Youngevity International, Inc.
Q2 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Welcome to the Youngevity Shareholder Call. During this call, we will be making forward-looking statements regarding Youngevity's current expectations and projections about future events. Generally the forward-looking statements can be identified by terminology such as may, should, expects, anticipates, intends, plans, believes, estimates and similar expressions. These statements are based on current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, including those set forth in Youngevity's filings with the SEC many of which are difficult to predict. No forward-looking statements can be guaranteed and actual results may differ materially from such statements. The information on this call is provided only as of the date of this call, and Youngevity undertakes no obligation to update any forward-looking statements contained on this conference call on account of new information, future events, or otherwise, except as required by law. It is now my privilege to turn this call over to Youngevity's Cofounder and CEO, Mr. Steve Wallach.

[Steve Wallach:]

Thank you, Alex. Hello everyone, I want to welcome you all to the Youngevity International Shareholders call today. Speakers on the call are myself and our President and CFO of Youngevity, Dave Briskie; our new Vice President of International, Luke Taffuri, is also on the call with us today. We will cover the following topics, we will highlight Q2 performance, we will provide an update on global expansion activity, we will receive a comprehensive update regarding our Sorvana Free Life acquisition and the opportunities it provides as we expand in the U.S. and throughout Asia. We will also discuss our coffee operations. What I would like to do now is bring Dave Briskie, our CFO and President on the call.

[Dave Briskie:]

Yes I am here, do you hear me okay.

[Steve Wallach:]

Hear you perfectly.

[Dave Briskie:]

Perfect. Alright well thank you all for joining us this afternoon, we appreciate it very much. I just finished a road show, a non-deal road show throughout the Northeast and met with a number of new and current investors and one of the things that I’d like to highlight before we get into the specific numbers was there was a -- the kind of the questions that kept coming up during my road show meeting, and there was really three areas that those that I met with wanted to learn about. We had a couple of quarters that were a little bit lack bluster in Q4 and in Q1. And so the look that I was hearing and the interest that I was hearing was would we have a bounce back in Q2. As one thing that they would be looking for. And the second thing that they would be looking for is our international business, which we have invested significant dollars in, will that start to perform as we had planned it perform moving into this year. and so that was the second thing. And then the third thing and maybe most important would our EBITDA we’ve been positive EBITDA for a number of years now and we had a dip in Q1 would that bounce back as well. So I am pleased to say that those three areas that seem to be the biggest questions I received among literally over 100 different investors and high net worth and institutions that I met with. I am pleased to say that in Q2 revenues increased about $2.8 million over the first quarter. The direct selling segment revenue was up almost 7%, the coffee significant revenue was up over 9% over the first quarter and adjusted EBITDA has rebounded and returned to a positive $745,000 versus the $1.2 million loss we experienced in the first quarter. So nearly a $2 million turnaround on adjusted EBITDA. So we’re pleased to see the progress there, by no means do we -- are we thinking that we owe ourselves a pat on the back for that performance, for us it’s a beginning of what we see in the coming quarters. We see continued progress and we feel strongly that we’re back on a growth trend for the company after those two quarters, Q4 and Q1. So we feel good about that, but there is certainly a lot of work to be done. And this was the first major step in that work. So on relation to the second quarter financial results. For the first three months and I’ll cover the three month period ended June 30, 2017, our revenue decreased about 2% compared to last year, $41,527,000 compared to $42,500,000 for that three month period. During the three months ended June 30, we derived about 86% of our revenue came from the direct selling significant of the business and 14% came from the commercial coffee sales. Our direct selling significant revenues decreased by about $1.5 million or around 4% to $35,538, 000 as compared to $37 million for the three month period ended June 30, 2016. The commercial coffee segment revenues had an increase of over $0.5 million or up 9.3% to just under $6 million for that three month period ending June of 2017. As compared to $5,481,000 for the three month period of last year. This increase was primarily attributed to increased revenues in our coffee, roasting and green coffee business both actual areas of the coffee business, which we’ll cover in a little bit more detail later in the call, showed some growth numbers. For the three month ending June 30, 2017, gross profit actually decreased approximately 5.2% to $24.1 million as compared to $25.4 million for the same period in the prior year. And overall gross profit as a percentage of revenue decreased to 58% compared to 59.8% in the same period. This decrease was primarily as a result of increased direct cost, which adversely impact the commercial coffee segment margins and we saw better performance actually on the direct selling side of the business. June 2017, our operating expenses increased about 3.6% to $24,778,000 as compared to $23.9 million for the period a year ago. Looking at a breakdown of our operating expenses is as follows. Distributor compensation expense decreased 0.7% to $16,686,000 for the three months ended June 30, 2017 down from $16,796,000 for the same period. And this was primarily due to the decrease in revenue as there is a direct correlation between those two items. Sales and marketing expense increased about 10% to $2.9 million for the three month period, up from $2.6 million for the same period a year ago. The increase in marketing staff and related cost as the company is revamping its marketing content and its overall branding strategy. General and administrative expense increased 16% to $15.2 million from $4.4 million for the three month period ended June 30, 2016, primarily due to increases in cost related to the international expansion, which we touched on earlier. Also higher legal expenses, higher Investor Relations expenses somewhat to wages and related benefits and the amortization and stock-based compensation costs. Also our computer and internet related costs were up as well as travel cost related back again to that international expansion. In addition the contingent liability revaluation resulted in a benefit for $680,000 for last year's period. For the three months ended June 30, 2017 total other expenses increased by $1,026,000 to $2,599,000 as compared to $1,573,000 for the same period in the prior year. Total other expenses is a net interest expense of $1,258,000 and of course that change in fair value of warrant derivative liability of $1,341,000 that is a non-cash expense directly related to the closing price of our stock, which is an inverse relationships. So our stock closed up at the end of the quarter, which created this warrant derivative liability non-cash expense, which certainly impacted the net income. For the three months ended June 30, 2017 the company reported a net loss of $2.7 million as compared to a net loss of $109,000 for the same period in the prior year. The increase in the net loss is due to income taxes of $3,275,000 [ph] in '17 compared to a net loss before income taxes in '16 of $49,000 offset by a tax benefit of $545,000 in '17 compared to $60,000 tax provision in '16. Adjusted EBITDA, which is earnings before interest, income taxes, depreciation and amortization as adjusted to remove the effect of stock-based compensation expense and of course that change in fair value of the warrant derivative or adjusted EBITDA decreased to a positive $745,000 for the three months ending June 30, 2017 compared to a positive $2.5 million for the three months period ended June 30, '16. So those are the numbers a couple additional points I think is important to make is this year, we and Steve will mention some of this that we made the move obviously to the NASDAQ and this is our first call on the NASDAQ and our 50 day average trading volume since we made the move to NASDAQ we're pleasantly surprised or pleased I should say to see it's about four times higher than we were on the OTC markets. Given that we're comparing that period of time that we actually uplisted to June and moving into really July and August the slower months for all stock trading and we're comparing that to a period of time, which should be higher volume once on the OTCQX. We're hopeful that we’ll continue to see an improvement in the trading volume as we have post uplist. We'll see how that works following the summer months. One other thing I most excited about is the quality of the meetings that have taken place since our move to the NASDAQ certainly a more sophisticated investor group has come to our attention and we've had opportunities to present to funds and institutions that really were not able to participate in our company in terms of an investment. So, we're pleased with those types of meetings and the number of non-deal road show opportunities that have been presented to us that we will certainly be working very, very hard as we move into the third quarter and as we round out August, September and October specifically to continue to hit the roads and hit streets to tell our story. We think we've got a strong story to tell and we're appreciative of the new opportunity that the NASDAQ market has presented to us. In addition to that, maybe a little bit of surprised to us is our acquisition model seems to have lifted in terms of deal opportunity, because of this move to the NASDAQ possibly because our stock is maybe more considered a real currency at this point. And so it seems like the interest in our acquisition model is getting larger in terms of the revenue size companies that are coming out a way. We did complete our largest single acquisition in the acquisition of FreeLife, L'dara and we integrated that on July 1, and that was a largest acquisition that we've done to-date. And it seems that since we've moved to the NASDAQ that we've had opportunities that are a bit north of that coming out away. That's not to say that one of these are eminently closing I don't want anything misleading here, but the opportunities in terms of revenue and the size of the acquisitions that are interested in our model have certainly gotten to a larger scale. And that's encouraging because we believe it's a very, very important part of our model and Luke Taffuri who is on this call will talk further about that. Additionally, the percentage of international sales, which is one of the guide points that many of the institutions and funds were very keen in looking at knowing that that is a very, very key part of our growth strategy really over the coming years if not for the coming decade. Last year, we had basically only 9.3% of our revenue was derived from international sales and interestingly enough that was the average for the year. But Q4 and Q1 and Q2 of this year, that number started to hover up over about 10% versus 8% for the same period last year. So, we're seeing that movement happen and based on the numbers that we have and we have to be cautious here because we don't have our bottom-line numbers, we only have visibility to the top-line revenue. But our top-line revenue in July and for almost half of August seems to be tracking with higher percentage of international sales certainly above that 10% number. So, we're happy to see that, and you are going to hear more about that coming from our CEO, Steve Wallach. Before we turn it back over to Steve, I encourage all shareholders to review our financial numbers posted on virtually all financial sites, which you'll see coming up either late today or early tomorrow. And with that I would like to turn the call back over to our CEO, Steve Wallach to give us an update on specifically the global expansion efforts. Steve?

[Steve Wallach:]

Can you hear me?

[Dave Briskie:]

Yes we hear you good.

[Steve Wallach:]

So, thank you, Dave for that comprehensive finances. In Q2, we accomplished a great deal and I definitely feel that it set us up well for the future. I'm pleased to see us gain back sales growth in Q2 as Dave went through the financials and explained to us all. And to bring our adjusted EBITDA back into the positive territory, but really the bigger accomplishment took place in the quarter that have not yet shown up in Q2's numbers, but we anticipate a payback in the quarters to come. The NASDAQ uplisting that we've all talked about but Dave mentioned again earlier as well, the NASDAQ uplisting is a significant milestone for Youngevity and we just begin trading on the NASDAQ June 21st and as Dave mentioned trading volume has increased by about four times during that period of time from previous to the NASDAQ uplisting. So, we’re definitely optimistic and pleased about that we believe strongly that this move will ultimately help us unlock shareholders value, which was certainly one of the key drivers to uplist one of the major exchanges that we’ve talked about on this very caused in the past. Talking about the acquisition model again Dave mentioned a bit about that, but I will give you give some examples here the BellaVita acquisition is now fully integrated into Youngevity and is now producing revenue, you should see a greater impact in the coming quarters, we’re now open to business and shipping products in the following Asian countries and large part due to this BellaVita acquisition as well in Malaysia, Indonesia, Hong Kong, Taiwan, Singapore, Japan and the Philippines. The Free Life L’dara acquisition was completed or was signed on June 19th it became fully integrated on July 1st. We’re definitely exited to combine our newly opened office in the Philippines with their office in the Philippines that has been operational for about 12 years. So a lot of synergy there as well due to the Free Life L’dara acquisition partnership. Mexico, we’ll talked about Mexico, Mexico continues to grow at a nice pace and contributed $1.2 million on revenue for the quarter. We’re currently looking to expand our distribution capabilities in this market due to what we’re seeing on the growth that were seeing. And we’re planning another large event in October. So, definitely we’re excited about that, we continue to drive momentum into the region. We’ve talked about further expansion into Latin America and you’ll hear more about that in the near future I believe as well. To support this major growth driver, we proudly have announced the addition of Luke Taffuri to our team, Luke comes to Youngevity with a tremendous amount of international experience and Luke has over 20 years of experience in direct sales and has a tremendous amount of experience in international expansion and international management of many of these markets. And so I am excited to bring Luke on to the call. Luke, are you there?

[Luke Taffuri:]

I’m, can you hear me, Steve?

[Steve Wallach:]

Perfectly, thanks Luke. I’m going to turn this over to you and please tell us a bit about yourself.

[Luke Taffuri:]

Perfect and thank you. Good afternoon and as Steve mentioned I am recently being hired as the VP of International Sales and Operations at Youngevity, and I’m proud of that. A little more background of myself, as Steve mentioned I’ve over 22 years of experience in the direct selling industry, of which 17 years have been in the international space. I personally opened and managed 26 countries across the world including Europe, Asia Pacific and South and Central America to name a few where I managed growth and profitability of each of those countries. So, that’s was important part of the business. I’m excited for the tremendous upside of the international markets like Steve and Dave mentioned with 9.3% of the sales in 2016 coming from the international market. That leave just a bright future for the international markets and some of the acquisitions will really help toward that. Many of the direct selling companies the larger ones they find once ago international their international sales either equal or even a clips to their U.S. sales. So it’s going to be very exciting time. Again I start feel like I started at the perfect time Youngevity’s infrastructure is solid, which is important for launching international markets there is lots of talented employees as well as field leaders and the leaders are really what drive the market. A lot of those leaders I spoken to have connections in these international markets that were either opening or pursuing or recently acquired markets through the acquisition. So very excited about that. One of the thing I think is tremendous for Youngevity is the diverse product line. They have so many different verticals that will appeal in these international markets, because not each country likes nutritional products or maybe run into cosmetics. So they have different wants and needs and with Youngevity’s again diverse product line and verticals, we can do tremendous things in these markets. It also acts as an incubator for future products. So you can continually introduce new products down the road to keep the field excited for many years to come. Prior to joining Youngevity I met with Steve and Dave and discussed the acquisition technique, they had a strategy they have and as I begin to understand it I realized this is a tremendous help for the international markets. So that helps not only the car market by increasing the distributor base and product line, but it will help accelerate the global expansion. As seen with the recent acquisitions of Free Life and BellaVita where they quickly added several of those Asian markets to their portfolio. And that can cut once and even years of product registration and launching in a market, which if you would start from scratch again that would take a longer period of time. My current focus will be evaluating our international markets to make sure that we have the correct staffing and procedures in place to operate efficiently while producing both growth and profit. Some of the challenges I had in the past where we have had a good operations person on the team and but suffered from the sales side so you have a smooth running operation, but no sales. And the opposite we have a great sales leader in the market and operationally struggled, which led to lower profit. So that’s really important to really understand the players we have the team we have in those markets. And we need to have both of them working at a higher level. And this will be achieved by executive guidance, proper reported in metric which will lead to accountability in each of those markets. I have done this before and I expect to see results in the next two quarters. So look for that. One other thing I wanted to mentioned, just to give you some inside to the tremendous upside of these markets according to the directionally news website, the Asia-Pacific region which again we just launched several of those countries recently accounted for $83.8 billion of the world's direct selling sales in 2016, compared to North America’s sales of $37.5 billion that region alone is more than double North America and again demonstrates the potential for the international markets here at Youngevity. Again I am excited to be part of the team and I am going to turn the call back over to Dave to provide future updates or other updates on the coffee significant.

[Dave Briskie:]

Thank you, Luke and I appreciate that. And Luke is definitely going to be a regular speaker and a regular participant going forward because we have so much focus on the growth coming from international and one of the things that Luke is working on is literally a really keen set of procedures, a profitability plan, a growth strategy for each market. So I feel confident in the coming quarters we’re going to be very, very specific about the markets how we are performing, where our growth is come from. And the inverse in a market that maybe isn’t achieving our expectations I think our shareholder base deserves to hear the real progress that’s coming from these global markets. And certainly as we start to move from the 10% to the 15% and 20% numbers that story and would those metrics will be something that will be something our shareholder base will be interested in hearing about. Before I go on to the coffee sector, I wanted to mentioned that on the international footprint that Luke talked about, there is about -- there is 23 countries in the world that are over $1 billion in retail sales in the direct selling space. And I went through our list of countries and we are in 13 of those countries. So we are over 50% of our position are in the countries that generate a $1 billion or more in revenue. And so I feel good that we are in the markets that can deliver the sales if we execute. So we certainly -- and I feel like our homework was done right, in the beginning and now it’s time to step on the gas in these countries and get a return on the investment that we have been making over the last 2.5 years or so. In terms of the coffee business, the coffee sales as we said at the beginning of call grew about 9.3% over 2016. So we have had a decent growth spirit there in the coffee business. This was driven by a number of areas, many of you know that we signed a deal with the Major League baseball Florida Marlins and our Café LaRica our own brand, Espresso one of the major initiatives for our coffee business is to grow the value of our own brands. We feel there is tremendous value to be unlocked for shareholders, tremendous value to be unlocked for our company. It creates a more stable position at retail when your brands are being marketed there. And once you grab onto that shelf space you want to hang on to that shelf space. The hardest part is grabbing on it. And this relationship with Major League Baseball has definitely exceeded our expectations of course with the official Cafecito of the Miami Marlins or the Florida Marlins. And this has led to a co-branding relationship with Major League baseball's Florida Marlins and having our brand alongside such a brand of that stature has definitely elevated our brand. And therefore it's really predominantly grabbed two areas of major increases for Cafe LaRica. The first is in the food service business, this is an area that we have wanted to get into in a big way for a long time as a company. Food service drives retail brand. You really want to do them in tandem. And what we talked about the food service we're talking about restaurants and cafeterias and places where people are actually drinking your coffee not packaged, but drinking it right from the cup. And you have table tops and banner ads and information and the cups are branded, your Cafe LaRica. So as people are enjoying the coffee the idea is when they're shopping at retail they recall that good coffee drinking experience and it drives your retail business. So you have to kind of do them together, and we have added since the Miami Marlins deal so that was in April. And this quarter we've added 53 food service accounts and are currently adding four accounts a week to our food service division. This is important for a couple of reasons. One of the biggest reasons is the highest profitability into the coffee business is in food service. So it's area we really want to focus on growing and of course it will drive our retail brand business. And the advantage of the retail brand business although not as high end profitability it's very, very high in creating shareholder value. Because brands today especially consumer brands at retail can bring tremendous value to a company as you would to maybe sale off our brand or spin off a division. So it's very difficult to build a retail brand. Things that are driving are keys for that is this relationship that we form. There is a there is press release out on this recently with Ascaso out of Spain. And they are one of the premier Espresso equipment manufacturers in the world. And we were able to create an exclusive relationship with this company where we're on the only food service company distributing this particular Espresso equipment along with our own brand of Espresso in that very lucrative South Florida market all through Florida in fact and Florida is a key place for growing an Espresso brand. Because the number of different Latino cultures that live there and it really does drive great business to retail. In terms of Cafe LaRica our 10 ounce brick pack and I'm looking at specifically last year 2016 in the second quarter we sold about 109,000 units of Cafe LaRica in that quarter. This past quarter largely attributable to the relationship with Marlins with the Miami -- the Florida Marlins. And of course the food service business that now is driving traffic into these stores our second quarter for this year we've sold 336,000 units of our Espresso. So the increase over prior is 209% over last year that really does a lot for our brand and more encouraging than the fact that we've had that type of sell-in is the sell-through based on the metrics we've been gaining from our retail partners we've moved from the number of five Espresso brand in the market to number two just behind Bustelo and actually ahead of Pilon and [indiscernible]. So our product is not only on the shelves, but it is moving off the shelves into the hands of the consumers. So we intend on really focusing on that and trying to continue to grow that business and build the value of that particular brand. In anticipation of growth in the rest of our coffee business outside of Espresso particularly in the K-Cup business we are very excited about another announcement that was made in this quarter which is a relationship with Daymon worldwide, who is really one of the largest if not the largest distributor or representative group of selling coffee in all of major, major retailers they literally have offices in places like target and in companies of really large scale. And literally since the beginning of me being in coffee business, it's a relationship that I hope to establish and possibly because of the relationship Major League Baseball and our brand we are able to get Daymon to be our representative group nationwide for both of our brands that being Cafe LaRica and Josie’s Java House as well as private label. And so, since we've sign them and it's then a very, very short period of time, the opportunity to bid on business has really, really been trigging for us to the tune of very significant volume. Once again I caution you we have not won these bids, but we have the opportunity just since Dave come aboard we've bid on over $9 million of different coffee contracts over five major retailers, which I won’t name, but obviously if we land one of these relationships and accounts we’ll put the news out quickly. But in years past we have not had the opportunity to bid to the sizes of accounts which are very focused on the K-Cup, single serve business and the bag business. So, in anticipation that this growth is forth coming, we've invested in a robotic arm and a robot to help us do the packaging because the K-Cup equipment we had is so fast producing over 200 cups a minute. The pack out can get very extensive just using human labor. So, we've made a $0.5 million investment in this robot to do the pack out for us and it will be in in September. We also had to buy an additional commercial coffee grinder of $100,000 because of the increase of our Espresso selling at retail. We needed to keep up with the demand there and we’ve invested in a machine that will wrap our bricks together. So that when we ship them, we won't have any damage issues. So we've had about $643,000 of additional CapEx funding going into Cafe LaRica and CLR Roasters in anticipation has some growth there. Green coffee sales was also up over last year. Last year we did about $3,256,000 of sales in the second quarter of this year we’re just under $3.5 million or about 6.14% growth. So, the good things happening with the coffee business, the real story on coffee is now to focus on these higher profit businesses and really start to drive revenue not only on the top-line, but to have the coffee business start to put EBITDA numbers in to the company that will help the profitability. Obviously that's the story for Youngevity now. People will be watching our growth, but are also going to want to see improvement in adjusted EBITDA and of course net income. So, everything we're doing now and into the next couple of quarters and certainly into next year will be driving those metrics. I look at the couple of soft quarters and this pick up in Q2. We pretty much finished the year just a little bit behind last year. But as I look into Q3 and Q4 I feel very, very good based on the early read of Q3 and what's going on in the international markets as we see that metric starting to improve. I feel very confident that although, we started the year a little bit slow that we will finish the year ahead of last year and actually have our 7th year of sustain growth. And we're -- it's good to see that and that's what we're working hard doing. With that I'd like to turn the call back over to Steve Wallach for some final comments.

[Steve Wallach:]

Thank you, Dave, thank you for again that update on the coffee operations. And thank you Luke for the comments and updates about yourself and potential of international. And with that I would like to close this call out. And now look forward to the next one. So everybody have a great afternoon and thank you for attending our shareholder call.