Youngevity International, Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Welcome to this Youngevity Shareholders 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 upon 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 my privilege to turn this call over to Youngevity’s CEO, Mr. Steve Wallach.

[Steve Wallach:]

Thank you, Alex. Hello. I want to welcome everyone to the Youngevity International Shareholders Call today. Speakers on the call today are myself, and our President and CFO of Youngevity, Dave Briskie. We will cover the following topics today. We will highlight Q2 performance, we'll provide an update on a new product strategy that ties into our expanding Scientific Advisory Board. We'll discuss growth drivers in the coffee operations and international operations. I'd like to now bring Dave Briskie on to the call.

[Dave Briskie:]

Thank you, Steve. Hello and welcome shareholders, analysts, investment bankers that are on the call. We appreciate your attendance today. Today, we're going to highlight a few things. I want to get to some of the highlights right away and then we'll get into the specific numbers. Highlights for Q2 2018 compared to Q2 2017 is what we’ll be highlighting. So Q218 versus a year ago. Total revenues increased by 6.6% to $44.3 million. The coffee segment revenues increased by 23.7% during that period and operating income increased to $653,000 compared to an operating loss of 676,000 just a year ago and also for Q2 2018 compared to Q2 2017, adjusted EBITDA increased to 2.2 million compared to $745,000 to the year ago quarter. Second quarter numbers, let's get right in to it. For the three months ended June 30, 2018, revenues increased 6.6% to $44,255,000 as compared to $41,527,000 for the three months period just one year ago. During the three months ended June 30, 2018, the company derived approximately 83% of its revenue from the direct selling sales channel and approximately 17% of its revenue came from its commercial coffee business. For the three months ended June 30, ’18, direct selling segment and revenues increased by $1,300,000 or just under 4% to 36,846,000 as compared to 35,538,000 for the three month period ended June 30, ’17. This increase was primarily attributed to revenues from new acquisition and price increases on certain products that went into effect at the beginning of this year 2018. For the three months period June 30, 2018, commercial coffee segment revenues increased by over 1.4 million or 23.7% to just over 7.4 million. This is compared to $5,989,000 for the three month period ended June 30, 2017. The increase was primarily attributed to increase in revenues coming from the green coffee distribution business. For the three months ended June 30, 2018, our gross profit increased approximately 5.3% to 25,382,000 as compared to just over 24.1 million for the three month period ended June 30, ’17. Overall, gross profit, as a percentage of revenues, increased -- decreased to 57.4% compared to 58% in the same period a year ago. Also, for the three month period ended June 30, ’18, our operating expenses decreased by 0.2% to 24,729,000 as compared to 24,778,000 for the three month period 2/30/17. Distributor compensation expenses also decreased by 1.2% to $16,487,000 for the three month period versus a year ago $16,686,000 for the same period. The primary increases is reflected in revenue, which did not impact base revenues. Sales and marketing expense increased 6% to $3,076,000 for the three months ended June 30, 2018 from 2,901,000 for the same period in the prior year, primarily due to the Asia convention, which was held in Malaysia this year. Also, general and administrative expenses decreased by 0.5% to 5,166,000 from $5,191,000 for the three months ended June 30, ’17. This was primarily due to contingent liability reevaluation that resulted in a benefit of 1.2 million and for the three months ended June 30, 2018 compared to a benefit of $680,000 for the three month period ended last year. This decrease was offset by increases in IT spending, consulting costs, amortization costs, Investor Relations investments, salaries and other related costs, including legal fees and accounting costs. For the three month period ended June 30, ’18, total other expenses decreased by 1,242,000 to 1,357,000 as compared to 2,599,000 for the three month period ended a year ago. Total other expenses included net interest expense and change in the fair value of derivative liabilities, net interest expense increased by $291,000 for that period to 1,549,000 compared to 1,258,000 for the three month ended June 30. The change in the fair value of derivative revealed liabilities decreased by 1,533,000 for the three month period ended June 30, ’18 to $192,000 benefit compared to $1,341,000 expense for the three month period ended June 30, ’17. Also for the three months ended June 30, 2018, the company reported a net loss of $614,000 as compared to a net loss of $2,730,000 for the same period a year ago. The decrease in net loss was due to a net loss before income taxes in the current quarter of 704,000 offset by a tax benefit of $90,000 compared to a net loss before income taxes of 3,275,000 offset by a tax benefit of 545,000 for the same period a year ago. So certainly showing some improvement in the bottom line. Adjusted EBITDA, which is earnings before interest, income taxes, depreciation and amortization as adjusted to remove the effect of stock-based compensation expense and the non-cash loss on extinguishment of debt and the change in the fair value of warrant derivatives or what we define as adjusted EBITDA, which is a non-GAAP term, adjusted EBITDA increased to $2,203,000 for the three month period ended June 30, ’18 compared to $745,000 for the three month period ended a year ago. A few areas I'd like to point out to our shareholders and the interested parties on the call. I believe our significant interest in some of the comparisons over the six month period, comparing results six months 2018 to six month 2017. So basically where we landed at the half year mark on some key performance indicators, please be aware that all of this information and all of the detail is clearly outlined in our 10-Q, which was filed earlier today and you can read all of those details there. So I encourage you to check that out. But for the six month period, revenue ended June 30, ’18 increased 8.7% to just over $87,250,000. Gross profit for the six month period increased 9.6% to $50,394,000 and this is in comparison to 45,968,000 for the period just a year ago, the six month period that is. Also, for the six month period or the half year mark, just 1.4% increase in operating expenses at 49,717,000 and this compares to 49,044,000 for the six month period ended June 30, ’17. Sales and marketing expenses were essentially flat, despite the revenue gains and general and administrative expenses increased 6.9% to $11,077,000 versus $10,363,000 for the same period a year ago, once again the six month period. We cut our net loss for the six month period versus last year by over $1.8 million and our adjusted EBITDA improved from a negative $492,000 to a positive adjusted EBITDA of over $3.7 million for the period, representing an improvement in adjusted EBITDA of $4.2 million. Once again, I encourage you to check out the 10-Q for further details and any details or any questions you may have, you may email our Investor Relations site, which is ygyi.com. I also encourage all our shareholders, analysts and those interested parties on the call to go to ygyi.com, which is a newly updated Investor Relations site and I encourage you, if you are wanting information and news on our company, up to the minute, when press releases are released, if you would subscribe to our IR site at ygyi.com, you will automatically be pushed news. With that, I'm ready to turn the call over to Steve Wallach and Steve is going to talk about the direct selling division and dig in a little more granularity on the international end of the business. Steve?

[Steve Wallach:]

Thanks, Dave. Appreciate that. We are pleased to see our direct selling division stabilizing its organic growth, which has been a challenge over the last couple of years. In Q1, we outlined that the international markets were contributing to revenue and revenue growth and this trend continues in Q2, 2018. In fact, international Q2 revenue contributed just over 17% of the direct selling segment revenue. We like the progress as our plan is to derive more and more revenue coming from these international markets. Revenues coming from international markets for Q2 was just under $6.3 million, which is the largest revenue contribution coming from our international offices, since we began our global growth strategy. It is encouraging the say that Australia and New Zealand, Japan, Canada and Mexico are now contributing to our bottom line. Our acquisition strategy of overlaying accretive revenue on top of existing infrastructure is proving to be effective. To outline a few market specific highlights versus a year ago, for example, Q2 2017 versus Q2 2018, Australia and New Zealand, as a region, as a market, was up nearly 47%. In fact, it was a record quarter for our Australia and New Zealand region. As an example of an accretive acquisition being overlaid on top of existing infrastructure, Nature Direct, which you're going to be hearing more and more about, I believe, as we get closer and closer to our convention and throughout our convention was one such acquisition recently. Asia is another example in terms of regional growth, was up about 194% year-over-year for the same period. Japan and Singapore had record quarters as well. Another example of an acquisition being overlaid on top of existing infrastructure was our recent acquisition of ViaViente. Latin America, our Latin America market year-over-year was up 23.5%. Mexico had a record quarter as well. So in terms of this acquisition strategy of overlaying acquisitions on top of existing infrastructure, you can see it’s having a significant effect already and we continue to -- continue down this path, this type of acquisition as well. What I want to do now is bring Dave Briskie back on to the call to provide some additional color on our coffee segments and some recent events that have occurred there as well. Dave?

[Dave Briskie:]

Yeah. Thank you, Steve. I also want to point out to those of you on the call that the direct selling division was -- did produce bottom line profits for the Q, which shows that we are starting to make progress, particularly in the international markets, which was a big part of the burn, the domestic direct selling business has kind of been carrying the day over a number of years to build out scalable coffee operations and to build out a scalable global platform for the direct selling business and it is certainly nice to see the direct selling business delivering profits now. Some markets internationally now beginning to deliver profits, we're going to continue to focus on those profits. In the aggregate, the direct selling space has delivered a profitable quarter, which is good to see. And then, we obviously made some significant announcements regarding the coffee business. We’ve discussed it many times on this call that the coffee business has been a long term focus on very scalable revenue. Obviously, the coffee business, as a whole, is a very significant business in terms of size. We focus on three very large and very scalable ends of the business, which is private label grossing for the development of our own brand and green coffee distribution. In this quarter, we have seen progress in each area. First of all, on our own brand, we are continuing to see results from the beginning of last year, when we -- around April of last year, we entered in to the deal with the Miami Marlins, Major League Baseball team and became the official Cafecito of the Marlins. That continues to bear fruit for us in our own brand, the Café La Rica brand. It continues to grow at a very, very nice pace, as does our Josie's Java House American coffee brand. So we're seeing significant strides in our recent releases. We talked about the growth, not only of the Café La Rica at retail, but also in food service and we're continuing to see scalable growth there, growing our own brand. Very quickly to the private label business, which is really our roasting operations based in Miami, Florida, where we roast package and grind coffees, whether it be for our own brand, but more importantly for private label type of opportunities. We did make an announcement about a significant private label business this year, a $5 million piece of business that we just landed. Those of you that have been following the coffee sector for some time, we talk about the importance of a relationship with Damon Worldwide, which really is the market leader when it comes to representative nationally that puts on coffee business at major national chains and that business relationship is beginning to come into its own, as Damon Worldwide brings more bidding opportunity, more RFPs to us and obviously the result of this recent contract award with them on the ground across the country, bringing us more and more opportunity. The other area which had very, very significant news is the green coffee distribution business. We recently released news on an award of a $250 million five year contract, so roughly $50 million per year. There has been a number of questions about this particular contract. We're very bullish on this contract. It's for all Nicaraguan based coffee where obviously we have put our base of operations and we are going to start shipping that contract in January of 2019. So in 2019, we anticipate significant strides being made in turning the coffee business profitable in 2019. So with the direct selling business now reaching profitability, with international markets now starting to come online and some of those markets starting to enjoy some profits and now with this large contract seemingly as we deliver, that contract is contributing to the profitability of the business, obviously, we're feeling very good about 2019 and beyond, given the size of that green coffee contract. We have been working towards this for some time. The contract is quite comprehensive, not only is it for strictly high ground coffee, but it also leverages all of the different certifications that we’ve worked so hard to attain and frankly everyone that's been following our company for some time understands that the idea of obtaining certifications like organic certification, direct trade certification, the Starbucks Cafe Practices Certification the Rain Forest Alliance certification, Bird Friendly certification, we went through this, it was an expensive process, because we believed it would ultimately lead to significant business because these certifications are so difficult, not only to obtain, but to maintain and this became an important part of this large contract that we will -- we have landed and will be in place for over the next five years. So we're very, very bullish on what that will bring and brings the opportunity for profitability to our coffee business and of course then the opportunity for increased profits to the overall YGYI business as a whole. So I am going to now turn the call over to Steve to talk a little bit about our upcoming convention and then I want everyone to be aware. I know, we've got some folks that wanted to ask some questions. If you're interested in asking a question, you would hit star two and that would allow us to see a hand raise and we can answer a question on this particular call. We only have time for a few questions, so we'll go ahead and make ourselves available. And Steve, I know you wanted to mention the convention that's coming up very, very soon.

[Steve Wallach:]

Absolutely. Thanks, Dave. Our largest ever convention is just about, in fact it's a little under two weeks away from now. It's right here in San Diego at the headquarters, not at the headquarters, but where our headquarters of the direct selling division is located. So we're excited to have our annual convention back here in kind of our hometown, if you will. And so that's exciting. I would encourage everybody to pay close attention to upcoming news and news releases. The convention is always a time when we get excited about product introductions and product launches. That also includes things such as technology initiatives. I had mentioned at the beginning of the call that we were going to talk about the expansion of our scientific advisory board and how that plays into our product initiatives and really helps get the word out about our particular products and helps promote our products. With the upcoming convention, you'll be hearing and seeing some news, not only about exciting new people in addition to our scientific advisory board, but these people are people that have specific knowledge and experience around specific products and ingredients and product categories that are very exciting. Going into the convention, I think you're going to see -- I know you're going to seeing news and news releases about some very exciting products and product categories that I believe are game changing, in fact, for not only our industry and our profession of centered around dietary, supplements for instance and ingredients, but for Youngevity in particular. In addition to that, we're always working on improving our technology that helps our distributors promote our business that much better and further and now that we have an international footprint established, it's even more important to be able to get that information around the world much faster and also for people to be able to manage their businesses within Youngevity that much more efficiently and effectively. And so I'm excited about technology initiatives that are upcoming as well as very exciting product initiatives. And again, this is our largest ever convention right here in our hometown, just under two weeks away, so definitely pay attention to upcoming news releases. And with that, I'll turn it back over to you Dave for those questions.

[Dave Briskie:]

Yes. I see we've got -- I'm going to unmute Mr. Bill Sutherland and welcome, Bill Sutherland onto the call. Bill, hi, how are you?

[Bill Sutherland:]

Hi, Steve. I would be curious if you could talk a little bit about, you've rolled out a pretty important mobile technology. And what are your hopes for that as far as impacting sales and related numbers?

[Steve Wallach:]

Sure. Mobile is incredibly important. Obviously over the last several years, anybody who's paid any attention to technology and IT and where consumer spending is really going and living, mobile is imperative and mobile initiative is imperative and we've invested heavily in our IT. We've hired really, really talented staff in-house. We also work with third parties that are best in class in terms of being able to create and provide additional technology and with the gig economy, which is such a huge economic driver inside and outside of the direct selling profession these days, mobile is imperative. And so with that, we continue to introduce better and more advanced mobile technology for our distributors to be able to use. Our intent is to continue to expand that and I think you'll be seeing and hearing more about that in the coming days and weeks, in fact, and with that, it also ties into our international strategy, which means additional languages and additional tools that are mobile friendly around the world and must all interact, but empowering our distributors with that mobile technology consumers and distributors are living on their mobile devices these days, almost solely on smartphones, but also tablets. And so we know that's where our distributors and customers live and where our business really is won or lost. And so it's incredibly important to us. And again, we've invested heavily and we’ll continue to do so. As far as how that relates and translates to sales, we're confident that it will not only drive sales, but win additional sales going forward. So, it just is incredibly important to us and we know that.

[Bill Sutherland:]

So when you look at your competitive profile versus obviously fragmented industry, but there are a few very large guys. How do you -- where do you kind of put your – how do your characterize your competitive advantages and challenges at this point?

[Steve Wallach:]

Sure. In terms of advantage, we're a small enough company, infrastructure wise, that I believe we have the advantage of being more nimble than our much larger competitors. I personally and they have us too, we know many of the CEOs, Presidents, executives of many of these large direct selling companies, we interact with them at industry events as well as outside of industry events and I'm proud to say that Youngevity really has a competitive advantage in terms of how quickly we move on technology trends compared to those very large companies. I can tell you that things like social media, I personally believe we run circles around some of these very large companies that are still trying to figure out what social media is and what it means and how it interacts or how could benefit their businesses. I can -- I'm proud to say that Dave, myself and the staff here at Youngevity embrace technology and as an example, but also in terms of product initiatives, many of these companies, these very large companies are very set in their ways, they're reluctant to even bring on a new product and they're reluctant to introduce new technology, they're living on old systems, they call it technology debt and actually in terms of -- they just have to find ways to work with this very old technology to even move forward for us and we're not afraid to really kind of move beyond that old technology and quickly move on to things that are new, but also in terms of product trends. If we see something that is a product or an ingredient that has efficacy, that has a lot of opportunity, a lot of benefit to consumers and to our distributors to provide that to our customers, we’ll move on it quickly and I think you'll begin to see that even in the next few days.

[Dave Briskie:]

Hey Bill, if I could add to this, by the way, Bill Sutherland is analyst with Benchmark. Bill, I appreciate these questions, but I did want to just touch on, just back on the mobile because I know you took a relatively deep dive in to some of the stuff, but on the mobile end, you're aware that we are launching a new app that will be very, very mobile friendly at this upcoming convention and you know that it's in a beta mode right now. So a number of our distributors are obviously using it at a higher level and that particular application will be very, very interesting for the field from a lead generation standpoint, from a communication vehicle from Youngevity standpoint and everyone that becomes new in Youngevity will get started with this piece of technology, so it will become the main line of communication, which is always the challenge in the space, we want to go ahead and make sure that that challenge is overcome by finding a very streamlined way to communicate folks with new ideas, new product launches, new initiatives and actually give them ways through our marketing and sales teams to give them tools that allow them to promote the products we want them to promote. So that's exciting. And then really quickly to add to some of Steve’s excellent points regarding the advantages that we have, you know what, we're less inclined and I think Steve touched on this, but the analysis paralysis and more inclined to taking calculated risk and very, very swift action. If you look at the amount of time that we entered the international market, with our swift international acquisition strategy and how quickly we built a footprint in Asia and even for the cost we did, I'm not sure a company much larger could move that swiftly. And also collaboration, I think, is a big thing that we can do as a nimble company versus the large silos that exist in these large companies. I know for a fact some of their product launches take upwards of 18 months before they enter a new product and it will be interesting a very -- be introducing, Steve alluded to it, a very interesting line of products that we have been working on for some time that we think will really, really make a difference in the space. Do you have further questions, Bill?

[Bill Sutherland:]

Just had one more Dave and I will hand it over to others. [indiscernible] much larger commitment on the green coffee side. How are you going about operational and financial requirements to fulfill the contract? Is it just gradually coming together or are you all set as we speak?

[Dave Briskie:]

It's all set as we speak. One of the things we've done very, very unique to us and working this contract, it took some time to put it together, but we've built a very significant consortium in terms of a large partnership with a number of growers in Nicaragua. So these growers have become our partners and this allows us to be in a position to go ahead and have the financial capability to deliver on a $50 million contract and the inventory that needs to be procured with it without the need for a large influx of capital from either borrowing the money or from a bank. The other thing this does is it creates a bit of a hedge for us in terms of coffee prices go up. I've seen this happen in the space where a large contract is granted and coffee of course is sold on differentials. And all of a sudden, this contract is for 41 million pounds of coffee each year and you can imagine the financial impact, if all of a sudden the price of coffee went up $0.50 per pound and you needed to buy 41 million pounds, you can imagine the impact you would have to have if you’re borrowing this money from a bank in terms of interest costs and so forth. But we have baked that all into this very clever consortium that we've been working on developing over the last four years and so we have found a very novel way and a very efficient way and a very streamlined way to go ahead and be able to deliver on this large contract from a buying inventory standpoint, which is typically the largest and most difficult part of the process. Okay. Let me see if we have any other questions really quick. As I said, you could raise star two. So we don't have any further questions, so I want to, I guess, Steve, we can close out this call now. Thank you everyone for jumping on the call. Bill, thank you for the questions. I appreciate those. This call will be posted up on ygyi.com. We will make sure that there's a recording available for those that may want to listen to it again or you may want to share with those that were unable to get on the call, we will catch up with you on the release of Q3. Dave Briskie, thank you very much for the call. Steve.

[Steve Wallach:]

Thank you, everybody. Have a great afternoon.