Earnings call transcript: Charlotte's Web Q4 2024 sees revenue drop, stock falls

Charlotte's Web Holdings Inc. reported its fourth-quarter 2024 earnings, revealing a net revenue of $12.7 million, which fell short of expectations and marked a 20% decline year-over-year. The company posted a net loss of $3.4 million, or $0.02 per share, which was slightly better than the forecasted loss of $0.03 per share. Despite these results, the company's stock dropped by 7.06% in pre-market trading, reflecting investor concerns over the revenue miss and ongoing challenges in the CBD market. According to InvestingPro analysis indicates the stock is currently undervalued, though investors should note its high volatility with a beta of 1.96. The company's market capitalization stands at just $16.54 million, making it a micro-cap stock with significant risk factors. For detailed valuation metrics and 8 additional ProTips about Charlotte's Web, consider exploring InvestingPro's comprehensive research report.

Outlook & Guidance

Looking forward, Charlotte's Web is targeting a gross margin of over 50% in 2025. The company plans to continue expanding its product portfolio and enhance operational efficiencies. It is also seeking federal regulatory clarity to better navigate the CBD market landscape.

Executive Commentary

CEO Bill Marashnick stated, "We are well positioned for 2025," emphasizing the company's strategic initiatives to improve shareholder value and adapt to regulatory changes. Marashnick also highlighted the company's commitment to building its 2025 strategy in a "regulatory agnostic" manner.

Risks and Challenges

• Regulatory Challenges: The CBD market faces ongoing regulatory uncertainties that could impact growth.
• Revenue Decline: Continued revenue shortfalls could affect investor confidence.
• Market Competition: Increased competition in the wellness and CBD markets may pressure margins.
• Supply Chain: Potential disruptions could impact product availability and costs.
• Cash Burn: Reducing cash burn remains a priority to sustain operations.

Q&A

During the earnings call, analysts focused on the company's strategies to improve margins and address regulatory hurdles. Management discussed state-level regulatory challenges and outlined plans for reducing cash burn and enhancing operational efficiencies.

Full transcript - Charlotte's Web Holdings Inc (CWBHF) Q4 2024:

Ina, Conference Call Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings Inc. Fourth Quarter Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, 03/19/2025.

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And I would now like to turn the conference over to Mr. Corey Pala, Director of Investor Relations. Please go ahead.

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Thank you, Ina, and good morning, everyone. Thank you for joining us for our twenty twenty four fourth quarter and year end conference call for Charlotte's Web Holdings Inc. Our earnings press release was issued this morning and posted on the Investor Relations section of our website along with our financial statements. Our 10 K filing is also available on sedrplus.ca in Canada and EDGAR in The U. S.

CEO, Bill Marashnick and CFO, Erica Linde are leading our call this morning. We will review the financial results and provide some color around the business and the outlook. Afterwards, we'll answer some questions submitted by our analysts and a replay of this call will be available through the next week, accessible via the details provided on our earnings press 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. Please note that some statements made during today's discussion include responses to questions containing forward looking information based on current expectations and assumptions.

Actual results may differ materially due to risks and uncertainty, many of which are detailed in our latest SEC filings, including our most recent Form 10 K report. We encourage you to review these filings, which are comprehensively discussed the risk factors and other important considerations that may impact our future performance. We reserve the right to update these statements as conditions change. During the call, we will also refer to supplemental non GAAP accounting measures, including adjusted EBITDA, which do not have standardized meanings prescribed by GAAP. Please refer to these earnings press release for descriptions of these measures and reconciliations to their most directly comparable GAAP financial measures.

And now I'll hand over the call to Charlotte's Web Chief Executive Officer, Bill Maraczek. Good morning, everyone, and thank you for joining us today. The 2024 marked a pivotal year for Charlotte's Web as it was highlighted by achieving a return to consecutive quarterly revenue growth throughout the year. While the growth was modest, it is encouraging. We have not seen consistent quarter on quarter improvement in several years.

Having said that, we also acknowledge that we were still down significantly year over year and this is not the level of revenue we find acceptable nor that shareholders had expected. It does seem to indicate however that the revenue decline has bottomed and this is the first step in the process of returning to growth. While I won't go into detailed financials as Erica will cover that shortly, I do want to highlight that the improved quarter on quarter revenue and operating performance reflect the synergy between our upgraded e commerce platform, high impact omni channel strategy, disciplined cost management and operational efficiencies implemented throughout the year. This foundation positions us well for growth in 2025 and beyond. Our fourth quarter, which is traditionally our strongest period due to holiday shopping was indeed our best quarter this year.

While regulations in some states impacted our retail performance, our e commerce channel delivered excellent results during the Black Friday, Cyber Monday period and throughout the holiday season. Since launching our new e commerce platform in June, we've seen a 20% reduction in shopping cart abandonment, which has had a real impact on our conversion rates. One of the core benefits of our new platform is the unprecedented clarity it provides into the effectiveness of the consumer journey and related transactional insights. This enhanced visibility has enabled us to optimize individualized transactions and maximize consumer value through tailored bundles and targeted promotions. The platform has revealed purchasing behaviors that we really just couldn't see or act upon in our old legacy system.

The insights and adjustments we can make now are a total game changer. We're also seeing a notable lift in first time customer ordering in Q1 this year, which seasonally has been our softest quarter. Okay, let's turn to our omni channel approach. This continues to support growth by broadening consumer access through seamless integration of e commerce, traditional retail, healthcare channels and a multitude of digital shopping platforms. Our retail partnership with Walmart has our CBD isolate topicals available in more than 800 physical stores and with extended availability now on walmart.com.

We're also encouraged by the initial sales we are seeing with our strategic partnership with chewy.com, the largest online pet retailer. This has strengthened our pet product sales through targeted promotions and consumer outreach. Let's talk about our expanding product offerings. The successful introduction of our functional mushroom gummies last fall represents a strategic expansion into the rapidly growing mushroom wellness market. This innovative product line featuring focus, stress support and energy support formulations has gained significant traction across hundreds of retail locations, including walmart.com with additional sales channels through other third party platforms.

I'm also pleased to announce our further expansion into the functional mushroom market with two new innovative gummies unveiled earlier this month at Expo West. The first one is Vital Defense and that's a proprietary blend of five mushrooms for immune support. And the second one is Muscle Restore featuring Chaga mushrooms for athletic recovery. These new gummy offerings further extend our botanical wellness portfolio. The functional mushroom market is valued at more than $200,000,000 per year.

These new products allow us to leverage our reputation for science backed solutions to capture market share, while also creating natural cross selling opportunities with our existing consumers. As mentioned in this morning's earnings press release, I'm especially pleased to announce that our functional mushroom gummies will soon be selling at amazon.com. This represents our first meaningful presence on this critical e commerce platform, introducing our brand to millions of potential new customers. I also want to touch on our improvements in operations. Our focus on operational efficiencies has yielded gains.

We've made significant strides in reducing SG and A expenses and aligning our cost structure with revenue levels. These actions combined with our ongoing transition to in house gummy and topical production are establishing the foundation for improved margins in 2025. To review our Q4 results and financial positions further, I'll now hand over the call to our CFO, Erica Lynn.

Erica Linde, CFO, Charlotte's Web Holdings Inc.: Thank you, Bill. Our approach now reflects a true omnichannel model, where sales through third party platforms are integrated into our total revenue reporting. This strategy offers a more holistic view of our performance. In terms of the financial results for the quarter, net revenue was $12,700,000 which while down 20% from the prior year was up modestly compared to the prior quarter. This outcome aligns with the trends we've observed throughout 2024, indicative of the broader category headwinds.

Our growth over the previous quarter demonstrates the initial impact of our comprehensive omni channel approach and validates the traction we're gaining with our product initiatives and strategic retail partnerships, where we have generally outperformed the category in retail. In 2024, we achieved our initial objective of establishing a solid foundation from which to build. As Bill mentioned earlier, this stabilization of quarterly revenue levels marks the first critical step in reversing our previously declining revenue trends illustrated by delivering consecutive quarter over quarter growth. Our strategic focus now shifts to achieving year over year growth in 2025, leveraging the operational improvements implemented throughout 2024. Q4 gross profit was $5,100,000 down $3,800,000 or 42.7% compared to the prior year.

Margin as a percent of net revenue was 40.2% down 15.8 basis points compared to Q4 of twenty twenty three. This temporary reduction in gross margin primarily reflected holiday promotional investments, some shipping inefficiencies and compression of fixed cost absorption on lower than expected revenue. Looking ahead, we anticipate incremental margin improvement in 2025 as we execute our manufacturing strategy, bringing a higher percentage of gummy and topical production in house. This transition will further enhance our cost structure and strengthen our quality control, production flexibility and speed to market capabilities. We have recently implemented carrier diversification, shipping threshold adjustments and production enhancements to drive gross margins toward historical ranges as these measures take effect.

Expense management was a strategic priority in 2024 and I'm pleased to report substantial progress in this area. In the fourth quarter alone, we achieved an $8,000,000 year over year reduction in total SG and A expenses, representing a 43.3% decrease. This brought our Q4 SG and A down to $10,600,000 from $18,600,000 in the same period of last year. These significant cost reductions stem from our disciplined approach to cost optimization, including contract renegotiations, eliminating discretionary expenditures and leveraging efficiencies gained through our new e commerce platform. These reductions were strategically implemented to preserve our core capabilities and growth initiatives.

We reported a Q4 net loss of $3,400,000 or $0.02 per share, marking a meaningful reduction of $5,100,000 or $0.04 per share compared to the fourth quarter of twenty twenty three. To provide greater visibility into our operational performance, our fourth quarter twenty twenty four adjusted EBITDA was positive $300,000 representing a $6,200,000 improvement over the fourth quarter of last year. This substantial progress represents our successful operational efficiency initiatives and stringent expense management. The strategic actions implemented throughout 2024 materially reduced our cash burn to $1,800,000 in the fourth quarter. We concluded 2024 with $22,600,000 in cash reserves.

We are confident that our current cash position is sufficient to support our path to positive cash flow as we further optimize operations and maintain a disciplined spending posture. Turning to our full year results, total revenue was $49,700,000 representing a decrease of 21.4% from the prior year. While retail sales continued to face headwinds despite important new partnerships, our e commerce performance showed encouraging trends. Notably, despite declines in the overall CBD category, Charlotte's Web continued to outperform the category at retail for the year according to data from Spins LLC, and we hold the leading brand position in trust and loyalty according to the latest surveys by the Brightfield Group. Gross profit before inventory provision for the full year was $25,400,000 or 51.1% of net revenue.

And we anticipate improvement in 2025 as we bring more production in house, particularly for our high volume gummy and topical product lines. We substantially reduced SG and A expenses for the full year by $22,400,000 or 29.6%, a reduction rate that significantly outpaced our revenue decline. This demonstrates our commitment to operational efficiency while increasing quality as we look to bring manufacturing in house. Net loss for 2024 was $29,800,000 or $0.19 per share compared to a net loss of $23,800,000 or $0.16 per share in the prior year. It is important to note that 2024 included a non cash inventory provision of $4,200,000 while 2023 included a non cash net gain of $20,000,000 from fair value adjustments related to the debt derivative and the investment in DeFloria.

For more transparency on operating results, the adjusted EBITDA loss for 2024 was 12,600,000 compared to an adjusted EBITDA loss of $22,700,000 for 2023. This $10,100,000 improvement demonstrates our substantial progress in financial discipline and we are committed to maintaining that stewardship in 2025 as we enter a critical growth phase. Concluding our financial overview, I will now hand the call back over to Bill.

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Thanks, Erica. All right, so we had an exciting announcement last month with DeFloria, which is our collaboration with Ajna Biosciences and British American Tobacco. DEFLORIA achieved a significant milestone as the FDA accepted DEFLORIA's IND application for advancement to Phase two clinical trials for treating the symptoms of autism spectrum disorder. This achievement represents a historic moment for Daphloria and for botanical drug development with this being the first orally ingested botanical drug designed to meet standards for advanced clinical testing. The upcoming Phase II clinical trial will evaluate its effectiveness in people with autism, which is building on the promising Phase I results.

Charlotte's Web is contributing a decade of research, cultivation and manufacturing expertise to the DeFlora Venture with our proprietary Hemp Genetics forming the foundation for the IND. Charlotte's Web has exclusive manufacturing rights for this product. If it successfully commercialized, this initiative could represent a very significant long term revenue opportunity for Charlotte's Web. And finally, I'm excited to share that earlier this month at the Expo West Natural Products trade show, we unveiled our comprehensive rebranding initiative that unifies our expanding product portfolio under a cohesive Charlotte's Web identity. The strategic evolution transforms us from a family of brands to a branded family, which creates a singular recognizable presence across all product categories.

This brand consolidation not only enhances retail shelf presence, but it also maximizes our marketing efficiency as we prepare to introduce additional product categories throughout 2025. So in summary, as we approach the end of the first quarter, we're focused on returning to year over year growth. Charlotte's Web is well positioned for 2025. We've established a solid foundation with our optimized cost structure, expanded product portfolio and strategic retail and e commerce partnerships. As always, any regulatory clarity at the state and federal levels create additional tailwinds that can support growth.

One final comment I want to add as well. Let me also add that is not lost on myself or the leadership team and the Charlotte's Web board that our shareholders have suffered a long and difficult ride, but we remain fully committed and focused on improving shareholder value and on the important mission of Charlotte's Web. We truly appreciate your continued patience and support as we move forward on this effort. With that update, Corey will now take questions from our analysts. All right, Ina, can you open the call for our analysts, please?

Ina, Conference Call Operator: Thank you. Your first question comes from the line of Luke Hennan from Canaccord Genuity. Please go ahead. Yes, thanks. Good morning, everyone.

Bill, I just wanted to hear a little bit more detail on some of the state level restrictions that impacted you in retail during the quarter. Maybe a little bit more specificity on when they took effect? And overall, what was the impact to basket and traffic as a result of those restrictions?

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Yes. Thanks, Lou. So the short answer is it's pretty it's difficult to say how big the impact is because the state regs now are really such a chaotic patchwork of different rules and they're ever changing. I think it does highlight how critical it is for us to finally get federal regulations in place, which establish a baseline for all of our companies to operate within. But you can imagine the confusion that it creates for consumers and for retailers as well when the state regs are all over the place.

For us as a business, I can say that we're going to be just fine. We're going to continue to adapt and figure out ways to grow and thrive regardless of the state regs. As we were just mentioning in the call, we are rapidly expanding our product portfolio to include botanical products, so the mushrooms that we mentioned, as well as a wide range of minor cannabinoids and isolates. So we when I talk about the confidence we have for 2025, we know that we're going to be able to grow revenue, profits and scale the business successfully. I think the much more important issue is the impact that what I would categorize humbly as ill conceived regulations, what that impact will have on the millions of consumers who depend on our products.

I'm trying to remain hopeful that the state legislatures are engaging with their constituents and hearing what I hear every single day from people that depend on our products to manage a wide range of health and wellness needs. Ultimately, these are the folks that lose if the regs aren't done correctly. What I can tell you is that Charlotte's Web is never going to stop fighting for these millions of people in need to have access to our products that fundamentally change their lives.

Ina, Conference Call Operator: Yes, I appreciate that. Thanks. And maybe as somewhat of a follow on to that then. So in light of all of that, what is your high level view when it comes to retailer shelf allocations for the CBD category for 2025, again, in light of all of what you just described there?

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Yes. So, Luke, it's what's really hard to kind of crystal ball is where there's a multitude of regs that are in play. I would categorize it across multiple states. As we saw last year, some of the regulations came into place where they failed in state legislatures, they then emerged in executive orders through leadership at various state levels. So it's just it's very hard to gauge where that falls.

I can tell you and I know you know this, it does keep major retailers on the sidelines because they just don't know where they're going to be able to operate and what's going to change or they have to pull product off the shelf. It causes massive disruption to their supply chains and to the way that they do their planning for slotting and retail sales. So we're really building 25 in a method that is regulatory agnostic and saying that we're going to lean much more aggressively into the miners isolates botanicals, while doing everything we can to preserve our full spectrum business. But we've got a really broad portfolio that allows us to compete effectively regardless of where the state regs land. And Luke, it's Corey.

One last item I might add to that is that retail represents about a third, less than a third of our revenues in the fourth quarter. So even the impacts on retail are not material to the business, meaningful but not material.

Ina, Conference Call Operator: Understood. Thanks for that. And then so the next question I have here is again looking at 2025. So it was mentioned in the press release, you're targeting greater than 50% gross margin for the year ahead. So that's an implied roughly 700 basis points of gross margin expansion year on year.

So maybe somewhat of a two part question in that. One is, what are the biggest buckets contained in that? And then how should we be modeling or thinking about the cadence of that improvement over the course of the year?

Erica Linde, CFO, Charlotte's Web Holdings Inc.: Hi, Luke. Sure. This is Eric. I'll take that question. So there's a couple of things I want to address with this.

First, I do want to be clear that the margin compression we saw in Q4 was it was very much an anomaly based on some specific factors that I went over in the call about we had some really aggressive holiday promotions. We had some shipping challenges because of the revenue levels we saw in 2024. We were experiencing higher shipping rates because we fell into a different shipping tier. And so and some of our fixed cost leverage because of again of the revenue levels we were at. So with the growth that we're modeling in 2025 on the revenue side, we are we're bumping back into a higher shipping tier.

We've also diversified our shipping carriers to take advantage of some savings in that area. We've made some adjustments to some of our shipping thresholds on our ecom platform, some of our just enhancements in that area. And then bringing more of our production in house really beginning in the next quarter is a significant improvement in our margins. We've been working on that project for a little bit and we're really seeing really successful pilot runs now and really making meaningful progress in that area. So we are expecting it to ramp throughout the course of the year and that's going to bring us back into that plus 50% margin on a regular cadence throughout the course of the year.

We're expecting it to basically ramp up. It takes time for margin improvement to really hit the P and L because of the way inventory works, but we are expecting that to occur and it will have a more immediate impact to our cash flow.

Ina, Conference Call Operator: Understood. Thanks. And then maybe that's a good segue into my last question here and we'll stick with you, Erica. Overall, what are your cash burn expectations for 2025? How should we be thinking about that?

Erica Linde, CFO, Charlotte's Web Holdings Inc.: And I appreciate this question because I think it's important to give context given that it's going to be a significant shift from what we saw in the past couple of years. I know these past couple of years were challenging from a cash flow perspective. And while we're not going we're not I'm not going to give a specific guidance number for 2025 outlook, I will say that we are expecting a significant reduction in cash burn for a couple of very specific reasons. We're not going to have the significant CapEx that we've had the last couple of years. So that alone is going to provide significant savings.

The in house production is also going to provide significant savings, helping those CapEx projects pay for themselves very quickly. I'll say that. So you can do that math. And then just the increase in revenue and bringing in that margin makes a significant adjustment. But I think one of the biggest impacts is going to be having a full year of cost savings that we didn't even see this year.

So the cost impacts that we had this year really didn't take effect until the half year. And Q4 is basically what we expect to see from an SG and A perspective going forward. So we'll have a full year of that. It will make a significant impact for our cash next year.

Ina, Conference Call Operator: Okay, great. Appreciate all the commentary. All the best.

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Awesome. Thanks, Luke.

Erica Linde, CFO, Charlotte's Web Holdings Inc.: Thanks, Luke. It was great.

Ina, Conference Call Operator: Thank you. And there are no further questions at this time. I will now hand the call back to Mr. Coropalo for any closing remarks.

Corey Pala, Director of Investor Relations, Charlotte's Web Holdings Inc.: Okay. Thank you everyone for attending our call today and we will look forward to speaking to you on our next earnings call.

Ina, Conference Call Operator: Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.

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