Cronos Group, Inc. (CRON) Q2 2023 Earnings Call Transcript

Cronos Group, Inc. (NASDAQ:CRON) Q2 2023 Earnings Convention Name August 8, 2023 8:30 AM ET

Firm Members

Shayne Laidlaw – Director, IR & Technique

Michael Gorenstein – President, CEO & Chairman

James Holm – CFO

Convention Name Members

Vivien Azer – TD Cowen

Operator

Good morning. My identify is Victor, and I will be your convention operator in the present day. I wish to welcome everybody to Cronos’ 2023 Second Quarter Earnings Convention Name. At the moment’s name is being recorded.

Presently, I wish to flip the decision over to Shayne Laidlaw, Investor Relations. Please go forward.

Shayne Laidlaw

Thanks, Victor, and thanks for becoming a member of us in the present day to evaluate Cronos’ 2023 second quarter monetary and enterprise efficiency. At the moment, I am joined by our Chairman, President and CEO, Mike Gorenstein; and our CFO, James Holm. Cronos issued a information launch asserting our monetary outcomes this morning, which is filed on our EDGAR and SEDAR profiles. This data in addition to the ready remarks will even be posted on our web site beneath Investor Relations.

Earlier than I flip the decision over to Mike, let me remind you that we could make forward-looking statements and consult with non-GAAP monetary measures throughout this name. These forward-looking statements are primarily based on administration’s present expectations and assumptions which might be topic to dangers and uncertainties that might trigger precise outcomes to vary materially from these projected within the forward-looking statements.

Elements that might trigger precise outcomes to vary materially from expectations are detailed in our earnings supplies and our SEC filings which might be obtainable on our web site, by which any forward-looking statements made throughout this name are certified of their entirety. Details about non-GAAP monetary measures, together with reconciliations to U.S. GAAP, can be discovered within the earnings supplies which might be obtainable on our web site.

Lastly, we might be making statements concerning market share data all through this convention name, and until in any other case acknowledged, all market share knowledge is supplied by Hifyre. We are going to now make ready remarks, after which we are going to transfer to a question-and-answer session.

With that, I will move it over to Cronos’ Chairman, President and CEO, Mike Gorenstein.

Michael Gorenstein

Thanks, Shayne, and good morning, everybody. Our core focus areas in 2023 are persevering with to launch revolutionary borderless merchandise, bettering our gross margin and driving efficiencies in working bills, culminating in a standard aim of constant money movement era. We initiated a number of measures to pursue higher effectivity and to realign our enterprise and strategic priorities.

Within the second quarter of 2023, we exited our U.S. CBD operations, which allowed us to scale back prices and deal with adult-use and medical hashish markets. At the moment, we introduced plans to exit our Winnipeg, Manitoba facility by the tip of this yr, which we anticipate will drive further OpEx financial savings and enhancements in COGS in 2024. As we beforehand introduced, in 2023, we anticipate saving $20 million to $25 million in working bills, and we anticipate capturing incremental financial savings of $10 million to $15 million in 2024 on account of our bulletins in the present day to exit our Winnipeg facility and implement further working expense reductions.

Whereas we execute these efficiency-focused initiatives, we’re laser-focused on profitable in market. Our Spinach edibles stay the #1 rank edible in Canada as of June. Spinach is the one model that’s prime 10 in market share in Canada in all classes it participates in, which incorporates edibles, vapes, pre-rolls and flower. In Israel, Peace Naturals proceed to be a prime model pushed by our highly effective genetics program and cultivation capabilities. And lastly, with the U.S. exit, our groups are engaged on the relaunch of the Lord Jones model into adult-use classes in Canada, with its anticipated introduction in This fall of this yr.

Now I will dive into every of those parts of our enterprise in additional element. Following our overachievement of financial savings in 2022, we elevated our working expense financial savings goal this yr to $20 million to $25 million, pushed partly by the exit of the U.S. enterprise. The extra price reductions introduced in the present day could have some in-year profit, will primarily hit full yr 2024, given the timing of the selections, with anticipated incremental financial savings of $10 million to $15 million. The continued enchancment in free money movement this quarter improves our laborious work in driving OpEx reductions and placing our industry-leading steadiness sheet to work to realize higher ROI paying off.

At the moment, we additionally introduced the deliberate exit of our Winnipeg, Manitoba facility. We initially bought this fermentation facility to scale up the event of our extremely specialised cultured cannabinoid IP. Whereas we’ll proceed to make the most of this IP and uncommon cannabinoids, we are able to now accomplish that with an asset-light strategy. We have been the primary and nonetheless the one firm to ferment cannabinoids and commercialize them in Canada. As a part of our profitable branded portfolio technique, we are going to proceed to deal with creating merchandise using uncommon cannabinoids to drive differentiated results for our shoppers. This transformation is anticipated to drive materials COGS and OpEx financial savings in 2024.

We’re additionally getting ready the ability on the market, which is meant to yield extra money for our already industry-leading money steadiness. The exit of our U.S. CBD enterprise permits us to deal with adult-use merchandise whereas preserving money for our eventual U.S. entry. We imagine that at some point, the U.S. might be one of the necessary hashish markets on the earth, however sustaining a CBD enterprise is not a part of our plan. Our sources are greatest spent staying laser-focused on the borderless adult-use merchandise that we are able to promote in authorized markets and by driving price financial savings and course of efficiencies to be money movement constructive.

We all know that there is worth within the Lord Jones model, and we’re excited to carry Lord Jones again to its adult-use roots by launching new THC-focused merchandise within the Canadian adult-use market later this yr. Together with the refreshed visible id for Lord Jones, our final aim is to create a borderless suite of merchandise beneath this model. We’re excited to share this product portfolio with you sooner or later as will probably be extremely complementary to our Spinach choices and differentiated from different manufacturers out there in the present day.

James will go into extra element on the monetary outcomes throughout his remarks, however I need to touch upon the wins this quarter. We additional improved our industry-leading steadiness sheet, growing our money and short-term funding steadiness by roughly $5 million from Q1 2023. This achievement was pushed by improved gross margin, decrease OpEx and strong curiosity earnings and improved working capital administration.

Gross margins expanded by a powerful 130 foundation factors sequentially to 16.3%, a giant win given the macro pushed headwinds on the highest line, and our funding technique continues to pay dividends, leading to $12.5 million in curiosity earnings within the second quarter. We intend to construct on this momentum within the again half as we notice additional P&L efficiencies and extra curiosity earnings from our money and short-term investments.

Turning to the enterprise. In Canada, in the course of the second quarter, we continued to execute our plan to create a sturdy providing of borderless merchandise, highlighted by new launches. As of June 2023, Spinach is the #3 ranked hashish model in Canada and is at the moment the one hashish model that’s prime 10 in all classes it participates in, which incorporates the #1 rating within the edibles class in the course of the second quarter of ’23.

Spinach edibles merchandise accounted for 14.8% of the market in June, remaining the market chief in edibles. We’ve an unbelievable product that continues to launch in new taste profiles in cannabinoid blends, an ideal instance of a borderless scalable product. The edibles class continues to really feel the residual impression of the now banned chewable hashish extracts. As these banned merchandise proceed to be faraway from the market, we anticipate a restoration in our total market share and are already seeing an enchancment with weekly retail gross sales up 15% since June.

This quarter, we launched a brand new SOURZ by Spinach taste, our tackle the timeless summer time drink pink lemonade, infused with raspberry and refreshing lemonade flavors. Having simply launched in late Might, this product has rapidly gained market share. Pink Lemonade is already #4 in our portfolio and retains rising. We’re excited for grownup shoppers to do this new taste this summer time.

Within the vape class, we held a 4.1% market share in June, sustaining a #7 market share place. We are going to construct on that momentum within the again half of 2023 with the continued push to incorporate taste ahead profile and uncommon cannabinoids in our base, driving innovation whereas leaning on our profitable formulation that buyers know and love throughout the portfolio.

In July, we launched 3 new vapes beneath the Spinach model. These new vapes are available in a 1.2 gram format within the flavoring choices of Pink Lemonade, Peach Punch and Strawberry Slurricane. In Q2, we launched a number of new choices to bolster the Spinach pre-roll portfolio. together with Sonic Lemon Gasoline pre-rolls and three new infused pre-roll choices. In Q2, we have been the #8 model in market share in pre-rolls, a big enchancment from #14 in This fall.

We anticipate that with these new launches and the extra ones coming down the pipe, we are able to additional enhance on this place. Our flower efficiency continues to be propelled by our strong genetics program and best-in-class cultivation capabilities at GrowCo, and as of June ’23, we’re the #2 flower model. We had 3 SKUs within the prime 10 within the second quarter: GMO Cookies within the 3.5 gram and 28 grams, and our Marriage ceremony Cake, 28 gram.

GrowCo’s efficiency in cultivation continues to be sturdy. GrowCo reported a preliminary unaudited income of roughly $3.6 million to 9 Cronos prospects within the second quarter. Moreover, the credit score facility that Cronos beforehand supplied GrowCo at the moment has $72.4 million excellent, following the principal compensation of $2.5 million by GrowCo in Q2. As well as, GrowCo made a $1.7 million curiosity cost in Q2. The strong monetary efficiency of GrowCo yielding fairness pickup, curiosity funds and mortgage payback to Cronos is an important part of our total monetary image.

Turning to Israel. In June ’23, the Knesset Well being Committee modified the hashish rules to make it simpler for some sufferers to acquire prescription. The brand new rules are scheduled to start in December 2023. For sure medical situations, sufferers will not be required to acquire a license with approval from the well being ministry. Now, docs can immediately prescribe hashish to these sufferers. This transformation simplifies the method for sufferers and docs, and is anticipated to extend entry and affected person rely.

Shortly after the announcement, I met with regulators, prospects and sufferers, and I am completely satisfied that they share my pleasure concerning the progress potential within the Israeli market and the progress this transformation ought to contribute in direction of realizing that potential. We have all the time had confidence within the long-term potential of our place within the Israeli market because it’s nonetheless one of many world’s largest medical applications.

Our Peace Naturals model launched 2 new pre-roll merchandise, Marriage ceremony Rolls and Cocoa Bomba, final quarter. Pre-rolls have turn out to be a considerable and rising a part of the market in Canada, and we’re excited to carry this innovation to the Israeli market, which continues to be primarily dominated by flower. Along with the pre-roll launches, we additionally launched a House Cake dried flower providing. In collaboration with Fighters for Life, an Israeli group that works with veterans to reacclimate to civilian life after navy service, Peace Naturals partnered to launch a fundraising marketing campaign advert that appeared on native TV and social media in Israel. This difficulty is one which has resonated with our shoppers in Israel, and we’re proud to assist this group as soon as once more.

Shifting to Germany. We’re excited to announce that we signed a distribution settlement in July with one of many main distributors of medical hashish in Germany. We anticipate commencing shipments within the third quarter. Reentering Germany is a big milestone for Cronos, and we look ahead to increasing our attain and model consciousness. The just lately proposed regulatory change to reschedule hashish, not labeling medical hashish as a narcotic, is anticipated to unlock vital progress out there, and we intend to determine our Peace Naturals model as a prime model, much like our execution in Israel.

This quarter’s successes in pivots have resulted in price financial savings and higher positioned us to assemble a portfolio of borderless merchandise with strategic infrastructure and international partnerships. The mix of those efforts and an industry-leading steadiness sheet units us up properly to execute in any market.

With that, I would prefer to move it on to James to take you thru our financials.

James Holm

Thanks, Mike, and good morning, everybody. I’ll now evaluate our second quarter 2023 outcomes for persevering with operations in relation to the prior yr interval. The corporate reported consolidated web income within the second quarter of $19 million, a 12% lower from the prior yr. Fixed foreign money consolidated web income decreased by 6% to $20.2 million. The income change was primarily pushed by decrease hashish flower gross sales in Israel attributable to aggressive exercise, the slowdown in affected person allow authorizations and political unrest; and in Canada attributable to opposed value combine shift within the hashish flower class, driving elevated excise tax funds as a p.c of income.

Consolidated outcomes have been moreover impacted by the weakened Canadian greenback and Israeli shekel towards the U.S. greenback in the course of the present interval. Consolidated gross revenue within the second quarter was $3.1 million, equating to a 16.3% gross margin representing a $1.2 million decline from the prior yr. The decline was primarily attributable to decrease hashish flower gross sales in Israel and an opposed value combine shift in hashish flower gross sales in Canada. These outcomes have been partially offset by decrease biomass prices.

Our quarterly leads to 2022 have been unstable quarter-to-quarter pushed by the realignment of our enterprise, which makes the comparability on the gross margin line troublesome. With that in thoughts, each the total yr 2022, the place we had a constructive 17.8% gross margin and the sequential development from This fall 2022 at 5.7% and Q1 2023 at 15% gross margin to Q2 2023, the place we had a constructive 16.3% gross margin, you’ll be able to see encouraging indicators of enchancment and stability, and we intend to construct off this momentum all through 2023 and into 2024.

Consolidated adjusted EBITDA within the second quarter was damaging $15.9 million, representing a $0.7 million enchancment from the prior yr. The development was primarily pushed by a decline normally and administrative and analysis and improvement bills. As beforehand talked about, we elevated our anticipated price financial savings goal in 2023 from $10 million to $20 million to a brand new vary of $20 million to $25 million. As a continuation of this financial savings program, we anticipate that the exit of the Cronos Fermentation facility and the extra working expense reductions introduced in the present day will seize an incremental $10 million to $15 million within the full yr financial savings in 2024.

Turning to the steadiness sheet. The corporate ended the quarter with roughly $841 million in money and short-term investments, which is up roughly $4.5 million from the primary quarter. Along with maximizing the return on our money, we obtained an curiosity cost on our GrowCo senior secured mortgage of $1.7 million, a principal cost of $2.5 million and $1.3 million in funds on the Mucci promissory observe for whole money paid by GrowCo and our JV companions to Cronos of $5.5 million in Q2. Having the most effective steadiness sheet within the hashish {industry} permits us to take calculated strategic bets whereas we stay steadfastly targeted on lowering money burn.

Shifting to free money movement, outlined as working money movement much less CapEx, Q2 2023 was damaging $12.3 million, representing a 36% enchancment year-over-year. Backing out the earnings taxes payable related to the onetime Altria warrant relinquishment in Q1, the sequential enchancment in free money movement was 22%. We anticipate recouping a lot of the tax cost related to the onetime Altria warrant relinquishment over the following 3 years.

Lastly, transferring to outlook and steering. We anticipate the online change in money, outlined because the sum of money and money equivalents and short-term investments, for the rest of fiscal yr 2023 will decline by lower than $5 million to $10 million. That is an enchancment to the earlier steering of declining lower than $25 million within the remaining 9 months of fiscal yr 2023. The corporate additionally nonetheless expects the online change in money might be constructive in 2024. The improved money movement trajectory might be pushed by, amongst different gadgets, continued gross margin enchancment, working expense discount efforts and anticipated curiosity earnings of $20 million to $25 million for the rest of fiscal yr 2023.

Whereas we proceed to execute on working expense reductions and money movement administration, we made the choice this quarter to discontinue offering income steering and to withdraw our beforehand introduced web income goal of $100 million to $110 million for the total yr 2023. The discontinuance of offering web income steering displays turbulent market situations past earlier expectations within the markets we function in, particularly growing political unrest and stagnant affected person progress in Israel, the choice to exit the U.S. enterprise and aggressive exercise in Canada, pushed by the lingering results of edible extracts. As well as, overseas alternate charges have had an unfavorable impression on our web income.

Regardless of the highest line headwinds, now we have lots of wins to level to, and I share Mike’s confidence within the trajectory of the enterprise and our preparedness for entry into new markets as they turn out to be obtainable.

With that, I will flip it again to Mike.

Michael Gorenstein

Thanks, James. We’re profitable in Canada and Israel due to all of the laborious work from our workers to carry best-in-class borderless merchandise to market. Our Spinach model is the one model that holds a prime 10 market share place in all classes it participates in, that are flower, pre-rolled, base and edibles. We’re assured that as rules change, we might be among the many best-positioned hashish firms to seize further market share in any market.

Earlier than stepping into questions, I need to stage set what’s beneath the Cronos umbrella and the place issues stand in the present day. We closed Q2 with $841 million in money and equivalents and 0 debt, and we generated $12.5 million in curiosity earnings in Q2 with an anticipation to generate a further $20 million to $25 million in curiosity earnings by the rest of 2023. Our Spinach model has the next market share vary for June 2023: total, Spinach is the #3 hashish model, #1 in edibles, #2 in flower, #8 in pre-rolled and rapidly taking share; and #7 in vape and in addition gaining floor. We’ve a number one medical model, Peace Naturals, in Israel, which posted $5.4 million in web income in Q2.

We’ve a 6.3% stake in PharmaCann, one of many largest personal U.S. MSOs at the moment on our books, for $49 million. We’ve an approximate 10% stake in Vitura, a number one publicly-traded Australian medical hashish supplier, value roughly $18.9 million as of the tip of Q2. We personal 50% of the fairness in Cronos GrowCo, which is worthwhile, and between GrowCo and our JV companion, they paid us $5.5 million in principal and curiosity funds in Q2. We ended the quarter with a remaining steadiness of roughly $84 million on our mixed loans to GrowCo and its companions. We personal actual property and a number of license services free from any encumbrances, and final and positively not least, now we have an unique partnership with Altria on a worldwide foundation.

On the shut of the market yesterday, Cronos traded at a market cap of roughly $720 million and an enterprise worth of roughly damaging $120 million. Whereas this quarter’s prime line fell wanting what I imagine Cronos is able to reaching, we ended the quarter with extra cash than we had final quarter. If there’s one frequent theme from hashish earnings calls the previous few quarters, it is that money is king. And on condition that now we have greater than 4x extra web money than the closest competitor, Cronos wears the crown.

With that, I will open the road for questions.

Query-and-Reply Session

Operator

[Operator Instructions]. Our first query will come from the road of Vivien Azer from Cowen.

Vivien Azer

So Mike, I used to be questioning if we may speak a little bit bit extra concerning the anticipated launch of Lord Jones in Canada, particularly, in gentle of your commentary round volatility within the Canadian market. I am simply reflecting on the model’s legacy positioning within the U.S. and the way you are fascinated with positioning it in Canada, simply given the challenges on the most premium finish of the market.

Michael Gorenstein

Positive. Thanks, Vivien. It is a fantastic query. So after we take into consideration Lord Jones, we have all the time favored its historic place on the premium finish, particularly in edibles. I believe that we have executed a very good job of with the ability to differentiate, particularly in that class. However we do nonetheless see that there are areas total in premium merchandise if you’re differentiating. Flower is perhaps a little bit harder, however we do assume that there is a possibility, given lots of the work we have executed, on a very incremental kind of edible product that matches very well with Lord Jones model to form of tie these collectively for a launch.

And I additionally assume if you look total on the portfolio, should you have a look at our — the place we’re sitting with distribution, the power that we have had with Spinach, with the ability to leverage the relationships that now we have with our commerce companions, with the information and the product improvement that we have had over the previous few years, we do see the chance. We expect it is incremental. We’re typically very cautious with what we do resolve to launch. So I am fairly enthusiastic about it.

Clearly, if you have a look at premium, your market measurement is not going to be one thing like the place Spinach could be, however we expect from a margin and gross revenue perspective, it is a actually good concept to launch in a greater place to essentially wonderful tune the merchandise and making an attempt to have merchandise within the U.S. that do not essentially match the longer term state of what the model seems like.

Vivien Azer

Positive. That makes good sense. And simply to observe up on that. From a distribution standpoint, is there sort of any logic to taking a extra discrete view of distribution to just remember to’re preserving that model fairness somewhat than going full nationwide distribution?

Michael Gorenstein

It is a fantastic query. I believe that lots of that, if you have a look at the completely different provinces, how deep perhaps promoting could be will depend upon what the setup of the shops appear to be in every given province. Clearly, there are some that you’d anticipate you’d do higher on the premium finish. However of the key provinces by inhabitants, I believe it is smart nonetheless to place the identical quantity of focus. However I believe that you’re going to nonetheless see a nationwide launch. However we, as you already know, are inclined to do a extra phased rollout and make it possible for we have got the demand and the correct positioning.

Operator

[Operator Instructions]. All proper. As there aren’t any additional questions within the queue. This concludes in the present day’s convention name. Thanks for taking part. Chances are you’ll now disconnect. Everybody, have a fantastic day.