Q4 2023 Cronos Group Inc Earnings Call
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Operator: Good morning, my name is Josh, and I will be your conference operator today. I would like to welcome everyone to Cronos 2023, the 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. Please go ahead.
Good morning, My name is Joshua and that'll be your confidence operator today I would like to welcome everyone to Kronos 20, twenty-three fourth quarter and pull your earnings conference call. Today's call is being recorded at this time I would like to turn the call over to Shane Laidlaw Industrial relations. Please go on.
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Shayne Laidlaw: Thank you, Josh. And thank you for joining us today to review Cronos' 2023 fourth quarter and full year financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holm. Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR profiles. This information, as well as the prepared remarks, will also be posted on our website under investor relations.
Thank you Josh and thank you for joining us today to review Kronos is 2023 fourth quarter and full your financial and business performance.
I'm joined by our Chairman, President and CEO, Mike Ornstein, and our CFO James home.
Issued a news release announcing our financial results. This morning, which was filed on her at garden seed our profiles. This information as well as he prepared remarks will also be posted on our website under investor Relations.
Shayne Laidlaw: This information presented during this call is preliminary and subject to change until the company's audited and consolidated financial statements are filed with the SEC, which we anticipate occurring later today. 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 and our SEC filings that are available on our website, but with 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 our earnings materials that are available on our website.
Information presented during this call is preliminary and subject to change until the companies already consolidated financial statements are filed with the SEC, which we anticipate occurring later today before.
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 current expectations and assumptions that are subject to risk and uncertainty that could cause the actual results to differ materially from those projected on the forward looking statements.
Factors that could cause the actual results to differ materially from expectations are detailed in our earnings materials in our SEC filings that are available on our website, which energy forward looking statements made during this call are qualified in their entirety information.
Information about non-GAAP financial measures, including reconciliation C. U S. Gap can also be found on earnings materials that are available on our website.
Shayne Laidlaw: Lastly, we will be making statements regarding market share information throughout this conference call, and unless otherwise stated, all market share data is provided by HIFIRE. We will now make prepared remarks, and then we will move to a question-and-answer session. With that, I'll pass it over to Cronos Chairman, President, and CEO, Mike Gorenstein. Thank you, Shayne, and good morning, everyone.
Lastly, we will be making statements regarding market share information throughout this conference call unless otherwise stated all market share data is provided by <unk>.
NAMIC prepared remarks, and then we'll move to a question and answer session with that I'll pass over to <unk>, Chairman President and CEO My currency.
Thank you Shane and good morning, everyone.
Michael Gorenstein: As we reflect on 2023, I'm incredibly proud of everyone at Cronos, as we have successfully steered our company through a variety of transformational changes. In addition to our product, Winnigan Mark, we have positioned Cronos well to capitalize on opportunities in 2024. We captured $30 million in operating expense savings in 2023, which exceeded our previously stated target of $20 to $25 million. Following the $5 million overachievement savings in 2023, we anticipate saving an incremental $5 to $10 million in 2024. [inaudible] and we entered into a sale lease back agreement for a Peace Natural campus in Stata that we anticipate receiving 17 million. And we wound down operations at our Winnipeg facility, which is currently listed for sale.
Reflect on 20th 23, I'm incredibly proud of everyone. In Congress as we were successfully theater company for a variety of transformational changes.
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We captured 39, an operating expense savings in 23, three which exceeded our previous target of $20 million to $25 million.
Following the 5 million over to my savings in 2023, we anticipate saving incremental 510 1920 24.
We activate or U S. D V D operations to focus on a dog used products.
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Michael Gorenstein: These changes culminated in significant cash flow improvements, and we stayed laser focused on organic growth. We grew the spinach brand to be the number two brand by market share in Canada, propelled by number one rankings in the flower and edible categories. We launched the Lord Jones brand in Canada, opened two international markets, Germany and Australia, and continue to navigate our business through the war in Israel. Our cash and equivalent balance increased by approximately $22 million from Q3 to roughly $862 million, driven by operating expense reductions, increased interest income, and improvements in working capital.
These changes culminated insignificant Castro improvement and with a laser focus on organic growth.
With grilled finished randomly the number two brand by market sharing here propelled by a number one ranking flower an animal categories.
We watched the large on Brandon, Canada open to international markets, Germany, and Australia.
And continue to navigate our business to the war in Israel.
Our cash equivalent balance increase by approximately $22 million from Q3 to roughly $862 million given by operating expense reductions increased interest income and improvements would work a capital.
Michael Gorenstein: Cronos has the strongest balance sheet in the cannabis industry, and we continue to manage our capital responsibly while maintaining our ability to launch innovative borderless products and create a blueprint for selling into other cannabis markets as they open up. Starting with our growing international business, we continued ramping up with our German distribution partner, Cannes Sativa, a leading distributor of medical cannabis in Germany. CanSativa has a network of approximately 2,000 pharmacies that currently supply around 300,000 patients in Germany's medical market.
Kronos has a strong balance sheet in Kansas industry and to continue to manage our capital responsibly, while maintaining our ability to launch innovative borrow this product and creating a blueprint for selling into other kind of just marketed they open up.
Starting with a growing international business, we continued wrapping up with our German distribution partner, Kansas, Eva leading distributor medical cannabis in Germany.
Kansas, even had a network of approximately 2000 pharmacies that currently supply around 300000 patients in Germany medical market.
Michael Gorenstein: Our Peace Naturals flowers products have quickly gained patient attention and loyalty, which has elevated Peace Naturals to be a leading brand in the German market, led by winning genetics from our in-house breeding program, such as GMO cookies and Wedding Cake. Within weeks of launching, our GMO Cookies Flower SKU achieved a leading position by market share in Germany. Re-entering the German market was a significant milestone for Cronos, and we look forward to expanding our reach and brand awareness with the help of Kansas people. On Friday, Germany's chief legislative body approved a cannabis bill that opens up the cannabis market in Germany, including no longer classifying cannabis as a narcotic.
Our peace natural products are quickly gaining patient attention and loyalty, which is elevated piece natural has to be a leading Brandon German market.
Led by winning genetic from our in house breeding program, such as G. M O cookies and wedding cake.
Within weeks of launching a GMO cookies flowers Q achieved a leading position by market share in Germany.
Re entering the German market with significant milestone for Kronos, and we look forward to expanding our reach and brand awareness with the help of Kansas fever.
On Friday, Jeremy a cheap legislative body approved you can't even fill that opens up the candidates market in Germany, including no longer classified candidate to the narcotic.
Michael Gorenstein: This change allows us to more effectively market to patients and unlock the significant runway of growth in the market. We believe Cronos is well-positioned with a leading distributor and best-in-class genetics to capitalize on the growth fueled by potential legislative changes. Turning to Australia, we continue to work with our partner, Vitora Health, of which Cronos owns approximately 10% of the common share.
This change allows us to more effectively market, the patience and unlock the significant runaway of growth in the market.
We believe Charles is well positioned with a leading distributor and best in class genetics to capitalize on the growth fuelled by potential legislative changes.
Turning to Australia, we continue to work with a partner My tour of house of which Kronos owns approximately 10 per cent of the common shares.
Michael Gorenstein: Flying the Australian market, which has grown significantly in the past three years, reaching approximately 200 million retail sales in 2023, according to BDS Analytics, is another accomplishment Cronos worked towards achieving in the back half of 2023. We look forward to working closely with our partners at Vitura to provide patients with high-quality cannabis products. Our German and Australian market entrances were a positive way to cap off the back half of 2023 and are expected to be growth drivers for us in 2024. Cronos will continue to look for additional international growth opportunities as 2024 progresses and new markets open and evolve. We have a leading flower breeding program and an innovation pipeline winning in the Canadian market, which we're eager to bring to a broader subset of patients and consumers globally. Moving to Israel, despite the challenges of the war, our Israeli colleagues have shown incredible resilience and resolve.
Supplying Australia market, which is growing significantly in the past three years, reaching approximately 200 million in retail sales in 2023. According to B D. S. Analytics is another complishments condoms work towards the cheating in the back half 2023.
We look forward to working closely with your partner that <unk> to provide patients with high quality candidates Ross.
Ah German Australian market in cases, where a positive way to cap off the back half of 2023 and are expected to be growth drivers for some 2024.
Could also will continue to look for additional international growth opportunities at 2020th for Progressive New markets open and evolve.
We have a leading flower green program and innovation pipeline, winning in the Canadian market, which were eager to bring you a broader subset of patients and consumers globally.
Moving to Israel, Despite the challenges of the war or Israel colleagues have shown incredible resilience and resolve.
Michael Gorenstein: They continue to push the business forward despite the war, the geopolitical climate, and marketing. Powered by our genetic breeding program, Peace Naturals continues to be a leading brand in the market, with SKUs such as GMO and Wedding Cake leading the pack. These genetics are repeatedly proving to be winners as we enter a new market. In early January, we launched a new brand called LIT. LIT has a differentiated marketing positioning with a more approachable price point while maintaining the quality that's become synonymous with our existing products and markets. Following stagnant patient growth counts for most of 2023, the market experienced a rebound in growth in the fourth quarter, providing a positive tailwind for the industry. This coincides with the regulator, the ACAR, reviewing an overhaul of cannabis regulations that would gradually improve ease of access for patients by moving to a prescription model and moving cannabis to a first-line treatment option for doctors treating certain diseases. The growing patient count, which now exceeds 140,000, coupled with potential regulatory reform can unlock growth for the industry, and we are well-positioned to take advantage of that. Turn to Canada.
They continue to push the visit for it despite the war geopolitical climate and market issues.
Powered by your genetic breeding program is natural.
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Genetics are repeatedly proving to be winners as we enter new markets.
In early January we launched a new brand helpless.
With a differentiated marketing positioning with a more approachable price point, while maintaining the quality that has become synonymous with our existing products on the market.
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The market experienced a rebound and growth in the fourth quarter, providing a positive tailwind for the industry.
This coincides with the regulator via car reviewing overhaul candidates regulations that would gradually improve ease of access for patients by moving to a prescription model.
With a candidate to it first line treatment option for doctors treat certain disease indications.
Growing patient count, which now exceeds 140000, coupled with potentially regulatory reform can unlock wrote to the industry and we are well positioned to take advantage of it.
Turning to Canada during the fourth quarter, we continued to execute our plan to create a robust operated for this product.
Michael Gorenstein: During the fourth quarter, we continue to execute our plan to create a robust offering of borderless products, highlighted by new launchers and a strong market. Our spinach brand closed 2023 as the number one ranked flower brand in Canada with a 6.9% market share in the fourth quarter, up from the fourth ranked brand in 2022. This achievement is the culmination of years of genetic breeding, R&D investments, and best-in-class cultivation at scale with our JV Cronos GroCo, which has separated our products from the field. Capturing the leading position in flower around that strong year of growth and innovation for the Spinach Product Portfolio, which is ranked as the second best selling cannabis brand in Canada across all categories as of December 2023. In the edible category, spinach edibles accounted for 16.2% of the market's retail sales in the fourth quarter, remaining the market leader in edibles.
Buy new launches and strong market performance.
Are finished brand clothes 2023 is the number one ranked fire brand in Canada with a 6.9% market share in the fourth quarter.
Up from the forthright brand new 2022.
This achievement is a combination of year genetic breeding R&D investments and best in class cultivation at scale with R. J V. Kronos broke out which is separated our products from the field.
Cathy with a leading position in flower around a strong your growth and innovation. If it is finished product portfolio, which is ranked second best selling cannabis brand in Canada across all categories added December 23 three.
And the animal category spinach animals accounted for 16.2% of the market's retail sales in the fourth quarter remained in the market leader in animal.
We have incredible products that continues to launch a new flavor profiles and cannabinoid plans. The perfect example of a bordelaise scalable product.
Michael Gorenstein: We have an incredible product that continues to launch new flavor profiles in cannabinoid blends. This is a perfect example of a borderless, scalable product. In total, we have four edible products in the top 15 market share rate. Sphinx Brand also recently launched its Strawberry Kiwi 5-to-1 CBD THC Sour Gum.
In total we have four animal products in the top 15 market share right.
Just finished grad also recently launched a strawberry Kiwi five to one C V D T H D salaries gummies.
These companies were designed to compete with other C. B D for animal products seeing success and market and the 10 pack offer the chance for the lower T C edibles to be shared among friends.
Michael Gorenstein: These gummies were designed to compete with other CBD4 edible products, seeing success in the market. And the 10-pack offers a chance for these lower THC edibles to be shared among friends. Earlier this month, our Lord Jones brand launched Chocolate Fusions, an exciting first entry into the chocolate edibles category. Cronos' newest edible innovation was developed and designed by an expert team of culinary chefs, food scientists, and leaders in cannabis product development. The bite-sized chocolate fusions feature a dynamic, multi-texture experience, combining a soft and chewy center, crunch inclusions, and an outer layer of rich, creamy chocolate that delivers a decadent, sweet treat for adult consumers.
Earlier this month, our Lord Jones brand launch chocolate fugitives and exciting first entry into the chocolate animals category.
Corona's newest edible innovation was developed and designed by expert team culinary chef food scientists and leaders in cannabis product development.
The bite sized chocolate fusion feature of dynamic multi texture experience, combining a soft and chewy center crush inclusions and outer layer of rich creamy chocolate the deliver the decadent sweet treat for adults consumers.
We believe chocolate fusions or a category to finding product that will expand the chocolate pregnant.
Chocolate agents deliver on what a dork consumers have come to expect from our brands truly differentiated consistent and high quality products that introduced new and unexpected ways to consume an experienced campus.
Michael Gorenstein: We believe chocolate fusions are a category-defining product that will expand the chocolate category. Chocolate Fusions deliver on what adult consumers have come to expect from our brand: Truly differentiated, consistent, and high quality products that introduce new and unexpected ways to consume and experience chocolate. We look forward to growing the Lord Jones brand in Canada and building a bold premium portfolio that shapes the future of what is possible in cannabis innovation. Turning to VAPES, I'm really excited about our efforts and the success we're seeing in this category. We climbed to the number three market share position, growing to 7.7% of the market in Q4. We've done a lot of work on our VEY portfolio in the past year, and it's great to see these strong results in the market.
We look forward to grow into or Jones Britain, and Canada and building a bowl premium portfolio that shape the future of what is possible in Kansas innovation.
<unk> I'm really excited about our efforts and success, we're seeing in this category decline in the number three market share positioning growing to 7.7 per cent on the market in Q4.
We've done a lot of work on or have a portfolio in the past year and it's great to see the strong results in the market.
In 2024 will continue to have all the Babe category by providing consumers with flair forward profile and rare cannabinoid combinations.
Such as our new 1.2, Graham format, which was a large drag or at the games and a quarter.
In January 20th 24, we launched Lord Jones <unk> in two different hardware options.
The lineup features burst outsiders, including a halfway on trial side and the convenience of an all in one device and a one grams stock of size of the five Kenneth Red cartridge catering to both enthusiastic and that was new to the category.
Michael Gorenstein: In 2024, we'll continue to evolve the vape category by providing consumers with flavor-forward profiles and rare cannabinoid combinations, such as our new 1.2-gram format, which was a large driver of the gains in the... In January 2024, we launched Lord Jones Live Red and Bait in two different hardware flavors. The lineup features versatile sizes, including a half-gram trial size in the convenience of an all-in-one device and a one-gram stock-up size in the 510 thread cartridge.
<unk> with a discerning consumer in mind these products and bought a commitment to excellence offering unmask combination of curious drains Caroline <unk> and high quality hardware.
I'm incredibly proud of new products, and we see them, helping us penetrated more of the Babe category 2024.
We also continue to improve and drive innovation through our spinach for your portfolio several new ones used products, including take lemonade Peach punched in Strawberry short okay.
Your year are pre wrote retail sales grew by 137% in the fourth quarter.
Michael Gorenstein: Catering is both an enthusiasts, and that was new to the category. Crafted with a discerning cannabis consumer in mind, these products embody a commitment to equity, offering an unmatched combination of curated strains, pure live resin, and high-quality hardware. I'm incredibly proud of these new products, and we see them helping us penetrate more of the vape category in 2020. We also continue to improve and drive innovation through our Spinach Pre-Roll portfolio with several new infused products, including Pink Lemonade, Peach Punch, and Strawberry Swerve. Year over year, our pre-roll retail sales grew by 137% in the fourth quarter. In Q4, we added a Spinach Fields Full Tilt THC-B pre-roll to our infused pre-roll lineup. This pre-roll offers a boosted and elevated high due to the THC and THC-B blend and complements our existing THC-B vape and gummy products. In the fourth quarter, we launched the Lord Jones Icewater Hash Fusions pre-roll. The popularity of hash products in premium pre-rolls is increasing amongst adult consumers. Icewater Hash is the most popular solventless infusion, and it's the second most popular infusion overall in the pre-roll category.
In queue for we added a spinach feels fulfilled T. C V for your all for it is used for your alignment.
This pre Raul offers a boosted an elevated high due to T. T N T. A C D blend and compliments, our existing tacb rape and gummy four fries.
And the fourth quarter, we launched the Lord Jones Iced water has fusion free rolls.
The popularity of half products and premium for your old is increasing amongst us all consumers.
Iced water hash of the most popular solving listen fusion is the second most popular infusion overall in the pre wrote category.
These payrolls are crafted with an optimized ratio premium iphones the flower complimentary with complementary solving with ice water hash, which preserves the bud natural therapies.
David with a reusable ceramic tech to help cool to smoke.
These new products has been extensively research and sensory tested to deliver a smoother experience feature bold flavors.
Both the white tile and cosmic pushed range of our Lord Jones infused for your roles are selling well in the Alberta in D C markets.
We're excited to see additional growth when the pre roles become available more widely in Canada throughout this year.
With our award winning for your old and strong position and drive flower. We know can continue to grow in this category under both our Lord Jones and finished brands to innovations in quality product offerings.
Turning to our Canadian cultivation joint venture.
Those performance and cultivation continues to be strong.
Broke a record reported to us preliminary annoyed revenue approximately $616 million from non photos customers in the fourth quarter.
Michael Gorenstein: These pre-rolls are crafted with an optimized ratio of premium high potency flour and complementary solventless ice water hash, which preserves the buds' natural terpenes, fitted with a reusable ceramic tip to help cool the smoke. These new products have been extensively researched and sensory tested to deliver a smoother experience featuring bold flavors. Both the White Tahoe and Cosmic Kush strains of our Lord Jones infused pre-rolls are selling well in the Alberta and BC markets. We're excited to see additional growth when the pre-rolls become available more widely in Canada this year. With our award-winning pre-rolls and strong position in dried flower, we know we can continue to grow in this category under both our Lorde Jones and Spinach brands through innovation and quality product offers. We turn to our Canadian Cultivation Joint Venture GrowFoods performance and cultivation continues to be strong. Broker reported to us preliminary unaudited revenue of approximately $6.6 million from non-Cronos customers in the fourth quarter.
Additionally, the credit facility that code was previously provided broke out currently has 69.8 million outstanding the principal repayment 5.6 million by Growco in 2023.
In addition, growco made interest payments at $10.3 million in 2023.
The solid financial performance of Growco yawning equity pick up interest payments and loan payback to Kronos has a vital component of our overall financial picture.
Turn to the U S market, we're pleased to hear of interface momentum to reclassify cannabis <unk>.
Regardless of the specifics of how federal regulation and commercialization of cannabis products evolved reschedule. It it would be an important step in the right direction for U S candidates and it was <unk>.
Hope to see continued momentum in 2024.
This year's success as a result in a significant operating expense savings and a substantial improvement cash flow, which better positions us to assemble a portfolio boorda was products with strategic infrastructure and global partnerships.
Longterm strategy to invest in Brainerd innovation stay acid light is working and we're just getting started.
Michael Gorenstein: Additionally, the credit facility that Cronos previously provided GroKo currently has $69.8 million outstanding following the principal repayments of $5.6 million by GroKo in 2023. In addition, GroCo made interest payments of $10.3 million in 2023. Solid financial performance of GroCo, yielding equity pickup, interest payments, and loan payback to Cronos is a vital component of our overall financial. Turning to the U.S. market, we're pleased to hear of increased momentum to reclassify cannabis. Regardless of the specifics of how federal-like regulation and commercialization of cannabis products evolve, rescheduling would be an important step in the right direction for U.S. cannabis, and we hope to see continued momentum in 2024.
The combination of these efforts and industry, leading balance sheet set us up well to execute in any market.
With that I'd like to pass it on the James take you through our financials.
Thanks, Mike Good morning, everyone.
I will now review our full year 2000 twenty-three results at a high level before getting into the details of the fourth quarter.
In 2023, we increase net revenue, 1% year over year to 87.2 million withdrawal performance in Canada, and commencement of sale to Germany, and Australia balanced by a slowdown in Israel.
Constant currency consolidated net revenue increased 6% to $91.7 million.
Total operating expenses declined by 30 million versus the prior year adjusted EBITDA improved by 12% to negative $61 million and operating cash flow improved by 46 million to negative $43 million.
Michael Gorenstein: This year's successes have resulted in significant operating expense savings and a substantial improvement in cash flow, which better positions us to assemble a portfolio of borderless products with strategic infrastructure and global partnerships. Our long-term strategy to invest in branded innovation and stay asset light is working. And we're just getting started.
I will now review our fourth quarter of 2023 result in relation to the prior year period.
The company reported consolidated net revenue of 23.9, Billion% to 9% increase from the prior year constant currency consolidated net revenue increased by 11% to $24.5 million the.
James Holm: The combination of these efforts and an industry-leading balance sheet sets us up well to execute in any market. With that, I'd like to pass it on to James to take you through our financials. Thanks, Mike. Good morning, everyone.
Revenue increase was primarily driven by higher cannabis flower sales in Canada, and Canada's shipments to Germany, and Australia, partially offset by lower candidates flower sealed in Israel due to the war and competitive activity and an adverse price makes sense <unk> Canadian cannabis flower category driving increased excise tax payments as a percentage of revenue.
James Holm: I will now review our full year 2023 results at a high level before getting into the details of the fourth quarter. In 2023, we increased net revenue 1% year-over-year to 87.2 million, with strong performance in Canada and commencement of sales to Germany and Australia, balanced by a slowdown in Israel. Constant currency, consolidated net revenue increased 6% to $91.7 million.
Gross profit in the fourth quarter was $1.9 billion equating to an 8% gross margin representing a point $7 million improvement from the prior year period.
The increase was primarily driven by higher sales in Canada and continued supply chain optimization.
James Holm: Total operating expenses declined by $30 million versus the prior year, adjusted EBITDA improved by 12% to negative $61 million, and operating cash flow improved by $46 million to negative $43 million. I will now review our fourth quarter 2023 results in relation to the prior year period. The company reported consolidated net revenue of $23.9 million, a 9% increase from the prior year. However, constant currency consolidated net revenue increased by 11% to $24.5 million.
Looking at the margin for the full year, we had been performing well in the first nine months highlighted by a steady margin profile between 15 and 16% to the third quarter.
Unfortunately due to the both the war in Israel and increased competitive activity margins were negatively impacted as you look into 2024 with a more streamlined operational footprint. We are working to further optimize our supply chain and add automation to our production processes to increase throughput and drive costs out of the system, which should improve margins throughout the year.
James Holm: The revenue increase is primarily driven by higher cannabis flower sales in Canada and cannabis shipments to Germany and Australia, partially offset by lower cannabis flower sales in Israel due to the war and competitive activity, and an adverse price mix in the Canadian cannabis flower category, driving increased excise tax payments as a percentage of revenue. Gross profit in the fourth quarter was $1.9 million, equating to an 8% gross margin, and representing a $0.7 million improvement from the prior year period. The increase is primarily driven by higher sales in Canada and continued supply chain optimization. Looking at the margin for the full year, we had been performing well in the first nine months, highlighted by a steady margin profile between 15 and 16 percent through the third quarter. Unfortunately, due to both the war in Israel and increased competitive activity, margins were negatively impacted.
We anticipate that as you move through 2024, we will recover from the fourth quarter performance and build upon the success. We had in the first nine months of 2023.
Consolidated adjusted EBITDA in the fourth part with negative 14.8 million, representing a 4.2 million improvement from the prior year.
The improvement was primarily driven by a decline in general and administrative and research and development expenses and an improvement in gross profit.
Following the increase or operating expense savings goal to 20 to 25 million. In Q2 2023, we are pleased to share that we surpassed the high end of the range by 5 million, achieving 30 million an operating expense savings.
Due to the over achieving in savings in 2023 were adjusting our 2024 savings projections to deliver an incremental $5 million to $10 million.
Turning to the balance sheet accompany ended the quarter with approximately 862 million in cash and short term investments, which is up by about 22 million from the third quarter.
James Holm: As we look into 2024 with a more streamlined operational footprint, we are working to further optimize our supply chain and add automation to our production processes to increase throughput and drive costs out of the system, which should improve margins throughout the year. We anticipate that as we move through 2024, we will recover from the fourth quarter performance and build upon the success we had in the first nine months of 2023. Consolidated adjusted EBITDA in the fourth quarter was negative $14.8 million, representing a $4.2 million improvement from the prior year. The improvement was primarily driven by a decline in general and administrative and research and development expenses and an improvement in gross profit.
In addition to delivering on operational efficiency maximizing the return on our cash we received an interest payment on a broke Ho senior secured loan at 1.9 million at a principal repayment of 1.4 million for total cash paid by Growco to crowed US a 3.3 million in queue. Thank you for.
In total for 2023, we receive 10.3 million in interest payments and 5.6 million a principal payments.
Having the best balance sheet and the cannabis industry enables us to take calculated strategic pets, while you remain steadfastly focused on reducing Casper.
James Holm: Following the increase to our Operating Expense Savings goal to $20 to $25 million in Q2 2023, we are pleased to share that we surpassed the high end of the range by $5 million, achieving $30 million in Operating Expense Savings. Due to the overachievement in savings in 2023, we're adjusting our 2024 savings projections to deliver an incremental $5-10 million. Turning to the balance sheet, the company ended the quarter with approximately $862 million in cash and short-term investments, which is up by about $22 million from the third quarter. In addition to delivering on operational efficiencies and maximizing the return on our cash, we received an interest payment on our GroCo Senior Secured Loan of $1.9 million and a principal repayment of $1.4 million for total cash paid by GroCo to Cronos of $3.3 million in Q4. In total, for 2023, we will receive $10.3 million in interest payments and $5.6 million in principal.
Moving to the cash flow statement cash flow from operations with positive approximately $16.8 million, representing a substantial improvement in free cash flow to find his operating cashflow less capex with positive 15 million another great achievement.
We have many when's, the 0.2 market share gains opex reduction cash balance optimization and improving cash flow from operations and we are reaffirming our guidance that we anticipate the net change in cash to find that the sum of cash and cash equivalents and short term investments to be positive in 2024 looking.
Looking back on these improvements I, Sharon bikes 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.
2023, with an impressive year for Kronos, we continue to transform our business and adapt it to our industry is today.
Our brands are winning globally. Thanks to all the hard work tomorrow employees to bring the best in class four of those products to market.
Or spinach brand is a number two brand overall and hold the number one position as in both flower and animals.
James Holm: 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 the cash flow statement, cash flow from operations was positive, approximately $16.8 million, representing a substantial improvement, and free cash flow, defined as operating cash flow less capex, was positive $15 million, another great achievement. We have many wins to point to, market share gains, OPEX reduction, cash balance optimization, and improving cash flow from operations, and we are reaffirming our guidance that we anticipate the net change in cash, defined as the sum of cash and cash equivalents, and short-term investments, to be positive in 2026. Looking back on these improvements, I share in Mike's confidence in the trajectory of the business and our preparedness for entry into new markets as With that, I'll turn it back to Mike. Thank you, James. 2023 was an impressive year for Cronos.
We watched Lord Jones in Canada by returning the brand to its candidates roots with a suite of innovative and high quality products you can't wait to continue to build.
Before getting into questions I Wanna level set what is under the Kronos umbrella and where things stand today.
We closed the year with approximately $862 million in cash and short term investments and zero debt.
Generated over 14, my interest income in queue for and we anticipate generating approximately 40 to 50 million in interested to come in 2024.
In Canada are finished ran to the second most popular brand.
We brought the Lord Jones ran to the Canadian adult used cannabis market with products, we know can win.
We have a leading medical brand piece natural's in Israel, which posed to $21.1 million net revenue in 2023.
And the fourth quarter of 2023, we shipped candidate to Germany, and Australia, extending our global reach.
We have a 5.9 per cent stake in farm mechanics, what are the largest U S. M. S. O is currently on her books for $26 million.
We owned 50 per cent of the equity and Chronos broke up which is profitable a grill co pay to $15.9 million principal and interest payments in 2023.
We have an approximate 10 per cent is taken by tour, the leading medical cannabis company in Australia on our books for $9.6 million.
Michael Gorenstein: We continue to transform our business and adapt it to where our industry is today. Our brands are winning globally, thanks to all the hard work from our employees to bring best-in-class, borderless products to market. Our spinach brand is the number two brand overall and holds number one positions in both flour and. We launched Lord Jones in Canada by returning the brand to its cannabis roots with a suite of innovative and high quality products, and we can't wait to continue to build on that legacy. Before getting into questions, I want to set the stage for what is under the Cronos umbrella and where things stand today. We closed the year with approximately $862 million in cash and short-term investments and zero debt.
And finally, we have an exclusive partnership with Altria on a global basis.
We stabilized or cash balance and drastically improved our cashback trajectory, making this one of the best position candidates company is to take advantage of new market growth opportunities.
We're heading into this new fiscal you're energized and ready to take photos too. It's next chapter.
With that I'll open the line for questions.
Thank you 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 one again, please limit yourself to one question and one follow up one moment for questions.
Our first question comes from John <unk> C. I B C capital markets you May proceed.
Thank you good morning, I wanted to start on any gross margin you mentioned some of the reasons that that show was lower in the quarter versus Q3, I Wonder if you could rank order those and then are the initiatives that you identified for next year about automation a few other items is the benefit of that included in your cost savings target.
Michael Gorenstein: We generated over 14 million in interest income in Q4, and we anticipate generating approximately 40 to 50 million in interest income in 2020. In Canada, our spinach brand is the second most popular brand. We brought the Lord Jones brand to the Canadian adult-use cannabis market with products we know can win. We have a leading medical brand, Peace Naturals, in Israel, which posted 21.1 million in net revenue in 2023. In the fourth quarter of 2023, we shipped cannabis to Germany and Australia, extending our global reach. We have a 5.9% stake in Pharmacand, one of the largest U.S. MSOs, currently on our books for $26 million. We own 50% of the equity in Cronos Groco, which is profitable, and Groco paid us $15.9 million in principal and interest payments in 2023.
For 24 would that'd be incremental to it.
Thanks, John So we showed studying study results in the first nine months of the year with gross margin ranging between 15 and 16% looking beyond the inventory write downs, we should study improvement kind of throughout the year right with the exception of two four unfortunately due to the war in Israel any increase competitive activity those margins where <unk>.
<unk> affected.
We do anticipate as we move through 2024 and will recover from that fourth quarter performance and build upon the success we had in the first nine months.
Michael Gorenstein: We have an approximate 10% stake in Vytura, the leading medical cannabis company in Australia, on our books for $9.6 million. And, finally, we have an exclusive partnership with Altria on a global basis. We've stabilized our cash balance and drastically improved our cash flow trajectory, making us one of the best-positioned cannabis companies to take advantage of new market growth opportunities. We're heading into this new fiscal year energized and ready to take Cronos to its next chapter.
Positive impacts of our gross margin in the quarter will continue to be a cannabis extracts category that carry a higher margin profile and benefit for lower Canada biomass costs as we continue to leverage our joint venture with broke out and it proved fixed costs absorption and a can of Canadian supply chain as we continue to grow the business and further optimize our supply chain costs.
Operator: With that, I'll open the line for questions. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
Further the announced exit of our Winnipeg facility is also anticipated to drive additional Cox saving of 2024 contributing to the $5 million to $10 million in savings target for 24, and then John as you alluded. There's some additional opportunity they were driving automation into the supply chain and so some of that is baked in there was additional potential upside as well throughout the year.
Operator: Please limit yourself to one question and one follow-up. One moment for questions. Our first question comes from John Zamparo with CIBC Capital Markets. You may proceed. Thank you. Good morning.
<unk>.
Got it Okay. That's helpful. And then two parts my second question I, just I would love to get your thoughts on.
John Zamparo: I wanted to start on gross margin. You mentioned some of the reasons that it was lower in the quarter versus Q3. I wonder if you could rank order those.
On each of US, Australia, and Germany in particular, how it how it relates to Kronos Australia's seemingly interesting to do a lot of different L. P. As it is becoming more crowded do you think that market has sustainability in terms of its grow with their their barriers to entry that would prevent further participants for joining and on Germany what up.
James Holm: And then are the initiatives that you identified for next year about automation and a few other items, is the benefit of that included in your cost savings target for 24? Or would that be incremental? Thanks, John. So we showed steady, steady results in the first nine months of the year with gross margins ranging between 15 and 16%. Looking beyond the inventory write-downs, we showed steady improvement kind of throughout the year, right? With the exception of Q4.
I do think Kronos has given you use the distributor model with respect to the recent change in legislation. Thank you.
Sure.
Thanks, John.
So I think when you look at at the Australia, and German market you know at last year. They were similar sizes with the Australian <unk>, a little larger and and you see pretty similar bears the other international markets just in terms of having a type of supply chain that you know any.
James Holm: Unfortunately, due to the war in Israel and increased competitive activity, those margins were negatively affected. We do anticipate that as we move through 2024, we'll recover from that fourth-quarter performance and build upon the success we had in the first nine months. Positive impacts to our gross margin in the quarter will continue to be our cannabis extracts category, which carries a higher margin profile and benefits from lower cannabis biomass costs as we continue to leverage our joint venture with GroCo and improve fixed cost absorption in our Canadian supply chain as we continue to grow the business and further optimize our supply chain costs. Further, the announced exit of our Winnipeg facility is also anticipated to drive additional COG savings in 2024, contributing to the $5 to $10 million in savings target for 2024.
Kind of what you need to make sure you get product across the border.
<unk> really types best for us similar to other markets, what's gonna really matter is having great genetics and making sure that those genetics are thrown very well so what's propelled us to <unk> in in Israel, and Canada, and Germany is what we expect will allow us to succeed there.
As far as a gross relative to Germany, I think just given the country size.
I wouldn't expect it to continue to outpace Germany, but I do think they're still runaway ahead.
Uhm, Germany.
We already expected there to be be gross but you know a week ago, having having to vote to change the way the canvas is treated.
James Holm: And then, John, as you alluded to, there's some additional opportunity that we're driving automation into the supply chain. And so some of that is baked in. There's additional potential upside as well. Got it. Okay, that's helpful. And then two parts.
You know if there's a bill that opened up the cannabis Margaret and it's no longer classified as a narcotic.
And I think that's really significant because you know what people may talk about the adult use or compassion clubs and what that might mean really for us with this means that we are allowed to to know effectively market medical cannabis and.
John Zamparo: My second question, I would love to get your thoughts on each of Australia and Germany, in particular, how it relates to Cronos. Australia is seemingly interesting to a lot of different LPs, but it's becoming more crowded. Do you think that market has sustainability in terms of its growth or the barriers to entry that would prevent further participants from joining? And in Germany, what upside do you think Cronos has given you to use the distributor model with respect to the recent change in legislation? Sure. Thanks, John.
That's that's a significant change so I expect a lot of growth in Germany, and I think you know it from international market perspective, that's that's what the story can be over the next year.
Okay, great. Thank you very much.
Thank you.
One moment for questions.
Our next question comes from Bill Kirk with Roth M. Cam you May proceed.
And good morning, everyone. So increased competitive activity was noted as a margin headwind where their specific formats or provinces, where you saw that increase Quebec competitive activity.
Michael Gorenstein: So I think when you look at the Australian and German markets, you know, last year, they were similar sizes, with the Australian market being a little larger. And you see pretty similar barriers to other international markets, just in terms of having the type of supply chain, you know, and, kind of what you need to make sure you get products across the border and meet really tight specifications. For us, similar to other markets, what's going to really matter is having great genetics and making sure that those genetics are grown very well. And so what's propelled us to lead in Israel and Canada and Germany is what we expect will allow us to succeed there. As far as growth, you know, relative to Germany, I think just given the country's size, I wouldn't expect it to continue to outpace Germany, but I do think there's still, you know, runway ahead.
Yeah. So thanks for the question I'd say overall right we experienced competition across the board, mainly what we were alluding to their with competition in Israel driven by the war and so a lot of the <unk>. Our competitors are essentially dealing with the same one that we are today there are supply chain issues there.
You know thankfully our facility you know what not directly impacted and we have an extremely resilient workforce there and so we've done a lot to stabilize and continue to produce and make sure. We are providing our best in class products to the end consumer we do experience a little bit of competition in Canada, as well, but I think he Canada, you're saying.
Michael Gorenstein: We already expected there to be growth, but, you know, a week ago, we had the vote to change the way that cannabis is treated. There's a bill that opened up the cannabis market, and it's no longer classified as a narcotic. And I think that's really significant because, while people may talk about adult use or compassion clubs and what that might mean, really, for us, what this means is we are allowed to now effectively market medical cannabis. That's a significant change. So I expect a lot of growth in Germany. I think, you know, from an international market perspective, that that's what the story should be over the next year. That's great. Thank you very much.
You know even in spite of the competition right. We are number one in flower number one and edible number three and <unk> and number eight pre rolling steadily increasing so you know we feel very confident in our portfolio in in the products and innovation that we're bringing to market.
And then if if I could follow up on Germany, Uhm, a y Y with the changes in Germany help grow the medical market rather than you know if if cannabis isn't a narcotic why wouldn't call. It the adult use unstructured adult use market share from the current med.
John Zamparo: Thank you. One moment for questions. Our next question comes from Bill Kirk with Roth MKM. You may proceed. Hey, good morning everyone.
<unk> market right of it could you help me to kind of figure that you think about that a little bit.
William Kirk: So, increased competitive activity was noted as a margin headwind. Were there specific formats or provinces where you saw that increased competitive activity? Yeah, so thanks for the question. I'd say overall, right, we experienced competition across the board. Mostly what we were alluding to there was competition in Israel driven by the war.
Sure.
Great question.
If you if you compare how candidates has been treated in in Europe, or North America, it's completely different what do you think about medical cannabis a and the U S. It's not really going through a pharmaceutical like system and in Germany. It is truly been treated like a narcotic and so <unk>.
James Holm: And so a lot of the competitors are essentially dealing with the same problems that we are today. There are supply chain issues there. You know, Thankfully, our facility was not directly impacted, and we have an extremely resilient workforce there.
Really extremely restrictive marketing regime, you know.
Changing that and allowing you to actually go communicate with the benefits of having a superior product or to patients.
I think at the at the game changer and.
James Holm: And so we've done a lot to stabilize and continue to produce and make sure we're providing our best in class products to the end consumer. We do experience a little bit of competition in Canada as well, but I think in Canada, you're saying that, you know, even in spite of the competition, right? We are number one in flour, number one in edibles, number three in vape, and number eight in pre-roll, and we are steadily increasing.
Adult use program that people talk about in Germany isn't really a commercial adult youth program, you're not able to have the same type of infrastructure you have in Canada, or Germany, there's not actual legal adult you sail it's really just.
Lessening the penalties an illicit adult use market.
And I think with that you would expect to see.
Quality product coming out improved access to quality products. So it'll bifurcate is sort of.
Illicit market with a premium medical market and you know you later the ability to.
James Holm: So, you know, we feel very confident in our portfolio and in the products and innovation that we're bringing to market. And then, if I could follow up on Germany, why would the changes in Germany help grow the medical market rather than, you know, if cannabis isn't a narcotic, why wouldn't, call it, the adult use, unstructured adult use market take share from the current medical market? Could you help me kind of figure that out, you know, think about that a little bit? Sure. That's a great question. You know, if you compare how cannabis has been treated in Europe versus North America, it's completely different. When you think about medical cannabis in the US, it's not really going through a pharmaceutical system. And in Germany, it has truly been treated like a narcotic.
The advertising market on top of that I think it's final table towards premium product.
And it was a great. Thanks, Mike.
Thank you, but as a reminder to ask a question. Please press star one one on your telephone.
One moment for questions.
Our next question comes from you won't King with Ken Accord Genuity you May proceed.
Hi, My name is <unk> on behalf of my outside of me. Thank you for the question I just wanted to kill down on the gross margin question, just a little bit more wanted to ask in relation to be about to this day about Jesse with that last thing you buy stock is quite that uhm could it be perhaps that there was some kind of.
Michael Gorenstein: And so, extremely, extremely restrictive marketing regime. You know, changing that and allowing me to actually go communicate with the benefits of having a superior product are to patients, I think is a game changer. And, you know, the adult use program that people talk about in Germany isn't really a commercial adult use program. You're not able to have the same type of infrastructure you have in Canada or Germany.
Reclassification of certain expenses between operating expenses and caused that like to you know a drop off in the grocery I can profile, but uhm a stable just to be with that cough.
That's quite a <unk>.
Yeah. Thanks for the question. So you know as we mentioned it it really with predominantly driven by Israel and the increased competitive activity there due to the war and then some inventory right down related to that so you know that's really the main driver.
Michael Gorenstein: There are not actual legal adult use sales. It's really just lessening the penalties of an illicit adult use market. And I think with that, you won't expect to see, you know, quality products coming out, and improved access to quality products. So it'll bifurcate the sort of, you know, illicit market with a premium medical market. And, you know, you layer the ability to advertise the market on top of that. I think it's funneled people toward premium products.
Okay got it and in terms of my accounts launch I know the laundry on a couple of months ago, but could you just comment on maybe the initial reaction fan the consumers that you're seeing your cock, Canada and like about 10 minutes are saying about the brand.
William Kirk: That was great, thanks. Thank you. And as a reminder, to ask a question, please press star one one on your telephone. One moment for questions. Our next question comes from Yewon Kang with Canaccord Genuity. You may proceed. Hi, good morning. This is Yewon Kang on behalf of Matt Bottomley.
Sure. Thanks, Yeah, I think it's been it's been very positive you know as you mentioned it's been it's.
In a limited in terms of the size of <unk>, so far but we wanted to take a very Taylor it'd be cautious approach, but you know when we look at the distribution were receiving reorders receiving strong demand specifically the <unk> receiving the top of the category. So we're very excited about.
Yewon Kang: Thank you for the question. I just wanted to drill down on the gross margin question just a little bit more. I wanted to ask in relation to the relatively stable adjusted default loss that you guys saw this quarter. Could it perhaps be that there was some kind of reclassification of certain expenses between operating expenses and COGS that led to, you know, a drop off in the gross margin profile but a stable adjusted default loss this quarter?
Put that and a lot of anticipation I think especially given you know.
The successive had in its hours for chocolate fusions, which you know, we really expect to be a crown jewel a portfolio and something that can not just to find the category, but push the overall chocolate category for the where are we gonna get it.
James Holm: Yeah, thanks for the question. So, you know, as we mentioned, it really was predominantly driven by Israel and the increased competitive activity there due to the war, and then some inventory write-down related to that. So, you know, that's really the main driver. Okay.
It should be six with inedible.
Mmk.
Thank you and this concludes the conference call. Thank you for your participation and you may now disconnect.
Yewon Kang: And in terms of Lord Jones, I know the launch was only a couple of months ago, but could you just comment on maybe the initial reaction from the consumers that you're seeing across Canada and what the bartenders are saying about the brand? Sure. Thanks. Yeah, I think it's been, has been very positive. You know, as you mentioned, it's been limited in terms of the size of the launch so far, but we wanted to take a very tailored and cautious approach.
Mmm Mmm [music].
Michael Gorenstein: But, you know, when we look at distribution, we're seeing reorders, we're seeing strong demand, specifically for the hash-infused pre-rolls. We're seeing the top of the category, so we're very excited about that. And a lot of anticipation, I think, especially given the success we've had in sours for chocolate fusions, which, you know, we really expect to be a crown jewel portfolio and something that can not just define the category but push the overall chocolate category forward to where we think it should be sitting within edibles.
Operator: Thank you. And this concludes the conference call. Thank you for your participation. You may now disconnect.
Operator: !!!!!!! Thanks for watching!