Q4 2024 The Honest Co Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to The Honest Company's fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ms. Elizabeth Bouchard, Senior Director, Investor Relations at The Honest Company. Please go ahead.
Speaker Change: Good afternoon, everyone. Thank you for joining our fourth quarter 2024 conference call. Joining me today are Carla Vernon, our Chief Executive Officer, and Dave Loretta, our Chief Financial Officer.
Speaker Change: Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today.
Speaker Change: These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Speaker Change: Please refer to our earnings release issued today, as well as our SEC filings, for a more detailed description of the risk factors that may affect our results.
Speaker Change: Please also note that these forward-looking statements reflect our opinions only. As of the date of this call, then we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events, except as required by law.
Speaker Change: Also, during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.
Speaker Change: You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP-to-GAAP measures in the financial results section of today's earnings release.
Carla Vernon: A live broadcast of this call is also available on the investor relations section of our website at investors.honest.com. And with that, I'll turn the call over to Carla.
Carla Vernon: Thanks, Elizabeth. Good afternoon, everyone, and thank you for joining us today. Before diving into our results, I would like to take a moment to acknowledge the heartache and tragic impact many people in our Los Angeles community have experienced as a result of the recent wildfires.
Carla Vernon: Our long-standing partnership with community service organizations like Baby2Baby and others allow us to support fire relief efforts by donating supplies that are essential to families in need.
Carla Vernon: We're deeply grateful for the first responders and volunteers in California and in communities across the country who provided support during these challenging times.
Speaker Change: I would also like to take this time to welcome back Elizabeth Bouchard, our host today and our Senior Director of Investor Relations as she returns from parental leave. We're so grateful to have her back and to celebrate her little girl as the newest member of the Honest family.
Speaker Change: Today there are three key messages I would like to share. First, we delivered strong results in both the quarter and the full year, reaching new financial milestones in the history of our company and exceeding our guidance.
Speaker Change: Second, we delivered these results by successfully executing our transformation pillars.
Speaker Change: And third, we're introducing our 2025 Outlook today in line with our long-term algorithm. Let's begin by taking a closer look at the financial milestones for our full-year results.
Speaker Change: For the full year of 2024, we delivered revenue of $378 million, which was up 10% year over year, and our gross margins expanded 900 basis points to 38%.
Speaker Change: This was our highest annual revenue and gross margin ever as a company. We also delivered our first full year of positive adjusted EBITDA as a public company.
Speaker Change: As I reflect back on this year, we accomplished what we set out to achieve. Simply put, we are an organization that does what we say we're going to do.
Speaker Change: These pillars provide our teams with clear operating principles, which enables us to drive profitable growth for honest, to create long-term value for shareholders, and to unlock the power of the organization. Let me bring these three pillars to life with a few examples.
Speaker Change: We always lead with our brand maximization pillar. This pillar is inspired by the growth vision we have for the Honest brand across our incredible portfolio of cleanly designed personal care products.
Speaker Change: The brand maximization pillar focuses on growing honest and our product portfolio through the increased availability of our products, pricing strategy, and through investments in innovation and marketing.
Speaker Change: We've made significant advancements in this pillar over the last year.
Speaker Change: Our revenue is up 10% and our household penetration has reached 7%. This growth represents more than a 20% increase in the number of households who use honest products since we went public in 2021.
Speaker Change: In addition, our repeat rate is up 32% as our community of users become increasingly loyal to the honest brand. Let me provide some specific examples of how we're driving brand maximization.
Speaker Change: Our WIPES portfolio grew in strength and scale this year. Our WIPES growth was due to increased velocities, the introduction of larger pack sizes, and the launch of new innovations.
Speaker Change: And now, according to Track Channel data, our clean, conscious wipes have led us to the top spot as the number one natural wipes brand across the country.
Speaker Change: In Q4, our wipes velocities were up 17% and repeat was up 26% for the year. With the introduction of larger pack sizes, we've expanded the distribution of our wipes collection at our top three retailers.
Speaker Change: So now our community has many more options, allowing them to choose the right quantities for their needs.
Speaker Change: In fact, during Amazon's most recent October Prime Day, our 720 count clean conscious wipes landed in the top 100 performing deals across the store by unit volume sold.
Speaker Change: Our increases in both repeat rate and sales of larger sizes are strong indicators of how satisfied our community is when they experience the performance of our wipes.
Speaker Change: We're also driving brand maximization by expanding the breadth of our portfolio through new product innovations.
Speaker Change: We launched flushable wipes last year, and now they are available in a variety of pack sizes.
Speaker Change: And for the littlest members of our honest community, we have introduced Sniffer Soothers to help kiddos through that cold and flu season. And our little flushable wipes are perfectly sized for toddlers on their journey to independence.
Speaker Change: Building upon the role of wipes in our brand maximization pillar, we are all so pleased with the growth of our collection of baby personal care products.
Speaker Change: Our sensitive skin collection nearly doubled in consumption, with year-over-year growth of 96 percent, according to TrackChannel data.
Speaker Change: This collection of fragrance-free personal care items, which includes bubble bath, shampoo body wash, body lotion, leave-in hair detangler, and conditioner, is a fan favorite for people who are sensitive to the scent of perfumes and fragrances on their body all day.
Speaker Change: In particular, the shampoo body wash in our Sensitive Skin Collection is a true standout. With more than 6,000 5-star ratings on Amazon, our fragrance-free shampoo body wash has become a trusted part of the daily routine for many honest families.
Speaker Change: We have supported this growth with our biggest brand campaign for the year.
Speaker Change: The campaign, Clean Ingredients for Life's Most Sensitive Skin, is a compelling, emotionally driven marketing campaign that resonates with our community's preference for clean ingredients and products that work.
Speaker Change: This campaign, which increased Honest's brand impressions by more than 150% quarter-over-quarter, strongly resonated with consumers and achieved six times the industry engagement benchmarks on key social media platforms.
Speaker Change: And with the sensitive skin product space expected to double by 2030, we're driving full steam ahead with what we see as a significant opportunity to continue growing and innovating sensitive skin product offerings from Honest.
Speaker Change: Another very exciting milestone on our journey of brand maximization is the rollout of our improved packaging design.
Speaker Change: Whether you're walking through the aisle of a grocery store or looking through the cabinets in your home, packaging is the most important marketing lever of any consumer brand.
Speaker Change: Packaging is the one marketing lever that every product user sees and experiences.
Speaker Change: It is an essential element in capturing shoppers' attention and in communicating the most important product information. Recently, we introduced refreshed and optimized packaging across our adult skincare portfolio.
Speaker Change: and it really pops off the shelf. This rollout began with the launch of two new luxurious skincare additions to our collection of adult skincare.
Speaker Change: Our new Ageless Firming Cream and Ageless Firm and Even Serum have quickly become two of my favorite products and a go-to part of my morning and evening routine.
Speaker Change: Before launching, the packaging for these two items and the updated designs on our entire adult skin and beauty line were vetted with extensive consumer research and testing.
Speaker Change: We love how the new look elevates the brand with product imagery that's more clear and color blocking that is a handy wayfinding tool to help busy shoppers find their favorite honest skincare products more quickly.
Speaker Change: We also improved the readability of our product descriptions with larger and more modern typefaces. And most importantly, the packaging improves the communication of our product benefits and science-backed claims.
Speaker Change: At its core, our brand maximization pillar is focused on growing our unique and special honest brand.
Speaker Change: as a portfolio that leverages one single consumer brand across a wide array of categories, aisles, and consumer demographics. We have the rare ability to scale our marketing investments in a way that are both efficient and powerful.
Speaker Change: As we build our brand trust, we build the awareness and trust that no matter where Honest goes, regardless of the product category or the people using it, our Honest brand stands for clean products that are trustworthy, reliable, and safe.
Speaker Change: We've also made meaningful progress on our Margin Enhancement Pillar. We expanded gross margin 900 basis points to 38% for the year. This was driven by our teams giving great focus to strong revenue management and significant cost savings projects.
Speaker Change: For example, we transitioned our warehousing and fulfillment operations to a more efficient partner.
Speaker Change: Because of the large scale of this project, our partner was able to drive meaningful cost savings through automation and technology improvements, making our fulfillment more efficient.
Speaker Change: We also drove cost savings by consolidating our personal care manufacturers in the United States using scale to boost our productivity.
Speaker Change: And we did all of this while maintaining our rigorous, honest standard, which is our unwavering commitment to clean ingredients and thoughtful design.
Speaker Change: Since day one, we've been raising the bar on ingredient formulation, and we continue pushing boundaries by avoiding the use of more than 3,500 ingredients of concern, which is far beyond both the U.S. and EU regulations.
Speaker Change: Our operating discipline pillar is our third and final pillar. Operating discipline underscores our focus on building a culture of executional excellence.
Speaker Change: We are on a journey to continue improving how we execute, and this can be seen by how we build our team with people who bring strong consumer products expertise and experience to Honest.
Speaker Change: Earlier this week we announced that Etienne von Kunstberg has joined Honest as our Senior Vice President of Supply Chain.
Speaker Change: Etienne is a seasoned executive with supply chain experience across top global consumer brands, including his recent leadership role at Dole Packaged Foods and his prior experience at Procter & Gamble, Cody, and Henkel.
Speaker Change: This addition to our executive team is further evidence of our commitment to optimizing and driving greater operating discipline across our supply chain. Welcome Etienne.
Speaker Change: We also recently announced Dave Loretta will be retiring from his role as our CFO. As we actively work to identify our next finance leader, Dave remains committed to leading the financial strategy of the enterprise and facilitating a seamless transition.
Speaker Change: I would like to take this opportunity to thank Dave for the impact he's made on the financial stability of the business and the organization as a whole.
Finally, we begin 2025.
Speaker Change: with a powerful brand, successful strategies, and a talented team to build upon our performance from 2024.
Speaker Change: As we presented in our earnings release this afternoon, our 2025 Financial Outlook includes expectations for revenue growth of between 4% and 6% and adjusted EBITDA margin expansion.
Speaker Change: This remains consistent with our long-term algorithm and aligns with our goal to create value for shareholders.
Speaker Change: I'm incredibly proud of our team for their hard work and extraordinary execution this year. And now I will turn it over to Dave to share the financial results of our fourth quarter and more details on our 2025 financial outlook.
Speaker Change: Our team's hard work over the last year has been instrumental in advancing our strategic objectives and building a stronger financial foundation.
Speaker Change: The progress we have made across our transformation pillars has led to strong top-line growth and improved profitability.
Speaker Change: In 2024, we achieved double-digit revenue growth of 11% for the fourth quarter and 10% for the full year through a combination of expanded distribution, velocity gains, and product innovation.
Speaker Change: We expanded gross margins, 530 basis points in the fourth quarter and 900 basis points for the full year through focused cost management.
Speaker Change: And, we surpassed our bottom line improvement plans and exceeded adjusted EBITDA guidance.
Speaker Change: We believe the executional excellence will continue in 2025 and beyond as demonstrated by the outlook we will share today.
Speaker Change: But first, let me dive deeper into our fourth quarter results.
Speaker Change: This quarter, we delivered a record high revenue of $100 million, up 11 percent, driven by strong performance across our baby apparel and wipes portfolio.
Speaker Change: We continue to see growth across our customers' retail and digital channels.
Speaker Change: More specifically, our retail track channel consumption grew 7% in Q4 compared to the comparative categories, which were down 2%.
Speaker Change: At Amazon, our largest digital customer, consumption was up 35% in the quarter driven by baby personal care, wipes, and baby apparel.
Speaker Change: In the diaper category, which remains our most competitive category and was a soft spot for us in the quarter, we are committed to bringing meaningful innovation and product performance to our lineup of diapers.
Speaker Change: And we look forward to sharing more in our upcoming quarters about the innovations that we will be rolling out later this year.
Speaker Change: Our gross margin in the fourth quarter was 39% of 530 basis points versus last year, primarily driven by cost savings and efficiencies.
Speaker Change: This included 300 basis points from reduced supply chain costs and 230 basis points from reduced product costs.
Speaker Change: Our ability to expand gross margins is due in large part to the successful collaboration with our logistics and distribution center partners.
Speaker Change: In addition to our sourcing and operations teams, we have identified and took action to generate portfolio savings through raw material cost reductions, packaging updates, and robust rebidding of manufacturing contracts.
Speaker Change: Another key driver of margin improvement this year came from our strategic shift towards higher margin channels while moving away from lower margin channels.
including our own DTC channel through Honest.com
Speaker Change: The shape of our business model has changed since we launched as a solely direct-to-consumer company 13 years ago.
Speaker Change: Consumer shopping patterns have changed over the last decade and our digital customers provide honest products with same-day delivery and subscription service optionality that our consumers are looking for and we benefit from their broader access to new consumers.
Speaker Change: With the higher costs of shipping and fulfillment activities related to our DTC business and other related costs, we will continue to shift our focus and investments towards more efficient and scalable distribution models with our current retail and digital customers.
Speaker Change: As we move forward beyond 2025, we'll gradually transition away from Honest.com as a shipping and fulfillment channel, while ensuring that the site remains a resource for educating consumers, showcasing our complete product portfolio, and driving consumers to purchase off-site.
Next, turning to operating expenses.
Speaker Change: Total expenses increased $11 million in the fourth quarter compared to last year, primarily driven by an increase in selling, general and administrative expenses, and retail marketing expenses.
Speaker Change: Selling general and administrative expenses as a percentage of revenue increased over 510 basis points, mainly driven by non-reoccurring legal costs, as I shared on our Q3 earnings call.
Speaker Change: Marketing expenses of $11 million increased $3.5 million from the prior year, fourth quarter, to 11.3% of revenue.
Speaker Change: This increased investment in our brand and product advertising across a diversified mix of media platforms has been a key strategy resulting in capturing new honest consumers and expanded household penetration.
Speaker Change: Adjusted EBITDA for the fourth quarter was positive nine million compared to four million for the prior year fourth quarter.
Speaker Change: We also achieved full-year positive adjusted EBITDA of $26 million, exceeding our original outlook.
Thank you. Thank you.
Speaker Change: Our adjusted EBITDA margin improved from negative 3.3% in 2023 to positive 6.8% in 2024.
Speaker Change: These results are in line with our long-term algorithm of adjusted EBITDA margin expansion and are the base we expect to build on in 2025, as I will share shortly.
Speaker Change: Turning to the balance sheet, we ended the quarter with $75 million in cash, an increase of $43 million at the end of last year due to the continued discipline in managing working capital and proceeds of $41 million of pre-IPO stock options that were exercised, mostly in the fourth quarter.
Speaker Change: As of year-end, there remains 5 million outstanding pre-IPO options with an exercise price of $5.41.
Speaker Change: Our free cash flow for the full year was $1 million, inclusive of spending over $12 million in non-reoccurring legal costs in 2024.
Speaker Change: Combined with 18 million of free cash flow generated in 2023, this represents a significant improvement since we announced our transformation pillars in spring of 2023 and has contributed to a solid balance sheet with zero debt outstanding.
Speaker Change: Our strong financial footing provides greater flexibility in our growth model and allows us to invest in the business in support of expanding the availability of honest products.
With that, let's turn to our outlook for 2025.
Speaker Change: One year ago, on our Q4 2023 earnings call, we introduced our long-term financial algorithm of revenue growth of four to six percent and continued adjusted EBITDA margin expansion.
Speaker Change: As we shared at that time, our long-term financial view is grounded in our strategic plan and our transformation pillars of brand maximization, margin enhancement, and operating discipline.
Speaker Change: We continue to believe that these frameworks set the building blocks for long-term value creation as we demonstrated in our results this year.
Speaker Change: With this in mind, our full year 2025 financial outlook, we expect to be in line with our long-term financial algorithm.
Speaker Change: We expect year-over-year revenue growth of 4 to 6 percent and adjusted EBITDA to be in the range of 27 million dollars to 30 million dollars.
Speaker Change: supported by sustainable gross margin levels similar to 2024 and continued expense management disciplines.
Speaker Change: We expect our first quarter revenue growth will be higher than our full year outlook of 4-6% revenue growth due to the comparable period from last year.
Speaker Change: Given the dynamic consumer and tariff environment, this outlook includes what we know today about tariffs as related to our product sourcing in China and Mexico.
Speaker Change: We currently manufacture our wipes in China and diapers in Mexico.
Speaker Change: It's important to note that we've been managing with tariffs in portions of our portfolio for several years and believe we are prepared to navigate changes with various levers to pull in order to mitigate new tariffs.
Speaker Change: Although the full degree and duration of exposure remains uncertain, our teams have a playbook in place and are diligently monitoring in partnership with our valued sourcing partners.
Speaker Change: Our proactive and cross-functional approach to addressing cost pressures from tariffs or other consumer spending impacts will continue as we closely monitor and address emerging risks.
Speaker Change: We believe our financial outlook reflects the dynamic environment, and we are confident in our ability to deliver our plans.
Speaker Change: In closing, as I look back over the past two years, our financial performance has improved significantly by growing revenues over 20 percent
Speaker Change: increasing gross margin 880 basis points and increasing our cash position over five times while maintaining zero debt on our balance sheet.
And now I'll turn the call back over to Carla.
Thank you, Dave.
Speaker Change: We're proud of the record results we delivered in Q4 and 2024, exceeding our outlook.
Speaker Change: Our results tell a powerful story, one of dedication and the focused execution of our transformation pillars.
Speaker Change: Honest is more than just a brand. We are part of people's lives. We are in the most personal parts of their homes and we are trusted to be safe and effective for their most important uses.
Speaker Change: As our community of honest users has grown, our business has become stronger, our financial foundation has become healthier, and we are driving shareholder value while unleashing the power of the honest brand.
Speaker Change: Thank you for joining our call today, and now I will turn it back over to the operator.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for questions.
Speaker Change: Our first question comes from Aaron Gray with AGP. He may proceed.
and David Loretta. Thank you.
Speaker Change: Hi, good evening and thank you very much for the questions and congrats on the strong quarter and finish to the year.
So...
Speaker Change: First question from me, just wanted to talk a bit about
Speaker Change: the guidance, right? So I know you gave some color in terms of the first quarter, you know, being at a higher growth rate than for the full year, but just as we think about the cadence of that, right? So for the back of half of the year, you know, you're at a run rate of nearly 400 million. You were at that for the fourth quarter. So just, you know, how best to think about that cadence. You know, if you match 4Q, that'd be, you know, a mid-teens growth rate year over year. So just how much higher of a growth rate should we be thinking about for the first quarter versus the full year and it's how best to think about that cadence. Thank you.
Thank you.
Speaker Change: Yeah, hi, Aaron. Good to hear from you. And yeah, let me address kind of the cadence of across the year of our revenue growth.
Speaker Change: As you did share, you know, 2024 was a healthy growth period for us, and maybe it'd be good to context that with
how that year played out for for guidance on 25.
Speaker Change: The first quarter in 24 was our softest one. As you recall, we had pulled orders into the prior year and so that that was a soft period for us and and why I provided some color about this.
Speaker Change: Q1 of 25 being on the higher end and probably slightly above our guidance range.
Speaker Change: But as we look through, and then the rest of the year in 2024, we went up against
you know, some pretty.
Speaker Change: interesting retail events that drove some volume for us both at Target and at Walmart.
Speaker Change: incremental distribution that those events carried for us. And our fourth quarter was really strong in 2024 with apparel leading the way there. So we do see that the comps are going to be a little more challenging in the back part of the year because of those activities.
and where we sit today.
We know that across the balance of the year, there's
Speaker Change: It's a dynamic environment right now, and there's a macro factor that we want to simply understand this guidance of 4 to 6% for the full year is for a full year period, and we'll provide updates as we move each quarter.
Speaker Change: through that. But, you know, we've got high confidence that it's a level that we're comfortable in achieving.
Speaker Change: Okay, great. Thank you for the cover there. And then second question for me, Jess, we've talked a lot about distribution, both in terms of depth and breadth, and I know you guys are attacking, you know, both initiatives there in terms of the prepared marks.
Speaker Change: But just as we think about 2025 and potential growth opportunities are upside, you know, to the growth given the guidance Do you feel like there's a more lower hanging fruit in terms of getting more depth or breadth in terms of that distribution? Thank you
Hi, Aaron. This is Carla. Great to hear from you.
Speaker Change: And I would just remind folks that we have an investor presentation that has a really nice explanatory section in it. You can find the presentation at investors.honest.com that gives you some very granular detail with a specific approach to how we see the distribution opportunities.
Speaker Change: both philosophically, as you asked it, but also specifically related to some of our most important products. So I'd encourage folks to look there.
Speaker Change: We saw that the success of 2024 was very much supported by distribution growth in the year.
Speaker Change: So, for the year, our distribution growth was up 2%, but on our hero items, which is where we're really emphasizing, the distribution gains were double that.
Thank you.
Speaker Change: Underneath really looking at distribution gains, I would say some distribution gains are not obvious when you look into those metrics.
Speaker Change: and for the most recent year that we're finishing in 2024, we saw gains in what we like to say as aisles.
Speaker Change: So, we are new in our CVS distribution of diapers this year.
Speaker Change: And so we already had some items in CVS in our baby personal care line, but getting diapers in was new for us this year. We also have an array of products and categories across our grocery retailers where we saw distribution gains.
Speaker Change: Also, this year, our distribution at Walmart was actually up 33% of points of distribution. Some of that was because with our very strong wipes portfolio, sometimes we only had one of the patterns or we didn't have all of the sizes. So we really partnered with Walmart because those wipes are so popular to make sure that we have an even greater presence of our large sizes in Walmart.
Speaker Change: previous years. Sometimes when we launch into a retailer, we like to create a very unique launch strategy that just fits them and their shopper. At Walmart, we launched into baby personal care with a signature flavor just for, or fragrance just for Walmart, but not with our most popular fragrance, lavender.
Speaker Change: So this year, we added to our baby personal care set the lavender items that are our top performing items.
Speaker Change: As we look to the future, I would say the great news is there is so much opportunity and sometimes you do multiple versions all at the same time. There are still stores we're not in at all. We're not in the Dollar Channel, we're not in the Club Channel, as examples. And yet, there are still sections of our very top retailers where we're still not represented.
Speaker Change: We have parts of our beauty and adult portfolio that are not yet in Walmart's brick-and-mortar. We have some of our wipes collection that is not in any brick-and-mortar yet, but doing very well online.
Speaker Change: So, we will keep chasing this down, and we believe that there is lots of opportunity that will continue to be available to us in the long term, which is why when we give you our long-term algorithm of 4 to 6 percent.
Speaker Change: That takes into consideration that we believe that there is distribution that will drive that and we also like the role that mix can play as we drive that distribution to continue advancing our margin accretive elements of our portfolio.
Speaker Change: Thanks, Carl. I really appreciate the detailed answer there, and I'll go ahead and jump back into the queue.
Thank you.
Speaker Change: Our next question comes from Andrea Teixeira with J.P. Morgan. You may proceed.
Andrea Teixeira: Thank you, operator, and I hope all is well and congrats again on the numbers.
Speaker Change: Carla, you spoke just now about the balance of potentially mix and volume and pricing and getting the distribution sets and you had some very good inroads and still have a lot of opportunities, as you said, in some channels in Club and Dollar.
Speaker Change: So, how should we be thinking to 2025? What is the balance of...
Speaker Change: I'm assuming it's mostly volume at this point, but if you have anything about like the 5% that can help us understand.
Speaker Change: And also for, I know Kate has been working, and you of course, in getting not only the Hero products that you were so focused on the transformation over the past year.
Speaker Change: And that was super successful to get, you know, these products to be more available. The pack architecture also more, I think, on point. But how we should be thinking about innovation as we...
Speaker Change: As we go into the years into your algorithm and and just a clarification also what Dave had said in the prepared remarks I think you actually when you were talking about margin you were saying
Speaker Change: I think you're assuming gross margin will be similar to last year. I just wanna understand if that's the message. And can you also touch on cash flow? I'm sorry for all these questions that I wanted to just lay out so you can both discuss. Yeah.
Yeah.
Speaker Change: No problem, Andrea. Good to hear from you. And let me take a few of those and then Carla can jump in as well. But, you know, you kicked it off with questions around the mix.
Andrea Teixeira: and our guidance on revenue, how much might be volume, distribution.
Speaker Change: And as we look back at what we were able to achieve in 2024, with the complement of
Speaker Change: distribution gains, product into stores, and more product onto incremental shelves blended with velocity gains. We're expecting that those elements will continue to be the supporting.
Speaker Change: our 25 sales goals as well. You know, pricing increases was a factor that helped drive it, not that we took prices, but the average price of the mix of products was a positive outcome in 2024. And a lot of that came through introduction of products.
Speaker Change: earlier and mid in the year. And so we'll continue to benefit from that in 2025.
Speaker Change: So I would expect it to be a blend, similar to what we've articulated.
Speaker Change: And when we look at our consumption trends across the full year of, you know, 8% in Mulu and our Amazon over 30%.
Speaker Change: It's all supported with the same mix of portfolio dynamics that we're expecting.
Speaker Change: Now on innovation, I think we do have, you know, some innovation coming. We highlighted our diapers is one new category that's got some product coming in that's new, enhancements that are being made, and that'll be introduced in 2025.
Speaker Change: But I would expect also to see that the highlights around skin care and
Speaker Change: and the new packaging will be, you know, new and in terms of highlighting to the consumers that we've got innovation happening in the market.
Now, you also asked about margin, the gross margin.
24, 900 basis points up.
Thank you. Bye.
Speaker Change: you know, it's obviously a reflection of where our transformation pillars were really driving that enhancement, margin enhancement pillar for across the supply chain and into the product set. So those are all sustainable elements of what drove our gross margin expansion, and those are in place that we'll continue to benefit from at a structural level.
So, I do see that our gross margin, while
Speaker Change: And that's also going to be combined with some expense leverage that we also expect will be part of the earnings growth for us. And then lastly on my list of what you asked here, the cash flow.
you know, the rigorousness of our
Inventory Management.
of being a Capitolite.
Speaker Change: business model, continuing to improve the earnings and the flow through from that, will give us what we expect a positive free cashflow period in 2025.
Speaker Change: I think looking back over the last two years where positive free cashflow was an important element of the transformation initiative.
Speaker Change: We, you know, we are in a great place with how much that cash has been built up, and we do expect it to continue in 2025. So that's, hopefully that captures a lot of the questions you had there, Andrea.
Andrea Teixeira: Yeah, no, Dave, that's super helpful. The one last thing that may not be as clear to everyone, but when you don't just out the, like, your legal fees, right, that were penalized in the second half,
Dave Loretta: Would we expect, and I think you alluded to just probably behind you, is that the reason like we are basically out of it, or are you still going to have some lingering expenses into the first half?
Yeah, we are
Dave Loretta: Pretty close to having that behind us. I'd say there we do expect
Dave Loretta: in the first half of the year, some remaining legal costs that are in the neighborhood of one to $2 million.
Dave Loretta: So, so significantly below what we absorbed in 24, but not not 100% gone away yet. And so those, those would be, again, kind of add backs as we would see it. And, but that that's the range that that I would expect to.
Dave Loretta: And so as a mosaic, probably you will finally you had inflected earnings in the third quarter, but then probably.
Dave Loretta: Coming out of the $30 million to your guidance for EBITDA, obviously, if you don't have that penalization for such a big headwind, you're poised to kind of reflect on EPS, obviously.
Dave Loretta: It continues to be our number one priority of improving that bottom line. And, you know, where we are within the transformation journey, it's a multi-year journey.
Dave Loretta: I'd say the modeling should suggest that, but our guidance today is still going to be based on adjusted EBITDA, just given intransitory items that may still happen, like those legal expenses.
Okay. Thank you very much. I'll pass it on.
Thank you.
Speaker Change: Our next question comes from Anna Glasson with B. Reilly Securities. You may proceed.
Good afternoon. Thanks for taking my question.
Anna Glasson: I'd like to start with gross margin, a little bit of a follow-up to the previous question, but clearly you had...
Malkin, Elizabeth Bouchard, Elizabeth Bouchard, Carla Vernon, David Loretta
Anna Glasson: in 2024, such as changing warehousing partners, etc. I was wondering if you could share a little bit more perspective on the shape of gross margin expansion in 2025 as we contemplate lapping those benefits and
Anna Glasson: what the underlying kind of gross margin expansion should be as you strip away some of those more one-time benefits.
Thank you. Bye.
Yeah, sure thing, Anna.
you know we.
Anna Glasson: I'd say from a lapping gross margin impacts in 2004, probably the more notable item would be some of the price increases that we did.
Anna Glasson: have benefitting in the early part of the year that we did lap through the back part of the year.
Anna Glasson: That helped contribute to the 900 basis points increase. Roughly 200 to 300 basis points could have been attributed to that pricing, and so we're now behind that event.
Filament centers continue to realize is the shape of a
the fulfillment operations.
Anna Glasson: Our DTC platform, as it just continues to become less of a driver of what's happening in the model, that adds another benefit that will continue to be realized for us.
Anna Glasson: And I'd say the product mix within our set, so all of the introductory of items that we've done over the last two years have been rigorously set against hurdles of a higher margin.
Anna Glasson: than historically, and where we're focusing on those hero items, they are of, you know, a margin that meets the criteria that we've got, and so mix of those products, wipes in particular, being a strong growth driver for us.
Anna Glasson: So obviously we do not expect another 900 basis point expansion. I don't want to set that expectation, but we do see that it's going to continue to be a contributor through the mix of channel and products that we sell.
Speaker Change: Great. Thanks for that. And now turning to the comments you made about de-emphasizing or shifting away from the honest website in favor of existing digital partners.
Speaker Change: Understanding that this would be beyond 2025, but I'd like to understand a little bit better the margin delta between those existing partners and maybe your own DTC as we think about the longer term margin opportunity, particularly as you mentioned, the rising fulfillment and distribution costs associated with the website.
Thanks.
Speaker Change: Yeah, I can touch on a little bit of that, but let me take maybe a step back and also talk about how much has really changed in our business model over this period of time. You know, the shape of the business model since we launched solely as a DTC company.
Speaker Change: 13 years ago has really changed and our consumer behavior has also changed in terms of where they're able to buy our product.
the advancement of our retail customers, our partners.
Speaker Change: and the development of their digital platforms has made it much more compelling.
for consumers to move in that direction.
Speaker Change: So, it's only natural at the stage of our company's kind of life cycle that we start to benefit from the scale of retail distribution and where we've seen our own DTC channel only two years ago at roughly a quarter of our revenues is down in the low teens.
that's manifesting itself into
Speaker Change: you know, more efficient operations at the Fulfillment Center. We can't compete on the speed of delivery, on the shipping costs.
Speaker Change: that we can, you know, against the big guys, the Amazon and the walmart.coms, and so we're, we understand.
that that's an important aspect of
of finding the profit opportunity in our own business model.
Speaker Change: And that's something that we're committed to over time, but we want it to be a seamless transition along the way.
Great, thanks.
Thank you.
Speaker Change: Our next question comes from Ryan Myers with Lake Street Capital Markets. You may proceed. Hey, guys. Thanks for taking my question. You know, first one for me, Dave, wondering if you can kind of call out some of the areas in the operating expenses where you think you guys can gain additional leverage here in 2025.
Yeah, certainly operating expenses where we have seen
Speaker Change: probably the biggest improvement is is not having as much of a legal cost overhang that that we articulated previously and so that that frees up operating expense dollars but
Speaker Change: where we also have taken a really sharp eye towards is across across the the structure of what's needed to to operate and our in our new you know strategic
Speaker Change: parameters and what kind of organization we have to be so we're
Speaker Change: We're very diligent about managing the expense profile of this business model and finding ways.
Speaker Change: to do things more efficiently and under a lot of different places. But where the savings that we do see in operating expenses, that'll realize
Speaker Change: at least in SG&A, gives us the opportunity to invest back into marketing, for example, or R&D. And while total operating expense, we do see the opportunity to invest in R&D.
Speaker Change: leverage, we're not going to be shy about putting some of those investments back into marketing and research and development since those are drivers of growth in both near-term and long-term.
Speaker Change: So, again, we're committed to having expense leverage and reinvesting some of that back in to drive the long-term outlook for the company.
Speaker Change: Got it. And then forgive me if you guys talked about this in the prepared remarks, but did you give what the ACV is across the retail distribution that you guys have right now?
Carla Vernon: Hi Ryan, this is Carla. Good to hear from you. We did not specifically reference ACV because you can find that in our investor presentation and I think our ACV right now is about 84 percent.
Carla Vernon: on a national level, but the reason why it's so important to take a look at our investor presentation is because ACV, when you are a multi-category single brand, is actually a slightly, what can I say, it's a metric that can give you the wrong perspective about how much room is left at the top.
Carla Vernon: So, that ACV number saying that somewhere in the retail world, in 84% of the retail world, there's at least one honest item on the shelf.
Carla Vernon: does not really give you an opportunity to understand the great scale across our portfolio. At the item level, the ACVs are much lower item by item.
Carla Vernon: and so we made sure that in our investor portfolio you can see that some of our items for example our lavender bubble bath that I just told you about is one of our top turning items and recently gained distribution at Walmart.
Carla Vernon: still only has a 34% ACV and it is one of our top items.
and one of our fan favorites.
Carla Vernon: So, 34 ACV on that item. We've got our hydrogel cream, that is our fastest-turning facial cream, less than 20% ACV on that item. And our sales organization, one of the big changes that might not be visible to investors is that to go along with the importance of our distribution strategy, we have also increased the number of people in our organization devoted to each key customer and each strategic account.
Carla Vernon: Now, with not only a clear strategy, a clear designation in our portfolio of which items matter, but now also very experienced CPG talent that knows these customers well and is selling and driving the growth.
Got it. Thank you for taking my questions.
Thank you.
Speaker Change: Our next question comes from Owen Rickert with Northland Capital Markets. You may proceed.
Owen Rickert: Hey, Carla. Hey, Dave. Congrats on a great way to end 2024. Just quickly.
Owen Rickert: Can you guys dive into how, you know, your relationships with Target and maybe Walmart are progressing? And are you seeing any shifts in shelf space allocation or some updates on promotional activity going into 2025?
Owen Rickert: Oh, and thank you so much. It's nice to hear from you. I think that the context that I want to ground all of this in is, as we look back on the results of 2024, whether you look at our revenue growth in Q4 of 11% or our full year revenue growth of 10%.
Owen Rickert: The business is performing in a very balanced and successful way across our set of retail partners. Our consumption overall for the year is up 7% and that consumption growth is really balanced in both units and dollars.
Owen Rickert: When I look at that, at our top accounts that you asked about, Target, Amazon, Walmart,
Owen Rickert: for the year, you will also find that our consumption is up at all of those accounts.
Owen Rickert: whether you're looking at total 2024 or you are looking at Q4. So we have fantastic relationships. We have discussions at the highest levels with those companies.
Owen Rickert: Make sure that we understand as they're trying to attract the high upper income customer to their stores, that Honest plays a very important role, not only as a brand that attracts that kind of consumer base, but a brand that attracts that consumer base both in-store and online. So we're very pleased with not only the partnership, but the performance in the year.
Perfect, thank you.
Carla Vernon: Thank you. I would now like to turn the call back over to Carla for any closing remarks.
Carla Vernon: It's been a pleasure to talk with you about how we closed 2024. Thank you so much for joining us. We are looking forward to spending time with some of you throughout the rest of the week, and we look forward to meeting up with you next quarter.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.