Cronos Group Inc.

Good morning. My name is Brittany Morgan, and I will be your conference operator today. I would like to welcome everyone to Kronos Group's 2024 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Lalaw, Investor Relations. Please go ahead.

Thank you, Brittany, and thank you for joining us today to review Kronos' 2024 First 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 profile. This information and 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 our 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'll move to a question and answer session. With that, I'll pass it over to Kronos' Chairman, President, and CEO, Mike Gornstein.

Thank you, Shane, and good morning, everyone. Our year is off to a strong start, marked by 30% year-over-year revenue growth fueled by market share gains in Canada and a rebound in sales in Israel, gross margin improvement, and operating expense reductions from fully realizing the savings we implemented in 2023 as we are well on our way to achieving incremental savings of $5-10 million in 2024. The team's consistent and relentless focus on delivering top-line growth while simultaneously driving operational efficiency has positioned Kronos for success in 2024 and beyond. I want to take a moment to discuss the cannabis market and our brand positioning. A lot of the cannabis market today is characterized by products that were launched to appeal to as many consumers as possible based on price rather than building a strong connection with a targeted segment of consumers. Without building a strong connection with consumers through a targeted approach, we've seen many brands lose share to more focused offerings. With Spinach, we were very intentional to target specific consumer needs and believe that was instrumental to our success. This strategy drove our success in cementing Spinach as the number two brand in Canada. We launched Spinach in Canada at the end of 2018, and since then, the team has worked hard to bring thoughtful innovations to market across different categories. I'm so proud of the team and what we've achieved. And we leveraged that success of Spinach as a blueprint for our broader portfolio, starting with Lord Jones. We returned Lord Jones to its adult use route and brought it to Canada to attack product categories with a more narrow premium focus, where we think brand share will be stickier and borderless. Since launching with hash-infused pre-rolls in Q4 2023, we expanded the portfolio in Q1 to also include chocolate fusions and live resin baits that have done well in the early days following the launch. We continue to expand the reach of our leading international brand, Peace Naturals. Utilizing our best-in-class genetics and high-quality cultivation, we have brought strains such as wedding cake and GMO cookies to Israel, Germany, Australia, and now the UK. Utilizing the Peace Naturals brand in new markets we enter, we continue to cement our flour products as leaders in the market and lay the groundwork for when regulations allow us to launch borderless products such as edibles and vapes. Let's dive into how our brands are performing in market. Our strength of spinach extends across various product categories, notably in flour, edibles, and vapes, where we are top three share positions. We've seen exceptional performance with our top products, such as our GMO Cookies Flour, Sours by Spinach Edibles, and new flavor-forward 1.2-gram baits, driving significant market traction. In Q1, spinach continued its strength in the dried flower category, remaining the number one brand with 6.5% of retail sales. This success is driven by years of genetic breeding, investment in R&D, including tissue culture, and best-in-class cultivation at scale. with our JV Chronos ProCo. In the quarter, we launched new flower strains in formats, including ASG in 28 grams and Alien Kush in 3.5 grams, and we continue to develop new strains to bring to market, which capitalize on this lead. We also launched a new brand specifically for the Quebec market, called Sonique, which will feature high-quality flower products to meet consumer demands for this market. In the edibles category, Spinach had 14.4% market share in Q1. Our focus on developing innovative strategies and products in this category have been instrumental in this success. A key addition to our product lineup is the fully blasted Sours, a high-potency, one-pack, 10-milligram THC gummy, which garnered early momentum in Q1, and we are encouraged by early sales to date. With non-compliant edibles coming off the market again and the introduction of our competitive one-pack, 10-milligram gummy, we are confident we are bringing the right products to market, Beyond our Spinach brand, we launched Lord Jones Chocolate Fusions, a bite-sized chocolate featuring a dynamic, multi-textured experience. We believe our Chocolate Fusions will be a category-defining product and are looking forward to getting it into more retail locations over the coming months. In the vape category, Spinach maintained our number three market position but gained shares sequentially, now capturing 7.6% of retail sales in the category. Our new and improved Spinach 1.2 gram vape have received positive feedback, further solidifying our market presence and growth in this category. We also launched two new Spinach all-in-one vapes, Pineapple Paradise and Blueberry Dynamite. Under the Lord Jones umbrella, we launched Lord Jones live resin vapes in two different hardware options in January. The lineup features versatile sizes, including a half gram trial size and the convenience of a very sleek all-in-one device and a one-gram stock-up size as a 510 thread cartridge, catering to enthusiasts and those new to the category. We are focused on driving market share in the pre-roll category and continue to do extensive product development and R&D work in this area. We've launched several new flavor-forward-infused pre-roll offerings under the Spinach brand, as well as a multi-pack. The Spinach Fully Charged Party Pack is a combination of infused pre-rolls at 40% plus THC, which includes the finest cold-filtered cannabis extract and the keep coating. Our hash-infused pre-roll under the Lord Jones brand has become a fan favorite and my personal favorite product. Our continued focus is to be leaders in all categories we operate in, and that remains a North Star for our efforts in the pre-roll category. Turning our attention to international markets, Our operations in Israel rebounded well from Q4, which was impacted by the war, and Q1 was the highest revenue quarter in Israel since Q4 of 2022. The team in Israel has done a ton of work to refine their processes and approach to the market, which has yielded both higher volumes and improved average selling prices sequentially. Our strength in Israel is also driven by our GMO and wedding cake genetics, which were developed in-house and have propelled the Peace Natural brand to be a leader in the market it enters. In April, we appointed Adam Wagner as SVP Head of Protos Israel, who was previously the VP of Finance. Adam brings significant finance and operational experience across both public and private companies to this leadership position. We are already seeing a positive impact from his leadership and look forward to his stewardship of the business. We are confident that our team's approach to the Israeli market is as good as ever, and I believe that with their leadership, we will continue to refine and improve over time. We're particularly excited about our growth potential in Germany, where recent legislative changes have fueled material incremental growth in the market and have allowed for opportunities to responsibly market medical cannabis products, which was not permitted under previous regulations. We are committed to delivering high-quality cannabis products and nurturing our relationship with our partner, CanSativa. We were also excited to announce another international milestone earlier this week with our first shipment to the UK medical market. We intend to establish our Peace Natural brand as the top medical brand for patients in the UK, as we've done in Israel and Germany. International revenue can be lumpy from quarter to quarter, so although we did not have revenue in Q1 in Germany or Australia following our initial load-in, we are very pleased with the in-market sell-through in the quarter. We are confident about the trajectory of our international revenue in 2024, underscoring our commitment to global expansion and revenue diversification. Our joint venture, GroCo, continues to excel, demonstrating robust performance in line with our expectations. GroCo reported to us preliminary unaudited revenue of approximately $5.1 million from non-Kronos customers in the first quarter. Additionally, the credit facility that Kronos previously provided GroCo currently has $67.1 million outstanding, following the principal repayments of $1.2 million in Q1. In addition, GroCo made interest payments of $1.4 million in Q1. The solid financial performance of GroCo, yielding equity pickup, interest payments, and the loan payback to Kronos, is a vital component of our overall financial picture. Turning to the U.S., last week the media reported that the DEA plans to follow the HHS's recommendation to reschedule cannabis to Schedule 3. The proposal, which still needs to be reviewed by the White House Office of Management and Budget, would not legalize cannabis federally for adult use, but it's a dramatic shift in how the plant will be classified. We think incremental progress is great for the industry and this is a step in the right direction. This quarter's successes have resulted from our steadfast focus on building a portfolio of borderless products with strategic infrastructure and global partnerships. Our long-term strategy to invest in branded innovation that targets specific consumer needs or remaining asset light is working, and we're off to a tremendous start for our 2024 fiscal year. A combination of these efforts and an industry-leading balance sheet sets us up well to grow in our current market and execute in any new market we decide to enter. With that, I'd like to pass it on to James to take you through our financials.