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spk05: Good morning ladies and gentlemen, and welcome to the Charlotte's Web Holdings Inc. 2023 First Quarter Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session with the company's analyst. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Corey Palla, Director of Investor Relations. Please go ahead.
spk04: Thank you, Sergio. Good morning, everyone. Thank you for joining us for our 2023 first quarter earnings conference call for Charlotte's Web Holdings, Inc. Our earnings press release was issued this morning and posted on our website along with our financial statements. Our 10Q has been filed on CDAR and EDGAR. Leading our call this morning is CEO Jacques Tortoroli, CFO Jessica Saxon, and COO Jared Stanley. Jacques and myself are each joining from remote locations today. On this morning's call, we will review our Q1 financial results and provide some color on some recent strategic initiatives. We'll 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 for the details provided in our earnings press release. And a webcast replay of this call will be available for an extended period, accessible through the IR section of our website. Certain statements made on today's call, including some answers we may provide to certain questions, may include content that is forward-looking in nature and therefore is subject to risks, uncertainties, and factors which could cause actual future results or company performance to differ materially from implied expectations. Risks surrounding such forward-looking statements are all 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 description of adjusted EBITDA as well as a reconciliation to the comparable gap financial measures. With that, I'll now hand over the call to Charlotte's Web Chief Executive Officer, Jacques Tortoroli. Jacques?
spk03: Thank you for joining our call. Thank you, Corey. And happy Friday. This morning we reported Q1 revenue of $17 million, down 12%. with volumes down 5% versus the prior year, modestly below our expectations. Jessica will review selected financials momentarily, but I wanted to ground this in the market and then give you an update on the progress in our strategic initiatives. Looking at the CBD category, the CBD market is approximately $4.4 billion, according to Brightfield. The top 20 brands share 17% with Charlotte's Web at number one. while the one FDA-approved cannabinoid drug represents 16% share. That leaves over 60% of the market, or roughly $3 billion, to some 2,000 brands, by the way, down from over 3,500 brands in 2021. Therein lies the size of the prize, before regulation, which we shouldn't lose sight of as we discuss each quarter. Dollops Web is number one, with 3% share of the total market and 6% share if you exclude the channels, formats, and pharma sectors we don't today participate in. We are number one in brand metrics, like awareness and loyalty, number one in retail. Retail represents 25% of the total market, and we have category-leading shelf velocities. In e-commerce, which is 35% of the market, we rank number one with less than 4% share. Finally, given the high fragmentation of very small brands in the market, we'd expect to see a significant culling of the number of competitors to continue without regulation in Washington, D.C., and certainly when regulation happens. Our brand equity, full spectrum, NSF-certified broad-spectrum products, innovation pipeline, and our IP, and the opportunity to expand our consumer reach and relevance through Recreate starting later this summer, Our partnership with MLB and our balance sheet uniquely position us to grow our number one share over time. And our recently announced partnership to enter into an IND path for a botanical drug with the FDA opens the potential longer term for us to participate in a substantial part of the market that we don't do today. We've previously framed our strategy with you, namely returning to growth, winning in D.C., and unlocking the value of Charlotte's Web IP and botanical wellness. Let me briefly update you on some significant progress in the quarter on each pillar. First, returning to growth. Last month, we announced the launch of ReCreate, a new botanical lifestyle brand designed for young and attractive active wellness seekers in sports and other valuable cultural verticals. ReCreate capitalizes on the growing trend of CBD-infused functional botanical wellness formulations self-care, and mental well-being, certainly among millennials and Gen Zers who make up approximately 47% of this multibillion-dollar CBD market. They're also among the most active daily users of CBD when they wake up throughout the day across different occasions, making this a very important demographic for broad-spectrum CBD. Launching this new Neat States-driven brand with new formulations across multiple formats coincides with the first year of our MLB partnership and packaging that bears the iconic MLB logo with NSF certification. We launched Recreate Daily Edge Tincture last month, exclusively available on our e-commerce site, and we'll begin rolling out new formats starting with a line of Neat State gummies, which will be available on our site in the summer and retail during the second half of this year. Recreate products have secured early interest from leading retailers, including Fresh Thyme, The Vitamin Shop, and others, as well as Southern Glaciers Wine and Spirits. We recently appointed Andrew Schaefer as our Chief Marketing Officer, leading our cross-platform activations with MLB and the Sports Vertical for Recreate to drive online traffic and sales. Andrew comes to us from two decades of Verizon, leading brand strategy, digital experience, social marketing, while benefiting as well from his work with professional sports partnerships. Finally, we recently announced a partnership with Phillips Pet Food and Supplies, the largest pet specialty channel distributor, servicing over 14,000 retail dogs across the country. And by the way, PET is a $400 million channel, but today less than 10% of our revenue is in the quarters. Second pillar of our strategy is regulatory. In Washington, D.C., and increasingly at the state level, we are actively progressing both. Garrett has taken a critical leadership role in these initiatives and will speak more to Doug in his remarks. We also activated the third strategic pillar, unlocking the value of the company's IP in botanical wellness. This means formally pursuing an IND pathway seeking an FDA-approved botanical drug based on our proprietary cultivars. through the right partnerships and structures. Jessica and Jared will each touch on this in their remarks. So with that, I'll now pass the call over to our CFO, Jessica Saxon.
spk01: Thank you, Jacques. Our financial results and adjusted EBITDA are reviewed in detail in our earnings release and 10-Q. As such, I will not go through all of them on this call. However, I am happy to answer any specific questions you have in our Q&A session. Net revenues of $17 million declined 12% compared to last year, with B2B down 8% and e-commerce down 14%. However, our unit volumes only declined 6%. Consumer shifts from tincture to other formats, principally gummies, continues, for the category and for us specifically. Tinctures and gummies are number one and number two formats in the market, with 19% and 15% share, respectively. This continued shift represents a strain on revenues given the price points of tinctures versus gummies. We expect this to continue until the growth in gummy volumes more than offsets the drop in tincture volumes. In the quarter, this mix shift resulted in tincture revenues declining five points to 27% of our revenue mix, with gummies up seven points to 43% of our revenue mix. In the quarter, Gummy volumes were up high single digits year over year. Charlotte's Web operates the largest e-commerce business in the industry. Our e-commerce business generates more than 66% of our revenues with attractive gross margins. B2C revenue of $11.3 million was 14.2% lower on a year-over-year basis in Q1 as we continue to experience lower traffic to our site. Increasing top of the funnel by educating and attracting new consumers into CBD and Charlotte's Web remains the number one priority in turning around the company's overall revenue trajectory. As we have talked about previously, we believe the MLB partnership, as we go through the seasons and activate against MLB's jewel events, Leveraging the league's enormous fan base and media platforms will be an unlock against this business priority, as will Recreate, our new Lifestyles brand, which is both attractively priced and carries the MLB logo on packaging. Our online conversion rates remain strong at 11.7%. Our subscribers account for approximately 40% of revenues, showcasing that when we bring people into our ecosystem, they go through their consumer journey from awareness to purchase to ultimately becoming subscribers, representing significant lifetime value. We are prioritizing growing traffic to our web store and have a cross-functional team working on improving the user experience on our site. In the food drug mass retail channel, Q1 sales were 9.3% lower year over year, outperforming the total category, which was down 10.1%. As a result, we held 18.7% share in retail dollar volume and the number one channel position. In FDM, we increased the number of retail doors while we saw a decrease in the number of doors for the overall category. This speaks to our brand strength. In addition, our ARP was up 7% in FDM, while the category was down 15%. And we hold four of the top 10 SKUs in the channel. In the natural channel, Q1 sales were 12.8% lower year over year, outperforming the category again, which was down 13.5%. I want to spend a minute on the natural channel. What we saw in the last quarter was interesting. First, we grew doors with existing customers within the quarter at about two times the category rate. However, while more doors are selling Charlotte's Web and CBD, retailers are also reducing the total facings on shelf and the number of SKUs and formats carried, principally taking gummies and reducing tinctures. For us, the number of doors carrying our gummies grew ahead of the category while the number of doors carrying our tinctures declined slightly higher than the category. Net, despite significant incremental penetration in the quarter, given the mix, revenues were negatively impacted. Given our leadership in the category and with the highest velocities, that bodes well for the longer-term opportunity for Charlotte's Web to grab an incremental share of shelves. We expect to gain further market share pending customer receptivity to our soon-to-launch recreate gummies and positively impact revenues when the rate of growth in other formats, particularly gummies, eclipses the decline in tinctures. Moving to SG&A. Our first quarter SG&A was 14% lower year-over-year despite the addition of the MLB rights fee amortization. as well as a $1 million non-cash amortization expense from the convertible debenture we completed with BAT last fall. Going forward, each quarter will include an amortization expense in our SG&A related to the MLB asset, reflecting this valuable three-year partnership. Notwithstanding the additional MLB expense, we expect SG&A for the full year of 2023 to be comparable to 2022. Excluding these amortization items, our SG&A expenses in Q1 were approximately $14.7 million, which is a decrease of more than 20% year-over-year. Our material reduction in operating expenses significantly reduces our cash burn to a manageable level. Net cash used for operations was $6.1 million in Q1 2023 versus $4.7 million last year. with the increase entirely attributable to the initial quarterly rights fee payment to MLB. With our $61 million cash position at the end of the first quarter, we are in a stable financial position moving forward, which is also an advantage against the bulk of our competitive set in the current environment. Jacques discussed earlier the collaboration with Ajna Biosciences and BAT to pursue a botanical drug. I wanted to give a little bit more insight into the rationale of the structure and the benefits for Charlotte's Web and our shareholders. On April 6th, we announced this collaboration with BAT and Ajna with the formation of Defloria, which each party is contributing. Charlotte's Web is contributing existing studies and a license permitting the use of certain proprietary hemp intellectual property, including clinical and consumer data. Ajna is contributing laboratory provisioning, regulatory services, and IND clinical expertise, such as Dr. Oren Davinsky. Lastly, BAT is contributing $10 million to fund phase one of the project, which is being fully managed by Ajna. Financially, the funding from BAT and other potential third parties reduces capital risk for Charlotte's REB. We maintain the opportunity to participate in future funding rounds, though not obligated. I will now turn the call over to co-founder and COO, Jared Stanley.
spk02: Thank you, Jessica. Before getting into regulatory, let me give a brief update on our progress with our partner Tilray in Canada. We are progressing on tinctures, topicals, capsules, and gummy formats and on track to launch tinctures late this quarter as we await Health Canada approvals. Next, we are focusing our attention on topicals and capsules with gummies as final phase. Our gummy formulations combined with Health Canada requirements will take more time. For this reason, we want to ensure we bring other great products to market in a timely manner while ensuring we launch our gummy SKUs with confidence and consistency to what is produced in the U.S. Let me give you an update on the regulatory front, starting with the state level. It's been 10 years since CBD was introduced to American consumers as a dietary supplement choice. It has been nearly five years since the passage of the 2018 Farm Bill. Since then, the lack of FDA guidance has forced states to step in, specifically to address the recent concerns of hemp-derived Delta-8 THC and other intoxicating hemp cannabinoids. We have and will continue to educate legislators in this process to ensure that consumer access to therapeutic full-spectrum CBD is preserved while regulating intoxicating compounds like Delta-8 THC. We have been present in states like Virginia, Florida, and Colorado where our voices were heard and Charlotte's Web full-spectrum products will continue to be accessible to consumers. A few states have implemented regulatory requirements that impact the sale of non-intoxicating CBD products, and we will take appropriate steps through the legislative process. While this process is coming to an end in 2023, this will be an ongoing focus of the company. On the federal front, as stated in previous earnings, we are seeing more come together in the last month than we have in years in DC. To highlight impactful events, FDA's position in January stated the need for a new regulatory lane for CBD and their commitment to work with Congress on a new path. We responded by supporting Congress in compiling industry safety and toxicology data to address the FDA's concerns. HR 841 was reintroduced in the 118th Congress, now as HR 1629. This shows the intent of Congress to regulate CBD as a dietary supplement. Furthermore, Congressman Jamie Comer sent a letter to the FDA investigating the agency's failure to regulate CBD as a dietary supplement. Considering our engagement with Congressman Griffith's staff and the letter sent by Congressman Comer, it is clear Congress is holding their position to regulate CBD as a dietary supplement. We have established the foundation to support Griffith through Coalition for Access Now, a political consumer advocacy 501c4 we support. Additionally, we are addressing the FDA's concern over the safety of CBD by uniting industry talk studies and sharing the reports with Congress. Moreover, we engaged an objective firm to bring the industry data together to recommend a safe daily use of CBD based on science. We are also actively participating in and supporting the industry coming together under one united strategy to progress the dietary supplement path for CBD. This does not mean we will find a one-size-fits-all approach for every CBD provider. It means the industry is embracing the actuality that a set of standards must be met to address the FDA's concerns. Our goal is to embolden Congress with the confidence and credibility needed to land a favorable market for CBD. At a minimum, this will require amending the Griffith bill through the legislative process with aligned industry stakeholders to ensure CBD products are standardized across labeling and warning statements, accurate testings, protections against false claims, and GMP standards and facilities registered with the FDA. Our journey began by amplifying the consumer's voice through our support of Coalition for Access Now. This served as the cornerstone of our strategy in Washington, D.C. Now our focus expands to encompass the entire industry, recognizing the crucial collaboration between industry and consumer voices. It is essential that we synchronize our efforts to advance the Griffith bill this year. With these vital elements converging, I have full confidence in the progress we will achieve. However, We're simply not waiting for the FDA to act, but are driving the destiny of our business. The recent announcement of our biotech partnership with Ajna Biosciences and BAT is a testament to this commitment we have made to shareholders. Defloria is the name of the entity created to hold the IP, an investigational new drug asset, in the third leg of our business strategy, the botanical drug path. It's critical to understand the difference between a botanical drug and a traditional pharmaceutical to realize the vast market potential. A botanical drug refers to a medication that is derived from natural plant sources. It is developed, formulated, and standardized to contain specific active ingredients or mixtures of plant-based substances. They're not isolated and synthesized like traditional single-compound pharmaceuticals, Yet they hold the same requirements for safety, quality, and efficacy for pharmaceutical use. The development of botanical drugs involves rigorous scientific research, clinical trials, and adherence to established guidelines to demonstrate their effectiveness and safety for treating specific medical conditions. Botanical drugs are regulated and approved by the FDA. Botanical drug guidance was introduced in 2004 and expanded in 2017. Combining this with CBD being removed from the Controlled Substances Act in the 2018 Farm Bill enables this path to create an entirely new pharmaceutical category for full-spectrum CBD. This is the logic behind our IP investment into Defloria. The joint venture has an amazing team of senior drug experts led by Aajna's chief medical advisor, Dr. Oren Davinsky, and recently appointed chief scientific officer of Charlotte's Web, a 21-year cannabinoid researcher, Marcel von Miller. The team has already made significant strides in the drug development process. Ajna has engaged with the FDA on behalf of DeFloria and completed its first pre-IND meeting to ensure the partnership meet the administration's botanical drug guidance. This meeting provided valuable agency feedback to inform DeFloria's clinical strategy and trial roadmap. We are continuing preclinical and commencing phase one trials this summer. And we believe the venture has enough seed funding from VAT to complete the investigational new drug application and the phase one clinical trials. I'll now hand the call back over to Jacque.
spk03: Thanks, Jared. Continue to execute on our three pillar strategy of returning to growth, winning in DC, and unlocking the value of our IP and botanical wellness. We're confident about our strategic moves and the long-term view of the business. However, in the short term, having a constructive regulatory outcome, our optimism remains reserved. Yet, in stepping back for a moment, we didn't grow revenues in the quarter, however, slowed the rate of decline to 12% in revenues and 5% in volumes. There are signs of momentum we should not let be drowned out. We nearly doubled the category growth in expanding doors in the natural channel. We grew distribution double digits in FDM while the category was down mid-single digits. Our average retail price in FDM is up single digits while the category pricing is down double digits, indicating the strength in our brand equity while ineffective brands will not turn at any price. Our B2B revenue growth is being muted by mix from tinctures to gummies. However, this will pass, and year-over-year growth will return. Particularly with our pending new recreate gummies spurring incremental SKU sales, it will help grow the traction while bringing new customers into our brand worlds and e-com. We're working on improving the user experience on our e-com platform. We have a cost-based in control. We're making progress on regulatory at both the federal and state levels. MLB for us kicks off in the second half of the year, starting with the All-Star Game in Seattle in July. And we have the balance sheet to win. I want to make sure we're sharing a balanced view of where we are and where we're heading. Now I'll turn the call back over to Corey.
spk04: Thank you.
spk06: Sergio, can we open the call to questions?
spk05: Ladies and gentlemen, we'll now open the question and answer session. Should you have a question, please press star 1. If you want to withdraw your question, please press star 2. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Scott 14 from Roth MKM. Please go ahead.
spk08: Yeah, good morning, and thanks for the questions here. I appreciate the comments at first, Jacques, on kind of the market share, but you want to focus a little bit on the market share and what you're seeing in the competitive, you know, the very competitive fragmented market here. As small brands continue to kind of reduce count and the shift to the value here, but can you provide a little more color? You mentioned, obviously, it's come down from, you know, 3,500 competitors. And many with limited capital, you mentioned kind of the shelf at stores. But with your activation and support at the store level, can you provide a little more color? Is Shardsweb starting to pick up shares here, getting more shelf space? Just kind of a little bit of color on the rationalization of fees on these shelves and how you see this moving forward.
spk03: Yeah, sure. Thanks for the question, Scott. Look, I think, and it says in the remarks, but, you know, 3,500 quote-unquote competitors to 2,000 now. You know, we clearly see that culling, you know, expected to continue even before regulation and most dramatically probably after regulation. You know, you frame the competitive environment a little bit. You know, so many small brands undercapitalized and certainly not with the brand equity or science credentials. you know, that Charlotte's Web can bring to bear. So we're optimistic that we can grow share, you know, in a category that clearly, you know, declined last year, according to Brightfield. And we are, although we're doing it by contracting less at the moment than growth. And clearly, you know, there are factors for that, including the mixed shift of tinctures to gummies as one predominant element to it. But, you know, what we're seeing is, I think, a real opportunity to grow share because, As retailers are clearly seeing that not every CBD brand has the same velocity on shelves, right, I think that provides an opportunity for us with the highest velocity in the industry to grab that incremental shelf space as competitors are delisted. And so, you know, I look at that as a real opportunity for us that we can really further leverage through the introduction at retail later this year of the recreate brand. which, as Jessica alluded to, will also be at a price point that would be more affordable and SKU formats that are smaller packs to make the consumer coming into the brand for the first time afford to try. And we know by looking at our e-com statistics that once we bring people into our brands, they stay. because what they perceive to be the value of the brand for them on a personal basis, and they become lifelong consumers for us. So we're excited about the opportunity. It's not going to be overnight, but I think we're doing everything right from a branding, from a pricing, from a retail and e-com point of view to position ourselves to gain additional shares as we go forward here in the markets.
spk08: Just a quick follow-up on that. Let's say we do get, you win in D.C., and we do get the regulatory side of things coming on board. Kind of what's your sense of the brands that will be left that can meet the high regulatory standards expected from that standpoint? And then any momentum or timing on H.R. 1629 as it gets closer to the Farm Bill? Expectations for the for the number of brands that can meet these high regulatory standards and what that occurs?
spk03: Yeah, I'll start and then hand it to Jared to answer the timing piece, and he'll have a much better perspective on the brands. But look, my view, and we've talked about this, is we're certainly not going to have thousands of brands. How many we have, I don't know, but I don't suspect it's more than 20, 30. at that. And I think you'll see a lot of the brands won't be able to get through the FDA gate, obviously have to pivot. And I think between now and then, you'll see more competitors fall away as they don't have the capital to compete and invest behind whatever brands they do have. So I think the culling will continue. And I think post-regulation, you'll have a very limited number of competitors in the market compared to what we see today. Jared, do you want to add anything there?
spk02: Yeah, look. Hey, Scott. How are you? You know, I mean, the industry has to come together. We're not going to get support passing a bill that's restrictive to an industry. So what we're seeing and what I meant by my comments is that you're starting to see, you know, what really we call in passing this bill, there's two strategies. There's focusing on regular order and what we're calling the four-corner strategy. And focusing on regular order is really just the legislative process where you have committee hearings and you start to have markup and you amend the legislation through committees of jurisdiction. And in this process, this is where industries will unite and will engage the committees and it'll really be the industry that supports the technical drafting to ensure the final legislation you know, reflects the best approach for the industry, which ultimately we're here for the consumer, which then gives the best guarantee to consumer access. But in that process, it's very important because we've had the FDA come in with their concerns. So for the industry to come together to also address the concerns made by the FDA is a very important process as we amend this bill through focusing on regular order. The next part is you've got, you know, what we refer to as the four corners. You can look at H.R. 1629 with 21 co-sponsors where, you know, previously have, you know, 45, 46. But by focusing on the four corners, this is where we get a little bit more strategic. And we have to realize that there's very narrow majorities in the House and Senate, and it's a very politically charged environment. So very few pieces of legislation will make it to the president's desk this year. And in other words, meaning CBD and FDA legislation is not going to move as a freestanding bill. What we see instead is we will be focusing on what we call the four corners, which is the chair and ranking members of the Senate Health and the House Energy and Commerce Committees in Congress. By using these committees and hearing markup processes, we can catch a ride on a must-pass piece of legislation like the drug pricing bill or the 2024 spending bill. And all of this really happens in the fall, but the groundwork and the process and support by focusing on these ranking committee members in Congress is where we're at right now. Does that answer your question?
spk08: Yeah, no, I appreciate that. That's great detail for that. And just my last follow-up here, you mentioned recreate. I just want to kind of follow up on that lifestyle brand launched. You provided a little bit of color of the positioning of it, but how should we look at this with the product mix or the SKU availability ahead of Major League Baseball and their marquee events this summer and fall? One thing here now, but kind of the rollout to really drive growth towards the second half, kind of the SKU opportunity there for that recreate brand here in the second half.
spk03: Sure. Scott, go ahead, Jared. I was just going to say, I think, you know, we've launched Recreate Tincture, as you know, and, you know, we're going to be launching additional SKUs, additional formats in concert with the first, you know, the All-Star Game in July. And then, you know, we should see some pipeline into retail later in the year. But I'll let Jared kind of take you through the need states and the formats that we're initially going to have in the market and sort of a pipeline of what's to come.
spk02: Yeah, sure. Hey, Scott. So we're looking at the brand as new targeted need states. I don't know if we recall we were engaged in the MLB process and we were really saying the game is played in the eight inches between your ears. And what they really wanted to support were athletes and consumers alike and was mental wellness, sleep. But we took our need states even further. So we have a brain support that hits mental wellness, but really is built with a lion's mane CBD, which gets us into the whole new functional mushroom category, which functional mushrooms, you could compare it to what CBD was four or five years ago in its growth. And then we've got a sleep product, which uses a botanical passion flower. We looked at our sleep gummy SKUs today, and in the current legacy Charlotte's Web, And it's our number one selling SKU, but I would contend, is that product in the CBD market or is it in the melatonin market? So this allows us to get to a sleep product with a functional botanical. Then we also have gone even further to get more active lifestyle support for your everyday consumer. And so we've hit muscle recovery with a tart cherry, as well as endurance with a beet powder. Those are the new need states that are coming out. And then we're also focusing on what I refer to really more as an innovation behind tinctures to support the decline in tinctures. But these are spray formats. So think grab and go, throw in your gym. And these would also be need states focusing on sleep, energy, endurance. And then we're also working on powder formats, which are soon to come, likely late this year or early next year. which Powders opens the door to multiple innovation formats.
spk03: I think, Scott, if I could just add as well, I think we need to be clear that, you know, Recreate is positioned against the targeted demographic groups, Gen Z, millennials, which is really an opportunity and a white space for us when you think about, you know, the consumers going into the Charlotte's Web brand. So first and foremost, very different targeted approach in terms of, you know, the brand, how we position the brand, lifestyles, and how we price it, you know, on a more affordable basis for consumers, as I mentioned earlier, relative to Charlotte's Web. So I think the fact that the need states, the formulations, the pricing, and the targeted demographics we're going after, and the MLB support and amplification as we go through the term of the The deal with them really positions us for incrementality as opposed to running what would you typically see as more of a cannibalization risk. We're very comfortable that this unlocks an ability for us to be much more relevant with a different demographic of consumers who can come into the Recreate brand but also have the availability of then going, for example, on our e-commerce platform and shopping the rest of the Charlotte's Web portfolio depending on what their specific needs and what they're looking for. So, you know, looking at this is very different. It's not a brand extension, if you will, but it's a new line, new product, new look and feel, new messaging, new formulas, targeted at new consumer states that we don't really address today.
spk06: I really appreciate that, Colin, in detail. Thanks. I will pass it on. Thank you.
spk05: Your next question comes from Derek Daly from Canaccord. Please go ahead.
spk07: Yeah, hi, thanks. Good morning, everybody. I just wanted to talk a little bit about the margin difference between gummies and tinctures. Is there any notable difference there, or is the impact to the P&L mostly on revenue?
spk03: I'd say, I'll start and turn it over to Jessica for any color, but It's really much more of a revenue negative mix than it is margin. You know, we do, whether it's tinctures, which we produce in-house, or gummies that, you know, we produce today through Comans, you know, our margins are pretty healthy across the portfolio spectrum. So it's really more of a revenue mix impact than it is a margin impact, as you've seen with the margins that we put up in the first quarter.
spk07: Right. And then on the co-manufacturing, I mean, is there – a point where the gummy mix skews higher as a percentage of your revenue, that it would make sense to potentially bring that in-house? Do you guys have the capability or the capacity to be able to do that over time?
spk03: Yeah, Derek, thanks for that question. The answer is yes. We have the capacity, and more importantly, we've made the capital investment a few years ago. Recall, we put $40 million into a state-of-the-art facility where you're operating at about, I'll call it 20% capacity, plus or minus. So we have the capacity. We've invested the capital. And to your point, you know, when the economics turn in our favor, we will certainly be looking at that and more to come there. And not only gummies, by the way. I mean, we have the opportunity to bring other things in-house as well over time. So Certainly one of the things we're looking at, you know, as we look forward in our strategic execution of plans, but, you know, more to come.
spk07: Okay. And then can you maybe just give us some color on your, you know, when I think about your overall revenue split or product mix, however you guys want to put it, what percentage of sales or volumes is more value focused these days versus premium focused?
spk03: Again, I'll let Jessica come in, but I'd say Charlotte's Web, across all of our formats, continues to be priced at a premium to the rest of the competition. We're very concerned about keeping that brand equity. We continually look at our pricing relative to the competition. And, you know, that's another opportunity for Recreate to bring new consumers into our brand world, you know, with a more sort of appropriately, you know, standard price kind of skew set to complement what we're doing in Charlotte's Web's portfolio at the moment. But overall, we still, you know, we believe we do have a premium portfolio. product that deserves premium pricing. And then it's always a question of, you know, how much is that index and where is the sweet spot for it, which we continue to look at.
spk07: Yeah. And then in terms of, I guess, just that industry pricing, you know, as you start to see some of these smaller scale brands go away, I think you mentioned a thousand going to hopefully 20 or 30 over time. Have you seen that pricing change at all? Is it starting to stabilize? Any changes there just in the dynamics around pricing over the last couple quarters?
spk03: Yeah, we've seen a relative stability in pricing. There's mixed impact on overall pricing as well. But as we mentioned earlier, our average retail price has grown when the categories come down. And so we've been relying less on price promotions. And when products don't turn at retail and you don't have the brand equity, then there's only one thing you can do to move product, and that's take pricing down. So we have done as we think appropriately to protect pricing and that premiumization. But we constantly need to look at the level of index of our brands versus the competitive set that remains. But You know, I'd say, again, for us, relative stability of pricing.
spk07: Yeah, okay. That's good to hear.
spk06: Thank you very much. Cool. Thank you. Thank you. There are no further questions at this time. You may proceed.
spk04: Well, I'd like to thank everybody for participating in our first quarter call, and we'll look forward to speaking to you again after our second session. second quarter results in August. Thank you.
spk06: Ladies and gentlemen, this concludes your conference call for today.
spk05: We thank you for participating and ask that you please disconnect your lines. Thank you.
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