Q1 2020 Earnings Call
Ladies and gentlemen, please standby. This is the operator today's conference is scheduled to begin momentarily until that time. Your lines will began running musical. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Charlotte's Web Holdings Inc.'s first quarter conference call.
At this time all participants are in listen only mode. Now after the speakers presentation, there will be a question and answer session.
Yes. Good question during this session and read the press Star one on your telephone please be advised that todays conference is being recorded.
If you require any further assistance. Please press star zero I'd now like to end the conference over to your presenter today director of Investor Relations <unk> you may begin Sir.
Thanks, James Good morning, everyone and thank you for joining us for a first quarter results call. My name is Corey Palo director of Investor Relations and leading the call. This morning is Charlotte's web CEO Deanie elsner, along with CFO Russ Hammer, Judy will share her remarks, and her comments on the quarter regarding the business and Russ will provide some color on the financials will take.
Questions from analysts at the end of our prepared remarks, a replay of this call will be available through the next week accessible pretty detailed provided in our earnings release. This morning, a webcast replay of the call will be available for an extended period of time through the IR section of our website at Charlotte's web Dot com.
Earnings Press release was issued this morning at our Mdna in financial statements have been filed on SEDAR. You can also accessed season, the Investor Relations section of our website <unk>.
Our Saturday reminder, to listeners scoring that certain subjects discussed in this call, including some answers we may provide a certain questions may include content that its forward looking in nature, and therefore subject to risks and uncertainties, which could cause actual future results or performance to differ materially from implied expectation Chris surrounding forward looking statements are outlined in detail.
Well within the company's regulatory filings. In addition on this call we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which you don't have any standardized meaning as prescribed by IRS. Adjusted EBITDA is therefore defined in our press release as well as her mdna.
That any forward looking financial there for Charlotte's web business only do not include additional financials of the proposed abacus acquisition, we will not be commenting on abacus forward financials until the acquisition closes.
I don't know handover the call Charlotte's web Chief Executive Officer, Deanie Elsner anyway.
Good morning, as many of you are aware, we've recently lost the namesake car companies like the passing of Charlotte Picky. What began at her story became the shared story of hundreds of thousands and the inspiration for many millions more on their journey for better betterment Charlotte was and will remain our true north.
Her passing only strengthens our conviction that consumers deserve access to the natural alternatives provided by full spectrum have extracts to improve their wellness. Our company commitment is embolden as we strive to achieve a regulatory environment that enables global access to this category of products for consumers.
Before I get into our Q1 results I wanted to provide a quick update uncoated 19, and our business. We are tightly managing this unique situation and our production quality and warehouse teams have risen to the occasion, we structured our teams and ships for redundancy and to date, our operations have been running smoothly.
Our employees are engaged and supported but what we're doing so were nowhere on the right track.
I'm pleased to report that we have not had any known cases, the corona virus among our staff up over 300, and we've had no disruptions to our business to date now regarding the impact of coal bid on our sales we engage Nielsen to run an analysis to determine the impact of the cobot pandemic.
Cross several consumer product categories, including CBD within the food drug mass retail channels. The Nielsen data showed a slight increase and take away for the CBD category for the two week period, leading up to the March 21st shelter in place mandate.
Although there was some slight pantry loading that occurred in the CBD category prior to the shelter in place the FDM category take away remains 15% to 20% below the 2020 preclude that run rate in our DTC channel, we experienced a similar increase in our sales however.
We have not experienced the sales contraction occurring in the Afghan channel, it's premature to predict the impact of what Corona virus would be on the Afghan channels as we move forward. We expect the FDM channels to return back to pre could run rates, we anticipate that a portion of these sales will be realized online what.
Just confirmed with the continued strength of our DTC business, we will continue to monitor the situation and update you as it plays out.
Now turning to the review of our first quarter, our first quarter of 2020 delivered organic consolidated revenue of $21.5 million on par with a 21.7 million reported in Q1 2019 revenue was at the high end of our guidance provided in March driven by the strength of our DTC E Commerce business.
For the quarter DTC sales grew 29% year over year offsetting declines in our PDP business, which was down 32% versus year ago for the quarter DTC represented 66% of our total business, while b to B represented about 34%.
Consolidated gross margins in the first quarter were approximately 70% about three percentage points lower than Q1, 2019, and 16 percentage points higher than Q4, 2019, our Q1 margins increased due to the bigger percentage of our sales moving through the higher margin DTC channel.
<unk> T headlines capture our progress for the first quarter first our efforts to transform our DTC business are working to accelerate growth second we are proactively addressing some of the softness in our PDP channel with new products, new formats and reduced pricing launch late March and early.
April combined but distribution expansion.
Sure.
The new products, we introduced in Q3 2019 are exceeding expectations and represent approximately 25% of our total sales through Q1 2020.
Fourth we're making very good progress standing up our new production facility with initial distribution and warehouse operations commencing under our new Chief Operating Officer Officer, David painter, and finally, we've made strategic choices to strengthen the science behind our products with the launch.
CW labs, and our intent to acquire Abacus health.
Based on these five key headlines our trends and customer feedback, we're maintaining our guidance for 2020 restful speak to the guidance momentarily now let me on pack of Q1 performance in a bit more detail.
Our DTC channel continue to deliver strong performance in Q1 with revenue of $14.1 million DTC grew 29% year over year, demonstrating the success of our recently launched new technical platform as mentioned DTC was responsible for two thirds of our revenue in Q1 over the last.
Eight months, we have double down in this channel recruiting new talent transforming key processes and investing in new technology and capabilities to improve the online experience and accelerate sales growth.
Our DTC channel has successfully been hitting a high single digit to low double digit conversion rate, which is considered very high and as a key <unk> that we manage very closely.
Our DTC platform provides our consumers with access to our broadest product portfolio, enabling them to get what they want when they wanted this was a valuable asset during the cobot locked down as people shopped from the safety of their homes.
Im line sales remained the largest channel the CBD category today and it will remain the largest channel in the CBD category going forward. According to the Brightfield group for perspective, we believed that our DTC business alone is larger than any single competitor in the CPT category, which positions us well as the case.
Category growth accelerates, our DTC business remains a key strategic area for US and provides a place for us to gain quick consumer insights regarding new products.
And the first quarter beat it be sales were down 32%.
Versus year ago, driven by the natural channel down, 31% and F. T M down 33% the three issues impacting our b to B sales were first a lapping of initial pipeline stocking orders in FDM from Q1, 2019 second an ongoing regulatory uncertainty for.
Elements and third the competitive overcrowding in the natural channel.
In F T M. The year over year decrease in sales was amplified by lapping Q1, 2019 initial pipeline stocking orders as new customers launched into the CBD category.
FDM distribution expansion and pipeline pipe pipeline orders did not repeat in Q1 2020 as customers pulled back expansion plans due to the regulatory uncertainty. However, since then more encouraging statements. When the reason for recently from the FDA has resulted in a secure in distribution at our first national.
No pet retailer, but shipments beginning at the end of March. In addition, I'm pleased to announce an 1100 door expansion lock in treating this month with an existing FDM partner. This will increase our total door count to nearly 12000 by the end of this quarter and will help to improve performance of the FDM channel.
For the remainder of 2020.
Our BDP portfolio has faced some issues in terms of pricing. In addition to having an underdeveloped topical segment. We've been dressed these these issues.
In 20, <unk> and in Q1 2020, a in a number of different ways and I'd like I'd take you through that first on pricing, we faced two issues expanding competitive price gaps and second a lack of accessible price points to address the expanding competitive price gaps we executed a price steel realignment.
To reduce our list prices, 15% to 20% on average across our portfolio. This resulted in an adjustment to our promotional spend combined with a decrease in our list price. This was supported by a reduction in our Cogs. These moves minimize the margin impact on our list price reduction by two thirds.
To create accessible price points for consumers, we launched trial formats on our based products Charlotte's web benefits from the highest awareness of the catty category based on loyalty Radians. In addition to having the highest consumer satisfaction and willingness to recommend radiance and the category, creating accessible ways for consumers to come.
Into our franchise will drive long term sales. In addition, our accessible price point formats present opportunities to attract new consumers in new distribution channels.
To address or underdeveloped topical segment in March we launch seven new products, expanding our topical portfolio by three times, our new products have been very well received in the B to B channel and are particularly important to our growth in the FDM channel as the majority of these customers have only carry topical products to date for.
Context in 2019, Charlotte's web offered only two topical products and for skews, which represented less than 9% affordable sales.
Our new Topicals offer some of the highest full spectrum CBD concentrations available in the market today, making them more efficacious and our new formats are getting positive consumer feedback.
Finally, our proposed acquisition of Abbott Abacus health with greatly expand or topical portfolio advocates health as a leader in the over the counter topical prop product segment. The combined active pharmacological ingredients with hemp extract the expansion of our topical <unk> portfolio with abacus will enable us to.
Celebrate growth in food drug mass, where we have a combined market share of approximately 35%.
Turning to innovation sales traction for our new products launched Q3 2019 have exceeded expectations. Our innovative gummies for introduced last July and have been one of our most successful product launches to date customer feedback has been excellent and this segment has grown to become 18% of our portfolios.
Sales driving our Ingestible segment to grow approximately 10% year over year in Q1 on a gross sales basis.
Dennard Injectables portfolio dummy sales growth offset declines in oil and capsules.
Our pet line is also doing well our pet segment grew 163% through Q1 2020 as new distribution came online.
Regarding our capacity expansion, we're making good progress on the Buildout of our new fulfillment Center. This is now being led by David Kantor, who recently joined the company as Chief operating officer coming to us from the Estee Lauder Company, David brings deep experience and leadership to our supply chain teams.
Finally, we've made some strong strategic moves during Q1 with the proposed acquisition of advocate Health. In addition to the launch of the CW Lab Science and innovation Division with these strategic moves we are bringing more science legitimacy to the category, which enhances our ability to drive breakthrough innovation and.
Support regulators with much needed data the combination of Charlotte's web and advocates creates a formidable company in the CBD category, leading the market with brands science and quality combined we represent the deepest and brought US CBD company in the world with the most developed portfolio off.
Her across all channels and all segments, our integration discussions are encouraging with revenue and synergy opportunities exceeding our expectations and we are benefited by the depth of transaction and integration experience across the collected team.
For us the CBD <unk> category remains as exciting as ever as we believe that Charlotte's web is the best position company to lead the category growth going forward now I'll turn the call over to rush to provide some comments on the financials.
Thank you be and good morning, everyone. We certainly appreciate you joining us this morning.
Our Q1 financial statements and the management discussion and analysis had been filed on SEDAR I Trust you've had a chance review along with this morning Q1 press release I will address some of the more notable items in the Q1 financial results would be game of additional transparency and sure some highlights on our outlook and guidance.
Q1 revenue of 21.5 million came in ahead of our guidance range of 20 million, which we provided in March.
We need to be revenue, which includes both the FDM and natural retail channels was 31.5% lower year over year as a lack of ft I'd guide.
In the CBD market continues to result in a cautious approach by national retailers and the increase number competitors and independent natural retail channel.
However, we are pleased to report this weakness was fully countered by our strong do you see E commerce sales, which increased by 29% year over year in the first quarter of 2020.
Turning to gross margin or Q1 gross profit was 15 million or 69.8% before biological asset adjustments. This compares to gross margin before biological asset adjustments of 72.8% in Q1 2019.
Our modestly lower effective gross margin percentage reflects promotional programs as part of our competitive.
The growth strategies.
For modeling purposes going forward, we expect consolidated gross margins in the mid to upper Sixtys range and improving near the end of 2020 into early 2021 from production.
Film at cost improvements as our new customer fulfillment center comes online.
Our vertically integrated supply chain is one of our most valuable assets, enabling full control of product cost quality and service. Our 2019 harvest had higher yielding an potency, resulting in a 33% reduction per milligram of CBD.
Combined with cost savings through our new production perform and R&D Center, we are confident we'll be able to improve margins well the same time passing on savings to our customers as we enter 2021.
I'm 2022.
Now turning to hop back.
Q1, operating expenses of 23.3 million increased 76.5% year over year, but down quarter over quarter by 11.7%.
26.4 million in Q4 2019.
As a percentage of revenue. This high level is temporary we're forecasting revenue growth for 2020 and intend to leverage our opex down as a percent of sales against revenue growth.
Sequential quarter and 2020.
[noise] Opex growth was primarily for many who just seem estimate driven by investing ahead of revenue and building out our customer capabilities, expanding our management team and increased DTC investments.
We have also incurred legal fees as we protect a blend M IP angiomedics.
Adjusted EBITDA loss was a negative 5.7 million compared to a positive 4.5 billion a year ago.
So.
It was primarily the result of flat year over year revenues against the higher overall investments in operating expenses, we're maintaining our model for negative adjusted EBITDA in the first half 2020, and a return to positive adjusted EBITDA for the back half 2020.
Well take a moment talked about our tax provision during the first quarter.
The company reduced or deferred tax asset in accordance with I hear you asked well by 6.3 million due to our inability to recognize.
It cumulative operating losses, triggering I asked well were primarily caused by our Q4 non cash inventory reserves, plus our Q1 loss or in a wells we made available to use in the future as a company returns to profitability.
And as we have discussed we fully expect continued growth and a return to profitability in the future meal for believe we will still utilize the net operating losses in the future.
Now turning to cash in working capital our cash balances at the end of the first quarter were 53 million with working capital at 114.9 million.
Cash used in operations during the quarter totaled 14.9 million. There was primarily used for tax receivable accounts payable and trade receivables.
Well executing on our capitalization strategy to provide flexible liquidity tool to support anticipated growth and strategic opportunities.
As part of this process, we recently engaged in a banking relationship with JP Morgan men includes a line of credit.
In an implementation of JP Morgan merchant services, which will drive cost reduction in card fees in our growing DTC business.
Now turning to Capex in terms of Capex for 2020, we're carefully managing our investments into our capacity expansion as we continue our infrastructure build out ahead of anticipated growth, resulting from me anticipated eventual have da policies to support wide adoption of abstract products within the up the.
No.
Net cash used for our new production fulfillment center was approximately 4.6 million in the first quarter.
Net of tenant allowances, which are included in our receivables. We spent 1.5 million in the first quarter on her new 700 Tech side.
We are in both things significantly in our new customer production and fulfillment center capabilities. This year.
Our total 700 Tech capital expenditures are approximately 39 million over three years with 8 million spent in 2019.
28 million in 2020.
And we are postponed approximately 4 million into 2021.
Our total Capex investment plans for 2020 or approximately 36 million.
Now turning to guidance uncertainties around the Corona virus pandemic.
Regulatory environment remain however for Charlotte's web the impacts from the corporate banking pandemic. So far on the retail side of our business has been countered by the strong online sales of or D to C E Commerce business.
So we are therefore, maintaining our 2020 growth expectations for Charlotte's web business for 10% to 20% year over year growth.
This provides for a topline range of approximately 105 to 115 million per 2020.
Note that our guidance is for Charlotte's web business, only and does not consider the additional revenues of the abacus acquisition.
Based on successful abaca shareholder approval in June we anticipate the closing of the abacus acquisition around the ended the second quarter early Q3, and intend to update our 2020 guidance for the combined business in due course following a successful closing of the acquisition.
To conclude with some comments on proposed strategic Abacus acquisition.
I guess is holding its shareholder meeting on Thursday June 4th which will include the vote for approval from the shareholders of advocates.
Post acquisition.
Africa shareholder loan approximately 15% of Charlotte's web.
In terms of size average annualized run rate is about 15% to 20% of Charlotte's web.
Combined we are the depots and broader CBD company in the world fully integrated across all channels and all segments.
Our strategy is to accelerate our growth and extend our market leading position both in domestic.
National markets.
We look forward to updating you on our progress on the strategic acquisition.
This completes the financial update for the quarter I'll now turn the call back over to Dean.
Thanks, Russ I had tomorrow marks my one year anniversary since joining Charlotte's web over the last year, we strengthened the business and our market position building out the required management team to stand at the business up and leverage the strong brand proprietary genetics and the vertically integrated supply chain we invested.
In capital expansion for the anticipation.
Food drug and mass retail growth, we implemented business systems and processes accounting controls liquidity tools in corporate governance, we evolved our DTC technical platform, which is paying dividends in sales growth in data intelligence, we've introduced new products formats, we've introduced competitive pricing all aimed.
To fuel growth across all channels.
And we're bringing scientific legitimacy and data to the hemp derived CBD and cannot Benoit categories.
It's been a great year and I'm grateful to steward. This ship for you our shareholders with that operator, we'd like to be open up the line and we'd be happy to take any questions.
At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Pause for a moment, while we compile the Q in a roster.
And our first question comes from the line of Scott Fortune with Roth Capital Partners Go ahead. Please your line is open.
Good morning, and thanks, Congrats on the corridor.
Quick you know there has been in the past seasonality for for the channel in the first quarter are you seeing any that obviously covidien changing that and then just to focus on the natural channel are we seeing any rationalization or brands there or are you kidding still expect that can be crowded with competitors.
Moving forward here.
Hi, Scott it's good to hear you in terms of seasonality I'll tell you every quarter since I've been here has been a had an unusual quarter and I think Q1 is no exception.
And so where where we've been seeing different patterns of seasonality I'm not sure that we can put a stake in the ground as to what each quarter contributing I'll give you. An example, typically for US Q4, as a stronger quarter through the years.
In Q4 fell short of our expectations as the Sta uncertainty forced our retailers who had made commitments to lean into distribution pulled back I think in Q1, we're seeing some some similar apprehensive mission. So it's too early to call seasonality night.
I wouldn't want to put a stake in the ground from that standpoint in terms of read retail sections consolidating and starting to move on brands I think that's way too early in FDM. The brand still haven't really reached the shelf in the category really hasn't been developed in the.
Natural channel, we're still seeing overcrowded crowding no clear indication at this point, but there is a reduction in brands or an attempt to try to control. The category. So that you lean into the brands that are providing the best growth opportunities and so at this point, we're not seeing it and I wouldn't it.
Back to see it until this pandemic clears I think retailers right now are just trying to keep up with the foot traffic. They're experiencing in addition to just keeping essential categories in stock and so I wouldn't expect to see any of that come to fruition. If it did until late this year more likely cattle.
Wherever views March 2021 does that answer your question.
Yeah no.
Provides a lock our thank you on that and then just real quick on the FDM channel.
We announced a little bit expansion into new geographies and doors with existing partners now with presumably more topicals coming on board cases, there white space in your conversations with the fees FDM retailers for the ones, they're carrying your products and expanding into more skewed topicals kind of whats your average number.
Skews from that side and expectations embedded in tier.
Okay going forward here 2020.
So [laughter] I'd love to give you the number to plugged into the model, but what I'll tell you as best.
We've had very strong uptake on our topical launch across the majority of our retailers in our PDP business, they're taking the majority of if not the total topical line. So it's been received incredibly well.
In terms of of white space, and I think potentially.
Pushing towards our their broader discussions happening across other segments in the category. The answer to that is yes with the recent ft. A group in terms of just opening up distribution slightly we are seeing conversations happening where.
Customers are willing to entertain.
Discussions on Injectables and dietary supplements now that has not resulted immediately in distribution, but we're beginning to have those discussions. In addition, we do you understand that they themselves are looking at opportunities.
To expand private label out and so we know that the discussions are happening we're involved in a number of them and I would anticipate some positive news from the FDA, you'll see the food drug and mass channels move more quickly.
Okay. Thank you I will jump back into queue.
Thank you.
Thanks Gardner.
Our next question comes from the line of directly with.
Canaccord Genuity go ahead. Please your line is open.
Hi, Good morning, everyone I'm, just wondering in terms of.
Your online sales are year over year direct to consumer have you found that customer retention has improved as you've expanded your product offering or.
As well as as starting to offer some smaller.
It's like starter sizes, I think you called and trial size product offering.
Eric It's good to hear you yeah, it's exactly what's happening in our DTC. So so we look at several metrics in terms of of anticipating in forecasting our revenue on DTC I'm first it's the traffic the conversion rate the average order value as well as the retention.
And right silver attention becomes a very important factor to us because we know if consumers come into our brand. We've got a much higher likelihood of holding them in the brand from a loyalty standpoint, and so we are seeking an uptick in retention. We're also seeing an uptick in our subscription subscription rates and so.
I think the science of E Commerce in DTC is deep and broad and requires a very dedicated team of experts and capabilities to crack and that's exactly what we've done and and we've got.
Very deep plans across each of those K P eyes in terms of how do we continually improve them and retention has had the benefit of that.
Okay, Great and just wanted to touch a little a little bit on your.
Your your hemp crop for 2019, obviously really strong growth over 200% you just talk about what your plans are for that that robust have crop.
Yes, so sure there so let's just pick up.
Please.
Go ahead rests in pick it up.
Barrick and our hemp crop for 2020.
As we talked about in Q4, we have a substantial inventory.
That is cost reduced and sitting on our balance sheet and as that flow through so we have.
Significantly cost reduced and our plans for 2020 and are growing significantly less this year as we are obviously using our cash for the build out of the 700 Tech Center.
And but we are seeing significant improvement in.
And then yields that we are getting from our crop and the cost reductions from our crops, which is the advantage of our integrated supply chain.
Yes.
Okay, and then just last one I real quick one for me.
Just on abacus.
The shareholder vote really the sort of last remaining hurdle in closing that acquisition.
It is and we do not have any Hart Scott Rodino.
Regulatory issues in front of us as well so that is not going to be mystery sobi shareholder vote is the last.
The clear.
Great. Thank you very much.
Mhm.
Thank you there.
[laughter].
Your next question comes from the line of Gerald Pascarelli with Cowen Go ahead. Please your line is open.
Hi, good morning, Thanks, very much for taking a Jeremy.
[noise] Ginny good morning, So morning, Ross, so really encouraging to see they holding you know your revenue guide, especially in light of this current environment, but can we just dive a little bit deeper into you know what gives you the conviction that you're going to be able to show.
We need to be a pretty notable acceleration you know over the over the last.
Three quarters of the year. Thanks.
Yeah, I know what I just take time.
Okay well have.
I, just stick topline and I'll flip it over and I apologize to to the folks on the phone I'm wearing again three different states as we take this this call. So we have no visual [laughter] too too.
Run Air traffic control suggested in terms of just the initiatives that are in place that that helped to accelerate art our growth going forward. We've addressed some of the issues that exist in our in our B to B channel, we've addressed them with new products, new formats and accessible.
Price points, Henry price reductions and so.
That combined with distribution expansion that we've already secured gives us the confidence that we've got we've got be the momentum in FDM to deliver our internal commitments on the and the BTB business.
In DTC, it's it's more of a science and that's something we watch.
Our by our and day by day literally we are changing plans within hours of making decisions and so that's something that we have the ability to track very closely and have a fairly high level of confidence on in terms of making sure we deliver that number and the capabilities.
And infrastructure that we built give us the tools and and the platform to go do that we've launched new products in a new distribution Kindle a channel with pad that channel basically was non existent for us last year that volume is all upside to us. This year I mean, we're really quite excited about that.
And then when looking at some different options to activate some some.
Individual.
Specific new products to get out the door in the back half for some customer class. So in totality, we feel like we've got the components to hold that guidance and and can see the trends happening rusted you want to talk specifically about any of the numbers.
Now I'll just add a couple parts there you know about the big drivers of Danny mentioned, obviously.
We see accelerating in the back half a year or D to C. Channel. We also have the pet channel, but any had mentioned it earlier comments and with a national retailer coming online that is pretty meaningful for us.
And then FDM, we have modest growth built and on that on the back half as well so.
He said our confidence and how we built a modeling for our growth in the back half.
Sure.
Very confident in them and the DTC is the primary driver.
Thanks, very much that's super helpful.
Next question just on the advocates transaction, obviously it strengthens your portfolio when it comes to Topicals and it looks like you're building out gummies as well, which started to take hold last quarter I believe but you know as it relates to your portfolio. Today are there any gaps did you see a minute.
So how do you plan to address them. Thanks.
In terms of gaps to our portfolio without a doubt terms are largely in terms of for a form factors yes.
You may want to get more constructive on.
Over the near term.
Absolutely so.
For sure the biggest gap that exists in our portfolio was was topical we were greatly underdeveloped in a segment that was the only segment that retailers would take nationally and so we had to fast track both the development of a new topical line and get some unique form factors out with that and you're going to see on that line.
[noise] role lines, and sticks and shelf and they're they're really quite good. So so I feel wonderful about what we've done on the topical front in terms of other gaps in our portfolio I don't I would tell you right now that that in my opinion, we don't we don't have large gaps now what you're getting too is.
Are there other formats that could be unique.
Platforms for us to bring full spectrum CBD to consumer and the answer to that is absolutely, yes, and we are working hard through our CW labs and our development teams to identify those new formats that are more consumer friendly are more acceptable and more appropriate.
But by consumer segment across the portfolio and so I won't give too much more away on that front, because I think that we've got several things in development I literally just review this yesterday, but yes. We are the reason why we brought to you have you lots at the forefront is we need to continue to fuel breakthrough innovation in this category.
Why we build the science and the data.
That reinforces what makes us different and so absolutely that's in front of us.
Super helpful. Thanks, very much all back into the Kim.
You bet. Thanks.
And as a reminder, if you'd like to ask your question. Please press star followed by the number one on your telephone keypad.
Our next question comes from the line of Michael Library with Piper Sandler Go ahead. Please your line is open.
Morning.
Morning, Michael.
Good morning, Michael and also I know, it's only it sounds like about four to six weeks in to the new pricing, but can you give us a sense of what you're seeing so for and I guess, maybe two parts, but one is over much of a read you have on the consumers reaction in terms of elasticity them and that sort of.
Thing and then maybe as well you know trade response, certainly bill replenish as itself through but has the lower price point to triggered any incremental facings or any other way that they've also.
Increase their their interest in more volume.
Yeah, absolutely. So so first just to just to refrain this.
Competitive price gap and lack of accessible price points to bring consumers into the into the category. That's we're attacking [laughter] kicked gets to a competitive price gaps we did the price deal realignment and really funded that with a reduction in our promotional spending a reduction in our list price and benefit.
It's from our Cogs that were favorable coming through so that's how we funded almost two thirds of the margin hit from that price reduction.
Last part of that margin hold you're absolutely right is based on elasticity is and so what we built a was that we wouldn't see any elasticities because Michael we don't have data that shows US elasticity is we can we can't identify what the offset cities are in the marketplace, because we're not that development. However.
Sure.
What we've seen from DTC, and we launched a new pricing and the new formats in DTC about three weeks ago. So so those happened very quickly and we can get early reads on that channel, which is the benefit one of the biggest benefits of that channel for us and what we're seeing in DTC is an increase in units go.
In through on the new pricing and also you would expect with the price decrease our average order value to decline, it's actually held up because weve increased number of units were selling them. So the elasticities are holding up as we had hoped they would we didnt have the data to make.
That determination going in in terms of food drug mass a natural channels. It's just too early to tell the pricing would have just gotten locked in this this month April and we won't see that data for about another four weeks and so we can't call. It in retail yet, but early signs from DTC would say that that our theme.
He has held up and actually is positive.
Sorry, just though.
Clarify for sure you say causative meaning.
Good or actually.
Okay.
It sounds like if I heard you write a minute ago, you were saying that the lower price didn't drive a sales decline at the volume increase offset to be at that said about flat. It did I hear that right.
Yes, but again, it's three weeks in and so at this point could be flat to slightly up three weeks, then without us really getting behind it is very encouraging we would call that a positive sign and something this early that we were not expecting.
Got you know that's perfect and just on CW loves you talked about some of the innovation you expect that to drive can you also give us a sense of what else. We should expect from there would that be away that you might do work to support claims or clinical trials or or is it really just focused on product development.
The decision to launched CW labs was really threefold first we needed to strengthen and and organized the science behind our products and our genetic so that's the first checkmark.
The second with the launch breakthrough innovation and third was to partner with notable and prestigious institutions as they explore research on this category. So we have a number of partnerships we have in place right now we've.
Developed some products that.
A couple of principal investigators are actively working against and we would expect to see.
Structure and functional claims come out of some of those initiatives I think that's an important part for us. It's a big reason why we tied into the Buffalo The University of Buffalo campus and the Sunni system in New York was 64 different universities in New York, we have an opportunity to leverage.
Our position in the market and take advantage of a very receptive New York environment and a number of academic institutions. In addition, there's several others that we're working with so yes, we would expect to see a.
A feature but we'll be able to be a little bit more progressive in some of the structure and function claims that we make.
Okay. Thanks very helpful.
Good thank you.
It's Michael.
Our next question comes from line of Janney Wang with <unk> Capital Go ahead. Please your line is open.
Hi, Good morning, I'm just asked this question.
On the DTC channel I know that you're you're right you comment channels was stronger than your peers.
Are you seeing any I know you've mentioned that there is no contraction in sales, but I've seen any uptick in sandals.
Clinton Kobin environment.
What consumers are ordering online versus traditional brick and mortar.
Good morning, Jenny its good to hear from you on DTC.
You are the question is is absolutely.
Correct. It was correctly stated we are we are seeing an uptick in our traffic in DTC and we're seeing an uptick in our ability to convert on some of that traffic, we did going into the shelter in place mandate see an uptick in sales that was.
As.
You know kind of in <unk> I hate to put an exact number on it rather than most I must say it was in the 10% to 20% as an uptick in sales going into the shelter in place what's interesting about that channel for us is that it didn't contract and so I would contend that the continued strength.
That channel is reflective of consumers being home and reaching out and wanting to order in the safety of their homes. So we are seeing that I don't know that we can completely attribute it to co bid 19, because we've put in place a new technical platform and new capabilities.
We're getting really smart about how to.
Identify and personalized communication to our different consumer segment. So.
That is absolutely, helping us, but I would imagine there is a bit of a co bid 19 benefit to being online where consumers are shopping.
Yes, Jenny I would agree Denny's comments I think at the time the Shelton place when we were probably close to 15, 20% and as you know we finished up quarter over quarter up almost 30%.
We definitely have lifts from our technologies and our ecommerce team deserves the conversion that they're getting is just unheard of in this industry, but now and any do you just did see E commerce site as well so but some of it.
It was probably due to people sheltering in place for sure.
I just like Russ I, just remember just probably genuine other fun Little fact, and it's just a for humor, we are seeing a really nice uptick on our pet business since the cobot 19 pandemic hit.
And our hypothesis is that with consumers being home and more CAD adoption happening and and consumers being what their pets standout and seeing some of the paying their living through they're getting online and that we're seeing a really nice uptick on pad online. So I believe that's probably a benefit of what we're seeing through DTC.
That's very interesting and maybe just moving onto.
Your sales guidance for the year.
Finished sales are you modeling in or maybe you know that it kind of greater than 10 declined 66% for your DTC channel for the remainder of 2020.
We actually are intact.
There, we see our DTC ecommerce business, increasing as a percent of our mix in the back half.
Okay. That's helpful. And then maybe on the marketing spend could you give us a ranking of kind of which sales channels. The majority of the marketing and promo expenses gone towards this quarter just in terms of tier three sales channels.
Yeah that without a doubt our focus on it.
Our then go ahead.
That's okay I, a without a doubt our focus on marketing has been redirected to drive traffic could DTC.
In an environment, where the run rates in I'd be to be our at about 15% to 20% down versus versus where they were pre shelter in place mandate on we're making sure that every dollar we spend is being focused against where we can realize the revenue so that we can improve our.
Our lives and deliver against that expectation for the year and so we've shifted to be more DTC traffic driving and and as as the as the economy begins to open up and consumers are back in stores and shopping broader categories, we will shift back to where.
We are original plans where.
Okay. That's helpful and one last one for me.
Mentioned, the advocates shareholder gold, it's kind of last for for this transaction to close.
I interpret that as you won't need to fall for HFR to close the transaction.
That's correct any I think I said that on one of the other answers to someone else question, we will not need to file HSR that's correct.
Thank you so much.
You're welcome Thanks, Jenny Thank you.
And our next question comes from line of Mike Hickey with the benchmark Oh go ahead. Please your line is open.
Hey, guys.
Glad you sort of I might good.
Morning.
Thanks for taking my questions here, just just curious obviously unemployment continues to.
Client were pretty aggressively how do you think about.
CBD demand.
Your products and sort of a deep recession that maybe just getting the experiencing.
Mike you're right unemployment is is a watch out for us.
With unemployment comes a reduction in discretionary spending and so for us that is something in a category like this that becomes very important I think a couple of things to keep in mind, what what consumers are feeling today anxiety stress lack.
Of sleep because of what's happening externally.
Really feeds right into this category and wellness and so we feel like the consumer trends are well positioned for this category in terms of how does unemployment impact potentially the future of what's going to happen. This year I would contend that the moves we've made in our BDP channel.
In terms of reducing price across our portfolio, 15% to 20% and finding accessible ways to let consumers trial our products.
In more accessible price points is exactly what we should be doing for this environment and sometimes you're smart, sometimes you're lucky sometimes you're both and I would content in this case, where both we made the right strategic pricing moves at a time when when discretionary dollars get more more challenged.
And I think we're well positioned to take advantage of that so I feel pretty good about about what's ahead of us and the consumer trends would indicate the category will be in demand.
Thank you see that in your price adjustments was batches b to b or is that ecommerce as well it looks like but probably so any comments on the site.
Well.
They're not we took a price reduction list price reduction across our total portfolio and we've launched the accessible.
Formats across all channels, so it's impacting our total doesn't.
No no way to think about that is the product became much more affordable to a lot of people and we think that help give us a lift from a strategic product portfolio standpoint.
Got you do you reduce the pricing Thats fine that'll excuse me.
No. We did it we did bring that that out and Mike I think maybe the reason why it might look the same to you is our national.
Retailer before we got really national distribution, the prices were changed and so.
That won't be as obvious, but yes across our total portfolio our prices were.
Reduced.
Okay. All right. Thanks, guys. It's helpful. Good luck.
Thank you thanks Bye.
And there are no further questions in queue at this time I'd like to turn the call back over to our prevention.
Oh.
Good.
Thank you very much I appreciate all the time you guys have spent with US this morning.
And these unusual circumstances appreciate the support you're giving us and a and your questions.
If theres any follow ups, please reach out to quite Paula and a and have a great day.
[laughter].
This concludes todays conference call you may now disconnect.
[music].