Charlotte's Web Holdings, Inc. (CWBHF) CEO Deanie Elsner on Q4 2019 Results - Earnings Call Transcript

Mar. 24, 2020 3:08 PM ETCharlotte's Web Holdings, Inc. (CWBHF), CWEB:CA3 Likes
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Charlotte's Web Holdings, Inc. (OTCQX:CWBHF) Q4 2019 Earnings Conference Call March 24, 2020 8:30 AM ET

Company Participants

Cory Pala - Director, IR

Deanie Elsner - CEO

Russ Hammer - CFO

Conference Call Participants

Derek Dley - Canaccord Genuity

Michael Lavery - Piper Sandler

Scott Fortune - ROTH Capital Partners

Pablo Zuanic - Cantor Fitzgerald


Ladies and gentlemen, thank you for standing by, and welcome to the Charlotte's Web Holdings, Inc. Fourth Quarter Conference Call. At this time, all lines are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Cory Pala, Director of Investor Relations. Please go ahead.

Cory Pala

Thank you, Marcella. Good morning everyone. Thank you for joining us for our 2019 fourth quarter and year end conference call for Charlotte's Web. My name is Cory Pala, Director of Investor Relations. And leading the call this morning is Charlotte's Web's CEO, Deanie Elsner along with CFO, Russ Hammer, who will review the fourth quarter results in detail.

As has become the recent norm, the three of us are all calling in from different remote locations as part of our efforts as social distancing to mitigate COVID-19 risk. So, we cannot see each other, and there can be modest latency delays in cell phone channels. So, please bear with us, should we trip over each other or have any disconnections during the call, but I am confident.

On today's call, Deanie will share her high level comments on the quarter and the business, Russ will share some color on the Q4 financials, and we'll take your questions from our analysts at the end of our prepared remarks.

A replay of this call will be available for the next week, accessible for the details provided in our earnings release. And a webcast replay of the call will be available for an extended period of time accessible through the IR section of our website at

Our earnings press release was issued this morning. Our MD&A and financial statements for the quarter can be found in the Investor Relations section of our website, and they are also filed on SEDAR.

As always, a reminder to our listeners that certain subjects discussed in the call, including some answers we may provide to certain questions may include content that is forward-looking in nature, and therefore, subject to risks and uncertainties, which could cause actual future results or performance to differ materially from any implied expectations. Such risks are rounding forward-looking statements are all outlined in detail within the company's regulatory filings, again, which can be found on

In addition on this call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have any standardized meaning as prescribed by IFRS, adjusted EBITDA, therefore, defined in our press release as well as our MD&A filed with SEDAR.

And finally, yesterday morning, we announced that we have entered into an agreement to acquire Abacus Health. On today's call, we are pleased to share some of our insights on the synergies and the strategic value of this transaction.

However, we will not be providing any forward-looking financial estimates or combined revenue projections about the combined business outside of what has already been disclosed in yesterday's press release. This remains in place until the transaction is closed, which is anticipated to occur near the end of the second quarter.

With that, I'll now hand over the call to Charlie Webb's Chief Executive Officer, Deanie Elsner.

Deanie Elsner

Good morning and thank you for joining us today. I hope that everyone on the call is healthy and keeping safe, along with family, friends and colleagues during this unprecedented environment created by the COVID-19 virus.

The health and wellness of our employees and customers is our top priority and we have implemented social distancing through a remote working policy with our offices and facilities open to essential staff only.

To address the potential operational disruption from COVID-19, we've taken constructive actions with our quality and warehouse teams to ensure continuity. As a business that falls into the critical business definition by the Colorado Public Health and Environment order, we have cross-trained our staff to create backup teams to keep our lines running smoothly.

Our vertically integrated supply chain provides significant shelter from supplier risk, and gives us confidence that we'll be able to manage the manufacturing and shipping of our products to meet customer demand.

Finally, we are closely monitoring the ever-changing external environment and meeting twice a day to make decisions to both protect our employees and to minimize business disruption.

I'll begin today's call with a summary of our intent to acquire Abacus Health Products and then provide a review of our Q4 results and outlook. Russ will follow and speak to the fourth quarter results in more detail.

Yesterday, we issued a press release announcing that we've entered into an agreement, with an intent to acquire Abacus Health Products, in an all-stock transaction valued at approximately $69 million enterprise value. The transaction is expected to close late Q2 or early Q3 of this year, subject to customary closing conditions and the approval of the shareholders of Abacus.

Abacus is a market leader in the over-the-counter topical products that combine active pharmacological ingredients with hemp extract. This is a game-changer for Charlotte's Web as it greatly expands our portfolio of topical products.

Charlotte's Web is a leader in the CBD ingestible products and Abacus is a leader in the CBD topical products. Combined, we have a current market share of approximately 35% of the F/D/M channel, in addition to having an advantaged cost position through our vertically integrated supply chain.

According to the estimates by the Brightfield Group, the topical segment is forecasted to become the fastest-growing and largest segment within the CBD category, growing to more than $4 billion by 2025.

Charlotte's Web has the broadest distribution coverage of any CBD brand across the food, drug, and mass retail channel. However, our portfolio was underdeveloped in the topical segment.

Abacus adds substantial portfolio depth in topical products with more than 50 unique SKUs, including FDA-registered topical medications that target specific pain relief need states. This dramatic expansion of our topicals portfolio presents a significant value enhancement for Charlotte's Web across all channels.

Charlotte's Web's total distribution exceeded 11,000 doors this month. Abacus has distribution of around 12,000 doors. Together, the new company will have greater than 15,000 doors of distribution.

In addition, Abacus has an established sales network, representing more than 16,000 health care practitioners with their CBD clinic line of topicals. Combined, our complementary products and distribution presents a significant cross-selling opportunity.

This is particularly valuable within the current environment of regulatory uncertainty that's holding back ingestible sales in the F/D/M channel. An immediate expansion of our topical portfolio enables us to accelerate growth in the F/D/M. This effectively turns a headwind into a tailwind for Charlotte's Web.

Charlotte's Web and Abacus have two of the top management teams in CPG, leading the market with brands, science, and quality. Combined, we become the deepest and broadest CBD company in the world fully integrated across all channels and all segments.

Our complementary strengths and relative market share positions provides a powerful one plus one equal three formula we sought from acquisition. Post-acquisition, Abacus shareholders will own approximately 15% of Charlotte's Web. In terms of size, Abacus' annualized annual run rate is about 15% to 20% of Charlotte's Web.

On a pro forma basis, that combined company sales in the third quarter of 2019 were about $29 million, for an annualized run rate of around $115 million. Together, we aim to accelerate our growth and extend our market-leading position. We look forward to updating you on our progress.

Now, a review of this morning's Q4 earnings and business outlook. Since joining the company nearly a year ago, we've been working to build the management team and infrastructure necessary to move from a start-up to a standup CPG business.

Charlotte's Web already had the talent, a strong brand, proprietary genetics, and the vertically integrated supply chain. From there, we built a leadership team for the future and began to establish the operational excellence required to achieve our long-term ambitions.

In 2019, we established the infrastructure necessary to support our growth in five key areas. First, we invested in capacity expansion in preparation for the anticipated F/D/M retail growth. Second, we implemented business systems and processes, accounting controls, liquidity tools, and corporate governance.

Just yesterday, we announced a new banking relationship with JPMorgan for a senior credit facility and merchant banking services. This is a Tier-1 banking relationship we're very pleased to announce.

Third, we evolved our DTC technical platform. We've built new capabilities, and expanded the team to accelerate growth. Fourth, we achieved multiple third-party certifications to deliver against our quality and safety commitment. Examples of this include achieving the National Animal Supplement Council certification. This was instrumental in us landing distribution at our first national pet retailer this month.

Our manufacturing site received NSF certification for dietary supplements, we achieved and published our self-affirmed GRAS, and we made great progress towards our ambition of achieving 100% organic certification.

Importantly, we brought scientific legitimacy to the CBD and cannabinoid categories with the recent launch of our CW Labs R&D division located on the medical campus at the University of Buffalo.

CW Labs is integrated into the SUNY network of 64 universities and medical centers and we are working with leading institutions to deliver clinical data and breakthrough renovation. So, we've been checking the boxes, filling the gaps, and the company is getting into good shape.

Now, turning to our 2019 full year sales performance. Overall, Charlotte's Web grew 36% in 2019 to roughly $95 million of revenue. Gross margins were 70% before taking actions to clean up aging inventory associated with standing up the organization. Russ will speak to this in more detail momentarily.

For the full year 2019, our B2B business grew 33% and our DTC e-commerce business grew 39%. Our total 2019 revenue mix reflected a split of B2B representing about 43% of our total sales, and DTC representing about 57% of our total sales.

In our B2B business, the natural channels grew sales by 13% versus a year ago, and F/D/M sales grew 361%. We added over 6,000 doors in 2019 and have commitments to add an additional 2,000 doors, that's 2,000 doors, in the coming months.

In 2019, as a standalone, our DTC business was larger than any single competitor in the CBD retail category. The DTC business for us is a key strategy for growth going forward.

Our 2019 revenue was at the low end of our expectations. This was almost entirely due to the lack of the anticipated regulatory direction in the back half of the year. In November, the FDA issued several warning letters to certain CBD companies, which caused our customers to pull back across all channels, negatively impacting the sector and our sales.

We're not going to look the lack of regulatory direction, disrupt our growth ambitions. Instead, our plan is to adjust to the new operating landscape and find other paths to grow.

Turning our focus to Q4 sales, total revenue was roughly $23 million, up 6% versus a year ago but down 9% versus Q3. This sequential decline versus Q3 was due to a 26% decrease in our B2B revenue, driven by two issues; first, the negative Q4 FDA comments; and second, competitive oversaturation in the natural channel.

Q4 DTC revenue increased 14% versus a year ago, and increased 4% versus Q3. Our Q4 revenue mix was split 35% B2B and 65% DTC. Despite the pullback from customers in our B2B channel, we delivered some solid wins.

We increased distribution in Q4, ending the year with greater than 10,000 stores, an increase of 6,140 versus a year ago. We accelerated our innovation growth that we launched in Q2 and Q3.

Today, for an example, our gummy sales in Q4 represented about 14% of our total sales. For the year, our gummies represent about 7% of our total sales. That's on a segment that didn't launch until about July of 2019.

We launched the "Trust the Earth" marketing campaign, and our new earned media model. We launched new DTC platform and capabilities. We transformed the model, and we improved the online experience. And finally, after all of this, Charlotte's Web remained the number one brand in the category.

Our DTC channel was the shining star of our business in Q4, posting our largest quarterly sales to date, with revenue of about $15 million. DTC is a critical channel for us for two reasons; it is the single largest channel today in the CBD category and it will remain the single largest channel in the CBD category, growing to $8.8 billion by 2025.

Our forecast in Q4 was to increase web traffic, increase acquisition, and increase conversion rate and I'm happy to report we succeeded. In Q4, our DTC channel achieved the highest conversion rates in our history, hitting double-digits in key revenue weeks.

We also successfully acquired 38,000 new consumers, up 22% versus Q3, in addition to increasing our subscription rate. In 2020, we're increasing our focus and investment in the DTC channel as we expect online sales to grow faster than retail in the first half of 2020.

DTC sales disproportionately benefit our gross margins in addition to providing consumers with our broader portfolio of products. We look forward to updating you on this channel going forward.

Finally, I want to provide a little context to the CBD category. Consumer interest in the overall category growth momentum continue, despite the regulatory headwinds and the explosion of competitors. The potential of the CBD category to achieve $24 billion in sales remains intact.

Here are some consumer facts that support this. Consumer awareness for CBD remains at 85%, while familiarity of CBD moved from 47% in 2018 to 70% in 2019. The percent of consumers using CBD moved from 8% in 2018 to 15% in 2019. That reflects a category with high awareness and low penetration that equals growth upside.

The three biggest reasons consumers report taking CBD are anxiety, pain, and sleep. These are rising challenges in our society and macro trends, which will continue to lead the category in terms of growth going forward.

In 2019, Charlotte's Web was the number one brand in consumer awareness and loyalty. And as a fun side note, Forbes Magazine reported that searches for CBD were more popular than searches for Taylor Swift, the NBA, the Beatles, and Kanye West. Now we know we've succeeded as a category.

The CBD category remains as exciting as ever, as the regulatory framework gets sorted out. Charlotte's Web remains the best positioned CBD company to win globally. This was the case before announcing our intent to acquire Abacus and it's even more accurate as a combined company going forward.

I'll now turn the call over to Russ to provide some comments on the financials.

Russ Hammer

Thank you, Deanie and welcome everyone. We certainly appreciate you sharing your time with us. The financial statements and the management discussion and analysis have been filed on SEDAR. I trust you've had a chance to review, along with our press release, and Deanie, very thorough review of our revenue.

So, I will focus only on some key financial items to provide transparency and understanding, and then we will be happy to answer any questions from analysts after our prepared remarks.

I'll start by discussing the inventory provisions that Deanie mentioned earlier. In the fourth quarter, we took an inventory impairment, non-cash reserve of $13.9 million. This is expensed through cost of sales, which reduces the gross margin. Most of the on cash reserve was against ingestible oil inventory from 2017 and 2018 earmarked for the F/D/M channel.

The unanticipated delay in FDA regulations that would have enabled the sale of this inventory to the F/D/M channel shortened the remaining product exploration base required for the channel, with ongoing regulatory timing uncertain; our aged inventory reached the end of its useful shelf life.

There was also old branded packaging and topical products that we are replacing next month with new and improved formulations. The result of this was reduced gross margin for the fourth quarter and the year.

Before taking biological asset adjustments and increases in inventory reserves, our Q4 gross profit was $12.2 million or 54% gross margin. This compares to gross margin before biological asset adjustments of 72% in Q4 2018.

Operationally, the lower effective gross margin percentage reflects the discounting programs that were implemented during the quarter as part of our competitive pricing promotions.

For modeling purposes, going forward, we expect consolidated gross margin in the mid-60s range, improving weight in the back half of the year due to production cost improvements for our new customer performance center coming online.

Q4 gross margin after biological asset adjustments and the $13.9 million non-cash reserves was negative 9%. This reduction affected gross margin for the 2019 year as well.

For the 2019 year, our gross margin before the impact of inventory reserves was 70% compared to 75% in 2018. The lower gross margin in 2019 was influenced significantly by the Q4 as gross margin for the first nine months of 2019 was 73%.

With our aged and expiring inventory items cleaned up, we entered 2020 with a net 7 million of current and new finished product inventory in preparation for our new product launches in April. The remaining inventory consists primarily of hemp biomass from our 2019 harvest.

We inventory a minimum two years of hemp biomass for extraction and manufacturing over time. This provides consistent low-cost raw material and guaranteed supply for projected sales.

Our vertical supply chain is one of our most valuable assets, enabling full control of product, quality, traceability, and costs. We continuously reduce our costs in the supply chain.

Our 2019 harvest had higher yield and potency, resulting in a 33% reduction in cost per milligram of CBD. Combined with significant cost savings through our new production center, we will be able to improve margins, while passing on savings to our customers.

Now, some comments on our Q4 operating expenses. Q4 2019 OpEx of $26.4 million for the quarter was high at 116% of revenue. We guided for a portion of this increase in our Q3 call due to our expansion plans. But there was also approximately $6 million of one-time and timing issues in the quarter, which I will review in detail in a moment.

We are modeling for the lower OpEx dollar levels going forward in 2020. And for further clarifications, we expect OpEx to leverage sequential improvement each quarter as a percent of sales.

Specifically, we experienced an increase in SG&A from Q3 to Q4 2019, driven by the following. The disproportionate amount of our marketing was recorded during Q4 on a $3.6 million "Trust the Earth" marketing campaign, which generated 352 million impressions during the quarter. We will continue to generate value from this investment over future periods.

Our marketing spend will be phased more evenly across 2020 going forward. We also had $0.6 million increase in share-based comp associated with some Q4 events. And we had 1 million extraordinary consulting, obvious and legal fees, which were one-time in nature.

Finally, our Q4 fixed OpEx profile was modeled around higher expected revenues from the anticipated launch of ingestible products in the F/D/M channel. We have responded with cost controls, and our 2020 we intend to leverage our OpEx down each quarter as a percent of sales beginning in the second quarter.

Now, to provide more transparency, we'd like to share how we are managing our investment strategy. We are carefully managing our expansion investment costs as we continue to prioritize our infrastructure build-out and invest ahead of revenue in anticipation of FDA guidance and the forecasted F/D/M channel growth.

Our new customer fulfillment center will come online in phases this year, driving our competitive cost advantage as we enter 2021. The new capabilities of our customer fulfillment center investment will enable Charlotte's Web to be one of the only well-positioned and vertically-integrated suppliers, able to provide high-quality capabilities, including EDI, automated pick and pack, inventory refurbishment, and on-time delivery promise. We plan to share with you the DTC, B2B, and F/D/M capabilities of our new customer fulfillment center with an Investor Day later this year.

Q4 2019 adjusted EBITDA loss was negative $10.2 million compared to positive $3.4 million last year. The loss was primarily a result of lower-than-expected sales against the higher OpEx as we strategically invest ahead of revenue. We are modeling negative adjusted EBITDA in the first half of 2020, and positive adjusted EBITDA in the back half, with double-digit adjusted EBITDA in Q4 2020.

Our cash balances at the end of the quarter were $68.6 million and working capital increased to $116.9 million. Cash used in operations during the quarter totaled $8.7 million and was primarily used for our new production and fulfillment capabilities in our new customer service center. Our CapEx investment plans for 2020 are approximately $38 million.

We are executing on our capitalization strategy to provide ample liquidity to meet anticipated growth and recently engaged in a strategic banking relationship with JPMorgan as part of this process, where we can use a mix of debt and cash for prudent flexibility. We have also completed our implementation of JPMorgan Merchant Services, which will drive additional cost reduction in card fees in our growing DTC business.

As our new facilities come online later in the year, we expect to harness cost savings through our vertically integrated chain to support meaningful increases in adjusted EBITDA and leverage against higher revenue as we enter 2021 and 2022.

Now, I'll turn to guidance. While we are optimistic about our strong DTC business and the Abacus acquisition, with the uncertainties around coronavirus and regulatory environment, we are revising down our 2020 growth expectations for Charlotte's Web business to 10% to 20% year-over-year growth.

We expect Q1 2020 revenue growth to be flat to slightly down year-over-year in the $20 million range. As the same headwinds from the fourth quarter carryover in coronavirus, distracts our retail partners focus on keeping category staples and stock during this crisis.

This completes the financial update for the quarter. I'll now turn the call back over to Deanie for questions.

Deanie Elsner

Thanks Russ. Now, turning our attention to the FDA. We had a productive conversation with the FDA in January, and we continue to believe they want to find a way to build a regulatory framework for the CBD dietary supplements.

Recently, the FDA provided the Senate Appropriations Committee the required assessment on the CBD category. In our opinion, the remarks from the FDA were much more constructive and positive from what we've heard in the past.

We heard three new themes emerged. First, there is a path to set regulatory guidance for CBD dietary supplements. Second, the dietary supplement category is viewed differently than the food and beverage categories.

And third, full spectrum CBD is different from CBD isolate and may need to be addressed separately. We were encouraged with this communication and remain committed to partnering with the FDA to provide data and studies to facilitate their progress.

In closing, the global CBD opportunity remains intact and we believe we are operationally well-positioned to lead the category as the one CBD player that checks all the boxes in all the areas of critical criteria.

Our acquisition of Abacus solidifies our market leadership and provides the foundation to scale going forward, making Charlotte's Web a formidable competitor in the CBD space.

With that, operator, I'd be happy to answer any questions at this time.

Question-and-Answer Session


[Operator Instructions]

Your first question comes from line of Derek Dley from Canaccord. Your line is open.

Derek Dley

Hi, good morning everyone. Just wondering on the -- in the natural health channel, what were some of the main reasons that you saw that were causing the declines? Is it more new competitors entering the space? Is it lack of regulatory oversight, combination of the two? Can you just give us some color there, please?

Deanie Elsner

Yes, I'd be happy to do that, Derek. I'll give you some perspective. Q4 versus a year ago, the natural channel for us declined about 11%. If you look at Q4 versus Q3, the decline was closer to about 21%. That was in large part because of the oversaturation of competitors coming into the category, and then an aggressive reduction in prices.

We had a number of market-leading brands that perpetually had their products on sale at 50% or greater. And so the category lost total average sales per unit that was sold, despite the fact that category distribution expanded.

So, for us, we increased distribution in Q4. But because there are so many players, there's not great navigation, and the pricing is getting aggressive as more competitors get more desperate. That's what happened to the category.

So, as we go forward, we've reset our expectations for natural, and we're finding other places in our portfolio to drive growth through other channels.

Derek Dley

Okay, that's helpful. And then on the pricing, have you seen any pricing pressure in direct-to-consumer in F/D/M? Or is it just mostly held to natural at this point?

Deanie Elsner

We're seeing the most aggressive pricing pressure in the natural channel. And that's primarily because it's a channel that has the most broadly developed portfolio offering to consumers. So, the independent natural channel was basically the first channel to really carry all the total portfolio across all these different companies. That's where we're seeing the most aggressive pricing.

Pricing, I would say, is mildly aggressive in other channels. In DTC, we have dialed up a very précised and targeted pricing offer. The brilliance of DTC is we can do that in a very specific and in a very targeted way.

So, we're not overexposing our portfolio to days and weeks on -- and at a certain price point, we can be in and out of price points within hours and that's exactly how we're playing the DTC channel.

So, one of the things we're most encouraged by in DTC is we've got our broadest portfolio offer and consumers are responding to that. We're able to price and target that portfolio to consumers very specifically by need states. And we're able to pulse our communication and news on an hourly basis with consumers. And so these new capabilities and this new platform gives us great flexibility to really play to win in DTC in a way that we've never done before. Does that answer your question?

Derek Dley

It really does. Yes, that's great. Just Russ, one for you. Looking at the balance sheet here at the end of the quarter, to me, it look strong $69 million plus your new ABL and obviously, some working capital. Are you guys confident or comfortable in terms of your balance sheet flexibility and your ability to complete your expansion plans not only this year but over the next two as you bring on the larger processing facility in Boulder?

Russ Hammer

Yes. Thanks Derek. We're very comfortable. Our capitalization strategy not only provides ample liquidity for our operational strategic investments this year and our other strategic investments, but it also -- coronavirus going on, who knows what's going to happen here in the environment, we have liquidity to withstand that. So, we feel very confident going forward.

Derek Dley

Okay. And then just the last one for me and I'll turn the line. Are you guys having any -- or can you comment, I guess, on any discussions with retailers that may lead you to believe they're getting closer to putting adjustables on the shelves even without incremental clarity from the FDA or is that really going to be the catalyst for the majority of your retail partners?

Deanie Elsner

For sure, especially as it pertains to F/D/M. The catalyst for their broad-based expansion across ingestibles will be FDA regulatory getting landed. But that said, Derek, it's a great question because, in fact, coming off of the most recent FDA comments, we have had some encouraging conversations with our customers.

Now, encouraging conversations versus commitments is two different things. But the door -- I think, they're watching the FDA as closely as we are and the door, I think, is opening to conversations about the future. That's encouraging.

Derek Dley

Great. Thank you very much.

Deanie Elsner

Thank you.


Your next question comes from the line of Michael Lavery from Piper Sandler. Your line is open.

Michael Lavery

Thank you. Good morning.

Deanie Elsner

Good morning.

Russ Hammer

Good morning Michael.

Michael Lavery

Can you give a sense -- you've mentioned the decline you expect in the first quarter with the 10% to 20% growth on the year. Can you just give us a sense of what your assumptions are that drive that and where the acceleration comes from?

Deanie Elsner

Absolutely. Probably three key places we would anticipate the growth to come this year. And the guidance that Russ has presented is what we believe we are confident we can deliver against.

The first is expanded distribution. We launched new products in 2019, about halfway through the year. On some of those products, it took about August before they got on the shelf. And so we're going to have a run rate, Michael, on those products, into 2020 that is incremental to our plan.

Second, we just launched new innovation across our topicals business, in addition to launching new formats that make our trial to entry more accessible. So, we're getting to more accessible price points for consumers to come in and try our products.

As a brand that has the highest loyalty in the category, we know that if we can bring consumers in to try our products, we will keep them. So, that's the first part of expanding our distribution.

Second, we've opened up the pet channel. The pet channel for us in 2019 was below $1 million. It's going to significantly exceed that in 2020 as the launch -- as we launch a national pet retailer distribution. That order literally is going out this week. And so that would be all incremental upside to what our plan was last year.

And then finally, then we can't underestimate this enough. DTC will continue to be invested behind and will continue to grow. Our new capabilities, our new technical platform, this new team that we have in-house for the first time ever and our focus on using our data to guide our communication and our deal structures is enabling us to target consumers in a very, very, very different way. And so those three things give us confidence that we can grow above what we did last year.

Now, is there more upside on top of this? I would hope so. But I don't think I would ever expected the COVID-19 virus to put us where we are today as a country. So, I don't know that we can lean any further into what Russ has provided in terms of guidance. But those are three areas that we feel the most comfortable about.

Michael Lavery

Now, that's helpful color. And just assuring to know that it's not dependent on an FDA green light that's necessarily this year. While some of the comments and color they've added has some encouraging notes to it, their timing is still totally unpredictable, and we certainly have really never seen them move quickly.

So, can you just touch on what some of your planning assumptions are on that? And how you think about that relative to your resources and capabilities and managing the cost structure?

Deanie Elsner

Yes. It's a good question. In the Q3 earnings call, we reset guidance and we literally unhinged our guidance from the FDA in terms of forward-looking. And that's primarily because, as a management team, we've made the decision to focus on the things we can control and not the things we can't control. We have dialed up a regulatory group inside our company and are actively talking to state and the federal government around regulating dietary supplements.

But for us, that remains an unknown and not something I'm willing to build into our forecast. And so as we're looking at the FDA, we're anticipating an environment where FDA regulatory is not set until mid-2021. We're literally building a planning stance that says, if that happens, how do we continue to grow, how do we continue to accelerate that growth, and how do we continue to control our costs so that we can stay at the front end of the CBD category and that's what we're doing.

Now, if the FDA lands a regulatory environment for dietary supplements in front of that 2021 midyear timing that we're expecting, that would be upside to our plan, but we can't plan on that.

Russ Hammer

Yes, Mike--

Michael Lavery

No, that's helpful. And yes, sorry, Russ, go ahead.

Russ Hammer

I just wanted to give you just a little more color there. So, the way I think about it, to put into perspective, the growth that we're looking at, the expanded distribution that Deanie mentioned, is in the topical space mostly in those F/D/M channels that you were talking about. It does not have, assuming FDA green lights, and then we get that volume to get the 10% to 20%, just to be clear.

Michael Lavery

Got you. Yes, that's helpful. And just one last one on the EBITDA progression that you touched on. The color that you gave there, does that include Abacus? Or is that separate? And maybe related, when you talk about accretion from Abacus, what are some of the drivers? What are some of the way -- what are some of your assumptions on what drives that?

Russ Hammer

Sure. We'll give -- so all of our guidance is just Charlotte's Web because we have not closed this deal, and that could be 60, 90 days out. So, all the guidance and discussion we're doing today is just Charlotte's Web ongoing business as normal.

And the second part of your question, Michael, on the synergies, so there's obviously public cost synergies. But as Deanie earlier in our prepared remarks, we see significant door expansion that is unique.

I think the numbers you mentioned is about 15,000 on the retail side, and we also see significant opportunity in the cross-selling between our two channels of both of our businesses. In addition to that, there are other operating leverages and cost advantages of our vertical supply chain.

So, for example, we've been a supplier to Abacus for a long time, a strategic partner. Our cost advantages in our vertical supply chain on our cost of CBD that I mentioned earlier are significantly advantaged to the industry, and so we will be leveraging their costs down as we fold them into our vertical supply chain. Hope that's helpful.

Michael Lavery

Yes, very helpful. Thank you very much.


Your next question comes from the line of Scott Fortune from ROTH Capital. Your line is open.

Scott Fortune

Good morning and thanks for the call. Congratulations on the acquisition.

Deanie Elsner

Thank you.

Scott Fortune

Real quick, just want to follow up on the $20 million guidance for first quarter. And where are you seeing -- I know you've mentioned a little bit of it. But where are you seeing it come from? And going forward, do we expect the DTC to remain elevated at 65% of revenues? So, the first quarter, it shows continuous kind of falloff from the natural channel. And then where does the F/D/M fit in there as far as new store growth going forward?

Deanie Elsner

Yes, it's a great question, Scott, because we got a lot of moving pieces. So, while it's true that the DTC channel will continue to grow and frankly outpace the growth of our F/D/M channel, it's -- we'll have some balancing out because we've introduced new products like gummies that, in Q4, represented 14% of our portfolio. And so there's going to be a little bit of massaging of the numbers.

But in general, we're looking at DTC to be above 2019 in terms of percentage of our total sales. In Q4, that number leaned closer -- picked up about 4 percentage points versus the prior three quarters, and we would expect that to carry forward in 2020. So, that's what's happening on the DTC front.

In terms of our portfolio, we're seeing our ingestibles in total come down a little bit, but our gummies, which is also an ingestible, increased. And so there's a little bit of share swapping between our segments. But in general, our total ingestibles will remain at about 90% of our portfolio, and that's pre-Abacus acquisition.

Scott Fortune

Okay. And then -- go ahead Russ.

Russ Hammer

Scott, I'm sorry. It's Russ. I just wanted to maybe give a little more clarity and color on the first quarter. As you mentioned, we only have a week left, so we know that pretty well. And the DTC does continue to be the significant portion of the business. The natural channel, we still see the weakness, as we mentioned earlier in our prepared remarks.

And then F/D/M is starting to expand as we pick up some more doors, but it's not on the -- it's on the topical side. And the pet channel is the other piece of the first quarter that Deanie just mentioned is shipping this week, as a matter of fact.

Scott Fortune

Okay. And then just to expand, in the past, you mentioned your data analytics that you're bringing on and thought you might have a little more color from the learnings here in the first quarter. And then kind of leveraging your data analytics versus the science side that you're getting more into CW Labs and now the Abacus acquisition and the science behind that, what is the data kind of tell you as we move forward in innovation and new products and looking at the different cannabinoids moving forward for your future products here?

Deanie Elsner

It's a great question, Scott, and I think this is what's so exciting about the construct of the Charlotte's Web company today. Our horticulture and genetics division is busy looking at genetics that overdevelop different cannabinoids like CBG, CBN, CBDA. And so we know we have access to different cannabinoids that operate a little differently in an extract, and that's encouraging.

We can translate that -- those cannabinoids into innovation, whether it's in injectables or in topicals. And so we feel like we've got an ingredient pipeline that's exclusive, that's affordable, that's advantaged and can be translated into unique and advantaged innovation and product.

Our focus on CW Labs is both on the clinical front and on the development front. And so a couple of the areas that we will be looking for expansion into is topical specifically and getting into some exciting new need states that we currently are not in, potentially getting into the sports landscape area as well as getting to some interesting new forms of CBD.

So, we think the combination of our genetics, with our innovation in-house, with our link to science and now our availability across every segment is this ample run room to launch new products and really create competitive advantage in the marketplace.

Russ Hammer

Yes. Scott, I'll just add one thing to what Deanie said. I think the new product innovation that she just alluded to, you'll see significant tie-in to the needs base in our new product innovation that's coming out. So, we'll give you more color on that in the coming quarters, but it's pretty exciting.

Scott Fortune

Okay. And last question for me regarding international potential expansion. And how does Abacus fit from an international standpoint or are you still just evaluating and looking at the timing on that?

Deanie Elsner

Not evaluating it. We've got full intention of becoming a formidable international brand, and so the intention to acquire Abacus Health Products supports that ambition to grow internationally. Today, Abacus already has distribution into a number of international markets. They've got it with their topical products.

Again, that's a great vessel for us to expand our portfolio and create the portfolio depth with the portfolio that we have. And so we see a number of growth avenues for us to get to a global leadership of the CBD category across all segments, across all countries where CBD is federally regulated.

Scott Fortune

Thanks. That's it for me.

Deanie Elsner

Thank you.


Your next question comes from the line of Pablo Zuanic from Cantor Fitzgerald. Your line is open.

Pablo Zuanic

Good morning everyone. Two housekeeping questions, first. In the press release, it says that human ingestibles were up 26% year-on-year, so I'm guessing consumables were down. Can you explain that difference there? What's the exact definition? What was up and what was down?

And also in terms of housekeeping, I think you gave the numbers, but if you can clarify them. In the fourth quarter in terms of B2B, obviously sales declined, but break that between what happened in F/D/M in terms of sales on specialty. And particularly related to F/D/M, were there any de-listings or SKUs card as a result of FDA comments? Thank you.

Deanie Elsner

Sure. And so Pablo, the first question you asked was, in Q4, our ingestibles -- our total ingestibles grew year-on-year, 26%. And so -- I'm sorry, that was -- it is 26%. That's correct. And so on the year, we saw really healthy growth in our ingestibles portfolio, and so we feel like ingestibles continues to be a growth area that will be unlocked as we gain distribution in F/D/M.

One of the biggest drivers in this category in terms of adoption for consumers is availability of distribution, and so our ingestibles will continue to grow behind our DTC business and outlets where we have it available today. We will continue to evolve that offer, so the format of our ingestibles by channel will be appropriate to bring consumers in at accessible price points.

We have a number of plans that we'll launch in April of this year as well as August of -- the back half of this year that get to being more specific about the formats we bring consumers in and the accessible price points by channel so that we match the consumer shopping in the channel.

In terms of -- Pablo, the second half of your question was pertaining to -- one more time, what was that?

Pablo Zuanic

Deanie, can I interrupt you before we go to -- it was about F/D/M. But if I may -- and maybe I should ask this off-line. But sales year-on-year were up 6% in the fourth quarter, right? And then you broke the three products for us, you said ingestibles were up 26%; topical was up 29%; and pet was up 33%. So, I'm just wondering what was down, right? And in the press release--

Deanie Elsner

Yes, yes. Pablo, I'm sorry. I apologize. I've given you the wrong numbers. I was looking at our contribution versus our sales growth, so let me try this one more time. Sincere apologies. In Q4, our total business versus Q3 was -- Russ, I'm telling you; I think I've confused the numbers here.

Pablo Zuanic

Well, maybe to make it easier, Deanie, if you -- from the press release, it seems that -- and I had not realized that there was a difference before. But from the press release, it sounds like human ingestibles and human consumables are different or it's the same thing? Because the numbers--

Deanie Elsner

No, it's the same thing. Pablo, it's just -- it semantics. It's the same thing. So, our change in our B2B business, in total business, you are right, was down in Q4 6%. Our ingestibles business for Q4, I've got, is up 26%. But Russ, I might have the wrong number in front of me.

Russ Hammer

Yes, I'm checking myself right now, sorry.

Pablo Zuanic

Yes. I mean we can -- yes. But I think there is something -- I guess I'll move on. In terms of -- I mean, the big picture is that, obviously, something was down, right, in terms of formats? But--

Deanie Elsner

Yes. So, in terms of formats, I can tell you where our numbers were down, and it's a little bit of a change, Pablo, in terms of our portfolio mix. So, our volumes were down. In terms of total contribution, our topicals-- is our total portfolio contribution was down slightly. That is because we introduced new pet products, and we introduced new gummies.

And so there was a mixing of our contribution between segments. But in terms of ingestibles versus non-ingestibles, our mix for the year was -- of ingestibles was at 87% of our portfolio in Q4. Our ingestibles was at 90%, and that remains relatively constant.

Pablo Zuanic

Okay. And then just in terms of channel, obviously you've talked -- I guess a very simple question. In the fourth quarter, B2B was down. But can you break that out between the natural specialty channel and the F/D/M channel? Maybe you gave the number already but quarter-on-quarter change for both of those channels.

And regarding F/D/M specifically, I can understand that maybe in the third quarter, you benefited from pipeline feel. And then in the fourth quarter, there's still a process of the trade adjusting those inventories. But was it something about non-repeat purchases because the consumer was scared away by the FDA comments or were de-listings from the retailers as a result of those comments? Just more color in terms of what happened in the fourth quarter in F/D/M and how that portends to this expectation for more of those to be added in 2020. Thanks.

Deanie Elsner

Yes. So, I'll take your second question first, and then I'll come back on the channel. So second question first. Is the consumer scared away given the F/D/M channels -- the FDA comments? The answer is no. The consumer is not spooked by the FDA comments. We're seeing our ingestibles business remains strong and our DTC specifically ingestible business remain very strong. So, it's not the consumer. It's the lack of available distribution and availability of that distribution.

In terms of the segments and where we saw the growth. Although our B2B channel in Q4 was down 6% that was primarily driven by -- in Q4 that was primarily driven by our natural channel that was down 11% and our F/D/M channel that was up 68%. And so that's the mix that created the B2B being down 6% on the quarter.

DTC, in that quarter, as you know, was up 14%. And so DTC continued to drive strong growth, but it's really the independent natural channel that's having the greatest impact in our Q4 numbers, and that's really due to an oversaturation and the FDA comments.

Now, did that result in customers discontinuing our business? Absolutely not. What we did see is customers pulling back on previously committed expansion, and that's, in large part, what impacted our businesses. We had anticipated commitments and sales and new shipments going out in Q4.

The FDA comments resulted in our retailers pulling back on those expansion plans. Those are the discussions that Derek asked me about, and those are discussions that are getting reestablished in the context of the new FDA communication.

Pablo Zuanic

Thank you. That's very helpful. And just one last one regarding Abacus, and of course, congratulations for the deal. I guess two questions. One, I'm surprised that you're guiding for the deal to close by the second quarter. I think there is some antitrust overlap, so it may take longer, but correct me if I'm wrong.

And then, more important than that, based on the market share numbers you gave yesterday for the F/D/M channel, and you differentiate it between food and drug, it sounds that they were a lot more successful than Charlotte's Web in entering the drug channel with their topical products.

Of course, that is something out of your plan. But I'm surprised about that given the cloud that Charlotte's Web is supposed to have. And if they were doing so well in the drug channel, I know it's a question more for them, why would they want to sell right now? Thanks.

Russ Hammer

Yes. Deanie, I'll take the first part of that question.

Deanie Elsner

Yes please.

Russ Hammer

Thank you. So, regarding the timing, you're right, Pablo. It's HSR that it could take on the longer end of that out to 90 days. We are working with our attorneys and the Canadian regulatory to see if we will have to have that. If we don't, the deal will move faster, and that sort of really be dependent on the regulatory review. Deanie?

Deanie Elsner

In terms of the drug channel, you're right; Abacus was slightly more developed in the drug channel. Let me give you some perspective, and I said this in my opening comments. Abacus today has over 50 unique SKUs. Charlotte's Web today, in topicals, has two. And so from a development standpoint, topicals in our portfolio only represents about 9% of our business, where, today, it is entirely the total Abacus business.

The other thing that's very attractive about Abacus Health Products is that they are going after FDA-approved pharmacological need states, and so they've been able to gain distribution in non-CBD categories going up against category adjacencies in store.

In a number of the stores where Abacus and Charlotte's Web occupied together, we're in different sections of the store. And so to Cory's original point in terms of the business opportunity here, it truly is a one plus one equals three.

Charlotte's Web brings the cannabinoid insight, the genetics and the cultivation, the vertically integrated supply chain, the low-cost producer and the brand and the knowledge of ingestibles, while Abacus brings forward the enormous development in topicals. And so as you bring these two companies together, you truly create an advantaged CBD player in the market space.

The reason why Abacus would be interesting to partner with us is all of the pieces I've talked to you about, cultivation, genetics, vertically integrated supply chain, and then frankly, the scientific and innovation background, in addition to the management team, operational excellence focus.

And so between our DTC, our vertically integrated supply chain, our innovation pipeline and our cultivation, we are providing access to parts of the portfolio that Abacus cannot get to today, which will greatly enhance and accelerate innovation opportunities for the both of us going forward.

Cory Pala

Pablo, this is Cory. If I can just add one thing on the market share, according to latest Nielsen data on the mass drug store channel, Charlotte's Web does have the number one share at 29%. And CBDMEDIC, which is the advocates product is -- has third place market share. So, combined, we're still -- but we do have some ingestibles in some states. So, it's not apples to apples there. But just to clarify that Charlotte's Web has the dominant share in food, drug, and mass.

Pablo Zuanic

Got it. Can I just squeeze in one last one? So, the Abacus deal -- the sponsorship deal with Robert Gronkowski and the beauty brand they were buying in terms of CBD that they announced in February, that's not affected by this transaction, right, by you buying Abacus, I suppose? Or that's--

Russ Hammer

That's correct. Part of the deal includes whatever legal obligations they have under those. So, for example, if someone had a change of control as a marketing representative for the company, that was conditional. So, we're all clear there.

Pablo Zuanic

All right. Thank you.


There are no further questions at this time. I turn the call back over to your presenters.

Cory Pala

Okay. Well, thank you, everyone, for participating in this extended call today. We will look forward to reporting on our Q1 results in mid-May. Thank you for attending.


This concludes today's conference call. You may now disconnect.

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