Q1 2025 Cronos Group Inc Earnings Call
Good morning, my name is Jacinda, and I will be your conference operator for today. I would like to welcome everyone to the Cronos Group 2025 First Quarter Ernie's conference call. Today's call is being recorded.
Speaker Change: At this time, I would like to turn the call over to Terry to set Cronos General Council and the corporate secretary. Please go ahead.
Terry Doucette: Thank you just end up, and thank you for joining us today to review Cronos' 2025 first quarter financial and business performance.
Speaker Change: Today, I'm joined by our Chairman, President and CEO , Mike Gorenstein and our CFO , Anna Shlimak.
Speaker Change: 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
Speaker Change: Before I turn the call over to Mike, let me remind you that we may make forward-looking statements and refer to non-depth financial measures during this call.
Speaker Change: These forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements
Speaker Change: 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.
Speaker Change: Information about non-GAAP financial measures, including reconciliation to U.S. gap can also be found in the earnings materials that are available on our website.
Speaker Change: Lastly, we'll be making statements regarding market share information throughout this conference call. And unless otherwise stated, all market share data is provided by High Fire.
Speaker Change: We will now make prepare remarks, and then we'll move to a question-and-answer session. With that, I'll pass it over to Cronos' Chairman, President and CEO , Michael Gorenstein.
Speaker Change: Thank you, Kerry, and good morning everyone. Our goals for 2025 remain unchanged from the strategic objectives that have always guided Cronos.
Speaker Change: We remain focused on leading the market in product innovation, quality and distribution and then leveraging these strengths into leading positions in cannabis markets globally.
Speaker Change: As we look ahead, we see opportunity for continued strong revenue growth, and we aim to deliver additional margin improvement over time through operating leverage and continued cost discipline.
Speaker Change: Now turning to brand updates, our spinach brand ended the quarter as the second most popular brand in Canada, with 4.6% market share demonstrating category leading performance across multiple formats.
Speaker Change: In the flower category, finish slip to the number three spot with market share of 5.1%.
Speaker Change: Strong and growing consumer demand for a flower product had led to supply constraints that have restricted growth for the finished brand, but we believe this restricted growth to be temporary.
Speaker Change: Be sure to reflect the exceptional popularity of our flower offerings, and while this tent-up demand presents a near-term challenge, we are taking deliberate steps to ensure we meet it swiftly.
Speaker Change: Our team is carefully allocating existing inventory to maintain the availability of our most sought-after product across markets.
Speaker Change: The upcoming completion of our Groco Expansion will mark a pivotal moment unlocking significant additional capacity in the second half of 2025 that will allow us to capitalize on this
Speaker Change: We remain steadfast in our commitment to deliver the cannabis industry's best flower products and our strategic investment in Groco positions us to strengthen our market share and supply
Speaker Change: Our leading edibles remain strong, where we hold the number one position with 20.7% market share.
Speaker Change: The Sours by Spinach Line continues to set the standard, capturing over 23% of the gummy category.
Speaker Change: We strengthen this lead with new innovative offerings, fully blasted government featuring 10 milligrams THC and rarekin abinoids, including three new standout flavors, mango lime with CBC, peach passion fruit, CBN and TBD, and strawberry watermelons, CBG.
Speaker Change: In the vape category, we've achieved the number 4 position overall with 5.7% share, while our vape cartridges specifically rank even higher at number 3 with 7% share.
Speaker Change: We successfully extended our winning sourced flavor profile into the vape category with three new rare cannabinoid infused offerings. Mango Kiwi Hay, the CBC, Peach Passion Fruit Cush with CBN and Strawberry Watermelon with CBG.
Speaker Change: Our Premier Lord Jones brand continues to demonstrate the category specific strengths across the Canadian market.
Speaker Change: The brand maintained its position as the number three chocolate brands with 9.6% market share, solidifying its status as a leader in the confectionery space, and recently expanded its line up in January with a launch of a further brownie bite featuring a THD, CBN, and CBD ratio.
Speaker Change: The Lord Jones brand is a category leader in the hash-infused pre-year-old segment with an outstanding 30-1-1% market share
Speaker Change: This number one position highlights our ability to create differentiated high-quality products that resonate with the surrounding cannabis consumers.
Speaker Change: The performance across multiple categories demonstrates Lord Jones' ability to achieve premium positioning while delivering strong results in specialized market segments.
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Speaker Change: Moving to the international side of the business, the peace natural brand and product portfolio continues to grow. The peace natural portfolio in Israel was overhauled with a revised pricing strategy with focus cultivars and meets the needs of our patient-based.
Speaker Change: Peace Naturals ended the quarter at the number one flyer brand in Israel, with well over 20% market share, according to pharmacy data collected by Cronos.
Speaker Change: New launches in Q1 included two new piece natural strain-specific canvas oils designed to deliver the full benefits and essence of each strain.
Speaker Change: We've been investing in building our team and business in Israel since 2017, and through consistent delivery of high-quality products that leverage our extensive investments in genetics, breeding, cultivation, and R&D, we've earned the trust of Israeli patients and pharmacies and attained the leading share position in the market.
Speaker Change: The Cronos Israel team performed remarkably in Q1 with a business growing revenue by over 40% year over year and getting significant share within the market remains highly competitive and dynamic.
Speaker Change: Q1 was a record for Cronos, Israel from the sales volumes, revenue, and margin perspective with Israel's sales contributing nearly 30% of our consolidated net revenue in the period.
Speaker Change: Following investigation into anti-dumping allegations, which Cronos strongly believes to be baseless and firmly disputes, on April 10th, Israel's Ministry of Economy and Industry announced that Israel would impose tariffs of up to 155% on Canadian cannabis, which would include Cronos' imports.
Speaker Change: The proposed tariffs were opposed by the Ministry of Health and the Competition Authority and on April 25th were vetoed by Israel's Minister of Finance.
Speaker Change: Despite the veto, on April 29th, the Minister of Economy and Industry publicly stated that he would move forward to seek final approval for the tariffs.
Speaker Change: This is without precedent and contrary to the law, and it risks severely impacting patients and IDF veterans by raising prices, limiting choices for patients and reducing quality.
Speaker Change: We are committed to Israel, which we have been investing and operating in for almost a decade, building a robust supply chain in a competitive medical market.
Speaker Change: As the top medical provider in Israel, this was a record quarter across the TNL, which stands in sharp contrast with allegations that we are dumping.
Speaker Change: At Cronos we believe in a fair and equitable market structure that benefits Israel's medical cannabis patients. And we will continue to advocate for them in opposing these tariffs as patients are counting on us and our product.
Speaker Change: Our international expansion continues to gain traction across key markets. In Germany, we expect to see further growth as our GROCO capacity expansion comes online. And we continue to build demand and momentum in the UK market.
Speaker Change: Looking ahead to the remainder of 2025, we're focused on successfully bringing the Groco Expansion online to address current supply constraints, continuing to realize operational efficiencies and operating leverage, pursuing international expansion in markets, offering the strongest ROI and maintaining our discipline approach to cost management.
Speaker Change: Cronos maintains the strongest balance sheet in the industry with no debt and cash, equivalence, and short-term investment of $838 million.
Speaker Change: Reinforcing our ability to invest in growth, innovation, and global expansion. And today we announce our board's authorization of a 50 million share repurchase program.
Speaker Change: Now I'll turn it over to Anna to walk you through the first quarter financials.
Anna Shlimak: Thanks, Mike, and good morning, everyone. I will now review our first quarter 2025 results, which include the consolidation of grow-codes financials.
Anna Shlimak: The company reported consolidated net revenue of $32.3 million, a 28% increase from the prior year period, with constant currency net revenue growth higher at 33% year-over-year.
Anna Shlimak: Net revenue for Cronos, excluding Groco, was $29.4 million representing a 16% growth year over year, or 21% year over year growth on a constant currency basis.
Anna Shlimak: Groco's net revenue was 2.9 million for Q1 2025. Overall, the consolidated net revenue increase was driven by higher flower sales in Israel, higher flower sales internationally and higher extract sales in Canada.
Anna Shlimak: Gross Profit in the first quarter was 13.7 million, equating to a 43% gross margin. Adjusting for the impact of the inventory set up from the grow-code transaction that was recorded into cost of sales.
Anna Shlimak: Argesic Rose Prophet with $14.3 million, equating to a 44% adjusted gross margin.
Anna Shlimak: During Q1 2025, we sold through the last of the inventory that was stepped up to fair market value through the purchase accounting adjustment. So gross profit in future quarters will not be impacted by the adjustment.
Anna Shlimak: The 44 percent adjusted growth margin in Q1 2025 is a significant improvement from 18 percent in Q1 2024. This improvement is driven by regional makeshift, lower direct costs, and production efficiencies, as well as by timing benefits which flattered Q1 2025 growth margin.
Anna Shlimak: Given these timing benefits, we would view the blended adjacent gross margins over Q4 2024 and Q1 2025 as more indicative of the current underlying margins of the business.
Anna Shlimak: Operating expenses, excluding restructuring costs and impairment charges were 17.3 million in the quarter, a year-over-year decline of nearly a million.
Anna Shlimak: primarily due to lower sales and marketing costs. A reversal and previously accrued bonuses benefited reporting operating expenses in the quarter, and a portion of the op-ex reduction was timing related due to the cadence of sales and marketing activations and R&D activities.
Anna Shlimak: As a result, for the balance of 2025, we expect quarterly operating expenses to be higher than Q1 2025 levels, but to remain relatively flat on a year-over-year basis.
Anna Shlimak: Adjusted EBITDA on the first quarter was 2.3 million, representing a 13 million improvement from the prior year period. The improvement was driven by increased revenue, significantly higher adjusted gross margins and reductions in operating expenses.
Anna Shlimak: While a portion of the growth margin improvement in the quarter was related to the underlying business improvements, a portion was timing related. Reduced operating expenses are partly due to our ongoing efficiency measures but also partly reflection of the expense timing benefits and the bonus accrual reversal.
Turning to the balance sheet and cash lift statement.
Anna Shlimak: The company ended the quarter with 838 million in cash and cash equivalents and short-term investments.
Anna Shlimak: down 21 million from Q4 2024, driven primarily by an approximately 50 million networking capital outflow and have expend of approximately 50 million.
Anna Shlimak: partially offset by positive cash flow from operations before changes in working capital of approximately 12 million.
Anna Shlimak: The majority of CAPEX is related to the previously announced facility expansion at GROCO. CAPEX spend will remain elevated for the next couple of quarters of the GROCO expansion continues and is completed, after which CAPEX levels are expected to normalize lower.
Anna Shlimak: In summary, we posted a strong quarter, and with our large-scale capacity expansion at Gropo, we are well-positioned for continued medium and long-term improvement in our operating
Anna Shlimak: Notwithstanding shorter-term headwinds due to supply constraints and growth margin and off-ex-normalization over the next couple of quarters. With that, I would like to hand it back to Mike for a brief comment before going into Q&A.
Mike Gorenstein: Thanks, Anna. As we look ahead, we remain relentlessly focused on three strategic pillars, groundbreaking innovation, operational excellence, and discipline, global expansion.
Mike Gorenstein: Our core business is performing well with market and category leadership positions that demonstrate the strength of our brands and executions, and our team has built incredible momentum going into 2025.
Mike Gorenstein: As we move through this year, we're particularly excited about several catalysts
Mike Gorenstein: are upcoming capacity expansions, new product launches, and growth in international markets.
Mike Gorenstein: With our best-in-class balance sheet and market leading products, we have the pieces in place to navigate and succeed within the rapidly evolving global cannabis industry.
With that, I'll open mine for questions.
Speaker Change: 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 1-1 on your telephone and wait for your name to be announced.
I'm showing no questions at this time.
Bill Kirk at Roth, your line is open.
Speaker Change: Hey, thank you. Good morning, everybody. Mike, you talked a bit about product shortages and that's not an idea we've had to think about much in the years since Canada legalized adult use. So I guess my question is, is the shortage more specific to Cronos product and demand or is it a broader industry-wide phenomenon right now as well?
Speaker Change: Hi Bill Apologies. I think Mike accidentally dropped the call. Hopefully he'll dial that again. But, you know, I think it's...
Speaker Change: It's really about having the right product to supply the market and I think you're seeing a shortage of good product in market and that's something you know we're dealing with and one of the biggest reasons for investing in the growth of expansion and of those
Speaker Change: leading genetics, leading products that we have in Canada and Israel, we'd like to supply more of globally.
Speaker Change: And then Anna, I think you said that underlying growth margin is more likely a blend of one
Speaker Change: How does underlying growth margin change maybe when the growth co-expansion is complete?
Speaker Change: We're incrementally going to be able to better leverage fixed costs at the facility, but it will take us time to ramp and hit our stride there as well.
Okay, perfect. Thank you.
Thanks, pal.
Thank you. This concludes the question and answer session.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Thank you for listening !!
Speaker Change: William Kirk, John Zamparo, Matt Bottomley, Michael Gorenstein, Anna Shlimak, James Holm, Cronos Group
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Speaker Change: Produced by Michael Shlimak In collaboration with Michael Shlimak Directed by Michael Shlimak Music by Michael Shlimak Sound by Michael Shlimak
Speaker Change: William Kirk, Matt Bottomley, Michael Gorenstein, Anna Shlimak, James Holm, Terry Doucet, Cronos Group, Michael Gorenstein, Anna Shlimak, James Holm, Terry Doucet, Cronos Group, Michael Gorenstein, Anna Shlimak, James Holm.
Speaker Change: William Kirk, Matt Bottomley, Michael Gorenstein, Anna Shlimak, James Holm, Terry Doucet
unknown: Interview with Michael Gorenstein Interview with Shayne Laidlaw Interview with James Holm Interview with Michael Gorenstein Interview with Shayne Laidlaw Interview with James Holm
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