Cronos Group Inc.

Good morning. My name is Victor, and I'll be your conference operator today. I would like to welcome everyone to Kronos' 2023 Second 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, Victor, and thank you for joining us today to review Kronos' 2023 second quarter 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 US GAAP, can also be found in the earnings materials that are available on our website. 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. We will now make prepared remarks, and then we will move to a question and answer session. With that, I'll pass it over to Kronos' Chairman, President, and CEO, Mike Ornstein.

Thank you, Shane, and good morning, everyone. Our core focus areas in 2023 are continuing to launch innovative borderless products, improving our gross margin, and driving efficiencies in operating expenses, culminating in a common goal of consistent cash flow generation. We initiated several measures to pursue greater efficiency and to realign our business and strategic priorities. In the second quarter of 2023, we exited our U.S. CBD operations, which allowed us to reduce costs and focus on adult use and medical cannabis markets. Today, we announced plans to exit our Winnipeg, Manitoba facility by the end of this year, which we anticipate will drive additional OPEX savings and improvements in COGS in 2024. As we previously announced, in 2023, we anticipate saving 20 to 25 million in operating expenses. And we anticipate capturing incremental savings of 10 to 15 million in 2024 as a result of our announcements today to exit our Winnipeg facility and implement additional operating expense reductions. While we execute these efficiency-focused initiatives, we are laser-focused on winning in market. Our spinach edibles remain the number one ranked edible in Canada as of June. Spinach is the only brand that is top 10 in market share in Canada in all categories to participate in, which includes edibles, vapes, pre-rolls, and flour. In Israel, Peace Naturals continue to be a top brand, driven by our powerful genetics program and cultivation capabilities. And lastly, with the U.S. exit, our teams are working on the relaunch of the Lord Jones brand into adult use categories in Canada, with its anticipated introduction in Q4 of this year. Now I'll dive into each of these elements of our business in more detail. Following our overachievement savings in 2022, we increased our operating expense saving targets this year to $20 to $25 million, driven partly by the exit of the U.S. business. The additional cost reductions announced today will have some in-year benefit, but will primarily hit full year 2024, given the timing of the decisions, with anticipated incremental savings of $10 to $15 million. The continued improvement in free cash flow this quarter proves our hard work in driving off X reductions and putting our industry-leading balance sheet to work to achieve greater ROI as paying off. Today, we also announced the planned exit of our Winnipeg Manitoba facility. We originally purchased this fermentation facility to scale up the development of our highly specialized cultured cannabinoid IP. While we will continue to utilize this IP and rare cannabinoids, we can now do so with an asset-light approach. We were the first and still the only company to ferment cannabinoids and commercialize them in Canada. As part of our winning branded portfolio strategy, we will continue to focus on developing products utilizing rare cannabinoids to drive differentiated effects for our consumers. This change is anticipated to drive material COGS and OPEC savings in 2024. We are also preparing the facility for sale, which is intended to yield additional cash to our already industry-leading cash balance. The exit of our U.S. CBD business enables us to focus on adult use products while preserving cash for our eventual U.S. entry. We believe that one day the U.S. will be one of the most important cannabis markets in the world, but maintaining a CBD business is no longer part of our plan. Our resources are best spent staying laser focused on the borderless adult use products that we can sell in legal markets and by driving cost savings and process efficiencies to be cash flow positive. We know that there's value in the Lord Jones brand, And we're excited to bring Lord Jones back to its adult use roots by launching new THC-focused products in the Canadian adult use market later this year. Along with a refreshed visual identity for Lord Jones, our ultimate goal is to create a borderless suite of products under this brand. We are excited to share this product portfolio with you in the future, as it will be highly complementary to our spinach offerings and differentiated from other brands in the market today. James will go into more detail on the financial results during his remarks, but I want to comment on the wins this quarter. We further improved our industry-leading balance sheet, increasing our cash and short-term investment balance by approximately $5 million from Q1 2023. This achievement was driven by improved gross margin, lower op-ex, robust interest income, and improved working capital management. Gross margins expanded by an impressive 130 basis points sequentially to 16.3%, a big win given the macro-driven headwinds on the top line. And our investment strategy continues to pay dividends. resulting in $12.5 million in interest income in the second quarter. We intend to build on this momentum in the back half as we realize further P&L efficiencies and additional interest income from our cash and short-term investments. Turning to the business, in Canada, during the second quarter, we continued to execute our plan to create a robust offering of borderless products, highlighted by new launches. As of June 2023, Spinach is the number three ranked cannabis brand in Canada and is currently the only cannabis brand that is top 10 in all categories it participates in, which includes the number one ranking in the edibles category during the second quarter of 23. Spinach edibles products accounted for 14.8% of the market in June, remaining the market leader in edibles. We have an incredible product that continues to launch in new flavor profiles and cannabinoid blends, the perfect example of a borderless, scalable product. The edibles category continues to feel the residual impact of the now banned chewable cannabis extracts. As these banned products continue to be removed from the market, we anticipate a recovery in our overall market share and are already seeing an improvement with weekly retail sales up 15% since June. This quarter, we launched a new Sours by Spinach flavor, our take on the timeless summer drink, Pink Lemonade, infused with raspberry and refreshing lemonade flavors. Having just launched in late May, this product has quickly gained market share Pink lemonade is already number four in our portfolio and keeps rising. We're excited for adult consumers to try this new flavor this summer. In the vape category, we held a 4.1% market share in June, maintaining a number seven market share position. We will build on that momentum in the back half of 2023 with the continued push to include flavor-forward profiles and rare cannabinoids in our vapes, driving innovation while leaning on our winning formulations that consumers know and love across the portfolio. In July, we launched three new vapes under the Spinach brand. These new vapes come in a 1.2 gram format in the flavoring offerings of pink lemonade, peach punch, and strawberry slurking. In Q2, we launched several new offerings to bolster the Spinach pre-roll portfolio, including Sonic Lemon Fuel pre-rolls and three new infused pre-roll offerings. In Q2, we were the number eight brand in market share in pre-rolls, a significant improvement from number 14 in Q4. We expect that with these new launches and the additional ones coming down the pike, we can further improve on this position. Our flower performance continues to be propelled by our robust genetics program and best-in-class cultivation capabilities at Groco. And as of June 23, we are the number two flower brand. We had three SKUs in the top 10 in the second quarter, GMO cookies in the 3.5 gram and 28 gram, and our wedding cake, 28 gram. Groco's performance in cultivation continues to be strong. Groco reported us preliminary unaudited revenue of approximately $3.6 million to non-Kronos customers in the second quarter. Additionally, the credit facility that Kronos previously provided Groco currently has $72.4 million outstanding, following the principal repayment of $2.5 million by Groco in Q2. In addition, Groco made a $1.7 million interest payment in Q2. The solid financial performance of GroCo, yielding equity pickup, interest payments, and loan payback to Kronos, is a vital component of our overall financial picture. Turning to Israel, in June 23, the Knesset Health Committee changed the cannabis regulations to make it easier for some patients to obtain prescriptions. The new regulation is scheduled to begin in December 2023. For certain medical conditions, patients will no longer be required to obtain a license with approval from the health ministry. now doctors can directly prescribe cannabis to those patients. This change simplifies the process for patients and doctors and is expected to increase access and patient count. Shortly after the announcement, I met with regulators, customers, and patients, and I'm happy that they share my excitement about the growth potential in the Israeli market and the progress this change should contribute towards realizing that potential. We've always had confidence in the long-term potential of our position in the Israeli market, as it's still one of the world's largest medical programs. Our Peace Naturals brand launched two new pre-roll products, Wedding Rolls and Filco Bombo last quarter. Pre-rolls have become a substantial and growing part of the market in Canada, and we're excited to bring this innovation to the Israeli market, which is still primarily dominated by flour. In addition to the pre-roll launches, we also launched a space cake dried flour offering. In collaboration with Fighters for Life, an Israeli organization that works with veterans to re-acclimate to civilian life after military service, Peace Naturals partnered to launch a fundraising campaign ad that appeared on local TV and social media in Israel. This issue is one that has resonated with our consumers in Israel, and we're proud to support this organization once again. Moving to Germany, we are excited to announce that we signed a distribution agreement in July with one of the leading distributors of medical cannabis in Germany. We anticipate commencing shipments in the third quarter. Re-entering Germany is a significant milestone for Kronos, and we look forward to expanding our reach and brand awareness. The recently proposed regulatory change to reschedule cannabis, no longer labeling medical cannabis as a narcotic, is expected to unlock significant growth in the market, and we intend to establish our Peace Naturals brand as a top brand, similar to our execution in Israel. This quarter's successes and pivots have resulted in cost savings and better positioned us to assemble a portfolio of borderless products with strategic infrastructure and global partnerships. The combination of these efforts and the industry-leading balance sheet sets us up well to execute in any market. With that, I'd like to pass it on to James to take you through our financials.