Earnings Transcript for CWBHF - Q1 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings, Inc. 2024 First Quarter Conference Call. [Operator Instructions] This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Cory Pala, Head of Investor Relations. Please go ahead.

Cory Pala: Thank you, and good morning, everyone. Thank you for joining us for our 2024 first quarter earnings conference call for Charlotte's Web Holdings, Inc. Earnings press release was issued this morning and posted on the Investor Relations section of our website along with our financial statements. Our 10-Q report for the quarter is also available and has been filed on sedarplus.com in Canada and in the U.S. with EDGAR and the SEC. CEO, Bill Morachnick; and CFO, Jess Saxton, are leading our call this morning. On this morning's call, we will review the financial results of the quarter and provide some color around the business and our outlook. We will take questions from our analysts at the end of our prepared remarks. A replay of this call will be available through the next week, accessible via the details provided in our earnings release. Additionally, a webcast replay of this call will be available for an extended period, accessible through the IR section of our website at charlottesweb.com. As a reminder to our listeners, certain statements made on today's call, including answers we may provide to certain questions, may include content that is forward-looking in nature, and therefore, subject to risks and uncertainties and factors which could cause actual future results or company performance to differ materially from implied expectations. Such risks surrounding forward-looking statements are outlined in detail within the company's regulatory filings. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which does not have any standardized meaning prescribed by GAAP. Please refer to the earnings release that we filed this morning for a description of adjusted EBITDA as well as a reconciliation of such measures to their respective and most directly comparable GAAP financial measures. And now I'll hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.

Bill Morachnick: Thanks, Cory. Good morning, everyone, and thank you for joining us today. So let's dive into our first quarter results and provide some insight into how we are moving forward with our company-wide turnaround initiatives. We outlined our True North pillars on our year-end call in March, and as promised, we'll be updating you on each of those initiatives and where we stand. Just as a quick reminder, these initiatives include

Jessica Saxton: Thank you, Bill. We continue to find ways to deploy our cash better and increase our return on investment. However, with our Q1 revenue levels, stringent expense management is a top priority. We have quickly addressed and taken actions towards further rightsizing the business to better align with our current revenue levels. Using a real-time example, we recently focused on redesigning our overall B2B business from both a strategic perspective and overall cash flow performance. Historically, our B2B business was structured for a high-volume federally regulated market. We continue to work towards federal regulation. Within the interim, we need to have a more efficient structure in place for what is happening now, pre-regulation. Why are we changing this now? The CBD peak from 2017 to 2020 was a time where there were more than 4,000 brands that flooded the market with Charlotte's Web at the top. As quickly as the category rolls, it struggled to recover the significant year-over-year growth previously experienced. We continue to see this trend through 2023 and have acted to be in line with revenue expectations moving forward. We face challenges to comp year-over-year numbers and find new avenues for revenue-generating partnerships. We saw that instead of building partnerships, Charlotte's Web had engaged in several transactional retailer relationships that were not always optimal to our business. Utilizing historical and forward-looking data, we have reorganized streamlined and reduced our overall B2B business. These actions will modestly reduce our B2B revenue, but more importantly, aim to improve our overall annual cash flow position. Along with further rightsizing our business, we have also redesigned our targeted strategic pathways. Specifically, we are working closer with our largest retail partners, prioritizing those who are knowledgeable and comfortable with the existing safety data of CBD and Hemp Wellness. We are also prioritizing our focus on our highest margin B2B partners and channels including the health care practitioner channel, which we also refer to as the medical channel. I want to give more context on the rightsizing of our business relative to our Q1 performance, specific to our expenses. The finance team utilized historical data as well as projected growth to reforecast our entire business, working closely with each department, including everything from net revenue through SG&A and cash flow. Working closely with Bill and our leadership team, these actions will reduce our expenses significantly versus last year. These costs are expected to be approximately $15 million on overall annual SG&A improvement versus last year. This will bring down our SG&A as a percentage of net revenue to be more in line with the industry and also decrease our cash burn, illustrating our ability to maintain agility within the business. And now turning to the specific financial results for the quarter. For the first quarter of 2024, net revenue was $12.1 million, down $4.9 million year-over-year. The decline was primarily driven by lower revenue in our e-commerce business, which saw a decrease of $3.5 million year-over-year to $7.8 million. Our e-commerce business continues to struggle with organic traffic and acquiring new consumers, partially due to competitive online discounting pressures as well as prior consumer stocking during holiday promotions in the fourth quarter of 2023. The lower traffic in sales in the quarter was amplified by a recent transitioning of our digital marketing strategy. We had lower traffic as we pulled back on paid media programs to

Bill Morachnick: Thanks, Jessica. I'd like to focus the remainder of this call on the progress that we've been making. And let's start with out e-commerce business. Our e-commerce platform migration to Shopify is progressing according to plan, and it's on track to launch by the end of Q2. This is the top priority for the company. Simply put, it doesn't make a lot of sense to do a great job of attracting consumers to our website and then providing them with an amazing shopping experience. And this is where we're beginning, frankly, to see some of our competitors gain traction. With the transition to the new e-commerce platform, we can have a consistent streamlined user experience, effective campaign performance and be agile to increase market speed. Now despite these hurdles, we continue to drive increases to our conversion rates on our website through several strategic initiatives. And some of these examples include

Operator: [Operator Instructions] Your first question comes from Scott Fortune with ROTH MKM.

Unidentified Analyst: This is Nick on for Scott. First one for me, just on the shelf opportunity. We're continuing to see reductions in shelf space allocated to the CBD category, just in B2B retail. Do you dimensionalize where we are in terms of that kind of fully playing out here? And how should we view shelf shrinkage for 2024 and its impact on B2B, especially considering minimal legislative movement coming on board in the near term here?

Bill Morachnick: Yes. Thanks, Nick. So it's hard to project. You identified it there at the end, where regulatory will finally fall. We've been waiting on this for a long time. I think for the time being, we've 0seen the shakeout on the shelf. We don't anticipate a lot more further contraction on that. I think for us, more importantly and where we're really putting our energy and our focus is we've got a lot of existing doors, as I refer to them, in outlets where we've got significant opportunity to drive greater velocity. The other thing I'll add to that, and this is part of a B2B revisioning that we did earlier this year is there are channels where we believe were under-indexed relative to the opportunity. And the one we keep emphasizing here is on the medical side. We believe that we've got a much stronger right to win there. We've got the right portfolio. We've got the right resources. We're modifying our tools and platforms to address that channel much more effectively. And it also happens to be a very high margin opportunity for us as well. So we're actually very bullish about what we can do to continue to enhance our whole B2B go-to-market strategy.

Unidentified Analyst: I appreciate that. And then second one for me, just on the cost side. As far as expense reductions and efficiency, are that -- is that $15 million in reductions already in place to limit the cash burn? And just your sense of the balance of 2024, are you expecting additional cuts or reductions to be implemented? Just your take on the OpEx moving forward here would be helpful.

Jessica Saxton: I'm happy to take that. It's Jessica. So I can say these reductions are already in place throughout the business. However, relative to the timing throughout the year, we've only experienced a little over $2 million of those savings thus far in Q1. The remaining is expected to be fairly evenly distributed throughout the remainder of 2024 to get to the $15 million. These are specific to SG&A and don't have anything to do with CapEx just to make that clear, both Shopify and in-sourcing of topicals and gummies is happening live. The lower revenue has made cash more challenging, but we continue to be prudent with that expense and cash management. We are not anticipating additional costs at this time outside of the $15 million. But what I can say is we always continue to evaluate the business with the objective always being to operate within our means. And right now, we do believe we have sufficient cash and working capital for the foreseeable future moving forward.

Operator: Your next question comes from Luke Hannan with Canaccord Genuity.

Luke Hannan: I just wanted to get a better sense of overall in response to the price cut, are you -- were expectations -- sales expectations in line as far as elasticities go? Is it in line with what you were expecting? And then how does that help you figure out future product introduction and specifically the pricing that's going to be attached to new innovation going forward?

Bill Morachnick: Luke it's Bill. So yes, in terms of elasticity, we -- so as you know, we took the price reduction on the oils. It was too recent to get a really clear read on it. As you may recall, we came down by about on an average of 25% relative to where we were. We're going to monitor that very closely. I think -- this is a very challenging space, sometimes to measure elasticity because of the various formats and the amount of active ingredient that's in the range of products. What we want to do moving forward is the very strategic and measured in how we go to market with pricing being one component. What I mean by that is what you see in the category is a tremendous amount of discounting. And we want to continue to make sure that we're balancing our pricing to be attractive to the consumer, along with the levels of discounting where we have to remain competitive. With new product launches, stay tuned. I think that we've got it thought through really well. And we've got a really interesting portfolio queued up that I think will be extremely competitive as we move forward.

Luke Hannan: Okay. And then for my follow-up here, the new sleep gummy launch. I'm curious to know how does that compare to past product launches in terms of either initial penetration on the shelf for the number of those top 50 accounts or even beyond that, that are involved with any new product that you guys have introduced?

Bill Morachnick: Yes. So we launched that in our D2C channel, again, it's pretty recent. So that was mid-March. And we'll be coming into retail in Q2. So stay tuned for that. Let me just start with something anecdotal for you. So I was at Expo West when we debuted that. And it was pretty incredible. We went through our samples -- that's like a 3-day event. We went through our samples like the first half day. And what was fascinating for me was the next morning, I showed back up at the booth, and we had many, many people coming back and describing what an incredible sleep they had the night before, and were looking for more samples for themselves and friends. So I knew we had something really special there. When you can see it live, that's very validating. Within the B2C channel, keeping in mind, we just launched that in around the middle of March, about the 9th or 8th, we had around 12% of the orders that were placed in D2C contained a CBN product. That number increased by about 50% in April. So we're seeing a really beautiful trend line there. I think -- I'm not spiking the ball here, but it's really demonstrating that when we get it right, it resonates. It bodes well for our future portfolio. And I think we've also got a ton of learning how to go to market with innovative and compelling products. So that gets me very excited for the balance of this year.

Operator: There are no further questions on the line. I will turn the call back to Cory for closing.

Cory Pala: Okay. Well, I'd like to thank everybody. We'd like to thank everybody for participating in today's call and your continued support, and we look forward to communicating with you again on our second quarter earnings call in August. Thank you.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.