Greenlane Holdings Inc (GNLN) 2019 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to today's conference call to discuss Greenlane Holdings Third Quarter Fiscal 2019 Financial results. (Operators Instructions) Hosting today's conference call will be Liz Zale with Sard Verbinnen. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Ms. Zale, please go ahead.

Thank you, Sherri. Good morning, everyone. And welcome to Greenlane's Third Quarter 2019 Call. As a reminder, a press release detailing the financial results for the quarter is available on the Investor Relations section of the Green Lane website. This call is being webcast, and a replay will be available on the company's website for approximately 30 days. On the call today are Aaron LoCascio, Chief Executive Officer; and Ethan Rudin, Chief Financial Officer.

Before we begin, I'd like to remind everyone that Greenlane's prepared remarks may contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors included in Greenland's IPO prospectus dated April '17, 2019, and in today's press release.

This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, November 8, 2019. Greenlane assumes no obligation to update any forward-looking statements that may be made in today's release or call. During today's call, management will discuss non-GAAP financial results, including adjusted net income and adjusted EBITDA. Management believes these financial measures can facilitate a more complete analysis and greater transparency into Greenlane's ongoing results of operations, particularly when comparing underlying results from period to period. Greenlane has included a reconciliation of these non-GAAP financial measures in today's press release.

And now I will turn the call over to Aaron LoCascio.

Thanks, Liz, and good morning, everyone. I'll start with a brief review of our third quarter sales highlights, operating environment and business development activities. And then we'll turn the call over to Ethan to discuss our financial results in more detail. After Ethan's comments, we'll open up the call for your questions.

Let me start by noting that our core business remains strong, and we continue to make progress on the 3 pillars of our strategy: one, building our house brands; two, growing our supply and packaging business; and three, strengthening our direct-to-consumer operations. We are confident these will be key drivers of our growth as we think about 2020 and beyond.

Before I talk more about these growth drivers and our progress there, I want to directly address certain industry headwinds that impacted our sales this quarter. Overall, revenues were up 3% year-over-year to $44.9 million, but decreased from the second quarter. The unforeseen crisis of acute liquid vaping-related health conditions, coupled with the lack of clarity around regulatory actions negatively affected our sales of JUUL and other vaporization-related products and caused some B2B customers to reduce their orders. As a result of these and other factors, which Ethan will provide more context on shortly, JUUL sales decreased sequentially from Q2. As a leading distributor of vaporization hardware and e-cigarettes, we are, of course, very concerned about recent reports of acute health issues related to vaping. Studies and investigations into vaping-related illness are ongoing and no clear conclusions have been reached to date. We are closely monitoring the situation for additional developments. I believe it is important to reiterate that Greenlane is dedicated to consumer safety and we have taken numerous steps to protect the health and safety of end users to ensure the quality and integrity of our products. As some of you may have seen, we recently shared some additional thoughts about this issue on our website.

I also want to be clear that: one, while our products have not been directly linked to acute health issues, we do believe the impact on our sales is correlated with the associated reporting and uncertainty -- uncertain regulatory environment; and two, not all our products were impacted by these broader macro issues.

Our open system products like the Volcano Hybrid, a next-generation product by Storz & Bickel, do not fall under most current regulatory bands, given that they are loaded directly by consumers as opposed to closed system vaporizers or consumers by prefilled cartridges. For now, we expect the concerns about vaping-related illness and impact on vaping-related product sales to continue to pressure sales over the near term. We also note that the regulatory environment with regard to some of these products continues to remain unclear with ongoing discussions at both the federal and state levels, and some federal activity expected in the near future. And I'm sure you saw the announcement by JUUL yesterday that they are no longer selling mint flavor. We believe some consumers may switch from mint to flavors traditionally known to smokers. That said, we are making a purposeful effort to actively reduce our JUUL concentration by eliminating aspects of this business that do not deliver on our margin expectations. We expect JUUL will remain part of our portfolio, but we are going to be deliberate about allocating our sales resources to focus on higher-margin opportunities. Ethan will talk more specifically about the impact of these developments on the business. But as we continue to focus on the 3 pillars that I mentioned above, I am now more confident than ever that this strategy best positions us for long-term growth and success.

With all this in mind and turning back to our core business, which comprises our products outside of JUUL impacts, during the third quarter, we made significant progress on driving our long-term growth strategy and diversification of our business model. We invested in a variety of ongoing initiatives within our 3 pillars, and we are well funded to continue to execute on our pipeline of growth opportunities.

The first pillar of our growth is our focus on expanding and diversifying our portfolio of owned brands. Overall, sales of house brands are growing double digits year-over-year. As an example, since our VIBES launch, sales have more than doubled over sequential quarters, and that trend is expected to continue. Our aim is to continue to grow our house of brands and launch new innovative ones by leveraging our deep understanding of the market and our technical expertise in design and product development. As many of you know, we were pioneers in the industry, and we can continue to be trendsetters and innovators as the market evolves. Particularly, we see opportunities in the CBD space, where we nearly doubled our sales between Q2 and Q3, and we are looking to capitalize on the $22 billion U.S. CBD market opportunity, created by the 2018 farm bill and further develop a portfolio of CBD and hemp products. This quarter, we have announced some great new distribution and partnership agreements with Bouquet, Cookies, Green Lotus, Sherbinskis and Shaboink. We also want to continue to partner with specialized cannabis-production companies to develop our own ancillary products to benefit from the potential future decriminalization of cannabis in more U.S. states.

With regard to supply and packaging, our second growth pillar, we continue to develop our manufacturing and supply chain excellence and have signed several new distribution agreements to expand the strength of our platform. We launched an exclusive U.S. and Canadian distribution partnership with Omura, the first of its kind flower cartridge vaporizer, offering a unique vaping experience of whole flower candidates using next-generation heat-not-burn technology. We have signed an agreement in the quarter for a sourcing office in Hong Kong, which will bolster our supply chain and allow us to be geographically closer to contract manufacturers in order to best control cost, quality and timeliness of deliveries to our network. We continue to focus on our flagship premium packaging brand, Pollen Gear. Sales for the quarter have increased by 25% to the prior year period. The third pillar of our growth is direct-to-consumer. As we continue to leverage our Higher Standards retail stores and e-commerce platform, Vapor.com to reach consumers. We have entered into a lease agreement for Higher Standards third retail location in Malibu, California, and are expecting to sign a lease for 1 additional Higher Standards location by the end of the year, which will get us to 4 permanent stores in the U.S. with more growth to come.

Vapor.com, which we own and operate, remains 1 of the most visited North American direct-to-consumer e-commerce websites in the vaporization products and consumption accessories industry. Throughout the quarter, we also continued to focus on our international expansion in areas of our core business. We made significant strides with our acquisition of Conscious Wholesale, a leading European wholesaler and retailer of consumption accessories of vaporizers and other high-quality products. We view this as a launching pad to pursue more opportunities in Europe, which we consider a high potential market.

According to industry estimates, Europe is forecasted to have the world's largest legal and medical cannabis markets by 2023. The acquisition expands our footprint geographically across 20 European markets through a multichannel sales platform with approximately 700 points of retail distribution. This also gives us new ways to grow our higher-margin house of brands portfolio. We also have opportunities -- we also have other opportunities in Europe. We now have access to a U.K. distribution facility. And our partnership with NOUS, N-O-U-S, that will bring Higher Standards, branded and curated shop-in-shop to Paris, France. Each of these individually and together, create more avenues for Greenlane to participate in the improving global landscape for cannabis. We are keeping a close eye on Latin America for near-term opportunities.

As discussed, looking ahead to Q4, while we continue to see the same market dynamics at play, we are predominantly focused on driving growth in our higher-margin business areas, which we expect to contribute to margin expansion in the long term. While we, of course, continue to monitor the vaping situation and regulatory environment, I am incredibly excited about our path forward and firmly believe that our continued focus on the 3 pillars to drive our core business best positions us for long-term sustainable growth.

With that, I'll now turn it over to Ethan to run through our third quarter financial results.

Thanks, Aaron, and hello, everyone. Our Q3 2019 revenues increased year-over-year, 3% to $44.9 million. If we include the revenue of Conscious Wholesale on a pro forma basis, net sales would have been $47.3 million for the third quarter of 2019. Positive drivers of revenue growth for the quarter were the continued growth in popularity and availability of our top 6 products from our top product lines as well as continued innovation from these brands, which collectively resulted in a 6.3% increase in net sales year-over-year. We also had strong performance in Canada, where the expansion of the Canadian cannabis market drove a 100% and year-over-year increase in sales for the quarter to $6.4 million. Our total sales growth was impacted by a $2 million increase -- decrease, excuse me, in sales related to the vaporizers and vaporizer accessory products within the top 6 brands.

As Aaron briefly touched on, in the third quarter, we were impacted by the industry headwinds related to consumer concerns around vaping-related illnesses. As we look ahead to Q4, we anticipate a meaningfully negative impact on revenue due to the vaping regulatory environment our deliberate decision to proactively move away from low-margin deals and limit discounts on JUUL and other products moving forward, and the discontinuation of sales mint in the U.S. announced by JUUL yesterday. In light of these impacts, we anticipate up to a 50% decline in our JUUL sales from Q3 2019. We expect these dynamics and deliberate business decisions to contribute to margin expansion going forward. Gross profit for the third quarter of 2019 was $6.4 million, resulting in a gross margin of 14.3%. Including the contribution from Conscious Wholesale on a pro forma basis, gross profit would have been $7.6 million or 16.1% of revenue for the third quarter of 2019. As we've noted, gross margin fluctuates based on a variety of factors, including the mix of products sold and volume purchase rebates. Our gross margin in the quarter was largely driven by JUUL sales, which comprised 45.4% of net sales. Due to the nature and timing of JUUL purchase rebates, we experienced a disproportionately negative effect on our Q3 margin profile.

As we look ahead to the key drivers of growth in our business, we are going to be focused on the higher-margin parts of the business that will better position us for the long term. The key to driving this gross margin profile is continued investment in growing our house brands, the supply and packaging business, and our direct-to-consumer businesses. On a stand-alone basis, these combined businesses are accretive to our current margin mix, and we expect their growth to provide an important tailwind for margin expansion.

Salaries, benefits and payroll tax expenses for the third quarter increased $2.7 million year-over-year as a percent of net sales, sales benefits, payroll taxes increased to 14.6% from 8.9% in the prior year quarter. This increase is primarily due to the incremental personnel expenses of $1.2 million as we added 45 new employees to further expand our domestic sales and marketing efforts. We also recorded approximately $1.5 million in equity-based compensation expense.

General and administrative expenses were relatively stable, up $0.5 million to $4.8 million or 10.6% of net sales compared to 9.7% of revenues in the prior year. These included an incremental $200,000 in marketing expenses and $100,000 increase each in insurance expenses, bank merchant fees and computer hardware and software expenses.

Net loss for the third quarter 2019 was $9 million. This was negatively impacted by $1.5 million of equity-based compensation, as previously mentioned, and $5.4 million attributable to the establishment of a valuation allowance against the deferred tax asset during the period. The overall loss was offset by a gain of $1.5 million recognized on an equity investment. Pro forma net loss, including Conscious Wholesale would have been $8.4 million. Adjusted net loss for the third quarter was $7.5 million compared to the adjusted net income of $20,000 in the third quarter of 2018. Adjusted EBITDA was a loss of $3.4 million in the third quarter compared to a gain of approximately $900,000 for the same period in 2018. We ended the quarter with $52.5 million in cash and approximately $100 million of working capital.

Aaron previously referenced our acquisition efforts in his comments, and I want to build on that and reiterate on what I said last quarter. While M&A continues to be a focus for us, and we rigorously consider all sorts of opportunities, including bolt-on and transformational acquisition, we will always remain disciplined. Just as a reminder, for our long-term financial targets, we expect approximately 25% annual net revenue growth, average gross margins of 20% plus and adjusted EBITDA margin of 10% plus.

Before I turn the call over for Q&A, I want to touch upon the share repurchase authorization we announced. Our Board has provided the authorization for the company to repurchase up to $5 million worth of shares. We are focused on striking the right balance between our capital allocation priorities of delivering value to shareholders in the near term versus investing in growth -- strategic acquisitions to create long-term value.

With that, I'll turn the call back to the operator and open it up for Q&A.

[Operators Instructions) Our first question is from Vivien Azer with Cowen and Company.

So even -- I understand your commentary around gross margin volatility, but if I reflect back on some of our understanding of your gross margin profile last quarter, the way we were thinking about it was JUUL's like a 10% margin, the rest of the business is a 24% and then we can use your revenue mix and get to the 17.3% that you reported last quarter. That math doesn't seem to hold this quarter. Is there any incremental detail you can offer to help us think about modeling gross margin, based on the evolution of your revenue mix, in particular, given your commentary around deprioritizing JUUL a little bit?

Yes. Thanks for the question, Vivien. I would say that, obviously, the quarter would intimate that there's been some margin degradation in the JUUL business. And I would say that over the quarter, the margin profile has been in the mid- to high single digits.

Additionally, I'll also add to that, this is Aaron. That the nature and timing of the JUUL rebates contributed in excess of 200 basis points to the margin decline.

Okay. That's great. So it's encouraging that you guys are going to focus on higher-margin opportunities and reiterating your target for a 20%-plus gross margin. How should we think about the timing of attaining that kind of targeted margins?

Well, I would say that in the last quarter, we had reiterated that when you remove JUUL from the margin profile, blended of our entire gross margin, you actually -- you serve those long-term targets. I would say that our continued focus on reducing that JUUL concentration and particularly, self-selecting not to do the low-margin part of the business, should have us back there, hopefully, in the coming quarters.

And we've got our own estimate of what we think JUUL did in the quarter, but can you disclose what was JUUL versus non-JUUL revenue?

So JUUL revenue for the quarter in total was $20.4 million.

Our next question is from Glenn Mattson with Ladenburg Thalmann.

Curious a little bit on the Conscious Wholesale acquisition, obviously, you're expanding into Europe, you've talked about those plans in the past. But is part of that -- is part of the idea there to distribute JUUL products, and is there -- a large percentage of their business is vaping, and just give us kind of maybe some sense of the background as to whether or not this news has traveled across the pond, just kind of negative vaping backdrop?

So a couple of things. Thanks for the question. I appreciate it. So we have seen some of the concerns around vaping cross borders, in particular, in Canada, where we have a long-term business. In Europe, where we're relatively new, and we've recently made this acquisition. The Conscious Wholesale acquisition does not currently have any nicotine products within its portfolio. It's something that we'll continue to evaluate as we go forward. Otherwise, their business is relatively analogous to our business in terms of the products they sell. They do sell a lot of open-system vaporizers, which I will also comment that in light of -- or despite the fact of -- around the vaping concerns in the industry, the effect to the open-system vaporization products has been limited. And we anticipate that trend to continue. But really, this acquisition is a launching pad for us to expand our portfolio, namely of our high-margin house brands into more than 20 new markets in Europe.

Okay. Great. And I'll squeeze one more in. On the retail store rollout, can you give us an outlook for what you're thinking about for next year? And just the thought process as to how quickly you think you'll be moving as far as opening new stores and how hard it is to find locations, and just background around that?

Sure. So New York -- we have our New York location, Chelsea market, which continues to perform very well. Ponce City is early days. We're excited for the holiday season. Just opened up or about to open up, rather, I should say, the Malibu location. We're nearing a fourth location that we're not quite ready to disclose. As we look towards next year, we aren't specifying the exact number of locations. We're targeting however, we have previously cited that, on average, typically around 3 stores per year, but we want to be very thoughtful around each individual location. We want to study and learn from each individual location, the differences between how Chelsea market performs against Ponce City against Malibu and the various demographics. But we have a great partner on the real estate front, Jamestown, which has a large number of real estate assets across the country. And we are evaluating a number of other potential locations for next year, launches.

Our next question is from Scott Fortune with Roth Capital Partners.

Could you provide a little more color on Canada and kind of the JUUL sales that is going on up there? And then the rollout -- kind of from a timing standpoint, what are you seeing the rollout in Canada look like from a timing standpoint here?

Yes. Thanks for the question. So in terms of JUUL concentration in Canada, the split is about 80-20: 20%, Canada; 80%, U.S. Canada is still very early days. And as we mentioned in our prepared comments that we've doubled the business there, it's gone over $6 million from $3 million. And what I would say is that we are very, very encouraged at the introduction of our house brands up there. Obviously, we're looking to increase our margin profile. Unfortunately, the margin profile of JUUL sales in Canada is better than what we're doing in the U.S. as it isn't as pervasive yet.

Okay. Great. And are you seeing any kind of delays or pushback for the Cannabis 2.0 rollout or kind of timing expected, probably first quarter next year to really start -- you're seeing some meaningful revenues from that side of thing?

Yes. As I said, it's still such early days, and we have plenty of wood chop that we don't see it slowing us down, although we do see delays in the broader market.

Okay. And then real quick on the operations side, kind of -- with JUUL, obviously, a lot of volatility there, but kind of speak to me on the rightsizing of kind of SG&A going forward and potential tender -- timing of getting adjusted EBITDA positive from that standpoint?

We're always in a state of reassessing our talent and thinking through are we setup for growth for the future. And so while salaries have increased. A lot of it is figuring out where to strategically place sales, thinking about how to do more specified sales targeting. So at the end of the day, we will be rationalizing a bit of the workforce. But it's not, at this stage, anything that we're prepared to talk about in any sort of detail.

[Operators Instructions) Our next question is from Mike Grondahl with Northland Capital Markets.

What 1 or 2 product categories -- are you kind of most confident that can kind of drive revenues incrementally in margin. How should we think about that going forward?

Rather than a product category, more broadly speaking, we are and remain focused on our house brands. We've launched a number of various house brands. They typically have a much higher margin profile associated with them, much higher than our general long-term margin targets. So as that business continues to grow, we expect that to have a disproportionately meaningful effect on our margin profile. In this quarter, we grew it up to 7.7% of our total revenue. And we expect to see double digits in the very near term.

Okay. Is there a second area we should think about or watch? Or is that the main one?

Well, there's really 3 areas of the business. As it relates to products, it's the house brands predominantly. Then we have our business-to-consumer operations, which includes both our e-commerce properties as well as our brick-and-mortar stores, Higher Standards. And then the third pillar that we focus on that has a higher margin profile associated with it is our supply and packaging business, which is predominantly made up of our patented child-resistant packaging, Pollen Gear, by virtue of our acquisition earlier this year and some of our closed-cartridge vapor systems. Those 3 areas of our business, all have much higher margin profiles associated with them. And frankly, even our B2B CPG category, which is selling the consumer packaged goods to our independent smoke shops and vape shops across the country, absent JUUL, have a margin profile that's much more substantial than otherwise blended with JUUL, strictly in the [mid 20].

And how were -- how were e-commerce sales in the quarter?

There was no material change to our performance on e-commerce sequentially. So there's nothing specific to report there, but it is a key focus area for us going forward. So we will continue to make investments. Essentially, it's a work-in-progress as we continue to invest in that segment of our business.

We have reached the end of the question-and-answer session. I would like to turn the conference back over to Aaron for closing remarks.

Thank you very much. I just wanted to say thank you for everyone's time today, and I look forward to seeing many of you in Boston in the coming days.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.