Q2 2023 Cronos Group Inc Earnings Call
Okay.
Good morning, My name is Victor and I will be your conference operator today I would like to welcome everyone to Kronos is 2023 second quarter earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to Shayne Laidlaw.
Relations. Please go ahead.
Thank you Victor and thank you for joining us today to review Kronos is 2023 second quarter financial and business performance today I'm joined by our Chairman President and CEO , Mike corn seed and our CFO James home current issued a news release announcing our financial results. This morning, which is filed on our Edgar and SEDAR profile. 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 statements.
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.
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, we will be making statements regarding market share information throughout this conference call unless otherwise stated all market share data is provided by high fire will now make prepared remarks, and then we'll move to a question and answer session with that I'll pass it over our Karnes is chairman President and CEO Michael Weinstein.
Yeah.
Thank you Shane and good morning, everyone.
Our core focus areas in 2023 are continuing to launch innovative borderlands products, improving our gross margin and driving efficiencies in operating expenses, culminating in a common goal of consistent cash flow generation.
We initiated several measures to pursue greater efficiency and to realign our business and strategic priorities.
In the second quarter of 2023, we exited our U S CBD operations, which allowed us to reduce costs and focus on adult use in medical cannabis market.
Today, we announced plans to exit our Winnipeg, Manitoba facility by the end of this year, which we anticipate will drive additional opex savings and improvements in Cogs in 2024.
As we previously announced in 2023, we anticipate saving 20 to 25 million in operating expenses and.
And we anticipate capturing incremental savings of $10 million to $15 million in 2024, as a result of our announcements today to exit our Winnipeg facility and implement additional operating expense reductions.
While we execute these efficiency focused initiatives, we are laser focused on winning in market or spinach edibles remain the number one ranked edible in Canada as of June .
<unk> is the only brand that is top 10 market share in Canada in all category to participate in which includes edibles vapes pre rolled in flour.
And Israel Peace Naturals continue to be a top brand driven by our powerful genetic program and cultivation capabilities and lastly, with the U S. Exit our teams are working on the relaunch of the Lord Jones brand into adult use categories in Canada with its anticipated introduction in Q4 of this year.
Now I'll dive into each of these elements of our business in more detail.
Following our over achievement in savings in 2022, we increased our operating expense savings target this year to 20% to $25 million driven partly by the exit of the U S business.
The additional cost reductions announced today, we'll have some in year benefit will primarily hit full year 2024, given the timing of the decision with anticipated incremental savings of $10 million to $15 million.
The continued improvement in free cash flow this quarter proves our hard work in driving opex reductions and putting our industry, leading balance sheet to work to achieve greater ROI at hanger.
Today, we also announced the planned exit of our Winnipeg, Manitoba facility.
We originally purchased this fermentation facility to scale up the development of our highly specialized cultured cannabinoid IP.
While we will continue to utilize its IP and rare cannabinoid. We can now do so an asset light approach.
We were the first and still the only company to aforementioned Avenue and commercialize them in Canada.
Part of our winning branded portfolio strategy, we will continue to focus on developing products utilizing rare cannabinoid to drive differentiated effects for our consumers.
This change is anticipated to drive material Cogs and Opex savings in 2024.
We're also preparing the facility for sale, which is intended to yield additional cash we're already industry, leading cash balance.
The exit of our U S. CBD business enables us to focus on adult use products, while preserving cash for eventual U S entry.
We believe that one day the U S will be one of the most important cannabis markets in the world of maintaining a CBD business is no longer part of our plan.
Our resources are best been staying laser focused on the board with adult use products that we can sell and legal markets.
By driving cost savings and process efficiencies to be cash flow positive.
We know that there is value in the Lord Jones brand and we're excited to bring Lord Jones backed with adult use routes by launching new THC focused products in the Canadian adult use market later this year.
Along with a refreshed visual identity for Lord Jones, our ultimate goal is to create a <unk> suite of products under this brand. We are excited to share this product portfolio with you in the future and there'll be highly complementary to our finish offerings and differentiated from other brands in the market today.
James will go into more detail on our financial results during his remarks, but I want to comment on the wins this quarter.
We further improved our industry, leading balance sheet, increasing our cash and short term investment balance by approximately $5 million from Q1 2023 <unk>.
This achievement was driven by improved gross margin lower opex robust interest income and improved working capital management.
Gross margins expanded by an impressive 130 basis points sequentially to 16, 3%, a big way and given the macro driven headwinds on the top line.
And our investment strategy continues to pay dividends, resulting in $12 5 million interest income in the second quarter.
We intend to build on this momentum in the back half as we realize further P&L efficiencies and additional interest income from our cash and short term investments.
Turning to the business in Canada during the second quarter, we continued to execute our plan to create a robust operating a cordless products.
Highlighted by new launches.
As of June 2023, Spanish is the number three ranked cannabis brand in Canada. It is currently the only cannabis brand in the top 10 in all categories. We participate in which includes the number one ranking in the edibles category during the second quarter of 'twenty three.
Spinach edibles product accounted for 14, 8% of the market in June remain the market leader and edibles.
We have an incredible product that continues to launch new flavor profiles and cannabinoid Glenn the perfect example of a board with scalable product.
The edibles category continues to feel the residual impact of the now banned chewable cannabis extracts.
As these band product continue to be removed from the market, we anticipate a recovery in our overall market share and are already seeing an improvement with weekly retail sales up 15% since June .
This quarter, we launched a new salaries by finished flavor our take on the timeless summer drank pink lemonade infused with raspberry and refreshing lemonade flavors.
Having just launched in late May this product has quickly gained market share pink lemonade has already number four in our portfolio and keeps rising.
Excited for adult consumers to try this new flavor this summer.
And the Vape category, we had a four 1% market share in June maintaining a number seven market share position.
We will build on that momentum in the back half of 2023 with the continued push to include flavor forward profile and rare cannabinoid than our base driving innovation, while leaning on our wedding formulations that consumers know and love across the portfolio.
In July we launched three new base under the Spanish brand.
These new <unk> come in at one two gram format, and the flavoring offerings of Pink Lemonade Peach punch and Strawberry Clerkin.
In Q2, we launched several new offerings to bolster this finished zero portfolio, including Sonic Lemon fuel pre rolls and three new infused Bureau offerings.
In Q2, we were the number eight brand in market share in <unk>, a significant improvement from number 14 in Q4.
We expect that with these new launches and the additional ones coming down the pipe. We can further improve on this position.
Our flyer performance continues to be propelled by our robust generics program and best in class cultivation capabilities of <unk> and as of June 23, we are the number two flower brands.
We had three skus in the top 10 in the second quarter GMO cookies in the three five Gram and 28 Gram and our wedding cake 28 Gram.
Brokers performance in cultivation and continues to be strong.
<unk> reported us preliminary unaudited revenue of approximately $3 6 million to non front end customers in the second quarter.
Additionally, the credit facility. The Kronos previously provided broke out currently has $72 4 million outstanding following the principal repayment of $2 5 million by broke out in Q2.
In addition, <unk> made a $1 7 million interest payment in Q2.
The solid financial performance of broke out yielding equity pick up interest payments and loan payback to Kronos is a vital component of our overall financial picture.
Turning to Israel and June 23, the connected Health Committee change the cannabis regulations to make it easier for some patients to obtain prescription.
The new regulation is scheduled to begin in December 2023.
For certain medical conditions patients will no longer be required to obtain a license with approval from the health Ministry now doctors can directly prescribed candidate to those patients.
This change simplifies the process for patients and doctors and is expected to increase access and patient counts.
Shortly after the announcement and met with regulators customers and patients and I'm happy that they share my excitement about the growth potential in the Israeli market and the progress. This should this change should contribute towards realizing that potential.
We've always had confidence in the long term potential of our position in the Israeli market and it's still one of the world's largest medical programs.
Our peace Naturals brand launched two new three row products wedding roles in film Obama last quarter.
Payrolls have become a substantial and growing part of the market in Canada and we're excited to bring this innovation to the Israeli market, which is still primarily dominated by flower.
In addition to the <unk> launches, we also launched as basic dried flower offerings.
In collaboration with fighters for life and Israeli organization that works with veteran to re acclimate to civilian life after military service.
Naturals partner to launch a fund raising campaign at Purion local television and social media in Israel.
This issue is one that has resonated with our consumers in Israel and we're proud to support this organization once again.
Moving to Germany, we are excited to announce that we signed a distribution agreement in July with one of the leading distributors of medical cannabis in Germany.
We anticipate commencing shipments in the third quarter.
Reentry in Germany is a significant milestone for Kronos and we look forward to expanding our reach and brand awareness there.
The recently proposed regulatory change to reschedule candidates no longer labeling medical cannabis as a narcotic is expected to unlock significant growth in the market and we intend to establish our peace Naturals brand at the top brand similar to our execution in Israel.
This quarter successes and pivots have resulted in cost savings and better positioned us to assemble a portfolio of borderless products with strategic infrastructure and global partnerships.
The combination of these efforts an industry, leading balance sheet sets us up well to execute 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'll now review, our second quarter 2023 results for continuing operations in relation to the prior year period.
The company reported consolidated net revenue in the second quarter of $19 million, a 12% decrease from the prior year.
Instant currency consolidated net revenue decreased by 6% to $22 million.
The revenue change was primarily driven by lower cannabis flower sales in Israel due to competitive activity slowdown in patient permit authorizations and political unrest and in Canada due to adverse price mix shift in the cannabis flower category driving increased excise tax payments as a percent of revenue.
Consolidated results were additionally impacted by the weakened Canadian dollar and Israeli shekel against the U S. Dollar during the current period.
<unk> gross profit in the second quarter was $3 1 million equating to a 16, 3% gross margin representing a $1 $2 million decline from the prior year.
The decline was primarily due to lower cannabis flower sales in Israel, and an adverse price mix shift in cannabis flower sales in Canada.
These results were partially offset by lower biomass call.
Our quarterly results in 2022 are volatile quarter to quarter, driven by the realignment of our business, which makes the comparison on the gross margin line difficult with that in mind looking at both the full year 2022, where we had a positive 17, 8% gross margin and the sequential progression from Q4, 2022% and five 7% in Q1.
<unk> 23, a 15% gross margin for Q2, 2023, where we get a positive 16, 3% gross margin you can see encouraging signs of improvement and stability and we intend to build off this momentum throughout 2023 and into 2024.
Consolidated adjusted EBITDA in the second quarter was negative $15 9 million, representing a <unk> 7 million improvement from the prior year.
The improvement was primarily driven by a decline in general and administrative and research and development expenses.
As previously mentioned, we increased our expected cost savings target in 2023 from $10 million to $20 million to a new range of 20% to $25 million.
As a continuation of this savings program, we anticipate that the exit of the Kronos fermentation facility and the additional operating expense reductions announced today will capture an incremental $10 million to $15 million in the full year savings in 2024.
Turning to the balance sheet. The company ended the quarter with approximately $841 million in cash and short term investments, which is up approximately $4 5 million from the first quarter. In addition to maximizing the return on our cash we received an interest payment on our <unk> senior secured loan of $1 7 million principle payment of $2 5 million and $1 three.
Million of payments on the Mucci promissory note for total cash paid by <unk> and our JV partners to Kronos, a $5 5 million in Q2, having.
Having the best balance sheet in the cannabis industry enables us to take calculated strategic bets, while we remain steadfastly focused on reducing cash burn.
Moving to free cash flow defined as operating cash flow less Capex Q2, 2023 was negative $12 3 million, representing a 36% improvement year over year.
Backing out the income taxes payable associated with the onetime altria warrant relinquishment in Q1, the sequential improvement in free cash flow was 22%, we anticipate recouping most of the tax payment associated with the onetime altria warrant relinquishment over the next three years.
Lastly, moving to outlook and guidance, we anticipate the net change in cash defined as the sum of cash and cash equivalents and short term investments for the remainder of fiscal year 2023 will decline by less than $5 million to $10 million. This is an improvement to the previous guidance of declining less than $25 million and the remaining nine months of fiscal year 2023.
The company also still expect the next net change in cash will be positive in 2024.
The improved cash flow trajectory will be driven by among other items continued gross margin improvement operating expense reduction efforts and anticipated interest income of $20 million to $25 million for the remainder of fiscal year 2023.
While we continue to execute on operating expense reductions and cash flow management. We made the decision this quarter to discontinue providing revenue guidance and to withdraw our previously announced net revenue target of $100 million to $110 million for the full year 2023 <unk>.
The discontinuance of providing net revenue guidance reflects turbulent market conditions beyond previous expectations in the markets. We operate in specifically, increasing political unrest and stagnant patient growth in Israel. The decision to exit the U S business and competitive activity in Canada, driven by the lingering effects of edible extracts in addition, foreign.
Rates have had an unfavorable impact on our net revenue.
Despite the topline headwinds, we have a lot of wins to point to and I share my confidence in the trajectory of the business and our preparedness for entry into new markets as they become available.
With that I'll turn it back to Mike.
Thank you James.
We are winning in Canada, and Israel things to all the hard work from our employees to bring best in class cordless products to market.
Our Spanish brand as the only branded hold the top 10 market share position in all categories, we participate in which or flower pre rolls vape and edibles.
We are confident that as regulations change we will be among the best positioned cannabis companies to capture additional market share in any market.
Before getting into questions I want to level set what is under the Kronos umbrella and where things stand today.
We closed Q2 with $841 million in cash and equivalents and zero debt and we generated $12 5 million of interest income in Q2 with anticipation to generate an additional $20 to $25 million of interest income through the remainder of 2023.
Our British brand has the following market share range for June 2023, overall finished as the number three cannabis brand.
Number one on edibles number two in flower number eight and for Euro and quickly taking share and number seven in vape and also gaining ground.
We have a leading medical brand peace naturals in Israel, which posted $5 4 million in net revenue in Q2.
We have a six 3% stake in pharma can one of the largest private U S. Msos currently on our books for $49 million.
We have an approximate 10% stake in Ventura, a leading publicly traded Australia medical cannabis provider worth approximately $18 9 million as of the end of Q2.
We own 50% of the equity in front of us broker, which is profitable and between <unk> and our JV partner they paid us $5 5 million in principal and interest payments in Q2.
We ended the quarter with the remaining balance of approximately $84 million on a combined loan to <unk> and its partners.
We own real estate in multiple licensed facilities free from any encumbrances and last and certainly not least we have an exclusive partnership with altria on a global basis.
At the close of the market yesterday, Kronos traded at a market cap of approximately $720 million and an enterprise value of approximately negative $120 million.
While this quarter's top line fell short what I believe Kronos is capable of achieving we ended the quarter with more cash than we had last quarter.
If there is one common theme from cannabis earnings calls the last few quarters.
Cash is king and given that we have more than four times more net cash and the closest competitor.
Those were the ground.
With that I'll open the line for questions.
To ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
We limit yourself to one question and one follow up.
Please standby, we compile the Q&A roster.
One moment for our first question.
Our first question comes from the line of Vivien <unk> from Cowen Your line is open.
Thank you good morning.
Good morning.
So Mike I was wondering if we could talk a little bit more about the anticipated launch of Lord Jones in Canada in particular in light of your commentary around volatility in the Canadian marketplace, I'm, just reflecting on the brands.
Legacy positioning in the U S and how you're thinking about positioning and in Canada.
Just given the challenges at the most premium in the market. Thank you.
Yeah.
Sure. Thanks, Vince it's a great question so.
We think about Lord Jones, we've always.
Like its historical position is at the premium end, specifically and edibles.
I think that we've done a really good job of being able to differentiate especially.
Especially in that category, but we do still see that there are spaces overall in in premium products, when youre differentiating flower might be a little more difficult.
But we do think that there is an opportunity given a lot of the work we've done on a completely incremental type of animal product that fits really well with Lord Jones brand.
<unk>.
To sort of tie those together for a launch and I also think when you look overall at the portfolio. If you look at our where we are sitting with distribution and the strength that we've had with finished being able to leverage the relationships that we have with with our trade partners I think that knowledge and product development that we've had over the last few years.
We do see the opportunity we think it's incremental we are generally very careful with what we do decide to launch so.
I'm pretty excited about it obviously, it's when you look at premium your market size and going to be something like we're spending should be.
But we think from a margin and gross profit perspective, it's a really good idea to launch in a better place to really fine tune the product and trying to have products in the U S that don't necessarily fit the future state of what the brand looks like.
Sure that makes good sense and just a follow up on that from a distribution standpoint.
Is there kind of any logic to taking.
More discrete view of distribution to make sure that you are preserving that brand equity rather than going full national distribution.
Yes, it's a great question I think that a lot of that when you look you look at the different provinces, how deep maybe selling would be will depend on what the setup of the stores look like in each given province, obviously there are some that you would expect you would do better on the premium end.
But.
Of the major.
Major provinces by population I think it makes sense to put the.
Same amount of focus.
But I think that Youll still see a national launch, but we as you know tend to tend to do a more phased rollout and make sure that we've got the demand and the right positioning.
That makes sense. Thank you.
Thank you and as a reminder, that star one wonderful question Star 111.
One moment for our next quarter.
Q&A to compile.
Alright.
There are no further questions in the queue. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
Yes.
Okay.
<unk>.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
Sure.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
Okay.
[music].
Okay.
Okay.
Yes.
Yes.
[music].
Okay.
Yeah.
Thanks.
[music].
Yes.
Okay.
Helpful.
Yes.
Okay.
Yeah.
Thanks.
Yes.
Okay.
Sure.
Thanks.
Yes.
Yes.
[music].
Okay.
Okay.
[music].
Yes.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
Yes.
[music].
Yes.
Okay.
Yes.
Thanks.
Okay.
Okay.
Sure.
Okay.
Yes.
Okay.
Earnings.
Okay.
[music].
Okay.
[music].
Yes.
[music].
[music].
Yes.
Yes.
Yes.
Okay.
[music].
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Sure.
Okay.
[music].
Yes.
Okay.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Sure.
Yes.
Thanks.
[music].
Yes.
[music].
Thanks.
Thank you.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
[music].
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Okay.
Okay.
Sure.
Okay.
[music].
Okay.
Okay.
Yeah.
Okay.
Sure.
Okay.
Okay.
<unk>.
Yes.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Sure.
Great.
Sure.
Okay.
Sure.
Yes.
Okay.
Sure.
Yes.
Okay.
Okay.
Thank you.
Yes.
Yes.
Okay.
Okay.
Sure.
Yes.
Thanks.
Okay.
Okay.
Okay.
Yes.
Sure.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Great.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.
Right.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Sure.
Sure.
Thanks.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
Perfect.
Thanks.
Sure.
Okay.
Okay.
Okay.
Okay.
Yes.
Perfect.
Okay.
Thank you.
Sure.
Okay.
Sure.
Thanks.
Yes.
Okay.
Great.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Sure.
Thanks.
Okay.
Sure.
[music].
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Sure.
[music].
<unk>.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
Okay.
Okay.
Thank you.
Yes.
Okay.
Okay.
Thanks.
Perfect.
Yes.
Yes.
Okay.
Thanks.
[music].
Okay.
Hum.
Okay.
Yes.
Thanks.
Okay.
Okay.
Sure.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Thank you.
Okay.
Okay.
Thanks.
Okay.
Okay.
Yes.
Yes.
Thanks.
Okay.
Sure.
Hi.
Sure.
Okay.
Thanks.
Thanks.
Sure.
Okay.
Yes.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
Sure.
Great.
Sure.
Okay.
Yes.
Thank you.
Yes.
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
[music].
Yeah.
Okay.
Okay.
Tom.
Yes.
Sure.
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
Thank you.
Okay.
Okay.
[music].
Yes.