Q2 2024 Cronos Group Inc Earnings Call

August 8, 2024

Good morning. My name is Andrea and I will be your conference operator today. I would like to welcome everyone to Cronos Group's 2024 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Shayne Laidlaw, Investor Relations. Please go ahead.

Operator: to Cronos Group's 2024 second quarter earnings conference call. Today's call is being recorded.

Shayne Laidlaw: At this time, I'd like to turn the call over to Shayne Laidlaw and Vester Relations. Please go ahead.

Shayne Laidlaw: Thank you, Andrea. And thank you for joining us today to review Cronos' 2024 second quarter financial and business performance. Today, I am joined by our chairman, president and CEO, Mike Gorenstein, and our CFO, James Holm.

Operator: Thank you, Andrea, and thank you for joining us today to review Cronos' 2024 second quarter financial and business performance. Today, I am joined by our chairman, president, and CEO, Mike Gorenstein, and our CFO, James Holm.

Shayne Laidlaw: Andrea, and thank you for joining us today to review Cronos' 2024 second quarter financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holm.

Michael Gorenstein: And that created a market structure with high excise tax, high provincial margins, and high regulatory costs, forcing more facilities to shut down and bankruptcy. That is, in part, why, in June, we announced the expansion of GroCo to continue to fuel our global growth initiative. GroCo has proven to be a leading cannabis grower, continually improving yields and hitting consistent and high THC levels that consumers desire. Turning now to brand updates, when we launch our best-selling brand, Spinach, we strategically focus on specific consumer segments and product attributes, elevating the consumer experience, which offers the same great tasting sours by Spinach Flavors, now with 10 milligrams of THC per piece.

Shayne Laidlaw: Thank you, Andrea. And thank you for joining us today to review Cronos' 2024 second quarter financial and business performance. Today, I am joined by our Chairman, President and CEO , Mike Gorenstein, and our CFO , James Holm.

Shayne Laidlaw: Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR profiles. This information and the prepared remarks 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 statement.

Shayne Laidlaw: Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CEDAR profiles. This information and the prepared remarks will also be posted on our website under Investor Relations.

Speaker Change: ro sued in news release announcing our financial results this morning which is filed on our ad currency our profiles this information and the prepared remarks will also be posted on our website under investor relations

Shayne Laidlaw: 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 risk and uncertainty 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, by which any forward-looking statements made during this call are qualified in their entirety.

Shayne Laidlaw: 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, 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, we will be making statements regarding market share information throughout this conference call.

Speaker Change: beforei 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 risksand uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements

Shayne Laidlaw: Information about non-GAAP financial measures including reconciliations to U.S. Gap can also be found in the earnings materials that are available on our website.

Shayne Laidlaw: information about non-gaap financial measures including reconciliations to u s gap can also be found in the earnings materials that are available on our website lastly we will be making statements regarding markesha information throughout this conference call and unless otherwise stated all market share data is provided by high fire

Shayne Laidlaw: Unless otherwise stated, all market share data is provided by HiFIRE. We will now make prepared remarks, and then we'll move into a question and answer session. After that, I'll pass the floor over to Cronos' Chairman, President, and CEO, Mike Gorenstein.

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 High Fire.

Shayne Laidlaw: We will now make prepared remarks, and then we will move into a question-and-answer session.

Michael Gorenstein: With that, I'll pass over to Karnas' chairman, president and CEO Mike Gornstein. Thank you, Shane, and good morning, everyone. The Canadian market has been characterized by extreme cycles of supply, demand, and balances. In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity. This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they have been used to raise more capital and build even more capacity. This placed a lot of industry focus on facility size, not on production efficiency or product quality.

Shayne Laidlaw: We will now make prepared remarks and then we will move into a question and answer session. With that, I'll pass it over to Cronos' Chairman, President, and CEO , Mike Gorenstein.

Michael Gorenstein: Thank you, Shayne, and good morning, everyone. The Canadian market has been characterized by extreme cycles of supply, demand, and balance. In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity. This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they then used to raise more capital and build even more capacity. This has placed a lot of industry focus on facility size, not on production efficiency or product.

Mike Gorenstein: Thank you, Shayne, and good morning, everyone. The Canadian market has been characterized by extreme cycles of supply-demand imbalances.

Speaker Change: In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity.

Shayne Laidlaw: This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they then used to raise more capital and build even more capacity.

Shayne Laidlaw: This placed a lot of industry focus on facility size, not on production efficiency or product quality.

Michael Gorenstein: As a result, total supply quickly ballooned and significantly outpaced demand. The industry structure and expectations were all set up with price assumptions that were three to four times what they are today, and that created a market structure with high excise tax, high provincial margins, and high regulatory fees. However, companies with inefficient production facilities, having already built significant capacity, had to capture significant market share for their business models to work, and attempts to get that market share led to price regression. Many of these companies continue to raise capital, albeit on much less attractive terms, and hope to survive long enough to benefit from expected tailwinds of attractive international markets opening, or rationalization in the Canadian market.

Michael Gorenstein: As a result, total supply quickly ballooned and significantly outpaced demand. The industry structure and expectations were all set up with price assumptions that were three to four times what they are today. And that created a market structure with high excise tax, high provincial margins, and high regulatory costs. However, companies with inefficient production facilities, having already built significant capacity, had to capture a significant market share for their business models to work, and attempts to get that market share led to price compression.

Shayne Laidlaw: As a result, total supply quickly ballooned and significantly outpaced demand.

Shayne Laidlaw: The industry structure and expectations were all set up with price assumptions that were three to four times what they are today, and that created a market structure with high excise tax, high provincial margins, and high regulatory fees.

Shayne Laidlaw: However, companies with inefficient production facilities, having already built significant capacity, had to capture a significant market share for their business models to work, and attempts to get that market share led to price congression.

Michael Gorenstein: Many of these companies continue to raise capital, albeit on much less attractive terms, and hope to survive long enough to benefit from expected tailwinds of attractive international markets opening or rationalization in the Canadian market. Some have resorted to not paying excise taxes to artificially lower their cost of production, and others have lab-shopped to artificially inflate consumers' perception of quality via higher potency limits. However, with global macro events taking priority with policymakers,

Shayne Laidlaw: Many of these companies continue to raise capital, albeit on much less attractive terms, in hopes to survive long enough to benefit from expected tailwinds of attractive international markets opening or rationalization in the Canadian market.

Michael Gorenstein: Some resorted to not paying excise taxes to artificially lower their cost of production, and others lab shopped to artificially inflate consumers' perception of quality via higher potency label claims. However, with global macro events taking priority with policymakers, many producers were not able to survive long enough to see the benefits of new markets opening. Over the last year, we have seen CRA begin the ramp-up of collections and enforcement again, companies not paying excise tax, and regulators crack down against lab shopping, forcing more facilities shut down and bankers. and earlier this year, with regulatory changes in Germany and increased traction in the UK, we've seen international demand finally begin to ramp.

Shayne Laidlaw: Some resorted to not paying excise taxes to artificially lower their cost of production, and others lab-shopped to artificially inflate consumers' perception of quality via higher potency label claims.

Michael Gorenstein: Many producers were not able to survive long enough to see the benefits of new markets opening. Over the last year, we have seen CRA begin to ramp up collections and enforcement against companies not paying exit tax, and regulators crackdown on lab shopping, forcing more facility shutdowns and bankruptcies. And earlier this year, with regulatory changes in Germany and increased traction in the UK, we've seen international demand finally begin to ramp up. But as we've said in the past, there's a difference between available cannabis inventory and available inventory that is sellable as quality flowers.

Shayne Laidlaw: however with global macro events taking priority with policymakers many producers were not able to survive long enough to see benefits of new markets opening

Shayne Laidlaw: Over the last year we have seen CRA begin to ramp up collections and enforcement against companies not paying excise tax and regulators crackdown against lab shopping, forcing more facility shutdowns and bankruptcies.

Shayne Laidlaw: And earlier this year, with regulatory changes in Germany and increased traction in the UK, we've seen international demand finally begin to ramp.

Michael Gorenstein: As we've said in the past, there's a difference between available cannabis inventory and available inventory that is sellable as quality flower. While there's plenty of the former, there is now a shortage of high quality, desirable flower that is sellable to consumers in Canada.

Speaker Change: as we said inthe past there's a difference between available cannabis inventory and available inventory that the cellw' quality flower

Michael Gorenstein: While there's plenty of the former, there is now a shortage of high-quality, desirable flour that is sellable to consumers in Canada. That is, in part, why, in June, we announced the expansion of GroCo to continue to fuel our global growth initiative. GroCo has proven to be a leading cannabis grower, continually improving yields and hitting consistent and high THC levels that consumers desire. This investment, which will be funded by an additional approximately $51 million credit facility, will support the expansion of GroCo's state-of-the-art, purpose-built cannabis facility to meet the growing global demand for high-quality cannabis flower, enabling growth opportunities in the markets Cronos operates in today and enabling future growth into new An important component of this transaction is that, in Q3, Cronos will consolidate GroCo in its financial statement.

Shayne Laidlaw: While there's plenty of the former, there is now a shortage of high-quality, desirable flour that is sellable to consumers in Canada.

Michael Gorenstein: That is in part why, in June, we announced the expansion of GroCo to continue to fuel our global growth initiatives. GroCo has proven to be a leading cannabis grower, continually improving yield than hitting consistent and high THC levels that consumers desire. This investment, which will be funded by an additional approximately $51 million credit facility, will support the expansion of GroCo's state-of-the-art purpose-built cannabis facility to meet the growing global demand for high quality cannabis flower, enabling growth opportunities in the markets Cronos operates in today, and enabling future growth into new markets that open. An important component of this transaction is that in Q3, Cronos will consolidate GroCo in its financial statements.

Shayne Laidlaw: That is in part why in June we announced the expansion of GroCo to continue to fuel our global growth initiatives.

Shayne Laidlaw: GroCo has proven to be a leading cannabis grower, continually improving yields and hitting consistent and high THC levels that consumers desire.

Shayne Laidlaw: This investment, which will be funded by an additional approximately $51 million credit facility,

Shayne Laidlaw: will support the expansion of GroCo's state-of-the-art purpose-built cannabis facility to meet the growing global demand for high-quality cannabis flower, enabling growth opportunities in the markets Cronos operates in today and enabling future growth into new markets that open.

Speaker Change: an important component of this transaction is that in q three clinals will consolidate growco and its financial statements

Michael Gorenstein: You've heard me speak at length in the past about the strong performance of GroCo. Cronos will provide investors with additional information on this under-appreciated component of our business.

Michael Gorenstein: You've heard me speak at length in the past about the strong performance of Groco. Consolidated Groko will provide investors with additional information on this underappreciated component of our business. Turning now to brand updates, when we launch our best-selling brand, Spinach, we strategically focus on specific consumer segments and product attributes, elevating the consumer experience. This approach has played a crucial role in establishing Spinach as one of the most recognized and best-selling brands in Canada.

Speaker Change: You've heard me speak at length in the past about the strong performance of Groco. Consolidated Groco will provide investors with additional information on this underappreciated component of our business.

Michael Gorenstein: Turning out of brand updates, when we launch our best-selling brand spinach, we strategically focus on specific consumer segments and product attributes, elevating the consumer experience. This approach played a crucial role in establishing spinach as one of the most recognized and best-selling brands in Canada. Our team has introduced thoughtful innovations across various categories, and I'm incredibly proud of what we've accomplished from a brand perspective this quarter. Spinach continues its exceptional performance in the flower category, and the Canadian market was 6.2 percent market share, led by popular genetics such as GMO Cookies, Wedding Cake, and Space Cake, and a variety of size formats.

Speaker Change: Turning now to brand updates. When we launch our best-selling brand, Spinach, we strategically focus on specific consumer segments and product attributes, elevating the consumer experience.

Speaker Change: This approach played a crucial role in establishing Spinach as one of the most recognized and best-selling brands in Canada.

Michael Gorenstein: Our team has introduced thoughtful innovations across various categories, and I'm incredibly proud of what we've accomplished from a brand perspective. Spinach continues its exceptional performance in the flower category in the Canadian market with 6.2% market share, led by popular genetics such as GMO cookies, wedding cake, and space cake in a variety of size formats. In Q2, we introduced Spinach Grinds, a milled flour offering conveniently designed to be ready to roll or used in a variety of smoking and vaporizing devices. Ready-to-use milled flour offerings have grown in popularity in Canada, appealing to consumers seeking both value and convenience.

Speaker Change: our team has introduced thoughtful innovations that drives various categories andi'm credibly proud of will we accomished from a brand perspective this quarter

Speaker Change: Spinach continues its exceptional performance in the flower category in the Canadian market with 6.2 percent market share, led by popular genetics such as GMO cookies, wedding cake, and space cake in a variety of size formats.

Michael Gorenstein: In Q2, we introduced Spinach grind, a milled flower offering conveniently designed to be ready to roll or used in a variety of smoking and vaporizing devices. Ready-to-use milled flower offerings of grown in popularity in Canada, appealing to consumers seeking both value and convenience. Spinach grinds cater to this growing demand by providing high-quality milled cannabis that saves time and effort. Our commitment to quality, innovation, and investment in genetic breeding keeps us at the forefront of the flower category.

Speaker Change: in q two we introduced fininishage crimees a milld flower offering continually designed to be ready toa role or used ina variety ofsmoking in v broen devices

Speaker Change: Ready-to-use milled flour offerings have grown in popularity in Canada, appealing to consumers seeking both value and convenience.

Michael Gorenstein: Spinach Grinds caters to this growing demand by providing high-quality milled cannabis that saves time and effort. Our commitment to quality, innovation, and investment in genetic breeding keeps us at the forefront of the flower category. Macro trends show that pre-rolls will be the number one category in retail sales within the next few years, so winning there will be critical. The pre-roll category is an area of focus for us, and there is a lot of work and development going into this segment.

Michael Gorenstein: Spinach Grinds caters to this growing demand by providing high-quality milled cannabis that saves time and effort.

Speaker Change: Our commitment to quality, innovation, and investment in genetic breeding keeps us at the forefront of the flower category.

Michael Gorenstein: The macro trends show that pre-rolls will be the number one category in retail sales within the next few years, so winning there will be critical. The pre-roll category is an area of focus for us, and there is a lot of work and development going into this segment. As we innovate and iterate in this space, we're especially proud of our recent launches under the Lord Jones brand, adding to the ice water hash-infused pre-roll lineup with Sour Blueberry and Snow-Loaded strains. What you see from us in the pre-roll category today is just the beginning, and we plan to bring new and innovative products to market in the future.

Speaker Change: the macrotrend toshow the preodls will be the number one category in retail sales within the next two years so winning there will be critical

Speaker Change: The pre-roll category is an area of focus for us, and there is a lot of work and development going into this segment.

Michael Gorenstein: As we innovate and iterate in this space, we're especially proud of our recent launches under the Lord Jones brand, adding to the ice-water, hash-infused pre-roll lineup with Sour Blueberry and Snow Lotus Strain. What you see from us in the pre-roll category today is just the beginning, and we plan to bring new and innovative products to market in the future. In the edibles category, Spinach had 15.6% market share in Q

Speaker Change: As we innovate and iterate in this space, we're especially proud of our recent launches under the Lord Jones brand, adding to the ice-water, hash-infused pre-roll lineup with sour blueberry and snow lotus strains.

Speaker Change: what you seeforfrom us in the preo categor today is just a beginning and we plan to br new and innovative products to market in the future

Michael Gorenstein: In the edibles category, Spinach had 15.6% market share in Q2. Our focus on developing innovative strategies and products in this category has been instrumental in our success. In Q2, we launched our first variety pack offering, the soures by Spinach Tropical Party Pack, which introduces new gummies with bolder tropical flavors and the distinctive Spinach S-shake. These gummies have a perfect blend of sour and sweet, and utilize chronicle proprietary flavor and mass and technology, and feature three new dual flavors: peach-fashion fruit, pineapple coconut, and strawberry guava. We're excited to introduce these great new products under our spinach brand in time for the summer season, when we know consumers want convenience and new products to try.

Michael Gorenstein: Our focus on developing innovative strategies and products in this category has been instrumental in our success. In Q2, we launched our first variety pack offering, the Sours by Spinach Tropical Party Pack, which introduces new gummies with bolder tropical flavors and the distinctive spinach S shape. These gummies have a perfect blend of sour and sweet and utilize Cronos' proprietary flavor masking technology and feature three new dual flavors: peach passion fruit, pineapple coconut, and strawberry guava.

Speaker Change: In the edibles category, Spinach had 15.6% market share in Q2.

Speaker Change: Our focus on developing innovative strategies and products in this category has been instrumental in our success.

Michael Gorenstein: In Q2, we launched our first variety pack offering, the Sours by Spinach Tropical Party Pack, which introduces new gummies with bolder tropical flavors and the distinctive spinach S shape.

Michael Gorenstein: These gummies have a perfect blend of sour and sweet and utilize Cronos' proprietary flavor amassing technology and feature three new dual flavors peach passion fruit, pineapple coconut, and strawberry guava.

Michael Gorenstein: We're excited to introduce these great new products under our Spinach brand in time for the summer season, when we know consumers want convenience and new products to try. Also, a pivotal addition to our product lineup is the new Sours by Spinach Fully Blasted Gummy, which offers the same great tasting sours by Spinach Flavors, now with 10 milligrams of THC per piece. This product launched in select markets earlier this year but didn't hit Ontario, Canada's largest market, until July.

Michael Gorenstein: we're excited tointroduce these great new products under a finish brand in time for the summer season when we know consumers want convenience and new products to try

Michael Gorenstein: Also, a pivotal addition to our product lineup is a new sourced by spinach and fully blasted gummies, which are for the same great tasting sourced by spinach flavors, now with 10 milligrams of THC per piece. In June, Health Canada published proposed amendments to the cannabis regulations, which currently limit edibles to 10 milligrams of THC per package. The proposed amendments would allow greater flexibility in packing together multiple packages of edibles, each containing up to 10 milligrams of THC within a larger package, which we would welcome as an option for our best selling sourced edibles. We think this would be a great step in the right direction to provide the consumer with their desired pack sizes, which are popular in other adult-use legalized markets.

Michael Gorenstein: Also, a pivotal addition to our product lineup is the new Sours by Spinach fully blasted gummies.

Speaker Change: which offer the same great tasting sours by Spinach Flavors, now with 10 mg of THC per piece.

Michael Gorenstein: This product launched in select markets earlier this year but didn't hit Ontario, Canada's largest market, until July. The proposed amendments would allow greater flexibility in packing together multiple packages of edibles, each containing up to 10 milligrams of THC, within a larger package, which we would welcome as an option for our best-selling Sours edibles. In Q2, the team in Israel launched four new strains, GG4, Key Lime Punch, Pink Sherb, and GMO Light. Our long-term approach of investing in borderless-branded innovations tailored to specific consumer needs is proving successful.

Michael Gorenstein: This product launched in select markets earlier this year, but didn't hit Ontario, Canada's largest market, until July .

Michael Gorenstein: We expect this to provide positive momentum for Edible's portfolio now that it is more fully distributed. In June, Health Canada published proposed amendments to the cannabis regulations, which currently limit edibles to 10 mg of THC per package.

Michael Gorenstein: We expect this to provide positive momentum for Edible's portfolio now that it is more fully distributed.

Michael Gorenstein: The proposed amendments would allow greater flexibility in packing together multiple packages of edibles, each containing up to 10 milligrams of THC within a larger package, which we would welcome as an option for our best-selling Sours edibles. We think this would be a great step in the right direction to provide the consumer with their desired pack sizes, which are popular in other adult-use legalized markets. In the Vape category, Spinach had the number 4 market position in the quarter, with 6.8% of retail sales in the category.

Michael Gorenstein: In June , Health Canada published proposed amendments to the cannabis regulations, which currently limit edibles to 10 mg of THC per package.

Michael Gorenstein: the forpropos of amendments would allow greater flexibility and tacking together multiple packages ofavatables each containing up to ten milligrams at acc within a larger package which would welcome with an option for our best-selling sour ediabals

Speaker Change: we think this would be a great step in the right direction they provide the consumer with their desired tax sizes which are popular and other adultts use legalized markets

Michael Gorenstein: In the vape category, spinach has a number four market position in the quarter, with 6.8% of retail sales in the category. Spinach's performance in the vape category is led by our top selling products, such as Pink Lemonade, Blueberry Dynamite, Strawberry Sluricane, and Rocket Icicle. Under Lord Jones, our new live resin vape features the Gorilla Z straight, including a half gram trial size, and the convenience to the very sleek all-in-one device, and a one gram stock up size as a 510 thread cartridge, catering to enthusiasts who love the natural flavors of live resin, and those adult consumers near the category want to give this new strain to try.

Michael Gorenstein: In the Vape category, Spinach has the number 4 market position in the quarter with 6.8% of retail sales in the category.

Michael Gorenstein: Spinach's performance in the vape category is led by our top selling products such as Pink Lemonade, Blueberry Dynamite, Strawberry Slurcane, and Rocket Ice. Under Lord Jones, our new live resin vape features the Gorilla Z-Strain, including a half-gram trial size in the convenience of a very sleek all-in-one device and a one-gram stock-up size as a 510 thread cartridge. KW enthusiasts who love the natural flavors of live resin and those adult consumers new to the category want to give this new strain a try.

Michael Gorenstein: Spinach's performance in the bait category is led by our top selling products such as Pink Lemonade, Blueberry Dynamite, Strawberry Sluricane, and Rocket Icicle.

Speaker Change: Under Lord Jones, our new Live Resin Vape features the Gorilla Z-Strain, including a half-gram trial size in the convenience of a very sleek all-in-one device, and a one-gram stock-up size as a 510-thread cartridge. Catering to enthusiasts who love the natural flavors of live resin, and those adult consumers new to the category who want to give this new strain a try.

Michael Gorenstein: We continue to develop the portfolio to bring differentiated flavor and cannabinoid combinations to market, and formats and sizes consumers desire.

Michael Gorenstein: We continue to develop this portfolio to bring differentiated flavor and cannabinoid combinations to market in formats and sizes consumers desire. Turning our attention to international markets, our Israel team continues to perform very well. The team in Israel has put in tremendous efforts to refine the cult of our portfolio, manufacturing processes, and pricing strategy, resulting in higher volumes of products sold and improved pricing for our hero SKUs. In Q2, the team in Israel launched four new strains, GG4, Key Lime Punch, Pink Sherb, and GMO Light.

Speaker Change: we continue to develop this portfolio to bring differentiated flavor and cannab combinations to market and formats and sizited consumers' desire

Michael Gorenstein: Turning our attention to international markets, our Israel team continues to perform very well. The team in Israel is put in tremendous efforts to refine the cultivar portfolio, manufacturing processes, and pricing strategy, resulting in higher volumes of product sold and improved pricing for our heroes' dues. In Q2, the team in Israel launched four new strains: GG4, Keyline Punch, Pink Sherb, and GMO Light. Our success in Israel is fueled by our in-house genetic breeding program, which is elevated to the Peace Natural brand to a leadership position. In May, we announced the peace natural expanded into the UK, via our distribution partner, GrowFarma, a leading distributor of prescribed medicinal cannabis products.

Michael Gorenstein: Turning our attention to international markets, our Israel team continues to perform very well. The team in Israel has put in tremendous efforts to refine the culture of our portfolio, manufacturing processes, and pricing strategy, resulting in higher volumes of products sold and improved pricing for our hero SKUs.

Speaker Change: in q two the team isra launch four new strrenands g four key lines punch pinkure and gmo light

Michael Gorenstein: Our success in Israel is fueled by our in-house genetic breeding program, which has elevated the Peace Naturals brand to a leadership position. In May, we announced that Pete's Naturals expanded into the UK via our distribution partner, Grow Pharma, a leading distributor of prescribed medicinal cannabis products. Supplying the UK market, which has the potential to grow significantly this year, is another milestone for Cronos as we enter and expand into an international market.

Speaker Change: our success in israel is fueled lier and house genetic greeting program which is elevated the peie natural brand to a leadership position

Speaker Change: in may we announced that teep naturalally expanded into the uk vr distribution partnerred grow pharma a leading distributor of prescribed additioninal cananabis products

Michael Gorenstein: The supply in the UK market, which has the potential to grow significantly this year, is another milestone for Kronos, as we enter and expand within international markets. We intend to establish peace natural with the top brand in the UK as we have done in Israel and Germany. We remain focused on growing within the markets we have entered and expanding our portfolio of borderless products to those markets one allowed. This quarter's achievements stem from our unwavering commitment to developing a portfolio of borderless products supported by strategic infrastructure and global partnerships. Our long-term approach of investing in borderless branded innovations tailored to specific consumer needs is proving successful.

Michael Gorenstein: Supplying the UK market, which has the potential to grow significantly this year, is another milestone for Cronos as we enter and expand within international markets.

Michael Gorenstein: We intend to establish Peace Naturals as a top brand in the UK, as we have done in Israel and Germany. We remain focused on growing within the markets we have entered and expanding our portfolio of borderless products to those markets when allowed. This quarter's achievements stem from our unwavering commitment to developing a portfolio of borderless products supported by strategic infrastructure and global partnerships. Our long-term approach of investing in borderless branded innovations tailored to specific consumer needs is proving successful.

Speaker Change: we intend to establish thesece natural of the top rand in uk as we'have done an israel in germany

Michael Gorenstein: We remain focused on growing within the markets we have entered and expanding our portfolio of borderless products to those markets when allowed.

Speaker Change: this quarter achievements stem from our unwa verant commitment to developing a portfolio of boderorless products supported by strategic infrastructure and global partnerships

Michael Gorenstein: our long-term approach of investing borderless branded innovations tilo specific consumer needs is proving successful

Michael Gorenstein: We have stayed focused and shown in our Q2 results. The combination of these efforts and industry leading balance sheet test us up well to grow in our current markets and execute in any new market we decide to enter.

Michael Gorenstein: We have stayed focused, and it's shown in our Q2 results. The combination of these efforts and an industry-leading balance sheet sets us up well to grow in our current markets and execute in any new market we decide to enter. With that, I'd like to pass it on to James to take you through our financials.

Michael Gorenstein: We have stayed focused and it's shown in our Q2 results.

Speaker Change: the combination of these efforts and industry-leading balance sheet tets us up well to grow in our current markets and executeing in any new market we decide entered

Michael Gorenstein: Who's that?

James Holm: I'd like to pass it on to James to take you through our financials.

James Holm: Thanks, Mike. Good morning, everyone.

James Holm: Thanks, Mike. Good morning, everyone. I will now review our second quarter 2024 results in relation to the prior year period. The company reported consolidated net revenue of 27.8 million, a 46% increase from the prior year. Constant currency consolidated net revenue increased by 49% to 28.3 million. The revenue increase is primarily driven by higher cannabis, flower, and extract sales in Canada. Higher cannabis flower sales in Israel and sales in other countries, which included Germany and the UK. Gross profit in the second quarter was 6.3 million, equating to a 23% gross margin, representing a 3.2 million improvement in gross profit and roughly a 600 basis point improvement in gross margin.

Michael Gorenstein: With that, I'd like to pass it on to James to take you through our financials.

Michael Gorenstein: thanks mike good morning everyone i will now review our second quarter two thousand and twenty four results in relation of the prior year period

James Holm: I will now review our second quarter 2024 results in relation to the prior year period. The company reported consolidated net revenue of $27.8 million, a 46% increase from the prior year. Constant currency consolidated net revenue increased by 49% to $28.3 million. The revenue increase is primarily driven by higher cannabis flower and extract sales in Canada, higher cannabis flower sales in Israel, and sales in other countries, which included Germany and the UK.

Michael Gorenstein: The company reported consolidated net revenue of $27.8 million, a 46% increase from the prior year. Constant currency consolidated net revenue increased by 49% to $28.3 million.

Speaker Change: the revenue increase is primarily driven by higher cannabis flowerand extract sales in canada higher canabais flower sales in israel and sales and other countries which included germany and the uk

James Holm: Gross profit in the second quarter was $6.3 million, equating to a 23% gross margin, representing a $3.2 million improvement in gross profit and roughly a 600 basis point improvement in gross margin. The increase was primarily driven by higher sales of cannabis flower and extracts in Canada, higher cannabis flower sales in Israel, and sales in other international markets, partially offset by an adverse price mix in the Canadian cannabis flower category. This, in turn, drove increased excise tax payments as a percentage of revenue.

Michael Gorenstein: Gross profit in the second quarter was $6.3 million, equating to a 23% gross margin, representing a $3.2 million improvement in gross profit and roughly a $600 basis point improvement in gross margin.

James Holm: The increase is primarily driven by higher sales in cannabis, flower, and extracts in Canada. Higher cannabis flower sales in Israel and sales in other international markets, partially offset by an adverse price mix in the Canadian cannabis flower category, driving increased excise tax payments as a percentage of revenue. Consolidated adjusted EBITDA in the second quarter was negative 11.1 million, representing a 4.9 million improvement from the prior year period. The improvement year over year was driven by an increase in gross profit and decreases in sales and marketing and general administrative expenses. It's important to note that during the quarter, we incurred a 1.2 million non-cash Cecil charge within our general administrative expense line associated with the idea of additional credit facility for Groco's expansion, which is not adjusted for in the adjusted EBITDA figure.

James Holm: The increase was primarily driven by higher sales of cannabis flower and extracts in Canada, higher cannabis flower sales in Israel, and sales in other international markets, partially offset by an adverse price mix in the Canadian cannabis flower category, driving increased excise tax payments as a percentage of revenue. Consolidated adjusted EBITDA in the second quarter was negative $11.1 million, representing a $4.9 million improvement from the prior year period. The improvement year over year was driven by an increase in gross profit and decreases in sales and marketing and general and administrative expenses.

James Holm: the increase was primarily driven by higher sales in canabais fer and extract in canada higher cannabis flower sales in israel and sales in other international markets partially offset by an adverse price mix in the canadianand cannabis flower category driving increased excite tax payments at the percentage of revenue

James Holm: Consolidated adjusted EBITDA in the second quarter was negative $11.1 million, representing a $4.9 million improvement from the prior year period. The improvement year-over-year was driven by an increase in gross profit and decreases in sales and marketing and general and administrative expenses. It's important to note that during the quarter, we incurred a $1.2 million non-cash CECL charge within our General and Administrative Expense Line associated with the additional credit facility for GroCo's expansion, which is not adjusted for in the adjusted EBITDA figure. This charge will reverse upon consolidation in Q3.

James Holm: It's important to note that during the quarter, we incurred a $1.2 million non-cash CECL charge within our general and administrative expense line associated with the additional credit facility for GroCo's expansion, which is not adjusted for in the adjusted EBITDA figure. The strong OPEX controls employed to date have put us well on our way to achieving our 2024 goal of saving an incremental $5-10 million for Cronos on a stand-alone basis Mike took you through the deal rationale and high-level numbers, but let me briefly share more details on the transaction with Grok.

James Holm: This charge will reverse upon consolidation in Q3. The strong OPEX controls employed to date have put us well on our way to achieving our 2024 goal of saving an incremental 5 to 10 million for Kronos on a standalone basis. Our joint venture Groco continues to excel, demonstrating robust performance and line with our expectations. Groco reported to us preliminary unaudited revenue of approximately 2.7 million from third-party customers in the second quarter. Additionally, the combined credit facilities that Kronos provided Groco currently has 74 million outstanding, following the principal repayment of 1.2 million in Q2. In addition, Groco made an interest payment of 1.4 million in Q2.

James Holm: The strong OPEX controls employed to date have put us well on our way to achieving our 2024 goal of saving an incremental $5-10 million for Cronos on a stand-alone basis. Meanwhile, our joint venture GroCo continues to excel, demonstrating robust performance in line with our expectations. GroCo reported to us preliminary unaudited revenue of approximately $2.7 million from third-party customers in the second quarter. Additionally, the combined credit facilities that Cronos provided GroCo currently have $74 million outstanding following the principal repayment of $1.2 million in Q2.

James Holm: this charge will reverse upon consolidation in q three the strong opex controls employee to date and put us well in our way to achieving our two thousand and twenty-four goal of saving an incremental five to ten million for chronos on a stand-alonean basis

James Holm: In addition, GroCo made an interest payment of $1.4 million in Q2. Mike took you through the deal rationale and high-level numbers, but let me briefly share more details on the transaction with Grok. Cronos has provided a second credit facility to GroCo of approximately $51 million to fund the expansion of GroCo's purpose-built cannabis facility. With this additional investment, the GroCo board expands to five members, three of whom have been appointed by Cronos

James Holm: Our joint venture GroCo continues to excel, demonstrating robust performance in line with our expectations. GroCo reported to us preliminary unaudited revenue of approximately $2.7 million from third-party customers in the second quarter.

James Holm: Additionally, the combined credit facilities that Cronos provided GroCo currently at $74 million outstanding following the principal repayment of $1.2 million in Q2. In addition, GroCo made an interest payment of $1.4 million in Q2.

James Holm: Mike took you through the DO rationale on high-level numbers, but let me briefly share more details on the transaction with Groco. Kronos has provided a second credit facility to Groco for approximately 51 million to fund the expansion of Groco's purpose-built cannabis facility. With this additional investment, the Groco board expands to 5 members, three of whom have been appointed by Kronos. We also struck a new supply agreement that will give Kronos the option of purchase up to 70% of the total production once the expanded facility is online. In Q3, 2024, Kronos will consolidate Groco's results in its financial statements, which we believe will highlight the significant underappreciated strength of Groco's performance and the advantages provided to our overall business.

Mike: lke took you through the deal rationale and high-level numbers but let me briefly share more details on the transaction with roco

James Holm: Cronos has provided a second credit facility to GroCo of approximately 51 million to fund the expansion of GroCo's purpose-built cannabis facility.

James Holm: With this additional investment, the GroCo board expands to five members, three of whom have been appointed by Cronos. We also struck a new supply agreement that will give Cronos the option to purchase up to 70% of the total production once the expanded facility is online. In Q3 2024, Cronos will consolidate GroCo's results in its financial statement, which we believe will highlight the significant underappreciated strength of GroCo's performance and the advantages it provides to our overall business.

James Holm: with this additional investment the growth co board expans to five members three of whom have been appointed by pronos we also struck a newsupply agreement that will give cut up the option of chase up to seventy percent of the total production once the expanded facility is online

James Holm: We also struck a new supply agreement that will give Cronos the option to purchase up to 70% of the total production once the expanded facility is online. In Q3 2024, Cronos will consolidate GroCo's results in its financial statement, which we believe will highlight the significant underappreciated strength of GroCo's performance and the advantages it provides to our overall business. We are excited about the expanding partnership with our JV partners and look forward to continuing to grow with them.

James Holm: in q three two thousand and twenty four cononus will consolidate roco's results in its financial statements which we believe wewillll highlight the significant underappreciate a strength of grow coast performance and the advantages provides that to our overall business

James Holm: We are excited about the expanding partnership with our JB partners and look forward to continuing to grow with them. Turning to the balance sheet and cash flow, the company ended the quarter with 848 million in cash and cash equivalents. Cash and cash equivalents were down by 6.9 million from Q1, driven by an 8.8 million cash from investing activities outflow for advances in loans receivable to fund the construction of Groco's face-to expansion.

Speaker Change: we are excited about the expanding partnership with our jv partners and look forward to continuing to grow with that

James Holm: Turning to the balance sheet and cash flow, the company ended the quarter with $848 million in cash and cash equivalents. Cash and cash equivalents were down by 6.9 million from Q1, driven by an 8.8 million cash outflow from investing activities for advances in loans receivable to fund the construction of GroCo's Phase 2 expansion. Cash flow from operations was positive $1.7 million, compared to a negative $11.8 million in the prior year period.

Speaker Change: Turning to the balance sheet and cash flow, the company ended the quarter with $848 million in cash and cash equivalents.

James Holm: Cash and cash equivalents were down by $6.9 million from Q1, driven by an $8.8 million cash from investing activities outflow for advances in loans receivable to fund the construction of GroCo's Phase 2 expansion.

James Holm: Cash flow from operations was positive $1.7 million, compared to a negative $11.8 million in the prior year period. And free cash flow was positive $8 million, compared to a negative $12.3 million in the prior year period. So a significant improvement.

James Holm: And free cash flow was positive $8 million, compared to a negative $12.3 million in the prior year period. This was a significant improvement. Despite our cash balance being down in the quarter, you can see the underlying fundamentals of our operations are showing a significant improvement, and without the additional investment to expand GroCo, our balance sheet would have been up sequentially by almost $2 million. Due to the additional $51 million investment in GroCo and the resulting facility expansion, we no longer anticipate the net change in cash, defined as the sum of cash and cash equivalents and short-term investments, to be positive

James Holm: and John Zamparo. Despite our cash balance being down in the quarter, you can see the underlying fundamentals of our operations are showing a significant improvement, and without the additional investment to expand Groco, our balance sheet would have been up sequentially by almost 2 million. Due to the additional 51 million investment in Groco and resulting facility expansion, we no longer anticipate the net change in cash, defined as the sum of cash and cash equivalent and short-term investment, to be positive in 2024. This additional investment to expand Groco's purpose-built cannabis facility will greatly aid our ability to serve its existing markets and take advantage of additional growth opportunities.

James Holm: Despite our cash balance being down in the quarter, you can see the underlying fundamentals of our operations are showing a significant improvement, and without the additional investment to expand GroCo, our balance sheet would have been up sequentially by almost $2 million.

James Holm: Due to the additional $51 million investment in GroCo and resulting facility expansion, we no longer anticipate the net change in cash, defined as the sum of cash and cash equivalents and short-term investments, to be positive in 2024.

James Holm: This additional investment to expand GroCo's purpose-built cannabis facility will greatly aid our ability to service existing markets and take advantage of additional growth opportunities. Looking back on the progress we have made, I share in my confidence in the trajectory of our business and our preparedness for entry into new markets as they become available. With that, I would like to hand it back to Mike for a brief comment before going into Q&A.

James Holm: Looking back on the progress we have made, I share in Mike's confidence in the trajectory of our business and our preparedness for entering into new markets as they become available.

James Holm: Looking back on the progress we have made, I share in Mike's confidence in the trajectory of our business and our preparedness for entry into new markets as they become available. With that, I would like to hand it back to Mike for a brief comment before going into Q and A.

Michael Gorenstein: With that, I would like to hand it back to Mike for a brief comment before going into Q&A. We're on the right trajectory. Growing revenue, improving margins, and reducing costs, all while building our borderless product portfolio, supplemented by new and exciting innovations and opening new markets globally.

Michael Gorenstein: We're on the right trajectory. Growing revenue, improving margins, and reducing costs, all while building our borderless product portfolio, supplemented by new and exciting innovations, and Opening New Markets Global. With that, I will open the line for questions. Thank you.

Operator: We're on the right trajectory.

Operator: We're on the right trajectory. Growing revenue, improving margins, and reducing costs, all while building our borderless product portfolio supplemented by new and exciting innovations.

Operator: With that, I will open line for questions. Thank you.

Operator: and opening new markets globally. With that, I will open the line for questions.

Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we kindly ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Yewon Kang with Canaccord Genuity. Please go ahead.

Operator: At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to 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.

Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced.

Operator: In the interest of time, we kindly ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.

Speaker Change: to draw your question please press star one one again in the interest of time we kindly ask that you limit yourself to one question and one follow up please stand by while we compileed the q and a roster

Yewon Kang: Your first question comes from you, Wang Kang, with Canacorn Genuity. Please go ahead.

Speaker Change: your first question comes from you on kingang with cannicacorenuity please go ahead

Yewon Kang: Hi, good morning. Thank you for the question. Just the first one here is regarding the Groco investment.

Yewon Kang: Hi, good morning; thank you for the questions. Just the first one here is regarding the GroCo investment. I wanted to see if you guys could provide some color behind the cost-benefit analysis that must have been conducted in terms of investing your dollars into Canadian-based GroCo versus production facilities located in international channels that you supply to, given that the facility expansion in GroCo is going to be heavily leveraged to increase your supplies into those channels. Thank you.

Speaker Change: Hi, good morning. Thank you for the question. Just the first one here is regarding the GroCo investment. I wanted to see if you guys can provide some colour behind the cost benefit analysis that must have been conducted in terms of investing your dollars into Canadian-based GroCo versus in production facilities located in international channels that you supply to, given that the facility expansion in GroCo is going to be

Michael Gorenstein: I wanted to see if you guys can provide some color behind the cost benefits and analysis that must have been conducted in terms of investing your dollars into Canadian based Groco versus in production facilities located in international channels that you supply to, given that the facility expansion in Groco is going to be heavily leveraged to increase your supplies into those channels. Thank you.

Speaker Change: heavily leveraged to increase your supplies into those channels. Thank you.

Michael Gorenstein: Sure.

Michael Gorenstein: Sure, good morning. As I discussed at the beginning of the prepared remarks, we've really seen a huge shift in the supply dynamics where we've had significant oversupply in the past. For high-quality flour, which, you know, we've seen GroCo consistently produce, there really is a shortage. And I think, you know, as we see international markets expanding, we're and we're seeing supply contract in Canada, we're seeing, you know, from both ends, that gap expand, and we're seeing pricing increase.

Michael Gorenstein: Good morning. As I discussed at the beginning of the prepared remarks, we've really seen a huge shift in the supply dynamics, or we've had significant oversupply in the past for high quality flower, which we've seen Groco consistently produce. There really is a shortage. I think as we see international markets expanding, and we're seeing supply contract in Canada, we're seeing, you know, from both ends, that gap expand, and we're seeing pricing increase. So, you know, we think that it's not just what we've been able to do with achieving number one flower brand in Canada, but also with the growth we're seeing in international markets.

Speaker Change: Good morning. As I discussed at the beginning of the prepared remarks, we've really seen a huge shift in the

Speaker Change: in the supply dynamics we've had significant oversuly inandthe past for high quality flower which you know we've we've seen groco consistently produce

Operator: There really is a shortage, and I think as we see international markets expanding, and we're seeing supply contract in Canada, we're seeing from both ends that gap expand, and we're seeing pricing increase.

Michael Gorenstein: So, you know, we think that it's not just what we've been able to do with achieving the number one flour brand in Canada, but also with the growth we're seeing in international markets. It's a really good way for us to continue to fuel growth, but also from a risk perspective, GroCo already being profitable, looking and seeing, you know, we do own 50%, now we consolidate. You know, we think that we're able to control them. We've seen for years how they perform. It's a really good way for us to do it. We've been very disciplined and conservative and see this is, you know, a great risk award overall.

Operator: know we think that

Operator: It's not just what we've been able to do with achieving number one flyer brand in Canada, but also with the growth we're seeing in international markets.

Michael Gorenstein: It's a really good way for us to continue to fuel growth, but also from a risk perspective, of Groco already being profitable, looking and seeing, you know, we do own 50 percent, and now we consolidate. You know, we think that we're able to control. We've seen for years how they perform. It's a really good way for us to do it.

Operator: It's a really good way for us to continue to fuel growth, but also from a risk perspective. GroCo already being profitable, looking and seeing, you know, we do own 50%, now we consolidate.

Speaker Change: You know, we think that we're able to control. We've seen for years how they perform. It's a really good way for us to do it. We've been very disciplined and conservative and see this is, you know, a great risk award overall.

Michael Gorenstein: We've been very disciplined and conservative, and see this as, you know, a great risk of war. Thank you.

Yewon Kang: And just my second question here as a follow-up, I wanted to ask about what your plans are for Peace Naturals Campus going forward, given that the sales lease back that was previously announced has been terminated, and if, you know, this idle facility is causing any kind of drag on your guys' operations for the past few quarters. Thank you.

Michael Gorenstein: And just my second question here as a follow-up, I wanted to ask about what your plans are for peace and outdoors campus going forward. Getting that the sales lease back that was previously announced has been terminated and if, you know, this idle facility is causing any kind of drag on your guys' operations to the ask you quarters. Thank you. Sure, thanks. That's a great question. So, Peace Naturals has not been idle. It's actually where we make our edible number of derivative products packaging. So it's still, you know, our center we bring in and package flower.

Speaker Change: Thank you. And just my second question here as a follow-up. I wanted to ask about what your plans are for Peace Naturals Campus going forward.

Speaker Change: get in that the sales lease back that was previously announced has been terminated and if this idle facility is caing any kind of dragg on your guys operations for the past few quarters thank you

Michael Gorenstein: Sure, thanks. That's a great question. So Peace Naturals has not been idle. It's actually where we make our edibles, a number of derivative products, and packaging. So it's still, you know, our center. We bring in and package flour, you know; we ship distribution. So, you know, as we're continuing to see growth in the Canadian market, adding products, you know, adding Lord Jones, we actually like having the ability to, you know, have space on one licensed campus that we can keep moving into. So we don't see that as a drag. We think that, you know, especially once phase two is complete, having that extra space is going to be critical to being able to achieve our objective.

Speaker Change: Sure, thanks. That's a great question. So, Peace Naturals has not been idle. It's actually where we make our edibles, a number of derivative products.

Michael Gorenstein: You know, we ship distribution. So, you know, as we're continuously growth in the Canadian market, adding products, you know, adding more drones, we actually like having the ability to, you know, have space in one licensed campus and keep moving into. So we don't see that as a drag. We think that, you know, especially one space to complete, having that extra space is going to be critical to, you know, being able to achieve our objectives. Thank you for the caller. I'll jump back into the Q. Thank you.

Speaker Change: packaging so it's still our center we bring in in package flower we shippped distribution

Operator: So, you know, as we're continuing to see growth in the Canadian market, adding products, you know, adding Lorde Jones.

Speaker Change: We actually like having the ability to, you know, have space on one licensed campus so we can keep

Operator: moving into. So we don't see that as a drag. We think that, you know, especially once phase two is complete, having that extra space is going to be critical to being able to achieve our objectives.

Yewon Kang: Thank you for the color; I'll jump back into the queue.

Speaker Change: thank you for the call i'll jump back into the que

Operator: Thank you. One moment for our next question. I'm showing no further questions. Yewon, if you would like to continue, you may.

Operator: One moment for our next question. I'm showing no further questions.

Speaker Change: thank you one moment for our next question

Operator: You want if you would like to continue? You may. I think I'm good.

Yuan: I'm showing no further questions. Yuan, if you would like to continue, you may.

Yewon Kang: I think I'm OK; thank you so much.

Operator: Thank you so much. Thank you.

Operator: I'm showing no further questions at this time.

Operator: I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Operator: I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the question period.

Operator: ithink i'm good thankyou so much

Operator: Thank you for your participation in today's conference. This concludes the program.

Operator: Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Operator: You may now disconnect.

Operator: to Cronos Group's 2024 Second Quarter Earnings Conference call. Today's call is being recorded.

Shayne Laidlaw: At this time, I'd like to turn the call over to Shayne Laidlaw and Vester Relations. Please go ahead. Thank you, Andrea. And thank you for joining us today to review Cronos' 2024 Second Quarter 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 Cedar profiles.

Shayne Laidlaw: This information and the prepared remarks 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-gap financial measures during this call. These forward-looking statements are based on management's current expectations and assumptions that are subject to risk and uncertainty that could cause actual results to differ materially from those projected in the forward-looking statements.

Shayne Laidlaw: 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, by which any forward-looking statements made during this call are qualified in their entirety. Information about non-gap financial measures including reconcilations to U.S. Gap 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 and less otherwise stated all market share data is provided by High Fire.

Shayne Laidlaw: We will now make prepared remarks and then we will move into a question and answer session.

Michael Gorenstein: With that, I'll pass over to Karnas' Chairman, President and CEO Mike Gornstein. Thank you Shane and good morning everyone. The Canadian market has been characterized by extreme cycles of supply demand and balances. In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity. This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they have been used to raise more capital and build even more capacity.

Michael Gorenstein: This placed a lot of industry focus on facility size, not on production efficiency or product quality. As a result, total supply quickly ballooned and significantly outpaced demand. The industry structure and expectations were all set up with price assumptions that were three to four times what they are today, and that created a market structure with high excite tax, high provincial margins and high regulatory fees. However, companies with inefficient production facilities, having already built significant capacity, had to capture significant market share for their business models to work and attempts to get that market share led to price regression.

Michael Gorenstein: Many of these companies continue to raise capital, albeit on much less attractive terms, and hopes to survive long enough to benefit from expected tailwinds of attractive international markets opening, or rationalization in the Canadian market. Some resorted to not paying excite taxes to artificially lower their cost of production, and others lab shopped to artificially inflate consumers' perception of quality via higher potency label claims. However, with global macro events taking priority with policymakers, many producers were not able to survive long enough to see benefits of new markets opening.

Michael Gorenstein: Over the last year, we have seen CRA begin the ramp-up collections and enforcement, again, companies not paying excite tax, and regulators crack down against lab shopping, forcing more facilities shut down and bankers, and earlier this year, with regulatory changes in Germany and increased traction in the UK, we've seen international demand finally begin to ramp. As we've said in the past, there's a difference between available cannabis inventory and available inventory that is sellable as quality flower. While there's plenty of the former, there is now a shortage of high quality desirable flower that is sellable to consumers in Canada.

Michael Gorenstein: That is in part why in June, we announced the expansion of GroCo to continue to fuel our global growth initiatives. GroCo has proven to be a leading cannabis grower, continually improving yield than hitting consistent and high THC levels that consumers desire. This investment, which will be funded by an additional approximately $51 million credit facility, will support the expansion of GroCo's state-of-the-art purpose-built cannabis facility to meet the growing global demand for high quality cannabis flower, enabling growth opportunities in the markets Cronos operates in today, and enabling future growth into new markets that open.

Michael Gorenstein: An important component of this transaction is that in Q3, Cronos will consolidate GroCo in its financial statements. You've heard me speak at length in the past about the strong performance of GroCo. Cronos will provide investors with additional information on this under-appreciated component of our business.

Michael Gorenstein: Turning out of brand updates, when we launch our best-selling brand spinach, we strategically focus on specific consumer segments and product attributes, elevating the consumer experience. This approach played a crucial role in establishing spinach as one of the most recognized and best-selling brands in Canada. Our team has introduced thoughtful innovations across various categories, and I'm incredibly proud of what we've accomplished from a brand perspective this quarter. Spinach continues its exceptional performance in the flower category, and the Canadian market was 6.2 percent market share, led by popular genetics such as GMO cookies, wedding cake, and space cake, and a variety of size formats.

Michael Gorenstein: In Q2, we introduced spinach grind, a milled flower offering conveniently designed to be ready to roll or used in a variety of smoking and vaporizing devices. Ready to use milled flower offerings of grown in popularity in Canada, appealing to consumers seeking both value and convenience. Spinach grinds cater to this growing demand by providing high-quality milled cannabis that saves time and effort. Our commitment to quality, innovation, and investment in genetic breeding keeps us at the forefront of the flower category.

Michael Gorenstein: What you see from us in the pre-roll category today is just the beginning, and we plan to bring new and innovative products to market in the future. In the edibles category, Spinach had 15.6% market share in Q2. Our focus on developing innovative strategies and products in this category has been instrumental in our success. In Q2, we launched our first variety pack offering, the soures by Spinach Tropical Party Pack, which introduces new gummies with bolder tropical flavors and the distinctive Spinach S-shake.

Michael Gorenstein: These gummies have a perfect blend of sour and sweet, and utilize chronicle proprietary flavor and mass and technology, and feature three new dual flavors, peach-fashion fruit, pineapple coconut, and strawberry guava. We're excited to introduce these great new products under our spinach brand in time for the summer season, when we know consumers want convenience and new products to try. Also, a pivotal addition to our product lineup is a new sourced by spinach and fully blasted gummies, which are for the same great tasting sourced by spinach flavors, now with 10 milligrams of THC per piece.

Michael Gorenstein: In June, Health Canada published proposed amendments to the cannabis regulations, which currently limit edibles to 10 milligrams of THC per package. The proposed amendments would allow greater flexibility in packing together multiple packages of edibles, each containing up to 10 milligrams of THC within a larger package, which we would welcome as an option for our best selling sourced edibles. We think this would be a great step in the right direction to provide the consumer with their desired pack sizes, which are popular in other adult use legalized markets.

Michael Gorenstein: In the vape category, spinach has a number four market position in the quarter, with 6.8% of retail sales in the category. Spinach's performance in the vape category is led by our top selling products, such as pink lemonade, blueberry dynamite, strawberry sluricane, and rocket icicle. Under Lord Jones, our new live resin vape features the Gorilla Z straight, including a half gram trial size, and the convening to the very sleek all-in-one device, and a one gram stock up size as a 510 thread cartridge, catering to enthusiasts who love the natural flavors of live resin, and those adult consumers near the category want to give this new strain to try. We continue to develop the portfolio to bring differentiated flavor and cannabinoid combinations to market, and formats and sizes consumers desire.

Michael Gorenstein: Turning our attention international markets, our Israel team continues to perform very well. The team in Israel is put in tremendous efforts to refine the cultivar portfolio, manufacturing processes, and pricing strategy, resulting in higher volumes of product sold, and improved pricing for our heroes' dues. In Q2, the team in Israel launched four new strains, GG4, Keyline Punch, Pink Sherb, and GMO Light. Our success in Israel is fueled by our in-house genetic breeding program, which is elevated to the peace natural brand to a leadership position.

Michael Gorenstein: In May, we announced the peace natural expanded into the UK, via our distribution partner, GrowFarma, a leading distributor of prescribed medicinal cannabis products. The supply in the UK market, which has the potential to grow significantly this year, is another milestone for Kronos, as we enter and expand within international markets. We intend to establish peace natural with the top brand in the UK as we have done in Israel and Germany. We remain focused on growing within the markets we have entered and expanding our portfolio of borderless products to those markets one allowed.

Michael Gorenstein: This quarter's achievements stem from our unwavering commitment to developing a portfolio of borderless products supported by strategic infrastructure and global partnerships. Our long-term approach of investing in borderless branded innovations tailored to specific consumer needs is proving successful. We have stayed focused and shown in our Q2 results. The combination of these efforts and industry leading balance sheet test us up well to grow in our current markets and execute in any new market we decide to enter.

unknown: Who's that?

James Holm: I'd like to pass it on to James to take you through our financials. Thanks, Mike.

James Holm: Good morning, everyone. I will now review our second quarter 2024 results in relation to the prior year period. The company reported consolidated net revenue of 27.8 million, a 46% increase from the prior year. Constant currency consolidated net revenue increased by 49% to 28.3 million. The revenue increase is primarily driven by higher cannabis, flower and extract sales in Canada. Higher cannabis flower sales in Israel and sales in other countries, which included Germany and the UK.

James Holm: Gross profit in the second quarter was 6.3 million, equating to a 23% gross margin, representing a 3.2 million improvement in gross profit and roughly a 600 basis point improvement in gross margin. The increase is primarily driven by higher sales in cannabis, flower and extracts in Canada. Higher cannabis flower sales in Israel and sales in other international markets, partially offset by an adverse price mix in the Canadian cannabis flower category, driving increased excite tax payments as a percentage of revenue.

James Holm: Consolidated adjusted EBITDA in the second quarter was negative 11.1 million, representing a 4.9 million improvement from the prior year period. The improvement year over year was driven by an increase in gross profit and decreases in sales and marketing and general administrative expenses. It's important to note that during the quarter, we incurred a 1.2 million non-cash Cecil charge within our general administrative expense line associated with the idea of additional credit facility for Groco's expansion, which is not adjusted for in the adjusted EBITDA figure.

James Holm: This charge will reverse upon consolidation in Q3. The strong OPEX controls employed to date have put us well on our way to achieving our 2024 goal of saving an incremental 5 to 10 million for Kronos on a standalone basis. Our joint venture Groco continues to excel, demonstrating robust performance and line with our expectations. Groco reported to us preliminary unaudited revenue over approximately 2.7 million from third-party customers in the second quarter. Additionally, the combined credit facilities that Kronos provided Groco currently has 74 million outstanding following the principal repayment of 1.2 million in Q2. In addition, Groco made an interest payment of 1.4 million in Q2.

James Holm: Mike took you through the DO rationale on high-level numbers, but let me briefly share more details on the transaction with Groco. Kronos has provided a second credit facility to Groco for approximately 51 million to fund the expansion of Groco's purpose bill cannabis facility. With this additional investment, the Groco board expands to 5 members, three of whom have been appointed by Kronos. We also struck a new supply agreement that will give Kronos the option of purchase up to 70% of the total production once the expanded facility is online.

James Holm: In Q3, 2024, Kronos will consolidate Groco's results in its financial statements, which we believe will highlight the significant under appreciated strength of Groco's performance and the advantages provided to our overall business. We are excited about the expanding partnership with our JB partners and look forward to continuing to grow with them.

James Holm: Turning to the balance sheet and cash flow, the company ended the quarter with 848 million in cash and cash equivalent. Cash and cash equivalents were down by 6.9 million from Q1, driven by an 8.8 million cash from investing activities outflower for advances in loans receivable to fund the construction of Groco's face to expansion, and John Zamparo. Despite our cash balance being down in the quarter, you can see the underlying fundamentals of our operations are showing a significant improvement and without the additional investment to expand Groco, our balance sheet would have been up sequentially by almost 2 million.

James Holm: Due to the additional 51 million investment in Groco and resulting facility expansion, we no longer anticipate the net change in cash defined as the sum of cash and cash equivalent and short-term investment to be positive in 2024. This additional investment to expand Groco's purpose-built cannabis facility will greatly aid our ability to serve its existing markets and take advantage of additional growth opportunities. Looking back on the progress we have made, I share in Mike's confidence in the trajectory of our business and our preparedness for entering into new markets as they become available.

Shayne Laidlaw: With that, I will open line for questions. Thank you.

Operator: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to 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. In the interest of time, we kindly ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.

Yewon Kang: Your first question comes from you, Wang Kang, with Canacorn Genuity. Please go ahead. Hi, good morning.

Michael Gorenstein: Thank you for the question. Just the first one here is regarding the Groco investment. I wanted to see if you guys can provide some color behind the cost benefits and analysis that must have been conducted in terms of investing your dollars into Canadian based Groco versus in production facilities located in international channels that you supply to, given that the facility expansion in Groco is going to be heavily leveraged to increase your supplies into those channels. Thank you.

Michael Gorenstein: Sure. Good morning. As I discussed at the beginning of the prepared remarks, we've really seen a huge shift in the supply dynamics, or we've had significant oversupply in the past, for high quality flower, which we've seen Groco consistently produce. There really is a shortage. I think as we see international markets expanding, and we're seeing supply contract in Canada, we're seeing, you know, from both ends, that gap expand, and we're seeing pricing increase.

Michael Gorenstein: So, you know, we think that it's not just what we've been able to do with achieving number one flower brand in Canada, but also with the growth we're seeing in international markets. It's a really good way for us to continue to fuel growth, but also from a risk perspective, of Groco already being profitable, looking and seeing, you know, we do own 50 percent, and now we consolidate. You know, we think that we're able to control. We've seen for years how they perform. It's a really good way for us to do it. We've been very disciplined and conservative, and see this is, you know, a great risk of war and Thank you.

Michael Gorenstein: And just my second question here as a follow up, I wanted to ask about what your plans are for peace and outdoors campus going forward. Getting that the sales lease back that was previously announced has been terminated and if, you know, this idle facility is causing any kind of drag on your guys' operations to the ask you quarters. Thank you. Sure, thanks. That's a great question. So, peace naturals has not been idle.

Michael Gorenstein: It's actually where we make our edible number of derivative products packaging. So it's still, you know, our center we bring in and package flower. You know, we ship distribution. So, you know, as we're continuously growth in the Canadian market, adding products, you know, adding more drones, we actually like having the ability to, you know, have space in one licensed campus and keep moving into. So we don't see that as a drag.

Michael Gorenstein: We think that, you know, especially one space to complete, having that extra space is going to be critical to, you know, being able to achieve our objectives. Thank you for the caller. I'll jump back into the Q. Thank you. One moment for our next question. I'm showing no further questions. You want if you would like to continue? You may. I think I'm good. Thank you so much. Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

Q2 2024 Cronos Group Inc Earnings Call

Request a DemoDemo

CRON

Cronos Group

Earnings