Cronos Group Inc.

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

Thank you, Andrea, and thank you for joining us today to review Kronos' 2024 Second Quarter Financial and Business Performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holmes. Kronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR profiles. 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 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 into a question and answer session. With that, I'll pass it over to Karnas's Chairman, President, and CEO, Mike Gorenstein.

Thank you, Shane, and good morning, everyone. The Canadian market has been characterized by extreme cycles of supply, demand, and balances. In the early days of legalization, there was not enough supply to meet demand, which caused many investors and industry participants to measure value using metrics such as funded capacity. This essentially rewarded companies that were building large cultivation facilities with higher valuations, which they then used to raise more capital and build even more capacity. This placed a lot of industry focus on facility size, not on production efficiency or product quality. As a result, total supply quickly ballooned and significantly outpaced demand. The industry structure and expectations were all set up with price assumptions that were three to four times what they are today. and that created a market structure with high excise tax, high provincial margins, and high regulatory fees. However, companies with inefficient production facilities, having already built significant capacity, had to capture significant market share for their business models to work, and attempts to get that market share led to price compression. Many of these companies continue to raise capital, albeit on much less attractive terms, in hopes to survive long enough to benefit from expected tailwinds of attractive international markets opening or rationalization in the Canadian market. Some resorted to not paying excise taxes to artificially lower their cost of production, and others lab-shopped to artificially inflate consumers' perception of quality via higher-potency label claims. However, with global macro events taking priority with policymakers, many producers were not able to survive long enough to see benefits of new markets opening. Over the last year, we have seen CRA begin to ramp up collections and enforcement against companies not paying excise tax, and regulators crack down against lab shopping, forcing more facility shutdowns and bankruptcies. And earlier this year, with regulatory changes in Germany and increased traction in the UK, we've seen international demand finally begin to ramp. As we've said in the past, there's a difference between available cannabis inventory and available inventory that is sellable as quality flower. While there's plenty of the former, there is now a shortage of high-quality, desirable flower that is sellable to consumers in Canada. That is in part why in June we announced the expansion of GroCo to continue to fuel our global growth initiatives. GroCo has proven to be a leading cannabis grower, continually improving yields and hitting consistent and high THC levels that consumers desire. This investment, which will be funded by an additional approximately $51 million credit facility, will support the expansion of GroCo's state-of-the-art purpose-built cannabis facility to meet the growing global demand for high-quality cannabis flower, enabling growth opportunities in the markets Kronos operates in today and enabling future growth into new markets that open. An important component of this transaction is that in Q3, Kronos will consolidate GroCo and its financial statements. You've heard me speak at length in the past about the strong performance of GroCo. Consolidating Groco will provide investors with additional information on this underappreciated component of our business. Turning now to brand updates, when we launched our best-selling brand Spinach, we strategically focused on specific consumer segments and product attributes, elevating the consumer experience. This approach played a crucial role in establishing Spinach as one of the most recognized and best-selling brands in Canada. Our team has introduced thoughtful innovations across various categories, and I'm incredibly proud of what we've accomplished from a brand perspective this quarter. Spinach continues its exceptional performance in the flour category in the Canadian market with 6.2% market share, led by popular genetics such as GMO cookies, wedding cake, and space cake in a variety of size formats. In Q2, we introduced Spinach Grinds, a milled flower offering conveniently designed to be ready to roll or used in a variety of smoking and vaporizing devices. Ready-to-use milled flower offerings have grown in popularity in Canada, appealing to consumers seeking both value and convenience. Spinach Grinds caters to this growing demand by providing high-quality milled cannabis that saves time and effort. Our commitment to quality, innovation, and investment in genetic breeding keeps us at the forefront of the flower category. The macro trends show that pre-rolls will be the number one category in retail sales within the next few years, so winning there will be critical. The pre-roll category is an area of focus for us, and there is a lot of work and development going into this segment. As we innovate and iterate in this space, we're especially proud of our recent launches under the Lord Jones brand, adding to the ice-water hash-infused pre-roll lineup with sour blueberry and snow lotus strains. What you see from us in the pre-roll category today is just the beginning, and we plan to bring new and innovative products to market in the future. In the edibles category, spinach had 15.6% market share in Q2. Our focus on developing innovative strategies and products in this category has been instrumental in our success. In Q2, we launched our first variety pack offering, the Sours by Spinach Tropical Party Pack, which introduces new gummies with bolder tropical flavors and the distinctive spinach S shape. These gummies have a perfect blend of sour and sweet and utilize Kronos' proprietary flavor masking technology and feature three new dual flavors, peach passion fruit, pineapple coconut, and strawberry guava. We're excited to introduce these great new products under our spinach brand in time for the summer season when we know consumers want convenience and new products to try. Also, a pivotal addition to our product lineup is the new Sours by Spinach fully blasted gummies, which offer the same great tasting Sours by Spinach flavors, now with 10 milligrams of THC per piece. This product launched in select markets earlier this year, but didn't hit Ontario, Canada's largest market, until July. We expect this to provide positive momentum for our edibles portfolio, now that it is more fully distributed. In June, Health Canada published proposed amendments to the cannabis regulations, which currently limit edibles to 10 milligrams of THC per package. The proposed amendments would allow greater flexibility in packing together multiple packages of edibles, each containing up to 10 milligrams of THC, within a larger package, which we would welcome as an option for our best-selling Sours edibles. We think this would be a great step in the right direction to provide the consumer with their desired pack sizes, which are popular in other adult-use legalized markets. In the vape category, Spinach had the number four market position in the quarter, with 6.8% of retail sales in the category. Spinach's performance in the vape category is led by our top-selling products, such as Pink Lemonade, Blueberry Dynamite, Strawberry Siluricane, and Rocket Icicle. Under Lord Jones, our new live resin vape features the Gorilla Z Strain, 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 who love the natural flavors of live resin and those adult consumers new to the category who want to give this new strain a try. We continue to develop this portfolio to bring differentiated flavor and cannabinoid combinations to market in formats and sizes consumers desire. Turning our attention to international markets, our Israel team continues to perform very well. The team in Israel has put in tremendous efforts to refine the cultivar portfolio, manufacturing processes, and pricing strategy, resulting in higher volumes of products sold and improved pricing for our hero SKUs. In Q2, the team in Israel launched four new strains, GG4, Key Lime's Punch, Pink Sherb, and GMO Light. Our success in Israel was fueled by our in-house genetic breeding program, which has elevated the Peace Naturals brand to a leadership position. In May, we announced that Peace Naturals expanded into the UK via our distribution partner Grow Pharma, a leading distributor of prescribed medicinal cannabis products. Supplying the UK market, which has the potential to grow significantly this year, is another milestone for Kronos as we enter and expand within international markets. We intend to establish Peace Naturals as the top brand in the UK, as we have done in Israel and Germany. We remain focused on growing within the markets we have entered and expanding our portfolio of borderless products to those markets when allowed. This quarter's achievements stem from our unwavering commitment to developing a portfolio of borderless products supported by strategic infrastructure and global partnerships. Our long-term approach of investing in borderless branded innovations tailored to specific consumer needs is proving successful. We have stayed focused and shown in our Q2 results. The combination of these efforts and an industry-leading balance sheet sets us up well to grow in our current markets 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.