Q4 2019 Earnings Call
[music].
Good day, ladies and gentlemen, and thank you for standing by welcome to todays conference call to discuss Greenland Holdings fourth quarter and full fiscal year 2019 financial results.
Time, all participants are in English could only mode. Following the formal remarks, we will conduct a question and answer session and instructions will be provided that that fibria Q.
Hosting todays conference will be live belt.
Sard Verbinnen.
As a reminder, today's conference call is being recorded and now I would like turn the conference call over to Mr. <unk>. Please go ahead ma'am.
Thank you Michelle good morning, everyone and welcome to Green links fourth quarter and full year 2019 call.
As a reminder, a press release featuring the financial results for the quarter in full year was distributed this morning and is available Investor Relations section of the Greenland website.
Call is being webcast a replay will be available in the company's website through Monday April six.
On the call today, our air Locascio, Chief Executive Officer, Anything Britain, Chief Financial Officer.
Before we begin I'd like to remind everyone that green lights prepared remarks may contain forward looking statements and management may make additional forward looking statements in response to your question. 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.
Involve inherent risks and uncertainties and other factors discussed in today's press release.
This call also contains time sensitive information that is accurate only as of that they have to fly broadcast March Thirtyth Twentytwenty remain assumes no obligation to update any forward looking statements that may be made in today's release or call.
During todays call management will discuss non-GAAP financial measures, including adjusted net income and adjusted EBITDA Spanish Mcaleese. These financial measures can facilitate a more complete analysis and greater transparency into Greenland ongoing results of operations, particularly when comparing underlying operating results from period to period remain has included.
A reconciliation of these non-GAAP measures in todays press release, and now I'll turn the call over to err on the Kathy.
Thanks live and good morning, everyone.
We greatly appreciate your time, an interesting greenline, especially has all of us navigate these unprecedented times.
During this call I'll review, our fourth quarter and full year sales highlights operating environment and business development activities before turning the call over to even to discuss our financial results in more detail.
After even his comments, we will open the call for your questions.
Before we begin a discussion of our results I want to take a moment to acknowledge the koeppen 19 pandemic like many we're closely monitoring the situation not only for the potential impact to our business, but importantly, how it may affect our employees retail partners and consumers.
First and foremost as the safety of all our stakeholders, we're doing our best to ensure that everyone with Greenland feel safe and remains healthy.
Across our six global offices, the majority of our employees are now working remotely.
We have also temporarily closed our retail outlets, including our three U.S. higher standards locations and our store front in Amsterdam to minimize risk to our employees and our customers.
Our distribution centers remain open as many governments have deemed candidates businesses as essential.
We are following all guidelines from the CDC and local officials and taking measures to ensure the safety and comfort if those team members, including cleaning regularly throughout the day using show social distancing and encouraging anyone feeling sick to stay home.
We are acutely monitoring our business for impacts caused by the outbreak and the situation remains very fluid.
As social distancing and shelter in place directives have become increasingly widespread across North America, and Europe, we've experienced and continue to anticipate some negative pressure on or b to b cells as some of our retail partners such as smoke shops have temporarily closed to minimize covert 19 risks to their stakeholders at the same time.
We expect increases in our ecommerce business as consumers redirect their shopping online.
Overall, we expect that we'll see some adverse impact our business, although the duration the impact remains difficult to assess at this time.
Moving onto our Q4 in fiscal year result, 2019 was a historic year for US we're proud of the progress we made in our first year as a public company in particular, our ability to weather turbulent industry headwinds, both the changing regulatory environment and concerns regarding they thing, but even more than navigating the rough waters of the cannabis vaping.
The industry I'm proud of this strategic business improvements, we are undertaking to put greenline and the strongest position for the future.
For example, we have proactively prioritize higher margin sales in the form of our house brands and products, we've concentrated on identifying cost cutting opportunities and putting in place a thoughtful plan to leverage our scale to drive sustained long term growth and profitability.
As a result of starting to execute on this priority we saw a material improvement in our gross margin profile with gross margin up by 396 basis points from the third quarter and gross profit up by $400000 or 6% over the same period. Despite a decrease in our fourth quarter revenue, which was down 17% to 37.
Point 2 million sequentially.
Further we have successfully decreased our jewel percentage of revenue from 45.4% of revenues in the third quarter to 15.9% in the fourth quarter and although jewel revenue decreased by 14.3 million total revenue experienced less of a decline down by only 7.7 million sequentially.
This represents substantial growth of six point Sixmillion and other key areas of our business.
As we conducted this mix shift to higher margin products. We did so in a consumer centric manner, notably in the third quarter Jewel only orders represented 13% of sales orders, but by the fourth quarter. These decrease the only 7% of sales orders.
Instead, 23% of sales orders in the fourth quarter included products from our house brands up from 18% over sequential quarters.
We plan to continue our current strategy of being discerning around the jewel sales to make and we expect our jewel percentage of revenue to remain consistent with that of Q4.
We also continue to expand and diversify our portfolio of owned brands by leveraging our deep understanding of the market and our technical expertise in design and product development.
We expect owned brands to become an increasingly larger part of our business and meaningfully contribute to revenue moving forward overall sales of house brands grew to represent 12% of fourth quarter revenues up from 8% in the prior quarter. As an example, since our vibes launch sales have roughly doubled over sequential quarters now.
Now with a precedent presence at over 1500, b to b customers and growing.
We continue to expand our direct to consumer business, leveraging our higher standards retail stores and E commerce platform vapor dotcom to reach consumers.
Paper Dot com experienced sustained growth over Cisco sequential quarters, both in terms of daily store transactions and average basket size, which increased 30% and 7% respectively.
With a focus on aggressively and strategically cutting costs to keep the company on track to returning to positive cash flow, we set forth a plan to streamline our operations and focus resources on the most strategic opportunities and investments.
These decisions, which we continue to execute on in the first quarter, including included eliminating 31 positions in our corporate offices. Additionally, we're taking steps to optimize our distribution network in the coming months transitioning to a more centralized model with fewer larger highly automated facilities, we plan to close four out of five.
Five total distribution facilities in the U.S. and add one new streamlined and centrally located facility, which will help the company reduce costs going forward.
This consolidation will require fewer distribution center employees, while also driving business improvement in multiple areas, including inventory management sales operations and customer experience.
During this time of macro level uncertainty, we do not take lightly the security of our strong cash position, a 47.8 million as of December 30, Onest 2019.
We're taking strong measures to preserve this cash and use it responsibly to reinforce our growth during this challenging period for our economy.
We're confident that by successfully executing these measures our strong cash position will be more than adequate to successfully takes the company through a transformation process and lead us to being cash flow positive.
Prior to the covert 19 pandemic, we had anticipated becoming cash flow positive by the fourth quarter of 2020.
While we are continuing to work towards this goal, we expected timing makeshift depending on how long the current environment remains.
I want to take a moment to review some other key highlights for the fourth quarter and full year.
Revenue for the year was up 3.4% year on year, even any year filled with unprecedented headwinds for the industry.
The crisis of acute liquid vaping related health conditions, and regulatory related regulatory uncertainty continued to pressure fourth quarter sales.
We believe that this quarter represents the trough in terms of impact to our business from regulatory and health concerns around vaping.
In addition, we are confident that the changing mix in our business will help mitigate potential regulatory impacts in future quarters.
On the international front, we completed the acquisition of conscious wholesale establishing our platform to sales in Europe with an emphasis on our house brands portfolio.
We have been successfully integrating the business and we expect increasing momentum as we advance through 2020.
In addition to our progress in Europe, our presence in Canada prior to their candidates legalization drove strong sales, increasing 44% year over year to 22.8 million.
We continue to believe that being early in territories that legalize cannabis consumption for Charles will result in sales growth beyond current projections.
I'm proud of our work and result in a tough environment in 2019, and I'm incredibly excited by our path forward for long term sustainable growth and 2020 and beyond.
With that now I'll turn the call over to Ethan to run through our fourth quarter and full year 2019 financial results. Thanks, Aaron and Hello, everyone I want to Echo errands appreciation for everybody joining during these volatile times and I sincerely hope everyone is staying safe and healthy our Q4 19 revenues decreased 28 per se.
That year over year to 37.2 million. This decrease was primarily driven by significant declines in sales related to our two largest brands Jualin packs. This decrease was partially offset by increases in sales related to some of the company's other brands, primarily stuart's and vehicle and other product launches, which in the aggregate risk.
Got it in net sales of approximately 2 million for the fourth quarter as Aaron mentioned, we delivered on our strategy to reduce jewel concentration and focus on higher margin products, resulting in a sequential margin improvement of 396 basis points from the third quarter. While these changes represent a slowdown our near term.
Revenue growth. We believe this is a very positive sign for our business as we move forward into 2020 and beyond.
Gross profit for the fourth quarter of 2019 was 6.8 million, resulting in a gross margin of 18.3% during the fourth quarter of 2019, we implemented a gross margin floor on jewel products, which lessen the impact on our gross profit.
Salaries benefits and payroll tax expenses for the fourth quarter decreased by 900000 to 7.8 million compared to 8.7 billion for the same period. In 2018. This decrease is largely due to the 4.1 million of equity based compensation expense, which we recognized in the fourth quarter of 2018.
Compared to the equity based compensation of 1.7 million for the fourth quarter of 19.
General and administrative expenses increased by 2.4 million on a year on year basis to 8 million, primarily due to additional cost incurred in connection with our operations as a public company net loss for the fourth quarter of 2019 was 9.4 million compared to 8.3 million for the prior year period.
It impacted primarily by higher cost of sales investments in people when equipment higher depreciation and amortization expenses adjusted net loss for the fourth quarter of 2019 was 7.7 million compared to adjusted net loss of 4 million for the fourth quarter of 2018.
Adjusted EBITDA was a loss of 7.3 million for the fourth quarter of 2019 compared to a loss of 700000 for the same period in 2018.
Now I'd like to share a few highlights of our full year 2019 results for the full fiscal year 2019. The company reported net sales of 185 million, an increase of 3.4% compared to the 179 million in fiscal year 2018.
Net sales in the United States decreased by 2.3% to 155 million, primarily attributed to industry headwinds and consumer concerns around beeping related health conditions year over year. This mid June sales declined by 7%, while other beeping related products declined 13% this was off.
Offset by a 24% increase in our core business and a revenue increase of 68% from our own brands.
Gross profit was 31.4 million or 17% of net sales compared to 34 35.7 million worth 20% of net sales for the prior year. The declining gross profit as a percentage of net sales on a year over year basis Primark, primarily reflects fluctuations in factors.
Including sales mix purchasing efficiencies and average mark up over the cost of products.
Salaries benefits and payroll tax expenses increased to 29.5 million were 15.9% of net sales. This increase was primarily due to incremental personnel expenses of 6.6 million and incremental equity based compensation of 3.7 million as compared to 2018.
General and administrative expenses increased 6 million to 23.6 million or 13% of net sales compared to 10% of revenues in the prior year.
These included increases in marketing expenses subcontracted services accounting expenses and in professional fees related to our transition to becoming a public company net loss for the year was 39 million compared to 5.9 million for 2018 impacted by the higher cost of sales investment in people and equipment higher did.
Appreciation and amortization expense and the recognition of a full valuation allowance against our deferred tax asset offset by the reversal of the tax receivable agreement liability adjusted net loss for the year was 18.3 million compared to the adjusted net loss of 800000 in fiscal year 2018.
Adjusted EBITDA was a loss of 30.1 million for the full year compared to income of 4.1 million in the fiscal year 2018.
As a reminder, we ended the quarter with 47.8 million in cash and long term liabilities of 12.7 million compared to 7.3 million and 48.6 million respectively. At December 30, Onest 2018.
To provide some direction on how our performance has started for the year in Q1 2020, we expect to achieve between $30 million to $33 million of revenue and gross margins in excess of 22% with that I'll turn the call back to the operator to open it up for Q Wednesday.
Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. It confirmation told one indicate your line is in the question Q you may Prestart Q, if you'd like to remove your question from the Q for participants do you think speaker equipment, maybe necessary to pick up your hands that before passing with dark.
One moment please poll for your question.
Our first question comes from the line of Vivian Ebert with Cowen and company. Please proceed with your question.
Hi, good morning.
So it sounds like you guys are doing all the right thing as it relates to cobot 19 in particular.
And your stores I was hoping you could just contextualize like what percentage of sales.
Does brick and mortar outlets represent for 2019 guidepost. Thanks.
Hey, Vivian.
So overall I think the best way to give you. Some context here is that when we look towards our business to consumer segment, which comprised of both our E commerce stores, namely vapor dot com and our brick and mortar stores.
They were anticipated to be of low double digit percentage of sales that being said, obviously the revenue for brick and mortar now is effectively zero as weve shuttered those stores.
The increase in the ecommerce business has entirely offset.
The decrease in sales and the brick and mortar mortar business. So overall, we anticipate our business to consumer segments to remain stable.
Okay. That's super helpful. Thank you I'm, just thinking about the supply chain.
Have you guys on experience any disruption in particular for products that are being sourced from China, how you're managing that thanks.
So ahead of you know Chinese new year, we actually went through thoughtful exercise to make sure we had adequate inventory levels to carry us through the Chinese new year prior to the impacts of covert 19 that inventory level was sufficient to sustain us through not just Chinese new year, but sometime thereafter.
After our particular suppliers.
Our international suppliers were actually seeing at I've seen that as a few weeks ago, they've return to 75% to 100% capacity. So we do not anticipate any related impacts to covert 19 on our international supply chain that being said Ethan did provide some flow.
Cash numbers for Q1, and some of that number was in fact impacted by supply chain issues unrelated to covert 19 from two of our largest suppliers.
Okay. That's helpful context, thank you.
That's one more on the hop back in the queue, but in terms of your target to consolidate.
Your distribution network I mean is that even possible right now or is that kind of an aspirational plan when we get kind of the all clear post covet 19th.
It's absolutely possible even in this challenging environment and we've been undertaking preparations for that for quite some time and we anticipate a that transition to take place and the second quarter.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line of Derek delay with Canaccord Genuity. Please proceed with your question.
Yes, hi, guys.
Just in terms of your gross margin comment, though both for this quarter in for Q1. So if we exclude jewel, which as you know I'm assuming is still in that sort of low.
Double digit gross margin range, where you guys well above that 20% target of years, 20% plus yeah.
100% in fact, we anticipate this quarter coming in at North of 22% and that's just based on a reduction of our jewel concentration. So arguably if we were to take it out of the portfolio entirely our gross margin looks more like 25, 26% range and Weve reported that in prior quarters said and we view that as consistent.
Our margin on other goods away from jeweler actually holding quite nicely and improving in some parts.
Okay. That's good.
Just in terms of the acquisition in Europe. The conscious wholesale have you been able to move any of your house brands through that distribution network at this point or is that still to come.
[noise], we've actually started to move some of our brands overseas predominantly in to the Netherlands were conscious wholesales its headquarters.
We obviously had a lot of plans for other countries in Europe, Spain around span Abyss, which was supposed to be going on in was cancelled.
So we're actually seeing traction picking up but given what's happening in the market today, we're being cautiously optimistic about what we do in Europe.
Okay and then in terms of your commentary is done.
Being cash flow positive likely a little bit later than that Q4 goal of 2020.
Can you just talk about some of your.
I mean, a part of that is going to come from cost reductions can you talk about them year as today and.
Cost reduction plans for 2020.
Yes.
Scott, It's a combination of thing take us there so including a reduction in headcount some of which we described in the call.
We've also furloughed a number of employees amidst the covert 19.
Pandemic.
The DC consolidation impacts 50 ft, ease, which does provide a material savings impact, but then beyond that there are other components are we're looking at that there is a consolidation of.
On to a very thoughtful merchandising and inventory analysis.
To make sure that we are focusing again on our highest margin products and eliminating a lot of skews that do not meaningfully contribute to our business to focus on those higher margin products. And then also we have been conducting just the a merchandising pricing strategy a tiered pricing strategy that will continue to improve the mom.
Second profile, so when taken in the aggregate. It's the combination of those factors that I want to take us to profitability in Q4 2020 again.
In light of back over 19 pandemic add there's a level of uncertainty that's been added to the equation in terms of the timeliness of that's or the timing of that but we remain very focused on returning to profitability as a core goal of this organization.
Okay, great. Thank you very much.
Thank you. Our next question comes from the line got Fortune with Roth Capital Partners. Please proceed with your question.
Good morning. Thank you for take time can we focus on pollen geared can supply and packaging.
Can you call out certain states or in that growth. You know are we seeing larger in the so those are larger clients coming onboard and what's your take on kind of the California in the smaller client markets and their viability from that standpoint.
Yeah, we've been very focused in our supply and packaging segment, which again largely consists of the child resistant packaging. We have been focused predominantly on the larger customers for our packaging and for the closed cartridge based systems. The smaller customers there remains a strong opportunity with our.
CPG products.
But we are seeing still seeing strong demand from our large cultivators producers and Extractors and anticipate we actually anticipate continued growth in that segment, even amidst the covert 19 impacts as a lot of those businesses I have been deemed essential by by various governments.
Okay perfect.
And then quick follow up on the hip side of the business you called that out all what's the what's the progress there and kind of your.
You are looking to kind of offset the July sales from outside the <unk>, how do we look at the end upside the business looking out into 2020.
You know, we've invested a lot of time and effort and selecting the best brands in the had based CBD area. So we continue to remain cautiously optimistic that said, we haven't seen the sales velocity pick up the way we would like to so again, it's a matter of just being more discerning around.
High margin.
Products and skew mixes within brands that work and so.
Again, one of those things, we're not calling out independently, but something we continue to work on and as I say cautiously optimistic on have Bay CBD.
Okay.
Well that's question congrats on the vibe business Rolling out strong doubling what are the trends. There are you seeing replacing competitors or is it adding you're an over 1500 doors kind of kind of step us through the continuing trends as you see divides business moving through 2020.
Yes, so we're incredibly excited by the the growth that we're seeing in fives again, doubling over sequential quarters and that trend is continuing into Q1.
And it's going to maybe making up a meaningful portion of our revenue going forward as as as we are currently projecting.
In terms of market share, we definitely see it gaining market share although the pie is much much larger theres a lot more room to grow their assets very very early innings, which is one of the reasons why it makes us so excited by this particular opportunity.
Okay I'll jump back in the queue. Thanks.
Thank you. Our next question comes from the line of Glenn Mattson Who's a private Investor. Please proceed with your question.
Hi, guys. Thanks, Glenn Mattson from Ladenburg Thalmann, Thanks for taking my question.
Yes, no I guess, you know the world's change rapidly you're seeing a pick up an E commerce or make up for the lack in retail stores and I guess I'm wondering about.
Kinda product mix are you seeing you know people begin to get concerned about their income is baskets projecting maybe basket size kind of declines over time.
You know there's been a lot of publicity about pick up in.
Canada sales during this crisis, but.
Wonder how sustainable that is and things maybe just some color on that please thanks.
Yep.
So a couple of thanks. Thanks, Thanks for the question.
Again speaking at a little bit more detail about our individual segments I described how our business to consumer segment overall remains stable because the increase in ecommerce sales, which is offsetting the decrease in the brick and mortar sales again, our supply and packaging sales, which is to our license.
Yes, there's cultivation extractors the large scale cannabis companies remains very strong and stable and growing I've been at the helm of this company for almost 15 years I've also taking the company through the 2008 financial crisis.
So I don't anticipate that consumer purchasing patterns as it relates to cannabis.
We'll change through any increases in the unemployment.
Just from from my experience historically that being said, we also have to other segments I want to quickly touch on we have what we call our channel and drop ship, which is our online marketplaces business, which again is also very stable and strong. The one that we do you are starting to see some impacts on.
Our business to business consumer packaged goods segment. This is the business, where we account for all the sales of the jewel impacts.
Stores and because some examples graco science to our a snapshot customers that's being impacted by the.
The actual shelter in place orders that taking place around the company in so much as.
The other countries in shelter in place orders, we see a fairly direct correlation to our revenue declines in those particular areas.
Some of that's actually being offset by revenue increases in the states that are not under mandatory shelter in place orders, but overall, we do expect that that to have some amount of impact as we see this proliferation and prolong shelter in place orders, a and b to B business.
It's about 60% of our overall total overall sales.
I think there and that's helpful and then.
Perhaps one more you know just the world's changed a lot just in the last couple of months so.
And your capital allocation strategy changed at all.
Oh, there did you have acquisition.
Markets for 2020 and.
So.
What's become of that and that's it for me so thanks.
Yeah. Thanks, Thanks for the question Glenn just speaking on M&A for three seconds, obviously with our stock valuation where it is we're not all that eager to be deploying our equity to do acquisitions, but our pipeline has not changed we remain very opportunistic an active with targets and wall.
Maybe a certain juncture in time, you pause to be reflective of your own business in your answer Louie focused.
We're always thinking about that pipeline, we're always thinking about filling in white spaces in our product portfolio and also our global footprint. So no our appetite and curiosity and opportunistic lens has not changed.
Thank you once again, if you'd like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipment, maybe necessary to pick up your hands that before passing the Starkey. Our next question comes from the line of Mike Grondahl.
Ill with Northland capital markets. Please proceed with your question.
Yes. Thank you guys two questions. One can you talk a little bit about the inventory balance at year end.
And then secondly, some of your cost cutting measures the head count reduction the furloughs and consolidating the distribution warehouses.
Can you kind of give us a sense when know what's happened or when those are going to happen. Just so we can kind of think about it.
Sure. Thanks, Mike.
So couple of things our inventory position at the ended the year.
I didn't know if you had a particular question about the inventory position, but it wasn't very strong inventory position and what do you think you. The question you're looking for as we believe it to be more than adequate to take us through any potential impacts to our supply chain a that I was describing.
Vivian question.
The other important thing to note as we consolidate our distribution network at will actually require less inventory overall, so we believe there to be an opportunity to actually convert inventory into cash and maintain a lower levels of inventory turn our inventory more times.
And I'm sorry, what was your second question.
Oh It was just some of the timing of the cost reduction effort to head count the for low and the warehouses.
Yes so.
A lot of for a lot of the furlough has already taken place predominantly in our company owned brick and mortar stores that happened a couple of weeks ago and then our de sees a again there is about 50 full time employees that will be impacted as we transition.
Turning to our consolidated distribution network towards the end of Q2.
Got it okay. Thank you.
Thank you. This concludes the question and answer period I would now like turn the call back over to Aaron Lucky you know for final comments.
I just want to thank everyone again for joining Greenlights fourth quarter and full year 2019 conference call and and as a reminder, replay for this conference call will be available and approximately two hours on Green Plains Web site and the Investor Relations section and I look forward to speaking to everyone again soon.
Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have an eye sight.