Cronos Group - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 revenue of $33.5M grew 21% year over year and ~4% sequentially; gross margin expanded to 43% from 23% YoY, with Adjusted EBITDA positive at $1.7M. International and Israel demand plus GrowCo consolidation drove mix/price and margin gains.
• EPS missed consensus as a large unrealized FX loss on USD cash held in Canada drove a net loss of $(38.5)M (diluted EPS $(0.10)); management cited CAD strength vs USD as the driver.
• S&P Global consensus had Q2 revenue at ~$33.53M and EPS at ~$(0.02); actual revenue was roughly in-line while EPS was a larger loss than expected* [GetEstimates].
• Strategic highlights: record international/Israel revenue; Spinach maintained strong share in Canada despite flower supply constraints; GrowCo expansion complete with sales expected to begin in Fall 2025, positioning 2H25 acceleration.
• Balance sheet remains a differentiator with $834M cash and short-term investments and no debt, offering flexibility for global expansion and brand investments.

What Went Well and What Went Wrong

What Went Well

• Revenue growth and margin expansion: Net revenue up 21% YoY to $33.5M; gross margin rose to 43% (from 23% YoY); Adjusted EBITDA improved to $1.7M.
• International momentum: Highest-ever international and Israel revenue; PEACE NATURALS retained #1 brand in Israel and expanded to Australia, Malta, and (post quarter-end) Switzerland.
• Brand strength in Canada despite constraints: Spinach #2 brand (4.7% share), #3 in flower (4.9%); vapes #4 overall (6.5%) and #2 in cartridges (8.4%); gummies held ~19.9% share; Lord Jones #3 chocolate (10.2%) and #1 in hash-infused pre-rolls (28.5%).
• CEO commentary: “record sales from Cronos Israel and continued momentum in international markets” and “our debt-free balance sheet and $834 million in cash…provide superior flexibility to execute our strategy”.

What Went Wrong

• FX-driven earnings pressure: Net loss widened to $(38.5)M due to a $(39.5)M unrealized FX loss on USD cash/short-term investments held in Canada as CAD strengthened vs USD; overshadowed operating improvements.
• Canada softness/sequencing: Canada revenue declined 3% YoY in Q2 ($19.15M vs $19.84M) amid ongoing flower supply constraints that capped growth.
• Limited external estimate coverage: Only one estimate for Q2 (EPS/Revenue), implying higher uncertainty; actual EPS loss was larger than expected* [GetEstimates].

Transcript

Operator (participant)

Good morning. My name is Steven, and I will be your conference operator today. I would like to welcome everyone to Cronos Group's twenty twenty five Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Harrison Aaron, Senior Director, Investor Relations and Corporate Development. Please go ahead.

Harrison Aaron (Senior Director, IR & Corporate Development)

Thank you, Steven, and thank you for joining us today to review Cronos' twenty twenty five second quarter financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein and our CFO, Anna Schlemech. Cronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and SEDAR profiles. This information and the prepared remarks will also be posted on our website under Investor Relations. Before I turn the 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 Hifyre. 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 Cronos' Chairman, President, and CEO, Mike Gorenstein.

Mike Gorenstein (Chairman, President & CEO)

Thank you, Harrison, and good morning, everyone. Cronos Group's core business continues to perform well, driven by robust demand across key markets and product categories. Despite flower supply constraints, we grew net revenue by 21% year over year, including the consolidation of Groco. The strong demand we are seeing for our flower is a testament to our focus on developing best in class cordless products. We are pleased with the continued improvement in operating fundamentals in the first half and remain focused on our key goals for the year.

Launching our expanded cultivation capacity at Groco, improving our share position in Canada once this additional supply comes online, continuing to grow the business in higher margin international markets, and remaining disciplined on costs. Our spinach brand continues to be a standout performer, ending q two with the number two cannabis brand in Canada with a 4.7% market share across formats. In the flower category, spinach ranked number three with 4.9% market share despite ongoing supply constraints that have prevented us from fully meeting demand. This limited availability reflects the exceptional popularity of our flower products. Our team is strategically allocating inventory to ensure availability of top selling SKUs while preparing to unlock significant additional capacity for the expansion at Groco.

The initial sales of flower from the expansion are expected to begin this fall. And once fully online, this new capacity will help meet demand and reaccelerate growth. In the vape category, spinach achieved the number four position overall with six and a half percent share. And within the vape cartridge category, spinach holds the number two ranking with 8.4 share, with the spinach pink lemonade vape, the best selling 1.2 gram vape cartridge in Canada. We're incredibly pleased with our strength in vapes and look forward to launching innovative products in this category.

We continue to demonstrate strong consumer demand and brand strength in in this edibles category, with five spinach gummies ranking in the top 10 of all edible products in Canada. Our industry leading gummies maintained an impressive 20% market share in q two, underscoring our continued leadership in innovative high quality cannabis edibles and reflecting strong consumer loyalty to spinach branded products. Our Lord Jones brand has strengthened its premium positioning with the launch of concentrates. We recently launched Lord Jones live resin caviar with standout offerings like Gorilla Grape and Orange Velvet. These high terpene, no compromise extracts pair premium strains with state of the art hardware, delivering a refined and flavorful experience for discerning consumers.

The Lord Jones brand remains the category leader in the hash infused pre roll segment with 28 and a half percent market share in q two. We'll be launching live resin caviar infused pre rolls later this month, expanding the Lord Jones product line into new high end market segments and supporting our leadership in the premium pre roll category. Moving to the international side of the business, our core medical brand Peace Naturals and value brand Lit continue to grow in Israel. Cronos Israel posted another record quarter, growing revenue by 36% year over year by continuing to gain share within a competitive and evolving market. Peace Naturals ended the quarter as the number one flower brand in Israel with well over 20% market share according to pharmacy data collected by Cronos.

Cronos Israel launched several new flower strains in Q2 under both the Peace Naturals and Lip brands, bolstering its best selling portfolio of products. Last quarter, we discussed proposed duty on Canadian medical cannabis imports in Israel, and I'd like to provide an update. Israel's finance minister rejected the proposed duty in April 2025, leading to an attempted legal challenge. In the July 2025 decision, the Israel Ministry of Justice concluded that the minister of finance's veto of the proposed duty was valid. We are incredibly pleased with the decision to veto the proposed duty.

We have been investing and operating Israel for nearly a decade, helping us to become the top medical cannabis provider in Israel. We remain committed to serving Israel's medical cannabis patients, and q two is the second consecutive record quarter for us. We believe in a fair and equitable market structure that benefits Israel and medical cannabis patients, and we will continue to advocate for patient access and fair competition. Internationally, Peace Naturals continues to grow. Germany is a standout market and with the largest contributor to year over year revenue growth for the business overall.

Though potential changes to the regulatory framework proposed in the past month, we see continued growth potential for our products in Germany. In Switzerland, Peace Naturals branded flower is now available within the country's medical cannabis network. We also launched Peace Naturals in Malta in June, and with Australia ramping up distribution, our core medical brand is now available in seven key global markets, including Canada, Israel, Germany, The UK, Australia, Switzerland, and Malta. Providing global medical markets with Cronos' portfolio of products is a key area of focus for us, and we're happy to report that our distribution keeps growing each quarter. Cronos maintains the strongest balance sheet in the industry with no debt and cash equivalents and short term investments of $834,000,000 reinforcing our ability to invest in growth, innovation and global expansion.

Now, I'll turn it over to Anna to walk you through the second quarter financials.

Anna Shlimak (CFO)

Thanks, Mike, and good morning. I will now review our second quarter twenty twenty five results. The company reported consolidated net revenue of $33,500,000 a 21% increase from the prior year period. Net revenue for Cronos excluding Groco was $31,200,000 representing a 13% growth year over year. Groppo's net revenue was $2,200,000 for Q2 twenty twenty five.

Overall, as of last quarter, the consolidated net revenue increase was primarily driven by higher flower sales in international markets and Israel, the consolidation of Groco, and higher extract sales in Canada. Gross profit in the second quarter was $14,500,000 equating to a 43% gross margin, a significant improvement from 23% in Q2 twenty twenty four. The year over year gross margin improvement was driven by the consolidation of Groco, higher average sales prices resulting from regional mix shift and production efficiencies. Operating expenses excluding restructuring costs were $19,100,000 in the quarter, a year over year decline of $2,300,000 driven by a $2,200,000 year over year decline in G and A. While operating expenses have been down year over year in the first half, we expect OpEx to be relatively flat on a year over year basis for the 2025.

Adjusted EBITDA in the second quarter was $1,700,000 an improvement of $12,700,000 year over year, driven by the revenue and margin enhancing consolidation of Proko, a revenue mix shift to higher priced non Canadian markets with Israel and international accounting for 43% of our revenue and reductions in operating expenses. Turning to the balance sheet and cash flow statement, the company ended the quarter with $834,000,000 in cash, cash equivalents and short term investments, down $3,400,000 from Q1 twenty twenty five, driven by approximately $7,000,000 net working capital outflow, as well as by CapEx spend and share repurchase of approximately $4,000,000 each. This was partially offset by positive cash flow from operations before changes in working capital of approximately $10,000,000 and approximately $2,000,000 of FX benefits. In July, we invested $18,500,000 in High Tide through a five year convertible loan. The loan has a face value of $22,000,000 with a 16% original issue discount and bears interest at 4% of the face value of the loan per annum payable quarterly.

If the loan is not converted our yield to maturity is expected to be approximately 8%. Upon mutual agreement of Cronos and Hightide the loan is convertible into Hightide equity at a price of 4.2 Canadian per share. Additionally, with this investment, we received a five year common share purchase warrant exercisable for up to 3,840,000.00 common shares of High Tide at an exercise price of CAD 3.91 per warrant share. In closing, we posted another strong quarter demonstrating sustained growth and continued improvement in our operating fundamentals, despite the flower supply constraints we have been experiencing. We look forward to fall twenty twenty five flower sales from Groco's expansion to relieve these supply constraints and drive further growth for our business.

With that, I'd like to hand it back to Mike for a brief comment before Q and A.

Mike Gorenstein (Chairman, President & CEO)

To wrap up, our performance this quarter demonstrates that Cronos' core business is strong and resilient, With leading brands like Spinach and Lord Jones, accelerating international momentum with our medical brand Peace Naturals and the Groco capacity expansion, we're well positioned to capture both top and bottom line growth. We're confident in our strategy and excited about what's ahead for the rest of twenty twenty five. Thank you, and we'll now open the call for questions.

Operator (participant)

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. One moment, please. One more moment.

Okay. I am showing no questions at this time. I'd like to thank you for your participation in today's conference. This does conclude the program. You may now