Cronos Group Inc.

Good morning. My name is Chris, and I will be your conference operator today. I would like to welcome everyone to Kronos Group's 2022 Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laidlaw, Investor Relations. Please go ahead.

Thank you, Chris, and thank you for joining us today to review Kronos Group's 2022 Third Quarter Financial and Business Performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, Bob Mador. Kronos Group issued a news release announcing our financial results this morning, which is filed on our Edgar and Cedar profiles. This information, as well as 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 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. 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. 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 Kronos Group's Chairman, President, and CEO, Mike Gornstein.

Thanks, Shane, and good morning, everyone. I'd like to start our call today by discussing the strategic realignment we have been working on this year. We've taken steps to cut costs, as you've seen within our operating expense structure, and continue refining our budgeting and capital allocation processes to improve further. Our slimmer cost structure and more targeted approach to growth across segments helps ensure that we're allocating funds to the right projects and initiatives. All new investments share a common goal, profitably grow Kronos with a focus on borderless products and brands that can adapt to new markets as they open. Thanks to continuous efforts and reinforcing our startup mentality, we remain on track to hit our cost savings target of 20 to 25 million in operating expenses in 2022. As we complete the budgeting process for 23, we remain keenly focused on cutting additional costs throughout our business to provide a firm footing for Kronos to build its borderless product portfolio and enable long-term sustainable growth. A key area of focus for us has been adapting our supply chain. The build-out of downstream processing capabilities at GroCo is progressing with flower packaging up and running, and we continue to be pleased with the cultivation performance at GroCo and our other CMO providers. In the third quarter, GroCo reported to us preliminary unaudited revenue of approximately $5.8 million to non-Kronos customers. And as a reminder, GroCo has been repaying its senior secured loan, which is now approximately $73 million. These loan receivables, combined with our balance sheet of approximately $890 million in cash and short-term investments and strategic investments in Kronos Australia and Pharmacan, set us up well to enter new markets as they open. Balance sheet management through economic uncertainty is paramount, and our desire to maintain a significant industry-leading cash balance ahead of potential global strategic growth opportunities has guided many of our decisions year-to-date. To maximize the benefits of our balance sheet, we have repositioned a significant portion of our cash into short-term investments to take advantage of the higher interest rate environment. Growth via innovation continue to be a theme for us. In Canada, our spinach brand is winning in the edible and vape categories, and we expanded on our offerings in these two categories with spinach fields, CBN gummy, and vape products. We're excited that this portfolio of rare cannabinoids continues to grow and with a best-in-class product development team, we believe we can continue to provide consumers with superior and differentiated products utilizing rare cannabinoids. Further leveraging rare cannabinoids to expand our portfolio will continue to be pivotal for our ongoing new product launches. Having most recently announced the achievement of the equity milestone for THC-B, we are pleased with the product development progress across categories and look forward to sharing more details on new product launches in the future. This quarter, we also received the results of an important third-party verified study, which evaluated the sustainability and impact of traditional methods of cannabis extraction and their own proprietary fermentation methods. The results were clear. The environmental footprint of growing plants indoors is high, and using innovative fermentation processes dramatically lowers the environmental impact of cannabinoid production. These results show a striking advantage for the fermentation method. as the average percentage carbon footprint saving of the fermentation method is 99.8%. While our industry is young, it's never too early to lead and invest in technology that helps contribute to a greener future. While fermentation enables us to make a smaller environmental impact, it also allows us to leverage rare cannabinoids, making way for unique and new experiences through proprietary blends of cannabinoids. The fact that we're able to create breakthrough products while being environmentally friendly is a win-win for Kronos. Despite a challenging macro environment in Canada, driven by disruptions at our provincial customers in Ontario and British Columbia, our team continued to push new innovations and drive profitable growth. To make up for these disruptions, we strive to maintain supply continuity with customers, although those efforts resulted in higher labor and shipping costs. We expect that the focus we put on making sure our products are on the shelf will pay dividends over the long run. The following market share commentary will all be referencing high-fire data. In the flour category, 28-gram bags have come to dominate the market, making up seven of the top 10 SKUs. Spinach once again achieved the number one-ranked dry flour SKU in September with our 28-gram wedding cake offering, achieving a nationwide flour market share in Q3 of 6.4%. up 50 basis points from last quarter, making us the number three brand nationally in flour. 28-gram flour typically carries a lower margin profile, despite this impact to our financials. It is important that when selling into the provinces and building relationships with retailers that we have a full product portfolio that they are looking for. Our 28-gram products are winning on quality, not just being the cheapest. We are confident that over the long run, in partnership with GroCo and other contract manufacturers, we can improve on the margin profile of the category. Moving to edibles, spinach continues to expand market share, up 100 basis points from last quarter to 15.3% and 19.8% market share when looking at just the gummies category. Five spinach gummies SKUs are in the top 15, including the number one and number two market share positions on a per SKU basis. We continue to be more efficient and targeted with our SKU launches in edibles. driving market share gains with limited cannibalization, which is exemplified by our spinach fields, rare cannabinoid-focused gummy additions, which are quickly climbing market share ranks. In vapes, we expanded market share by 70 basis points versus last quarter to 4.1%, driven by the wave of new products we brought to market this year, including the Blackberry Kush CBN vape, the Tropical Diesel CBG vape, and the Atomic Sour Grapefruit vape. In free rolls, Despite not being where we want to be yet, we have several innovations and SKU assortment changes that we expect to change the trajectory of this category for us. This overhaul will include new packaging, market-aligned pricing, and innovative new infused pre-roll offerings that just shipped last week. These new spinach pre-rolls include a THC-boosted product called Atomic GMO, which is a crossbreed of two of our best-selling flower offerings, Atomic Sour Grapefruit and GMO Cookies. as well as a CBG-infused pre-roll under the new Spinach Fields sub-brand. We are very excited to get our new pre-roll product assortment into the retail channel so our sales team can do what they do best. Turning to Israel, our Peace Naturals products continue to win in the market. Our team in Israel grew reported net revenue 88% year-over-year to $7 million, and on a constant currency basis, net revenue in Israel increased 98% year-over-year to $7.4 million. We've had incredibly positive patient reactions to our newest strain launches, Tocobamba, Wedding Cake, and GMO Cookies, in addition to our packaging redesign, which allows for additional information on the terpene profiles of our product. Israel's patient count continues to grow as well, adding approximately 1,500 new medical cannabis patients in September, nearing a total of 120,000 patients. This is the third... consecutive months, we have seen patient growth of approximately 1,500 or greater. The re-acceleration and year-over-year growth for patient permits provides a good foundation for growth in the Israeli market for us to capitalize on. Earlier this year, our brand Peace Naturals launched an ad campaign in partnership with the Warriors for Life Association in Israel. The campaign called on mayors to restrict or stop traditional firework shows that cause distress and anxiety to medical patients. and those with PTSD as a result of conflict and war, a serious problem faced by many veterans in the country. We are proud to have been awarded a prestigious CLIO Award for this campaign in the social good category. Congratulations to our deserving Peace Naturals team in Israel and the amazing work Warriors for Life do for our veterans. I want to take a moment to shed light on our U.S. business performance. As you have heard over the past couple of quarters, we have completely shifted away from our beauty category focused portfolio. All inventory that is beauty focused is being worked through in the wholesale and DTC channels as we shift the focus of these brands to adult use product formats. We continued improving our cost structure in the US and believe it is important to focus our investments only in areas that will give us an advantage in adult use product formats. We are focused on creating borderless products and brands that can easily be adapted to emerging cannabis markets as they become commercially viable opportunities. The pivot in our US business further drives us towards our singular focus of creating adult use cannabinoid products. Looking to the adult use cannabis market opportunity, we are pleased to see progress by the Biden administration last month to issue pardons for minor cannabis related offenses at the federal level and urging governors to do the same. These actions represent a small but important step towards healing the harm done by cannabis prohibition in the United States. We believe cannabis should be legal and that a comprehensive and reasonable regulatory framework should be put in place for the industry. As legalization efforts continue across the U.S., we are committed to using our voice to lead the industry forward responsibly, and we will continue to be an integral part of the conversation. We're proud to support responsible legalization efforts and meaningful social justice reform. Moving to Australia, where we have an approximate 10% stake in Kronos Australia, the team is executing at a high level in the early stages of the market development. During our third quarter, Kronos Australia announced the one cent per share cash dividend, which yielded Kronos approximately 390,000 US dollars in October. Having a long-term low capital investment such as Kronos Australia start to pay capital back is a big positive. Kronos Australia also recently, excuse me, also recently reported strong financial results with revenue in September hitting a record 9.9 million Australian dollars, which is a run rate of nearly 120 million annually. To continue to drive long-term growth, they recently brought a new state of the art distribution center online. With a growing infrastructure, expanding medical market, and strong team, we look forward to Kronos Australia's continued growth and market penetration. And last, but certainly not least, I would like to congratulate Jeff Jacobson on his expanded role and promotion to Chief Growth Officer. Jeff has been with Kronos since 2016 and most recently served as SVP, Head of Growth, North America. In addition to Jeff's oversight of the marketing and sales functions, In his new role, he will oversee North American operations. Given the speed at which this industry moves, we believe having one leader guide the process from the point of idea creation to getting the product on the shelf will lead to better results for us going forward. Congrats to Jeff on this new role. With that, I would like to pass it to Bob to take you through our financials.