Greenlane Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 17 Nov 2020

[Operator:]

Good morning all. Welcome to today’s conference call to discuss Greenlane Holdings Third Quarter Financial Results. A press release detailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Greenlane website. As a reminder, today’s conference is being recorded. On the call today are Aaron LoCascio, Chief Executive Officer; and Bill Mote, Chief Financial Officer. Before we begin, Greenlane would like to remind listeners that today’s prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to the questions received. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them.

[Aaron LoCascio:]

Good morning, and thank you, everyone, for joining us today. During this call, I will review our business transformation plan, third quarter sales highlights, operating environments and business development activities before turning the call over to our Chief Financial Officer, Bill Mote, for a detailed review of our financial results. During the third quarter, our new senior leadership team and I completed an extensive review of our business and acted on several key initiatives related to our go-forward category emphasis organizational structure and related staffing levels. We have taken additional decisive steps to deemphasize certain product lines, invest in our fastest-growing and high-margin opportunities and further improve our cost structure. We remain focused on executing on our strategic vision, launching exciting new consumer products and making the necessary positive changes throughout organization to maintain Greenlane’s position as the leading platform for cannabis consumption products globally, return to profitability and generate strong shareholder value. The steps we are taking now will reaffirm our strong foundation to capitalize on the anticipated sector growth as existing markets continue to evolve and new markets develop. Our approach is focused on four key pillars

[William Mote:]

Thanks, Aaron, and hello, everyone. As a reminder, the results I will be reviewing for you this morning can be found on our earnings release that is available on EDGAR and the Investor Relations section of our website at gnln.com. Before I begin my review of our third quarter financials, I want to provide some additional color on the improvements we have made and are making to the company. Since speaking with you last quarter, we have made substantial progress on our business transformation plan with a new COO, President and CFO, we worked throughout August and September to craft the pathway that we anticipate will bring the business to profitability in 2021. We made strategic decisions to pivot away from certain lines of business to increase inventory velocity, margins and turns. We also focused on swiftly selling down these deemphasized lines to generate cash, allowing us to reinvest in more profitable third-party inventory and our own health brands. While these decisions had a negative financial impact on Q3 2020, these actions were necessary to put the company on the right course for future revenue growth and profitability. As part of our efforts to improve the financial profile of the company, we reduced worldwide staff by 4.5% in October and are implementing additional expense reductions between now and the end of Q1 2021. These reductions along with the margin-enhancing direction in inventory and sales focus will save an annualized $5 million per year. This is in addition to the $1 million of savings that we discussed on our Q2 call. With all of these recent initiatives, we believe our path to return to adjusted EBITDA profitability in Q1 2021 is well underway. Net sales for Q3 2020 were 35.8 million compared to 44.9 million for the third quarter of 2019, a decrease of 9.1 million or 20.3%. This decrease was the result of the impact of our business transformation and strategic decisions made to reduce our low-margin sales. We reduced our sales of nicotine products to 3.3 million or 9.2% of net sales for the third quarter 2020 compared to 20.2 million or 45% of net sales for the third quarter of 2019. This is an 83% reduction in nicotine-related product sales year-over-year.

[Operator:]

Our first question comes from the line of Vivien Azer from Cowen. Your line is now open.

[Vivien Azer:]

Good morning. I just like to start with the inventory adjustment that you guys took in the quarter. We talked about this last quarter. It seems like last quarter was a onetime item and now we have got another inventory issue, which sounds like it is more related to our strategic review. So hoping to get more clarity on what changed into quarter please? Thanks.

[William Mote:]

Actually, Vivien, this is Bill Mote. I will take that question. Vivien, we, in the third quarter, obviously, we turned several new management members into the group. As a team, we spent a good 60-days reviewing the entire business strategy. We, as a new management team, had a bit of a different perspective on what inventory turns should be, what the quality of inventory should be, what the velocity of certain SKU items should be. And from there, we made decisions about what we wanted to do going forward. One of our key aspects of our strategy is to continue to conserve our cash. And we wanted to be able to move some of these inventory items a lot faster than they were actually moving on the balance sheet. So we did make a strategic decision, Vivien, to reduce the selling price of certain items so that we could get the velocity up and the cash back into the company. Our inventory turns are less than 1.5% at this point in time, historically. And we believe, as a management team, that needs to be higher than 3%. So there is a lot of work to do there. But the first step is setting in motion a rapid inventory sale for items that are either deemphasized or that we are no longer going forward with. So that was the crux of the decision process to reduce inventory further.

[Vivien Azer:]

That is really helpful, Bill thank you for that color. And then just my follow-up on your outlook, to get back to EBITDA positive, adjusted EBITDA positive in the first quarter of 2021. Certainly, it is nice to see a quarter of 2021. Certainly, it is nice to see a sequential improvement in your top line, and I understand the $5 million in run rate cost savings from headcount reductions and other efficiencies. But can you help dimensionalize what kind of revenue base you need to generate the appropriate operating leverage to actually get to that positive adjusted EBITDA target in 1Q 2021, please? Thanks.

[Aaron LoCascio:]

I think it is going to be in the low 40s, Vivien. We are going to need to be - on an annualized basis, need to be in the low 40s on a quarter basis to achieve that.

[Vivien Azer:]

Understood. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Scott Fortune from ROTH Capital Partners. Your line is now open.

[Scott Fortune:]

Good morning and thanks for the questions here. Can you provide a little bit color on the DTC segment and kind of maybe normalizing that level from the third quarter after the post-COVID here? We saw a meaningful pickup during the shelter in place. And what has kind of you guys expect the ordering pattern or the growth on the DTC side here as we normalize opening up the economy here.

[Aaron LoCascio:]

Yes, great question, Scott. Nice to speak to you as well. So obviously, a tremendous lift on a year-over-year basis, as we had described in previous quarters. We saw the early indications, obviously, in late Q1, but really saw a tremendous uplift in the DTC. That remains relatively sustained, it has come down on a sequential basis, a little bit as brick-and-mortar has largely reopened. But as we kind of mentioned, on a go-forward basis, we do believe that we will see sustained increased levels of DTC on a go-forward basis. It will be very interesting to see what impacts COVID may have as we continue through Q4 and into Q1. I know, obviously, all of us are well aware of the increase in COVID cases, and we are even seeing some lockdowns in international countries and watching that very closely. But again, it is great to have an Omni-distribution channel where we have these different revenue channels to drive sales from. So we will watch it closely to see how COVID may impact that. Overall, we do expect an increased sustained level of direct-to-consumer go forward. As we mentioned before, we are in the low teens as a percentage of total revenue, and we do anticipate that trends to continue at a minimum.

[Scott Fortune:]

Great thanks for that color. And then kind of a follow-up on kind of your strategic initiatives here as far as your own stores, higher standard brick-and-mortar kind of rollout potentially in Europe. And then you are well-positioned with 40 million in cash. Kind of how are you guys looking at potential expansion from the store side and what is the M&A opportunity that you guys are looking at from a European side? It seems that is where you want the global growth to continue to grow.

[Aaron LoCascio:]

Sure. So I will start with the question about the brick-and-mortar stores. In a COVID environment, I will tell you, especially, we are being very, very cautious around brick-and-mortar stores. Obviously, there has been tremendous negative impact to many stores, brick-and-mortar stores around the world during the pandemic. We did reopen our brick-and-mortar stores back in July for the most part. But as of right now, especially during the COVID environment, we do not have any near or midterm plans to expand our physical brick-and-mortar footprint. Again, we will continue to analyze as we continue to go through the pandemic and life begins to normalize in the future, but we have no near or midterm plans to expand that footprint. On the M&A side of things, we continue to have a very robust pipeline of potential opportunities that I will let Bill speak more to as well. But generally speaking, at the height of the pandemic, we went into capital preservation mode. And we were very cautious as no one really knew what the true impacts of COVID would be. Now that we have a better sense of that, we have reinvigorated and reengaged a number of potential M&A opportunities and conversations.

[William Mote:]

Yes. And that is primarily the reason we are conserving our cash to make sure that we have plenty of dry powder to execute on those acquisitions to help augment our organic revenue and margins.

[Scott Fortune:]

Okay. Thank you. I appreciate. I will jump back in the queue.

[Operator:]

Thank you. Our next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is now open.

[Glenn Mattson:]

Hi thanks for taking the questions. So curious, a little more color on gross margin and you have a lot of factors that are should be helping gross margin over time, the in-house brands, the direct-to-consumer, the supply packaging, all growing segments all higher margins. Can you give us a sense of how we should think about for next year is like a mid-20s number feel right for you? And then remind us if the in-house brand margins are still holding up from where they were a couple of quarters ago or a year-ago or so. And maybe you can give us some more color on kind of what is driving that growth is it new product introductions, do you have more new products coming out of the pipe or just some color around that would be great.

[William Mote:]

Yes. So gross margins adjusted are 20. 4%. And also mentioned on the call that we had about 150 basis points of what I would call the noise in the margin related to the inefficiencies we had as we transitioned multiple warehouses into one centralized U.S. warehouse and the Canadian warehouse. So you take those two things together, 20, 24 plus another 150 basis points, get very close to 22%. And our expectation is for that 20.4% plus level to exist in the near future. Obviously, as we continue to convert more of our revenue, which we said on the call, 36% of the growth in Greenlane or core products, as we continue to convert to our Greenlane brands, we will see that margin increase. So our guidance - while we don’t give a lot of future guidance, we are definitely confirming or reaffirming that the 20 plus margin area is where we will be in the short term, which we feel nice and confident about. Related to just Greenlane brand margins, on a year-over-year or quarter-over-quarter basis, they continue to be strong. And some of the growth that you mentioned for next year is going to come from products that we have already released in terms of product lines, but also from new product development that is being created out there. We do see strong revenues in the VIBES area and we feel that will continue into next year. And VIBES, as we have mentioned before has a very strong margin profile.

[Aaron LoCascio:]

Yes. And to follow-on with Bill’s comments there, so we are seeing tremendous growth in our Greenlane brands. This is the existing brands. So we are seeing continued growth in the products we have already launched. We do have a robust pipeline of additional products that we would be launching in the near and mid-term. But definitely, a lot of the growth overall of Greenlane brands that we are seeing thus far is just the growth of the brands themselves. And we called out a couple of examples like Marley Natural, 210% quarter-over-quarter growth. VIBES, 202% quarter-over-quarter growth. Year-to-date, VIBES is up 628%, as an example. So we are seeing tremendous growth numbers and trajectory in our existing Greenlane brands. And we will supplement that growth with additional launch of new products that we are very excited about.

[William Mote:]

I would say Greenlane brands was 36%. It was actually 65% growth in Greenlane brands compared to last year at the same time. So as you can see, it is a considerable amount of growth in continued trajectory.

[Glenn Mattson:]

Alright. Kind of related, I guess. But in the last couple of years, there is a lot of noise around the quarters because of all the JUUL stuff and everything. But is there a seasonal effect in Q4, do you see like a bump in product revenue like that from the holiday season?

[Aaron LoCascio:]

Historically, we do see a seasonally adjusted positive increase in overall revenues that is tied, generally speaking to the cooler months of the year, in particular, the holidays as well. But oftentimes, we see that trend continue into Q1 of 2020. So we do anticipate a seasonal lift to revenues.

[Glenn Mattson:]

Great. And last one for me. Can you just give us more color on the outlook for packaging business? Just kind of what some of the dynamics of what is going on there. And that is it for me. Thanks.

[Aaron LoCascio:]

Yes. The packaging business, again, in conjunction with a lot of the leadership changes that we made at the senior leadership level, we made some changes to senior leadership on the packaging division. We do anticipate a steady growth trajectory for the packaging business. We decided, again, similar to what Bill had mentioned before in the supply and packaging. We did deemphasize certain lines of business that were somewhat legacy at this point and reemphasize and refocus on some of the hotter products that we have and new innovative products that we continue to launch. So all that in, I would consider let’s say steady growth into 2021 and beyond is really what we are focused on.

[Operator:]

Thank you. Our next question comes from the line of Mike Grondahl from Northland Securities. Your line is now open.

[Michael Grondahl:]

Yes. Thanks and good morning guys . In terms of the restructuring that you guys have been going through, is there anything still significant that you need to clean up or fix or working on that you want to highlight?

[William Mote:]

Well, we continue to work on our overall distribution and logistics. That big chunk of that was done in the U.S., and we have to look at that all over the world to make sure we are doing that efficiently. We continue to look for any mechanisms to reduce other expenses, including some of the work that we have already done on our global head count, which we announced that we reduced 4.5% in October. So those are the areas that we have focused on historically and continue to focus on. In addition, in the margin area, as I said, some of the work that we have done to improve the overall logistics and warehousing has caused temporarily an increase in cost there, which ultimately will diminish as we get lined out with all of the new warehouses. And we are operating at 100% efficiency. So those are kind of the areas we are always focused on the entire P&L, and anything that we can do to make things more efficient or less expensive, we will continue to do so.

[Aaron LoCascio:]

But overall, we have spent a tremendous amount of energy and effort as an executive team in Q3. Again, a lot of new senior leadership to the team. So a heightened amount of activity in Q3. We will always look to ways to continue to improve our operational efficiency and increase our margin profile and sales. But yes, an unusually high amount of activity in Q3. While we continue to make incremental improvement, we do not expect to see that type of activity going forward.

[Michael Grondahl:]

Got it. It sounds like you are over the hump there. So, did you guys push hard in e-commerce, you saw a lot of growth there or was that just sort of a natural effect of COVID and whatnot. How do we think about that going forward?

[Aaron LoCascio:]

It is a combination of both. I mean, obviously, we have a dedicated team of e-commerce experts that is constantly pushing the envelope in terms of the customer experience and driving new customers and existing customers to our sites. But definitely, COVID was a positive windfall in terms of consumer purchasing patterns and behaviors. So frankly, it is the combination of those two. As we said before, we do anticipate an increased sustained level of online purchasing behavior to continue even post pandemic which is why we are making additional strategic investments in our e-commerce and other digital assets going forward.

[Michael Grondahl:]

Got it. And then maybe just lastly. Nicotine sales, does that remain low single-digit for a while? Or do you see that going away? How should we think about modeling that into 2021?

[Aaron LoCascio:]

Another great question. So I would say the best way to characterize that is that we do anticipate it to continue in a single-digit fashion on a go-forward basis. Well, again, continuously evaluate that. in terms of potentially just eliminating that. But frankly, our job here, we really want to make sure that we are meeting our customers’ needs. And as of today, nicotine products do represent an important component of our customers product lines. So we do anticipate to continue to carry those products. But again, the historical deemphasis on nicotine products, while has driven our overall concentration down. We will continue to maintain those product lines for the foreseeable future. But there has also been a lot of pricing pressures in the market that had driven the prices down, which is also contributing to a lower overall revenue number or a concentration number. So all those things considered, we do anticipate it to remain in our product portfolio for the foreseeable future as an important part of a broader portfolio to our customers and meeting our customers’ needs. But that it will maintain a lower percentage of revenue. The only caveat to that is there is potential opportunity just on the short term, maybe Q4, as we had mentioned, kind of reducing the selling prices of certain inventory items. Some of that does include nicotine products. So we are in the process of selling down some of those inventory items that we have so that we can increase our overall inventory turns on a go-forward basis. So mid-single-digit go-forward basis, but maybe a onetime uplift in Q4.

[Michael Grondahl:]

Got it. Thank you.

[Operator:]

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Aaron LoCascio for closing remarks.

[Aaron LoCascio:]

Yes. I just want to say thank you again for everyone for joining Greenlane’s conference call today. The replay for this conference call will be available in approximately two hours on Greenlane’s website in the Investor Relations section. I hope everyone has a wonderful day.

[William Mote:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.