Greenlane Holdings Inc (GNLN) 2020 Q1 法說會逐字稿

Good morning, all. Welcome to today's conference call to discuss Greenlane Holdings first quarter financial results.

A press release detailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Greenlane website. As a reminder, today's conference is being recorded. On the call today are Aaron LoCascio, Chief Executive Officer; and Ethan Rudin, Chief Financial Officer.

Before we begin, Greenlane would like to remind listeners that today's prepared remarks may contain forward-looking statements, and management may make additional forward-looking statements in response to the questions received. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed in today's press release.

This call also contains time-sensitive information that speaks only as of the date of the live broadcast, June 4, 2020. Factors that could cause Greenlane's results to differ materially are set forth in today's press release and in Greenland's annual report on Form 10-K filed with the SEC. Any forward-looking statements made today on this call are based on assumptions as of today, and Greenlane assumes no obligation to update these statements as a result of new information or future events.

During today's call, Greenlane's management may discuss non-GAAP financial measures, including adjusted net loss and adjusted EBITDA. Greenlane has included a reconciliation of these non-GAAP measures in today's press release, which is available in the Investor Relations section of our website at gnln.com.

I would like to turn the conference over to Mr. Aaron LoCascio, Chairman and CEO of Greenlane. Please go ahead, Mr. LoCascio.

Thanks, everyone, for joining us today. During this call, I'll review our first quarter 2020 sales highlights, operating environment and business development activities before turning 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.

First off, I'm proud to report that Q1 2020 top line revenue came in at $33.9 million ahead of our initial $32 million to $33 million revenue target. Gross profit was $7.3 million compared to our original $7.2 million target, representing a 22% gross margin. And gross profit increased $0.8 million compared to Q4 2019, representing an improvement in gross margin of 414 basis points.

As we previously announced, we anticipate returning to cash flow positive operations by the fourth quarter of 2020, and I remain confident as we track towards this goal. That being said, we continue to monitor the uncertainties in the macro environment that could potentially influence this timing.

Second, as it relates to gross margin, we have continued to pursue our business transformation initiatives and are focused squarely on driving higher-margin sales.

I'm extremely encouraged by our progress thus far as our gross profit improved sequentially, even though our sales in Q1 2020 declined compared to Q4 2019. This positive trend has persisted since we implemented our strategic repositioning in Q4 2019, and we expect to continue shifting towards more profitable revenue streams going forward.

The investments we have made in developing our Greenlane brands is bearing fruit as each of our brands has continued to mature. In Q1 2020, Greenlane brands represented 19% of total revenue, up from 12% in the prior quarter. In particular, VIBES sales have doubled every quarter since our Q2 2019 launch, totaling $1.6 million in Q1 2020. Our supply and packaging revenue channel, which directly services cannabis brands with child-resistant packaging and other supply products contributed over $4.2 million in revenue with a strong gross margin of 35%.

Our own packaging brand Pollen Gear has seen a 36% increase in revenue, resulting in an additional $0.9 million in revenue compared to Q4 2019. B2C revenue represented approximately 8% of the total net sales in the period, driven by an increase in online consumer activity. Looking at our flagship e-commerce website, Vapor.com, we have seen unique visitors and average weekly revenue more than double since late March as compared to the year-to-date average prior to this period.

As a result of our deliberate pursuit of higher-margin revenue opportunities, JUUL sales in Q1 2020 represented 13% of total revenue, down from 16% of revenue in Q4 2019 and in line with our target levels. Our JUUL-only orders remain at 7% as they were in Q4 2019, highlighting the complementary nature of this product line to our customer base rather than a key driver of activity.

Third, we are continuing to streamline the cost structure of the business. In the first quarter of 2020, we had a targeted reduction in our workforce of approximately 50 full-time employees as a result of our business transformation efforts.

We expect to begin to realize the long-term financial impact in subsequent quarters. As much of this reduction took place later in the quarter and a further reduction took place shortly after the close of the quarter. That being the case, on a conservative basis, we estimate that the Q1 changes will result in annualized cost savings of approximately $3 million.

Subsequent to the quarter end, we successfully closed our New York distribution center and moved our inventory to our new facility in May, on time with our original expectations as we complete our business transformation plan. We have further plans to place the transition of the majority of our U.S. operations to a more centralized model, which is expected to impact roughly 40 employees once completed. As we transform our company with a focus on yielding greater efficiencies, ensuring that we continue to drive high customer satisfaction remains of utmost importance.

While the changes we are implementing will produce additional cost savings, which we expect to come into effect in the third and fourth quarters of this year, we also anticipate that this centralized model will result in improved operational service levels for our customers through a more automated at scale distribution center.

On a matter of COVID-19, broadly speaking, our operating environment today is largely unchanged since our last update in April 2020. Our distribution centers remain open as many state governments have deemed cannabis businesses as essential, and out of an abundance of caution, our U.S. retail outlets remain closed, while our European outlets have recently opened in a limited capacity.

Subsequent to the quarter end, we officially opened our new Cookies partnered location in Barcelona, Spain, and I'm excited to provide you with more details on this location soon. As noted on our prior earnings call, our B2B CPG revenue channel has been the most adversely impacted by COVID-19. Since our customer base is primarily comprised of small brick-and-mortar establishments many of which have experienced closures since mid-March 2020. Our industrious team continues to develop new ways to support our customers during this challenging time.

For instance, we recently created and launched a B2B drop ship program to provide the ability for our brick-and-mortar partners to service their customers when their stores are temporarily closed. We have continued to maintain a strong cash position and balance sheet, which we believe provides us a foundation to continue focus on the growth of the business.

Before turning the call over, I just want to thank our team for all of their hard work as we have continued to successfully execute our strategic initiatives despite a difficult environment. We have made great progress, and I am excited to continue to forge our path for long-term sustainable and profitable growth in 2020 and beyond.

With that, I'll now turn it over to Ethan to run through our first quarter 2020 financial results.

Thanks, Aaron, and hello, everyone. I want to echo Aaron's appreciation for everybody joining, and I hope everyone is staying safe and healthy. As a reminder, the results I will be reviewing for you this morning to be found in our earnings release, it's available on EDGAR and the Investor Relations section of our website at gnln.com.

Our Q1 2020 revenue was $33.9 million, a decline of 32% year-over-year as a result of implementing our business transformation plan to realign the company's focus on higher-margin revenue opportunities and shift us away from the lower-margin sales such as JUUL. This was partially offset by an increase in sales related to some of our other brands, primarily the Greenlane brands, house brands for which we experienced a $2.1 million increase in the first quarter of 2020 as compared to Q1 '19.

We are also seeing growth in our core business as we take on other third-party brands and products, which, in aggregate, resulted in an increased revenue of approximately $1 million sequentially since Q4 '19. As Aaron mentioned, we have continued to progress our plan to reduce concentration of JUUL sales and instead focus on higher-margin revenue opportunities, resulting in a sequential margin improvement of 250 basis points from the fourth quarter of '19. While these changes represent a slowdown in our near-term revenue growth, we believe that this is a positive sign for our business as we move forward into 2020 and beyond.

Gross profit was $7.3 million or 22% of net sales compared to $9 million or 18% of net sales for the prior year period. The increase in gross profit as a percentage of the net sales on a year-over-year basis primarily reflects fluctuations in factors, including sales mix, purchasing efficiencies and average markup over cost of products. While current market conditions have made it difficult to forecast future performance, the consistent increases in our gross margin over the past quarters is indicative of the improvements we've been driving towards in our operating model.

Salaries, benefits and payroll taxes expenses for the first quarter of 2020 decreased by $1.5 million to $6.6 million as compared to $8.1 million for the same period in 2019. This decrease is primarily the result of reduction in equity-based compensation expenses of $2.5 million, offset by increases to wages and related payroll expenses of $1.1 million attributed to hiring additional employees to accommodate our operations as a public company and absorbing new employees from the conscious wholesale acquisition.

General and administrative expenses increased by $3.3 million year-over-year to $8.7 million, primarily due to additional costs incurred in connection with our operations as a public company. Net loss for the first quarter of 2020 was $16.8 million compared to $17.7 million for the same period in '19. This was impacted primarily by investments in people and equipment. Adjusted net loss for the first quarter 2020 was $6.1 million compared to adjusted net loss of $1.5 million for the first quarter of 2019.

Additionally, we recognized an impairment charge of $9 million to our U.S. reporting unit's goodwill during the first quarter of 2020. Adjusted EBITDA was a loss of $6.3 million for the first quarter of 2020 as compared to a loss of $800,000 for the same period in 2019. We ended the quarter with $43.9 million in cash and approximately $81.8 million of working capital. With that, I will turn the call back over to the operator to open it up for Q&A.

(Operator Instructions)

And your first question is from Vivien Azer of Cowen.

I hope everyone continues to be safe and healthy. My first question is on the top line. Nice beat relative to your preliminary guidance. Any specific callouts on what surprised the upside?

Great. So Vivien, the -- one of the big drivers for us, honestly, has been some of that house brands, in particular. Last-minute -- some last-minute orders for our VIBES, Pollen Gear product lines, in particular, were quite strong. And as we had mentioned before, we're seeing strong momentum in our B2C revenue channel, in particular, on e-commerce properties.

Great. That's helpful. And then just a follow-up on VIBES. You called out the distribution that you were able to attain in the quarter. Like, where are you guys tracking relative to your target? Ultimately, how much distribution do you think there's still available for you on VIBES?

Sure. We -- I mean, we are certainly tracking as per our expectations. We are meeting our targets that we've set internally for ourselves. We do expect continued growth with our house brands in general, in particular, VIBES. So we do expect those trends to continue. In Q2, in particular, there has been some COVID related potential supply chain impacts but long term, we do expect that trend to continue.

Got it. And last one for me. We know that the supply chain is a bit nuanced in the rolling paper category. Have you seen any disruption because of COVID?

Yes, there have been some disruptions, not just related to the rolling paper supply chain, but other broadly speaking, supply chains, it has been largely intact but when you have a brand such as VIBES that's growing nearly 100% in sequential quarters, to sustain that growth and having even minor supply chain disruptions does create challenges. We do believe that those challenges will be limited in scope and that we'll see some meaningful numbers come out of our subsequent quarters. But yes, Q2 does have some potential supply chain impacts, but we still remain overall very bullish for VIBES and our house brands overall.

Your next question is from Derek Dley of Canaccord.

Sorry, I just wanted to follow-up on one -- I may have missed it, on Pollen Gear. Did you say it was 36%, was that sequential growth or year-over-year?

That's sequential growth.

Okay. And just following up on that, on the last question on the supply chain. I think last call, you guys mentioned that your suppliers were -- about 75% of your suppliers were kind of back up and running in terms of normal capacity. Where do you see them today? Obviously, with the comment you just made and the fact that there might be some slight supply chain disruptions in Q2.

Yes. Great question. It's a little bit of a one-off basis, supplier to supplier. We are seeing early indications that as stores begin reopening across the country in recent weeks and around the world that we're seeing some positive momentum in terms of macroeconomic recovery. And as that recovery is starting to take place and volumes are starting to pick up, there's definitely additional pressures being placed on supply chains. I think it remains largely where it is, where we described it to be before, call it, roughly a 75% capacity. It's not a blanket statement across every supplier. Like I said, it's kind of a supplier by supplier basis. So yes, there's definitely overall some degree of impacts to supply chain in Q2. But overall, relatively strong performance from our suppliers. We do anticipate some strong recoveries in Q3 in terms of their supply chain.

Okay. That's helpful. On the private label side, obviously, VIBES and Pollen Gear look like they're making up the -- close to the majority -- or if not more, the majority of your revenue there. Can you just talk about some other products or form factors that you think would make sense for private label? I think CBD was one that was mentioned in the past?

So some other house brands that we have, including like our Keith Haring line of glass, our higher standards, which is not only our brick-and-mortar store fronts, but also some of our own house brands, is actually also seeing good growth in sequential quarters. Marley Natural is another one that we're seeing great growth. And we'll continue to evaluate new opportunities and new brands for our portfolio, going forward. But good to call out. We're certainly seeing growth across the board, but we'd love to notate VIBES in particular because just the overwhelming strength of VIBES, and like you said, Pollen Gear.

Okay. And then just last one for me on the distribution center consolidation. So how many DCs would you guys be left with, call it, by year-end once your consolidation activity is complete?

After our consolidation is complete in the U.S., we'll have 2 distribution facilities. And in Canada, we'll remain at 2 as well.

Your next question is from Glenn Mattson of Ladenburg Thalmann.

So on the distribution center consolidation, is that an additional savings? So the savings that you called out in Q1, you annualized the $3 million? Or is that all combined?

Yes, there will be additional cost savings associated with the consolidation of our DC footprint, not recognized in that number. That $3 million is intended to represent the efficiencies gained out of headcount reduction.

Right. Okay. Next question. Can you talk about the -- on the B2B side, it might be difficult to track, but are you having -- are you seeing a lot of churn in the customer base, just maybe these are smaller mom-and-pop operators, as you say. So perhaps some of them are going to make it through multi-month shutdown. Can you give us any color on that?

Sure. Our B2B CPG customer base is very resilient, and we have been able to maintain our existing customer base, and we're seeing very little turnover and very exciting to see that a lot of the larger states are starting to reopen. And as those states come back online, we're seeing a lot of resilience and purchasing coming out of those customer bases.

Okay. Great. And the -- perhaps I missed it, but did you give an update? You reopened the -- your own in-house stores? And if not, can you give an update on when you expect that to happen?

We have not yet opened any of our physical U.S. company-owned outlets. However, we have been discussing what a opening plan looks out -- looks like. And we do believe that will likely take place in Q3, likely.

Your next question is from Scott Fortune of ROTH Capital Partners.

Real quick to follow-up on the Higher Standards stores, kind of the strategy there now. I know you guys closed the Ponce in Atlanta and you opened up Malibu, but they're closed right now. Can you discuss adding more stores in the U.S., and then kind of the -- around the Cookies, Barcelona kind of store from that standpoint?

Sure. A couple of points on the store. So with COVID, the brick-and-mortar environment remains relatively uncertain in terms of what the future will look like. We obviously do believe that there is a meaningful opportunity in the brick-and-mortar space. But the higher standard stores, in particular, the primary driving factor behind those stores has really been to support our Greenlane brands and also part of our retail merchandising program strategy into dispensaries. So it's largely been successful in that regard. We'll likely kind of take a wait-and-see approach in the United States in terms of what additional locations may or may not look like in the future.

And in Europe, we are extremely excited to have opened our Cookies store in Barcelona, Spain. Cookies is arguably one of the most notable, or the most notable, cannabis brands in the world, and having access to those products to our European customer base and having that flagship store really does lend itself to a tremendous amount of credibility for our organization in Europe. So we honestly couldn't be more excited about that opportunity.

Okay. And then staying on Europe, have you moved in more of your brands into the distribution in Europe? And kind of can step us through the Europe expansion from distribution sizing.

Yes. So we are -- we have been moving, and we have started the process of executing on our Greenlane brand strategy in Europe. It's still very, very early innings there. As COVID related supply chain disruptions happened during the second quarter, we really focused on our existing customer base as opposed to opening up new customer bases. So we're still very early innings with the launch of our Greenland brands in Europe, but we're seeing some early traction. And again, we have very strong expectations for the success of our brands, not just in the United States, but globally. So we'll look towards the brand success in Europe, likely in Q3 and beyond.

Okay. And then last question for me, shifting to kind of the e-comm side and -- I mean it's good growth there, but have you seen a shift in -- you said there's more traffic but have you seen a shift in the size of the average ticket and then even a product shift away from vape or different products? How do you kind of call out the strength on the e-com side?

Yes. The e-comm strength has just been absolutely phenomenal. It's a great place to be an omnichannel distributor like ourselves, having these various channels to sell the products into because that e-commerce strength and the online marketplaces strength has just been really just incredible to watch, not just on our flagship site like Vapor.com. But on our Greenlane brands website like marleynaturalshop.com, like our Higher Standards online store, just overall, it's been really incredible to see just how positive that momentum has been.

Obviously, it's being offset to some degree by the closure of our physical brick-and-mortar stores as well as the closure of a lot of our brick-and-mortar customers. But it's certainly the shining star in our arsenal thus far.

Are the average ticket sizes moving up? Or is it kind of more people, more transactions and same size of the tickets?

We are seeing more traffic, more conversions and higher average order value across the board.

Your final question is from Mike Grondahl of Northland Security.

So with the 50 people and the consolidation of the distribution centers, could you talk a little bit about what your cost structure can look like in 4Q '20 or 1Q 2021? Kind of whenever you expect to get there and what it kind of looks like?

So as we kind of stated before, we had originally targeted a returning to profitability by Q4 of this year. Obviously, the macroeconomic environment with -- in particular, the impacts of COVID has really impacted the potential timing of that, which may inevitably end up shifting. But just generally speaking, high level, our path to profitability is a combination of incremental improvement in our margin profile as well as incremental improvement in our cost profile.

We've obviously made a lot of changes in terms of headcount. There's a lot of other SG&A expenses that we've been very carefully evaluating and having targeted reductions. So it's difficult, again, to say specifically when we will be returning to profitability with the macroeconomic environment, the way that it is. But it is a core focus of ours as an organization. We've made tremendous progress towards that goal so far. We're really just barely scratching the surface and not seeing much of that activity yet in Q1 but we are dedicated to our vision, and we are confident that we will get there.

Yes. Aaron, I get that. I guess I was asking more specifically, in 1Q, you had roughly $15 million of salaries in G&A. Is -- do you have a goal to get those costs to x level? Where do you think those -- what do those costs look like maybe in 4Q or 1Q next year?

Yes. That's a -- those are great questions. I know Ethan has been particularly close to that. So it's a great question for Ethan.

Yes. Thanks so much, Aaron. What I would say, Mike, is we're not really broadcasting targets in terms of our transformation efforts. If you can think about what it's like trying to reduce the number of distribution centers, reduce headcount, and get ourselves aligned for what may be a near-term different trajectory in terms of growth pile. But I guess what I'm saying is we're learning as we go along. Obviously, hiring has become an entirely different ballgame with the number of people that are out in the market and available. So talent is becoming a great opportunity for us. Obviously, the real estate market in terms of distribution centers provides a lot of opportunity in terms of what you can get out of it and get into in this environment.

And lastly, I would say that we are learning and trying to mechanize and automate a lot of what we have going on in our distribution facilities and looking at models that maybe we do 3 PL in certain locations and staff other distribution facilities with people. So it's a long-winded way of saying that we really need to get our SG&A down in line with comparables of other distributors that are trying to really, really grow a house of brands, and that's a really unique model. So I would say that's a work in progress, but material reductions as we've already done in the first quarter. And we will continue to update you on progress as we go.

Great. Any high-level thoughts on 2Q revenues? Or just should we refer to the 8-K from a little bit ago?

Yes. I would say that you can refer to the 8-K a little bit ago. But I'd like to believe and we continue to have very, very cautious optimism about what we're seeing. We're very, very excited about what we've been able to do to date in terms of correcting our gross margin. Obviously, work to do on the SG&A side, as you point out. But we got our heads down, and we have no reason to continue to take our foot off the gas. So...

I would now like to turn the call back over to Aaron LoCascio for any additional or closing remarks.

Great. Appreciate it. I just want to thank everyone again for joining Greenlane's conference call today. The replay for this conference call will be available in approximately 2 hours on Greenlane's website in the Investor Relations section. And I hope to see everyone in the not-too-distant future. Thank you.

Thank you. This does conclude today's conference call. You may now disconnect.