NewAge, Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Greetings, and welcome to the New Age Beverages Corporation Second Quarter Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Cody Slach from Liolios.

[Cody Slach:]

Good morning…and thank you for joining New Age Beverages Corporation’s second quarter 2018 investor conference call. I am Cody Slach with Liolios Group, the investor relations counsel for New Age. I’d like to welcome you all to the call today and to thank you all for joining. On today’s call we will have Brent Willis, Chief Executive Officer of New Age Beverages and Chuck Ence, Chief Financial and Administrative Officer. I’d like to remind everyone that this conference call may contain certain forward-looking statements reflecting management’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the Company. Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties. The transcript of today’s conference call will be available on the Company's website, within the investor section at www.newagebev.com. I’d now like to turn the call over to Chuck.

[Chuck Ence:]

For the three months ending June 30, 2018, the Company delivered consolidated gross revenue of $15.2 million – an increase of 19% vs. the prior quarter but down 2% vs. prior year. Subtracting discounts and billbacks, at the net revenue level, the Company achieved $13.4 million vs. $15.1 million in the prior year. Sales were negatively impacted by approximately $2.7 to $3.2 million due to working capital constraints, which severely constricted inventory levels and the Company’s ability to meet the demands of major distributors and retailers. Without the inventory impact, revenue would have been up approximately 13% vs. prior year. Our strongest contributors to the quarter were the DSD Division, that continued to grow and add new leading brands to its roster. Our International Division, that is becoming a much more significant contributor overall, was up more than 300% in the quarter…and in both international and the US Division, our Búcha live KomBúcha brand continues to do extremely well. Not only have we transformed this brand from a cost structure standpoint going from a 16% gross margin to 47%, while reducing net selling price, but the brand is leading the KomBúcha category growth with over 250% growth vs. a segment average of 35%. The International Division, the Ecommerce Division, and the Foodservice Division were all up triple digits in the quarter vs. prior year, as they continue to expand despite the working capital limitations and lead all growth for the Company. In gross profit, the firm delivered $2.2 million for the quarter vs. $3.8 million in the prior year. Gross profit as a percent of sales, excluding shipping, was 16% versus 26% in the prior year and quarter. Similarly to the 3 point impact in Q1 from incremental production costs and transfer freight, we were impacted 10 points at the gross profit level due to the inventory impact in Q2, but we believe this to be short term in nature, and nothing fundamental has changed in our mix or pricing. Total operating expenses for Q2 were $5.0 million vs. $3.7 million in the prior year. This increase was driven by a number of non-cash items including increased amortization on the almost $20 million dollars of intangible assets added to the balance sheet, stock option and stock compensation expense associated with the acquisitions, and rent expense following our sale lease back executed last year. Versus our internal budget, our OPEX was actually right in line, but the impact to top line revenue from the working cap deficit, hurt us both in percent of revenue, and overall fixed expense absorption. Adjusted EBITDA for the quarter ending June 30, 2018 was minus $1.6 million, stemming from the inventory shortfall to fulfill demand. Most notably in the quarter on the financial side, is the new Asset Based Loan that was just completed. We are very happy to have completed this and it took an inordinate amount of time. The new line of credit for up to $12 million comes at the right time. I’d like to quickly re-review and explain why it took the time it did. Given our growth, we knew we had a working capital deficit in the beginning of the year. So, we went to put in place a new asset based loan. We started in January with PNC, and had their commitment letter to have it place by the end of January. With all of the exhaustive analyses that these banks due, it didn't happen on their committed timetable, which really hurt us, but in the end of March they approved it. Then - they re-calculate their borrowing base from available inventory and receivables, add in their hold back, and don't close, because with the hold back, there just isn’t enough scale in their view to eliminate the other debt we had at the time, close the loan, and provide sufficient working capital for the business for inventory. We then work with them for another two months to overcome their issues, gain their commitment another time, only to be back in the same position we were when we started. We had no idea that we needed a fallback or another option at the time, and no reason to think we needed one. Nonetheless, we then explored one other bank, and two traditional ABL groups, as we communicated in last quarters call…ultimately culminating in the transaction we consummated with Siena Lending Group last Friday. As communicated, we believe Siena is an outstanding partner, and the terms of the ABL are excellent for New Age. - 3 year term - Total loan amount up to 12 million dollars - Availability on the line based on 85% of receivables and 60% of inventory - No covenants That's it, and we are glad it is behind us so we can move on to refocusing on the business. In summary for the quarter, 95% of our shortfall to plan was due to lack of inventory from working capital constraints. Despite that we still delivered $15.2 million in gross revenue for the quarter and had some very strong operating performances from our DSD, E-Commerce, International and Foodservice Divisons. The brands, especially our newest ones, Coco-libre Sparkling, Marley Mate, and Búcha Live KomBúcha are selling extremely well and growing – and the impact of Marley Cold Brew that was just shipped in the end of the quarter is expected to be extremely positive also. And with that, I’d like to pass the call over to Brent.

[Brent Willis:]

Thank you Chuck. I appreciate all the hard work and diligence to close the ABL, and I am very glad it is behind us. I think we have talked enough about the line of credit, over the past quarter and virtually every day with investors over the past 4 months. We get it, but we have always maintained that it was a short term issue, and had very little to do with our investment proposition for the Company and even less to do with the brands and our strategies. Now that it is behind us, we can renew our focus on executing that strategy, which we believe is materializing extremely well. Mind you, this company is only two years old. In context, first we built the foundation of the firm. Then we established the organizational capabilities and processes, and uplisted onto the NASDAQ 18 months ago, to establish the right financial foundation and eliminate the debt associated with creating our foundation. Then, in the back half of 17 we integrated the business, took out $14 million in cost synergies, and began to re-architect the brands. We finished that in Q1 this year, and have been launching those new brands, that by the way have virtually double the gross margin of what we started with, since that time. We gained impressive new distribution in Q1 and especially in Q2 as Mike Cunningham, our head of our US Division described on the call last quarter, adding in 100,000 new points of distribution in Q2 alone. And Josh Hillegass, continued to drive our DSD Division throughout this evolution, unfettered, continuing to deliver its 9th year of consecutive growth. We have launched nationally our shelf stable and industry leading Búcha Live KomBúcha, Marley Mate in Q1, Coco-Libre Sparkling in the end of Q1, Coco-Libre overall in the beginning of Q2 in new PVC packaging away from the tetra pack like everyone else in the category, with a new, 100% sourced at origin from young coastal coconuts products, and just launched Marley Cold Brew in the end of Q2. That is a lot. It is a lot, but we are working at this pace, because the opportunity for healthy beverages is now, and we need to take advantage of this window while it is open. And in this upcoming quarter, we will have launched the last of our rearchitected brands – Xing, with the launch of Xing Craft. On the brands, the feedback from distributors, retailers, and most importantly consumers, has been outstanding. Outstanding. That’s the brands. Now, the brands in distribution. Just to give you some in-depth insight and impact of our new distribution. It is real, it is significant, and it is simple math of what it adds incrementally to our business. Conservatively $5.8 million from the distribution gained in Q1 and $21 million from what we gained in Q2. That’s the math, not based on forward projections or growth, based on historical sales per point of distribution actuals. What have we gained to make it even more tangible to understand? Just in the past six months we have penetrated 40 of the top 50 retailers in North America. 40 of the top 50, and it is just a starting point including

[Operator:]

[Operator Instructions]. Our first question comes from the line of John Aaroe from Aaroe & Associates. John Aaroe Now that you finally have sufficient capital to get scale, I take it that the company's focus is solely on organic growth of what you have and that no new acquisitions are on the mix and basically off the table. Am I right? Or are you still looking at other things? Brent Willis It's a great question, John. Our focus is organic growth, and I want to reiterate for the - another time that this is not an acquisition rollout. We had to build our foundation. We had to build the entry point into the - of the brands in the growth categories that we wanted to compete, but we don't believe we need new brands. We're actually focusing primarily on driving the organic growth of innovation within our four core brands. So that's really the focus of the company, drive superior, sustainable organic growth. And we believe we have the brands and distribution, and now the working capital to be able to effectuate that. But in this industry, if you look at all of the beverage companies under $1 billion in revenue, and between $1 billion and $100 million, there are about 30 of those companies, and then there's about 5,000 under $10 million. Very few of those companies frankly are profitable, but the benefits in this industry, when you really get into this P&L of scale, are significant, and that's what we've been building, and we are right at that precipice. And in terms of our cash flow plans going forward, now that we have the working capital, we can fulfill demand. We believe we will get that scale, and as long as we continue to stay disciplined at the OpEx line, deliver positive cash flow, which is our plan, and positive EBITDA, which is our plan through the rest of the year. As it relates to acquisitions, look, the other end of - yes, we drove superior organic growth, but we also did a significant amount of acquisitions only as an accelerant to get us done - to get us to where we wanted to get. So I think you have to always look at both, and we'll always look at both. This company gets presented at least one acquisition opportunity per week, and we've looked at more than 50 in the past year, and we've said no to all of those because we've been integrating what we had. And we do believe that there are some very significant, either alliance or distribution alliance or potential partnership or transformative acquisition opportunities out there that we are looking at aggressively and carefully. But right now, our focus is on execution of the business. The ink is barely dry on this working capital facility, and we have so much in front of us just getting these brands and distribution and driving trial awareness and conversion at the point of sale with a range of activities that we have coming up in third quarter, both on the social, digital side, on the consumer marketing front, but also in-store with some significant merchandising, racks, displays and shippers going in many accounts across the country. John Aaroe Okay. And at the first part of the conference call, I believe I heard Chuck said that there are no covenants attached to this line of credit. I haven't seen an 8-K out yet describing exactly the terms. Is he referring to the fact that there is absolutely no stock attached with this line of credit? And that it's simply just based upon receivables, inventory and a certain interest rate? Brent Willis Chuck, you want to address it? Chuck Ence All right. I can do it in short order. That is correct. And there will be an 8-K filed within the next day or two on that ABL.

[Operator:]

Our next question comes from the line of Kevin Barrett [ph] from BOE. Unidentified Analyst Brent, I got a handful of questions here. I'll try to fire off at you and see if you can knock them out. First thing that jumps out, I think, to me is the receivables line. So and my question regarding that is, is the receivables that have kind of ballooned a little bit here, a, can they be collected faster? And is it with one particular customer, in particular, that is the root of that issue? And then also going forward for the rest of the year, are you willing to throw out some sort of projections or expectation that we can look at as I think the lower end of that $90 million range? I think we all agree, it's probably a little ambitious, but do you have a number out there for the last six months of the year? Brent Willis Great questions, Kevin. I'll describe - or ask Chuck to describe on the receivables and basically our cash turns, both in - in both these different divisions and the kinds of things that we've been doing recently to collect those receivables faster from some of the biggest customers, which, believe it or not, are some of the worst payers. But, Chuck, can you describe the receivables, both for the DSD and the brands division? Chuck Ence Sure. Yes, on the DSD division, our receivables, day sales outstanding turned just about 12x a month, maybe 11x a month. So we have - our receivables get collected within 30 to 40 days. And all of our terms, all of our customers that are on terms are 30-day terms, and that's in the DSD division. Within the brands division, as Brent pointed out, there are a couple of $1 billion customers that we have in there that just perpetually, even though they're on 30-day terms, they pay in more like 45-day terms, and we - I mean, we make our best efforts to collect those in the 30-day time period, but it's just they're perpetual at slow paying. And so our terms on the brands division are more like 45 to 50 days is how we collect our receivables. Our 60-, 90-day balances are small and in pretty good position, so we do collect the monies. But it's just - it is quite frankly not as fast as we would want it not within our terms but when you're dealing with some of these $1 billion customers and their portals, and their - they don't let you talk to anybody. It's all through portals and e-mails, and we do collect in about 45 days rather than 30, so that's on the brands division. The inventory, just a little bit [indiscernible] it kind of plays into the whole fixture, very similar with our inventory turns on both DSD and brands division. Our inventory turns on the DSD Division are about 30 days and our inventory turns on the brands division - because it is more logistically difficult to have 7-or-so co packers throughout the country, customers throughout the country and internationally. So logistically, it's harder to manage, and it does - we can turn our inventory there in more like 45 to 50 days. Brent Willis And if I look at the receivables and the inventory, we're continually putting in, Kevin, new processes for better inventory management, and we simply do, ABC analysis to look at the bottom 20% of those SKUs in terms of movement and total inventory weeks on hand, and we're continually evolving the portfolio to basically call the weakest performers, and frankly, which are all old brands that we've had in the system and call those and focus and spend the money to keep in stock some of those best and fastest moving brands. So from the inventory management standpoint, we continue to do new things from a process standpoint and also from a receivables collection standpoint. So we've got good relationships on the sale side, and we're having to leverage those to get these guys to pay because we're a smaller company, we're not a $1 billion plus company like some of these are $50 billion plus companies, and when they slow pay us by 30 or 45 or 60 days, we need that cash, and frankly, the banks and the asset-based lenders don't really understand those reality with some of those companies. So we are changing some of those processes and strengthening those relationships directly with some of those major retailers such that we, a, increase our borrowing base on inventory receivables based on better collections, and so we're continuing to do that. And continuing to evolve the people in that area to strengthen and put our best foot forward. On the guidance and the last part of your question, I think, honestly, given we're just through the ABL, and we're 14 days into Q3, I think it would be a little bit irresponsible to renew guidance at this point. What I can tell you is, look, we expect to be cash flow positive in the back part of the year. We expect to be EBITDA positive in the back part of the year, and we expect our brands to deliver more double-digit growth in the back part of the year. That puts us at a very attractive run rate exiting the year, and so - such that you kind of need just to say, all right, well, the first six months of the year, we had this roadblocks and obstacles, and you just kind of need to transfer the path and the growth trajectory to the right-hand side of the ledger and the business plan by 4 or 5 months. And so the business proposition is still intact. The growth is still intact. The revenue targets are still intact. We're just a little bit delayed in achieving those. So that's why we remain very optimistic and excited on the business because even though we had the short-term impact, we've always said we believe that it was a short-term impact and long term doesn't change the proposition. We just achieved some of those targets, 3, 4, 5 or six months after we had initially envisioned. Unidentified Analyst Got you. Two more for you, Brent, and I'll let you go. We're used to seeing PRs on the brand names that we all know that the company has, but are you seeing a lot of opportunities in kind of the private-label arena with any products? And then also has any major accounts been lost or terminated due to the capital situation over the last six months? Brent Willis Two very good questions. And the reality with retailers is, look, all the brick-and-mortar retailers are struggling, because 80% of their business is declining, carbonated soft drinks that used to sell a lot have now declining. Beer, now declining. Tobacco, for those that still sell it, declining, but it's still a big product in convenience, but declining, and processed food. Those categories make up 80% of round numbers of the revenue and is traditional brick-and-mortar retailers in slightly different mix depending on the channel. But when 80% of your business is declining in that industry and you're getting channel disintermediation from like the - from E-Commerce and the Amazons of the world, so what do you do in that context? Number one, you reduce costs as much as you can. Number two, you consolidate to further reduce costs and gain more scale. Number three, you diversify your portfolio as much as possible. And that's really good news for us as they transition away from carbonated soft drinks and having 40% on average of their shelf sets in carbonated soft drinks, even though it only represents 28% of volume now, so they're diversifying. They are increasing their costs on different suppliers and transferring those costs in terms of markup and discounts and all those kinds of things. And the other thing that they're doing is significantly increasing their private label. And in the United States, private label as a percent of total revenue is significantly below that of Canada, Australia and Europe. And so they have a room to go in terms of increasing their private label, on which they have a higher margin. So frankly, a number of retailers have come to us and asked us if we would do a private label for them. And we consider it very carefully and on the condition they're willing to give us a strategic benefit, i.e., distribution on our core brands or greater influencing the overall category, we really consider it. And so basically, you have to go where the puck is going, and if retail isn't going to go to private label and they're asking you to do it, you basically engage in that dialogue and there are at least 3 or 4 major retailers all with north of 3,000 stores that have all approached us about doing private label on our Kombucha product because they believe our Búcha is the reference for the category on our - some of our Marley products, on our Aspen Pure Probiotic water, and importantly, surprisingly even on our Marley new Mate product. So some of those retailers we've already formed those agreements with but many of those won't happen until December of this year and the beginning of next year. And I'm not going to communicate who those retailers are because I will like to communicate it after I see the purchase orders, because sometimes ultimately, they change their mind. So when I see the POs, we'll communicate them, but we have a lot of visibility based on those informal commitments, the - and the work that we're already doing with them in terms of preparing for production and launch on that private label front. But again, we only do it in the context of if there is a strategic benefit for us. That was, sorry, a long answer to that one question, Kevin. What was that last one, I'm sorry? Maybe I got it. Unidentified Analyst Are there any accounts with the issues over the last six months with the capital? I mean, I'm sure there was a few accounts where there are some frustrations but any losses of any major accounts? Brent Willis Not to my knowledge. We haven't lost any accounts. And matter of fact, they've worked with us and that forcing of having to have those tough discussions with both Josh Hillegass, Craig Thibodeau and Mike Cunningham who run those three divisions. They've just done a superb job of leading through difficult challenges. So in some cases, they've strengthened and there's a major natural store with the national footprint that recently went through an acquisition that is just now doubling down on our Coco-Libre 1 liter. And I think our Coco-Libre 1 liter is still the leader in the multi-serve segment. So them doubling down with us on our new packaging on Coco-Libre is really great. So I'm not aware we've lost anything, and matter of fact, even though it's been tough, and we pissed them off, we - we're still hanging in there and all of the growth prospects, especially with the new distribution on the new brands are still there.

[Operator:]

Our next question comes from the line of Anthony Vendetti from Maxim Group. Anthony Vendetti Some of my questions have been answered, but just, Brent, you've talked about gaining incremental 85,000 points of distribution. I'm just curious if the working capital - I know you kind of addressed it a little bit here, you're not aware of any losses, but were you able to deliver to all 85,000 points? Or did some of those not occur but you expect them to come back online here in the third quarter? Brent Willis Yes, it's a great question, Anthony. Many, we were, but it depends. So we've kind of slow played everybody and trickled the product out, some SKUs not all the SKUs, and it doesn't just hurt us at the revenue level, but it hurt us at the revenue level and not fulfilling those existing and that new distribution to the tune of $2.7 million on the low to $3.1 million or $3.2 million on the high. So that's what we can calculate in terms of the loss sales that we didn't deliver. So that's one kind of data point. But we kind of trickled product out, but it costs so much money when you're incurring all this transfer freight and incremental production and cost of goods sold, cost to get these things out there. And when you're having a shift with Unified that wants to do $12 million with us over the next 12 months from $1 million last year, they charge you for those miss shifts and those kinds of things. So we have had our fair share of that. And the total amount that we have not been able to shift in Q2 was that number of $2.7 million to $3.1 million. But it's still there. We still have the slots, and we trickle that inventory. In some cases, we put out 1 or two SKUs, and we just expanded phasings on those two SKUs instead of the four that we had sold in to maintain the slots. So now as we have the working capital issues solved, we'll be able to fulfill that demand, and the other good thing too is we deferred a lot of the merchandising and the rack, shippers and those kinds of things and a lot of those are going out as a retailer on the East Coast where 600 of these racks are going out. So 600 of these racks, and for that retailer, you'll get about a 450% lift versus your normal volume there, and the trial and awareness and considerations that we need on the brands there. So we're excited about the merchandising that we have coming up in Q3 and our ability to fulfill the demand, and we may still get more distribution, but right now, we're not kind of selling in any more distribution until we kind of fulfill what we have. Anthony Vendetti Makes sense. And then just lastly, as best you can articulate it, the financing didn't close until August, do you see any lingering impact in here in the third quarter? Or do you think with the financing now in place, whatever impact they had here in the third quarter is mitigated? Brent Willis I'm not sure is the honest answer, Anthony, and that's why I've said, look, let's be really conservative. If things go great, great. But let's plan for the worst, and that planning for the worst is, look, let's just get double-digit growth in our brands in the back half of the year. Let's be cash flow positive, let's be EBITDA positive. And let's build the momentum in these brands and the awareness and consideration and trial strategically in those brands to be running and have a very good Q2 and - oh sorry, Q3 and Q4. Q4 is typically a very seasonal quarter for us, but because we've gained this new distribution, it will be an anomalous year and that we won't have that level of lower sales in Q4 because of the incremental distribution. So I think it's just a bit it would be irresponsible at this point given what we've gone through over the past six months to kind of reset guidance at this point, but that's why I said, look, I think our worst case is we'll get double-digit growth in the brands, we'll be cash flow positive, and then we'll exit the year running. So it kind of just pushes out on achieving our targets until first part in the beginning of 2019.

[Operator:]

Our last question comes from the line of Harold Weber from Aegis Capital. Harold Weber Glad to hear this has passed. Can you give me a little color on how having brand rollout in one side of Northeast and in New York, New Jersey, Connecticut area? Brent Willis Yes. So in - where a lot of our investors and the analysts and everybody are in, you are, Harold, the northeast, I would say, is historically the weakest part of the distribution for the company and still is today. So we have Coco-Libre in the city, and that's - and some Marley here and there in the city, but across New York, New Jersey, Connecticut and that tristate area. I would say it's our weakest position in the country by choice because when you're - there is a direct correlation, about a 92% R-square from presence to preference. Presence is another word for distribution and distribution penetration. And preference is another word for brand choice or brand loyalty. So we know that those are two of the key metrics for success, but if you can't get enough presence across all of the retailers in a market area such that people see it and all of the retailers in an area, it doesn't really help you. So for that reason, we have strategically decided not to put big investments in the Northeast - sorry, in the tristate area, new York, New Jersey, Connecticut yet. Boston is a different story because if you get a Market Basket, Hannaford, [indiscernible] and a range of other convenience and grocery retailers in that area, we've been able to get distribution from Ahold and all of those guys up there, and so we've been able to get that presence on some of our core brands. So Boston is a market area that we've chosen to do that, and we're doing more social and digital and consumer framing in that market area, but ultimately, we will get to the tristate area, but you got to have the right distribution and distribution partners and then it's got to be strategic for you because you don't - you just want to smatter out of few products here and there. If you're going to do it, you got to do it right, and you got to get the full presence. Harold Weber Certainly, good. Just as I see a lot of specialty type stores selling these type of products in the city as well as in the surrounding suburb is a great deal of affluence in these areas and people are buying this kind of stuff, and I'm sure if they saw your stuff, they'd be buying. So 7-Eleven there are a lot of 7-Elevens around the suburbs and around the city. You can get a lot of presence maybe that helps so already you've been there, I don't know... Brent Willis Yes. Harold Weber But I'm just saying. There's a lot of affluence and people are spending big money on this stuff, and I think we could easily pick up a whole lot of that. Brent Willis Well, we agree. And just like that shareholder Roy Milan, did in D.C., Harold, if you want to help us with some distribution there, I'm kidding and being facetious, but we're always talking to major distributors there to have a real presence. But - especially with the working capital limitations we had, we focused on maintaining and driving what we had. But I tell you honestly, it is in the priority list to penetrate the metro area in a very significant way. We just haven't been able to do it yet. But we completely agree with your assessment to the opportunity.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to management for closing remarks.

[Brent Willis:]

Thanks, everybody. We'll stop it there. As always, we're available, we're driving, we're not going to take no for an answer. We're really happy the working capital thing is behind us. We're really pleased with the quality of the partner and the quality of the financial terms that we've been able to achieve. And we're looking forward to driving to the next level, and we're really confident in our potential for success. So thank you very much for the call, and look forward to following up with you guys later. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.