Q3 2020 Greenlane Holdings Inc Earnings Call
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The press release, the tailing the financial results for the quarter was distributed this morning and is available on the Investor Relations section of the Green Lane website. As a reminder of todays conference is being recorded.
On the cost and they are air and low cost field, Chief Executive Officer, and Bill low Chief Financial Officer before we begin Greenland, we would like to remind listeners that todays prepared remarks may contain forward looking statements and management may make additional forward looking statements and response of the questions received these.
These statements do not guarantee of future performance and therefore undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties and other factors discussed in today's press release. This call also contains time sensitive information that's speaks only.
As of the day of this live broadcast November 17, 2020 factors that could of course Greenland results to differ materially are set forth entered the press release and and Greenleaf Annual report on form 10-K quarterly reports on form 10-Q, the failed filed with the FCC.
Any forward looking statements made today on this call are based on the assumptions as of today and Greenland assumes no obligation to update these statements as the result of new information or future events.
During today's call Greenlee management may discuss non-GAAP financial measures, including the adjusted net loss and the adjusted EBITDA Green Lane has included a reconciliation of these non-GAAP measures and today's press release, which are the avail, Andy Investor Relations section of our website, and Gi and L. and Dot com.
I would like to turn the conference over to Mr. Air and Locascio, Chief Executive Officer of Green line. Please go ahead Mr. locascio.
Good morning, and thank you everyone for joining us today.
During this call I will review our business transformation plan third quarter sales highlights operating environment and business development activities before turning the call over to our Chief Financial Officer build the right detailed review of our financial results.
During the third quarter, our new senior leadership team and I completed and extensive review of our business and acted on several key initiatives related to our go forward category emphasis organizational structure and related staffing levels.
We've taken additional decisive steps the de emphasize certain product lines and that's in our fastest growing and highest margin opportunities and further improve our cost structure.
We remain focused on executing on our strategic vision launching exciting new consumer products and making the necessary positive changes throughout the world organization to maintain green nice position as the leading platform for candidates consumption products globally returned to profitability and generate strong shareholder value.
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The steps, we're taking now will reaffirm our strong foundation to capitalize on the anticipated sector growth as existing markets continue to evolve and new markets develop.
Our approach is focused on four key pillars.
The first focuses on increasing our higher margin revenue opportunities through our greenline branded products and broader assortment the.
The second is increasing our operational efficiencies by streamlining and optimizing our distribution platform to further reduce costs the.
The third is to refine our sales approach to drive customer growth.
And the fourth is that we will continue to enhance and expand our platform through strategic development as well and a carefully selected M&A opportunities.
Subsequent to the quarter and we completed the transition to our new centralize and streamline distribution model and also reduce worldwide headcount by 4.5%.
And in combination with other expense reductions. These decisions are expected to generate annualized savings of 5 million by the end of Q1 2020.
We saw further proof that our transformation initiatives are being successfully implemented with the continued diversification of our revenue mix as well as growth in our high margin opportunities.
Our core revenue grew 36% to 32.3 million and Q3 2020 compared to 23.8 million and Q3 2019.
Notably sales of our Green line brands grew 65% to approximately 5.6 million in Q3, 2020 or 15.5% of total revenue.
The to see increased to 13% for Q3, 2020, compared to 3% and Q3 2019 and.
And S&P increased 11% for Q3, 2020 compared to 10% and Q3 2019.
This focus on higher margin opportunities and appropriate channel mix will position us for long term growth.
On the product side subsequent to quarter and we obtained the exclusive right to expand the availability of Marley naturals accessories, the specialty locations in central and South America, the Caribbean and Europe. This is an important component of our global expansion strategy of Marley Naturals is one of our most popular brand.
Growing 210 per cent compared to Q3 2019, and we are extremely pleased to bring these products to customers and new markets.
We remain committed to pursuing opportunities for channel expansion and digital solutions as we continue to see a high number of customers utilizing online shopping to meet their retail demands.
Online sales grew 196% for Q3, Twentytwenty compared to Q3, 2019, and we anticipate that many customers that were driven online due to the ongoing pandemic will remain online shoppers when the pandemic and.
We continue to look for opportunities to improve our digital platform and create a global best in class customer experience.
Turning to the numbers revenue for the quarter was 35.8 million a sequential increase of 10 per cent compared with Q2 Twentytwenty. While gross profit was approximately 2.5 million or 6.9% of net sales Bill will address this further in his discussion however, I'd like to note that.
Excluding the impact of certain inventory adjustments, which were recorded in response to strategic management decisions. During the quarter gross profit would have otherwise been $7.3 million or 20.4% of net sales.
As always I want the finish by sincerely thanking our team for all of their dedicated hard work as we continue to successfully execute on our strategic goals amid a challenging macro environment.
We have made significant progress year to date on our transformational growth initiatives and we look forward to ending the year solidly and entering 2021 and strong footing with that I'll now turn it over to bill to run through our third quarter 2020 financial results in further detail.
Thanks, Erin and Hello, everyone. As a reminder of the results I will be reviewing for you. This morning can be found on our earnings release that is available on Edgar.
And the Investor Relations section of the <unk>.
Of our web site at GE, and L. and Dot com.
Before I begin my review of our third quarter financials and want to provide some additional color on the improvements we have made and are making to the company since.
And speaking with the last quarter, we have made substantial progress on our business transformation plan with the new COO President and CFO. We worked throughout August and September to craft the pathway that we anticipate will bring the business to profitability in 2021.
We made strategic decisions to pivot away from certain lines of business to increase inventory velocity margins and turns we also focused on swiftly selling down these deemphasized lines generate cash, allowing us to reinvest and more profitable third party inventory and our own house brands.
While these decisions had a negative financial impact on Q3 2020.
These actions were necessary to put the company on the right course for future revenue growth and profitability.
As part of our efforts to improve the financial profile of the company, we reduced worldwide staff by 4.5 per cent in October.
And are implementing additional expense reductions between now and the end of Q1 2000 2021.
These reductions along with the margin enhancing direction and inventory and sales focus will save and annualized $5 million per year. This is in addition to the $1 million of savings that we discussed on our Q2 call.
With all of these recent initiatives, we believe our path to return to adjusted EBITDA profitability in Q1, 2021 is well underway.
Net sales for Q3, 2020 were 35.8 million cash.
Compared to 44.9 million for the third quarter of 2019, a decrease of 9.1 million or 20.3%.
This decrease was the result of the impact of our business transformation and strategic decisions made to reduce our low margin sales.
We reduced our sales of nicotine products to 3.3 million or 9.2% of net sales for the third quarter 2020, compared to $20.2 million or 45 per cent of net sales for the third quarter of 2019 the.
This is an 83% reduction and nicotine related product sales year over year.
Looking specifically at our core business lines Green lanes core net sales grew 36% to $32.3 million compared to 23.7 million. In Q3 2019, we are extremely excited to see this impact of our strategic vision.
Revenues in the United States for Q3 were approximately 29 million compared to approximately 38.6 million and the same period and 2019, representing a decrease of $9.6 million or 24.9%, primarily due to a decrease and nicotine products.
Revenues in Canada for the third quarter of 2020 were approximately 4.4 million compared to approximately $6.3 million in the same period in 2019, representing a decrease of $1.8 million or 29.3%.
This was primarily due to COVID-19.
Our European segment, which we entered last year with the acquisition of conscious wholesale and Q3 2019 generated revenues of approximately 2.3 million in Q3.
On a sequential basis Q3, net sales increased 10% from $32.4 million in Q2 2020.
In Q3 gross profit was 25 22.5 million or 6.9% of net sales compared to $6.4 million or 14.3% of net sales in Q3 2019.
During the quarter Green Lane made specific strategic decisions regarding existing inventory levels and go forward product lines. As a result of those decisions, we decided to sell down certain inventory items, which resulted in adjustments to the inventory of 3.2 million.
By reducing our slow selling inventory, we preserve warehouse space and working capital for higher margin products, one of the key goals of our transformation initiative.
In addition, a 1.1 million reserve was made for obsolete inventory items. While we also recorded a $500000 lower of cost or market adjustment related to a notification receive from a supplier that they have taken a permanent reduction in their wholesale selling price of certain items.
As Aaron mentioned, excluding the impact of these onetime inventory adjustments Q3, 2020 gross margin would otherwise have been 20.4%.
This results in the gross margin improvement of 610 basis points compared to Q3 2019.
Also we incurred inefficiencies related to transitioning our warehouses that amounted to approximately 150 basis points of margin, suggesting further opportunity.
We expect overall gross margin to expand from its current levels.
As we execute on our strategic vision with Green Lane brands at the core.
Salaries benefits and payroll taxes, and Q3 2020 decreased approximately 1.6 million to 5 million or 23.8 per cent compared to Q3 2019, primarily due to a decrease and equity based compensation expense of $2.5 million as the company recognized.
The net reversal of stock comp expense of approximately $1 million during Q3 as compared to $1.5 million of stock comp expense in Q3 2019.
DNA cost for the third quarter of 2020 increased approximately 5.9 million to $10.7 million compared to 4.8 million in Q3 2019, primarily due to a loss of 2.2 million related to a portion of an indemnification asset.
This was a onetime expense the remainder is due to an increase of approximately 900000 in subcontractor fees and increase of approximately 1 million and 30 party logistics expenses related to additional expenses incurred as we consolidated our distribution centers and us and Canada and Inc.
Increase of 800000 and allowances for uncollectible vendor deposits incurred in connection with management strategic initiative to improve inventory turnover and an increase of approximately half a million and restructuring costs.
Net loss for Q3, 2020 was 13.8 million compared to 9 million in Q3 2019, adjusted net loss was $6.9 million in Q3 2020 compared to 7.5 million adjusted net loss for Q3 2019.
Adjusted EBITDA loss was 6.3 million in Q3 compared to adjusted EBITDA loss of $3.4 million in Q3 2019.
The increase and adjusted EBITDA loss. This quarter was primarily driven by an increase in DNA cost of 3.7 million.
In Q3, 2020 as compared to Q3 2019.
Okay.
Which increased overall net loss for the current period, along with the provision for income tax expense of approximately 11 million recorded in Q3 2019 related to a full valuation allowance recorded against our deferred tax asset and the prior year. This amount represented a positive adjustment to derive adjusted.
EBITDA loss in Q3 2019.
We remain well funded with 40 million of cash as of September Thirtyth 2020, compared to $47.8 million in cash as of December 30, Onest 2019.
Year to date, our cash used in operating activities was 3.8 million as compared to 33.5 million last year. This is an 89% improvement in cash utilization.
With the renewed focus so and efficiently managing our cash balance we have improved our financial stability and have flipped had the flexibility to leverage our balance sheet to execute on growth initiatives. While also pursuing potential M&A opportunities with that I will turn the call back to the operator and open it up for Q and a.
As a reminder of task of question you will need to press star one on your telephone to withdraw your question press the pound key.
Yes. The you please limit yourself to ask free questions in order to allow others. The chance to ask a question you may rejoin the queue afterwards.
Please stand by while we compile the Q and a roster.
Our first question comes from the line of Vivien Azer from Cowen. Your line is now open.
Hi, Thank you good morning.
Good morning, the show good morning, I, just wanted to start with with the on the inventory adjustment that you guys took in the quarter. We talked about this last quarter. It seemed like last quarter was the one time.
Item and and now we've got another inventory issue, which sounds like it's more related to our strategic review, so hoping to get more clarity on what changed the inter quarter. Please. Thanks.
Actually moving this is bill mote ill take that question.
And we in the third quarter, obviously, we turned the several new management members into the group.
As a team we spent a good 60 days reviewing the entire business strategy.
We as a new management team had a bit of a different perspective.
On what the inventory turns should be what the quality of the inventory should be what the velocity of certain skew items should be and from there. We made decisions about what we want to do going forward one of our key aspects of our strategy is to.
The continued to conserve our cash and we wanted to be able to move some of these inventory items a lot faster than they were actually moving on the balance sheet. So we did make a strategic decision Vivian to reduce the selling price of certain items. So that we could get the velocity up and the cash back into the company.
Our inventory turns or less than 1.5 per cent at this point in time, historically, and we believe as a management team that needs to be higher than free. So there is a lot of work to do there, but the first step is setting and in motion a rapid inventories sale for items that are either.
Deemphasized or that were no longer going forward with so that was the crux of the decision process to reduce inventory further.
That's really helpful. Bill. Thank you for that color and then just my follow up on your outlook to get back to EBITDA.
The adjusted EBITDA positive in the first quarter of 2001, yes, certainly it's nice to see a sequential improvement and your topline and I understand the and the 5 million and run rate cost savings from the from headcount reductions and other efficiencies. They can you help dimensionalize, what kind of revenue base, you need to generate the appropriate operating leverage to actually get that.
The positive adjusted EBITDA target and once the 21 please thanks.
I think it's going to be in the low fortys Vivien, we're going to need to be.
On the on the annualized basis need to be in the low fortys.
On a quarter basis.
To achieve that.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Scott Fortune from Roth Capital Partners. Your line is now open.
Good morning, and thanks for the call of questions here.
Can you provide a little bit color on the of the DTC segment and kind of maybe normalizing that level from the third quarter of after the coded post covered here and we saw meaningful pick up during the shelter and place and what has kind of you guys expect the ordering pattern or the the growth on the PTC.
DTC side here as we normalize opening up the economy here.
Yes, great Great question, Scott and nice to speak the as well.
So obviously a tremendous lift on a year over year basis, as we had described in previous quarters.
We saw the early indications, obviously and in late Q1, but really.
Tremendous uplift and DTC and Q2 of that remains relatively sustained it has come down on the sequential basis, a little bit as brick.
Brick and mortar has largely reopened.
But as we kind of mentioned on a go forward basis, we do believe and that we will see sustained increase levels of DTC on a go forward basis.
I will be very interesting to see.
What impacts Cove and May have as we continue through Q4 and into Q1 I know obviously all of US are well aware of the increase in and Cobra cases, and we're we're even seeing some lockdowns and international countries and watching that very closely but again its great to have an omni district, and omni distribution channel, where we have the.
Different.
Revenue channels to drive sales from so we'll watch it closely.
The see how Cove and May impact that overall, we do expect a and increased sustained level of direct to consumer go forward as we mentioned before work and the low teens as a percentage of total revenue.
And we do anticipate that trends to continue at a minimum.
Great. Thanks for the color and then kind of follow up on the 10 year strategic initiatives here.
As far as your own stores higher standard brick and mortar kind of fit and rollouts.
Potentially in Europe, and then you're well positioned the $40 million and cash kind of power. How are you guys looking at potential expansion from.
The store side and what the M&A opportunity that you guys are looking at from from the European side of it since that's where you want the global growth to the continues to grow.
Sure So I'll I'll start with the.
Question, the brought the brick and mortar stores, you know and in a co of it environment and I will tell you, especially when.
We are being very very cautious.
Around brick and mortar stores, obviously, there has been tremendous.
Negative impact of two of many stores brick and mortar stores around the world during the pandemic.
We have reopened we did reopen our brick and mortar stores back in July for the most part.
As of right now.
Especially during the cobot environment, we do not have a and.
Any near or mid term plans to expand our physical brick and mortar footprint.
And we'll continue to analyze as as.
We continue to go through the pandemic and life begins to normalize.
And the future, but we have no and near or mid term plans to expand that footprint.
On the M&A side of things, we continued to have a very robust pipeline of potential opportunities that I'll, let bill speak more to as well, but generally speaking.
At the height of the pandemic and we went into capital preservation mode, and we're very cautious as no one really knew what the true impact of Covance would be and now that we have a better sense of that we have a reinvigorated and reengaged and number of potential M&A opportunities and conversations yes.
Yes, and that's primarily the reason we're conserving our cash to make sure that we have plenty of dry powder to execute on those acquisitions to help augment our organic revenue.
And margins.
Okay. Thank you I appreciate it I'll jump back in the queue.
Thank you. Our next question comes from the line of Glenn Mattson from Ladenburg Thalmann. Your line is now open.
Hi, Thanks for taking the question so curious of little more color on gross margin and.
The value of a lot of factors that are.
Should be helping gross margin over time, the the in house brands, the direct to consumer of the supply packaging all growing segments. All higher margins you can you give us a sense of.
How we should think about for next year is like of mid Twentys number.
Ill like right for you and then.
Remind us if the if the and the house brand margins are still hold and up from where they were a couple of quarters ago or a year ago or so and.
Maybe you can give us some more color on kind of what's driving that growth and is the new product introduction of more new products coming out of the pipe or just some color on that would be great.
Yep, So gross margins adjusted our 20.4% and also mentioned on the call that we had about 150 basis points of what I'd call noise and the margin related to the inefficiencies we had as we transitioned multiple warehouses into one centralized us where.
House, and and the Canadian warehouse so.
You take those two things together 20.4, plus another 150 basis points, you get very close to 22% and our expectation is for that that 20.4 plus level to exist in the near future.
Obviously as we continue to convert more of our revenue, which we said on the call 36% of it of the growth and Green lane or core products.
It is as we continue to convert to our Green Lane brands, we'll see that margin increase.
So our guidance, while we don't give a lot of future guidance. We're definitely confirming are reaffirming that the 20 plus margin area is where we will be in the short term.
Which we feel we feel nice and confident about.
Related to just Green Lane brand margins.
And on a on a year over year over year or quarter over quarter basis.
They continue to the strong and some of the growth the.
You mentioned for next year is going to come from.
It's going to come from products that we've we've already released in terms of product lines, but also from new product development that has been created and out there.
We do see strong revenues and the vibes area and we feel that we will continue into into next year and vibes as we've mentioned before has a has a very strong margin profile.
Yes, just and to follow on with Bill's comments there is.
It is so we are seeing the tremendous growth in our Greenline brands. This is the existing brands. So we're seeing continued growth and the price. We have already launched we do have a robust pipeline of additional products that we'll be launching and the near and mid term.
But definitely a lot of the a lot of the growth overall and Greenland brands that were seeing thus far is adjusted growth of the growth of the brands themselves.
And and we called out a couple of examples like Marley natural 210% at quarter over quarter growth.
5% to 202% quarter over quarter growth year to date five up 628% as an example, so we're seeing tremendous growth numbers.
And trajectory and our existing Green Lane brands.
And we will supplement that growth with additional launch of of new products and we're very excited about and actually use green I'd say Greenland brands of 36, it was actually 65% growth and Green Lane brands compared to last year at the same time so.
As you can see it's a considerable amount of growth and continued.
Trajectory.
Right.
Kind of related I guess, but the.
The last couple of years of a lot of noise around the quarters because of all of the.
Joel and stuff and everything but is there a seasonal effect and Q4 do you see like.
Most of bump and product revenue growth that from the from the holiday season.
Historically, we do see a seasonally adjusted of positive increase and overall revenues. That's that's tied generally speaking to.
The cooler months of the year in particular, the holidays as well, but oftentimes is we see that trend continue into and to Q1 of 2020. So we do anticipate a seasonal lift.
To revenues.
Great and the last one from me can you just give us more color on the outlook for the.
For the packaging business, just kind of what some of the dynamics of what's going on there and thats. It from me. Thanks.
Yes, the packaging business and again in conjunction with a lot of the leadership.
The changes that we made at the senior leadership level, we made.
The some changes to the senior leadership and the packaging Division.
We do anticipate a steady growth trajectory for the packaging business we.
We decided again similar to what Bill had mentioned before and in the supply and packaging. We did deemphasize certain lines of business that were somewhat legacy at this point.
And reemphasize and refocus on some of the hotter products that we have and and new innovative products and we continue to launch so all of that in I would consider and say yes.
Steady steady growth into 2021 and beyond is really what we're focused on.
Thank you.
The question comes from the low.
Our next question comes from the line of Mike Grondahl from Northland Securities. Your line is now open.
Yes, thanks, and good morning, guys.
In terms of the restructuring that you guys have been going through is there any thing still significant.
That you need to clean up or fix are working on that you want to highlight.
Well, we continue to work on our overall distribution and logistics that big chunk of that was done in the U.S. and we have to look at that all over the world and make sure we're doing that efficiently.
We continue to look for any mechanisms to reduce the other expenses and.
Including some of the work that we've already done on on our global head count, which we announced that we reduced 4.5 per cent.
In October so the.
Those those are the areas that we focused on historically and continue to focus on.
In addition, and the margin area as I said some of the work that we've done to improve the overall logistics and warehousing has cause temporarily and increase and cost there.
Ultimately will will diminish as we get lined out with all of the new warehouses and we're operating at a 100%.
Efficiency. So those those are kind of the areas. We're always focused on the entire PML and anything that we can do to.
Make things more efficient or less expensive, we'll continue to do so.
But overall, we spent a tremendous amount of energy and effort as an executive team.
And Q3 again, a lot of new new senior leadership to the team so.
As a heightened the amount of activity in Q3, we'll always look to outweighs the continued to improve our operational efficiency and increase our margin profile and sales, but yes, and unusually high amount of activity in Q3.
That while we can well, we'll continue to make incremental improvement we do not expect to see that type of activity going forward.
Got it it sounds like you're over the hump there.
So he did you kind of push hard and E. Commerce, you saw a lot of growth there or was that just sort of a natural effect of cold and and whatnot and how do we think about that going forward.
Its the combination of both I mean, obviously, our our team we have a dedicated team of ecommerce experts that's constantly pushing the envelope and in terms of the customer experience and driving new customers and existing customers to our our sites.
But definitely Cove it was a positive windfall in terms of.
Consumer purchasing patterns and behaviors. So frankly, it's the combination of those two as we said before we do anticipate a increased sustained level of online purchasing behavior to continue even post pandemic, which is why we're making additional strategic investments.
And our E commerce and other digital assets going forward.
Got it and then maybe just lastly, nicotine sales.
It.
Does that remain low single digit for a while or do you see that going away how should we think about modeling that into 2021.
Great and other great question, So I would say the best way to characterize that is that we do anticipate it's to continue in a single digit fashion on a go forward basis will again continuously evaluate that but as you know and.
In terms of potentially just eliminating that but frankly.
Our job here, we really want to make sure that we are meeting our customers' needs and as of today and.
Nicotine products do represent a and important.
And component of our customers.
Product line. So we do anticipate to continue to carry those products.
But again I guess the did the historical de emphasis on nicotine products was driven our overall concentration down we'll continue to maintain those product lines for the foreseeable future, but there's also been a lot of pricing pressures in the market and that have driven the price is down.
Which is also contributing to a lower overall revenue number or the concentration number. So all of those things considered we do anticipate the remain in our product portfolio for the strength for the foreseeable future as an important part of a broader portfolio to our customers and meeting our customers needs.
But that it will.
Maintain a.
Lower percentage of revenue the only caveat to that is there potential opportunity I just on the short term maybe Q4 as we had mentioned kind of.
And reducing the cost of the selling prices of certain inventory.
Inventory items.
Some of that does include nicotine products. So we and we are in the process of selling down some.
Some of those inventory items that we have so that we can increase our overall inventory turns on a go forward basis. So low single digit made the mid single digit go forward basis, but may be a one time.
Uplift in Q4.
Got it thank you.
Yes.
Thank you at this time of showing no further questions I would like to turn the call back over the air and low cost CEO for closing remarks.
Yes, I just want to say thank you again for everyone for joining Greens conference call today. The replay for this conference call will be available and approximately two hours on Green Plains website, and the Investor Relations Investor Relations section I Hope everyone has a wonderful day. Thank you. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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