our peace Naturals campus.
As a result of the company's planned exit from the peace Naturals campus. The company has incurred a $119 9 million noncash impairment charge on long lived assets and.
In the fourth quarter of 2021.
In addition, the company expects to incur charges of approximately $4 5 million in connection with the planned exit.
All of which impact.
R O W segment.
These charges include employee related costs, such as severance relocation and other termination benefits as well as contract termination and other related costs, which are expected to be incurred primarily in the second half of 2022.
In addition, the company anticipated capital expenditures of approximately $2 5 million to.
To modernize information technology systems and build distribution capabilities.
Kronos group will explore to leveraging <unk> capabilities and premium flower cultivation and efficient downstream processing.
With the intention to improve profitability of the company's Canadian operations.
In addition, with further leveraging its joint venture with <unk>.
This group will continue to maintain a network of third party license processors to supplement cultivation and manufacturing needs.
Now getting into the financial results filed today.
In 2021 on a consolidated basis, we increased revenue, 59% year over year to $74 4 million with.
With strong performance in the rest of the World segment.
Highlighted by Canada and Israel.
Our rest of the World segment recorded net revenue in 2021.
Of $64 6 million, representing a 73% increase year over year.
The United States segment increased 4% year over year to $9 9 million.
In light of slower growth in the U S. We're committed to right sizing the U S segment.
To realign it with our go forward strategy with a focus on improving profitability.
Now turning to the fourth quarter of 2021 results.
The company reported consolidated net revenue in the fourth quarter of 2021 of $25 8 million.
51% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth in the adult use Canadian market.
Increased sales in the Israeli medical market.
Consolidated gross profit for the fourth quarter of 2021 was one point.
9 million, representing a $16 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by a decrease in inventory write downs.
Increased gross profit and the rest of the World segment.
Consolidated adjusted EBITDA in the fourth quarter of 2021 was negative $27 4 million.
Representing a $25 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by an improvement in gross profit.
And then a decline in sales and marketing and research and development expenses.
Turning to our reporting segments.
And the rest of the World segment, we reported net revenue in the fourth quarter of 2021 of $22 7 million.
A 68% increase from the prior year period.
Revenue growth year over year was primarily driven by growth in both the adult use extracts and flower categories in Canada.
In sales and the Israeli medical market.
Gross profit for the rest of the World segment for the fourth quarter of 2021 was $2 4 million representing.
Representing a $19 1 million an improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by a reduction in inventory write downs.
And an increase in sales volume with cannabis extracts in the Canadian market, which carries a higher gross profit than other product categories.
Adjusted EBITDA in the rest of the World segment for the fourth quarter of 2021 was.
It was negative $14 6 million.
Representing a $21 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by an improvement in gross profit.
The decrease in research and development expenses.
Turning to the U S segment.
We reported net revenue in the fourth quarter of 2021.
$3 1 million.
But 11% decrease from the prior year period.
The decline year over year was driven by a reduction in volume due to competitive pressures.
We spoke at length, approximately two weeks ago that the U S. CBD business is not where we want it to be.
The strategic review of this business, including the potential for price optimization.
SKU rationalization.
In modification of the distribution channels.
We remain top of mind can we intend to share material updates with you at the appropriate time.
Gross profit for the U S segment for the fourth quarter of 2021 was negative zero point $5 million, representing a $2 $3 million decline from the fourth quarter of 2020.
The decline year over year was primarily due to increased production costs.
And increased inventory valuation adjustments to reflect net realizable value.
Adjusted EBITDA in the U S segment for the fourth quarter of 2021 was negative $8 3 million.
Representing a $3 5 million improvement from the fourth quarter of 2020.
The improvement versus prior primarily by sales and marketing.
And general and administrative expenses.
Now turning to the balance sheet.
The company ended the quarter with approximately $1 billion in cash and short term investments, which is down approximately $35 million from the third quarter of 2021.
Capital expenditures for the quarter were zero point $6 million with the spending focus across our global strategic priorities.
Capital expenditures are down approximately 95% year over year, driven by reduced spending on enterprise resource planning implementation.
And capital improvements across our facilities.
We remain committed to deploying capital in a disciplined manner.
Only in ways that align with our strategic priorities.
Lastly, I would like to provide you with an update on our remediation efforts in relation to the material weakness that we disclosed last quarter.
We as a company are committed to instituting best practices for financial reporting.
Our management.
With oversight from the audit Committee has initiated a plan, which we are working diligently to phase in over the course of 2022.
In addition, I'm happy to state that the material weaknesses previously disclosed related to inventory verification.
Has been Remediated.
With that.
I'll turn it back to Curt.
Thank you Bob it's not lost on us that our recent challenges are overshadowing our results.
But I want but I want to leave you with today is that despite of all that you are starting to see the strategy and execution show up in our results we.
We are building a great brand in Canada to spinach and have demonstrated sustainable market share gains we are seeing incredible growth in Israel, a robust medical market. We've heard we work hard to win it.
We are making decisions to realign our organization and moved quickly to help our business improve efficiencies and profitably and rapidly changing markets.
We are the first company to release, a cultured cannabinoid product using breakthrough science and technology.
And we are the leading company to market rare cannabinoids in a way that resonates with consumers.
On the right path and we're rising to the challenges in front of us.
With that I'll open the line for questions.
Okay.
At this time I would like to take any questions you might have for us today.
As a reminder to ask a question simply press star one on your telephone keypad and please note that participants are allowed one question and one follow up question Tony.
Thank you please standby, while we compile the Q&A roster.
We have our first question comes from the line of Andrew Carter from Stifel. Your line is open and you May now ask your question.
Hey, Thanks. Good morning, first thing I wanted to ask is how long has the kind of exit are staying are being contemplated in terms of an option to kind of say fund and also kind of creating some of the redundant redundancies have because I would think like you would not you would not want to put any risk of slowing down the revenue momentum. So maybe you could just help us with that thanks.
Yes. This is Kurt.
Yes.
This has been ongoing for quite a lot while again the whole idea.
Grilled Coe initiative is all about our belief that.
Yes.
Cultivation will move towards the agricultural sector. That's why we created the growth.
Initially and we're bearing that out so sort of construction start up and through full up with.
Hit every milestone we want so that is ongoing for a while and.
We're very pleased with where we're at right now, we're delivering high quality and well priced cannabis out of the gorilla co supply chain and we have enough redundancy in our supply chain as we talked about in.
In the upfront remarks that we feel very good that this is the right time for this move.
Okay. Thanks, and then just kind of a second speaking on kind of the revenue momentum great quarter. It's been a great build for the Edibles brand spinach brands really stood out just released the headset data for February . This morning, it's taken a step back both the edibles and spinach is that kind of a do you see that as kind of a seasonality.
Anything youre seeing and kind of reduced shipments and could kind of Canadian adult use revenue take a step back sequentially here in the calendar first quarter.
Yes, I think it's I think it's part of a little bit of the seasonality and some of cohorts that came roaring back temporarily in the first quarter created some disruption.
But again I think were seeing overall the momentum in the first quarter would be quite positive.
World is getting back to normal I think in the second quarter here. So we think that all that will write itself. We're really confident about the white space is developing on the consumer side.
Thanks, I'll pass it on.
Okay.
Our next question comes from the line of Rahul Saragossa from Raymond James Your line is open. Please go ahead.
Hi, there good morning, Curt Bob and Shane This is Michael <unk> on for <unk>. This morning.
I have one question my first one is on the.
The downstream effects of this of this exit from the peace Naturals site I guess.
I Wonder if you could describe for us the implications on head count.
Locations on where your top notch R&D facilities might be moving to with this move and then just broader implications on cost structure. As you go through this I sit through 2022, Thank you very much.
Okay, that's three things to unpack there the first one is.
I won't go on an exact number.
The head count, but I doubted Lee as we go to shutdown of this facility.
There'll be changes in the size of the organization.
Out about that.
But we're equally we're really committed and we've really planned this makes ensuring that we're treating our employees the right way and we do this in a high quality fashion as we move through this process, but it will that will it will have the effect of reducing.
Standard facility, including.
How many employees we have the second one on R&D. It is important to remember we have multiple facilities across the supply chain that the R&D work, Sir Winnipeg has as a facility.
We do already worked there.
We'll eventually move some stuff into grow co.
This has no effect on our R&D.
Scope, so as we've talked about our key.
Driver is brands and R&D and R&D is around margin accretive innovation and winning in rarest will.
We will see no effect, it's going to have no effect on innovation, we're developing and the timelines.
Driving towards.
Then your third one I think was about margin profile of the business pulses.
Don't give specific guidance.
But obviously, making this decision.
Obviously believe there's a significant opportunity to improve the profitability of our business.
Our peace Naturals campus.
Carries a real heavy complexity and the heavy overhead burden so removing that from a cost structure, coupled with a lower cost of production and the more efficient downstream processing at Grubhub.
Which are experts in cultivation, we think theres, a significant opportunity to expand gross profit and.
Both dollar and percentage terms and remember you've got a couple that with the with the.
During our third quarter earnings call, where we announced the first phase of the restructuring, which will reduce operating costs by between 20 and 25 billion. So we believe all these initiatives put us on a really strong path to improve profitability, while maintaining our clear focus on to <unk>.
Important thing, which is margin accretive innovation.
Winning in rare and of course sustainable growth and building our brands, particularly spinach.
That's very helpful. Chris Thank you very much for that color.
My follow up is perhaps for Bob.
We noticed.
Meaning in the third quarter.
On impairments related to ginkgo exclusive license and we see those again.
Appearing on the four key financials I Wonder if you could just unpack these impairments and perhaps related then to the way you're you're valuing this ginkgo exclusive license.
Yes.
One of the bigger challenges with.
Going after the rare cannabinoids.
Developing the different milestones.
Under the accounting rules and I won't bore everybody with the rules.
The.
Type of valuation methodology, the relief of royalty from royalty.
In a space where.
You really don't have any history operational history and from a projection perspective.
It really kind of limited little handcuffed in the valuation exercise Ben the level of growth you can put in the projections just just from a valuation perspective that these valuations are not indicative of the commercial opportunities that we think these development of these rare.
Has for US, it's just an implication of.
Heavily discounting future projections in a space that.
<unk> is very new rarefied air.
Over time, as we get more experience.
In history around commercializing the opportunities.
As we developed additional rears with six more milestones to go after the two we've already.
Completed.
We think that that history of commercialization and what the market represents better visibility to that.
<unk> will help.
And that valuation exercise by but by no means is it what.
We think it's worth what we think we could sell it to a third party. If we wanted to we don't.
It's it's it's just an accounting valuation method.
Implication.
Okay. Thank you Bob I'll pass it on.
Our next question comes from the line Jan <unk> from CIBC. Your line is open. Please go ahead.
Thank you very much good morning.
Wanted to start on <unk> co can you say approximately what percent of your current sales either either Q1 to date or in Q4 being supplied by grow Cowen can you remind us what the terms are of purchasing from the JV are you paying fair market value or is there just got embedded in that.
Yes, so our initial groucho purchases, we actually really started in 2021.
We're a relatively small amount prior to that.
<unk> our standard facility.
Could not.
Complete all of our supply.
Supply.
And demand requirements.
So in addition to grow co, which is really just been up and running for the last eight to 12 month period of time.
We also utilized other third party cultivators.
To fulfill our biomass and dried flower.
Flower needs.
Now moving forward. We obviously are looking to leverage just based on <unk> success in the harvest that they've already had.
In sourcing quite a bit more from them.
From a pricing perspective.
Competitive market pricing.
Relatively speaking.
But much.
More.
Efficient effective and lower cost.
Then.
What are our costs were to produce it ourselves internally, hence the reason for the the announcement this morning.
Around around standard.
We just think large.
Growers like <unk>.
That's where we always kind of thought.
The action was going to be.
And what the future most effective and efficient way of doing it and we felt we feel like we.
We've selected one of the best partners out there. So we're excited about about the opportunity.
Okay. That's helpful. Thank you and then my second question is on the Israeli market and I Wonder when you take a step back how you think that this country will evolve over time.
Will it continue to be served entirely by Canadian producers or do you think that eventually shift to domestic supplied market and I know you've got some exposure through Kronos, Israel, if and when that time comments, but just would like to get your thoughts on how that market will evolve.
Yes.
Well a lot of it will depend on the regulatory market in Israel. So.
Right now the way, we again like we do everything.
Our cultivation as we.
We have a lot of redundancy built in so we weekly impart from Canada, we produce ourselves on our own cultivation with our joint venture.
And we buy from third parties from Israel. So we are very well resource.
We think the biggest drivers can be the market as it continues to grow and develop.
Demand is certainly going up and we feel fully.
We are well.
Our position to be able to grow with that demand. So we're in a very good position.
Mike.
Understood. That's all for me thank you.
Our next question comes from the line of Colorado Jain from Barclays. Your line is open. Please go ahead.
Modern thank you for taking my questions.
Yes.
We reported a $27 million EBITDA loss this quarter.
What is it fair to assume that almost 2% of net losses in the U S segment, and 20% driven by rest of World segment.
Could you I'm, sorry could you repeat that last sentence the percentage.
August $27 million is it fair to assume that approximately $20 million of the loss will be in the U S segment and $8 million and the rest of the World segment, Yes, We don't think we have the breakdown.
EBITDA losses.
Debt level.
Sure.
Modern planning together.
U S business.
The commentary that you had but you are right sizing the business it is not that bad.
I know you have made that comments among a number of times over the last I would say.
A couple of years and it's still.
This is only $10 million of sales.
So how do we fix it.
Okay.
As part of the strategic alignment.
So I was just going to say, yes, clearly we're unhappy we're looking at we still think there is still strong strength in those brands.
One of the things, we're going to be focusing on more as we said previously is the adult use side of the business, we're going through that now we just announced the leadership.
Yeah.
At the last earnings call, which was just two weeks ago.
So we're doing that we're still doing a strategic review with that said.
It's.
It will come to the right conclusions as we go forward, but again there is still strength in those brands they still resonate.
And that's what we're about we're just not ready to announce anything we'll do that as we get closer.
Sure.
Your next question is this.
I look at your market fabrics like $1 3 billion.
Cash is about $1 billion. So how do we think of Kronos like Caribbean, you've got a billion dollar.
And the spaces I will say those kind of this.
Gen rig gone to make value because.
And are you and all your peers. So I think everybody is struggling with the same issue that we had done some kind of business as we have been pretty weak.
Sure.
Look at it.
That's it.
Well I'll, let Mike chime in as well our chairman because it is leaving US well all the things we announced today our focus on brands our focus on growing the business, that's been and I and the focus of the U S and.
Giving us the financial Youre right, we have a pretty strong balance sheet to.
To make those kinds of investments that we want to make that potentially we can make in the U S, which Mike actually has been leading for us a good example is the farmer Mccann.
As announced this morning that they closed down their live well acquisition and the reason why we invest in the farmer Mccann was the confidence we have.
And their management and their ability to.
Strategically grow both organically and M&A and Youre seeing that.
And we have a partnership with them and this is the kind of investments with our balance sheet. We can make Mike I don't know if you want to add anything to this.
Sure. Thanks sure, yes, the way, we think of it and making investments that we think.
Can can have.
Really good ROI globally over time, so things like the spinach salaries rare cannabinoid field line that as markets open up.
We will be able to take those products in adult.
Adult use open so things that we invested in Canada. We don't look at it just came a standalone, but how can we take those when you see the performance head to head with top U S brands.
With other Canadian brand in Canada, transitioning those into markets like Israel and U S. As they open and in addition, looking at opportunities for.
Our brands are IP that we see in other markets.
Or infrastructure distribution partners in the U S.
Thanks, so much Mike.
Okay.
We have our next question comes from the line of Andrew Bond from Jefferies. Your line is open. Please go ahead.
Hey, good morning, Andrew Bond on the line for Owen Bennett, Thanks for taking our questions.
So maybe just taking a little bit deeper into Israel I know, we touched on it before but maybe closer to near term wanted to get your expectations on how this strong momentum we see in third and fourth quarter might might continue.
Perhaps some stickiness there with the peace Naturals brands. So just wanted to get your thoughts on how kronos might be advantaged versus other LP selling in Israel, and how we should be thinking about the momentum moving forward as we look into 2022.
Yes, yes. Thank you for the question Andrew.
I think we have great momentum.
Market, which as we talked about is really doing well, we see that continuing as more pharmacies come on and more patients come into medical cannabis.
That is a strong carrier, we think we're competitively advantaged because.
We have great series of brands, we cover all the segments, we need to cover as I said, we were rated as the.
The most the highest brand in Israel.
And we have a great organization on the ground. So we are we.
We have our own organization on the ground Theyre doing a great job in terms of sales and marketing.
Customer relationship Doctor relationship in the market. So we feel we have a very strong organization on the ground with great brands and finally, we've talked about our ability to serve the market. We are very well placed to serve the market.
We use the same kind of strategy we've used in Canada.
And we have the ability through the <unk> joint venture.
Third parties and what we do in Canada. So we think we're well placed on it and again. This is just going to be a market, we see great momentum.
And the start of the new year, and we don't see anything stopping that.
All about being focused on building, great brands and great products.
Which not only is the.
Peace Naturals brand highly rated but a lot of our products are highly rated in the top prescribed products.
Great fantastic Thanks for the color.
Our next question comes from the line of Michael Lavery from Piper Sandler. Your line is open. Please go ahead.
Thank you and good morning.
Hi.
Joined a little late sorry, I hope this isn't repetitive but can.
Can you just give an update on your relationship with Altria and how wafer how that can help impact your.
Operations is or is there some opportunities there.
L three as a strategic investor.
And the company.
They have board seats in there that represented on the board and.
Again, they've been.
Great is supporting us as we develop our business as far as the U S. One of the things. We've done is the farmer can investments for that is.
That's a great example of the strength we have from.
From the entire board both.
Our independents.
I represented from GGP and.
And of course, they'll try them.
Okay. Thanks, and can you just also maybe give an update on edibles, how the fields brand is going.
Oh, yes.
We did talk about that yes. It feels brand is doing fantastic as we said.
Accordingly, the Hi Fi data high fire data, we achieved double digit market share and edibles during the fourth quarter period.
See continued growth in 2022.
You look at our salaries portfolio Theres three products in that line. They are in the top 10. According to Ocs data. So we are performing extremely well and as we said in October we launched under spinach.
We launched the field edible which is our first rare cannabinoid using CBD and THC and the progress early progress, but we're really really pleased the way that's developing.
<unk>.
Along with that we also launched our first rare cannabinoid based product with TPG that was done in January .
Okay, great. Thanks, so much.
Yeah.
And there are no further questions that does concludes our conference for today. Thank you all for participating you may now disconnect have a great day.
Okay.
Okay.
[music].
Good morning, My name is my IRA and I'll be a conference operator today.
We'd like to welcome everyone to Kronos group's 2021 fourth quarter and full year earnings conference call.
This call is being recorded.
At this time I would like to turn the call over to Shayne Laidlaw Investor Relations. Sir. Please go ahead.
Thank you Mara and thank you for joining us today to review Kronos group's 2021 fourth quarter and full year financial and business performance today I'm joined by our President and CEO , Kurt Schmidt, our CFO , Bob <unk>, and our executive Chairman, Mike Gordon Steve.
<unk> group issued a news release announcing these financial results. This morning, which are filed on Edgar and SEDAR profile. This information as well as the 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.
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 and regulatory filings, including the company's most recent annual report on Form 10-K 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 discussed that are not recognized under the U S. Generally accepted accounting principles referred to by the Securities and Exchange Commission as non-GAAP measures. We believe these non-GAAP measures assist management in planning forecasting and evaluating business and financial performance, including allocating resources.
Conciliation that these non-GAAP measures to their most comparable reported GAAP measures are included in our earnings press release furnished to the SEC, which is available in 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.
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 for patients and understanding we will now make prepared remarks, and then we'll move into a question and answer session with that I'll pass it over to Kronos group's president and CEO Kurt Schmidt.
Thank you Jay and good morning, everyone.
We appreciate your patience and for joining us for the second time in about two weeks. We are pleased to share our 2021 fourth quarter and full year results and business updates with you.
As I touched on during our call on February 18, we started this year by undertaking a realignment of the business too.
To position Kronos to drive profitable and sustainable long term growth.
This realignment plus our products and agility at the focal point.
I view the realignment in three distinct pillars.
First we have realigned the organization.
Moving redundancy and centralizing functions under common leadership.
Second we are reducing complexity and continuing to.
And continuing our asset light model.
As part of that we've decided to exit the peace Naturals campus.
Elaborate more on these plans in a minute.
We're also continuing to perform product reviews, and pricing optimization scenarios across our brands and products at.
And finally, we have implemented a cost reduction initiative.
Specced at to reduce operating expenses by approximately 20% to $25 million in 2022.
When we spoke two weeks ago, we bought you updates primarily on the first and third pillars of our realignment initiatives.
Today, we'd like to first provide a further development on the second pillar.
This morning, we announced in our earnings release that we are exiting our peace Naturals campus and Stayner, Ontario.
Extensive analysis went into this decision and.
And while we know this will mean transition and change. We also know this is the right decision to help ensure a promising long term growth.
Our goal has always been to operate an asset light business focused on brands and R&D. This transition allows us to that vision.
We have always maintained that cultivation will shift to large scale agricultural specialists as the industry matures.
Which is why we focused on building joint ventures and partnerships around the world with best in class Opera.
We now feel confident that the industry and our supply chain in Canada are at a maturity level, where we can implement this approach.
We have consistently focused on having a diverse supply chain aided by contract manufacturers and third party producers to supplement our cultivation and manufacturing needs.
In addition to building those relationships over many years, we have the development capabilities with our JV partner Kronos Roku in order to execute this node.
We are very pleased with their premium flower cultivation, which has increasingly become an important component to our biomass supply.
We know their capabilities and efficient downstream processing will enable our goal of improved profitability.
Protecting topline growth and continued momentum on R&D is of the utmost importance for our go forward strategy and they are top priorities for the transition.
To ensure smooth execution Kronos will continue to operate the peace naturals campus with a phased reduction and transition of activities throughout 2022.
Our plan to exit by the end of 2022.
In addition, we are focused on maintaining our relationship with our Canadian customers.
We intend to obtain a sales license from health, Canada at Brookhouse facility to ensure that continuity.
Regarding our R&D efforts all initiatives will continuous plan across our various facilities.
There'll be many moving pieces and complexity to manage during this transition.
But we're focused on staying as close to our timeline as possible, while maintaining our high and growing revenue and bringing innovative products to market.
We are grateful to our standard our associates for their hard work and contributions to Kronos group and.
And we appreciate those associates, who will continue to work at our peace Naturals campus to provide a seamless transition out of the facility throughout this year.
I now want to turn to our business and walk you through some highlights from the fourth quarter and full year 2021.
While this year had its challenges it's also important to note our wins.
All the fundamental work, we have put into making our brands successful and win with the consumer is starting to shine through in our results.
The spinach brand continues to win in the Canadian market.
In the fourth quarter salaries by spinach Gummies continued to strengthen its double digit market share in the category.
All three salaries by spinach flavors, we're in the top 10, and the edibles category nationally and within Ontario, Raspberry holds the number one spot.
Our market share has finished in the flower category ended the quarter in the high single digits.
The strength in the flower category as a result of years of R&D work in breeding and genetics.
Importantly, we have shared a lot of the genetics with World Cup and look forward to continuing to help them elevate our flower portfolio over time.
We also launched our sub brands spinach feel a brand designed to deliver a unique and enhanced experiences.
Made possible through proprietary blends of rare cannabinoids alongside more common cannabinoids like THC and CBD with a wide variety of products and formats.
In October 2021, we launched our first cultured cannabinoid product under spinach feel the chill Bliss coming which is making significant inroads within the edibles category in.
Although our base launch utilizing culture CPG is early we are happy with the trends.
The success of our Spanish brands and products to date is a testament to getting the fundamentals right.
We will continue to invest in our innovation to bring consumers the products they want and other products that haven't been thought of it.
We're starting to see success in the Canadian market with spinach, while readying ourselves to utilize our innovation and key market learnings and other markets as they emerge.
As we restructured the organization to match our go forward strategy. The primary focus of our energy will be towards elevating our brand by utilizing rare cannabinoids and focusing on adult use products.
We have always viewed the Canadian market as a REIT as a region to fine tune, our innovation and product development initiatives.
We run most of our adult use products to consumers in Canada, but we continue to conduct extensive consumer insights work and all the regions we operate.
With an eye towards adult use in the United States.
The United States remains a great place to learn more about the evolution of consumer preferences, while we focus on creating those turnkey solutions within the markets we operate in today.
Turning to Israel, we continue to be delighted with the results of our medical business, we started selling our peace naturals brand to medical patients through participating pharmacy in the second quarter of 2020.
We have increased our distribution to participating pharmacies to nearly all pharmacies that sell medical cannabis.
And we will continue to expand as more pharmacies come online.
Total patient count in Israel has also increased substantially to approximately 190000.
Which is up 40% versus the same period last year.
With a long runway for continued growth.
But the recent survey conducted by cannabis magazine naming peace Naturals. The most recognized cannabis brand in Israel, we have a lot to look forward to as we work towards meeting our patient demand in this market.
Given the growth of our business, we thought we could take some time to dive more into the Israeli market and how we positioned ourselves as a leader there.
Israel has a population of just over 9 million people and boasts one of the world's highest cannabis usage rates.
Unlike the North American cannabis market, Israel is much less competitive illicit market, given Israel's stringent border controls and security infrastructure.
The rapid growth in the Israeli medical market reminds us of the early days and Sandoz is medical markets with demand outpacing supply and the stigma associated with the product quickly fading away.
With our manufacturing workprint.
Established local team strong brand and product portfolio, we are very well positioned to succeed in the Israeli market.
As we realign the organization to match our go forward strategy.
Primary focus of our energy will be towards elevating our brands by utilizing rare cannabinoids and focusing on adult use products.
I want to conclude by outlining our four core business priorities all of which are focused on driving initiatives aligned with our vision and designed to deliver sustained sustainable growth.
In 2022, we look to one accelerate growth by focusing on the core business.
Leveraging our top selling products to deliver on each brand's potential.
While maintaining a disciplined approach to investing our time and resources and the opportunities. We believe will provide the most significant returns.
We diligently evaluate our manufacturing strategies to ensure that we only move forward with new products and processes that add incremental value and contribute to our strategic vision.
Three.
Creating a robust platform for innovation across prognosis group portfolio of global brands.
Courted by our belief that rare cannabinoids will drive differentiation.
Four key U S market entry as our North star by managing our turn on capital spend and external capital allocation to maintain the flexibility to capitalize on opportunities that will position Kronos as a leader in the U S market.
We have a lot of work ahead of us.
We are confident that the actions we've outlined today will improve our business and set us up for success in the long term.
With that I would like to pass it to our CFO Bob Mailer.
Thanks, Kurt and good morning, everyone.
Before getting into financial results allow me to provide further details on our planned exit from our peace Naturals campus.
As a result of the company's planned exit from the peace Naturals campus. The company has incurred a $119 9 million noncash impairment charge.
On long lived assets.
In the fourth quarter of 2021.
In addition, the company expects to incur charges of approximately $4 5 million in connection with the planned exit.
All of which impact the <unk> segment.
These charges include employee related costs, such as severance relocation and other termination benefits as well as contract termination and other related costs, which are expected to be incurred primarily in the second half of 2022.
In addition, the company anticipated capital expenditures of approximately $2 5 million.
To modernize information technology systems and build distribution capabilities.
Kronos group will explore to leveraging <unk> capabilities and premium flower cultivation and efficient downstream processing with.
With the intention to improve profitability of the company's Canadian operations.
Okay.
In addition, this further leveraging its joint venture with <unk>.
This group will continue to maintain a network of third party license processors to supplement cultivation and manufacturing needs.
Now getting into the financial results filed today.
In 2021 on a consolidated basis, we increased revenue, 59% year over year to $74 $4 million with.
With strong performance in the rest of the World segment.
Highlighted by Canada and Israel.
Our rest of the World segment recorded net revenue in 2021.
Of $64 6 million, representing a 73% increase year over year.
The United States segment increased 4% year over year to $9 9 million.
In light of slower growth in the U S. We're committed to right sizing in the U S segment to realign it with our go forward strategy with a focus on improving profitability.
Now turning to the fourth quarter of 2021 results.
The company reported consolidated net revenue in the fourth quarter of 2021 of $25 8 million.
51% increase from the prior year period.
Revenue growth year over year was primarily driven by the continued growth in the adult use Canadian market and increase sales in the Israeli medical market.
Consolidated gross profit for the fourth quarter of 2021 was one point.
$9 million, representing a $16 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by a decrease in inventory write downs.
Increased gross profit and the rest of the World segment.
Consolidated adjusted EBITDA in the fourth quarter of 2021 was negative $27 4 million, representing a $25 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by an improvement in gross profit.
And a decline in sales and marketing and research and development expenses.
Turning to our reporting segments.
And the rest of the World segment, we reported net revenue in the fourth quarter of 2021 of $22 7 million.
A 68% increase from the prior year period.
Revenue growth year over year was primarily driven by growth in both the adult use extracts and flower categories in Canada and sales and the Israeli medical market.
Gross profit for the rest of the World segment for the fourth quarter of 2021 was $2 4 million representing.
Representing a $19 1 million an improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by a reduction in inventory write downs.
And an increase in sales volume of cannabis extracts in the Canadian market, which carries a higher gross profit than other product categories.
Adjusted EBITDA in the rest of the World segment for the fourth quarter of 2021 was.
It was negative $14 6 million.
Representing a $21 8 million improvement from the fourth quarter of 2020.
The improvement versus prior year was primarily driven by an improvement in gross profit.
The decrease in research and development expenses.
Turning to the U S segment.
We reported net revenue in the fourth quarter of 2021.
$3 1 million.
But 11% decrease from the prior year period.
The decline year over year was driven by a reduction in volume due to competitive pressures.
We spoke at length, approximately two weeks ago that the U S. CBD business is not where we want it to be.
The strategic review of this business, including the potential for price optimization.
SKU rationalization.
In modification of the distribution channels.
We remain top of mind.
We intend to share material updates with you at the appropriate time.
Gross profit for the U S segment for the fourth quarter of 2021 was negative zero point $5 million, representing a $2 $3 million decline from the fourth quarter of 2020.
The decline year over year was primarily due to increased production costs and increased.
<unk> inventory valuation adjustments to reflect net realizable value.
Adjusted EBITDA in the U S segment for the fourth quarter of 2021 was negative $8 3 million.
Representing a $3 5 million improvement from the fourth quarter of 2020.
The improvement versus product, primarily by sales and marketing.
And general and administrative expenses.
Now turning to the balance sheet.
The company ended the quarter with approximately $1 billion in cash and short term investments, which is down approximately $35 million from the third quarter of 2021.
Capital expenditures for the quarter were zero point $6 million.
With the spending focus across our global strategic priorities.
Capital expenditures are down approximately 95% year over year, driven by reduced spending on enterprise resource planning implementation.
And capital improvements across our facilities.
We remain committed to deploying capital in a disciplined manner and only in ways that align with our strategic priorities.
Lastly, I would like to provide you an update on our remediation efforts in relation to the material weakness that we disclosed last quarter.
We as a company are committed to instituting best practices for financial reporting or.
Our management.
With oversight from the audit Committee.
It has initiated a plan, which we are working diligently to phase in over the course of 2022.
In addition.
Happy to state that the material weaknesses previously disclosed.
Related to inventory verification.
Has been Remediated.
With that.
I will turn it back to Curt.
Thank you Bob it's not lost on us that our recent challenges are overshadowing our results.
But I want but I want to leave you with today is that despite of all that you are starting to see the strategy and execution show up in our results we.
We are building a great brand in Canada to spinach and have demonstrated sustainable market share gains we are seeing incredible growth in Israel, a robust medical market. We've heard we work hard to win it.
We are making decisions to realign our organization and moved quickly to help our business improve efficiencies and profitably and rapidly changing markets.
We are the first company to release, a cultured cannabinoid product using breakthrough science and technology.
And we are the leading company to market rare cannabinoids in a way that resonates with consumers.
On the right path and we're rising to the challenges in front of us.
With that I will open the lines for questions.
Okay.
At this time I would like to take any questions you might have for us today.
As a reminder to ask a question simply press star one on your telephone keypad.
And please note that participants are allowed one question and one follow up question Tony.
Thank you please standby, while we compile the Q&A roster.
We have our first question comes from the line of Andrew Carter from Stifel. Your line is open and you May now ask your question.
Hey, Thanks. Good morning, first thing I wanted to ask is how long has the kind of exit are staying are being contemplated in terms of an option to kind of safe fun and also kind of creating some of the redundant redundancies have because I would think like you would not you would not want to put any risk of slowing down the revenue momentum. So maybe you could just help us with that.
Yes. This is Kurt.
Yes.
This has been ongoing for quite a lot while again the whole idea.
Grow Coe initiative is all about our belief that.
Yes.
Cultivation will move towards the agricultural sector. That's why we created the growth.
Initially and we're bearing that out so sort of construction through startup and through full up.
Hit every milestone we want so that is ongoing for a while and.
We're very pleased with where we're at right now, we're delivering high quality and well priced cannabis out of the <unk> supply chain and we have enough redundancy in our supply chain as we've talked about in the <unk>.
In the upfront remarks that we feel very good that this is the right time for this move.
Okay. Thanks, and then just kind of a second speaking on kind of the revenue momentum great in the quarter. It's been a great build for the edibles brands spinach brands really stood out just released the headset data for February . This morning, it's taken a step back both the edibles and spinach is that kind of you see that as kind of a seasonality.
Anything youre seeing and kind of reduced shipments and could kind of Canadian adult use revenue take a step back sequentially here in the calendar first quarter.
Yes, I think it's I think it's part of a little bit of the seasonality and some of cohorts that came roaring back temporarily in the first quarter created some disruption.
But again I think were seeing overall the momentum in the first quarter would be quite positive.
The world is getting back to normal I think in the <unk>.
Good quarter here. So we think that all that will write itself, we're really confident about the white space is developing on the consumer side.
Thanks I'll pass on.
Okay.
Our next question comes from the line of Rahul Saragossa from Raymond James Your line is open. Please go ahead.
Hi, there good morning, Curt Bob and Shane This is Michael <unk> on for <unk>. This morning.
And then one question my first one is on the.
The downstream effects of this exit from the peace Naturals site I guess.
I Wonder if you could describe for us the implications on head count.
<unk> on where your top notch R&D facilities might be moving to with this move and then just broader implications on cost structure. As you go through this as I said through 2022, Thank you very much.
Okay, that's three things to unpack there the first one is.
I won't go on an exact number.
The head count, but I doubt idly as we go the shutdown of this facility.
There'll be changes in the size of the organization.
Out about that.
But we're equally we're really committed and we've really planned this makes ensuring that we're treating our employees the right way and we do this in a high quality fashion as we move through this process, but it will it will it will have the effect of reducing.
Standard facility, including.
How many employees we have the second one on R&D. It is important to remember we have multiple facilities across the supply chain that the R&D work, Sir Winnipeg has as a facility.
We do already work there.
We'll eventually move some stuff there to grow co.
This has no effect on our R&D.
Scope, so as we've talked about our key.
Driver is brands and R&D and R&D is around margin accretive innovation and winning in rarest will.
We will see no effect, it's going to have no effect on innovation, we're developing and the timelines.
Driving towards.
Then your third one I think was about margin profile of the business pulses.
Don't give specific guidance.
But obviously, making this decision.
Obviously believe there's a significant opportunity to improve the profitability of our business.
The peace Naturals campus.
Lets carries a real heavy complexity and heavy overhead burden, so removing that from a cost structure, coupled with a lower cost of production and the more efficient downstream processing at Grubhub.
Which are experts in cultivation. We think this is a significant opportunity to expand gross profit.
In both dollar and percentage terms and remember you've got a couple that with the with the.
<unk>.
During our third quarter earnings call, where we announced the first phase of the restructuring, which will reduce operating costs by between 20 and 25 billion. So we believe all of these initiatives put us on a really strong path to improve profitability, while maintaining our clear focus on two very important thing which is <unk>.
Margin accretive innovation.
Winning in rare and of course sustainable growth and building our brands, particularly spinach.
That's very helpful. Great. Thank you very much for that color Mike.
And my follow up is perhaps for Bob we notice beginning in the third quarter.
Impairments related to ginkgo exclusive license and we see those again.
Appearing on the four key financials I Wonder if you could just unpack these impairments and perhaps related then to the way you're you're valuing this ginkgo exclusive license.
Yes.
One of the bigger challenges with.
Going after the rare cannabinoids.
Developing the different milestones.
Under the accounting rules and I won't bore everybody with the rules.
The.
Type of valuation methodology, the relief of royalty from royalty.
In a space where.
You really don't have any history operational history and from a projection perspective.
It really kind of limited little handcuffed in the valuation exercise Ben.
The level of growth you can put in the projections just just from a valuation perspective that these valuations are not indicative of the commercial opportunities that we think these development of these rare.
He has for US it's just an implication of.
<unk>.
Heavily discounting future projections in a space that.
It's very new Rarefied air.
Over time, as we get more experience.
In history around commercializing the opportunities as.
As we developed additional layers, we have six more milestones to go after the two we've already.
Pleated.
<unk>.
We think that that history of commercialization and what the market represents better visibility to that.
<unk> will help.
And that valuation exercise by but by no means is it what.
We think it's worth what we think we could sell it to a third party. If we wanted to we don't.
It's it's it's just an accounting valuation method.
Implication.
Okay.
Okay. Thank you Bob I'll pass it on.
Yes.
Our next question comes from the line of Jan <unk> from CIBC. Your line is open. Please go ahead.
Thank you very much good morning, I wanted to start on <unk> co can you say approximately what percent of your current sales either either Q1 to date or in Q4 being supplied by <unk> and can you remind us what the terms are of purchasing from the JV are you paying fair market value or is there just got embedded in that.
Yes.
Our initial <unk> purchases, we actually really started in 2021.
We're a relatively small amount prior to that sustain or our standard facility.
Could not complete.
Complete all of our <unk>.
Supply.
And demand requirements.
So in addition to grow co, which is really just been up and running for the last eight to 12 month period of time.
We also utilized other third party cultivators.
To fulfill our biomass and dried.
Flower needs.
Now moving forward. We obviously are looking to leverage just based on <unk> success in the harvest that they've already had.
In sourcing quite a bit more from them.
From a pricing perspective.
The competitive.
Competitive market pricing.
Relatively speaking.
But.
Much.
More.
Efficient effective and lower cost.
Then.
What are our costs were to produce it ourselves internally, hence the reason for the.
The announcement this morning.
Around around standard.
We just think large.
Growers like <unk>.
That's where we always kind of thought.
Action was going to be.
And what the future most effective and efficient way of doing it and we felt we feel like we've selected one of the best partners out there. So we're excited about about the opportunity.
Okay. That's helpful. Thank you and then my second question is on the Israeli market.
And I Wonder when you take a step back how you think that this country will evolve over time.
Will it continue to be served entirely by Canadian producers or do you think it eventually shifts to a domestic supplied market and I know you've got some exposure through Kronos, Israel, if and when that time comments, but just would like to get your thoughts on how that market will evolve.
Yes.
Well a lot of it depends on the regulatory market in Israel. So.
Right now.
Again, like we do everything our cultivation is.
We have a lot of redundancy delta so we import from Canada, we <unk>.
<unk> ourselves on our own cultivation with our joint venture on the composites and we buy from third parties from Israel. So we are very well resource.
We think the biggest drivers can be the market as it continues to grow and develop.
<unk> is certainly going up and we feel fully.
<unk>.
We are well positioned to be able to grow with that demand. So we're in a very good position.
Mike.
Understood. That's helpful. Thank you.
Our next question comes from the line of Ravi Jain from Barclays. Your line is open. Please go ahead.
I have a modern thank you for taking my questions.
You have reported a $27 million greater loss this quarter.
But is it fair to assume that almost 2% of net losses in the U S segment and 20% is in the rest of World segment.
Could you I'm, sorry could you repeat that last sentence the percentage.
Got it.
Of this $27 million is it fair to assume that approximately $20 million of the loss will be in the U S segment and $8 million and the rest of the segment breakdown.
The breakdown.
EBITDA losses at that level.
Sure.
Modern planning together on your U S business.
The commentary that you had but you are right sizing the business. It is not at the right place.
I know you have made that comment in a number of times over the last I would say.
A couple of years and it's still the business is only $10 million of sales.
How do you fix it.
Okay.
As part of the strategic alignment.
Sure.
So I was just going to say, yes, clearly we're unhappy we're looking at we still think there is still strong strength in those brands.
One of the things, we're going to be focusing on more as we said previously is the adult use side of the business, we're going through that now, we just announced new leadership.
At the last earnings call, which was just two weeks ago.
So we're doing that we're still doing a strategic review with that said.
We'll come to the right conclusions as we go forward, but again there is still strength in those brands they still resonate.
And that's what we're about we're just not ready to announce anything we'll do that as we get closer.
Sure.
Next question is this.
I look at your market cap looks like $1 3 billion.
Net cash is about $1 billion. So how do we think of Kronos late Caribbean, you've got a billion dollar.
First in the spaces outside of kind of this.
Generate economies value because.
You and all your peers. So I think everybody is familiar with the same issue that we've done some cannabis businesses have been pretty weak.
Sure.
Have you looked at it.
That's it.
Well I'll, let Mike chime in as well our chairman because he is leaving US well all the things we announced today our focus on brands our focus on growing the business, that's been and I and the focus of the U S.
And giving us the financial Youre right, we have a pretty strong balance sheet to.
To make those kinds of investments that we want to make that potentially we can make in the U S, which Mike actually has been leading for us a good example is the farmer Mccann.
As announced this morning that they closed on their live well acquisition and the reason why we invest in the farmer Mccann was the confidence we have.
And their management and their ability to strategically grow both organically and M&A and youre seeing that.
And we have a partnership with them and this is the kind of investments with our balance sheet. We can make Mike I don't know if you want to add anything to this.
Sure. Thanks sure, yes, the way, we think of it and making investments that we think.
Can can have.
Really good ROI globally over time, so things like the salaries rare cannabinoid field line that as markets open up.
We will be able to take those products in.
Adult use open so things that we invested in Canada, we don't look at it as just cannot stand alone, but how can we take those when you see the performance head to head with top U S brands.
With other Canadian brand in Canada, transitioning those to markets like Israel and U S. As they open.
<unk> looking at opportunities for.
Our brands are IP that we see in other markets.
Or infrastructure or distribution partners in the U S.
Thanks, so much Mike.
Okay.
We have our next question comes from the line of Andrew Bond from Jefferies. Your line is open. Please go ahead.
Hey, good morning, Andrew Bond on the line for Owen Bennett, Thanks for taking our questions.
So maybe just digging a little bit deeper into Israel I know, we touched on it before but maybe closer to near term wanted to get your expectations on how the strong momentum we see in third and fourth quarter might might continue.
Perhaps some stickiness there where the peace naturals brands. So just wanted to get your thoughts on how kronos might be advantaged versus other LP selling in Israel, and how we should be thinking about the momentum moving forward as we look into 2022.
Yes, yes. Thank you for the question Andrew.
We have great momentum.
Market, which as we talked about is really doing well, we see that continuing as more pharmacies come on and more patients come into medical cannabis.
That is a strong carrier, we think we're competitively advantaged because.
We have great series of brands, we cover all the segments, we need to cover as I said, we were rated as the.
The most the highest brand in Israel.
And we have a great organization on the ground. So we are.
We have our own organization on the ground Theyre doing a great job in terms of sales and marketing.
Customer relationship Doctor relationship.
In the market. So we feel we have a very strong organization on the ground with great brands and finally, we've talked about our ability to serve the market. We are very well placed to serve the market.
We use the same kind of strategy we've used in Canada.
And we have the ability through the <unk> joint venture.
Third parties and what we do in Canada. So we think we're well placed on it and again. This is just going to be a market, we see great momentum.
And the start of the new year, and we don't see anything stopping us. It's all about being focused on building, great brands and great products, which not only is the.
Peace Naturals brand highly rated but a lot of our products are highly rated in the top prescribed products.
Great fantastic Thanks for the color.
Our next question comes from the line of Michael Lavery from Piper Sandler. Your line is open. Please go ahead.
Thank you and good morning.
Hi.
Joined a little late sorry, I hope this isn't repetitive but can.
Can you just give an update on your relationship with Altria and how wafer how that can help impact your.
The U S operations is or is there some opportunities there.
Well <unk> as a strategic investor.
And the company.
They have board seats and that they are represented on the board and.
Again, they have been.
Great as supporting Us as we develop our business as far as the U S. One of the things. We've done is the farm Mccann investment for that is that.
A great example, the strength we have.
From the entire board both.
Our independents.
I represented from GGP and.
Of course, South Korea.
Okay. Thanks, and can you just also maybe give an update on edibles, how the fields brand is going.
Oh, yes.
Just talk about that yes. It feels brand is doing fantastic as we said.
Accordingly, the Hi Fi data, Hi, Fi our data, we achieved double digit market share and edibles during the fourth quarter period.
Continued growth in 2022.
If you look at our salaries portfolio Theres three products in that line there in the top 10, according to Ocs data so weird.
Performing extremely well and as we said in October we launched under spinach.
We launched the field edibles, which is our first rare cannabinoid using CPG.
THC.
The progress early progress, but we're really really pleased the way that's developing.
<unk>.
Along with that we also launched our first rare cannabinoid based product with TPG that was done in January .
Okay, great. Thanks, so much.
And there are no further questions that does concludes our conference for today. Thank you all for participating you may now disconnect have a great day.