Kinder Morgan Q4 2023 Earnings Call Transcript

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February 29, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Josh and I will be your conference operator today. I would like to welcome everyone to Cronos 2023 4th Quarter and Full Year 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.

Operator

Please go ahead.

Speaker 1

Thank you, Josh, and thank you for joining us today to review Cronos' 2023 Q4 and full year financial and business performance. Today, I am joined by our Chairman, President and CEO, Mike Gorenstein and our CFO, James Holm. Coramis issued a news release announcing our financial results this morning, which is filed on our EDGAR and SEDAR profiles. This information as well as prepared remarks will also be posted on our website under Investor Relations. This information presented during this call is preliminary and subject to change until the company's audited consolidated financial statements are filed with the SEC, which we anticipate occurring later today.

Speaker 1

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, 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.

Speaker 1

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. Unless otherwise stated, all market share data is provided by Highfire. 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 Cronos' Chairman, President and CEO, Mike Gorenstein.

Speaker 2

Thank you, Shane, and good morning, everyone. As we reflect on 2023, I'm incredibly proud of everyone at Cronos as we have successfully steered our company through a variety of transformational changes. In addition to our products winning in the market, we have positioned Protos well to capitalize on opportunities in 2024. We captured $30,000,000 in operating expense savings in 2023, which exceeded our previously stated target of $20,000,000 to 25,000,000 dollars Following the $5,000,000 overachievement savings in 2023, we anticipate saving incremental $5,000,000 to $10,000,000 in 2024. We exited our U.

Speaker 2

S. CBD operations to focus on adult use products and we entered into a sale leaseback agreement for our Peace Naturals campus and stay there that we anticipate receiving $17,000,000 for. And we wound down operations at our Winnipeg facility, which is currently listed for sale. These changes culminated in significant cash flow improvement and we stayed laser focused on organic growth. We grew the Spinach brand to be the number 2 brand by market share in Canada propelled by number 1 rankings in the flower and edible categories.

Speaker 2

We launched the Lord Jones brand in Canada, opened 2 international markets, Germany and Australia, and continue to navigate our business through the war in Israel. Our cash and equivalents balance increased by approximately $22,000,000 from Q3 to roughly $862,000,000 driven by operating expense reductions, increased interest income and improvements in working capital. Cronos has the strongest balance sheet in the cannabis industry and we continue to manage our capital responsibly, while maintaining our ability to launch innovative borderless products and creating a blueprint for selling into other cannabis markets as they open up. Starting with our growing international business, we continued ramping up with our German distribution partner, CanSativa, a leading distributor of medical cannabis in Germany. CanSativa has a network of approximately 2,000 pharmacies that currently supply around 300,000 patients in Germany's medical market.

Speaker 2

Our Peace Naturals Flowers products have quickly gained patient attention and loyalty, which has elevated Peace Naturals to be a leading brand in the German market, led by winning genetics from our in house breeding program, such as GMO Cookies and Wedding Cake. Within weeks of launching, our GMO cookies flower SKU achieved a leading position by market share in Germany. Reentering the German market with significant milestone for Cronos, and we look forward to expanding our reach and brand awareness with the health of cannabis people. On Friday, Germany's chief legislative body approved a cannabis bill that opens up the cannabis market in Germany, including no longer classifying cannabis as a narcotic. This change allows us to more effectively market to patients and unlock the significant runway of growth in the market.

Speaker 2

We believe Cronos is well positioned with a leading distributor and best in class genetics to capitalize on the growth fueled by potential legislative changes. Turning to Australia. We continue to work with our partner, Vitura Health, of which Cronos owns approximately 10% of the common shares. Supplying the Australian market, which has grown significantly in the past 3 years, reaching approximately $200,000,000 in retail sales in 2023 according to BDS Analytics, is another accomplishment Cronos work towards achieving in the back half of twenty twenty three. We look forward to working closely with our partners at Vitura to provide patients with high quality cannabis products.

Speaker 2

Our German and Australian market entrances were a positive way to cap off the back half of 2023 and are expected to be growth drivers for us in 2024. Cronos will continue to look for additional international growth opportunities as 2024 progresses and new markets open and evolve. We have a leading flower green program and an innovation pipeline winning in the Canadian market, which we're eager to bring to a broader subset of patients and consumers globally. Moving to Israel, despite the challenges of the war, our Israel colleagues have shown incredible resilience and resolve. They continue to push the business forward despite the war, geopolitical climate and market issues.

Speaker 2

Powered by our genetic breeding program, Peace Naturals continues to be a leading brand in market with SKUs such as GMO and Wedding Cake leading the pack. These genetics are repeatedly proving to be winners as we enter new markets. In early January, we launched a new brand called Litt. Litt has a differentiated marketing positioning with a more approachable price point, while maintaining the quality that becomes synonymous with our existing products and market. Following the stagnant patient growth count for most of 2023, the market experienced a rebound in growth in the Q4, providing a positive tailwind for the industry.

Speaker 2

This coincides with the regulator, the ACAR, reviewing an overhaul of cannabis regulations that would gradually improve ease of access for patients by moving to a prescription model and moving cannabis to a first line treatment option for doctors treating certain disease indications. The growing patient count, which now exceeds 140,000, coupled with potentially regulatory reform, can unlock growth for the industry and we are well positioned to take advantage of it. Turning to Canada. During the Q4, we continued to execute our plan to create a robust offering of borderless products, highlighted by new launches and strong market performance. Our Spinach brand closed 2023 as the number 1 Rake flower brand in Canada with a 6.9% market share in the 4th quarter, up from the 4th great brand in 2022.

Speaker 2

This achievement is the culmination of years of genetic breeding, R and D investments and best in class cultivation at scale with our JV Cronos GrowCo, which has separated our products from the field. Capturing the leading position in flower rounds a strong year of growth and innovation for the Spinach product portfolio, which is ranked the 2nd best selling cannabis brand in Canada across all categories at December 2023. In the edible category, spinach edibles accounted for 16.2% of the market's retail sales in the 4th quarter, remain the market leader in edible. We have an incredible product that continues to launch a new flavor profile in cannabinoid blends, the perfect example of a borderless scalable product. In total, we have 4 edible products in the top 15 market share ranks.

Speaker 2

The Spinach brand also recently launched its strawberry kiwi 5:one CBDTHV Sour Gummy. These gummies were designed to compete with other CBD-four edible products, seeing success in market and the 10 pack offered the chance for these lower THC edibles to be shared among friends. Earlier this month, our Lord Jones brand launched Chocolate Fusions, an exciting first entry into the chocolate edibles category. Cronos' newest edible innovation was developed and designed by an expert team of culinary chefs, food scientists and leaders in cannabis product development. The Bite Size Chocolate Fusion feature a dynamic multi texture experience combining a soft and chewy center, crunch inclusions and an outer layer of rich creamy chocolate that delivers a decadent sweet treat for adult consumers.

Speaker 2

We believe chocolate fusions are a category defining product that will expand the chocolate segment. Chocolate fusions deliver on what adult consumers have come to expect from our brands, truly differentiated, consistent and high quality products that introduce new and unexpected ways to consume and experience cannabis. We look forward to growing the Lord Jones brand in Canada and building a bold premium portfolio that shapes the future of what is possible in cannabis innovation. Turning to Vapes, I'm really excited about our efforts and the success we're seeing in this category. We climbed in the number 3 market share positioning, growing to 7.7% of the market in Q4.

Speaker 2

We've done a lot of work on our vape portfolio in the past year and it's great to see these strong results in the market. In 2024, we'll continue to evolve the vape category by providing consumers with flavor forward profiles and rare cannabinoid combinations, such as our new 1.2 gram format, which was a large driver of the gains in the quarter. In January 2024, we launched Lord Jones Live Resin Vapes in 2 different hardware options. The lineup features versatile sizes, including a half gram trial size and the convenience of an all in one device and a 1 gram stock up size of the 510 thread cartridge, catering to both enthusiasts and those new to the category. Crafted with the discerning cannabis consumer in mind, these products embody a commitment to excellence, offering an unmatched combination of curated strains, pure live resin and high quality hardware.

Speaker 2

I'm incredibly proud of these new products and we see them helping us penetrate more of the base category in 2024. We also continue to improve and drive innovation through our spinach pre roll portfolio with several new infused products including Pink Lemonade, Peach Punch and Strawberry Sweater Cake. Year over year, our pre roll retail sales grew by 137% in the 4th quarter. In Q4, we added Spinach Fields Full Tilt THCV pre roll to our infused pre roll lineup. This pre roll offers a boosted and elevated high due to THC and THCV blend and complements our existing THCV vape and dummy products.

Speaker 2

In the Q4, we launched the Lord Jones Ice Water Hash Fusion pre rolls. The popularity of Hash products in premium pre rolls is increasing amongst adult consumers. Ice water Hash is the most popular solventless infusion and is the 2nd most popular infusion overall in the pre roll category. These pre rolls are crafted with an optimized ratio of premium high potency flower and complementary solventless ice water hash, which preserves the bud's natural terpenes, fitted with a reusable ceramic tip to help cool the smoke. These new products have been extensively researched and sensory tested to deliver a smoother experience featuring bold flavors.

Speaker 2

Both the White Tahoe and Cosmic Kush strains of our Lord Jones infused pre rolls are selling well in the Alberta and BC markets. We're excited to see additional growth when the pre rolls become available more widely in Canada throughout this year. With our award winning pre rolls and strong position in dried flower, we know it can continue to grow in this category under both our Lord Jones and Spinach brands through innovations and quality product offerings. Turning to our Canadian Cultivation joint venture. GrowCo's performance in cultivation continues to be strong.

Speaker 2

GroCo reported to us preliminary unannounced revenue of approximately $6,600,000 from non Cronos customers in the 4th quarter. Additionally, the credit facility that Cronos previously provided GroCo currently has $69,800,000 outstanding following the principal repayments of $5,600,000 by GrowCo in 2023. In addition, GrowCo made interest payments of $10,300,000 in 2023. The solid financial performance of GrowCo, yielding equity pickup, interest payments and loan payback to Cronos is a vital component of our overall financial picture. Turning to the U.

Speaker 2

S. Market, we're pleased to hear of increased momentum to reclassify cannabis. Regardless of the specifics of how federal regulation and commercialization of cannabis products evolve, rescheduling would be an important step in the right direction for U. S. Cannabis and we hope to see continued momentum in 2024.

Speaker 2

This year's successes have resulted in significant operating expense savings and a substantial improvement in cash flow, which better positions us to assemble a portfolio of borderless products with strategic infrastructure and global partnerships. Our long term strategy to invest in branded innovation and stay asset light is working and we're just getting started. The combination of these efforts and an industry leading balance sheet set 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.

Speaker 3

Thanks, Mike, and good morning, everyone. I will now review our full year 2023 results at a high level before getting into the details of the Q4. In 2023, we increased net revenue 1% year over year to $87,200,000 with strong performance in Canada and commencement of sales to Germany and Australia, balanced by a slowdown in Israel. Constant currency consolidated net revenue increased 6% to 91,700,000 dollars Total operating expenses declined by $30,000,000 versus the prior year, adjusted EBITDA improved by 12% to negative $61,000,000 and operating cash flow improved by $46,000,000 to negative $43,000,000 I will now review our Q4 2023 results in relation to the prior year period. The company reported consolidated net revenue of $23,900,000 a 9% increase from the prior year.

Speaker 3

Constant currency consolidated net revenue increased by 11% to $24,500,000 The revenue increase was primarily driven by higher cannabis flower sales in Canada and cannabis shipments to Germany and Australia, partially offset by lower cannabis flower sales in Israel due to the war and competitive activity and an adverse price mix in the Canadian cannabis flower category, driving increased excise tax payments as a percentage of revenue. Gross profit in the Q4 was $1,900,000 equating to an 8% gross margin, representing a $700,000 improvement from the prior year period. The increase was primarily driven by higher sales in Canada and continued supply chain optimization. Looking at the margin for the full year, we had been performing well in the 1st 9 months highlighted by a steady margin profile between 15% 16% through the 3rd quarter. Unfortunately, due to both the war in Israel and increased competitive activity, margins were negatively impacted.

Speaker 3

As we look into 2024 with a more streamlined operational which should improve margins throughout the year. We anticipate that as we move through 2024, we will recover from the 4th quarter performance and build upon the success we had in the 1st 9 months of 2023. Consolidated adjusted EBITDA in the Q4 was negative $14,800,000 representing a $4,200,000 improvement from the prior year. The improvement was primarily driven by a decline in general and administrative and research and development expenses and an improvement in gross profit. Following the increase to our operating expense savings goal to $20,000,000 to $25,000,000 in Q2 2023, we are pleased to share that we surpassed the high end of the range by $5,000,000 achieving $30,000,000 in operating expense savings.

Speaker 3

Due to the overachievement in savings in 2023, we're adjusting our 2024 savings projections to deliver an incremental $5,000,000 to 10,000,000 dollars Turning to the balance sheet. The company ended the quarter with approximately $862,000,000 in cash and short term investments, which is up by about $22,000,000 from the 3rd quarter. In addition to delivering on operational efficiencies and maximizing the return on our cash, we received an interest payment on our GrowCo senior secured loan of $1,900,000 and a principal repayment of $1,400,000 for total cash paid by GrowCo to Cronos of $3,300,000 in Q4. In total, for 2023, we received $10,300,000 in interest payments and $5,600,000 in principal payments. Having the best balance sheet in the cannabis industry enables us to take calculated strategic bets, while we remain steadfastly focused on reducing cash burn.

Speaker 3

Moving to the cash flow statement. Cash flow from operations was positive approximately $16,800,000 representing a substantial improvement. And free cash flow, defined as operating cash flow less CapEx, was positive $15,000,000 another great achievement. We have many wins to point to: market share gains, OpEx reduction, cash balance optimization and improving cash flow from operations and we are reaffirming our guidance that we anticipate the net change in cash defined as the sum of cash and cash equivalents and short term investments to be positive in 2024. Looking back on these improvements, I share in Mike's confidence in the trajectory of the business and our preparedness for entry into new markets as they become available.

Speaker 3

With that, I'll turn it back to Mike.

Speaker 2

Thank you, James. 2023 was an impressive year for Cronos. We continue to transform our business and adapt it to where our industry is today. Our brands are winning globally, thanks to all the hard work from our employees to bring best in class cordless products to market. Our Spinach brand is the number 2 brand overall and holds number 1 positions in both flower and edibles.

Speaker 2

We launched Lord Jones in Canada by returning the brand to its cannabis roots with a suite of innovative and high quality products, and we can't wait to continue to build. Before getting into questions, I want to level set what is under the Cronos umbrella and where things stand today. We closed the year with approximately 862,000,000

Speaker 4

dollars in cash and short term investments and 0 debt.

Speaker 2

We generated over $14,000,000 interest income in Q4 and we anticipate generating approximately $40,000,000 to $50,000,000 in interest income in 2024. In Canada, our Spinach brand is the 2nd most popular brand. We brought the Lord Jones brand to the Canadian adult use cannabis market with products we know can win. We have a leading medical brand Peace Naturals in Israel, which posted $21,100,000 in net revenue in 2023. In the Q4 of 2023, we shipped cannabis to Germany and Australia, extending our global reach.

Speaker 2

We have a 5.9% stake in PharmaCann, one of the largest U. S. MSOs currently on our books for 26,000,000 dollars We own 50% of the equity in Cronos GrowCo, which is profitable and GrowCo paid a $15,900,000 in principal and interest payments in 2023. We have an approximate 10% stake in Vitura, the leading medical cannabis company in Australia on our books for $9,600,000 And finally, we have an exclusive partnership with Altria on a global basis. We stabilized our cash balance and drastically improved our cash flow trajectory, making us one of the best positioned cannabis companies to take advantage of new market growth opportunities.

Speaker 2

We're heading into this new fiscal year energized and ready to take Cronos to its next chapter. With that, I'll open the line for questions.

Operator

Thank you. Our first question comes from John Zamparo with CIBC Capital Markets. You may proceed.

Speaker 5

Thank you. Good morning. I wanted to start on gross margin. You mentioned some of the reasons that that was lower in the quarter versus Q3. I wonder if you could rank order those.

Speaker 5

And then are the initiatives that you identified for next year about automation and a few other items, is the benefit of that included in your cost savings target for 2024 or would that be incremental to it?

Speaker 3

Thanks, John. So we showed steady results in the 1st 9 months of the year with gross margin ranging between 15% and 16%. Looking beyond the inventory write downs, we showed steady improvement kind of throughout the year, right, with the exception of Q4. Unfortunately, due to the war in Israel and the increased competitive activity, those margins were negatively affected. We do anticipate that as we move through 2024, we'll recover from that Q4 performance and build upon the success we had in the 1st 9 months.

Speaker 3

Positive impacts to our gross margin in the quarter will continue to be our cannabis extracts category that carry a higher margin profile and benefit from lower cannabis biomass costs as we continue to leverage our joint venture with GrowCo and improve fixed cost absorption in our Canadian supply chain as we continue to grow the business and further optimize our supply chain costs. Further, the announced exit of our Winnipeg facility is also anticipated to drive additional COGS saving in 2024, contributing to the $5,000,000 to $10,000,000 in savings target for 2024. And then John, as you alluded, there's some additional opportunity that we're driving automation into the supply chain. And so some of that is baked in. There's additional potential upside as well throughout the year.

Speaker 5

Got it. Okay. That's helpful. And then two parts, my second question. I would love to get your thoughts on each of Australia and Germany, in particular, how it relates to Cronos.

Speaker 5

Australia is seemingly interesting to a lot of different LPs. It's becoming more crowded. Do you think that market has sustainability in terms of its growth? Are there barriers to entry that would prevent further participants from joining? And on Germany, what upside do you think Cronos has given you use the distributor model, with respect to

Speaker 2

the recent change in legislation? Thank you. Sure. Thanks, John. So I think when you look at the Australian and German market, last year, they were similar sizes with the Australian market being a little larger.

Speaker 2

And you see pretty similar barriers to other international markets just in terms of having the type of supply chain and kind of what you need to make sure you get product across the border and meet really tight specs. For us, similar to other markets, what's going to really matter is having great genetics and making sure that those genetics are grown very well. And so what's propelled us to lead in Israel and Canada and Germany is what we expect will allow us to succeed there. As far as growth relative to Germany, I think just given the country size, I wouldn't expect it to continue to outpace Germany, but I do think there's still runway ahead. Germany, we already expected there to be growth, but a week ago, having the vote to change the way the cannabis is treated, There's a bill that opened up the cannabis market and it's no longer classified as narcotic.

Speaker 2

And I think that's really significant because while people may talk about the adult use or kind of compassion clubs and what that might mean, Really for us what this means is we are allowed to now effectively market medical cannabis and that's a significant change. So I expect a lot of growth in Germany. And I think from international market perspective, that's what the story should be over the next year.

Speaker 5

Great. Thank you very much.

Operator

Thank you. One moment for questions. Our next question comes from Bill Quirk with Roth MKM. You may proceed.

Speaker 4

Hey, good morning, everyone. So increased competitive activity was noted as a margin headwind. Were there specific formats or provinces where you saw that increased competitive activity?

Speaker 3

Yes. So thanks for the question. I'd say overall, right, we experienced competition across the board. Mainly what we were alluding to there was competition in Israel driven by the war. And so a lot of the competitors are essentially dealing with the same problems that we are today.

Speaker 3

There are supply chain issues there. Thankfully, our facility was not directly impacted and we have an extremely resilient workforce there. And so we've done a lot to stabilize and continue to produce and make sure we're providing our best in class products to the end consumer. We do experience a little bit of competition in Canada as well. But I think in Canada, you're seeing that even in spite of the competition, right, we are number 1 in flower, number 1 in edible, number 3 in vape and number 8 in pre roll and steadily increasing.

Speaker 3

So we feel very confident in our portfolio and in the products and innovation that we're bringing to

Speaker 4

market. And then if I could follow-up on Germany. Why would the changes in Germany help grow the medical market rather than if cannabis isn't a narcotic, why wouldn't call it the adult use unstructured adult use market take share from the current medical market, right? Could you help me kind of figure that think about that a little bit?

Speaker 2

Sure. It's a great question. If you compare how cannabis has been treated in Europe versus North America, it's completely different. When you think about medical cannabis in the U. S, it's not really going through a pharmaceutical like system.

Speaker 2

And in Germany, it has truly been treated like a narcotic. And so extremely, extremely restrictive marketing regime, changing that and allowing me to actually go communicate what the benefits of having a superior product are to patients, I think is a game changer. And the adult use program that people talk about in Germany isn't really a commercial adult use program. You're not able to have the same type of infrastructure you have in Canada or Germany. There's not actual legal adult use sales.

Speaker 2

It's really just lessening the penalties of illicit adult use market. And I think with that, you won't expect to see quality product coming out, improved access to quality product. So it'll bifurcate to sort of illicit market with a premium medical market. And you layer the ability to advertise and market on top of that, I think it's funneled people toward premium product.

Speaker 4

That was great. Thanks, Mike.

Operator

Thank you. Our next question comes from Yewon Kang with Canaccord Genuity. You may proceed.

Speaker 6

Hi, good morning. This is Ayleng Kang on behalf of Matt Bottomley. Thank you for the question. I just Could it be perhaps that there was some kind of reclassification of certain expenses between operating expenses and costs that led to a drop off in the gross margin profile, but a stable adjusted EBITDA loss this quarter? Thanks.

Speaker 3

Yes. Thanks for the question. So as we mentioned, it really was predominantly driven by Israel and the increased competitive activity there due to the war and then some inventory write downs related to that. So that's really the main driver.

Speaker 6

Okay, got it. And in terms of Lord Jones launch, I know the launch was only a couple of months ago, but could you just comment on maybe the initial reaction from the consumers that you're seeing across Canada and what the bud tenders are saying about the brand?

Speaker 2

Sure. Thanks. Yes, I think it's been very positive. As you mentioned, it's been limited in terms of the size of the launch so far, but we wanted to take a very tailored and cautious approach. But when we look at distribution, we're seeing reorders, we're seeing strong demand, specifically the Hash infused pre rolls we're seeing at the top of the category.

Speaker 2

So we're very excited about that. And a lot of anticipation, I think, especially given the success we've had in sours for chocolate fusions, which we really expect to be a crown jewel portfolio and something that can not just define the category, but push the overall chocolate category forward to where we think it should be sits within edibles.

Operator

Thank you. And this concludes the conference call. Thank you for your participation. You may now disconnect.

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