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spk04: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings, Inc. 2024 First Quarter Conference Call. At this time, our lines are in lesson only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, May 8th, 2024. I would now like to turn the conference over to Corey Pala, Head of Investor Relations. Please go ahead.
spk00: 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 10Q report for the quarter is also available and has been filed on CDARplus.com in Canada and in the U.S. with Edgar and the SEC. CEO Bill Marachnik and CFO Jessica Saxton are leading our call this morning. On this morning's call, we'll review the financial results of the quarter and provide some color around the business and our outlook. 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 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'll 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 the respective and most directly comparable GAAP financial measures. And now I'll hand over the call to Charlotte's Web Chief Executive Officer, Bill Marachnik.
spk01: Thanks, Corey. 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're 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, one, transforming the consumer experience end-to-end, two, being the most trusted and valued partner among retailers and distributors. Three, reinforcing and amplifying CW's influential voice. And lastly, continuing to identify costs and operating efficiencies. Despite making good progress on our True North initiatives, the first quarter of 2024 was not what we wanted from a revenue standpoint at all. marked by weak year-over-year sales, particularly in our e-commerce business. Now, there's a number of factors that contributed to our weak sales in Q1, and they basically fell into three main buckets. First one is we pull down spend on our paid media in order to update the attribution of each program and evaluate the highest performing campaigns. Secondly, our legacy e-commerce platform limits our ability to move quickly. And third, we inadequately targeted the right products and offers to the right consumers. That said, we're laser focused on addressing these gaps, and I'll share with you the progress we're making shortly. But let me first say that I fully understand the frustration that investors are feeling as we work through these challenges. But I do want to reassure you that we are already seeing positive indicators that are expected to be the precursors to increased business results. For example, We've been actively laying the foundation to expand our offerings beyond CBD, using the recently launched Stay Asleep CBN product as an integrated part of our sleep portfolio. It's just one instance, which I'll dive into more shortly. But first, I'd like to hand over the call to our Chief Financial Officer, Jessica Saxton, to review our Q1 financial results.
spk06: 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 right-sizing 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. In the interim, we need to have a more efficient structure in place for what is happening now, pre-regulation.
spk05: Why are we changing this now?
spk06: 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 rose, 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 healthcare practitioner channel, which we also refer to as the medical channel. I want to give more context on the right sizing of our business relative to our Q1 performance, specific to our expenses. The finance team utilized historical data as well as projected growth to re-forecast 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 and 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, one, evaluate ROI, and, two, update our media attribution tools. Despite underperformance in the e-commerce business during the period, these changes and upgrades are crucial for laying the groundwork to support our short and long-term goals aimed at revitalizing our business and steering us back to growth. Also, during the quarter, we implemented a price reduction across our oil tincture portfolio. The lag between the price recalibration and associated promotional consumer behavior was apparent. However, We have already taken quick steps to reach our customers through new segmented marketing and associated promos, finding the right balance between discounting and everyday low prices. Now turning to our B2B business. Our B2B net revenue was 4 million versus 5.7 million last year. Year-over-year retail sales were down due to certain customers beginning to exit the CBD category or reducing total shelf space for CBD products between Q1 2023 and Q1 2024. As this occurred throughout the 2023 calendar year, the first quarter of 2024 has the highest year-over-year contrast. However, on a quarter-over-quarter basis, our B2B revenue decline was more modest. We are excited to share that B2B has secured 48 of our top 50 accounts to carry our new CBD Stay Asleep product. which will launch in stores in Q2. In April, we launched with FreshTime in 70 locations spanning 10 states. Despite lower revenue, gross profit was $6.9 million or 57% of revenue as compared to gross profit of $9.9 million or 58.3% of revenue in the first quarter of 2023. We expect to maintain gross margin strength throughout 2024 as a result of improving operating efficiencies, including our transition to the in-house production of our topicals and gummies later this year. Turning to expenses, our first quarter SG&A decreased 12.8% year-over-year from $17.5 million in Q1 last year to $15.3 million in Q1 of this year as we continue to right-size the business, taking actions to reduce expenses to be more reflective of our current revenue position. Additionally, we continued to eliminate inefficiencies such as unnecessary software subscriptions and contracts to better utilize our resources. With these changes, we have improved our SG&A as a percentage of net revenue, which will be reflected as we move forward in 2024 and beyond. As I stated earlier, these costs are expected to be approximately $15 million on overall annual SG&A improvement versus last year. As discussed in the last quarter, we are not just cutting costs. We are understanding the full implications and strategically optimizing our spending. Our focus continues to be on improving return on investment by reallocating funds towards higher producing ROI activities. For better transparency, depreciation and amortization plus public company costs account for approximately 20% of our 2024 total SG&A costs. Excluding these, our operating expenses were still too high relative to our net revenue, and we are bringing these down significantly to be more in line with sustainable business practices. Our Q1 operating loss of $8.4 million was modestly higher than the operating loss of $7.6 million in Q1 2023, primarily as a result of lower revenue. Net loss for the quarter was $9.7 million, or minus $0.06 per share, compared to a net loss of $2.9 million, or minus $0.02 per share in Q1 of last year. Q1 cash flow was negative $9.3 million, of which $2.1 million was CapEx-related, mainly attributable to our production insourcing, and $2.5 million was related to the MLB licensing fees, which, as a reminder, there will only be one other payment for this year for $2.5 million in Q3. Excluding these items, Q1 cash burn was $4.7 million, largely a result of our net revenue decline in the quarter as well as anticipated inventory build. At the close of the first quarter, we had cash of $38.5 million and our working capital was $48.6 million. With prudent cash management, we believe that we have sufficient capital to meet our near-term objectives and return to revenue growth. We are not happy with our Q1 revenue results. However, we are optimistic about the outcomes of our current initiatives. We have taken actions internally to ensure cash flow management, including the redesigning of B2B, along with a reduction in SG&A expenses. I remember once reading a quote that resonates with Charlotte's Web's current dynamics. The CFO of HP once said, if you save a dollar, you will drop a dollar to the bottom line. But if you save a dollar and you reinvest that back into the business in a disciplined way, a returns-based way, that dollar is actually worth a lot more in the future. And that's really what running a business is all about. So with that, we are investing returns-based dollars back into the business to stabilize the present and ensure growth for the future. I will now turn the call back over to Bill.
spk01: Thanks, Jessica. All right, so I'd like to focus the remainder of this call on the progress that we've been making. And let's start with our 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 than 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, one, introducing new prospecting and retargeting approaches within our paid CTV channels. Two, enhancing our digital marketing performance to drive increased engagement as well as transactions. And third, evolving our loyalty rewards program, which is already having impact on our subscriber growth. We launched this upgraded loyalty program in Q1, And we've increased new subscribers by around 25% since then, while maintaining a retention rate over 90%. The second pillar we've been prioritizing is our B2B retail partner relationships. As Jessica mentioned earlier, we've redesigned B2B and refocused our strategy to address current market and regulatory conditions. As part of this transformation, we have redirected part of our focus to the opportunities within the medical channel, which has displayed resilience with a relatively modest decrease. This channel represents a promising area for strategic repositioning and stands out as one of our more lucrative B2B channels. All right, so let's dive into the Stay Asleep CBA and Gummies launch as part of our next pillar, which is amplifying our leading voice in wellness. During the first quarter, we evolved our organic, social, and earned media strategies, complemented by the March launch of CBN, our new product innovation beyond CB Day. For example, the Stay Asleep CBN campaign reignited our earned media presence, resulting in a reach of over 26 million in consumer-facing media and a reach of over 750,000 through earned social influencer posts. The response from media platforms and journalists eager to experience our product has been exceptionally positive, and these efforts are continuing to yield promising results. Let's turn to social media. We transformed our social media accounts with a new look and feel that better captures our brand voice. In Q1, our organic impressions are up 32%, while our reach per post is actually up 55%. And for having only launched Stay Asleep CBN in March, we are currently the top ranked on Google for CBN sleep gummies. Now, by integrating these marketing activities with tailored messaging that includes science-backed research, we attracted new consumers into the marketing funnel. And this has allowed us to introduce them to the brand beyond CBD. The results of these efforts are a bump in new consumer acquisition and a higher than average sell-through rate. In response to this rapid spike in demand, our operations team has moved up manufacturing timelines for stay-asleep CBN. And this underscores the value and our prioritization to bring the production of gummies in-house from a flexibility and efficiency perspective. The last true north pillar I'll speak about today is driving access. Driving access represents pushing forth regulatory progress and access for consumers. And it also means furthering science and innovation so that consumers can have meaningful and impactful health choices. Let me also give you an update about the FLORIA. We're pleased with the progression of the FLORIA since our last update in December. The FLORIA LLC successfully completed all participant dosing for the phase one program in March, and the trial data will be included in an IND submission to the FDA expected this year. Pending a positive outcome from the FDA, phase two clinical trials are anticipated to commence shortly thereafter. So as Defloria continues to advance, it remains deeply intertwined with the origins of the company. And when you stop and think about it, Charlotte's Web started with a humble plant, its potential unknown, and a little girl on hospice who truly needed a miracle. It's been about a decade since Charlotte Spiggy's extraordinary moonshot turned into a mission, uniting a global community in its wake, rallying families, patients, and visionaries to join hands in a shared cause, inspiring millions, reshaping legislation, and propelling groundbreaking research that continues to change lives today. In April, we honored Charlotte's lasting impact during Colorado State Charlotte Figgy Day. At our company home base, we gathered to hear heartfelt and trailblazing health journeys from families, veterans, and advocates. They spoke about the ups and downs of searching for answers and the immense influence Charlotte had on bringing them hope and a solution. An early CW adopter for his daughter, Emily, and leading community advocate, Ray Merzabizian, said of the event, being present to commemorate Charlotte's Figgy Day was profoundly meaningful. It was an emotional experience and a true privilege. It's both an honor and obligation to uphold Charlotte's legacy ensuring her story continues to educate and raise awareness. While Charlotte's story has unfolded over the span of 10 years, its influence continues to shape lives, laws, and new science. So let me just say in closing that as we navigate the journey ahead, we must always remember our roots and those who forged the path before us and fuel our goals for tomorrow. We'll now take questions from our analysts.
spk04: Thank you, sir. Ladies and gentlemen, we now begin the question and answer session for analysts. Should you have a question, please press star followed by one on your touchtone phone. You'll hear a 3DM brand acknowledging your request, and your question will be pulled in the order they are received. Should you wish to decline from the booking process, please press star followed by two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Scott Fortune with Roth MKM. Please go ahead.
spk03: Hey, good morning. This is Nick. I'm for Scott. Thank you for taking the question. 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. New dimensionalize wherever you 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?
spk01: Thank you. Yeah, thanks, Nick. You know, it's hard to project. You identify 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 seen 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 is we've got a lot of existing doors, as I'd refer to them, 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 we're 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.
spk03: Thank you. I appreciate that. And the second one for me, just on the cost side, as far as expense reductions and efficiencies, 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.
spk06: Hey, 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 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. These are specific to SG&A and don't have anything to do with CapEx, just to make that clear, both Shopify and insourcing of topicals and gummies 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.
spk05: Great. That's it for me. I appreciate the color.
spk04: Thanks, Nick. Thank you. Your next question comes from Luke Hannon with Canaccord Genuity. Please go ahead.
spk02: Thanks, and good morning, everyone. I just wanted to get a better sense of overall, in response to the price cut, were sales expectations in line as far as elasticities go? Is it in line with what you were 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?
spk01: Hey, Luke. It's Bill. So, yeah, in terms of elasticity, so as you know, we took the price reduction on the oils. It was difficult. 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 be 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, you know, stay tuned. I think that we've got it thought through really well. And we've got a really, you know, interesting portfolio queued up. that I think will be extremely competitive as we move forward.
spk02: Okay, thanks. 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 or the number of those top 50 accounts or even beyond that that are involved with any new product that you guys have introduced?
spk01: Yeah, 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 three-day event. We went through our samples like the first half day. And what was fascinating for me was the next morning, I show back up at the booth, and we had many, many people coming back and describing what an incredible night's sleep they had the night before. And we're 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 D2C channel, keeping in mind we just launched that around the middle of March, about the 9th or the 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. You know, 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 this year.
spk05: That's great. Thank you very much.
spk04: Thank you. There are no further questions on the line. I will turn the call back to Corey for closing.
spk00: 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'll look forward to communicating with you again on our second quarter earnings call in August. Thank you.
spk04: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a great day.
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