Cronos Group Inc. Q1 2023 Earnings Call
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Yeah.
Good morning, My name is Tanya and I will be your conference operator today I would like to welcome everyone to Kronos Group's 2023 first quarter earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to Shayne Laidlaw Investor Relations. Please go ahead.
Thank you Tanya and thank you for joining us today to review corner through 2023 first quarter financial and business performance today I'm joined by our Chairman President and CEO , Michael <unk>, and our CFO James Home Congress issued a news release announcing our financial results. This morning, which was filed on our Edgar and SEDAR profiles. This information as well as the prepared remarks.
We will also be posted on our website under Investor Relations before I turn the call over to Mike. Let me remind you that we may make forward looking statements and refer to non-GAAP financial measures. During this call. These forward looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking.
David.
Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials in our SEC filings that are available on our website by which any forward looking statements made during this call are qualified in their entirety information about non-GAAP financial measures, including reconciliations to U S. GAAP can also be found in the earnings materials that are available on our website lastly will be may.
Statements regarding market share information throughout this conference call and unless otherwise stated all market share data is provided by high fire. We will now make prepared remarks, and then we'll move into our question and answer session with that I'll pass it over to <unk>, Chairman, President and CEO , Mike guarantee.
Thank you Shane.
Everyone.
Building off our strategic realignment in 2022 or 2023 strategy is focused on launching innovative borderlands products improving the gross margin of our overall business and driving cost out of the P&L as we move towards being cash flow positive in 2024.
During our last earnings call, we announced an additional $10 million to $20 million of projected operating expense savings in 2023 and.
I'm happy to report that we are tracking towards achieving the high end of this range.
This follows our over achievement of savings in 2022 of approximately $29 million versus a target of 20% to 25 million.
James will go into more detail on the financial results during his remarks, but I want to comment on the improved trajectory of our gross margin.
<unk> was a transformative year for Corona, which put us on better footing for the future, but given the quarter to quarter volatility of our gross margin performance driven by the timing of certain activities associated with our intended changes at the peace Naturals campus, we prefer to look at the year in totality.
As a reminder, our gross margin for full year 2022, with 13%, but we ended the year in Q4, the negative 1% growth market.
Turning to Q1, we posted a 12% gross margin on a consolidated basis.
Now that we have solidified our decision to stay at the peace Naturals campus and reorganized our business to optimize our supply chain, we intend to build on this momentum to have a smoother gross margin will improve from Q1 performance as the year progresses.
We are also keenly focused on margin accretive innovation to further diversify our product mix in higher margin derivative products, such as our number one ranking edibles.
In Canada during the first quarter, we continued to execute our plan to create a robust portfolio of order list products highlighted by several new launches across critical categories, such as pre <unk>.
Our Spanish brand is the only brand in the top 10 market share position in all categories. It participated which are flower pre rolls vape and edibles.
Our award winning spinning as companies became the number one gummy in Canada in Q1.
<unk> completed the quarter with a 15, 3% market share in the animals category growing retail sales by 49% year over year versus category growth of 25%.
When focusing on just gummy <unk> had a 21, 9% market share.
We are thrilled that our gummy that become an integral part of Sony adult consumers lives and we'd like to thank them for showing brand loyalty and enthusiasm for our products.
Winning in the Canadian Edibles category against the top U S brand is this additional confidence as boarder less product platform to win in any market.
Despite our strong performance the edibles category as the negative impact negatively impacted by chewable extracts, which are products that reports to take advantage of a regulatory loophole that sell at a higher potency per pack and combine edibles.
Health, Canada has recently notified producer is that these products are incorrectly classified as cannabis extracts.
Thats removed these products to market.
For reference for the top 10 edibles are noncompliant edible extracts and as a result, we anticipate a more robust back half performance for our edible portfolio.
And the vape category, we achieved a four 4% market share in the first quarter up 230 basis points year over year climbing to number seven.
We will build on that momentum in 'twenty three with the continued push to include flavor forward profile and Raritan avenues, and our base driving innovation, while leaning on our winning formulations that consumers loved across the portfolio.
We launched a new mango Kiwi CVC base under the spinach field brand with 32% THC and 5% CVC.
Our CBD gummies performed well in the early innings of their launch in the Canadian market and we are excited for consumers to try in PBC in the <unk> format.
We also introduced our finished field Blackberry touch THC, CBD vape, which has helped contribute to our outsized 155% growth in retail sales in the category year over year in Q1 versus category growth of 22% for the same period.
Pre rolls or one of the fastest growing categories in the cannabis market the category increased 38% year over year during the first quarter and it's used pre rolled accounted for approximately 24% of the dollar share and pre rolls during the same period.
Using our success and edibles category as a blueprint for other format funnel continues to elevate and differentiate the consumer experience by bringing our portfolio of infuse pre rolls to market utilizing our best in class potent genetics, our flavor board in Turkey, which formulation and sought after rare cannabinoid.
In Q1, we launched two new rare cannabinoid focus preoral fitness.
Fitness field, Mango Kiwi Hayes, THC, CVC pre Ro and spinach field, Blackberry Kush, THB ECB and payroll.
Since revamping the portfolio last year that is payrolls are gained market share moving up to the eight most popular brand in Q1 up from <unk> 16 in Q4.
With the right base for your portfolio in place and the recent launches of four infused funeral offerings three of which utilize rare cannabinoid <unk>.
And to build off this momentum to drive continued market share gains in this critical category for us.
We closed the first quarter by maintaining our number three market share in the flower category equating to a five 2% share of retail sales.
Flower in the Canadian market continues to be heavily weighted to 28 Gram bag.
Nine of the top 10-Qs.
Despite this we continue to defend market share across backed either leading with our three five gram GMO cookie SKU and Theyre 28 Gram wedding cake.
Robust performance continued to be strong in Q1 <unk>.
<unk> reported preliminary unaudited revenue of approximately $3 2 million to non front of those customers.
Additionally, the credit facility that Kronos previously provided the <unk> currently has $73 2 million outstanding following the principal repayment.
$7 million by <unk> in Q1.
In addition, broker made a $5 5 million interest payment in Q1.
Our strong financial performance of broker yielding equity pickup.
Interest payments in loan payback to Kronos is a vital component of our overall financial picture.
Turning to Israel the growth of the medical cannabis industry slowed in Q1, driven by geopolitical factors and government appointment disruption, which has led to multiple changes in the health ministry, causing a slowdown in patient permit authorizations and increased competitive activity.
Following recent news from the Israeli Health Ministry, we have renewed optimism about the prospect of regulatory change impacting how medical patients can access candidates.
Our government Committee recommended Israel transitioned to issue a prescription via public health care services from its current model, which issues personal patient licenses and is a more complex process.
The new proposal would enable a more streamlined approach to obtaining our candidates prescription.
Increasing patient counts by multiples.
As a reminder, the current number of medical patients in Israel is approximately 125000 or just one 3% of the population.
This compares to a certain mature medical markets, such as Florida, and the U S were three 7% of the population to the proved to purchase medical candidates.
Is your order reached three 7% of the population that would equate to 346000 patients a near tripling of the current market size.
This is a realistic scenario, we think is possible over the next couple of years, especially given the change would result in a favorable regulatory environment, such as pharmacy distribution in a federally legal jurisdiction.
We are confident in the long term potential of our position in the Israeli market is it still one of the world's largest federally legal medical programs today we.
We had a top performing brand in the market deep naturals, and we continue to invest for growth in this market.
In the U S. We have nearly completed the transition away from the beauty category and they're moving forward by returning Lord Jones to its roots as an adult use brands featuring high quality cannabinoid products.
We are assembling a portfolio of cordless products with strategic infrastructure and global partnerships combined with an industry, leading balance sheet, allowing us to execute effectively in any market.
With that I'd like to pass it on the James to take you through our financials.
Thanks, Mike and good morning, everyone.
I will now review, our first quarter 2023 results in relation to the prior year period.
The company reported consolidated net revenue in the first quarter of $20 1 million a 20% decrease from the prior year period constant currency consolidated net revenue decreased by 14% to $21 7 million.
The revenue change was primarily driven by lower cannabis flower sales in the rest of World segment and a decline in the U S segment due to its strategic repositioning.
Consolidated results were additionally impacted by the weakened Canadian dollar and Israeli shekel against the U S. Dollar during the current period.
These results were partially offset by growth in cannabis extract sales in Canada.
Consolidated gross profit in the fourth quarter was $2 4 million equating to a 12% gross margin representing a $4 5 million declined from the prior year period.
The decline was primarily driven by reduced gross profit in the rest of world segment due to lower candidates flower sales in Israel, an adverse price mix shift in cannabis flower sales in Canada increased return and a reduction in gross profit in the U S segment.
These results were partially offset by higher candidates extract sales in Canada with a higher margin profile than other product category and lower candidates biomass call.
As Mike mentioned, our results in 2022 were volatile quarter to quarter, driven by the realignment of our business, which makes the comparison on a gross margin line in Q1 difficult.
With that in mind looking at both the full year 2022, where we had positive 13% gross margin and the sequential progression from Q4, which had a negative 1% gross margin for Q1, 2023, where we had a positive 12% gross margin you can see encouraging signs of improvement and stability and we intend to build off this momentum throughout 2023.
Consolidated adjusted EBITDA in the first quarter was negative $16 8 million, representing a $2 1 million improvement from the prior year.
The improvement was primarily driven by a decline in general and administrative and research and development expenses as.
As Mike mentioned, we're tracking towards the high end of our previously announced 10% to 20 million in operating expense savings in 2023.
Turning to our reporting segments and the rest of World segment, We reported net revenue in the first quarter of $19 5 million, a 14% decline from the prior year period.
Instant currency net revenue in the rest of world segment decreased 7% to $21 million.
Revenue change was primarily driven by a decline in cannabis flower sales in Israel due to increased competitive activity to slowdown in patient permit authorizations and political unrest.
While sales in Canada were impacted by adverse price mix shift in the flower category driving increased excise tax payments as a percent of revenue and increased returns.
These results were partially offset by growth in cannabis extracts in Canada, driven by Edibles and Vapes.
Gross profit for the rest of World segment for the first quarter was $2 9 million, representing a $3 8 million declined from the prior year period.
The decrease was primarily due to lower cannabis flower sales in Israel adverse price mix shift in the Canadian flower category, driven by the consumer transition to 28 Gram bag from three five Gram bumps.
These results were partially offset by higher cannabis extracts sales in Canada, which carry a higher margin profile than other product categories and lower cannabis biomass call.
Adjusted EBITDA in the rest of World segment for the first quarter was negative $10 million, representing a $6 $6 million declined from the prior year period.
The decrease versus the prior year was primarily driven by a decline in gross profit.
Turning to the U S segment, we reported net revenue in the first quarter of 650000.
A 72% decrease from the prior year period.
The decline year over year was driven by a reduction in promotional spending and SKU rationalization due to the strategic realignment of our U S business.
Gross profit for the U S segment for the first quarter was negative 550000, representing a 760000 decline from the prior year period.
The decrease year over year was primarily due to lower sales volume and increased inventory reserves.
Adjusted EBITDA in the U S segment for the first quarter was negative $2 9 million, representing a $4 2 million improvement from the prior year period.
The improvement versus the prior year was primarily driven by a decrease in sales and marketing and general and administrative expenses.
Turning to the balance sheet. The company ended the quarter with approximately $236 million in cash and short term investments. In addition to maximizing the return on our cash we received an interest payment on our <unk> senior secured loan of $5 5 million, which combined with our regular quarterly principal payments of <unk> 7 million for total cash paid by <unk> to Kronos.
$6 2 million in Q1.
Having the best balance sheet in the cannabis industry enables us to take calculated strategic that while we remain steadfastly focused on reducing cash burn.
Last year, we made significant strides to reduce spending and improve our cash burn rate and in February we committed to an additional $10 million to $20 million of savings across operating expense categories. In 2023, and we are currently tracking towards the high end of that range.
Moving to cash flow adjusting for the cash outflow of approximately $32 8 million in income taxes payable associated with the onetime altria warrants relinquishment free cash flow in Q1, 2023 would have been negative $15 7 million, representing a 55% improvement year over year.
We anticipate recouping most of the tax payment associated with the onetime altria warrant relinquishment over the next three years.
Lastly, we anticipate the cash flow defined as the net change in cash and cash equivalents, excluding the impact of the purchase of proceeds of short term investments for the remainder of fiscal year 2023, while declined by less than $25 million the.
The company also expects that cash flow will be positive in 2020 for the.
The improved cash flow trajectory will be driven by among other items net revenue of $100 million to $110 million for full year 2023 continued gross margin improvement operating expense reduction efforts and anticipated interest income of $30 million for the remainder of fiscal year 2023.
With that I'll turn it back to Mike.
Thank you James.
We are winning in Canada, and Israel due to all the hard work our employees do to bring best in class board of lift products to market.
Our <unk> brand is the only brand that holds a top 10 market share position in all categories to participate in.
A flower pre rolls based and animal.
We are confident that as regulations change we will be among the best position candidate companies to capture additional market share in any market.
Before getting into questions I want to level set what is under the current us umbrella and where things stand today.
We closed Q1 with $836 million in cash and equivalents and zero debt and.
And we generated $11 2 million of interest income with an anticipation to generate an additional $30 million interest income with the remainder of 2023.
Our finished brand has a following market sharing for Q1 overall space. It's the number three cannabis brand number one and edibles number three in flower number 80 per euro and number seven base.
We have a leading medical brand peace naturals in Israel, which posted $5 million in net revenue in Q1.
With a six 3% stake in farm again, one of the largest private U S. Msos currently on our books for $49 million.
We have an approximate 10% taken mature elite.
Leading publicly traded Australian medical cannabis provider worth approximately $13 8 million as of the end of Q1.
We own 50% of the equity in Kronos broke up which is profitable and paid $6 2 million in principal and interest payments in Q1.
We ended the quarter with the remaining balance of approximately $87 million on a combined loan to <unk> and its partners.
We own real estate in multiple license facilities free from any encumbrances and last but certainly not least we have an exclusive partnership with altria on a global basis.
At the close of the market yesterday currently traded at a market cap of approximately $780 million and an enterprise value of approximately negative $56 million.
With that I'll open the line for questions.
Secondly, as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please limit yourself to one question and a follow up please standby, while we compile the Q&A roster one moment for our first question.
And our first question will come from John <unk>.
CIBC Your line is open.
Thank you good morning.
I wanted to start on on Israel and would like.
Some additional color there and apologies if I missed it but I'm curious.
What it is you think that market needs to do to get back to growth.
What is it you're seeing on competition and historically you had been somewhat protected versus your peers on the Israeli market because of your brand.
I wonder exactly what what needs to change to get you maybe more optimistic for the back half of the year in Israel.
Sure. Thanks, John .
The biggest thing that we're seeing in Israel related to competition. It has to do with patient growth.
There's been some unrest politically and thats really stalled a lot of the regulatory process.
But there have been announcements, especially recently on progress for announcement, sorry for regulations to actually change the way that the prescription are issued and which pharmacies are able to carry candidates. So this would essentially move from special process. They have now where you have to get.
All the different steps that are very strict.
Entering system to opening it up to being treated like another controlled substance.
And we've talked about in the.
The prepared remarks, we can see that really increasing the patient count by multiples and if you think about look at Q1 last year, we have seen that when there is a favorable regulatory change in Israel.
You can see really really rapid growth.
And given given the announcements all indications are that that is something that happened in this year. So we're looking at that over the next couple of months.
Thinking more Q4, and I think that would really just open up the entire market and return to what we saw at the beginning of last year in terms of growth.
Okay understood and then.
My second question is on gross margins.
In particular on rest of world saw a nice uptick in Q1 versus Q4.
I wonder at what point and maybe we're at the point now, but gross margin in rest of world somewhat stabilized.
Assume theres, some moving parts with the switchback sustainer, obviously, theres a decent amount of fixed cost in that line, but you're not able to completely predict it but are we at the point now where gross margin should somewhat stabilize or is that likely a back half of the year development.
Hey, John Thanks for the question so I.
I guess the answer I would say, yes, we're somewhat stable, but we do expect further improvements from here. So we're continually optimizing our supply chain as you highlighted right. We are evaluating moving certain activity back to <unk> and so some of those are in process and so we would expect further improvement as we see some of those flow through Cogs.
And so we would expect a potential margin pick up throughout the remainder of the year, but we're coming kind of coming back to more of a normalized state versus a lot of the volatility you were seeing in the prior year.
Okay. That's helpful I'll pass it on thank you.
One moment for our next question.
And our next question will come from Andrew Carter of Stifel. Your line is open.
Hey, Thanks, good morning.
Want to ask first off on the revenue guidance for the year. The 100 to 110 am getting 19% to 34% for the remainder of the year, which it looks like its spot rate is 24% to 39% constant currency could you give us the cadence of phasing and if I heard your answer to John's question right. You don't really expect an improvement in Israel until the fourth.
Quarter, just help me square all of that.
So Andrew can you maybe reframe. The question. So are you talking about when we're expecting the revenue.
For each period for each quarter.
Well, a little bit I mean, im just so tobacco up $100 million to $110 million in revenue for the year to start there.
The back nine has to grow 19% to 34%.
And that means constant currency. That's my math just on spot 24 to 39, so I'm asking kind of what's the phasing of that revenue growth acceleration.
And within that what about <unk>.
I heard Johns question, right, Israel doesn't improve till the fourth quarter.
Got it Okay. That's fair so yeah, we're confident in the revenue guidance of $100 million to $110 million for the full year 2023, right driving some of that back half improvement you've highlighted we've introduced a meaningful number of new innovations over the last six months, but we have also had a strong pipeline of innovation launches planned for the remainder of the year to help fuel that.
<unk> growth rate and then we also have announced today that we're on track to achieve the top end of our Opex savings targets right for $10 million to $20 million now all of that will work together to drive the overall cash flow improvement, but we do expect kind of continued revenue improvement right throughout the duration of the year.
And just just to layer on that I think.
When we're talking about Israel in that Q4, that's really.
For you to see a huge step change in what I think we'd be meteoric growth.
When we're talking about that we're not we're not relying and guidance on the regulatory changes, but we do think its something thats more likely than not and that we're very optimistic about yes, it would be additional upside.
And then the second kind of to clarify number one in 2024 I think you said positive free cash flow is that based on current interest rates and I guess going back to your kind of your your comments at the end of the script Mike.
Talked about kind of where the enterprise value is right now.
Does that become a hindrance in terms of what Youre trying to do here in <unk>.
Overall.
In terms of having an equity value that's a negative enterprise value or is it just hey, you have enough capital to allocate youre going to continue to allocate or do you still some kind of impetus to get get the shares moving to your direction obviously helpful for M&A. Thanks.
Yes.
Sure James I'll, let you go first on.
On guidance and then I can jump to the balance sheet.
Yes.
We're positioned.
Yes, sorry, and I apologize, Andrew I'm, having a little bit of issues on my line of you can reframe or restate the guidance question.
Yes, just the cash flow guidance for next year is that based on current interest rates and kind of your cash flow projections got it. So no. So interest rates, we definitely are assuming rates some stability there right, but theres a little bit of flexibility. Let me put it that way. We're also assuming same qualifying we're assuming no significant.
Degradation, right and general economic or regulatory environment right, though.
I'll say, we've got some flexibility at all of those so we're very comfortable with the interest rates. The guidance. We've given is reasonably conservative as well right. So I would say if there is material changes right, then obviously that could impact the guidance.
Let me try one more time to be absolutely clear so the free positive free cash flow in 2024 is that based on core operations or does that include an assumption for interest income.
Similar to allow interest incomes, providing I guess $40 million of cash this year, yes. So so yes.
Maybe dig in a little bit more right. So we're talking net cash flow right. So it does include interest income.
No.
We're saying this is a combination of improved Cogs improved opex savings rate in that $10 million to $20 million range, we're tracking towards the high end right improved topline that we're projecting that the year, which we highlighted that the guidance of 100 to 110 right and then obviously the interest would be a significant component of that as well.
Thanks.
It did jump in on the second part of your question Andrew.
Okay.
If theres a hindrance I think that we feel like we have a lot of flexibility, but also I think it's important and it's time for us to make sure that we're self sustaining so that's really the the.
Important to us.
Being cash flow positive for us.
That doesn't preclude us if we see something thats accretive.
We will continue to be opportunistic.
Of course, my my preference will always be weighted towards anything that is.
Accretive to cash flow, but ultimately.
We'll keep turning over every stone and looking for something that's value creative.
And not just.
Relying on interest income so.
I still think we have plenty of flexibility.
Thanks ill pass it on.
One moment for our next question.
And our next question comes from Michael Freeman of Raymond James Your line is open.
Hey, good morning, Mike James Shane Thanks for taking our questions I Wonder if given given interest payments are becoming has become an increasingly important part of your.
<unk> revenue picture I'm wondering if you could just described.
Your strategy for investing investing cash and yielding returns from it.
Sure. Thanks, Michael So we're constantly looking for how to maximize our return on our available cash and so we work with I'll say large stable top rated financial institutions right, especially in the current environment right. We're extremely focused on ensuring safety and security for those funds, but then obviously, making sure we.
Maximize the return on those so.
We're looking at to vehicles that are typically a year or less right. So we implement a ladder strategy 369 12 months vehicle.
But again with the intent that its large stable financial institutions with top rates of return there.
Alright, alright, great Thats helpful.
Second question.
You've seen your rare and cultured cannabinoid portfolio.
Proliferate through.
Your product set I Wonder looking ahead, a couple of years.
What are some underpenetrated products or markets you can see rare cannabinoid is playing an important role in.
Sure.
Great question I think.
As you see consumer preferences shift from flower towards derivatives.
I think youre also going to see more awareness of what those derivative products are and thats, where rare start to come in.
I would I would keep pointing to pre rolls.
And just the general rise in popularity of and it's used for Euro and you'll also notice a lot of our launches include.
In Q3 year old we still think that that is one of the biggest growth categories or the next few years one of the.
Best opportunities to differentiate and similar to what you see in edible further that you get from flower to more we believe there is an opportunity to differentiate.
I think thats going to be huge and we still have a lot of opportunity across the rest of our portfolio.
Format that are in market today.
Edible base payroll.
And then looking out a few years I think that there is some interesting things that we'll be able to do with concentrate.
You haven't seen it warrants to date.
We do think there's opportunity there.
Alright, Thats, great and if you could if I can.
Could just throw in one more on the given three year olds and infused bureaus, specifically seemed to be a.
Area of focus for Kronos.
I Wonder how you just how you're seeing the price action in that market.
We've been hearing some talk of price compression I'm wondering how kronos is able to.
How <unk> is going to manage that.
Going forward.
Yes look I think pre rolls is a very big category and I think that youre going to see real real segmentation and how the product develop I think that on one end of the spectrum. There is an opportunity to actually have pre rule that you can sell cheaper than flower.
You aren't going to be worried about.
Making sure the flowers.
While managed care, because it's going to mean profits into our payroll. So you will have a segment that's more value oriented that's more about automation.
And then I think on the other end of the spectrum.
You get into something that's almost more cigar lake that is much more premium.
That.
I think we'll be at a significant premium to flower. So I think it's really about innovation, it's about understanding.
Exactly what consumer needs Youre targeting and Thats one of the reasons that I think we've talking about why such a big opportunity there but.
I think you have to make sure that you would know exactly where your product fit and have a very narrowly tailored products for that segment in order to win.
Okay. Thank you very much I'll jump back into queue.
One moment for our next question.
And our next question will come from Nadine <unk> of Bernstein. Your line is open.
Hi, Good morning, everybody two questions for me can you comment on what Youre seeing in terms of pricing in Canada, any signs of reaching bottom yet.
Or are those oversupply in the market, helping the overwriting factor and then my second question you called out the strong market share position.
Financials developed especially with an edibles.
If I look back a couple of years people were saying, but developing strong brands in Canada.
Could prove challenging on risk Reserve bank.
Commoditized category.
So what's the experience you've had in the sector I'm curious to hear what factors would you say are behind the success building a brand with strong market share in Canada. Thank you.
Sure.
Thanks.
I think on the <unk>.
First what we're seeing and maybe one of the bigger factor in the price compression.
Is it solely about supply, but it actually has to do it.
But accurate and how they're being paid and what <unk>.
Trends, you've noticed is that really big portion of the LTE in Canada are actually not paying the excise taxes and given there.
The capital position they are really they really leveraging that that cost of billings to really further compress prices. So I do think one of the things that.
That is needed in that I expect will happen will be some enforcement on.
On how excise taxes are collected.
And generally excise tax reform I think it's something that's very important for the industry.
But we still see especially on flower there is there is compression.
And on the second part of your question.
Building a brand I think its understanding that it is a product based focus that you need to have a different product. We have in Canada consumers that are very very focused on what are the features of the actual product has its less about telling the story.
At this stage in the industry to let them out.
I'm trying to bring people into a lifestyle community given the regulations that we.
Have in brand building and marketing so for us the key things there certainly the effect really really matters.
What's the combination of cannabinoid and I think one of the really the DC, we had strength in edible.
It has to do with that I think that what we can do giving different experiences leading with either <unk> or with TBC or CBD as part of that.
Cocktail if you will the big differentiator, but also flavor flavor are extremely important.
I think that that initial experience you want it to be something that is enjoyable for consumers.
And I think.
Most of the brands are really just focused on on cost so.
Like any other product flavor matters experience matters.
Got it thank you very much.
And one moment for our next question.
Okay.
And our next question will come from Matt.
Matt Bottomley of Canaccord, Matt Your line is open.
Good morning, everyone and thanks for the color so far maybe just continuing on Mike the commentary just given some of the characteristics. There if you take a.
Maybe a further step back and just look at the overall Canadian landscape it still seems like.
It's hard to say, but maybe only 60% of the overall market opportunity. If legalized is has been converted over in the legal channels, but markets like Ontario, and others already have a saturation of retail stores.
It seems like a lot of the regulatory challenges of what you guys are able to do are keeping.
Some potential future customers continuing to purchase the religious channels, but is there anything outside of regulatory changes that you think will get the overall market Tam in Canada, which seems to be stuck in the $4 million to $5 million range for some time now.
Yes, I think I think there is I think that.
When you think about those regulatory challenges a lot of those are really holding consumers back.
On pricing and on on value I think on the more premium side.
There are things that you can continue doing so you've seen that we were able to do with sour than with the edible platform. I think if you are able to come out with a consistent.
Consistent product something that's higher and within that as a transparent.
Third supply chain there are consumers that are willing to pay a premium over the illicit market that will come in and.
So I think that's a still a big opportunity there is a different view as far as the sort of highest volume consumer its probably a bigger part of our Tam you can see what the regulatory change will do I talked a bit about that.
We will extract the remarks, and I think what that kind of show that if you can provide something that's higher potency that.
Larger pack size more similar to purchasing habits.
Our legacy consumer in the legacy market has.
<unk> will shift really quickly into the market and so I think that and making sure that you can combine that we didn't have a better product and you have something that's transparent and deemed to be a much safer alternatives.
That's really important to that conversion. So I think that that continues to progress I think that continuing to make sure that as an industry.
Specifically, we're improving our supply chain and we're able to be more competitive that is going to help.
But I think those are the two main things will drive.
Innovation on the premium end.
And potentially with <unk> being able to drive more value and then it will be the big regulatory change.
Okay got it thanks, and then just the other question for me is just on your level of interest in some of these U S. Federal headlines I know banking, which is reintroduced and there's been dozens and dozens of headaches in the past. So I think people are looking at it cautiously, but how important are those types of headlines to you in decisions to potentially deploy some of your capital or do you think it will.
Have to be something more meaningful reform, maybe like what Joe Biden Whitehouse is trying to do with with rescheduling altogether.
Yes.
Is that safe banking, there's really probably.
The biggest thing there has to do with just getting progress I think it's important and it's sort of a bellwether for sentiment capital markets wide, but as far as what it means big picture I think it's just showing that we have we have some type of regulatory catalyst in the U S.
Got it.
You think of the big things you need great like in one of the biggest to be eager for what you can do as far as getting.
Capital markets getting some of the larger banks involved all of that would be would be solved with the appropriate rescheduling and I think it's an underappreciated.
And the most significant piece of regulatory.
News that we have in the pipeline. So that's really what I look towards I think it's something that that's moving.
Safe banking I know everyone's focused on it.
I'm not going to make a prediction on whether or not it happens, but I think as currently drafted it's really more just incremental progress.
Okay. Thanks for all that.
One moment for our next question.
And our next question will come from Victor MA of TD Cowen. Your line is open Victor.
Hi, good morning, good demand, particularly in Asia and thank you for the questions.
So first based on how far data ex Quebec.
There were some sequential share losses on base metals can you offer any more color on what is driving these trends and also comment on the defensibility and product.
Product differentiation. Thank you.
Yes.
Sure.
And sorry, I missed the last part of the question.
Just comment on the defensibility.
And then just product differentiation.
Sure.
I think the biggest thing that we've seen here has to do with Jubal extract. So we were I think doing very well in defending and winning against it and once this announcement was made by health, Canada that essentially.
Anyone with Cubo extract with four out of the top 10 Skus right now.
I would not be able to sell at the end of May and you did see a fair amount of pantry loading so that might continue for a few more weeks.
But given that there has been.
<unk> that sort of ramped up for a few weeks I would expect though that and I don't want to be able to gain that share back.
Half of the year as that inventory is depleted but also.
Anything that we might have given up I think theres more opportunity gain just with that shift and looking longer term as far as the visibility I think of it more offensive layers.
I really do hope that.
The government take this opportunity to look and see the world didn't fall apart with higher potency edible it's something that is certainly in demand with consumers and we will be very ready.
If there is any change there to be able to put a compliant offering on the same quality that we have out today.
And I think absent regulatory shifts and we always do take the approach of.
Making sure our innovation budget goes into things that are long term.
Sure, we do things the right way, but we do believe that that.
It is a big moat that product get breakthrough product differentiation will be there I think we've been relatively consistent.
Depending on the product side and being able to take share so.
I think I think it's a temporary blip and ultimately.
The circumstances around the <unk> flip it more.
Bullish for us than than otherwise.
Great and then can you just add some color on the trial.
Losses for.
Sure was down sequentially as well in that category.
Yes.
This is probably a little bit more nuance has to do with the <unk>.
<unk> is the actual based cards and potency, which or updates that we've made in may.
To make those updates you can see relatively small fluctuations and that has to do a bit with.
What the ordering patterns are like and especially when you are doing changeovers, but I don't think that there is any any trend that I'm concerned about there and then youll see that.
Pick back up.
Great. Thank you and then just on my second question. So on Israel can you comment on the increased competitive activity over the quarter.
Are you seeing more discounting.
And how enduring do.
You think or are these competitive activities. Thank you.
Sure, Yes, I think there has been more discounting there is consolidation is similar to what we've seen in Canada with the market participants we've seen.
And you're starting to see more consolidation and you'll see more companies exiting the market I think that there is a lot less investment capital in Israel than there was in Canada.
And Youre seeing more companies in Canada to try to enter Israel.
But ultimately this is something that I think we're used to something that I think we can certainly defend against.
I do think the biggest relief and the biggest opportunity is related to a regulatory change.
But like we've seen in Canada as Theres exits I think there's opportunity and we've been able to with our flower products and other innovations.
Separate in and take share and they will continue focusing on in Israel.
Great. Thank you for the color I'll jump off the queue.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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