Cronos Group Inc. (CRON) Q4 2025 Earnings Call Transcript

Good morning. My name is Corey, and I'll be your conference operator today. I would like to welcome everyone to Kronos Group's 2025 fourth quarter and full-year earnings conference call. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. At this time, I would like to turn the call over to Harrison Aron, Senior Director, Investor Relations and Corporate Development. Please go ahead.

Thank you, Corey. And thank you for joining us today to review Kronos' fourth quarter and full year financial and business performance in 2025. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, Anna Schlemach. 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 available 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 to 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 Hi-Fire. 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 Gorenstein. Thanks, Harrison.

Kronos delivered a record year in 2025, growing net revenue by 25% organically, underscoring the continued strength of our core business and the progress we are making towards our strategic priorities. We achieved record net revenue in the fourth quarter and for the full year, and we delivered record full year gross profit and adjusted EBITDA. These results reflect strong consumer demand for our leading brands and the growing contribution from Israel and our international platform. In Canada, we delivered record quarterly net revenue of 42% year-over-year with key contributions from flour, vapes, and edibles. Spinach continues to be a standout performer in the Canadian market and the second most popular brand nationally. In vapes, Spinach delivered stellar performance in the quarter. In December, Spinach became the number two overall vape brand in Canada, rising from the number four share position in the first quarter of 2025. Within the vape cartridges subcategory, Spinach achieved number one market share in the fourth quarter with their Cherry Crush and Blueberry Dynamite flavors as the two best-selling vape cartridges nationwide. This performance in vape is a testament to our ability to leverage extensive of R&D and consumer insights work to develop market-leading products that strongly resonate with consumers. We're looking to build on this momentum, and towards the end of the fourth quarter, we unveiled Spinach Puffers, our newest innovation in the all-in-one vape device category. Puffers offer bold flavors of high-quality liquid diamond-infused cannabis in a modern POM-style format with a dual ceramic coil for maximum flavor and smooth draws and a uniquely satisfying tactile grip. Puffers initially launched in select markets within Canada, with distribution broadening to other Canadian provinces in early 2026. Innovation continues to be one of our biggest competitive advantages, and Puffers is another example of how we raise the bar on product quality, design, and flavor. As we continue building loyalty with consumers, our focus remains on creating products that look, feel, and taste great, delivering the exceptional experiences that define the spinach brand in edibles sours continued to deliver strong growth while maintaining category leadership with market share approaching 22 for the quarter growth was driven by fully blasted multi-packs which despite having just launched in mid 2025 were four of the top 10 selling edible skews in canada in the fourth quarter including the number one edible skew nationwide reinforcing spinach's leadership position in edibles and demonstrating the success of our innovation pipeline in flower spinach remains the number four brand in the quarter with supply constraints limiting growth potential with the expansion of groco now complete and the expanded cultivation space continuing to get dialed in we expect these supply constraints to ease in 2026 turning to lord jones the brand remains the market leader in canada in hash and live resin infused pre-rolls reinforcing its strength in premium formats where quality and differentiation matter most. Earlier this month, Lord Jones launched in Israel with a lineup of curated premium flower offerings featuring cold-cured large buds available in a series of limited-time drops, marking an important step in broadening the brand's presence. Internationally, Peace Naturals and Lit posted another impressive quarter. In Israel, net revenue grew 52% year-over-year, the eighth consecutive quarter of record net revenue for Kronos in the market. Peace Naturals remain the top-selling brand in the market based on pharmacy data collected by Kronos, continuing to benefit from strong brand equity, consistent product quality, and stellar commercial execution. Outside of Israel, Peace Naturals and Lit drove a strong quarter for other international markets, with net revenue up 68% year-over-year, led by growth in Germany, as shipment timing normalized and demand remained strong. We capped off the year with the December announcement that we entered into a definitive agreement to acquire Kanadalar, with closing expected in the first half of 2026. Kanadalar is the largest company operating within Netherlands' legal adult use cannabis program based on Kanadalar management data, and is the only industrial-scale greenhouse cultivator within the program. Under the agreement, Kronos will acquire Kanadalar for upfront consideration of 57.5 million euros, or approximately 67.5 million subject to certain adjustments with additional continuity consideration based on half-ex canadelaar's normalized Emida in 26 and 27. The Netherlands has a deep cannabis heritage and its coffee shops, which serve as cannabis retailers, are known worldwide to have played a foundational role in the evolution of the legal cannabis industry. The Dutch Legal Adult Use Cannabis Program was enacted in 2020 to establish a closed, regulated cannabis supply chain in 10 participating municipalities with the startup phase beginning in the fourth quarter of 2023 and the program officially launching on april 7th 2025. the program is scheduled to run for four years from that date with the dutch government retaining the option to extend it by up to an additional 18 months the program is well designed and regulated to limit cannabis to responsible levels among adult consumers only serving as a potential model for other countries We are committed to the continuity of the program in cooperation with regulators, municipalities, and all industry stakeholders to ensure its long-term success. Under the program, all 72 cannabis retailers in the 10 participating municipalities are now required to source their cannabis products exclusively from one of 10 licensed producers, including Kanadelaar. Including the 72 cannabis retailers in the program, there are a total of 562 cannabis retailers in the Netherlands based on data from the Dutch government, allowing for a potentially significant increase in the addressable market should the program be eventually expanded to additional municipalities or nationwide. European expansion is an important area of focus for us and if completed acquiring a marked leader in Europe's largest adult use cannabis market will allow us to further leverage our investments in borderless products at scale. Combined with a highly attractive financial profile and the expectation for accretion from the transaction we're excited to bring Kanadalar under the Kronos umbrella and to build upon the foundation that the company has established. Kronos maintains the strongest balance sheet in the industry with no debt and $832 million in cash, cash equivalents in short-term investments, allowing us to continue investing in growth, innovation, and global expansion. Now, I'll turn it over to Anna to walk you through our fourth quarter and full year financials.

Thanks, Mike, and good morning, everyone. I'll now review our fourth quarter 2025 results. The company reported consolidated net revenue of $44.5 million, a 47% increase year-over-year. The net revenue increase was driven by higher cannabis flower sales in Israel, Canada, and other countries, and higher cannabis extract sales in the Canadian market. Gross profit and adjusted gross profit in the fourth quarter were $16.2 million, equating to a 36% margin, a 670 basis point improvement from the 30% adjusted gross margin in Q4 2024. The year-over-year margin improvement was driven by higher average sales prices due primarily to a mixed shift to Israel and other countries and higher sale volume. Adjusted gross margin declined from the levels realized in the first three quarters of 2025. This was driven by adverse production quality mix at GroCo as GroCo dialed in the expansion, as well as an expense timing in Q4 as part of that ramp up. For full year 2025, adjusted gross margin of 43%, and we would view this as a reasonable margin level for the business. operating expenses, excluding restructuring costs and impairments, were $22.5 million in the quarter, a modest year-over-year increase of $0.3 million. Adjusted EBITDA in the fourth quarter was $0.5 million, an improvement of $7.7 million year-over-year, driven by higher adjusted gross profits. While remaining positive, adjusted EBITDA was lower than reported in the first three quarters of the year given the gross margin pressures and expense timing. Remain confident in the operating leverage of the business as production stabilizes and scale efficiencies are realized. Turning to the balance sheet and cash flow statement, the company ended the quarter with $832 million in cash, cash equivalents, and short-term investments of $8 million from Q3 2025. driven primarily by positive cash flow from operations before changes in working capital of $18 million and $3 million of proceeds from the sale of the Kronos fermentation facility, partially offset by a $7 million working capital outflow, $4 million of share repurchases, and $2 million of CapEx spend. In addition to this cash balance, we hold $21 million of loans receivable, and $8 million of other investments. In summary, our fourth quarter jump in top line set a net revenue record, setting the stage for bottom line growth in 2026. For full year 2025, we achieved record net revenue, gross profit, and adjusted EBITDA, demonstrating continued improvement in operating fundamentals as we execute against our business objectives. With that, I would like to hand it back to Mike for a brief comment before going into Q&A.

Thanks, Anna. In summary, we delivered meaningful improvements to our business and financial results in 2025, growing net revenue organically by 25% year over year, strengthening our competitive positioning across key markets and product categories. It's important to understand the context of this organic growth relative to our peers. Not only do we grow without acquisition, but while most of our peers have ATMs, have been issuing shares to fund their businesses with our strong balance sheet and self-sustaining business we have an active share repurchase program that led to a declining share count over the course of 2025. looking ahead to 2026 we continue to be committed to our share repurchase program we also will be opportunistic and disciplined while evaluating m&a opportunities canadler is an example of a transaction that allows us to advance our borderless product strategy and establish a strong foothold in an important market. In addition to new market opportunities, we will also look for strong brands and IP that we can add to our portfolio. We see multiple drivers of continued momentum this year. The expected closing of the Kanadlar transaction, increased production capacity following GroKo's expansion, continued growth in our branded products, and our increasing presence in international markets. We remain focused on delivering sustainable top-line growth and attractive gross margins while maintaining disciplined cost management as we continue to scale Kronos globally and position the business for long-term success. Thank you, and we'll now open the call for questions.

Thank you very much. At this time, we will conduct a question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. to withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Bill Kirk of Roth Capital Partners. Bill, your line is open. Hey, good morning, everybody.

I was hoping to talk a bit about product allocation coming out of the new GrowCo capacity. You know, how are decisions made of where to send that product, how did it kind of get allocated in 4Q, and are there any considerations like permit timing or things like that that might change the future allocation from what we see in 4Q?

Sure. Thanks, Bill. You know, I think when, you know, historically we've been trying to figure out how to deal from a position of shortage and allocate, and so, you know, there's been a balance between how do we make sure that we're keeping a certain level of demand in markets, but also focusing on margin. And I think now that we have more supply coming online, expect kind of the quality of supply to be consistent with what we've historically had. We'll be able to start filling more product in Canada, but also be a little bit more aggressive in scaling in Europe. So I think, you know, in Q4, you saw us trying to get a lot of the new product coming out. So we didn't maybe have the same normal fill as we would, but that should go back starting this year to more consistent than what we had in the past, with the exception that there's more product available for Canada than we historically had.

Got it. And then, Anna, you talked about go forward gross margins, you know, being similar to 2025 full year levels. What in particular leads to improving gross margin off what you reported in 4Q? Is it more price? Is it better mix? Is it lower costs? And then with the greater sales and scale from GroCo, why can't gross margin be higher than 2025?

Thanks, Bill. So, I mean, in Q4, there is a kind of couple adversities we face. So we have some expansion-related production quality mix from the Groco scale-up, as well as some one-time expenses that flowed through COGS due to the ramp-up. So kind of those headwinds have impacted Q4, which we don't expect to have going forward. So that's why we feel like that full year 43% margin range is reasonable for us for the business. look I think you know there's potential for some margin expansion in the future but we have to really be balanced right you could also have margin compression in Europe we don't really know at this moment but we feel good about kind of that full full year 2025 run rate going forward okay thank you thank you very much.

Our next question comes from the line of Kenrick Tai of Concordia Genuity Capital Markets. Kenrick, your line is open.

Thank you, and good morning. If I could just jump in with a follow-up on the gross margin quickly, and you're calling out sort of a similar level, Sefolio 25, just for clarification, would those expectations factor in the close of Canadalar, or is there a potential further upside, and that's perhaps what you were alluding to in your comment about there could be some further expansion through the year how should we just think about the the potential evolution here following up on your earlier comment sure so my comments were just for Kronos as a standalone business not considering Kanatalar there that is it is a profitable business as well with you know very nice gross margins so we could see some margin expansion from that but just

Just from, I'm more speaking to our business as a standalone, that 43% go forward.

I appreciate the clarification. And then just timing in the quarter, if I could, looking to the revenue and the revenue beat, you did call out that sort of 68% growth in international, I think was plus 52% in How much of the revenue beat in quarter was timing shift versus just call it QQ4?

So some of the – there was some timing shifts for those international markets outside of Israel going from Q3 to Q4. We had some kind of shipping time and move into Q4. But the rest is, you know, pretty – our business is growing. So, you know, you should expect to see that from us going forward across our markets.

Sorry, maybe just one quick final one. And, you know, CapEx, any sort of key initiatives we should be thinking through this year? Is it reasonable to think that we'd be looking at something less than $10 million on the year, given the spend in Q4 and, you know, what we currently understand your needs or those will be in 2026?

Yeah, I think that's right. I think those are appropriate levels for us going forward.

I'll get back in here.

Thank you very much. Our next question comes from the line of Ryan Neal of TD Cohen. Ryan, your line is open.

Good morning, everyone. This is Ryan stepping in for Derek. Just wanted to quickly start in the domestic market. So obviously saw Canada was up more than 40% year over year. Can you guys just talk a little bit about some of the drivers there? Especially, I know you mentioned in Q3, there were still some softer flower sales due to the domestic supply constraints.

Thanks. Yeah, I think one of the biggest drivers here is just having additional supply, and I think that's something that you'll see continue to work through. Before this quarter, we've really just been struggling with how to allocate the limited product we had, and I think now that we're starting to have more product come online, that allows us to fill existing demand in the markets that we're already in.

Great. And then you guys obviously have a pretty large capital base. I'm just curious how you view the current pipeline of potential opportunities and how you might deploy some of that moving forward.

Sure. I think, you know, first staying committed to the buyback is an important thing for us. You know, there's a lot that we're looking at internationally. You know, I think whether that falls in the bucket of a new market and is there anything we need to expand our platform, But also, are there new products, new brands that we can put on our existing platform and get the benefit of expanding those into new markets? So, you know, we'll continue to be disciplined and be opportunistic. And, you know, as you've seen from 2025, you know, when there's opportunities, we'll certainly act on them.

Great. And then I'll just put one more question in here. So curious about some of the innovation you guys are doing. I know you at last call mentioned a few launches.

How are those trending and sort of what are the categories that you're seeing the most Yeah, I think one that you don't always see sort of immediately and it's harder to measure, but genetics is a really important one for us. So there's a lot we've been doing, you know, over the years breeding. And I think you, you know, you're seeing every year the successes that come out of that. And we have some really interesting projects in genetics. So very excited there. continuing to innovate in you know in edibles is really important for us keeping keeping sours fresh but I think that maybe the most exciting one for you know for this quarter and you'll see showing up the data in Q1 is in vapes puffers so it's our all-in-one we've you know put a lot of time and work in and making sure that this is a going to be a big driver for us and I think you're seeing the early success already. So Huffers is, you know, what I think all of us are very excited about right now.

Great. Thanks, everyone.

Thank you very much. Our next question comes from the line of Pablo Zuenic of Zuenic and Associates. Pablo, your line is open.

Thank you, and good morning, everyone. Mike, can you explain, you know, in the context of the consolidation we're seeing in Germany, you know, high-tire Ramexian, OGI Sanity. Why Holland was a priority over Germany, especially with the market consolidating and some distributors still being available? Thanks.

Sure. You know, I think when I look at Germany, you know, the first thing is there's still regulatory uncertainty, and you've got some movement that's going through, and we expect, you know in the coming months to get certainty but i also think when you when you look at availability of licenses uh you know distribution and opportunity to get into the market uh it's there's plenty of opportunity to get in there are you know many options there and i think from a business model perspective it can be difficult because some of the distributors that you look at buying um well they're you know they have many brands on the platform so there's a lot of different distribution and I think you know you're not sure if you're picking up a business he's still going to have that distribution business because you're distributing your competitors so it's something we continue to evaluate think about the smartest way that we could deepen our presence in the market but we thought the Netherlands was much more sort of on strategy it's a market that you know without making an acquisition we would have no way to get in because it's closed as far as import export it has its own supply base its own brand and you know we feel like it's it's not a step towards getting towards all adult use and building a brand it is moving directly into the adult use market in a place where you've had a 50 year history of adult use sales and we think gets the most brand leverage you know for any market across Europe just given the kind of culture and history around the Netherlands coffee shops and And so we thought it just made a lot of sense, and it was a really unique opportunity for us.

Thank you. And then just a quick follow-up. Look, I mean, in markets like Australia, we've seen operators, distributors taking control of downstream assets, whether it's clinics or even online pharmacies. We're beginning to see that in Germany, apparently, and it's happening in the U.K. I mean, Kuralif owns a clinic there and an online pharmacy.

How do you think about downstream opportunities, medium-longer term? or is that something that you prefer not to not to be involved in thanks thanks it's a great question i think you know we take a really long-term view on uh on any acquisitions and capital spend and and i think it can be market specific but i'm always looking at where where do i think the market's going to end up um you know and if it's something where it's a more temporary business or we're worried regulations are going to change it uh something where we prefer to be a customer than an owner of the the asset but if I think it's going to be locked in for longer and you know we can model it out and see see there's a long-term payback to being an owner versus a customer then it's something we would consider and I think it's really market specific you know but I do go back to the experience we saw early in Canada so if it's a market where we think it's going to go adult use or if it's a market where we think that regulations can change you know what that what that funnel looks like it's something we would we would rather just spend spend money to help with marketing and demand versus be sort of an owner of that part of funnel thank you and one one last one if I may you know I know this is going back in time but what lessons can you take from the option you have wire in Pharmacan right you have

an option to buy, I think, a stake in the company, and I know that's a while ago, but what lessons did the company learn from that, and how do you think about that lesson as the U.S. begins to reschedule?

Sorry, I cut out there for a minute. I heard what lessons, and could you just repeat the part after that?

Yeah, I'm going to repeat. Yeah, I'm going to repeat. No, going back in time, I believe that Kronos had an option to acquire a stake in Pharmacan in the U.S., right? That company hasn't done too well. What lessons did Gronos learn from that, and how does that color you're thinking about future opportunities in the U.S. as that country reschedules cannabis?

No, that's a great question. I think, you know, there's two things that I would specifically point to. You know, the first is that when we did that, it was a little bit of a hedge. If you recall, the timing was around sort of crazy around states act um we didn't we it was roughly 10 percent uh on the option and and part of the reason was we wanted to make sure we had distribution security if you had uh regs move and so part of that is it's still important we didn't do a you know a larger stake and that we were being i'd say a little bit more disciplined and controlled um but i think also a bigger part is that you can't really move ahead of regulations. I think what we've seen in this industry is that when you try to be aggressive and move ahead of regulations, it doesn't usually work out. And specifically in the U.S., I think trying to get creative with structures doesn't always work to your advantage. And making sure that you have path to control and you have ways of operationally being able to pivot when things change is pretty important. So the U.S. is really the market where i think those those lessons are going to be most applicable uh you know given the federal legality but size of the business in spite of that uh still you know i think extremely important market and something that we monitor and think of other ways to get in but um you know it feels like until you have the actual opportunity to move in and operate and be able to directly own uh it's better to just continue developing, you know, the portfolio and building up, you know, strength outside of the U.S.

Thank you very much. This concludes the Kronos Group questions and answers session. Thank you very much, and you may now disconnect.