Charlotte's Web Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Charlotte's Web Holdings Inc. First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cory Pala, Investor Relations. Please go ahead.

[Cory Pala:]

Thank you, Megan. Good morning and thank you, everyone, for joining us for our 2021 first quarter earnings conference call for Charlotte's Web Holdings. My name is Cory Pala, Director of Investor Relations, leading the call today is Charlotte's Web's CEO, Deanie Elsner; and CFO, Russ Hammer.

[Deanie Elsner:]

Thanks, Cory. Good morning from Boulder, Colorado and thank you for joining our call this morning. As we close out of the first quarter of 2021, three themes are beginning to emerge. First, there is a return of retail. Second, the category is experiencing some competitive contraction. And third, within the category, there is a consumer demographic extension. Regarding the return to retail, closing out of Q1, we began experiencing a return to pre-pandemic category run rates in FDM coupled with strong improvements in the medical and natural channel run rates. Over the last year, the pandemic lockdowns had the biggest impact on takeaway in our bricks-and-mortar retail. Q1 2021 B2B run rate continued to build on the recovery we experienced in the second half of 2020, driven by expanded distribution and improving sales velocities. Now with the pandemic winding down, B2B retail run rates which are further improving.

[Russ Hammer:]

Thank you, Deanie and good morning, everyone. Q1 revenue, Deanie spoke to Q1 sales already, so I won't repeat them. What I would add is that, although we have not provided prior guidance for the first quarter, net revenue of $23.4 million was within our expectations. Q1 is seasonally our softest quarter of the year. Turning to gross profit. Gross profit was 58.4% for the quarter, resulting in a gross profit of $13.7 million, which was $1.4 million lower than $15.1 million gross profit last year, despite the higher revenue this year. Quarterly gross margin variations have primarily reflected product and channel mix during the respect of quarters. Lower gross margin in Q1 was primarily due to a higher revenue contribution from our lower margin gummy products. We expect high sale contributions from our leading gummies line to continue in 2021, but with improving margins from manufacturing cost reduction plans later this year. In addition, we will strategically decrease overall COGS as our new production distribution facility becomes fully operational with improved manufacturing and efficiencies as volumes ramp up. Where 2021, overall we modeled forward consolidated gross margins to land within the low-to-mid 60s range, generally increasing through the year. Now turning to operating expenses. Total OpEx for the first quarter was $24 million or up 2.9% from a year ago, but generating higher revenue which was up 19.1%. We are pleased with this result, our OpEx level also reflects the success of our expense reduction program that we implemented last quarter to reduce our OpEx by at least 10% from the Q3 2020 feet and bring our costs more in line with our pandemic impacted revenue levels. We have been well ahead of that plan with our OpEx run rate down 15.2% in Q1from our Q3 2020 run rate. Through this initiative, we are forecasting more than $12 million annualized cost savings for 2021 from our high point – Q3 2020.

[Deanie Elsner:]

Thanks, Russ. Over the last 15 months, we'll discuss our intent to expand our footprint with what is arguably the most recognized brand in the cannabis sector. Over the last six months, we've made moves to expand geographically and within the sector, which I want to highlight for you now. In December of 2020, we announced a strategic partnership with Canndoc, a division of InterCure in Israel. And train Israel with Canndoc was a strategically important decision for Charlotte's Web. Israel is one of the most advanced countries within the cannabis sector in terms of clinicals and research. In addition, InterCure has 100% distribution within every cannabis approved pharmacy in Israel with potential to access, to distribute into Europe. We are closely monitoring the regulatory environment in Israel as we map our plans to strategically expand our portfolio footprint. Last month, our proprietary cultivars were approved by Health Canada to be added to the list of approved cultivars. This was a critical first step in our expansion plans into Canada as current international laws do not allow for bulk importing of U.S. grown hemp CBD or related products into Canada. Hemp CBD wellness category is underdeveloped in Canada with limited offerings of quality, full spectrum hemp extract products. Most CBD products in Canada are produced from cannabis with THC levels well above 0.3%, which have an intoxicating effect. We believe that our patented full spectrum cultivars will be a competitively advantaged in Canada – in the Canadian market because of our high quality and consistent hemp extracts. We are employing an asset light model approach to the Canadian market benefiting from a well-established but underutilized infrastructure. We are finalizing strategic partnerships for cultivation, extraction, production, and distribution, and we expect to be planting next month. Finally, in March, we disclosed our intent to enter cannabis, the cannabis wellness space, when we announced an option purchase agreement with the Stanley Brothers Cannabis company pending U.S. federal legalization. There is a significant activity happening at the State and federal levels and we are keeping close pulse on how to legislatively resolve towards federal legalization. Between the Safe Banking Act, the States Act, the MORE Act and the push for federal legalization, there is clearly momentum, while it is unclear how quickly the landscape will shift in the U.S. We continue to consider various options in other company – countries where cannabis is federally legal, including Israel and Canada, where we have disclosed material first steps. We are positioned for both hemp CBD and cannabis wellness markets in these regions, employing an asset-light model through partnerships and leveraging our brand strength and proprietary genetics. We look forward to updating you on our progress on these long-term strategic initiatives throughout the year. With that, I'll ask the operator to open the line for questions.

[Operator:]

Certainly, at this time, we would like to take any questions you may have. Your first question is from Derek Dley with Canaccord Genuity. Your line is open.

[Pulkit Sabharwal:]

Hi, good morning. Thanks for taking my question. It's actually Pulkit filling in for Derek. Thanks for providing a lot of color on the gross margin. And I know you guys touched upon that a little bit and how you see it improving over the year. But I just wanted to see if you could provide some more color in terms of reducing the product mix shifting, or if you can provide us some more color regarding the SG&A part of it as well? Thank you.

[Deanie Elsner:]

You know what, I’ll kick off and then I’ll let Russ get into the specifics. In terms of the category, as we mentioned in the prepared remarks, there is two areas we see the product mix shifting having the biggest impact on our portfolio mix in the year. The first is into new forms of ingestibles very specifically gummies, that's coming as a result of the consumer demographic base moving more towards millennials and the Gen X, who have a propensity to go after more recognized formats. And so, ingestibles continues to grow, but that growth within ingestibles likely is going to continue to shift and continue to shift going forward into gummies. Second, historically, topicals has been the weakest part of our portfolio with sincerely a gap in our portfolio. The acquisition of Abacus last June enabled us to strengthen our portfolio in the topical segment, specifically now, as we move forward into 2021, we will be looking to expand distribution on those topical products both the Abacus products as well as the Charlotte's Web products in the channel that they have not been represented in before specifically, the natural channel and parts of food, drug, and mass. And so, there is real white space opportunity for us to continue to see topical – our topical portfolio develop and we expect both dummies and topicals to have the biggest product mix impact to our portfolio this year, driven specifically by channels and consumers. Russ can speak specifically to numbers.

[Russ Hammer:]

Derek, I just had one thing to what Deanie said, and that is the product mix, the gummies that we mentioned up 103%, we see that strengthening as we go forward. And that is our lower margin product as it was shifting from tinctures and capsules. But we think that the volume growth is going to be tremendous in that area.

[Pulkit Sabharwal:]

That's very helpful. Thank you. And then one more, if I can, it would be regarding the return you guys mentioned for B2B vertical. If any more color you can provide us regarding it? That'd be really good. Thank you.

[Deanie Elsner:]

Absolutely. We're not going to provide specific channel growth rates, specifically, because we feel like that is competitively a bit sensitive. But I will say, as I mentioned in my prepared marks, both the medical channel and the natural channel which are two of our biggest channels in B2B are rebounding in an incredibly strong way. And so, we would expect medical continue to be strong growth this year, as we both build out the portfolio of the Abacus products in those channels, as well as incrementally expand distribution behind innovation. As well as we take a number of our new topical products into the natural channel. We had to work a little bit on those topical products to ensure that the ingredient stream in topicals was acceptable to the natural channel, that has been completed, we're literally in the process of launching topicals in the natural. Now those two channels are really important, because those two channels are channels where consumers are early adopters and/or highly influenced by the medical profession. So having those channels grow disproportionally and our B2B business has a disproportionate impact to how it'd be returned to the pre-pandemic growth levels and that's what we're most excited about seeing. In terms of food, drug and mass, we are seeing retailers again begin to open up to broader distribution opportunities in both the topical channels, but even in the beginning of the ingestible segment. And so for those reasons, we're feeling very good about the return to growth in B2B and feel like we're really well positioned with our portfolio development, as well as our channel development to benefit in the most disproportionate way.

[Pulkit Sabharwal:]

That's excellent. Thank you so much.

[Deanie Elsner:]

Absolutely.

[Operator:]

Your next question is from Gerald Pascarelli with Cowen. Your line is open.

[Gerald Pascarelli:]

Hi, thank you. Good morning team. Thanks very much for taking the questions.

[Russ Hammer:]

Good morning, Gerald.

[Gerald Pascarelli:]

Good morning. So it’s encouraging to hear that the market seems to be becoming less saturated. But that said, over the past few months we have seen increased entry by some of the large Canadian operators into the U.S. CBD space, we've seen some recent – some more recent notable M&A. And so, I guess looking forward as you assess the competitive backdrop from like – from some of these larger companies, just how are you thinking about protecting, what is a market leading position in the U.S.? Thanks.

[Deanie Elsner:]

Absolutely. And Gerald, I think it goes back to classic consumer product good strategy. If you look at how this sector – this total cannabis sector is developing, it's very consistent with what we see in consumer products goods. There are consumers that are segmenting out. There are need states and conditions that consumers are shopping against. And as a brand and a portfolio brands within the sector, our job is to position these brands to take advantage of the greatest growth opportunities. And so, we do that by growing the brand, by growing innovation, as well and train new adjacencies. In terms of brand strength, I think the market share is our largest and fastest indicator of how well our brand is being received by consumers. They have a 34% share of the food, drug, and mass channel is incredibly advantage. To have that grow 6 points versus previous Q1 of 2020 and expand that position versus Q4 indicates that we are disproportionately taking market share and our brand is strong, and we're seeing that consistently played out in terms of awareness, conversion in terms of loyalty. So all of those brand health metrics are indicating brands matter, and we're winning that game. The second place is through innovation and you'll – you saw us just launch last month new products that where we have a bit of a gap in our portfolio, and that’s specifically the THC-free products. These are for consumers who don't want or cannot have any level of THC in their CBD wellness products. It took us a little bit of time to figure out the right way to develop the products that satisfy the needs of our consumers, but was consistent with the quality expectations we have for Charlotte's Web, that has now been launched and well-received, and we really see students, athletes as well as frontline workers taking advantage of that product. And I think the third is entering new adjacencies. And I – as we look at that, expanding further into the medical channel, as well as looking towards cannabis wellness, we know there is a lot of white space for us to enter. So from a brand standpoint, from a channel standpoint and portfolio, we're well positioned. Beyond that you differentiate on the science, as well as protecting your patents so that you drive value in an advantaged way in the marketplace. And so all of those things are coming to fruition, if you saw our Q1 release this morning, we have expanded our patent protection on our genetics. We've defended trademark challenges on our brand trademark, and we're continuing to advance our cultivation outside of the U.S. And so for all of those reasons, we're seeing a really nice return to B2B, and I think when it does return, we will disproportionately be advantaged.

[Gerald Pascarelli:]

Got it. Thank you, Deanie. That's super helpful. Next question is just on pricing. So as you've assessed the competitive landscape, have you noticed that competitive pressures, competitive pricing pressures have subsided some kind of given your commentary that some of the smaller brands have been essentially removed from the market at this point. Is that a fair assessment?

[Deanie Elsner:]

Yes. And I just will go to a comparative standpoint in terms of pricing. If you step back and take a look at Q1 2020, our competitive price gaps across our portfolio versus the competition were well over 100%, our products were well above 100% more expensive than the average price point across our channels. Fast forward to our price gaps today, and they're well within the gap range we need for us to drive the highest velocities. And in fact, we’re seeing the velocity improvement happen as of August of last year. And so I'm really quite pleased about the progress we've made in managing the average price of our portfolio to a price gap that we know we can win in market across our channels. To your question directly, are we seeing the same competitive saturation and pressure on price that we were seeing in the last 12 months or potentially the last 18 months? The answer to that question is. No. It's not as dramatic, for sure it’s still going to be there, although, there is some reduction in the competitive landscape, it hasn't brought in half. And so there are still competitors in the marketplace, who are challenged in an operating environment who will use price as the only differentiator to survive. But we do not have that pressure that we had, and we're at a very comfortable place in terms of price gaps versus our competitive set.

[Gerald Pascarelli:]

Got it. Super helpful color. Thanks very much. I'll hop back into the queue.

[Deanie Elsner:]

Thank you.

[Operator:]

Your next question is from Scott Fortune with ROTH Capital Partners. Your line is open.

[Scott Fortune:]

Good morning, and thanks for taking the call. Just want a little bit of follow-up of how much COVID has impacted sales trends and the foot traffic in 1Q obviously, from that standpoint? And you're seeing it normalized, and when you say normalized, how quickly are we getting back to where we were with pre-robust for traffic pre-COVID, kind of what level do you expect that to kind of occur as vaccinations open up here in the U.S.?

[Deanie Elsner:]

Yes, it's a great question. So just to give you some data points we can respond to. Our reported B2B revenue in Q1 was down 1.4%. And so, that was a disconnect for us Scott, because as we looked at all of the brand health indicators, our market share, our awareness, our conversion, our loyalty, everything was up. So as we stripped it back, what we found was, we had some non-retail drying revenue in our B2B numbers that was distorting our B2B numbers. So when you pull that out, because it wasn't actual retail revenue. A like-for-like comparison of our retail in Q1 was up 11%, that's very consistent with the additional data KPIs that we're seeing in share awareness, conversion and loyalty. And so that's a much more accurate reflection of our numbers. In fact, we've gone forward, and we've shared with you what we're seeing in the B2B channels as of April. And our April numbers across our channels are between a 20% and 30% up. Now that threshold, the category threshold for the pre-pandemic run rates in total B2B channels has now crossed over the impact of the pandemic from last year. And so I can tell you, from a category standpoint, we've crossed over, and we're beginning to hit the run rate. And I can tell you from a business standpoint, we've crossed over, and we're hitting the run rates. And so I don't want to declare that pandemic is over and that things are immediately back to normal. But I will tell you, we're very encouraged by what we're seeing in the B2B channels. Beyond that, our sales team has done a tremendous job in seeking out new channels for revenue beyond what we've reported on in the past. And we've had really nice success in those channels. And so we're quite encouraged by what we see in B2B to the point where we want to firmly declare that B2B as a percent of our business will be greater than it was last year and getting back to a normalized rate.

[Scott Fortune:]

Okay, appreciate that color. Thank you. And then a follow-up for me is you mentioned kind of Abacus and the health care channel, the practitioner channel will open up as we reopen the country from that standpoint. But any color on the Abacus products and selling online into your platform? And then also kind of a little bit of update on the pet side as far as growth opportunities there?

[Deanie Elsner:]

Yes, absolutely. So let's step back on Abacus first. The biggest opportunity we had in the Abacus acquisition was in the healthcare practitioner channel. About 65% of their revenue was sold through the health care practitioner channel, that's an incredibly important channel because 50% of consumers who come into this category come in because their healthcare practitioner has recommended them to come in. And so having the right portfolio, being able to partner with and influenced key opinion leaders is a big part of how we build our brand footprint in retail. So for sure, our biggest opportunity for Abacus continues to be in the healthcare practitioner channel, both in the business they've built as well as expanding that portfolio with new products and entering new segments. As you know, health care practitioners is a very big channel. So for sure, the number one priority for us with Abacus is building out our footprint in the healthcare practitioner channel. The second biggest opportunity for us with Abacus is expanding it into our B2B retail channels, where to-date, it has not held distribution. It's a really important product line, as I mentioned, the Abacus product line is an over-the-counter topical CBD product line, and that sits in a very different place in retail. And so we are actively working towards expanding the distribution footprint for the Abacus products in the food/drug/mass channels, which include also a natural channel. So medical and channel expansion in our B2B are the two biggest priorities we have on Abacus. You are right, eCommerce is a big opportunity, and we will expand eCommerce as we target new consumer segments with OTC topical products. But by far, the biggest revenue opportunities are in medical and retail expansion on that product line.

[Scott Fortune:]

Thank you. And real quick, the pet line, any color on the pet?

[Deanie Elsner:]

Sorry. Sorry. My – I didn't – my pen – I'm out of ink and I didn't write that down. So in terms of pet, we're seeing a really nice expansion in our pet line. That's coming online as well as food/drug/mass retailers who are beginning to expand their pet offering as well as specialty retail pet expansion. And so Q1, we lapped a big inventory build as we expanded our pet products in Q1, but our run rate in pet are encouraging. And you will see new products from our pet line being introduced in the back half of this year. So we're excited about what pet brings to our portfolio and it continues to be an opportunity in a white space for us to enter.

[Russ Hammer:]

Scott, I’ll just mention one thing. We have recently – and it's in our filings. We have brought on Carli Lloyd, Captain of the U.S. Women's National Soccer Team as a CBD medic sponsor because she actually came to us, she used the product for over a year before she came to us and told us how she recovered from her injuries with it. So I just wanted to share that as well.

[Scott Fortune:]

Okay. And you still have Gronkowski on board, correct?

[Deanie Elsner:]

We do. Gronk is active with our business, and we're in contact with him frequently. He uses our products. But because he's back in the NFL, we're unable to expand his voice as far as we would like to. We'll wait to see how this season plays out and how his career ends up. But yes, we're actively involved with Gronk at this point.

[Scott Fortune:]

Great. I appreciate it. I’ll jump back in the queue.

[Deanie Elsner:]

Absolutely, thanks Scott.

[Operator:]

Your next question is from Pablo Zuanic with Cantor Fitzgerald. Your line is open.

[Pablo Zuanic:]

Thank you. Good morning. Two quick questions. One, can you give more color about your discussions with the FDM channel? I think you did mention you plan to expand there, but what are they telling you, are they waiting for the FDA? Or are some of them just moving forward, with our drugstores, mass merchandisers, supermarkets. And the second question regarding bill 841. You talked about the bill version of it in the Senate. Is that a risk that the big bill for marijuana, somebody is working on takes presence over CBD or gets included in this marijuana bill? Or do you think that will just be a separate path for 841? Thank you.

[Deanie Elsner:]

You’re welcome, Pablo. So I'll tackle your first question – or your second question first and then come back and give you some color or retail. From a legislative standpoint, absolutely, there is momentum building for cannabis across the country, and we're seeing a number of bills being introduced to improve the operating environment as well as potentially challenge the federal legality of cannabis. Cannabis versus CBD are two different ends of the spectrum. CBD has already gone through the legalization standpoint. It's already pushed out the regulatory standpoint, and we're at the back end of the approval, waiting for final direction on regulations versus cannabis that is coming in and in the very early stages of legalization and building an operating landscape. And so yes, there is momentum shifting towards cannabis in terms of just the legislative process. On CBD, I really do believe, given our discussions with folks on the hill that the intention of the Senate and the House is to land the regulatory environment for CBD, why? Because it opens up an entire industry and sets the path for cannabis to follow going forward. Cannabis will have to go through the same process of getting the regulatory environment locked up, proving the science and giving the FDA comfort that they have controls over the product they're putting into the market place. So I am not concerned that cannabis morphs and takes over CBD, I'm much more focused on clearing the final hurdle on CBD and then shifting our attention to how we evolve our portfolio to take advantage of the emerging cannabis wellness opportunity we see coming forward. In terms of the retail channel and a little bit more color in terms of retailers, we're not in a position today to comment on the retailers that are leaning a little bit further into the channel. But we are seeing, Pablo, across the board and across the country, a number of different retailers beginning to have interest in expanding their offer, both on shelves and across segments. They have not shipped that buffer yet, but we are ready in ourselves to ship those offers. And I think what that indicates is, the date the FDA has not positioned themselves to regulate this category. A number of competitive retailers as well as companies are benefiting from the revenue opportunity this category provides and consumers want access to it. And so I think there will come a time if the FDA doesn't act, retailers will act and move forward. And at this point, we're having those discussions, and we've got a number of those commitments and we will look forward to Q2 when we can share some of that news.

[Pablo Zuanic:]

Great, thank you.

[Russ Hammer:]

Thanks Pablo.

[Operator:]

We have no further questions at this time. I turn the call back to Deanie Elsner for closing remarks.

[Deanie Elsner:]

That's good. I do thank you very much for taking the time this morning to join our call. I'm really looking forward to the year as it evolves. I'm looking forward to coming out of the pandemic and I really thank my Charlotte's Web's colleagues for everything they've done to get us to this point. We are exiting the pandemic as a stronger company than we entered the pandemic, and we're looking forward to an opening of the retail environment. So with that, thank you for your time, and look forward to talking to you in the future.

[Operator:]

This concludes today's conference. You may now disconnect.