Cronos Group (CRON) is a Hedgeye Cannabis Best Idea Long.
EVENT DETAILS:
|
Topics to be discussed & THE PATH FORWARD:
- Discussing Cronos's 1Q23 results and guidance.
- How Cronos is focused on cost reductions and cash flow positive in 2024.
- New products and market share trends in Canada.
- We believe that the US Cannabis market is broken and that Cronos is perfectly positioned to take advantage of legalization.
- Discussion around the cost of cultivation in different geographies (USA, CAN & ISR)
- How rare cannabinoids drive Cronos’s borderless branded strategy
- Discuss sum of parts
About Mike Gorenstein (CEO):
1Q23 Earnings Commentary:
Cronos reported 1Q23 net revenue of $20.1M, which decreased by $4.9M from a year ago. The decrease was primarily due to lower cannabis flower sales in the ROW segment and a decline in revenue in the U.S. segment. ROW segment net revenue was also impacted by the weakened Canadian dollar and Israeli Shekel against the U.S. dollar. They recorded gross profits of $2.4M, which decreased by $4.5M from last year. Cronos saw an adjusted EBITDA of $(16.8)M in the quarter, which improved by $2.1M from last year. The improvement was primarily driven by decreases in general and administrative expenses and research and development expenses due to the Company's cost savings initiatives.
Their Spinach brand continues to be a bright spot as it holds its number one market share position in the edibles category in Canada. According to Hifyre data, Spinach products held an approximate 15.3% market share in the edibles category expanding to approximately 21.9% within the gummy category alone across the SOURZ by Spinach and Spinach FEELZ sub-brands. The company guided net revenue for FY2023 to be between $100 to $110M. Additionally, the Company is on track to achieve the high-end of the previously identified $10 to $20M in operating expense savings for 2023. Cronos anticipates that cash flow for the last nine months of FY2023 will decline by less than $25M. They expect to be cash flow positive in 2024.
“Optimizing the returns of our industry-leading cash balance has also been a priority for us as we are in a great position to take advantage of the higher rate environment, especially given we have no debt,” continued Mr. Gorenstein. “You are now starting to see the higher interest income flow through our income statement, which is an underappreciated component of our company. Additionally, looking forward to the balance of 2023, we are on track to achieve the high end of the projected $10 to $20 million in cash operating expense savings we announced in February and are committed to further improvements as we target to be cash flow positive in 2024.”
When we think about Cronos, this is the type of company that you buy shares in and put them away for the foreseeable future. They are focused on building brands, which they are successfully doing, while maintaining the strongest balance sheet in the industry. This management team is waiting for their access point into the U.S. market (legalization) and ensuring they are in the best position to take market share when those walls come down. These are far from exciting results, but management continues to execute its plan. This is why we see Cronos as a tail duration long.
