NewAge, Inc.
Q4 2015 Earnings Call Transcript

Published: 8 Apr 2016

[Operator:]

Good morning, and thank you for joining American Brewing Company, Inc.’s full year results ending December 31, 2015, investor conference call. On today’s call we will have Brent Willis, Chief Executive Officer of American Brewing Company, and Lanny Lang, Chief Financial Officer. On our call, Brent will provide some opening comments. Lanny will provide an overview of our 2015 results and then turn back to Brent who will discuss our strategic priorities, the major factors impacting our business, and our business model for 2016. We will then open the call to questions. We remind you that this conference call contains 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 new website, within the investor section at www.mybucha.com. I’d now like to turn the call over to Brent.

[Brent Willis:]

A quick thanks to everyone participating on the call, the first ever investor conference call for American Brewing. As previously announced, I was asked to join the Board of Directors of the company and to take on the Interim Chief Executive Officer role, and last week I decided to do so. Why? Well, I did my due diligence and had others do some for me too and the conclusion was this is a massive opportunity. I never do anything small, and we used to have a saying at AB InBev, that it is as much work to do something, as it is to do something huge - so you might as well go big. No one on the planet believed that we could take a small little Belgian brewer that no one had ever even heard of, and make it into the world’s largest but we did against some pretty strong competitors. This opportunity, with Bucha Live Kombucha, won’t go from $2 Billion to $100 Billion like InBev, but there is no question in my mind that this brand, in this category, in this window of opportunity, is an absolute winner. In anything I get involved in I look at three sources of risk – I keep it simple… and it has worked pretty well for me. I look at #1 demand risk, #2 technology risk, and #3 execution risk. First, from a demand risk standpoint, with Bucha, we have great category growth… and relatively weak competition. There is a great built-in source of revenue to draw from with one competitor that is $400 million in revenue. We just want our fair share of this – which frankly we define as all of it. Second risk, technology, here, we are the disruptive tech both vs. the rest of the traditional beverage industry with a healthy functional beverage, but also vs. all other kombucha’s in the sector, with our proprietary production process that is a real competitive advantage. The final risk to look at is execution risk. We define this as having the people, processes, systems, information, and culture that leads to superior performance. Here, in my assessment we have a long way to go. It is all about execution, but this is what we know how to do. It sounds mundane, but in the beverage business, this is what it is all about, and with búcha, it is not a question of if, it is just a question of when – how long, it will take to achieve our goals. Now before we get into how we will achieve success and some of our keys to it, including how we will build the búcha brand, I’d like to ask Lanny Lang, our acting Chief Financial Officer that comes via the Eventus Advisory Group, to review last year's financial history and full year results.

[Lanny Lang:]

Thanks Brent and welcome aboard. There is a lot here, and there has been a tremendous amount of clean up over the past year, and I have been working on the financials, supporting that transformation during that period. Let me now take you into the details of the 2015 financial results, but let me please caution you, that the results are 9 months under American Brewing leadership, plus 3 months under B&R, the previous owners. That combination for 2015 is being compared to 12 months of financials under B&R in the prior year. It is confusing, but it is an accounting requirement of the SEC to view the financial results in this way. With that being said, on a full year basis ending December 31, 2015, revenue achieved $2.42 million vs. $2.78 million in the prior 12-month period ending December 31, 2014, a decrease of 13.2%. More than 100% of this decrease was related to two factors. First, was the Company’s decision to exit one major account that was unprofitable at the time of the acquisition. Second, in the transition from the previous ownership, other accounts were also compromised. In combination, these two impacts totaled more than $950 thousand dollars. So on an apples to apples basis, although it is a non-GAAP measure, sales would have been up more than 30% excluding those impacts, and we expect to recover those accounts going forward. Form a gross profit standpoint, cost of goods sold were in line with last year, up one half of one percent, with the exception of depreciation and amortization of customer relationships. Including those impacts, COGS increased 5% vs. prior year. Overall gross margin for the year was 17.1% vs. 31.5% in the prior year. This impact is due to a change in accounting treatment for freight, labor, and promotional expenses vs. how the previous ownership accounted for these line items. Independent of accounting treatment however, the gross margin for either 2014 or 2015, represents a “significant opportunity for improvement.” That’s corporate code for “it’s terrible”, historically, but a tremendous opportunity going forward at the same time. A full cost accounting review by every single input into COGS and shipping and supply chain is underway, in addition to a review of every supply arrangement and cost input into the company’s products. Moving on to operating expenses, they were down 24% vs. prior year. Great result, right? Wrong. Because G&A was actually up over 103%, or more than $630 thousand…and what got cut was sales and marketing. That hurts the brand and the long-term intangible franchise value. In fairness, there was an ownership transition integration, and other one-time expenses, and $320 thousand of the G&A was non cash stemming from accounting for equity awards. Notwithstanding, the OpEx opportunity is the next area of overhaul that we will be addressing. At the bottom line, in Operating income, the Company lost $972.7 thousand on a full year basis vs. a loss of $891.4 thousand in the prior year, or an increase of 9.1%. From a balance sheet standpoint, assets are essentially in line with liabilities, with current liabilities down a significant 52% vs. prior year, or a reduction of more than $619 thousand. In summary, looking at the financial performance for 2015 it is difficult to draw definitive conclusions given

[Brent Willis:]

Thanks Lanny. Here’s how I read the 10K ...Underlying positive momentum with customers and top line growth – a real determinant of health, and it looks ok. But we were only in roughly 1,500 stores last year. Driving this is beverage industry 101 basics, and has the highest ROI of any activity. The next germane point from the 10k, the gross margin and COGS, although it is essentially the same as most of our competitors, is in a word, abysmal. We will fix it, and it will take some heavy lifting – but we will get these things done. I do give tremendous credit to the leadership over the past year in integrating the business, cleaning it up, getting rid of any lingering issues, and paying down the debt – on which they did a great job. Because there is now such a solid foundation, it provides a springboard to accelerate the Bucha live kombucha brand, and we are experienced hands at doing this, it is not really that hard, but does take focus and discipline and unrelenting tenacity – fortunately all tenets of our approach to driving businesses. So let’s talk about our approach, what we're going to do, and from that - how you can create a financial model on which to determine earnings expectations going forward for the enterprise. First off, what are we working with? What do we have to build on? Well, I am happy to report that we have three sources of competitive advantage