Q3 2024 Cronos Group Inc Earnings Call

November 12, 2024

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Brianna: Good morning. My name is Brianna and I will be your conference operator today. I would like to welcome everyone to Kronos Group's 2024 Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Anna Shlemak, Chief Strategy Officer. Please go ahead.

Anna Shlemak: Thank you, Brianna, and thank you for joining us today to review Kronos' 2024 third quarter financial and business performance. Today I'm joined by our chairman, president, and CEO, Mike Gorenstein, and our CFO, James Holm.

Anna Shlemak: Kronos 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.

Anna Shlemak: 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.

Anna Shlemak: These forward-looking statements are based on management 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.

Anna Shlemak: 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.

Anna Shlemak: 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.

Anna Shlemak: 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.

Speaker Change: We'll now make prepared remarks and then we'll move to a question and answer session. With that, I'll pass it over to Cronus's chairman, president, and CEO, Mike Gorenstein.

Mike Gorenstein: Thanks for a strong balance sheet. We are exceptionally well positioned to capitalize on future growth opportunities and enhance our position in the current markets we operate in.

Mike Gorenstein: Before getting into details on the quarter, I'd like to spend a minute on where we are from a flower supply-demand perspective.

Mike Gorenstein: Over the past year we've seen a rapid increase in demand for our flower products after taking market share in Canada and Israel. We've also seen additional growth in international markets, particularly Germany and the UK.

Mike Gorenstein: As a result, we have not been able to fully meet flower demand. We believe the driver of this increased demand is a combination of our genetic breeding program and the cultivation capabilities at GroCo. And with European growth picking up and the shortage of high-quality flower in Canada, we only see demand increasing from here.

That is why we announced the expansion of Groco.

Mike Gorenstein: This investment involves an additional approximately 51 million dollar credit facility to support the expansion of BroCo's state-of-the-art production facility.

Speaker Change: With this investment, Kronos obtained majority control of the board and began consolidating Groco into our results this quarter.

Speaker Change: As I've mentioned before, Groco's strong performance has been significant, yet underappreciated. These consolidated results demonstrate a more complete picture of our whole business.

Speaker Change: Turning now to brand updates. In Q3, Spinach became the number one ranked cannabis brand in the Canadian market with 4.8% market share.

Speaker Change: Supported by number one rankings in edibles and flour, number four in vapes, and number eight in pre-rolls.

Speaker Change: The brand's market share outperformance represents our relentless commitment to quality, innovation, and bringing differentiated products to the competitive Canadian adult use market.

Speaker Change: In the edibles category, Sours by Spinach, our industry leading edibles, captured 17.2% of the market share in Q3, and today accounts for 5 of the top 10 best-selling edibles in Canada.

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

Speaker Change: We recently launched our first seasonal offering, Caramel Green Apple Sours, which has been a huge hit with consumers.

Speaker Change: In Q3, we also launched our fully blasted sours in Ontario, a single 10mg THC gummy.

This has been the fastest selling launch in company history.

Speaker Change: This quarter, we also launched new sour flavors with rare cannabinoids. Our Strawberry Watermelon 4-to-1 Gummy with CBG and THC, and our Peach Passion Fruit Gummy with CBN, CBC, and THC are now in market.

Speaker Change: Edibles from our Lord Jones brand are also doing well in the chocolate category, quickly growing to become the third best-selling chocolate brand in Canada. We look forward to seeing Chocolate Fusions perform during the holiday season and heading into the winter months, which tends to have a lift in the chocolate category.

Speaker Change: Spinach continues its exceptional performance in the flower category at the number one spot in the Canadian market with 6% market share, led by popular genetics such as GMO cookies, wedding cake and space cake in a variety of sizes.

Speaker Change: This segment has also been bolstered by our milled flour offering, Spinach Grinds.

Speaker Change: The continued success of our breeding program and GroCo has further strengthened our position in this category, ensuring premium quality and consistency.

Speaker Change: The vape category continues to perform steadily. Spinach maintains the number 4 position with 6.4% market share.

Speaker Change: This quarter we launched the new Spinach Hits all-in-one vapes in Pink Lemonade and Rocket Icicle as well as new flavors Mango and Grape for our 1.2 gram vapes.

Speaker Change: Our Pink Lemonade Vape is now the number one 1.2 gram vape.

Speaker Change: This is a competitive category, and we are committed to continuing to innovate and bring differentiated products, flavors, and cannabinoid combinations to market.

Speaker Change: This quarter, we saw an improvement in market share in the pre-roll category.

Speaker Change: In infused pre-roll, Spinner saw 25% retail dollar sales growth, boosting our brand rank to 6th among all infused pre-roll brands.

Speaker Change: Lord Jones is shaping up to be a clear leader in hash-infused pre-rolls in the Canadian market.

Speaker Change: The recently launched Sour Blueberry infused pre-roll ended Q3 as a top-selling hash infused pre-roll.

Speaker Change: The infused pre-roll category is growing, so we're particularly pleased to be winning here. We are laser-focused on improving and innovating our pre-roll offerings, and we are seeing signs of that success roll through the numbers.

Speaker Change: While we still have plenty of room to grow in this space, we remain focused and optimistic about our plans for expansion.

Speaker Change: Our strategy has always been to develop a portfolio of best-selling and disruptive branded products we can launch in new markets as cannabis regulations open globally.

Speaker Change: The Spinach brand becoming the best-selling brand in Canada is validation of our strong capabilities and we're just getting started in expanding our winning portfolio of borderless products and bringing to markets globally.

Speaker Change: Now moving to Israel, our team there has shown remarkable performance throughout Q3, with record volumes sold and our best revenue quarter in two years.

Speaker Change: Frontless Israel has built significant momentum throughout the year despite a very competitive market with declining patient growth, which is a testament to the strength and the quality of the Peace Naturals brand and products.

Speaker Change: We are excited about the growth in Israel, despite geopolitical factors affecting the region this past year, which gives us confidence in our position in this market.

Speaker Change: Internationally, we've made great strides in the markets we have entered. In Germany, our Peace Naturals brand continues to penetrate the market and grow at a strong clip. We are confident in the momentum we are seeing in the German market, given we are selling the same products that led us to our number one flyer position in Canada.

Speaker Change: We believe we have a right to win and are well positioned to continue to take share in the German market.

Speaker Change: Similarly, while it's early days in the UK, we are starting to grow our Peace Naturals brand and are excited about our growth potential.

Speaker Change: This quarter's success, driven by our growing portfolio of borderless products, strong infrastructure, and industry-leading balance sheet, enabled us to not only expand in our existing markets, but also to seize opportunities in any new market we choose to enter. Now, I'll turn it over to James to walk you through the financials.

James Holm: Thanks Mike and good morning everyone. I will now review our third quarter 2024 results which now include the consolidation of GrowCo's financials.

James Holm: The company reported consolidated net revenue of $34.3 million, a 38% increase from the prior year period. Net revenue from Kronos, excluding GroKo, was $30 million, representing a 21% growth year-over-year on a standalone basis, while GroKo net revenue was $4.3 million.

James Holm: The net revenue increase is primarily driven by higher cannabis flower extract sales in Canada, higher flower sales in Israel, and sales in other international countries, which include Australia, Germany, and the UK.

James Holm: Gross profit in the third quarter was $3.6 million, equating to an 11% gross margin.

James Holm: Adjusting for the impact of the inventory step-up from Kronos GroCo transaction that was recorded into cost of sales, our adjusted growth profit was $10.7 million, equating to a 31% adjusted growth margin.

James Holm: We will continue providing this adjustment until the inventory that was stepped up to fair market value through the Purchase Accounting Adjustment has been sold through, as we believe it is useful in reviewing and evaluating our ongoing performance.

James Holm: Year-over-year adjusted growth profit improved by 6.8 million and adjusted growth margin improved by 15 percentage points. 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.

James Holm: The disciplined approach to OpEx controls employed to date has put us well on our way to achieving our 2024 goal of saving an incremental $5-10 million for Kronos on a standalone basis.

James Holm: and we are tracking toward the high end of that range. However, the addition of GroCo's OpEx into our consolidated financials are expected to offset these savings next year.

James Holm: Turning to the balance sheet and cash flow, the company ended the quarter with $862 million in cash and cash equivalents. Cash and cash equivalents were up $14 million from Q2, driven primarily by improved cash flow from operations and some FX fluctuations.

James Holm: Cash flow from operations was positive $11.6 million, compared to a negative $0.2 million in the prior year period. And free cash flow was positive $5 million, compared to a negative $0.5 million in the prior year period, driven by an increase in adjusted gross profit and an income tax refund, a significant improvement.

Speaker Change: 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&A.

[inaudible]

Mike Gorenstein: In closing, we're proud of the record-breaking progress we've made this quarter. Our strategies are delivering results, and we remain committed to building on this momentum as we close out the year.

Mike Gorenstein: We'll continue to drive top-line growth, improve margins, and expand our international presence, positioning Kronos for long-term success.

With that, I'll open the line for questions.

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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We will allow one question and one follow-up per participant.

Speaker Change: Our first question comes from Matt Bottomley of CanAccord Genuity. Your line is now open.

Speaker Change: Good morning everyone. Thanks for the questions. Mike, I just wanted to start. I know it's not really fundamental to the business, but I know you have a long-standing, some long-standing experience and knowledge in sort of the U.S. sector, and I'm just curious your thoughts, you know, coming out of the election. You guys have obviously a very potent balance sheet potentially one day if there are opportunities down south, and just curious based on how these equities have reacted and, you know, a flippant administration, you know, any sort of takeaways on your end of where you see the U.S. going in the next year or so.

Speaker Change: Thanks, Matt. That's a great question. You know, I think there's still some uncertainty over the next couple weeks as we see the transition team come together, you know, and what that might mean. But generally, you know, I think it's a matter of policy and incoming administration.

Speaker Change: often pulled back and restarts all the pending regulatory rules. Our understanding is that the Trump administration supports the States Act and

Speaker Change: You know, I think that's still something that's positive, but at a minimum, I would expect for the rescheduling efforts sort of restart the clock.

Speaker Change: So, if at all, Schedule 3, I think, is about 18 months away, you know, if there is going to be rescheduling. But we we believe that building on on the States Act and on some of the existing frameworks are the way forward.

Speaker Change: Big picture, what I'll say is that I think we're now actually in a very good position where we don't need to rely on that regulatory change given the growth we're seeing in Canada, Israel, and the regulatory tailwinds in Europe and growth there.

Speaker Change: Okay, interesting. Got it. And then just more on the Kronos side of things. So yeah, just interesting, you know, some of the commentary you made on the dynamic you're seeing for your own branded flower and some of the genetics. I know you guys have a differentiation in that space of the market, but you know, we have not heard in a very, very long time of, you know, LPs expanding capacity. So just, you know, kind of the risk rewards of that and sort of how it's, you know, specific to the Kronos model relative to, you know, what we've seen over the last couple years, which is, you know, some pretty ugly supply demand dynamics for maybe lower grade flower.

Speaker Change: Yeah, thanks. So, you know, I think we're in a fortunate position where early on a lot of our focus was more on genetic breeding, on consumer insights.

and generally R&D on cultivation methods.

and we've seen flower demand steadily increase.

So, you know, we've got SKUs that are

Speaker Change: The top in Canada and in Israel, we're seeing really strong momentum in Europe.

Speaker Change: And I think we're in a position where we have to pick which markets we're filling. You know, and that's, that's just Kronos on its own. I think there's also a lot of demand from other LPs from Groko.

Speaker Change: But we feel like we would be performing much better in flour if we had more supply, and that's really across markets.

Speaker Change: I think as long as we continue to be focused on quality, you know, the model of having GroCo, you know,

Speaker Change: produce the genetics that we have in market and the pipeline of genetics we have, which we're really excited about, should continue to drive that success.

Awesome, thanks. I'll leave it there.

Thank you.

Speaker Change: Our next question comes from Bill Kirk of Roth. Your line is now open.

Speaker Change: Hey, thanks for taking the question. Mine's related to kind of your last answer there, Mike. For GroCo,

Speaker Change: How should we think about the seasonality of the business, whether it's the top line contribution or profitability contribution, now that you're consolidating that, like how should we think about the seasonality going forward, and then how is...

Speaker Change: the resource allocation determined, you know, between your needs and third party needs. How is that determined to make sure you get what you want, but also sell into the customers that need it as well? Thank you.

Sure, thanks. It's a great question.

Speaker Change: You know, I think there's really not a lot of seasonality on the top line, especially given, you know, the shortage and where we are today.

You do have, you know, some slight...

Speaker Change: slight deviations in terms of, you know, which seasons are the most efficient for production.

Speaker Change: how much power you need to pull for supplemental lighting versus heating and cooling. Sometimes you see, you know, the summer is not the best.

Speaker Change: season to cultivate in, but just given the high-tech nature of the greenhouse, you know, that's still relatively smooth over and pretty hard to notice a difference.

Speaker Change: And then, you know, overall, the way that we've structured the deal, we have a option, but not an obligation. You know, until the second phase is online, we can purchase up to 80%.

Michael Gorenstein, James Holm

Speaker Change: we have a option but not obligation to purchase up to 70% at a preset price. So we feel like it's a really good balance where we're able to make sure that we're, you know,

Speaker Change: Okay, and then, maybe I missed it in the prepared remarks, but there's like a step up in CapEx spending in the quarter relative to, you know, the levels that had been. What's behind that? Maybe I should already know this, but what's behind that and does that signify any sort of change in capital use intentions?

Speaker Change: Hey Matt, so the CapEx really was driven by that GroCo Phase 2 expansion, so we spent roughly $6.5 million in CapEx in Q3. We would expect increased CapEx levels along with that expansion until completion, so that's really the main driver there.

Speaker Change: And, like, if we're thinking about a quarterly round at the same level as 3Q, and what's the total kind of CapEx expectation for that second phase?

Speaker Change: Yeah, so Mike had kind of highlighted that earlier, but at least we have granted them, you know, approximately $51 million in USD, right? It could be something a little bit south of that, but I would anticipate, you know, maybe

Speaker Change: semi-evenly could be a little bit lumpy right over the next few quarters. We do expect kind of that additional biomass to be online second half, so kind of mid-year is hopefully when the CAPEX spend would complete for phase two.

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Speaker Change: At this time, I would like to turn the call over to Anna Schlemack, Chief Strategy Officer. Please go ahead.

Anna Schlemack: Thank you, Brianna, and thank you for joining us today to review Kronos' 2024 third quarter financial and business performance. Today I'm joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holm.

Anna Schlemack: Kronos 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.

Anna Schlemack: 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.

Anna Schlemack: These forward-looking statements are based on management 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.

Anna Schlemack: 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.

Anna Schlemack: 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.

Anna Schlemack: 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.

Anna Schlemack: We'll now make prepared remarks and then we'll move to a question and answer session. With that, I'll pass it over to Cronus's chairman, president, and CEO, Mike Gorenstein.

Thank you, Anna, and good morning, everyone.

Mike Gorenstein: Our results this quarter prove that our long-term approach to this industry is paying off.

Mike Gorenstein: With record revenue this quarter and our disciplined approach to operating expenses, we're demonstrating our ability to simultaneously grow and increase efficiency across our business.

Mike Gorenstein: Before getting into details on the quarter, I'd like to spend a minute on where we are from a flower supply-demand perspective.

Mike Gorenstein: Over the past year we've seen a rapid increase in demand for our flower products after taking market share in Canada and Israel.

Mike Gorenstein: We've also seen additional growth in international markets, particularly Germany and the UK.

Mike Gorenstein: And with European growth picking up and the shortage of high quality flour in Canada, we only see demand increasing from here.

That is why we announced the expansion of BroCo.

Mike Gorenstein: This investment involves an additional approximately 51 million dollar credit facility to support the expansion of BroCo's state-of-the-art production facility.

Speaker Change: With this investment, Kronos obtained majority control of the board and began consolidating GroCo into our results this quarter.

Speaker Change: Turning now to brand updates. In Q3, Spinach became the number one ranked cannabis brand in the Canadian market with 4.8% market share.

Speaker Change: Supported by number one rankings in edibles and flour, number four in vapes, and number eight in pre-rolls.

Speaker Change: In the edibles category, Sours by Spinach, our industry-leading edibles, captured 17.2% of the market share in Q3, and today accounts for 5 of the top 10 best-selling edibles in Canada.

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

Speaker Change: We recently launched our first seasonal offering, Caramel Green Apple Sours, which has been a huge hit with consumers.

Speaker Change: In Q3, we also launched our fully blasted sours in Ontario, a single 10 mg THC gummy.

This has been the fastest selling launch in company history.

Speaker Change: This quarter, we also launched new source flavors with rare cannabinoids.

Speaker Change: Our Strawberry Watermelon 4-to-1 Gummy with CBG and THC and our Peach Passion Fruit Gummy with CBN, CBC, and THC are now in market.

Speaker Change: Edibles from our Lord Jones brand are also doing well in the chocolate category, quickly growing to become the third best-selling chocolate brand in Canada.

Speaker Change: We look forward to seeing Chocolate Fusions perform during the holiday season and heading into the winter months, which tends to have a lift in the chocolate category.

Speaker Change: This segment has also been bolstered by our milled flour offering, Spinach Grinds.

Speaker Change: The continued success of our breeding program and GroCo has further strengthened our position in this category, ensuring premium quality and consistency.

The vape category continues to perform steadily.

Spinach maintains the number 4 position with 6.4% market share.

Speaker Change: This quarter we launched the new Spinach Hits all-in-one vapes in Pink Lemonade and Rocket Icicle as well as new flavors Mango and Grape for our 1.2 gram vapes.

Speaker Change: Our Pink Lemonade Vape is now the number one 1.2 gram vape.

Speaker Change: This is a competitive category and we are committed to continuing to innovate and bring differentiated products, flavors, and cannabinoid combinations to market.

Q3 2024 Cronos Group Inc Earnings Call

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