Cronos Group Inc.

Good morning. My name is Corey, and I'll be your conference operator today. I would like to welcome everyone to Kronos Group's 2022 fourth quarter and full year earnings conference call. Today's call is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, press star 1 1 again. At this time, I would like to turn the call over to Shane Laidlaw, investor relations. Please go ahead.

Thank you, Corey, and thank you for joining us today to review Kronos' 2022 fourth quarter and full year financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holm. Kronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR 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' Chairman, President, and CEO, Mike Kornstein.

Thank you, Shane, and good morning, everyone. I want to start our call today by reflecting on the transformative steps we took in 2022 to put our business on a better footing in preparation for the future growth of the global cannabis industry. In 2022, we embarked on a strategic realignment of our business centered on three key objectives. First, we centralized our function to improve strategic alignment. Second, we optimized our global supply chain to reduce complexity and drive enhanced innovation capabilities. And lastly, we implemented a cost reduction target to reduce operating expenses by $28 to $25 million, which we overachieved. The realignment of our business was centered on our core objective to create a portfolio of borderless products and brands across adult-used product formats. Last year, we spent a lot of time getting our product mix right for each market we operated. This involved strengthening our borderless product portfolio, including edibles, vapes, and infused pre-rolls. and exciting new flower genetics that launched in Canada and Israel. We also decided to exit the CBD beauty category in the U.S. in favor of focusing on adult use product formats. Quarter of strategic initiatives and continuous improvement efforts are getting cannabinoid products in market that elevate the consumer experience and leverage a nimbler supply chain. We are building a blueprint in Canada for what we think will win in other markets. Our focus is on borderless product innovation, meaning we're creating product lines and brands that we know from our experience will win when introduced to new markets. We've managed to do all this while cutting our costs significantly and reestablishing our mindset to ensure growth with attention to ROI and borderless innovation. Our slimmer cost structure enables us to fund the project initiatives to help grow Chrono strategically. As we look ahead this year, we know there's more we can do to cut costs while maintaining our innovation and growth engines. We remain keenly focused on cutting costs throughout our business to ensure Chronos is poised for long-term growth. As part of our plan to optimize our supply chain, in early 2022, we announced plans to begin winding down operations at our Peace Natural campus, including the shuttering of cultivation and moving certain activities to contract manufacturers. As you all know, we participate in an industry that is constantly evolving, so it's important to stay agile. We continue to transition towards a more flexible footprint, ensuring we have the capabilities to execute in current and future market opportunities. To that end, we've decided to maintain select components of our operations at the Peace Natural campus. Specifically, we plan to continue distribution, warehousing, certain R&D activities, and manufacturing our most proprietary innovative products. We expect this decision to provide us with space and security for continued growth. Through this realignment, our goal has always been to position Cronus to successfully assemble a portfolio of best-in-class cordless products, fueled by proprietary innovation, while preserving financial flexibility. The decision to remain in the Peace Natural campus allows us to make select strategic investments in our R&D and brand pipeline as we innovate and evolve consumer preferences. In Canada, we continue to execute our plan to create a robust portfolio of borderless products highlighted by several important product launches and the continued success of the products already in market. All of the following Canadian market share information I will be referencing is provided by HiFire. In January 2023, our award-winning gummies under the Spinach Grand Umbrella became the number one gummy in Canada with 15.9% market share in the edibles category. When focusing on just gummies, Spinach has a 20.9% market share. We are thrilled that our gummies have become a highlight of so many adult consumers' lives, and we'd like to thank them for showing grand loyalty and enthusiasm for our products. Sours by Spinach is a borderless product, and the flavors, combinations, and sales have made us confident that we have a winning product that can appeal to consumers in any market. In December, we launched the Spinach Field CBC Gummy in select markets and have continued to expand distribution in the first quarter of 23. This is the first CBC Gummy product in Canada and the first product of any kind to feature a 3 to 1 ratio of CBC to THC. We're incredibly excited about the potential of CBC and have big plans for it in 23. Early sales point to strong consumer adoption and we believe this product will be additive to our overall Gummy portfolio. In November, as we previously disclosed, we launched two infused pre-rolls in Canada. The first, under the Spinach brand, is our fully charged Atomic GMO, which comes in a five-pack with a half gram per pre-roll. We also launched a CBG infused pre-roll under the Spinach Fields brand, Tropic Diesel CBG, which comes in a three-pack with a half gram per pre-roll. These new pre-rolls are quickly climbing the market share ranks, led by our fully charged Atomic GMO infused pre-roll. Our pre-roll market share grew by 40 basis points sequentially from the third quarter to 1.4% in the fourth quarter. We have lagged the market in pre-rolls, but through extensive work in this category and the launch of infused pre-rolls, we believe that we now have the right foundation. The moves we've made in 22 to improve our near-term competitive position in pre-rolls are just the beginning of the work we're doing in the category. We believe, like the edibles category, pre-rolls will be a category where product differentiation will drive brand separation and one of our top priorities is to create next-generation borderless products. We are doing extensive work to develop a portfolio of products that will separate us from the competition, based on several factors, including reducing harshness, improving consistency, and hitting on consumer preferences around flavor and potency. In the base category, we achieved 4.8% market share in the fourth quarter, up 40 basis points in Q3, climbing to number six in market share. We will look to build on that momentum in 2023, continued push to include American Avanois in our bait and drive innovation, leaning on our winning formulations across the portfolio. While flour on the Canadian market continues to be heavily weighted to 28-gram bags, we continue to defend market share in the 3.5-gram segment with our DML cookie skew, the highest-ranking 3.5-gram skew in the country, at number six in the overall dry flour category. We had a 5.1% share of the overall dried flour category in the fourth quarter, making spinach the number three brand in flour. In Q4, GroCo reported a preliminary unaudited revenue of approximately $2.4 million from non-Chronos customers, and in the full year, GroCo had revenue of approximately $21 million to non-Chronos customers. Our 50% share of GroCo's net income, which is accounted for under the equity methods accounting, weighted at $3.1 million in 2022. Kronos previously provided GroCo with a credit facility, which currently has $73.8 million outstanding, following the repayment of principal of $3.1 million by GroCo as of December 22. In addition to principal repayment, Kronos also received $2.2 million in interest payments from GroCo in 2022, which totals $5.2 million in cash payments to Kronos. The strong financial performance of GroCo, yielding equity pickup, principal impact, and interest payments to Kronos is an important component to our overall financial picture, and I believe is an underappreciated part of our story. We are very pleased with how quickly GroCo achieved profitability and are excited that they are making significant strides in continuously improving their operations. GroCo's performance on cultivation continues to be strong, hitting north of 30% THC potency on recent harvests, which is a testament to our JV's complementary capabilities in cultivation and downstream processing, and our investment in genetic breeding and tissue culture. Turning to Israel, our Peace Naturals products continue to be strong performers. This past quarter, we launched two new flower skews, Miami Sky and Atomic Sours, powered by our flower genetics and breeding program, which continues to set us apart from the competition in Israel. Our in-market sales and marketing strategies have resonated, and our products have become synonymous with quality and consistency, driving the brand success. Turning to the U.S. market, We ceased the production of both Happy Dance and Peace Plus to streamline the brand portfolio and our operations to focus on adult-use product formats under the Lord Jones brand. We are pleased to move forward in 2023 with a leaner portfolio of brands and a mix of products that we feel confident will evolve and build our branded portfolio over time. We want to maintain the Lord Jones brand equity we've built in the U.S. and ensure that when the time is right, we can bring other cannabinoids in and re-engage with the consumer base that is looking for a high-quality hemp-derived product. Before turning it over to James, I want to highlight the performance of our approximately 10% equity investment in Australia. Please note that Chronos Australia recently changed its name to Vitura Health Limited, trading on the ASX under the symbol VIT. Vitura continues to execute, hosting a record first half of 23 with gross revenue of $57.6 million Australian dollars and EBITDA of $11.8 million. The medical market continues to grow in Australia, and Vitora is positioned incredibly well to take advantage of the market opportunity. As of the end of 2022, our stake in Vitora is worth approximately $22 million, which we believe is an underappreciated asset on our balance sheet. Last, but certainly not least, I would like to congratulate and introduce you to James Holmes, our new CFO, who joined us in November of 2022. James brings to Kronos roughly 20 years of experience in various finance and accounting roles at leading companies across industries. He has been immensely impactful to our business during his first four months, and we look forward to having him as a part of the team helping steer Kronos forward. With that, I'd like to pass it on to James to take you through our financials.