Cronos Group Inc. (CRON) Earnings Call Transcript

Thank you. Good morning. My name is Haley and I will be your conference operator today. I would like to welcome everyone to Kronos' 2026 second quarter conference call. Today's call is being recorded. At this time I would like to turn the call over to Harrison Aaron, senior director of investor relations and corporate development.

Thank you, Haley, and thank you for joining us today to review Kronos' 2026 Q2 Financial and Business Performance. I'm joined by our Chairman, President and CEO Mike Gorenstein and our CFO Anna Schlemack. Bruno's 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. We should cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our website. 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'll move to a question and answer session. With that, I'll pass it over to Chronos' Chairman, President, and CEO, Mike Gornstein.

Thanks Harrison. Kronos delivered a stellar second quarter, organically achieving records across net revenue, gross profit, and adjusted EBITDA, as our borderless product strategy continues to gain momentum across each region in which we operate. Yesterday, the Trade Levies Commissioner of the Israeli Minister of Economy and Industry announced that it had opened a new investigation into alleged dumping of medical cannabis imports from Canada. This announcement follows the previous investigation by the Commissioner, which did not result in the imposition of an anti-dumping duty. We dispute the allegations underlying the investigation. We will cooperate fully with the ministry and are confident the facts support us. Our position has not changed. Kronos does not engage in dumping. During the last investigation of these same allegations, we provided the Trade Commissioner with comprehensive pricing and cost data that demonstrated that our pricing in the Israeli market was not below our pricing in Canada. We stand behind that evidence fully. Over the last few years, there have been a number of geopolitical and regulatory issues that have made operating in Israel uniquely difficult. However, we will stay committed to Kronos Israel, as we have been since 2017 when we obtained our medical cannabis license. We have built strong infrastructure in Israel, investing over 100 million new Israeli shekels in building a greenhouse manufacturing facility in the cannabinoid R&D lab. and we are one of the largest cannabis manufacturers in Israel with a team of approximately 80 people. And that team has been incredibly resilient, consistently delivering record results despite the aforementioned challenges. This quarter was no different, with Kronos Israel delivering our 10th consecutive quarter of record net revenue, growing 60% year-over-year or 32% growth on a constant currency basis. The Peace Naturals brand continues to expand its lead in the Israeli medical cannabis market, based on pharmacy data collected by Kronos. This is the second quarter of Lord Jones sales in Israel, with the brand gaining momentum in the premium flower space. Turning to Canada, we delivered record net revenue with our brands generating 25% year-over-year retail sales growth relative to industry-wide sales growth of 1% according to HiFire. The Sprintage brand had another excellent quarter, with our product portfolio continuing to demonstrate the success of our innovation efforts through significant share gains. In Canada, spinach held its number one position in vapes for the second consecutive quarter, with total vape market share expanding to 10.6%. And within the vape cartridge category specifically, spinach remained number one for the third consecutive quarter, with market share expanding to 11.8%. In the disposable vape category, Spinach ranked number two in Q2, with share expanding to 8.2%, driven by our Puffers all-in-one innovation, which launched in late Q4 of 2025. We launched three new puffer flavors in the second quarter, strawberry burst, peach iced tea, and grape gas. We also introduced the spinach orange vanilla twist one gram cartridge, the brand's first limited time vape cartridge offering for the summer season. In edibles, spinach remained Canada's number one brand for the eighth consecutive quarter, with market share steady at 20.8% and share within gummies of 22.5%. In Q2, Sours by Spinach Fully Blasted offerings were five of the top ten edible SKUs in Canada, including the number one edible nationwide, the Fully Blasted Blue Raspberry Watermelon 10-pack. In flour, spinach ranked number three in Canada, with market share expanding to 5.4%. spinach flower strains, GMO Cookies and OG Kush were among the top six selling flower products nationally in the quarter. In pre-rolls, spinach rose to number seven in Canada, with market share rising at 3.1%. With an infused pre-roll, Spinach climbed to number six, with market share increasing to 3.5%. In traditional pre-rolls, spinach also rose to number six, with market share increasing to 2.9%. quarter, Spinach 6, the brand's first cylindrical style pre-roll, became more widely available across additional provinces in Canada. Turning to our other international markets outside Israel, we delivered record net revenue, which increased 88% year over year, led by strong demand in Germany. The breadth of our international footprint continues to provide meaningful growth as we execute our borderless product strategy. Building on our international momentum, this week I had the opportunity to meet with the Canadalar team in the Netherlands and the businesses performing in line with our expectations. We are prepared to close the acquisition of Canadalar upon receipt of regulatory clearance in the Netherlands in satisfaction or waiver of the remaining closing conditions. We expect the acquisition to close in the second half of 2026. We have not been informed of any specific issues with our regulatory clearance submission, and while it has taken longer to close than we had hoped, based on the information available to us, the timing appears to reflect the ordinary course of the Dutch regulatory review process for a transaction of this nature. As a reminder, Canadalar is the largest company operating within the Netherlands Legal Adult Use Cannabis Program. We're excited and eager for Cunadalar to join the Kronos family. We continue to execute on our capital allocation priorities and remain active under our share repurchase program, which we believe represents an attractive use of capital. Backed by an industry-leading balance sheet and positive cash flow from operations, we are well-positioned to invest in our growth strategy while returning capital to shareholders and maintaining optionality to be opportunistic as attractive opportunities arise.

Now, I'll turn it over to Anna to walk you through our second quarter financials. Thanks, Mike, and good morning, everyone. I will now review our second quarter 2026 results. The company reported consolidated net revenue of $53 million, a 58% increase year over year. The net revenue increase was primarily driven by higher cannabis flower sales in Israel, Canada and other countries, specifically Germany, and higher cannabis extract sales in the Canadian market. Gross profit in the second quarter was $28.5 million, representing 96% year-over-year growth from Q2 2025's gross profit. The year-over-year increase was primarily due to higher average sales prices, largely driven by a mixed shift to Israel and other countries, which carry no excise taxes, and higher sales volumes. Higher sales volumes led to both higher net revenue and efficiencies from overhead cost absorption. This quarter's gross margin demonstrates what our business looks like when it's firing on all cylinders, with Q2 also benefiting from seasonally better growing conditions. However, gross margins may vary from quarter to quarter due to factors including seasonality, product and geographic mix, production volumes, and potential price compression. Accordingly, we believe our gross margin performance over a trailing 12-month period provides more useful context than a series of high-end products. single quarter. Total operating expenses were $21 million in the quarter, a year-over-year increase of $1.2 million, driven by increases in sales and marketing, R&D, and G&A expenses. Note that half a million of the 1.2 million year-over-year OPEX increase was driven by transaction costs primarily related to our pending acquisition of Canadalar. Adjusted EBITDA in the second quarter was a record $13.1 million, an improvement of $11.4 million year-over-year, driven by higher gross profit partially offset by higher operating expenses. Turning to the balance sheet and cash flow statement, the company ended the quarter with $827 million in cash, cash equivalents, short-term investments, and non-current interest-bearing deposits, up $5 million from Q1 2026, driven primarily by $24 million of positive cash flow. cash flow from operations, partially offset by $60 million of share repurchases and $2 million of CapEx spend. In addition to this $827 million, we hold $17 million of loan receivable, a $15 million current income tax receivable, and $5 million of other investments. In summary, we delivered a record net revenue, gross profit, and adjusted EBITDA in 2Q. A testament to our focused strategy, the underlying momentum of our business, and the team's continued strong execution. With that, we'll now open the call for questions.

Thank you. At this time, we will host the question and answer session. To ask a question, please press star 1 1 on your telephone. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bill Kirk from Ross Capital Partners. Your line is now open.

Hey, good morning everyone. I wanted to ask about the Spinach brand. the brand has shown strength that's allowed it to kind of transcend across product formats. And I was hoping if you could talk about how you envision the brand and its potential to maybe cross borders and transcend borders where an adult use brand might eventually make sense.

Sure, thanks. That's a great question. I think part of what's made Spinach strong in different categories is we haven't really rested on the laurels of the brand. Category by category, we focus on each product as if we were launching it new and making sure it's a best-in-class product. In every single market you still have to win consumers. And as long as we take the same approach, I think we'll be able to do that. I think we've shown the ability for the products to translate to other markets already. But it's certainly something that we're planning and it's one of the reasons that we're so excited about the Kanadalar acquisition. adult use market where we think spinach will have a great opportunity to be able to perform and see those products like sours and puffers translate over.

And then if I can on Germany, the market has gotten a little tougher for some on some price compression, but you're showing strong growth there. So can you help us maybe understand your route to market into Germany? And was the unlock for Germany getting bigger for you, was that really the additional capacity at GroCo and you're just now satisfying demand that you had there? But can you talk about the German market, how your product gets into Germany and how you're positioned there? Sure.

Sure, it's really not that different in terms of what we're succeeding based on versus Canada, Israel, where also you can kind of look at data and it's competitive. It's tough. I think it just comes down to having the right value proposition to pay for the data. patients or to consumers. And while we don't have boots on the ground like we do in Canada and Israel, I think ultimately if you have a great product, I think that it finds a way to have demand. We understand the backdrop and competitiveness, but from my perspective, it's actually not as competitive yet as some of the other markets we're in. And yes, I think that is the unlock. We aren't really running from competition. We wanna make sure that we win in whatever market we're in. I think having the discipline to keep adapting and making sure you win sharpens and improves the offering you have. And now that we have additional capacity, there's much more of a focus on Europe than there has been in the past.

Thanks, Mike. And Anna, can I round out a question on gross margin? It expanded more than we expected, which obviously is a great thing. And you broke it into some buckets, which included average selling price and mix. Could you help us maybe which bucket was the largest contributor behind the year-over-year gross margin expansion.

Sure, happy to provide a bit more context. So, you know, like I said, we benefited from, you know, seasonally better growing conditions and that translates to both higher yields and more high quality grade A flower to sell. So obviously, you know, more flower contributes to efficiencies as fixed overhead costs are spread over growth. greater volumes. I would say that's your, probably your largest contributor. And then you have that geographic shift to higher ASPs, to Israel and international markets, so higher ESPs, no excise tax. And then lastly, you know, in Canada, we've experienced such tremendous growth in our vape portfolio, and that carries, you know, the best margin in the portfolio. So kind of all of those factors together was that perfect storm of favorability. But as I mentioned, you know, in the prepared remarks, we believe, you know, that our gross margin performance over that trailing 12-month period provides better context than, you know, this one particular quarter.

Thank you. I'll pass it along. Thank you. Our next question comes from Derek Lessard from TD Cohen. Your line is now open.

Yes, good morning everybody. Really strong results guys. Congrats Mike to you and the team. Good color so far. Two part question, I guess, was this, I guess these results, were they better than you guys had expected internally? And then secondly, is there anything that you can point to that really went really right for you guys in the corner? And I think Ana answered some of that, but curious on your thoughts.

Thanks, appreciate it. And, Yoke, I think we're We're generally optimistic, but we're always conservative, so we're all extremely pleased with the results. I think that you just saw things go well in pretty much every market and category, so... I don't know if there's a single thing that I would point to. I think that in Canada, we talked about it the last few quarters with Puffers launching and starting to get momentum. That's certainly been a big driver. I think that overall having more supply. That's been really helpful, just being able to satisfy a lot of the demand that we've been talking about has been out there but we haven't been able to fill. I think that, you know, you think about yield and you think about the weather and growing season, that was certainly positive. But things are just moving in the right direction in most of the markets and a lot of the work we've put in the last few years, you're starting to see things click and as we continue to dial in, you know, growth is going to be a big factor. and with some of the manufacturing, you know, at Stainer in Israel, things are improving.