Q3 2020 Charlotte's Web Holdings Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Charlotte's Web Holdings third quarter Conference call.
This time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question.
During this session you will need to press star one on your telephone.
Please be advised today's conference is being recorded.
Pardon me further assistance. Please press star the T. Rowe I would now like to hit the conference over to your host today Mr. Corey Carla head of Investor Relations. Thank you Sir.
Please go ahead.
All right. Thank you and good morning, or hopefully we're coming through clear I did hear a bit of static on the line.
Well, thank you anyway for joining us for our 2023rd quarter earnings Conference call for Charlotte's Web Holdings, Inc. My name is Corey Pallet director of Investor Relations.
And leading.
The call. This morning is Charlotte's web CEO, Deanie, elsner and CFO Russ Hammer.
This mornings earnings press release, along with financial statements for the quarter and M. DNA can be found in the Investor Relations section of our website. These have also been filed on SEDAR Dot com on today's call Deeni will.
Nichols' share her high level comments on the quarter and provide operational.
Updates on operations and the business Russ will provide some additional details around the Q3 financial results and we will take questions from our analysts at the end of our prepared remarks, a replay of this call will be available through the next week accessible for the details provide.
Got it on our earnings release and a webcast replay of this call will also be available for an extended period of time also accessible through the Investor Relations section on our website at Charlotte's web Dot com.
A reminder to our listeners that certain comments made on today's call, including some answers. We may provide certain questions may include content that is forward looking in nature and therefore.
Are subject to risks and uncertainties and other factors, which could cause actual future events or future results or company performance to differ materially from implied expectations such risks surrounding forward looking statements are outlined in detail with the companys regulatory filings, which can be found on SEDAR dot com.
In addition, during this call we will refer.
Supplemental non I FRS accounting measures, including adjusted EBITDA, which do not have any standardized meaning prescribed by IRS. Adjusted EBITDA is therefore to find in our press release as well as in the N. DNA as filed on SEDAR.
With that I'll now hand over the call to Charlotte's web CEO Deanie elsner any.
Thank you Corey.
Good morning, I hope everyone is healthy and its remaining safe. During these trying times, let me first comment on the COVID-19 impact on our company with regard to our employees I'm pleased to report that Weve had minimal Cook 19 packed with Musharraf weapon play teams.
With regard to our business, we've experienced some disruptions in our supply chain with vendors.
In.
Three however, these challenges were relatively minor and where were resolved by our supply chain team.
Prior to jumping into our Q3 results I want to share with you. Some perspective of how we are assessing our business as a result of the pandemic.
While analyzing year on year results provides perspective on long term sustainable.
Growth within a pandemic it fails to recognise early indicators of returning consumer momentum due to the fact that some of our distribution channels, where essentially shut down over a period of time in Q2, our management team needed additional context to determine the return of our business to the pre pandemic.
<unk> sales trends, so we've been assessing year on year trends quarter over quarter trends and brand health trends to determine the strength of our business.
Quarter on quarter trends provide us real time insight on consumer momentum while brand health trends are a good indicator of consumer.
Sumer connectedness.
Turning to our third quarter results three key takeaways emerge first our consolidated Charlotte's web business delivered year on year net revenue growth in Q3 of 2020.
Second.
Importantly, we delivered consecutive quarter over quarter.
Net revenue growth across both our DTC and B to B business is confirming an increase in consumer momentum coming out of Q2, and we anticipate this to continue into Q4.
Finally, our brand leadership is driving competitive outperformance and market share gains.
Now let me provide some color on our Q3 performance on a year over year basis.
Total consolidated Q3 revenue was $25.2 million up slightly versus year ago, a strong performance given the external operating environment.
Third party data indicates that Charlotte's web continues to outperform much.
Our competitive set as a result of our strong brand metrics competitive pricing strategies and expanded channel footprint in Q3, lower foot traffic in brick and mortar retail channels that make up our b to b business resulted in a decrease of 29% in b to B revenue versus Q3 2000.
Much of team. However, this was offset by a year on year increase of 28% and our direct to the consumer E Commerce business as consumers transitioned to online shopping as a result of the pandemic for the third quarter direct to the consumer sales represented 66% of our total revenue.
Right and B to B represented 34%.
DTC ecommerce revenues grew 28% year over year to $16.7 million as a result of effective online marketing targeting segmentation of customers and personalized messaging, which drove a 98% increase and our converse.
Version rate versus year ago. In addition, new customer acquisitions grew 52% retention grew 65% and our subscriptions grew a 139%. These results reflect our decision to invest to build new capabilities and expand our team to win in this important.
Important direct to the consumer channel.
During Q3, we launched CBD medic onto the Charlotte's web dot com platform migrate.
Migrating consumers from the CBD the medic dotcom platform. Our plans are to continue evolving in the CBD medic experience to elevate the brand and connect Charlotte's web consumers.
The unique CBD medic products.
Our new ecommerce capabilities have enabled us to put data at the center of our decision, making to better understand consumer buying habits to build relative relevant and timely communication. We successfully exited executed two significant activations in Q2.
And Q3, which delivered exceptionally relevant offers to the right people at the right time exceeding sales expectations and building our subscriptions, we feel very good about our strategy and new capabilities in DTC and we are confident in our ability to drive growth in this channel going forward.
Shifting to.
Sure B to B business year on year, BTD revenues declined 29% due to the pandemic competitive overcrowding and an unsettled regulatory environment for context, our bid to be revenue is comprised of four channels food drug and mass retail natural retail health care practitioners.
And Pat retail.
During the second quarter of this year when the country moved to shelter in place the channels that experienced the greatest impact from the pandemic, where our natural and healthcare practitioner channels. Our business. In these channels is a well developed but some customers experienced temporary closures during the second quarter.
Two are impacting our revenues. However in Q3 as many states began to reopen our sales trends began to improve resulting in year on year and quarter over quarter improvements.
Real time improvement in our business performance becomes more evident when we look at the Q3 sales on a quarter over quarter basis.
Consolidated Q3 revenue of 25.2.
Million dollars was up 17% quarter over quarter, making the important returns to consecutive quarterly growth in both our direct to the consumer business, which was up 8% and our BTB business, which was up 13.
9%.
Well ahead of our recent Q2 results.
Excluding the apogee Abacus acquisition legacy Charlotte's web delivered total consecutive quarterly growth of 8% with legacy DTC, increasing 6% and legacy be to be increasing 12%.
The legacy BTB improvement was led by our natural retail channel, which was up 20% and the healthcare practitioner channel, which was up 26% quarter on quarter responding positively to our portfolio repricing and expanded portfolio offering five.
Finally, the APA gift business.
Contributed additional Q3 revenue of approximately $2.5 million for the quarter.
Turning to segmented product performance on a gross revenue basis, all product segments grew sequentially versus Q2.
To further expand on product segment quarter on.
This quarter gross revenue sales growth, our tinctures were up 2%.
Our capsules were up 9% gummies were up 41% pet.
Pet was up 12% and Topicals was up a whopping 169%.
These gross sales results.
An increase in consumer momentum coming out of Q2. In addition, with the abacus business fully integrated into our Q3 gross topical sales contributed 17% of our gross revenue compared to just 8% of gross revenue in Q2 2020.
Looking forward we.
OPEC topical sales to increase further in Q4 to become an even bigger part of our portfolio.
Regarding distribution, we expanded our b to B channel footprint by nearly 1000 retail doors. In Q3. This included approximately 500, new FDM retail doors nearly 100.
New natural retailers and approximately 300, new independent pet stores.
We've had good traction in the patch at this year and we are currently in discussions with national pet chains for further distribution expansion in 2021.
In total Charlotte's web BTB retail distribution expanded to.
[music] about 13000 doors in Q3 today combined with the abacus distribution Charlotte.
Charlotte's web has a total of approximately 22000 unique retail doors carrying our portfolio brands, which include Charlotte's web CBD medic CPD clinic.
Great and harmony Ham for context. This number does not include the abacus network of about 16000 healthcare practitioners with.
With this leading distribution coverage Charlotte's web is positioned to benefit greatly as both the pandemic and regulatory uncertainty are resolved.
We're encouraged by.
By our B to B business and is and it is improving on a quarter over quarter basis in April of this year, we executed our price steel realignment, which reduced our base price points by 15% to 20% across our portfolio to close the price gaps within our product segments in the FDM Chen.
While our average price gaps have narrowed by more than 60 percentage points.
And our which reduced our base price points by 15% to 20%. This new competitive pricing is driving an improvement in our sales velocities as of August of this year, the Charlotte's web sales velocity growth.
I had a point of distribution was outpacing our competition and we are seeing a similar benefit across the b to b channels.
Pricing combined with our new expanded portfolio offer innovation and improved ecommerce capabilities have resulted in an overall improvement and our brand health metrics market share and.
And if and I've got a few points to Dimensionalize. How this works shallow slip dollars per point of GDP in the latest 12 weeks Q3 is 32% higher than the number two player and a 100% 7% higher than the category average Charlotte's web now has nine.
For the top 20 products in ex AOCI shelves.
Shelves web brand market share increased 1.8 share points in exit AOCI and the total company share position increased by 2.1 share points in Q3.
Our brand health Charlotte's web is number one in awareness number one and.
Of the duration number one and intend to purchase and number one in loyalty.
We've experienced double digit improvement in all of our E Commerce, KP eyes, and Charlotte's web is the number one brand in household penetration up over 30, 30% versus year ago in.
In summary, within a difficult business environment.
In Charlotte's web continued to perform I will now turn the call over Russ for an overview of our financial performance.
Thank you Dan and good morning, everyone. We certainly appreciate you joining us this morning, our Q3 financial statements and the management discussion and analysis have been filed on SEDAR.
Just you had a chance.
Its review along with this morning's Q3 press release I will address some of the more notable items in the Q3 financial results will be the aim of providing additional transparency and share some highlights on our outlook.
Total consolidated net revenue for the third quarter of 25.2 million was up modestly versus Q3, 2019, but up 17.
<unk> percent sequentially from Q2 and included approximately two and a half million from acquired Africa's business.
Excluding abacus approximate net revenue for the Charlotte's web legacy business was $22.7 million down 10% year over year due to the pandemic, but up 8% quarter over quarter from Q2 of this.
Marking that all important return to consecutive quarterly growth Danny referred to earlier and we expect revenues to continue to increase sequentially in Q4.
Since the pandemic pandemic began retail sales declines have mostly been offset by our strong DTC growth of around 30% and we have returned to.
Second consecutive quarterly growth and expect to report year over year growth in the coming quarters.
Gross margin prior to biological asset adjustments was 60.3% compared to 71.3% last year and adjusted gross margin of 64.8% in the second quarter of this year.
The.
Is your gross margin primarily reflects product sales mix portfolio, repricing, and new topical distribution and b to b.
For transparency and modeling purposes, we are modeling consolidated gross margins to vary quarterly based on sales mix, but to generally land within the low to mid Sixtys range.
Our Cogs or design.
Turning to decrease in the back half of 2021 as our new production distribution facility will be fully operational and we expect significant efficiencies from our capabilities investments this year as 2021 volumes ramp up.
Our new production and fulfillment center has been coming online in stages in 2020 and presents significant future cost saving efforts.
Lower earnings starting in 2021 for expense consolidations benefit of owning our supply chain consolidating disparate manufacturing operations into the new facility enables a closing of two former locations driving improved efficiencies in 2021.
Q3 operating expenses of 28.3.
Million were 44% higher year over year, reflecting our strategic investments in 2020 and capacity expansion and transition to a consumer package goods CPG operating company capable of supporting D to C and mass retail channel growth.
On a quarter over quarter basis operating expenses were down.
4% from Q2 2020, as we initiated expense reduction actions.
Let me unpack, our opex controls and cost controls for further transparency.
Our sales have been below our internal plan for the year due to the pandemic in response, we have proactively taken actions to better align operating expenses with.
Then our revenue levels and initiated an expense optimization program with identified reductions of more than 10% of the second half 2020, Opex run rate this will amount to more than 12 million annualized savings as we head into 2021.
This is primarily being accomplished with opportunistic expense.
Since reductions through efficiency and expense management actions. For example, we have cut our banking and merchant fees in half since partnering with JP Morgan reducing expenses by approximately 400000 per quarter.
At the same time, we are actively and proactively taking action to reduce spend.
We are expecting Q4 revenues.
As to increase sequentially over Q3, which will further reduce our opex as a percent of revenue.
Adjusted EBITDA loss was 6.7 million similar to Q2 compared to a positive zero point $8 million a year ago again, reflecting the infrastructure investment build out ahead of revenue growth and the cobot impacts.
Now turning.
Turning to cash and working capital.
Cash balances at the end of the second quarter were $65.9 million with working capital of $129 million in the quarter, we utilize capital for purchases of equipment to build out of the company's expanded production distribution facilities, we expect to see this level of investment drop off.
Off significantly as we complete our strategic investments and head into 2021.
We have no debt, we have an unused line of credit with JPM.
We expect to end the year with approximately $60 million net cash which includes $11.4 million income tax receivables from the IRS, who are delayed with refund.
Funds due to the pandemic.
I will now provide some clarity on our capex spend of $12.1 million during the quarter, which included $11.5 million invest and construction of the company's new production distribution facility.
Our cumulative capital expenditures on the new facility.
We will total approximately.
31 million between 2019 and 2021.
We planned Q4 capex expenditures of another 10 million, primarily allocate catered to the completion of this facility.
We expect Capex investment in 2021 of no more than $10 million.
We successfully completed.
Exit our 100 day integration plan for fully integrating abacus and it's topical portfolio into the business channels.
Operating synergies will be realized beginning the current quarter that will equate into savings starting in Q1 2021.
Now, providing an outlook due to the uncertainty presented by the ongoing pandemic, we're not providing revenue guidance numbers.
As for 2021 on todays call. However, we can state that we expect sequential quarterly growth to continue into the fourth quarter and growth for the overall year overall in 2021 and are targeting positive EBITDA in the back half I will now turn the call back over to Dean for her closing remarks. Thanks Russ.
Please.
We have not talked a lot about the new brands to the Charlotte's web portfolio, but let me take one minute to brag a bit last month, our CBD medic brand became the first and only CBD brand sold in FDM channel to be designated as an impact sponsor of the arthritis Foundation earlier this year our.
Our CBD CBD medic brand sponsored the arthritis Foundation survive and thrive fund raiser, including three time National NFL champion CBD Medic spokesperson Rob Grand Koski. According to Nielsen's. Most recent data CBD medic is a top selling product for those suffering from the symptoms of arthritis.
As well as pain and inflammation. The addition of the abacus brands to our portfolio provides charlotte's web immediate breadth and depth across channels and segments. We've worked hard to get to this point in our journey and we look forward to the growth ahead.
Now closing with thoughts on the FDA, we've continued to meet.
Eight and share information with the FDA in an effort to establish a regulatory environment for HAMP CPD dietary supplements. We continue to believe that the industry will see this accomplished in 2021 and will stay active and involved to move this industry forward on that path.
In parallel to the FDA is ongoing process.
There is increasing optimism around the recent HR 80, 179, Bill introduced to the house last month to legislate hemp derived products as dietary supplements.
Our 80 179 is widely supported and now has 16 bipartisan cosponsors in the house.
This will help.
Stabilize the hemp markets and open up a promising economic opportunity for us agriculture with the regulatory framework in place the hemp industry can provide a needed financial jolt to the nations emerged to the nation emerging from an economic recovery.
Independent surveys predict with.
Help regulatory pathway sales of CBD products would grow from approximately $1.2 billion in 2019 to anywhere from $10 billion to $16 billion in market size by 2025, and our intent is for Charlotte's web to be at the forefront of this industry. Thanks.
Thank you and.
With that operator, we'll now open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.
Please standby, while we compiled acuity roster.
Our first question is from and Gerald Pesqueria of Cowen.
Hi, good morning, Thanks, very much for taking the questions.
So Andrew good morning.
Good morning.
So now that we're halfway through for Q, we've obviously seen.
Co. Good case use ticking up Danny I was just hoping you could provide.
Some color on what you're seeing at the brick and mortar retail level.
In terms of the trend seen over the course of October and then maybe through November and how that compares.
Two what was.
Nice recovery.
Requeue. Thanks.
Absolutely. It's a great question. So I'll go back to the Q2 earnings what we saw going into the pandemic in both E commerce and in our BTB retail channel brick and mortar outlets.
A bit of a pantry load if I recall the numbers correctly Gerald I think those those.
The numbers were in the area, but 30% to 35% both channels pantry loaded going into the pandemic ecommerce held on to that growth and never stopped.
Where the BD channels began to suffer and take a hit on the reduced foot traffic and I think at the low point.
In a number of our of our BTB channels through different syndicated data sources, we saw as much as 60% to 70% decrease in consumption peer out that us up.
Period on period.
Q2 was hit incredibly hard coming out of Q.
As we mentioned about the fact that our quarter on quarter growth in two really important channels to us health care practitioners as well as the natural health channel have accelerated their momentum coming out of Q2 on the bricks and mortar side of the business and specifically in FDM, we're seeing a return to some normal sales volume.
Seats in.
In Q3 and so.
For the most part has started to turn those barrels we were seeing.
Reduce consumption in the FDM channel kind of in that in that low thirtys.
And that has rebounded through the end of the quarter and so it looks like a number of our retail channels have gotten back up to pre pen.
Pandemic trends I.
I would expect that see that fully realized by the end of the year, assuming the vaccination and the.
And the the medicines that have been brought forward come into play. So we feel like we've seen the worst of the pandemic and that were on the upward swing what's important.
I want to note is whether the pandemic continues or not we've all adjusted to a new normal I think thats true in terms of companies consumers and customers and so even in a in a Ics dented pandemic I don't think you'll see us returning back to Q2.
Impacts.
Got it that's super helpful. Thanks. Our next question is just on abacus.
The online opportunity seems like a big white space opportunity exists, which traditionally have a b to b business.
I guess can you just talk about some of the initiatives, you're taking to to drive E commerce growth with abacus.
And you know.
But how that like.
Like the steps you took over three Q and then would you expect to do in Fourq here and then over over the course of 2021. Thanks.
We do see the abacus acquisition as a big White space opportunity. So, let's just go back and unpack the numbers.
Advocates last year on a net revenue basis.
Gene delivery at about $15 million of net.
Almost 65% to 70% of that net revenue was contained in the healthcare practitioner channel on what that means is they had just a very early stage business developing.
In the more traditional.
Retail channels.
In addition, prior to our acquisition of Abacus advocacy acquire.
Harmony camp, which has a bath and beauty brand and.
And so what we were able to bring into our business in June was.
A portfolio that was very heavily concentrated in the healthcare practitioner channel important because about 50% of consumers.
Our our influence to come into this category by health care practitioners and an over the counter topical business that enables us to tap into very specific need states.
In addition, harmony HAMP gave us exposure to the fast growing beauty and Bath segment and so in total we now have a portfolio that gives us tremendous scale. When you combine that with the Charlotte's web supply chain.
Leverage as well as our scale across channels, what you find.
It is exactly what you've said tremendous white space opportunity in a number of retail and channels that we havent gotten into before retail outlets like like C store gas and convenience it.
Spansion into areas like the natural channel, where today Charlotte's web is the number two share player, but we havent.
Very very very underdeveloped portfolio portfolio of Topicals and this gives us an opportunity to bring abacus ended natural and expand out that offer in addition to harmony happened. So we see real upside to the portfolio as we look at the white space that we can benefit from by just scaling our efforts.
In terms of what we've been doing to capture that upside we've.
We've talked about it on both calls we have been aggressively expanding now our distribution. So in spite despite the pandemic. Our sales organization has been expanding distribution and I believe in Q2, we picked up about 1700 doors.
Ours in distribution in Q3, we picked up another 1000, we continue to expand out retailers are receptive to the message we have a lot in a big portfolio brings to the forefront and you will see us continue to expand distribution and fill those gaps across all the retail channels. This category is carried in today.
Very helpful. Thank you I'll hop back into the queue.
Yes.
Our next question comes from the line of Scott Fortune with Roth Capital Partners. Please go ahead. Your line is open.
Good morning, and thank you for the questions here I wanted to get a little more color natural channel.
Recovery there.
As far as the quarter recorder recovery or are you starting to see some consolidation in the space as there's more pressure on a lot more of the competitors in that natural channel kind of.
Step us through kind of the growth.
Well Kurt natural channel.
And on what you expect going forward here from that standpoint.
Yes, so it's a great question, Scott and I appreciate the opportunity to speak to it because natural is one of those channels, where this category was actually originally born and it's also a channel where we're seeing the most aggressive expansion of competitive crowding. So you are right we are seeing.
A nice uptick on quarter over quarter growth, our Q3 quarter over quarter growth was up 20% versus Q2 now that does not include the abacus portfolio at this point because we don't have it in the natural channel. So that's primarily being driven by the legacy Charlotte's web portfolio, we expect that to confess to to accelerate.
The.
Year over year.
Compares comparatives for natural are still down although improving versus Q2, it's still down and so we're seeing the natural channel continued to be challenged with competitive overcrowding.
And a bit of confusion, we're reading a lot of.
External data sources that are indicating that there are hundreds of smaller brands that are falling off the face of his category just on able to sustain their positions given the challenge of the pandemic and so going forward. We believe we will see a nice uptick in natural booking.
Both in Q4 this year as well as through next year, we've got an innovation pipeline planned to expand our footprint in natural and speak very specifically to different consumers within that channel consumers, we've not spoken to before so we're excited about the opportunity there and think that we've turned the corner on the natural channel we are seeing.
In sum retailer consolidation in that channel in Q1, this year right before the pandemic hit.
We saw a couple of big retailers go bankrupt and go out of business and we're continuing to see a slow recovery in some of the retailers that closed and just have been slower to reopen in full so I think.
We'll be some count foundation in the natural retail channel as well as the competitive set in natural and I think we'll see that all the way through next year.
Okay perfect. Thanks, and then just kind of a big picture question, you are seeing a lot larger somebody's Canadian Lps or larger competitors really come in.
Their word here and push into the U.S. CBD space.
And then increase kind of the marketing spend can it be growth bio steel is going for the sports naming rights and others are turning towards more traditional TV media to drive that.
How are you kind of strategically managing the cost of your build out and.
You see your your your sales and marketing efforts kind of continue to build your brand loyalty and add new consumers in this space going forward here.
The situation right now from that standpoint.
Yeah, absolutely and I think we've talked before Weve always looked at.
At our competitive.
Not at Who's in the category today, we've looked at it as the brands that are going to come in both the Canadian Lps as well as CPG brands that will be entering this space and we've been investing to build out capability.
And science and research as well as infrastructure to ensure that we can come.
Heat against.
The likes of Unilever or a canopy going forward and so that's what the investment has been behind Thats, what the capability.
Build out has been behind as well as really attracting quite a significantly strong management team who comes from a like experience as we look for.
Forward I think our best defense is a good offense and so what that means is we've got to stay focused on the science of Charlotte's web.
Key competitive differentiation that we have in the marketplace that comes through our genetics that comes through our product offer its consistency its quality its safety.
That comes from our ability to trace and be transparent all the way through our supply chain because in the end. This is a dietary supplement that consumers are going to take day in and day out and in its mature state it will be as prevalent in the medicine cabinets and an America that we believe aspirin is today and so this is going to be a six.
Chain $17 billion market theres going to be room for a number of different competitors, but competitors, who offer true differentiation. We have the consistency we have the quality we have the genetics. We have the science we have the data now our focus is how do we communicate that to the consumer so we stay at.
At the forefront of where this category is going and that's exactly what we intend to do so as we go into 2021, you will see us expand out our product portfolio across every single channel. This category competes in today, we'll have differentiated brands against different consumer sets and we will support that with science and I think.
When you have that lined up with the authentic story of the market share leader and pioneer in the industry.
Like our odds for being able to succeed in this category going forward. However, I do think you're going to see a massive fall out of the competitors in this space as FDA.
Regulatory opens up and the on slot of big scale players come in and I think I think we will be very careful about watching that so far our marketing model is working all the KP ice would say that it's working and we are seeing an expansion in market share in some in some key channels and so.
I feel good about our odds, but it's going to be a very competitive market in the next year.
I appreciate the color, thanks, and I'll jump back in the queue.
Absolutely. Thanks.
Our next question comes from the line of Patrick Sullivan with eight capital. Please go ahead. Your line is open.
Thanks, guys and good morning, some really great questions already been asked so far but I will.
Good morning, guys I will focus more on the.
You know the scaling up of the new facility I Wonder if you could provide a little bit more detail on exactly how you see that assisting with the growth and.
Armies of scale does that does that unit.
Alton driving down and of the DNA or is this revenue growth above those expenses is it an increased automation.
That will lead to those those expenses going down anything further you can provide there.
Sure.
Patrick Thank you for.
Quick question, it's a really good question I think it's important that everybody understands how.
Our 700 Tech loft facility is going to provide efficiencies in the future. So you know we've been building this out in phases and as Denise men.
I mentioned earlier, you know we were shipping in Q2 fully operational but we have.
Other sections that are coming on line. So for example, some of the cost savings if we.
Bring told man activity in house or quality testing in house will becoming a as.
As we finish building the rest of our Capex here in the fourth quarter, but next year the efficiencies, we're going to pick up specifically to answer your question.
Come around not.
Automation auto packing.
EDI capabilities auto replenishment orders.
We will be able to handle the large food drug and mass requirements that are just table stakes to to earn that business.
And then in addition to that we're consolidating from multiple facilities into one.
State of the art facility, which we are picking up efficiencies on that just not having to transport material between several different facilities. So we're expecting as I mentioned in my comments to see strong efficiencies in the back half of 21.
We will finish our capital build out of this facility and we will see a significant drop.
Off in our cash burn rate and our Capex spend rate as we head into next year, which I mentioned in my in my comments as well. So we're excited to see the impact of lower gross margin or have stronger gross margins lower cogs from the efficiencies I mentioned as well as the efficiencies of.
Being able to handle the ramped up volume that that's coming.
Okay, Great and then one more thing so you guys mentioned that.
The three of that of that facility extraction R&D expansion can you can you just talk about that.
Does that just increasing the scale of your current extraction process.
Adding new processes, which would lead to further product innovation development anything there you can provide.
Absolutely and so so we're excited about the fact that this infrastructure has enabled us to consolidate three different facilities into one and we're seeing the synergies and the scale.
Well the team being in one place and being able to communicate quickly and move move even more quickly.
Our new capabilities will be building in both automated capabilities in our extraction as well as new capabilities and our extraction. So we are putting us ourselves in a position where it's not just CP.
D., we're looking more broadly across.
The total hemp plant and we've talked before about this patrick but in terms of CPG.
BD, a when you look at and compounds like CB and Theres a lot of this plant that makes very smart.
Sense to try to leverage it into new products and so.
Not alone will leave getting more efficient.
And tighter on our controls with our extraction, but we will have the opportunity to expand capability that will drive new innovation. In addition to giving our R&D team.
Tim the tools they need to explore and further build out our innovation pipeline. So that's what we're excited about is just what the potential of what this is going to mean for us long term.
Okay, great. Thanks, I'll get back in queue.
Absolutely.
Operator any additional questions.
And just as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of Derik delay with Canaccord Genuity. Please go ahead. Your line is open.
Yes, good morning, everybody.
Good morning Derik.
Yes, Okay. One follow up just on on Ross one of your comment there on.
The new facility, allowing you to sort of meet the requirements of some of these large food and drug.
Retailers can you just as there been any update in any discussions with any of these players them recently.
Yes, I'll start Derek and a and then I'll, let Russ chip in and so we have been in conversation with these retailers and and what's different about the conversations today than what they were even three or six months ago is that we now have a portfolio of brands that they can access in their current distribution states.
The abacus brands give us the over the counter products within Topicals that we can sell in addition to the harmony HAMP brand, which gets us to Bath and beauty and so we've had productive conversations in parts of this category that we have not had as much exposure to and we're seeing a receptive.
So the two both further expansion within the current distribution footprint, but also expanded distribution in our new portfolio. So that we're excited about I think the other side of the equation is.
Our retailers, becoming more receptive to the ingestible side of the equation and I'm happy to report that yes. They are.
Albeit it's still slow and we're seeing a very cautious approach to injectables, but the conversations have opened up as a result of what topicals have done for us and so we would expect to see our injectables expand but our big expansion next year across food drug and mass and.
Brick and mortar retailers will come as a result of our of our of our Abacus Abacus acquisition.
Okay, that's really good to hear.
Maybe just in terms of some of these requirements can you just I guess really high level talk about the complexity behind what these larger retailers requires.
With some of the smaller natural players that better typically dominating the space right now.
Yes, when you go into the food drug and mass retail environment, you're going in.
To to compete among a competitive set that is serving some of the biggest companies in the world think about a Walmart a target a kroger.
These companies specialized and logistics and their stats by which they evaluate companies is something called on time and in full so Otis.
They are now in the process of penalizing companies if you cannot go.
Get their order to them on an agreed upon timetable.
As well as in full and so a challenge with that is a lot of the smaller players even working through different threepl and providers have a hard time, keeping up with the logistical challenges of this new retail consumer or customer and so that's what our focus has been on with.
Built out a very strong supply chain leadership team with people, who got tremendous experience in this space. We continue to build out our capabilities. So that we can do this in a very automated way, but thats really the scale up that a competitor in this environment is going to have to make to succeed in this environment and.
Where our focus has been.
Okay, and then Russ maybe just one last one.
For you on the on the Opex.
I appreciate you guys outlining plans to reduce this by 10% next year. How quickly can you do you think you'll be able to do that like is it going to be relatively linear over the course of 2021 or should we back.
To that end loaded how should we think about that.
No. We actually started these actions in the third quarter American that's a great question. Thank you and we will see.
Reductions in Q4, and then we should be hitting that run rate of those reductions as we enter 2021.
Okay, great appreciate the clarity thank you very much.
You bet. Thank you there.
Our next question comes from the line of Jason Sandberg with Pi Financial. Please go ahead. Your line is open.
Thanks, Anna and good morning.
Good morning, Jerry Su and good morning, I just words.
You folks.
Focus little bit on the on the pet segment.
Wondering if you have any color in terms of sell through.
And your your big box retailer.
Well I think I mentioned I think you mentioned.
That they're probably good.
Thanks to you too to more national retailers in the coming year.
Just any color on the pet segment would be greatly appreciated.
Absolutely.
Jason the numbers are a little bit.
Our staff to take kind of found them because they are so big that they're tripling.
Quadruple digit growth versus previous year, and Thats, primarily because our base is so strong so it's not.
It's not easy to look at the numbers and say, what's really going on there because we're seeing the benefit of the distribution and then the expansion in actual doors the sell through for US has been.
Been strong.
We continue to see this channel as an opportunity on both from a customer standpoint.
Endpoint, let's start with the customer.
In this channel.
There are a significant amount of pet owners I think theres about 180 million pets in this.
This country and so we see a very buoyant channel that has the potential to grow north of $2 billion in this mature state for this category and so we love what we see there.
In terms of consumers.
What our data is showing us is that we've got a number of consumers who are coming into.
Our franchise into our human franchise through our pet channel so.
Pet owner Who's got a dog this older with arthritic hips and they're looking for some joint in hip pain relief will come into our our our brand see the benefit it gives to their pet and then go online and begin.
To adopt some of our products for themselves and so that's the benefit of understanding this date and being broadly available across all these different channels with products that work and so the pet channel sell through has been very good we're actually having a very hard time, keeping up with the demand. It. It is one of the businesses where.
Copel has had an impact.
Because it's a little bit more difficult getting the products produced from a co man.
Outside.
But.
We're seeing really good pickup we're returning to a position in Q4 were able to supply that demand and.
We would expect to see this channel continue to accelerate next year. Both in terms of distribution expansion portfolio expansion and innovation and so it's a channel that continues to delight us and and then give us really strong breakthrough insights in terms of the total category.
No that sounds great.
The competitive nature in that segments. If you can compare to your traditional channels.
[laughter].
Yes. So so we are not seeing today the competitive over cryo crowding in the in the pet channel that we are deaf.
We've only seen in the human channels, but its coming.
And I think you're probably aware that a couple of our key competitors have just recently announced an entry into Pat after.
After I think laughing at our entry into pet last year, and so we see competitors coming in I think the tough part of Pat is that.
Anybody can produce a product in the competitors in the channel today tend to be smaller and much more regional.
When you are dealing with a category like hemp extract full full spectrum have extracts you.
You have to be incredibly focused on the consistency that quality in the safety.
Production of this product your pad is no different than any other men of member of your family and so we've been adamant about developing safe products that are traceable and transparent through our supply chain, but importantly, also have the right certifications from the appropriate external animal assume.
Associations.
That indicate we've got a safe product and they have been certified by them for us is the SC.
And and that's that's a certification that we're one of the few companies offered today in the industry have and so we will continue to expand our portfolio expand our distribution and do it with products.
At our consistent safe and high quality I am confident that that we will be able to hold our position in this category and expand going forward.
Okay. Thanks.
You bet. Thank you.
Our next question comes from the line of Michael Library with Piper Sandler Please.
Please go ahead your line is open.
Hi, This is Jeff craggy on for Michael Thank you for them in.
Most of my questions have been answered, but just one is there any more specific color you can add on how you're building consumer insights and how specifically are using data to help drive things like target marketing and product innovation.
Yeah, absolutely and I Love This question and ER and I'm thrilled that you advanced it. So one of the biggest challenges in this category is the lack of data that there's even a syndicated data sources, all have a different way by which they accumulate and extract.
Late this data and so it would be very easy to be confused by the conflicting data that exists in this market from traditional data sources that just claimed to have the right data I think the best data is your data so over the last year. We've spent a lot of time and.
We invested in building capability that puts data at the center of all of our decisions. We've built a data infrastructure and have organize our company across that data. We've also matched our consumer data was third party external data. So we can broaden out our data sets what that gives us the ability to.
Good.
Independently and exclusively cut our data sets by consumer demo by condition by channel and it's the driver of what our new product pipeline is going to be going next year, and so you're going to see us have in a very different way.
A differentiated portfolio developed by channel and it's all based on the data that we're accumulating and understanding about our consumer the other benefit of our capabilities is it puts us an ability to.
To build hypotheses and theses.
And then turn around and.
And rapidly test and learn our way to see if those hypotheses hold and so what used to take us weeks and months to understand from a consumer insight standpoint, now our E. Commerce team can do in hours and within a day. So we can very quickly jump on what we see as a trend get an offer.
In the marketplace see if theres a response that offer and if were seeing a positive response, thus delivering a return on our investment we can within the same our expanded across the scale of our E. Commerce platform now again, our ecommerce platform. If it were a standalone business. It would be the second biggest CBD company.
The U.S. and so that's not small potatoes, we have an ability to move quickly and with great insight move with precision and so we will continue to build this out our ambitions is to get to a position where our data becomes really connected to artificial intelligence and machine learning lets us drive these insights.
Is that what we're doing is reacting to the learning and not necessarily building the learning our set ourselves and that's where you will see this thing really accelerate so excited about where that's going and data is at the at the center of everything we are doing.
That sounds great. Thanks, so much at all possible.
In Q.
So this concludes the analyst QNX session I will now turn the call back over to Deanie elsner for closing remarks.
Thank you very much listen I appreciate it.
A very busy morning, earning.
Earnings returns all of your your participation and your questions.
I appreciate your patience and going long on this call.
And and I appreciate the insights you guys have brought thank you for your time, we look forward to Q4 and sharing out our full year results.
In March of next year, so enjoy the holiday stay safe and thank you for your time.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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