Charlotte's Web Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Charlotte’s Web Holdings Inc. Fourth 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, Mr. Cory Pala, Director of Investor Relations for Charlotte's Web.

[Cory Pala:]

Thank you, Deborah. Good morning, and thank you for joining us for our 2020 fourth quarter and year-end earnings conference call for Charlotte's Web Holdings. My name is Cory Pala, Director of Investor Relations and leading the call this morning is Charlotte's Web's CEO, Deanie Elsner; and CFO, Russ Hammer. The earnings press release, financial statements for our fourth quarter and year-end as well as our MD&A can be found in the Investor Relations section of our website, and these have also been filed on sedar.com.

[Deanie Elsner:]

Good morning from Boulder, Colorado and thank you for joining the call this morning. Before I begin, I want to express our condolences to the families of the victims of Boulder shooting 3 days ago. A tragedy like this impacts us all, our hearts go out to the families of the victims killed as well as to the family of heroic police officer, Eric Talley, who lost his life in the line of duty. This event occurred about 1 mile from our head office, so it hit post the home. Looking back, Charlotte's Web entered 2020 with plans to address 2 distinct headwinds

[Russ Hammer:]

Thank you, Deanie, and good morning, everyone. We certainly appreciate you joining us this morning. Our Q4 and 12-month financial statements and the management discussion and analysis have been filed on SEDAR. I trust you've had a chance to review along with this morning's Q4 earnings press release. Fourth quarter net revenue of $26.9 million continued our important return to consecutive quarterly growth of 7% over Q3 revenue of $25.2 million. The important takeaway is to return to quarter-on-quarter growth following the declining sales due to COVID in the quarters leading into the second half of the year and the all-important pivot back to quarterly growth. The return to quarter-on-quarter growth reflects both macro and microeconomic factors. On the macro side, we've seen significant culling of smaller competitors in the segment but we do not expect will return. We have seen this across a range of competitors from big to small. The ebb and flow of the pandemic impact has also been a factor at retail. We saw recovery in the back half of 2020, which resulted in a quarter-on-quarter growth in our retail and healthcare practitioner channels as B2B and HCP channels began reopening during Q3 and the distributor orders increased. This was mitigated, however, somewhat in December as regional lockdowns restarted and reduced some of the distributor pull. Regions have been reopening again as vaccinations are increasing, so we are fairly optimistic going forward. We currently expect that retail will continue to strengthen through the year. We are no longer able to accurately break out Abacus-specific P&L following its full integration into the Charlotte's Web family business, but we can confirm that net revenue from the acquired product line continued to grow quarter-over-quarter as before. We are very pleased with the integration and continued progress in the Abacus healthcare practitioner channel that was hit so hard by the pandemic in the first part of 2020. Since the pandemic began, retail sales declines have been mostly offset by our strong DTC growth. Our Q4 DTC sales were up 41% year-over-year. Our DTC business has been a consistent performer. This was further driven by the pandemic as consumers transition to online purchasing of our products.

[Deanie Elsner:]

Thanks, Russ. Earlier, I spoke about managing our business for the long term. Our intent is to expand our market share leadership in the CBD category by filling gaps in our portfolio and expanding our footprint internationally. In addition, we plan to increase shareholder value by positioning our company to enter adjacencies in the sector where we have a right to win. I'll speak briefly to how we're approaching each of these areas. In terms of new products, we will selectively launch high-quality, competitively priced product offerings into each channel where we have adapted in our portfolio. For example, recently, we announced the launch of our THC free offering to address consumers that do not want or cannot have THC. Through a unique extraction process, this product line maintains a broad spectrum of cannabinoids and terpene to deliver the wellness benefits of CBD without the THC. And later this year, we'll be transitioning our product lines to certified organic. This has also been a big consumer push as they desire organic products to produce in a regenerative way with transparency, and we are expecting us to deliver. In December, we announced an exclusive distribution agreement in Israel with InterCure, owner of Canndoc, one of Israel's largest and most established medical cannabis producers. This marked a first public step in our international strategy. There are a few important markets that we are targeting as the regulatory environments evolve. Our objective is to provide high-quality consistent products around the world. We're encouraged by what's happening in Israel and chose a partner that has tremendous scale and access because we believe the CBD market is on the cusp of fully launching there. We are also exploring distribution into Greater Europe and possible manufacturing with Europe and Israel. In the coming months, we will share with you our plans to support our international expansion strategy for '21 and 2022. Finally, this month, we announced that we have secured future optionality to enter the cannabis wellness space in the U.S. through an option purchase agreement to acquire the Stanley Brothers USA Cannabis Wellness Company following U.S. Federal legalization of cannabis. Stanley Brothers Holdings is a multistate cannabis wellness incubator and innovator with sales in Colorado, California and Florida with expansion underway in 8 additional states. The Stanley Brothers pioneered cannabis wellness with the same heritage and philosophy that drove the success of the Charlotte’s Web brand. This provides Charlotte's Web strategic optionality in a fast-moving U.S. legislative environment. Both companies will operate as standalone entities in the U.S. until the option is exercised, but we will explore international opportunities where cannabis is federally permissible. We view cannabis wellness as the space in the sector between full spectrum hemp through CBD and low dose THC. Charlotte's Web is arguably the most recognized brand in the sector globally, and it is a market share leader in CBD. We have a right to win in cannabis wellness and by expanding our brand equity and extending our consumer reach, this is a strategic move that increases our total available market by 2 times to 3 times driving shareholder value. This is a move in the right direction that reinforces our long-term destination that begins to frame the space in cannabis wellness. With that, I'll ask the operator to open up the call to questions.

[Operator:]

We have Gerald Pascarelli with Cowen.

[Gerald Pascarelli:]

So I look at the retail numbers, and I think double-digit quarter-on-quarter growth certainly came in better than maybe my going in expectations given the second wave of COVID cases that really took form in November and in December, which is encouraging. I guess, 2-part question. First, do you have any idea how much COVID impacted your trends in 4Q? And then as a follow-up, as we're almost through the first quarter, any color you can provide on how your top-line progressed from January through March, I think would be helpful in this environment?

[Deanie Elsner:]

Absolutely. Unfortunately, I can't give you a perspective on how COVID impacted our Q4. I will tell you that coming off of Q3 we saw a decent momentum going into Q4. And as the lockdowns post-Thanksgiving began to be reinstituted, we saw a little bit of a slowdown in B2B. And that kind of is how it played out on the quarter. And so I think Charlotte's Web is quite advantaged in that we've got a multitude of different channels to push and pull on when one channel goes down, we have the opportunity to shift and drive harder in other channel. I think that is, in large part, how we were able to keep our Q4 results where they were. And so that's the level of optionality I'm quite excited about. In terms of Q1, Q1 historically has been -- Q4 is usually the peak of the CBD category in terms of seasonality. So Q1 tends to come off a little bit. But we're continuing to see the foot traffic and the consumption happening in Q1. The data is a little murky. We can't see it completely because it lagged so far back. But from what we can see, we have a belief that we will continue to perform at a level that we're pretty excited about and have the opportunity to do more. So that's where we've got so far. Q1 eCommerce traffic, I think, remains decently strong and B2B appears to be returning. The natural channel, specifically in B2B is a little slower on the return. We lost a number of natural retailers with the pandemic. And so I would expect to see those numbers return probably about mid-summer in terms of full traffic.

[Gerald Pascarelli:]

Next question is just on pricing. Obviously, you took the 15% price cut. The commentary seems favorable that there's ultimately a -- there seems to be a shake out with some of the smaller competitors. So through that lens, can you just provide your outlook on the competitive environment as it relates to pricing? And then how comfortable you are with your gaps today? I think would be helpful.

[Deanie Elsner:]

Absolutely. So in terms of pricing, we took a pricing action across our portfolio in the way of the price deal realignment, which enabled us to reallocate our trade dollars and pass along savings from our supply chain and in that way we were able to fund the pricing. Now when we took that pricing action, our price gap versus our competitive set was over 100%. So we were really quite premium priced in the marketplace. That price deal realignment enabled us to get our price gaps work within a much more comfortable range that we feel like our products justified the premium upcharge. That pricing action took place at the end of March. And we began to see the sales velocities very specifically in the B2B channels about mid-August, they were pulled over in about mid-August, during the pandemic is when we saw them come through. At that point, we saw unit velocities pop up quite favorably as well as our total sales velocities. So it took that long to see it come through in B2B. That pricing action depresses our top-line by about 15% list price adjustment, but it did help result in us reestablishing our double-digit growth in both of our channels. So it was the right action. We're now in a really comfortable price gap that is something we feel like we can command. And it will continue to be something that we launch as we go forward very closely. In terms of the marketplace and the impact of that price gap had on the broader category, we're definitely seeing a culling of the market in 2020. Our competitive set at the peak last year was about 3,500 brands. Our numbers would indicate that there's about less than 2,500 brands in the marketplace today. We see a lot of the small brands dropping out. And the larger companies are starting -- that were starting to dabble on the outskirts of this category, have paused their efforts. So the culling has had taken place. We are seeing continued heavily fragmented consolidation of the leaders. And here are some amazing numbers. In the food, drug and mass channel, there's 115 different competitors competing today. 7 of them represent 65% of the retail sales in the latest 4 weeks. And so as these smaller players drop out, you're going to see even more momentum shift to those bigger players. In natural, the numbers are even more compelling and natural is about 306 different competitors on any given day. And 5 competitors generate about half of the sales. And so we think that we're going to continue through the rest of this year, see a culling of these brands and a fall-off of companies that can't sustain the marketplace. And then, of course, the category growth will explode as FDA lands a regulatory environment and F/D/M is reestablished as kind of a powerhouse set of channels. And so that's how pricing went, that's how we're seeing the market play out. And we are really looking forward to seeing the FDA eventually land this regulatory environment.

[Operator:]

The next question comes from the line of Scott Fortune with ROTH Capital Partner.

[Scott Fortune:]

Deanie, as you mentioned, you saw 2020 year like consolidation with COVID on the sales side and competition. But you've been busy adding to your supply chain distribution kind of the new categories of pet, topicals and practitioner channels to 22,000 doors. But can you provide a little more color on the next legs of growth and how are you looking at the global market, the strategy there? Where are you at on novel foods kind of certification and the potential revenue opportunity in the international side, looking at more of an asset-light model internationally and just more of a 2022 story? Just kind of help us understand that a little bit clear -- closer, that would be great.

[Deanie Elsner:]

Absolutely. Happy to do so. So in terms of the white space opportunity or where do we see growth? If you look domestically, it's really going to be around managing our portfolio gaps. Specifically, I mentioned THC-free organic and also expanding out platforms where we see real consumer stickiness. And obviously, for us, that’s gummies -- not to pun on the word, but gummies are a tremendous platform for us, and you'll see us do more there. And domestically, we'll also go after new conditions, mainly topicals uniquely targeting consumer conditions, new forms, depending on those conditions, the best way to deliver CBD to consumers. And then new consumer segments, whether that's a new offer, new brand and a new channel. So that's kind of what's happening domestically. You are absolutely right. We are looking at international and in order for us to look at international, we've got to be highly aware and engaged in the regulatory environment, it takes to compete in these different countries. And so we've been very, very involved in what's happening both in the UK and in Europe as well as Israel and Canada, looking at the regulatory environment to ensure that we've got the right applications and the right path forward to participate in those categories. I won't speak too much about that, Scott, because this is all still quite proprietary for us. And I don't want to overshare but we are -- our intent is to be international. Our intent is to be where the category is, and our intent is to be the market share leader in those categories. And so you mentioned an asset-light model. I think what’s key for us is that we lead with our cultivation. Our genetics are incredibly important to us, and we've got to ensure that we maintain consistency all the way through the system. And so cultivation would be the key but you're right, we won't be building a vertically integrated supply chain in every country we compete in because the market is more establishing, we're able to do it in more of an asset-light way.

[Scott Fortune:]

That's great. Appreciate the color. And then just a follow-up on the ValidCare data, the recap there, right? The FDA was looking for data around liver toxicity and such, and that came back very positive. Kind of help frame the next step for the FDA now that they have, this data is being submitted to them. And any updates on Congress. Congress is pushing forward with the SAFE banking, it seems, which will help out the CBD industry. But your sense of this being a priority for Congress to kind of move this -- accelerate this forward for guidelines and regulations?

[Deanie Elsner:]

Yes. I think it's definitely a priority for Congress to move this forward. And I think it's why there's such strong bipartisan support of H.R.841. We are on the back leg of getting the regulatory environment established for the CBD category. And as you know, between the SAFE Act, the STATES Act and the MORE Act, there's a lot of energy coming forward with cannabis legislation. And so our objective is to help push the legislative action through Congress so that we can push the FDA to take a stand on the regulatory environment and begin to enforce. I think we're quite excited about what's ahead of us as the FDA lands regulatory, but in full transparency. The Farm Bill Act of December 2018 legalize the agriculture of CBD and hemp. But it really left far more stranded because it didn't open up the distribution path that put consumers at risk because it forced them to be the person managing their own safety. And it challenged manufacturers because of lacked federal preemption. So we really need Congress to go back and clean up the tail of the law they've established so that the FDA can focus on regulating the environment. And I think when that happens, that's when you're going to see the explosion of this category open up and consumers have access to products and brands they want. Until then, we will continue to push on every parameter we can that help the FDA with data and push legislative forward and continue to operate across our channels where we can have the biggest impact.

[Operator:]

Next question is from Derek Dley with Canaccord Genuity.

[Derek Dley:]

Deanie, just wondering, you provided those comments and you say you got a #1 market share in a few different categories. Can you provide some just more color around that? Like what is #1 market share? Is it 20%? Is it 15%? Any context there will be helpful.

[Deanie Elsner:]

Yes, absolutely. And when you look at the market share -- and again, I'm going to say this, Derek, taking all this with a grain of salt because the data is not especially strong despite the fact that there's really good companies trying to read the data. But if you look at Q4, our total combined market share, in Q4, was about 34% in the food, drug and mass channel. If you shift that over to the natural channel, that was something more in the area of about 14% to 15%. And so natural is a much more saturated channel. It's a channel that we've been unable to compete with a broad topical selection, which clearly we're going to fix this year. But despite that, given what we have done in the last year, we've now moved into the #1 share position in channel -- in natural. So you're right. The numbers are quite as big. Right now, our share position in natural is about 1.5 points higher than our nearest competitors. Whereas, in the food, drug and mass channel, the share versus our competitors is in the 18 to 20 point range. Now again take that with a grain of salt because the data is relatively -- the data is relatively projected out, and we just -- we're looking at it every 4 weeks and trying to get a handle on it, but we're finally at a position where we feel like the data is stable enough to start sharing, and we're quite pleased with the position we're in. And we know the products we like to launch into these channels. And so we feel like that position will continue for the remainder of this year.

[Derek Dley:]

That's great. Appreciate the color there. Just a question on inventory. How do you feel about your inventory position heading into the rest of 2021? And I guess, what are the plans for -- are there plans for a new crop to be planted this year? How are you guys thinking about that?

[Russ Hammer:]

Yes. Derek, hey, it's Russ. We feel pretty confident in our inventory levels as we're going into 2021, and we do not have a need for a big grow. We will have some R&D type grow, but that will be most of what we have because we have enough biomass and extract on hand for our '21 demand.

[Deanie Elsner:]

So -- and just to point out, we did grow in 2020 Derek, and I think we've talked about this in the past, but it was really quite selectively growing. So instead of doing a broad cultivation grow in 2020 because as Russ mentioned, we're in a good position from an inventory standpoint, and we feel like we'll be in a position where we can take advantage of if there's a near-term injection of growth of say, the FDA lands, we'll be in a position where we can support that. But our 2020 cultivation really focused on new cannabinoids. And so we planted more R&D cultivation to start building our CBG cannabinoid profile as well as some other minor cannabinoids that we have interest in translating through to new products. And so for us, our inventories are solid on biomass. Our inventories are solid on extract, are ready to support any large growth that might be ahead of us. And now we're starting to pivot out to other minor cannabinoids that we have interest in driving new products behind. And I think that's the right profile for us because I think we're in a position where we can lead innovation and we can lead news in the marketplace. And we certainly have the institutions who are interested in researching all of this further. And so we're in a good position and one that I think is enviable in the market as we look at new products.

[Operator:]

And your next question comes from Jason Zandberg with PF Financial -- I'm sorry, PI Financial.

[Jason Zandberg:]

Just a question about Israel, if I could. Could you provide an update on that -- the regulatory framework in Israel? And sort of what your expectations are for this -- your 5-year partnership with Canndoc in terms of when you think that could hit some meaningful numbers? I know it's a little bit of a crystal ball question, but any hints there would be helpful?

[Deanie Elsner:]

It's a little bit of a crystal ball question, but I'll do my best. Israel is a good move for us, but not just because of the business. Israel is a good strategic move for us. And so if you know a lot about this category, Israel legalized medical cannabis almost 40 years or 50 years ago. So in terms of Israelis being the furthest ahead in terms of research and the medicinal properties of this plant, they are, by far, the country that’s the furthest ahead in that space. And so we're excited to begin to partner with some of the thought leaders and institutions researching this. The second leg for us in Israel is truly from a brand standpoint, Israel, although a small country, gives us an opportunity to further infiltrate that country with Charlotte's level and got consumers there who are looking for this product. And so we see there's an opportunity to walk in with our product. But I think the last part of this is partnership, the strategic partnership with InterCure and Canndoc. As you know, Canndoc is expanding across the world. And so they're a partner that provides us optionality across countries outside of Israel to potentially partner and/or penetrate other countries. And we feel like that is the right profile. And I think Gerald mentioned the asset-light model, maybe it was Derek, answered a question, the asset-light model. Outside of the U.S. if we're able to establish cultivation, we have a line of sight to how we can get our products available in the marketplace. And so for us, building the right strategic partnerships that can help us scale different countries on the international front is an important leg for us. Canndoc for us is that in addition to Israel being a country where we think there's going to be some real synergies between CW Labs and the depth of research and knowledge in this category. And so for us, that's why Israel becomes so important and a pivot point for us. We will explore cultivation and/or manufacturing in Israel, specifically. Certainly, our profile puts us in a place where we potentially consider a lot of options in terms of growing business, both from a branded and non-brand standpoint, and we're evaluating all that, but watching the legalization of this category very closely. We believe that by the back half of this year Israel will crossover this regulatory challenge, and we'll see CBD opening up. But if we don't, we think this partnership still has tremendous strategic value for us.

[Jason Zandberg:]

Okay. That's great. And maybe another question just closer to home on the domestic pet food or the pet product market. Just can you talk about sort of sales momentum in that segment in Q4 and sort of what your expectations are moving forward into 2021?

[Deanie Elsner:]

Absolutely. So in 2020, pet was a channel that saw a number of retail closures due to the pandemic. And so we ended Q1 of last year. Building distribution in pet and then we had a number of retailers who closed in Q2. And so the momentum just began to pick up in Q3 and Q4. So we are lapping in the first half of this year distribution expansion in that channel. We've got a lot of energy for pet. We're actually seeing consumers come into our franchise, having used our CBD product for their pets. There's no placebo effect when you see how your dog calms down by using some of our products. And so we will continue to invest in pet. We've got some new products coming out of the back half of this year. And we're excited about the opportunity this lends to us in terms of a consumer group, pet owners, but also more broadly, as it helps influence consumers into our franchise. So it will continue to be a place that we will focus. We think that the right certifications in pet is really important. And so we are putting science behind this so that we are ensuring that what we put it out in the marketplace is, in fact, safe. And I think that's a bit of a differentiator for us in this category, but that will continue to be an area of focus for us, and we anticipate to see decent growth there this year.

[Operator:]

The next question comes from Michael Lavery with Piper Sandler.

[Jeff Kratky:]

This is Jeff Kratky on for Michael. Just looking at B2B, I know COVID was an impact and the pricing action had more of a benefit to velocities in the second half. But given the big increase in 2020 distribution, you have a decrease in year-over-year sales in B2B. Could you help us understand that dynamic? And if there's any risk of losing distribution in places where velocities have fallen?

[Deanie Elsner:]

It's a great question, Jeff. So let me just -- let me help you understand why the data is a little bit murky because I think you're right, the data is murky. So first, we took a price deal realignment on our portfolio for B2B starting in -- at the end of March, early April. That means our list prices decreased by 15%. It was a bit of a self-inflicted reduction on our top line, but an important one for us as we reestablished the appropriate competitive price gap. So that's 1 piece of the thought we've got to work through. The other piece of the thought is we acquired Abacus Health, almost 70% of Abacus Health’s revenue is going through the healthcare practitioner channel. So that healthcare practitioner channel saw significant closures in Q2 and early Q3. So it was a part of the channel buy and that just really didn't generate a lot of revenue in the period. And then coming out, if there's a slower ramp coming out as outlets in the healthcare practitioners channel began to open. So that's the other murky part of the environment. I think the third murky part of the environment is our distribution expansion plans were slowed a little bit as retailers committed but didn't actually pull the trigger on distribution until Q4, although were able to achieve it. And so the numbers look a little bit like a disconnect because while we did expand doors, we didn't get the full year benefit of all of those doors. And I think that's why you're seeing the momentum in Q3 and Q4 and B2B begin to ramp up. If you look at us versus our competitive sets, while we're down 29.5% in B2B versus 1 year ago, if you look at our numbers versus our competitive set, we're actually significantly outperforming competitors who are in the same channel. And so those initiatives that we've put in place are, in fact, helping to improve our revenue, but due to the store closures and, I think, much lower traffic during the obvious pandemic, we're not seeing the full benefit. We will see B2B to be better this year as we're lapping that, and we expect the vast majority of those fog filters to lift in 2021 as we begin to get into Q2.

[Jeff Kratky:]

And then just a quick follow-up. The Stanley Brothers announcement was very exciting. How should we expect your strategy to evolve over time from just pure hemp-derived CBD to more cannabis wellness broadly, and how much of a push should we expect just in higher THC products over time?

[Deanie Elsner:]

The interesting thing about the cannabis market is we keep putting a very high number on that market. And depending on the outlook that you read, this market is going to be $60 million, $70 million, $80 million or $100 million big and I believe that it's going to be that big. But for whatever reason, we keep thinking that entire market is recreational. The truth of the matter is the cannabis sector will become a consumer products good company. And in doing so, it will be segmented by different consumers with different needs. As you look at that, the total available market for recreational THC is something well below the numbers that we've all read. What I get excited about is the continuum from full spectrum hemp extract, which is really low THC below 0.3 and high CBD to that grade ground up to medical cannabis. I don't have the exact products because we're in development as we speak. But we believe we've got a true right to win in that condition-based cannabis wellness environment that is above 0.3 THC, but well below the intoxicating levels of recreational or directly medical cannabis. And so for us, when we map that space out, today in the U.S., the CBD sector is anticipated to be about a $13 billion to $20 billion category over the next 3 to 4 years. When we map out the space, we believe our brands can compete with in the cannabis wellness sector. It increases our total available market to something closer to $30 billion to $40 billion. So without doing much beyond what we're doing today, but just getting to better products that have higher levels of efficaciousness with slightly higher levels of THC, we're able to expand our total available market by 2 times to 3 times. That's just within our company. And so what we get excited about is the option purchase agreement with the Stanley Brothers enables us to expand our footprint into segments that we have a right to win and then partner with the Stanleys who tend to be a little bit more in that social, what I would call, social lubricant stage of the cannabis market. That gives us a really good and great footprint to compete within with brands that consumers trust and brands that they recognize. And I think as the CPG category begins to defend in cannabis, you're going to see brand become more and more important and trust and safety and quality become the key parameters around where consumers make decisions. So we like the opportunity very much. We will prepare ourselves for the legalization of cannabis in the U.S. but outside the U.S. where it is federally permissible, we will begin to explore these opportunities and incubate, if you will, the strategy that we'll be pursuing in the U.S. So excited about what's ahead of us.

[Operator:]

. We have no questions in queue at this time. Management, would you like to go with closing remarks at this time?

[Deanie Elsner:]

Absolutely. I'll make this quick, guys. I really appreciate -- I know there's a lot of calls this morning. Really appreciate you participating and asking your questions and look forward to reporting next to you on our first quarter results on May 11. So thank you for taking the time Thank you for the questions, and I look forward to speaking to you again soon.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.