NewAge, Inc.
Q2 2017 Earnings Call Transcript

Published: 18 Aug 2017

[Shaun Persaud:]

Good morning and thank you for joining New Age Beverage Corporation’s second quarter 2017 results investor conference call for the period ending June 30, 2017. I am Shaun Persaud with Amato and Partners, the investor relation’s 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. On our call, Brent will provide some opening comments. Chuck will provide an overview of our second quarter 2017 results and then turn it back to Brent, who will discuss operating performance year to date, and progress on New Age’s emerging competitive advantages. 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 website, within the investor section at www.newagebev.us I’d now like to turn the call over to Brent.

[Brent Willis:]

Improved gross margins, 28% increase in investment behind brands, yet still lowering operating expenses as a percent of sales overall, positive EBITDA of more than two million, and revenue growth of over 1,800 percent. This is what we are supposed to do, what we said we would do, and what we have done. Not perfect by any means, but real quality of results that would compare favorably vs. any company in the world. When we started on this endeavor, a full 15 months ago, seems like a long time ago because we have been working 24/7, the company was nascent at $2.3 million in annual revenue and honestly, had no execution capabilities whatsoever. What we did have was a vision, a plan, and against that we have delivered. Now 15 months later, we have a business platform with all the national distribution network, the national sales force, a national manufacturing footprint, and the supply chain, marketing, R&D, and finance and systems capabilities to provide the foundation for New Age to accomplish its objectives and build a real quality and scale company. On a very personal basis, I have learned….that with smaller high growth companies, financial flexibility and strength is fundamental. Without it, you have a very high risk, almost uninvestable asset. At New Age, we really got it right, with a tremendous set of quality long term institutional investors, and I know with certainty, more that would like to come in. We have a balance sheet that for small cap companies – just does not get any better with over 18 million in current assets, and $7.6 million in current liabilities and total assets of $69 million vs. total liabilities of thirteen. We have 34 million shares outstanding with only one class of common stock. In the quarter, we had actually eliminated all the debt down to zero, but then assumed a note of $1.5 million as part of the Coco-Libre acquisition in the quarter, but still overall De Minimis. We generate cash, we have positive EBITDA, are funding our own growth, and have a healthy P&L, that is getting better with improved gross margins in the quarter, reduced costs of goods sold, and reduced operating expenses as a percent of sales. One of the targets for the Company and one of my personal targets to the Board for 2017 is EBITDA margin improvement, so we are working hard to improve it. We have De Minimis debt, a line of credit with US Bank based on the $18 million of inventory and receivables that is at roughly Libor + 2 – so a pretty reasonable surrogate of financial flexibility. In summary – to go with an increasingly strong business platform, we have an increasingly strong financial platform – and investors are increasingly seeing the evidence of that in current operating performance – that frankly wasn't there historically looking backwards as we were building our platforms to this point. If you have the business platform and the financial platform and the brands in the growth categories and a clear strategy – what else do you need right? Well the answer is team to execute both strategically and operationally. At the strategic level – the capabilities and backgrounds of our Board are above contestation. At the operational level – on the senior management team, there is an average of 20 years of successful experience in the beverage industry and almost 150 years collectively. Clearly, success being about the collective, the galvanizing of that team on a single-minded mission, focused and motivated which we are. Clearly not about me, or one person individually. I play my position for sure, but I will tell you that I am honored to be part of this team, and no one can logically argue with the team’s success over the past 15 months. After Chuck takes you through the details of the financials, I will discuss progress against our strategic priorities, and our 3 emerging competitive advantages. Before I pass it over to Chuck, to be consistent with what we have done on previous investor calls, let’s list our top 10 operational results for the Quarter. 1) We closed the Marley beverage company acquisition and have now fully integrated it – and converted it to profitability vs. a loss-making operation on a stand-alone basis before we acquired it. Because of the acquisition ...organizationally, we gained a new corporate controller, new head of manufacturing, new head of sales, a national sales force, and other A players, and strategically gained penetration into RTD Coffee and a brand with global awareness. 2) We fully integrated the Coo-Libre acquisition and converted it to profitability vs. a loss-making operation on a stand-alone basis before we acquired it. The coconut water category is the 2nd fastest growing category in the beverage industry and we now have a competitive positioning in it with one of the top 5 brands. 3) We acquired and closed the Premier Micronutrient acquisition. This is a game changer for New Age, because we are one of the only company’s in the beverage industry with intellectual property and patents. We have heart health, brain health, diabetes treatment, and environmental and radiation protection patents and products that are very topical right now with all the current political rhetoric. 4) We expanded internationally to close in international markets. In Canada, we expanded key brands in the portfolio to the 3 of the top retailers in Canada, Loblaw’s, Sobeys and 7-11. Just as an example, sales in just one of those three accounts, on just one of the brands, Búcha Live Kombucha are averaging over $1.1 million on an annual basis. 5) We expanded our new shelf stable Búcha Live Kombucha brand to major retailers in the United States. HEB, Ahold, Kroger, and others – these are some of the biggest and best retailers in the country – and form the basis for further expansion and distribution so we can then invest in marketing to transition from awareness of a brand …to consideration set, to trial, and conversion – the next phases of brand building. 6) Because of some of our expanded distribution on components of our portfolio, we are able to invest in our brands. As such, we increased Marketing and Social Media investment by 28% versus the previous quarter, and did so while reduced overall operating expenses by 2 points. For me, that is exactly the direction on shifting investment and expense that the Company needs to pursue. 7) On the brand front also, XingTea, a key piece of our core portfolio expanded with 7-Eleven in the United States, initially in the heartland Division across around 1,500 stores – an important inflection point as retailers transition to higher margin better for you products versus other pre-priced, low margin, high fructose laced competitors. 8) Operationally, we also looked and just said no – to five other acquisitions. Why is this important as one of our top 10. First, we are not an acquisition roll-up. It is not our strategy at all. Anyone that espouses that we are is a misguided, agendad, superficialist. We needed a platform, we needed scale, we had and have the expertise on how to derive value from acquisitions. One should realize, that acquisitions and acquisition integration is hard. Deriving full value does not happen in one month or three months or sometimes a year. On the acquisitions we have made, yes – we have done the first things on costs synergies and revenue synergies. Now we are on to the next things, the harder things, new sourcing, warehousing integration, value engineering, scale leverage and others on the cost side – and brand architecture, new products and brand building. Let’s face it, and be negative or caustic for a moment. None of our brands are leaders in their respective segments. None of them. If they were we would have paid 10 times revenue like others are, not less than 1 times revenue. Seriously. All our brands compete against deep pocketed, multibillion dollar competitors, with more resources, more capabilities, more distribution, more virtually everything. Except for more speed, more innovation, more motivation and more insight into consumers. Retailers are gravitating to smaller companies and consumers are brexiting traditional major consumer goods companies. New Age is being recognized in the industry, across all walks for not compromising. For being fast and right. For being the only, the only, pure play, healthy functional beverage company, with scale, with credibility, with resources, with an ability to invest, with profit, funding its own growth, with a track record, with trusted people and good relationships, with execution capabilities, with branding and marketing and innovation expertise, with a full portfolio all in the growth segments of the industry. Retialers and distributors don't want to deal with the 3,000 nascent beverage companies in the United States. They don't have the time, and they don’t have the risk tolerance given the changing dynamics in traditional grocery retail. So – we believe New Age is in an enviable and unique position with a great opportunity. We will not buy our way to success, we will earn our way to success, and the organic, new product, and brand building activities behind our original and newly acquired brand platforms coming out now and throughout the rest of the year is in a word – powerful. That's how you derive value from acquisitions. 9) In one respect, I feel a little embarrassed about continuing to beat our chests on the good things happening in the company, - I think it is good to be humble, and quiet and extremely conservative on establishing expectations. But on the other, I am unapologetic, and very proud of our associates, and I want everyone to know the really, really good, solid, substantive, things happening that are both visible, and sometimes less visible, like for example, the new national 5% reduced shipping contract, the consolidated warehousing, the new sugar contract that saves 5 cents a pound, the new flavor supplier terms that save $150 thousand annually, the national manufacturing alignment work that saves $180 thousand annually, and our improved work on Just in time inventory management, and inventory control, resulting in a less than 1% variance in physical inventory counts, while maintaining a days on hand of less than 30 days. Benchmarked against any CPG company on the planet – and that is in the top ½ of 1%. 10) And finally, number 10, all the work, across every function, across every day, across every person in the company that has led to 16 million in gross revenue for the quarter, up 1,876%, cost of goods sold down to 71.5% of net sales vs. 73.5% in the prior quarter, and total operating expense declining to 24.6% of net sales vs 26.5% in the prior quarter, with the 28% increased marketing investment, and $2.5 million in net income. Our investors know, that every one of the small cap public beverage companies lose money. Every one…except new Age. And with, I think I will pass it over to Chuck Ence, Our Chief Financial and Administrative Officer to tell you how and why. Chuck.

[Chuck Ence:]

Thanks Brent. You know, I hear from investors all the time that they are amazed at how much we have done in such a short period of time. We don’t see it that way – for us, this speed and pace is our normal pace, and we see it as what we are supposed to do. Yes, no one else is executing at our pace and our level of performance, but that is there problem. We have merely done…what we said we are going to do and we don't see any reason to change that model. Don’t forget – it was only 4 months ago when we uplisted onto the Nasdaq. Since then, completing and closing three acquisitions, driving further organic growth, launching new products, reducing costs, improving margins, growing topline 1,500%, and delivering $2.5 million in EBITDA, is just our normal course of business. Let me now take you into the details of the second quarter 2017 financial results. These results include Coco-Libre for the quarter, but only a small amount of the Marley performance as we did not close that acquisition until June 13th. For the 2nd quarter 2017, Consolidated gross revenue achieved $16,038,264 versus $811,740 in the prior year, a 1,876% growth. Subtracting discounts and billbacks, at the net revenue level, the group achieved $15,104,795 vs. $686,740 in the prior year. The significant growth reflects the small scale of the business in 2016. Apples to apples pro forma organic revenue was up 6.7%, in line with New Age’s organic growth model. All Divisions and brands contributed well with the DSD Division having its best three months in history delivering over 710,000 cases in the quarter, up 7% vs prior year, which was already up 11% in the prior year. That Division has been expanding well, adding both non-alcoholic brands to their portfolio including Nestea, Essentia Water, and others, and number of beer brands to the portfolio including Odyssey Beerwerks and others. That expansion, both in improved breadth of distribution in portfolio and number of accounts and depth of distribution with improved quality and point of sale activation. We are lucky in that when for example the Nestle and Coca-Cola partnership ended, New Age at least in Colorado and surrounding markets is the biggest and best, and consequently the natural choice to gravitate to. International, especially Canada really started to contribute in the quarter with the expansion to the big three there, and overall, we have a number of fires stoked in other markets that we expect to catch on. The US Division is now also gaining momentum with the brand-new expansion of XingTea in 7-Eleven, Búcha expansion nationally with some very quality large accounts, and the additions of the Marley and Coco-Libre portfolios through our DSD partnerships and Retailer partnerships. It is hard to see on the P&L looking back, the impact of this because we have just gotten the businesses – but looking forward, we start to see the revenue synergy impact – especially with the new products coming out on each of the newly acquired brand platforms. In gross profit excluding shipping expense, the firm delivered $4,120,544 vs. $347,476 in the prior year up 1,978%, reflecting some of the initial impacts of cogs improvement. This results in gross margin percent of 28.4% vs. 26.4% in the prior quarter and vs. 21.4% in the prior year. Shipping expense this quarter was higher than normal at 4.8% of net sales as we merged in the Coco-Libre operation and incurred their shipping burden as part of the integration. Total operating expenses were down to 24.7% of net sales vs. 26.7% in the last quarter and 197% last year. In addition to the discipline and good performance that this reduction in OPEX represents, the most quality thing about the result, is that Marketing expenditure was up 28%, while still overall reducing OPEX as a percent of sales. Net Income for the quarter was $2,496,682 or 8 cents per share vs. a loss of ($1,997,619) in the 3 months of the prior year for the stand-alone small Búcha company. EBITDA for the quarter was $2,778,330 and adjusted EBITDA was 2.95 million, when taking out the one-time, non-recurring Marley expense of $175,000 before we took over and consolidated the business in the last few days of the quarter. There were a number of other one-time, non-recurring expenses associated with the acquisitions, transitions, integrations and closing of Coco-Libre, Marley Beverage Company, and Premier Micronutrient Corporation during the quarter, but we have just absorbed these in overall opex vs breaking them out separately. Comprising the detail within our earnings is a combination of operating results and one-time other income impacts. This has always been the case with the Xing/New Age foundational company for the past 5 years consistently, contributing roughly a 500,000 to a million dollars a year in brand and other one-time sales and impacts, and we expect that to continue. On the Balance sheet, we now have receivables and inventory of $18.2 million, vs. current liabilities of $7.6 million, of which 1.25 is a contingent liability on the condition we grow the Marley business to $15 million in revenue. When that happens there will be a corresponding increase in Inventory and receivables in current assets. From a total assets standpoint, we now have $69 million in assets, vs total liabilities of $13.6MM. In the quarter, we had paid the debt down to zero, but took on the Coco-Libre note of $1.57 million as part of that acquisition. And overall we have $55 million of shareholder equity. From the cash flow statement, we generated positive net income for the first six months, of $1.8 million. Our working capital ratio of 2.4 when dividing current assets of $18.2 by our current liabilities $7.6 million is extremely healthy, and the overall adjusted EBITDA of $2.9 million is equally enviable amongst small cap beverage companies. We are using our free cash, we think intelligently to increase our inventories consistent with increased demand, and investing in the infrastructure and organic growth activities including new brands coming on stream now to take the business to the next level. In summary, looking at the financial performance for the quarter, there are a few important takeaways

[Brent Willis:]

Thanks Chuck. For the remainder of today’s call we are going to talk about progress against our three emerging competitive advantages. First competitive advantage